Ecuador and the IMF

 Press Release: IMF Completes First Review of Ecuador's Stand-By Arrangement, Approves US$42 Million Disbursement and Grants Waivers
August 01, 2003

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Ecuador—Letter of Intent, Supplement to the Memorandum of Economic Policies, and Technical Memorandum of Understanding

Quito, Ecuador
July 23, 2003

The following item is a Letter of Intent of the government of Ecuador, which describes the policies that Ecuador intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Ecuador, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.


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

Dear Mr. Köhler:

1. The attached Supplement to the Memorandum of Economic Policies (SMEP) describes recent developments and policy implementation, and the government's plans for the coming months, including additional steps to be taken to meet the objectives of the 2003-04 economic program supported by the Stand-By Arrangement (SBA) from the Fund. Except as modified in this letter and the SMEP, the objectives and commitments of the economic program remain as described in the original letter of intent (LOI) and Memorandum of Economic Policies (MEP) dated February 10, 2003, and the supplementary LOI dated March 13, 2003.

2. Regarding performance under the program through end-June, the quantitative performance criteria on deposits of the NFPS was observed. Moreover, the government believes that the end-June limit on the stock of registered gross debt also was observed although the precise data will not be available until after the Board meeting, and therefore the government requests a waiver of applicability for this performance criterion. The end-June quantitative performance criteria on the NFPS overall fiscal balance, noninterest expenditure, deposits in the central government BCE account (cuenta única), and domestic and external payments arrears are likely to have been missed. Final data will not be available until after the Board meeting. As indicated in the SMEP, corrective actions are being taken to bring the program back on track and the government requests waivers for the nonobservance of these performance criteria. Finally, there were some small external payments arrears in April, May, and June, contrary to the continuous performance criterion on the nonaccumulation of arrears under the SBA. The government will pay off these arrears as a prior action for the Board consideration of this review, and it requests a waiver for the nonobservance of this continuous performance criterion. Prior to the Board consideration of the review, the government will provide to the Fund the latest available data on the observance of the quantitative performance criteria described above.

3. Regarding the structural reforms, four performance criteria related to resolving issues in the closed banks could not be implemented by the intended date. Two have now been observed (to conduct audits in the AGD banks, and to hire firms to manage Filanbanco liquidation trust funds), and two are proposed to be rescheduled for a later date (to enter AGD banks into liquidation, and to hire a firm to manage the Filanbanco real estate liquidation trust fund). Moreover, an economic and environmental study of the petroleum sector has begun but was not finished by end-June, and efforts are underway to hire private sector management for the state electricity and telephone companies but these have not yet been concluded. The government also proposes new completion dates for these reforms. Progress has been made with the passage in Congress of a Customs Reform Law, but the legislation fell short of transferring full control of the customs administration to the SRI. Two corrective measures were included in the Civil Service Reform Law to remedy these shortcomings. The civil service reform and wage unification bill was submitted to Congress, as emergency legislation, in mid-June. However, because the bill was large and complex, Congress could not consider it on an emergency basis. Therefore, as a prior action for the first review, the government re-submitted to Congress only the civil service reform part, as emergency legislation. The portion pertaining to wage unification will be re-submitted to Congress as soon as possible, i.e., after the consideration of the tax reform bill, which is to be sent to Congress as urgent legislation by end-August. Based on corrective steps having been taken in each of these cases, the government requests waivers for the nonobservance of the above-referenced structural performance criteria.

4. Reflecting the latest estimates and projections under the program, the end-September targets on the NFPS overall balance, the deposit accumulation by the central government, and the stock of domestic arrears need to be revised slightly, although the end-December targets would remain unchanged. Therefore, the government requests a small modification for these end-September performance criteria by reducing slightly the target for the NFPS overall balance, and the stock of central government deposits, and increasing slightly the stock of domestic arrears, as specified in the attached Tables 1 and 2 of the SMEP. Finally, the government requests a reduction in the ceiling on the level of registered public sector gross debt during the remaining of the year, reflecting a revision in the end-2002 stock of debt, as shown in the attached Table 1 of the SMEP.

