Quito, Ecuador
May 14, 2001

Mr. Horst Köhler
The Managing Director
International Monetary Fund
Washington, D.C. 20431

Dear Mr. Köhler:

1. The attached policy memorandum outlines the economic policies and objectives of the Government of Ecuador for the year 2001. Also attached is a technical memorandum of understanding which lists the policy actions to be taken prior to consideration of the second review of the Stand-By Arrangement by the Executive Board of the Fund. On the basis of these memoranda, the Government of Ecuador requests an extension of the current Stand-By Arrangement to end-December 2001 and a rephasing of the schedule of purchases under the arrangement. The program for 2001 would incorporate two further reviews, to be completed by September and November 2001, respectively.

2. The Government of Ecuador requests waivers for the non-observance of the quantitative performance criterion for central government expenditure for end-August 2000, and for nonobservance of the structural performance criteria on the recapitalization of viable but under capitalized intervened banks (September 2000); the implementation of the redefined rules for the composition of bank capital in accordance with the Basle standards (December 2000); and the increase of the refinery prices of domestic fuels and cooking gas (October 2000).

3. The Government of Ecuador reaffirms its commitment to maintain close relations with the Fund and consult on the adoption of policy measures that may be needed during the period of the program.

Sincerely yours,

Memorandum of Economic Policies of the
Government of Ecuador for 2001

I. Background

1. The early results of the dollarization of the economy have been encouraging: the financial crisis has stabilized; economic activity has picked up; unemployment has fallen; inflation is declining; and the banking system is liquid. Although there have been some delays putting in place the institutional structure to support dollarization, considerable progress has been made in recent months. Two bank liquidity support mechanisms—a recycling facility at the central bank and a liquidity fund—are in place; tight control over public spending has contributed to a substantial build-up of "excess" reserves at the central bank to support dollarization; and last year's successful debt exchange has helped put the public finances on a more sustainable basis. This memorandum of economic policies (MEP) describes the policies and objectives of the Government of Ecuador for the year 2001, which aim at sustaining recovery in output and employment and addressing priority social needs, and in support of which the government requests from the Fund an extension of the current arrangement and a rephasing of the remaining purchases.

II. Recent Developments

2. Recent macroeconomic developments have been generally better than expected:

• The recovery in output was stronger than projected. Real GDP is estimated to have increased by 2½ percent in 2000 (compared to ½ percent projected in the program) and about 4½ percent (year-on-year) in the first quarter of 2001, mainly reflecting a recovery in public investment. Unemployment fell to 10 percent in March 2001 from a peak of 16 percent a year earlier. Inflation has remained high—reflecting the pass-through of price increases following the sharp devaluation prior to dollarization and increases in public sector prices—but is decelerating sharply. 12-month inflation in consumer prices was 46½ percent April 2001 and in producer prices it was 4½ percent in March 2001, down from peaks in 2000 of 108 percent and 301 percent in 2000, respectively.

• The public finances strengthened in 2000, reflecting oil export prices substantially higher than in the program and higher tax revenues because of faster economic growth and improvements in tax administration. The combined public sector recorded a surplus of about 1½  percent of GDP (compared to a programmed deficit of 2.7 percent of GDP) and the primary surplus of the nonfinancial public sector (NFPS) was 9 percent of GDP (compared to a programmed primary surplus of 5½ percent of GDP). Tight control was maintained over spending, and the public sector wage bill declined by 1.4 percentage points of GDP (to 5.7 percent of GDP). In the first quarter of 2001, the combined public sector recorded a deficit of ½ percent of projected annual GDP. Tax revenues remained buoyant but petroleum revenue weakened, reflecting a fall in export prices and production difficulties, the government on-lent US$147 million to the bank liquidity fund, and fixed investment recovered.

