Initiative of the year: Central Bank of Ecuador’s Gold Acquisition Programme

Since the global financial crisis, some emerging-market central banks have sought to increase their reserves with domestically mined gold, often bought from artisanal and small-scale gold miners (ASGM). Launched in 2012, the Central Bank of Ecuador’s (BCE) gold purchase programme has stood out as an increasingly promising initiative that helps formalise the ASGM industry and boost the developing country’s international reserves. In the past year, the BCE has also adopted important new environmental considerations into the scheme.

Gold mining in Ecuador has had a long, and sometimes, inglorious history associated with illicit activities such as money laundering, environmental damage and exploitation of miners. While the BCE has been buying locally mined gold since the 1980s to boost its reserves, it was only after Ecuador’s parliament passed a new mining law in 2003 that the central bank could buy gold directly from small-scale miners.

In 2016, the BCE’s gold purchase programme entered a new phase with the opening of its gold purchase office in Quito. At the office, small-scale miners could sell their non-monetary gold directly to the central bank at a small discount to the international gold price. In 2018, the BCE opened a second gold purchase office in Machala, a city in southern Ecuador, providing easier access for small-scale miners around the area.

The gold purchase programme has helped the BCE obtain around eight tonnes of non-monetary gold during the past decade. This enabled the central bank to add around 2.5 tonnes of internationally certified gold bars to its international reserves last year, boosting its coffers by $158 million. The addition of monetary gold helped Ecuador’s international reserves to grow to $9.35 billion as of January 20, 2023 – the highest level since the country adopted the US dollar as its legal tender in January 2000 during a serious economic crisis. The gold purchase programme has played a key role in bolstering the country’s financial position, with the country’s gold reserves having an estimated market value of $2.09 billion as of January, or just under a quarter of total reserves.

By using its gold reserves as collateral, the BCE has been able to set up credit lines with the Bank for International Settlements. In 2021, the BCE doubled its emergency credit line with the BIS to $840 million as a precautionary measure in case of an economic downturn. The BCE also tells Central Banking it is “very close” to setting up a liquidity line with the Latin American Reserve Fund, using its gold reserves as collateral. These examples are testament to the role the BCE’s programme has played in boosting the central bank’s financial defences.

Turning non-monetary gold into monetary gold is not a trivial exercise. It demands considerable efforts from both the artisanal miners and the central bank. Before selling their gold to the BCE, artisanal miners must deposit extracted gold ores at local refineries, where the gold will be refined into gold doré bars. The central bank will then buy these gold bars from the miners and stockpile them. When the BCE has sufficient stocks of non-monetary gold, it will seek to send the gold abroad to a refinery accredited by the London Bullion Market Association. Once the gold doré bars are sent, the LBMA-accredited refinery will further upgrade them into London Good Delivery bars.

Deciding when to send the gold abroad comes down to the international gold price at the time. The BCE sells its non-monetary gold to an international refinery when the international gold price is higher than the central bank’s original buying price. This practice can help strengthen the BCE’s balance sheet. Ecuador’s gold reserves are then vaulted at international financial institutions.

The development of the BCE’s gold purchase programme is viewed as “best practice in terms of reserve management”, according to Kurtulus Taskale Diamondopoulos, the World Gold Council’s director of central banks and public policy. At the heart of the programme is the goal to formalise the small-scale gold mining industry, which supports the living of tens of thousands of Ecuadorians. The BCE’s programme helps to reduce the amount of irresponsible mining, where miners could face hazardous exposure to dangerous chemical substances, such as mercury, exploitation by middlemen who pocket a large share of the extracted gold’s value and criminal use of mined gold to launder money.

To stymie money laundering, the central bank goes through a rigorous due diligence process to review the registered miners’ financial background and watch out for any criminal records. It also conducts site visits to ensure the registered miners are complying with relevant environmental and operational requirements. Last year, the BCE also signed a deal with the ministries of environment and energy and Ecuador’s largest public bank to encourage sustainable mining practices. Under the scheme, small-scale miners complying with green requirements can access better financing conditions.

“We are proud to fulfil our mandate by properly managing a non-traditional central bank program that complies with all local environmental and AML regulations, while promoting the formalization and development of the small-scale mining sector,” Guillermo Avellán, the BCE’s general manager, tells Central Banking.

The BCE is also moving to address some limitations miners have raised about the programme, notably that some have found it difficult to access the BCE’s two gold purchase offices due to the country’s poor infrastructure. The central bank is planning to open a new gold purchase office in Zamora, a major mining city in southeastern Ecuador, and is also seeking to certify its gold purchase programme as a sustainable project.

The Central Banking Awards 2023 were written by Christopher Jeffery, Daniel Hinge, Dan Hardie, Joasia Popowicz, Ben Margulies, Riley Steward, Jimmy Choi and Blake Evans-Pritchard.