5. Prior actions for the first review are as proposed in Annex I, and most of them have already been observed. These comprise a decree to reduce fuel intermediation margins; decrees to eliminate absentee workers and to implement hiring restrictions; signing a framework agreement for the electricity sector to improve payments flows to PetroEcuador and reciprocal letters between PetroEcuador and the Ministry of Economy and Finance agreeing to transfer these payments to the Treasury; clearance of nonreschedulable external arrears; submission to Congress of the civil service reform bill as urgent legislation; completing the first auction of restructured loans in the AGD banks; and establishing a high-level committee to expedite reforms in the oil sector. In addition to these actions, the government will take any additional measures necessary to stay within the 2003 programmed wage bill. In view of the delays in the structural reforms mentioned above, several follow-up actions are now expected to be completed somewhat later in the year than envisaged in the original program. The new set of proposed structural performance criteria and benchmarks are set out in Annex II. The government regards these structural reforms as integral parts of the economic program, and essential steps to improve the functioning of the Ecuadoran economy, and remains committed to their full implementation.

6. During the remaining period of the Arrangement, the government will continue to maintain a continuous dialogue with the Fund on the adoption of any measures that may be appropriate to achieve the objectives of the program. Further reviews are expected to be completed by end-September 2003, end-December 2003, and end-March 2004. These reviews will continue to be associated with the assessment of overall performance under the program, and observance of the performance criteria for end-June, end-September, and end-December 2003, respectively.

Sincerely,

/s/
Mauricio Yepez Najas
President
Central Bank of Ecuador 		  /s/
Mauricio Pozo Crespo
Minister of Economy and Finance

 

Supplement to the Memorandum of Economic Policies

I. Introduction

1. This supplement to the memorandum of economic policies (SMEP) describes recent developments under the program supported by a Stand-By Arrangement from the Fund, and elaborates policies for the remainder of the program period, including several initiatives to respond to problems that have emerged in recent months.

II. The Macroeconomic Framework

2. The outlook for real GDP growth for 2003 has been moderately lowered from 3.5 to 3.1 percent. The downward revision mainly reflects lower output in the petroleum sector in the first half of 2003. Inflation has been slightly higher than expected, and consumer prices are now projected to increase by 7 percent through year-end, from 6.5 percent expected previously. The external current account balance will likely be stronger than earlier projected, with a deficit below 5 percent, from above 5 percent in the original program.

III. Fiscal Policy

3. In the first quarter, the fiscal surplus and noninterest expenditure targets were missed by small margins. The NFPS overall surplus was 0.3 percentage points of GDP below program on an annual basis. Notwithstanding favorable oil export prices, oil revenue transfers by PetroEcuador to the central government were lower than programmed because of a decline in oil production and a shortfall in the output of the refineries, which had to be compensated with costly fuel imports. Also, fuel intermediation margins were not lowered, as had been programmed, leading to some revenue loss to the budget. The social security system and the local governments performed better-than-programmed. The small deviation from the noninterest expenditure target includes the effect of an adjustor under the program, which calls for offsets in expenditures when there are shortfalls in net oil revenues to the budget. While the budget expenditures were below program, the difference was not enough to fully compensate for the lower oil revenues to the budget.

4. While corrective actions are being taken, the end-June fiscal targets are also likely to have been missed. Preliminary data suggest that oil revenues in the second quarter were lower than programmed, in part because of a breakdown in the SOTE oil pipeline in May and a 10-day strike in the oil sector in June. Tax revenues were lower than expected in April and May owing to slowing consumption and disappointing import tax collections, although collections recovered in June. The government continued to exercise expenditure restraint, but the end-June noninterest expenditure target is also expected to have been missed by a small margin.

5. The government experienced some difficulties with the financing program in the first half of the year, and it was not able to reduce the payments arrears as expected. There were some delays in domestic debt placements, and part of the oil revenues to the budget were temporarily held up in a BCE escrow account. As a result, while external arrears have almost been eliminated, paying off domestic arrears remains to be completed. Nevertheless, in the second quarter of the year improvements have been made in the financing plan by reversing the buildup of deposits in the provisioning escrow account for oil revenues in the BCE; and in April and May the government regularized the domestic debt placements and sold over US$300 million in gross debt. It anticipates net domestic placements of bonds and bills in the amount of US$379 million in the second half of 2003.

6. In recent weeks, the government has had to accommodate some important spending pressures. To resolve a two-month old teachers' strike, the government agreed to wage increases that will raise wage costs by US$25 million in 2003 and US$170 million from 2004 onward. Also, the Social Security Institute (IESS) needed to honor a commitment to increase pensions by 27 percent in July 2003, which was included in a resolution adopted by the outgoing administration in January of this year. The pension increase is estimated to cost US$48 million in 2003 and double this amount in 2004.