• The banking sector stabilized. Total deposits grew at a fairly steady rate, increasing by 25 percent in 2000 and 26 percent (year-on-year) in March 2001. Credit to the private sector (net of loan provisions) fell by 3 percent last year but grew by 8½ percent in the year to March 2001. While banks' nonperforming loan ratio remains high—at about 47½ percent for the system as a whole—this mainly reflects developments in closed and intervened banks. For private banks the ratio peaked at about 18½ percent in March 2000 and fell to about 13 percent in March 2001, partly because of the restructuring of small (i.e., less than US$50,000) nonperforming loans to households and corporations. There was little progress in restructuring large loans in 2000, mainly because of the short period during which a formal restructuring scheme was in effect, the lack of appropriate incentives for creditor and debtor participation, and legal obstacles to the effective participation of intervened banks in the restructuring scheme (intervened open banks account for about 38 percent of the total loan portfolio of open banks). Banks' external credit lines have continued to fall—to US$645 million in April 2001 compared to a peak of about US$2.5 billion in mid-1998.

• The external position was stronger than projected in 2000. The current account surplus was about 5½ percent of GDP in 2000 (compared to a programmed surplus of 3.2 percent), reflecting the increase in oil prices. However, the surplus narrowed progressively over the year as imports recovered sharply and in the first quarter of 2001 the external current account moved in modest deficit. Private capital outflows have continued to be high, partly reflecting the rebuilding of banks liquidity positions, but the capital account has improved sharply, reflecting higher private direct investment. Central bank excess freely disposable net international reserves (FDNIR) increased by about US$1 billion to US$775 million in 2000 (compared to a programmed increase of US$469 million), and further to US$787 million by end-April 2001, notwithstanding a shortfall in expected external disbursements.

• Program performance criteria. The quantitative performance criteria for August 2000 were met comfortably with the exception of the ceiling on central government expenditure, which was breached by 1.3 percent because of somewhat higher than anticipated interest payments.

3. A number of policy measures have been implemented in recent months:

• Domestic fuel subsidies have been reduced markedly. In December 2000, the prices of gasoline and diesel were increased by between 20-30 percent; cooking gas prices initially were raised by 100 percent but in February 2001 the increase was rolled-back to 60 percent in the interests of social cohesion. The impact of the cooking gas increase on the poorest families was more than offset by a corresponding increase in the monthly cash transfer they receive (the bono solidario).

• The first stage of the tax reform became law on May 10, 2001 and included a 2 percentage point increase in the value-added tax rate (to 14 percent).

• Several steps were taken to strengthen the financial sector, make interest rate policy more transparent, and increase the supply of credit to the economy: (i) the financial transaction tax of 0.8 percent was abolished (from January 1, 2001) to encourage financial intermediation; (ii) the Ley para la Promoción de la Inversión y la Participación Ciudadana (known as Ley Trole II, which became law in September 2000) amended the calculation of the usury interest rate ceiling, setting it at 1.5 times the central bank's reference rate on new commercial bank loans to the corporate sector; (iii) in November 2000 the need for banks to make additional provisions on loans which carried interest rates above 18 percent was eliminated; (iv) also in November 2000 the ceiling on fees banks could charge in lieu of interest was abolished; and (v) to support banks temporarily in need of liquidity, in January 2001 the resources of the liquidity fund were boosted by onlending from the central government, and a liquidity recycling facility at the central bank became operational.

• The corporate debt restructuring scheme was relaunched in February 2001 with a 60-day window for the submission of applications. The early results have been very encouraging, with about 2,500 applications received from bank debtors to restructure loans of US$1.9 billion, or 95 percent of the loan portfolio eligible for restructuring.

• The pay-out of the deposit guarantee was accelerated. In December 2000, the ministry of finance transferred US$137 million to the deposit guarantee agency (AGD) to facilitate payments to small depositors of obligations stemming from guaranteed deposits in failed banks. The maintenance of the government's commitments under the deposit guarantee has been important in restoring stability to the banking system and containing liquidity pressures, and has helped sustain low income families. The obligations of the government to honor the deposit guarantee through cash payments to depositors now have been met.

• Foreign trade was liberalized through the partial elimination in January 2001 of the import tariff surcharge of 5-10 percent. The government hopes to eliminate the surcharge altogether if the tax reform to be submitted to congress on March 1, 2001 (see below) yields sufficient revenue.

• Good progress was made in normalizing relations with external creditors. At the meeting of Paris Club creditors on September 13-15, 2000 creditors granted Ecuador a rescheduling/deferral of about US$800 million in arrears and maturities due in 2000. The agreement takes effect on approval of the second review by the Fund's Executive Board. In August 2000, Brady bond and Eurobond debt totaling US$6.4 billion was successfully exchanged for global bonds of US$3.9 billion, and arrears to bond holders were cleared. About 97 percent of bondholders participated in the bond exchange; the government has paid the few remaining Eurobond holdouts (US$16 million) in full and is current with the Brady bond holdouts (US$137.5 million) and will continue to service these bonds.