7. Notwithstanding these pressures on the budget, corrective measures are being taken and the annual primary surplus objective of the program in 2003 of 5¼ percent of GDP is maintained. This objective will also facilitate aiming for the primary surplus of 6.7 percent in 2004, as envisaged in the medium-term projections for the original program.

  • First, as a prior action for the first review, the government issued a decree to lower the intermediation margin in fuels distribution and retailing--thus making available US$8 million in additional derivatives sales revenues to the budget.

  • Second, the government is committed to offsetting the additional wage costs arising from the settlement with the teachers within the wage bill itself, thus maintaining the ceiling on the NFPS wage bill for 2003 as in the program. To this end, and as a prior action for the first review, the government issued decrees that include hiring restrictions through year-end, and remove absentee workers from the payroll.

  • Third, the government has taken measures to lower purchases of goods and services and other current spending by US$25 million in the rest of the year.

  • Fourth, the government, through PetroEcuador, is committed to collect in cash at least US$70 million from the electricity companies for fuel sales in the second half of 2003. To do this, a framework agreement between the Fondo de Solidaridad, the electricity companies, the Minister of Economy and Finance, PetroEcuador, and the Central Bank of Ecuador to ensure cash payments to PetroEcuador for future fuel sales was signed as a prior action for the first review. In addition, the Ministry of Economy and Finance and PetroEcuador signed reciprocal letters to transfer the US$70 million in cash proceeds to the Treasury. Also, the government will develop a mechanism to start clearing the arrears from electricity companies on past fuel deliveries.

  • Fifth, in the social security area, the IESS has identified offsets to maintain the overall surplus of the social security system, notwithstanding higher pension outlays in the rest of the year. These offsets reflect a combination of higher-than-expected payroll contributions that are being received by the Social Security Institute (IESS) and lower-than-expected demand for health care services. Also, lending to the private sector from the IESS (préstamos quirografários) will be limited to contain the stock to US$142 million by end-2003.

  • Finally, the original program was framed with a deliberately cautious oil price assumption of US$18 per barrel. The latest WEO oil price projections show oil prices in excess of this benchmark, even after taking account of the recent decline in world oil prices following the conclusion of the Iraq war. This favorable oil price development is compensating for most of the lower volume of crude oil output now expected, even through the share of total oil revenues available to the central government is expected to be lower than what was budgeted.

8. The government has concluded the Paris Club negotiations. In June, the government reached agreement with Paris Club creditors to reschedule eligible maturities that are projected to fall due during the program period, and to seek comparable treatment in the rescheduling of maturities falling due during the same period to non-Paris Club creditors. Small amounts of external arrears were incurred in April, May, and June. As a prior action for the first review, the government will clear these remaining arrears that could not be rescheduled consistent with the Paris Club agreement.

9. The government has made progress in key fiscal structural reforms:

  • Customs reform. Legislation approved in April marked a substantial step forward to improving customs administration, including with new requirements for valuation and documentation of shipments at the point of origin, improvements in the information systems, and stronger surveillance in the ports. However, the law lacked two important provisions that relate to human resource management of the customs office without which the reform would be incomplete. Therefore, the government included in the civil service reform that was resubmitted to Congress as an urgent law (see below), provisions to remove the customs office personnel from the civil service labor code, and to eliminate the sharing by the customs office personnel in the proceeds from the auctions of confiscated goods.

  • Civil service reform. A bill divided in two parts dealing with civil service reform (including two corrective provisions for the customs reform law noted above) and wage unification was submitted to Congress as emergency legislation in mid-June. However because of the complexity of the bill, Congress indicated that it could not be considered in full as emergency legislation. As a prior action for the completion of the first review, the government resubmitted to Congress, as emergency legislation, the civil service reform part of the bill. We request that the related structural performance criterion on the passage of the legislation be modified to require only the passage of the civil service reform, and the provisions to remove the customs office personnel from the civil service reform, and to eliminate their sharing in the proceeds of auctions referred to above. The government will resubmit the portion of the bill on wage unification after the consideration of the tax reform bill, which is to be sent to Congress as urgent legislation by end-August.

  • Controlling wage costs. The government recognizes the importance of containing the public sector wage bill and avoiding further pressures on wage costs. To address these pressures, the government has already issued budget directives for 2004 that include no general wage rate increase for next year. Moreover, with the instruments provided by the civil service reform bill, the government will seek a reduction of employment in the NFPS next year. Together with the offset of the wage costs already committed in the rest of 2003, the government is confident that it can limit the increase in the NFPS wage bill in 2004 to US$105 million.

  • Strengthening the social safety net. With IDB assistance, and in the context of the government's intention to remove the generalized cooking gas subsidy later this year, the government has been developing systems to improve the targeting of the social safety net. The bono solidario (now restructured and renamed the bono de desarrollo humano) was increased as of July 1, 2003. Experience with this first step increase in the bono will be used to fine-tune the new data base for assessing eligibility to assistance and to improve the delivery system. Once experience shows that the new safety net is working well, and is appropriately targeted, the government will eliminate the generalized cooking gas subsidy. This second step of the program will be implement no later than end-2003.

  • Actuarial assessment of the social security system. With the new pension increase in July, average pensions have regained their value in 1998 dollar terms. To assess the sustainability of the system after the recent increase, the government, together with the IESS and external experts, will undertake an actuarial assessment of the general pension system and the police and military pension funds. This assessment is a structural benchmark under the program for end-September 2003. The assessment will also be used to implement steps to improve the coordination of pension policies between the IESS and the government, to synchronize better their efforts in managing the macroeconomy.

IV. Financial System Policies

10. Solid progress has been made with the financial system reforms included in the program, although legal obstacles and administrative difficulties have led to some implementation delays. As a result, it is proposed that the calendar for the follow up steps for these reforms be adjusted as stated below. We remain committed to return all blocked private sector deposits by year-end, which is the central objective of these reforms.

  • Filanbanco. On May 5, contracts were signed with two international firms to collect the proceeds from the loan portfolios in the liquidation trust fund, and they have started their work. Moreover, the firm(s) to collect on the real estate assets in a second trust fund will be hired by end-September.

  • AGD banks. Contracts for the financial and performance audits for nine closed banks were signed on May 7. The audits have now started and will be concluded by end-August. We now expect these banks to be liquidated by end-August, rather than by end-June as envisaged originally. The independent firms to manage the liquidation of these banks are expected to sign contracts by end-September.

  • Loan portfolio. An independent foreign firm assessed the value of the restructured loan portfolios from the AGD banks and prepared the auction process. The first auction will be completed in late July 2003 and is a prior action for Board consideration of the completion of the first review. It is expected that the whole portfolio will be sold by end-August.

  • Banco del Pacífico. An international investment bank has been hired to prepare Banco del Pacífico for sale. The firm is expected to conclude its work and bring the bank to the point of sale by end-September 2003.

V. Public Enterprise Reform and Other Issues

11. The government is fully committed to a fundamental restructuring of the petroleum sector. To this end, the government issued a decree establishing a high level committee, to develop the strategy and oversee its implementation. A key element of the approach will be to increase oil production in PetroEcuador facilitated by efficiency improvements in the company and increased private sector participation in the state run oil fields. The government already is making progress with an economic and environmental study of the petroleum sector, which is being conducted with foreign oil industry experts and with assistance of the multilateral institutions (CAF, World Bank, IDB, and the Fund). The government aims to finish the study by end-October 2003, and it will contain a calendar of concrete policy steps to improve the results in this important sector. Moreover, to improve disclosure and strengthen accounting, PetroEcuador will contract an independent external financial audit from one of the large international auditing firms by end-September 2003. This audit will become a regular annual feature of the company, and be published.

12. Reforms in the electricity sector have acquired new prominence. To help strengthen the public finances, the cash flow for fuel purchases by electricity companies from PetroEcuador needs to improve. While the tariff structure has been raised in recent years, the collection experience in the electricity distributors and the payment record of electricity generators to PetroEcuador is still very poor. To address this problem and improve corporate efficiency, the program already includes the commitment to introduce private sector management into the electricity sector. (The bids for these management contracts are now being issued.) Moreover, a further step is being undertaken by seeking agreement with the companies (as a prior action for the first review) to move to a cash payments system only (and clear payments arrears) to normalize fully the cash flow between the electricity sector and PetroEcuador from 2004 onward.

13. The process of hiring private sector management to run the state telephone companies is also underway. It is expected that contracts will be signed with foreign firms to begin managing Pacifictel and Andinatel by end-August 2003.

14. As recommended by Fund staff in the Safeguards Assessment exercise, on April 2, 2003 the Central Bank Board adopted a resolution to publish the full set of financial statements of the BCE within six months of the financial year-end, including disclosure notes and the audit opinion, starting with the 2003 financial statements. The notes will include the quantified impact of deviations from IAS.