III. The Government's Macroeconomic Program for 2001

4. The proposed macroeconomic framework for 2001 is set out in Box 1 below. Real GDP growth would be boosted by investment associated with the construction of the new oil pipeline (to begin in March). Twelve-month inflation would decline sharply, but still be 22-27 percent by end-2001, mainly reflecting increases in public sector prices that have already taken place or are scheduled. The external current account would shift to a modest deficit: imports would rebound from the compressed levels of the last two years, reflecting the recovery in economic activity and construction of the new oil pipeline, but exports would decline because of lower prices for primary exports, including oil, and weakness in Andean export markets. The program targets a decline of US$100 million of central bank excess net international reserves, which would put the stock of reserves at about 15 percent of projected M2 by end-2001.

Box 1. Ecuador: Macroeconomic Framework, 2001   (Annual percentage change)     Real GDP Consumer price inflation (end-period) 4 22-27   (In millions of U.S. dollars) External current account balance    In percent of GDP Central bank "excess" net international reserves    Change    Stock    Stock in percent of projected M2 Average oil export price (U.S. dollars per barrel) -227 1¼ -100 675 15 20

5. The performance criteria and indicative targets of the economic program for 2001 supported by the Fund are set out in a separate technical memorandum of understanding.

IV. Fiscal Policy and Social Spending

6. The program aims at a combined fiscal deficit of about ¼ percent of GDP, consistent with a primary surplus for the NFPS of about 6¼ percent of GDP (or about 7¼ percent of GDP excluding the onlending of CAF resources to the liquidity fund), to be achieved through a combination of revenue and expenditure measures. The main revenue measures to achieve the fiscal targets are: (i) the increase in domestic fuel prices in December 2000 (described above), which is projected to reduce fuel subsidies by the equivalent of about 1.3 percent of GDP in 2001; (ii) the tax reform which became effective on May 10, 2001 and is estimated to generate revenues equivalent to ½ percent of GDP in 2001 (and a further ¼ percent of GDP in 2002); and (iii) an increase in the salary base applied to social security contributions, expected to yield about 0.7 percent of GDP in 2001. The main elements of the tax reform were: a 2 percentage point increase in the rate of the value-added tax ; some rationalization of the tax system through the elimination of many "nuisance" taxes; an increase in taxes on motor vehicles; and a reduction in personal income tax through an increase in the income tax thresholds. Taking account of the revenue lost as a result of the elimination of the financial transactions tax and the import tariff surcharge, there would be a net increase in fiscal revenues deriving from policy measures in 2001 of about ½ percentage point of GDP.

7. Public expenditure will continue to give priority to addressing the needs of the poorest segments of the population. In particular: (i) the poorest families have been more than compensated for the recent increase in cooking gas prices by an increase in the monthly cash transfer they receive (the bono solidario); (ii) capital spending in 2001 is to give greater emphasis to the development of rural areas with a high density of indigenous groups; and (iii) the state development bank is to gear more of its microlending activities to support the economic development of indigenous communities. Given the overall financing constraints of the government's economic program, further efforts are to be made to improve the targeting of social expenditures.

8. To tighten control over public expenditure, in February 2001 a presidential decree was issued giving the ministry of economy and finance authority to set spending targets for public sector institutions, including with respect to wage payments, and to monitor and enforce compliance with the targets. The increase in public sector wages in 2001 will be limited to the 12½ percent increase granted in January 2001.The government will monitor closely the investment plans of the nonfinancial public enterprises and the rest of the general government, and ensure that pricing policies are consistent with achieving a modest operating surplus in the nonfinancial public enterprise sector in 2001.

9. The fiscal program for 2001 provides additional financial support for the banking strategy, including the interest cost of public sector bonds to be issued for bank recapitalization and in exchange for certificates of frozen deposits and the onlending of resources to the liquidity fund.

10. The assumptions behind the fiscal program have been kept conservative given the dependency on oil revenues and the relatively large financing needs of the program. If there are strong indications of a revenue shortfall prior to the third review of the arrangement (August 2001), the government will adopt the additional measures deemed necessary to ensure the achievement of the fiscal objectives of the program.

11. In June 2001 the second phase of the tax reform will get underway. It will focus on improving tax collections and facilitating stable macro and fiscal management in the presence of the large increase in fiscal revenues from the oil sector after 2003. In June 2001 emergency legislation will be sent to the congress in June 2001 to increase the control of the tax revenue service (SRI) over customs administration. In July 2001, legislation will be sent to the congress aimed at:

• Replacing the existing oil stabilization fund (whose operation is triggered by a threshold price and whose proceeds are marked for a variety of expenditure programs) by a new oil stabilization fund. The aim would be for the new fund to accumulate significant reserves to make it an effective device for absorbing external shocks.

• Eliminating tax revenue-earmarking with the exception of that mandated by the constitution. Instead, a revenue sharing mechanism would be introduced which would take into consideration proposals pending for greater fiscal decentralization.

• Revising and building on existing fiscal rules enacted under the Ley de Transformación Económica del Ecuador (known as Ley Trole I) with comprehensive fiscal responsibility legislation encompassing the central government as well as regional and local governments. In the process of fiscal decentralization, the government will put in place mechanisms aimed at transferring expenditure responsibilities pari passu with the constitutionally mandated transfer of central government revenues to the municipalities, and measures to strengthen the institutional capacity of the municipal authorities. Thus, revenues will be transferred only when municipal authorities have proven themselves competent to assume additional spending responsibilities.

V. Financial Sector Policies

12. The central bank is committed to greater transparency in interest rate policy and—subject to the usury interest rate ceiling—to market-determined interest rates. As such, the central bank will apply consistently the formula established in Ley Trole II for setting the usury interest rate ceiling, which will not be allowed to impede any adjustment of interest rates that may be needed to counter stresses in the banking system. The central bank is also committed to ensuring that the interest rate policy governing liquidity recycling is consistent with market conditions.

13. To speed up progress in the restructuring of large debts (above US$50,000) of households and corporations to banks, a presidential decree was issued in January 2001 reopening for a further 60 days the window for applications for loan restructuring. The implementing regulations supporting the scheme were issued by the banking board in early February 2001. The key principles of the restructuring scheme remained: the voluntary participation of creditors and debtors; only viable debts are to be restructured; and no net commitment of funds from the public sector. As noted above, the early results have been very encouraging with applications received to restructure almost all of the eligible loan portfolio.

14. The main incentives for creditor participation in restructuring are a flexible classification system to be applied to loans restructured under the scheme to encourage banks to recognize implicit losses, and classifying as a "loss" (with a 100 percent provisioning requirement) loans not restructured within the timeframe provided by the scheme. While closed AGD banks cannot forgive interest or principal, they will participate in the restructuring process by negotiating extensions of maturities and adjusting interest rates to provide debt relief consistent with the agreements reached between open banks and their clients.

15. Debtor participation in restructuring is encouraged through use of special foreclosure procedures (the coactiva) to be applied to debtors who continue to be in arrears for more than 90 days after the deadline for restructuring. In January 2001, the AGD issued regulations governing the use of coactiva; by end-April 2001 345 cases had been initiated for assets of about US$146 million. In addition, borrowers with nonperforming loans have begun to approach their banks to make use of the restructuring decree to forestall coactiva procedures. To facilitate the use of coactiva by intervened open banks, provision has been made for them to transfer nonperforming loans to intervened closed banks which have access to coactiva procedures. Furthermore, the resolution governing coactiva authorizes both the Corporación Financiera Nacional (CFN) and the central bank to apply it to the nonperforming loans of private banks.

16. A restructuring unit has been established in the superintendency of banks to coordinate the work of the public bodies involved in restructuring (the superintendency of banks, the central bank, the deposit guarantee agency, the ministry of economy and finance, and the CFN) and to promote the participation of debtors and creditors.

17. An important element of the banking strategy is strengthening bank solvency through recapitalization, provided such banks are deemed viable and establish business plans (to be agreed with the superintendent of banks) for restoring profitability. In this setting, in May 2001 the government recapitalized Filanbanco with a US$300 million issue of negotiable government bonds with a view to the eventual sale of the bank. The government bonds are immediately available to replenish the liquidity needs of Filanbanco.

18. To assist in the recapitalization of private banks, in June 2001 the government intends to establish a scheme for making available to banks matching funds to private capital contributions to bank recapitalization. The government has negotiated a loan of US$76 million from the CAF to finance bank recapitalization; and the fiscal program for 2001 includes a provision for public bond issues of up to US$100 million as additional resources. In assisting the recapitalization of private banks, the government will seek to maximize reliance on private sources of capital.

19. By August 2001, the authorities intend to submit to congress legislation providing the AGD (or some other public institution) with the authority to take over insolvent but viable banks, recapitalize them and prepare them for privatization. The legislation will clarify that the decision to liquidate or continue operating a bank will be made according to least costs criteria.

20. The authorities are reviewing the liquidity requirements of the banking system to determine the appropriate level and combination of liquid instruments to be held as reserves. It is envisaged that reforms to the current system of reserve requirements would be introduced in the second half of 2001.

VI. Financing of the Program

21. The external financing gap for 2001 is estimated at about US$501 million (2.9 percent of GDP). The government intends to meet this gap by means of emergency program financing of US$339 million from the World Bank, IDB, the CAF, and the Fondo Latinoamericano de Reservas (FLAR). The bulk of the financing from the multilaterals would represent disbursements of support already announced at the time of the initiation of the government's adjustment program. Negotiations are also underway with a foreign bank to reschedule arrears of about US$162 million on the external credit lines of intervened banks, and for the maintenance of foreign banks' exposure under external credit lines. The Government of Ecuador also intends to request from Paris Club creditors an extension of the consolidation period for the agreement reached last September, in line with the request for the extension of the period of the SBA.

VII. Structural Policies

22. Although legal obstacles have delayed important parts of the government's structural reform program, significant progress has been made in several areas:

• Agreement has been reached with a consortium of private oil companies to construct a second oil pipeline from the Amazon to the coast; construction is expected to begin in March 2001. The new pipeline will be able to transport up to 450,000 barrels of oil a day, more than doubling oil exports (the capacity of the existing oil pipeline is 385,000 barrels a day). Total foreign investment in the pipeline is estimated at US$1 billion over the next two years.

• In December 2000, a 30-year concession for the supply of water and sewage services to the city of Guayaquil (the largest city in Ecuador) was awarded to a foreign company; the company is to invest US$520 million over the next five years to improve the infrastructure for such services.

• The state monopoly in the telecommunications sector is to be ended from end-2001; after that date free competition in the supply of such services is permitted.

• The privatization of the six state electricity generation companies and 18 electricity distribution companies is envisaged by end-2001 (in March 2001 the government launched "road-shows" to Europe and the United States in support of the privatization).

23. The ruling by the constitutional tribunal last December that many elements of the Ley Trole II were unconstitutional has delayed the development of joint ventures in the petroleum sector and the privatization of the state airline (TAME). However, the authorities are examining the possibility of overcoming the objections of the tribunal through changes in the legal structure of the joint ventures and of the state airline and expect to be able to proceed with these activities later in 2001.

VIII. Statistical Issues

24. The statistical system in Ecuador is weak and the authorities have been unable to implement timely changes in the methodology, particularly with respect to the national accounts and the external sector. Furthermore, complications arising from the change in accounting systems following the dollarization of the economy, and high staff turnover in key ministries, have resulted in a marked deterioration in the quality and timeliness of data reported to the Fund recently. To improve the monitoring of developments under the SBA, the government is seeking technical assistance—including from the Fund—to improve the data management and information systems related to domestic debt and treasury operations of the nonfinancial public sector.

Ecuador—Technical Memorandum of Understanding

1. This supplementary technical memorandum of understanding (TMU) sets out the specific performance criteria (PC), indicative targets (ITs), structural benchmarks, and prior actions that will be applied under the second, third, and fourth reviews of Ecuador's Stand-By Arrangement with the International Monetary Fund. In addition, this supplement provides the technical details that underlay the government's plans for 2001 as discussed in the government's memorandum of economic policies (MEP). The definition and measurement of PCs and ITs, as well as the authorities commitments to providing data to the Fund staff, will remain as outlined in the original TMU of April 4, 2000.

I. Phasing of Purchases and Reviews

2. After approval of the second review and an extension of the Stand-By Arrangement to end-October, a purchase of SDR 37.80 million will be available to Ecuador. It is envisaged that Ecuador will complete two more reviews during 2001. The amounts, dates of review, conditions for completion of these reviews, are shown in Table 1. It is envisaged that the 2001 Article IV consultation will be concluded at the time of the fourth review.

II. Quantitative Targets

A. Fiscal Targets

3. There is a ceiling on the combined public sector deficit. The public sector deficits will be measured by their net borrowing requirements, and the combined public sector deficit is defined as the sum of the net cumulative borrowing requirements of the NFPS and the operating cash result of the Central Bank of Ecuador (CBE). Revenues are measured on a cash basis, while expenditures are on an accrual basis; in particular, interest is on a due basis. The NFPS comprises the central government (CG) and the same sub-national governments, government institutions, and public enterprises as described in the original TMU of April 4, 2000.

4. The borrowing requirement of the CG includes the interest accrued on bonds issued to the deposit insurance agency (AGD) as described in paragraph 5, and on all other government bonds issued for the recapitalization of the banking system and for honoring deposit guarantees. For the purpose of the program, and regardless of the terms with respect to grace periods on interest, bonds issued to the AGD for the recapitalization of banks will accrue monthly simple interest at a rate 6 percent per annum or higher from the effective date of issuance.

Box 1. Performance Criteria for the Combined Public Sector Deficit 1 (In millions of U.S. dollars)     Ceiling on the Combined Public Sector Deficit 2   Cumulative public sector borrowing requirement 1 January 1—June 30 (performance criterion) January 1—August 31 (performance criterion) January 1—October 31 (indicative target) January 1—December 31 (indicative target) -183 -130 36 -52     1 Public sector as defined below. 2 Maximum cumulative deficit.

5. The net borrowing requirements of all the NFPS entities are measured in U.S. dollars as the sum of the net change in: (i) the indebtedness of the NFPS to the domestic banking system, net of deposits and excluding government bonds initially sold abroad; (ii) the domestic public debt of the NFPS (including securities issues by any of its entities) held by the nonbanking private sector; (iii) the floating debt of the NFPS including the non-interest domestic arrears of the CG as defined in paragraph 9; (iv) the financial assets held abroad by NFPS entities; and (v) the total external debt of the NFPS. The borrowing requirements of the NFPS will also include all net privatization receipts. The combined public sector deficit equals the NFPS borrowing requirement plus the quasi-fiscal deficit of the central bank of Ecuador. Disbursements and debt-service charges in other currencies will be converted into U.S. dollars according to paragraph 20. The domestic banking system comprises the central bank, commercial banks, the National Development Bank, and any other financial institution holding deposits from or claims against the NFPS.

6. The interest debt settlements between the public enterprises being prepared for privatization (including PACIFICTEL, ANDINATEL, and the successor of INECEL) and the CG will be counted as current revenue of the CG. Privatization and concession receipts will be deposited in the account of the solidarity fund (SF) in the CBE, and for the purpose of the program will not be considered revenue of the government; its operations are consolidated with the accounts of the CG. Privatization receipts will not be counted as revenue of the SF but concessions receipts will be to the extent that they do not exceed the annuity component.

7. Expenditure of the CG includes the interest accrued on bonds issued to the AGD for the recapitalization of banks and for the payment of the deposit guarantee in AGD closed banks in bonds as described in paragraph 4.

8. Non-interest domestic arrears of the CG are defined as the difference between orders of payments submitted (valores determinados) by the budget directorate (Secretaría de Presupuesto) to the treasury (Tesorería de La Nación) and the payments issued (valores emitidos) by the treasury to the central bank to credit the public entities' accounts. Financial expenditures (gastos financieros) are excluded from this definition.

B. External and Monetary Sector Targets

9. The above limits apply to all public- and publicly-guaranteed external debt. Limits on new debt do not apply to: (i) loan disbursements to restructure, refinance, or prepay existing debts that do not result in an increase in outstanding external debt; (ii) any government loans or guarantees issued associated with the restructuring of banks intervened or under AGD administration, including the refinancing of arrears on external trade and interbank lines, or for the funding of government participation in the recapitalization of private banks and the restructuring of their loan portfolio. The above figures include disbursements from emergency credit lines from the World Bank, the Inter-American Development Bank (IDB), and the Andean Development Corporation (CAF), which will be used exclusively for the purposes listed below, and will be made to the extent needed for those purposes only. In the event that disbursements for balance of payments support from bilateral sources were to materialize, the above ceilings will be adjusted upwards for their full amount. The government will not collateralize any new medium- and long-term debt.

10. Current legislation mandates the full backing of specific CBE liabilities with freely disposable net international reserves (FDNIR). The program sets a performance criteria on the path for "excess" FDNIR of the CBE. The concepts of FDNIR and "excess" FDNIR are defined in the original TMU of April 4, 2000.

Adjuster for higher-than-programmed assistance to banks

11. The floor on "excess" FDNIR could be lowered by up to a half the amounts indicated in Box 6 to provide further liquidity assistance to banks through repurchase operations, if needed.

Adjuster for foreign loan disbursements shortfall

12. The floor on "excess" FDNIR will be lowered (increased) on any test date, and on that test date only, by the shortfall (excess) in disbursements on policy-based loans from multilateral or regional development institutions,¹ relative to the cumulative program baseline as specified below, to the extent that delays in disbursements do not reflect failure to meet loan conditionality as reported by the creditor institutions. In the event that bilateral creditors were to provide balance of payments support loans (not currently envisioned) the floor on "excess" reserves will be adjusted upward by the amount of disbursement.

Adjuster for CBE external debt

13. The path for "excess" FDNIR assumes the repayment of US$45 million to the FLAR in 2001. New foreign loan disbursements to the BCE other than from this source, but excluding from the Fund, will result in a matching upward adjustment to the "excess" FDNIR floor.

Accumulation of new external payments arrears

14. There will be no accumulation of external payments arrears. Any cash flow savings resulting from the extension of the Paris Club consolidation period will result in an equal upward adjustment of "excess" FDNIR.

III. Prior Actions

A. Second Review

15. Recapitalization of Filanbanco with a negotiable public bond issue.

16. Approval by congress of a tax reform acceptable to the IMF.

B. Third Review

17. Submission to congress of legislation that includes agreed reforms of the oil stabilization fund, and elimination of all tax revenue earmarking not mandated by the constitution.

IV. Structural Benchmarks and Performance Criteria

A. For Completion of the Third Review (No Later than August, 2001)

18. Implementation of the rules for the composition of banks' capital in accordance with the Basle standards.

19. Establish a time-bound program for the disposal of assets acquired by the AGD in the resolution process, which will include an asset management strategy covering institutional arrangements, information and transparency, and private sector outsourcing by April 30, 2000 (item VII. b. in the FSRM; SB).

20. Reach agreement on restructuring outstanding AGD external credit lines, and secure commitments with foreign banks to stabilize and reconstitute their interbank and trade-related credit lines to AGD open banks (item VI. f . in the FSRM; SB).

V. Disclosure of Specific Information

21. The authorities will provide regularly to Fund staff all the necessary information to monitor the program in an adequate form. In particular, the specific daily, weekly, and monthly data enumerated in the original TMU of April 4, 2000 will be provided on the schedules indicated therein. Whenever possible, the information will be sent by electronic mail; otherwise, by facsimile. In both cases, a copy will be provided to the Fund resident representative.

VI. Baselines and Conversion Rates Used for Selected Variables

22. SDR-denominated accounts will be converted into U.S. dollar at US$1.384 per SDR. Disbursements and debt-service payments falling due on foreign debt not denominated in U.S. dollars will be converted to U.S. dollars at the international market exchange rates.

Table 1. Ecuador: Purchases and Reviews, 2001
Amounts  (Millions SDRs)	Date of Review (earliest possible dates)	Conditions
37.80	May 25, 2001	Completion of second review, and observance of end-August 2000 performance criteria.
37.80	August 31, 2001	Completion of third review, and observance of end-June 2001 performance criteria.
37.80	October 31, 2001	Completion of fourth review, and observance of end-August 2001 performance criteria.