Table 1. Ecuador: Quantitative Performance Criteria under the 2003
Stand-By Arrangement Program1
(In millions of U.S. dollars)
December 31, 2002
January-March 2003
January-June 2003
Program Targets
Program Actual Program Actual Margin (+) Program Actual Margin (+) Jan.-Sep. Jan.-Dec.
1. NFPS overall balance (floor) . . . . . . 186 173 -13 420 . . . . . . 465 508
2. NFPS noninterest expenditure (ceiling) . . . . . . 1,161 1,182 -21 2,734 . . . . . . 4,245 5,860
3. Stock of public sector deposits in the BCE and commercial banks (floor)3 1,282 1,282 1,150 1,285 135 1,226 1,483 257 1,275 1,416
4. Stock of central government deposits in the "cuenta unica" at the central bank (floor)3 118 118 89 115 26 187 125 -62 114 192
5. Stock of registered public sector gross debt (ceiling) 13,730 13,458 13,770 13,292 478 13,862 . . . . . . 13,650 13,650
6. Stock of external arrears, e.o.p. (ceiling) 163 163 0 3 -3 0 5 -5 0 0
7. Stock of domestic arrears, e.o.p. (ceiling) 452 480 211 541 -330 22 . . . . . . 61 0
1As defined in the attached Technical Memorandum of Understanding (TMU).
2Includes a US$90 million adjustor on the NFPS noninterest expenditure (ceiling) as described in the TMU.
3Reflecting the quarterly averages of end-of-month stocks.

Table 2. Ecuador: Arrears Clearance Program for 2003
  Program
Actual
Program Targets
Dec. 02 Mar. 03 Dec. 02 Mar. 03 Apr. May Jun. Jun. Jul. Aug. Sep. Oct. Nov. Dec.
Stock, end-of-period 615 211 615 517 378 402 . . . 22 64 64 61 60 61 0
External 163 -0 163 3 1 2 5 0 0 0 0 0 0 0
    Paris Club, governments 111 -0 111 2 0 0 4 0 0 0 0 0 0 0
    WB, IDB, CAF 18 0 18 0 0 0 0 0 0 0 0 0 0 0
    Banks 33 0 33 1 1 2 2 0 0 0 0 0 0 0
    Other 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Identified domestic, central government 452 211 452 514 377 400 . . . 22 64 64 61 60 61 0
    Wages 117 0 143 156 158 168 . . . . . . . . . . . . . . . . . . . . . . . .
    ISSFA, ISSPOL 115 115 93 93 0 0 . . . . . . . . . . . . . . . . . . . . . . . .
    Transfers to local governments 41 20 41 101 77 76 . . . . . . . . . . . . . . . . . . . . . . . .
    Preasignaciones 30 0 73 70 47 40 . . . . . . . . . . . . . . . . . . . . . . . .
    IESS 26 26 26 26 0 0 . . . . . . . . . . . . . . . . . . . . . . . .
    Bienes y servicios (current and capital) 114 41 76 68 96 117 . . . . . . . . . . . . . . . . . . . . . . . .
    Other 9 9 0 0 -0 0 . . . . . . . . . . . . . . . . . . . . . . . .
Sources: Central Bank of Ecuador; Ministry of Economy and Finance.

ANNEX I

Ecuador—Prior Actions for the Completion of the First Review

Objective Timing
1. Issue a decree to reduce the intermediation margin in fuels distribution and retailing (Paragraph 7).

Observed.
2. Issue decrees to eliminate absentee workers from the payroll, and to implement hiring restrictions (Paragraph 7).

Observed.
3. Sign a written framework agreement between the Fondo Solidaridad, the electricity companies, the Minister of Economy and Finance, PetroEcuador, and the Central Bank of Ecuador to ensure cash payments to PetroEcuador for future fuel sales. Also, the Minister of Economy and Finance and PetroEcuador will sign reciprocal letters agreeing to transfer these cash payments to the Treasury. (Paragraph 7).

Observed.
4. Clearance of all external arrears that could not be rescheduled consistent with the Paris Club agreement (Paragraph 8).

At least five business days prior to the Board meeting for the first review.

5 Submission to Congress of legislation, on an emergency basis, for civil service reform (including amendments to the Ley de Servicio Civil y Carrera Administrativa), to reduce employment in the public sector and to contain the increase in the nominal wage bill in the central government 2004 budget. (Paragraph 13 of the MEP of February 10, 2003). This draft law must also include provisions to remove customs office personnel from the civil service labor code, and to eliminate the sharing by the customs office personnel in the proceeds from the auctions of confiscated goods (Paragraph 9).

Observed.

6. Complete the first auction of the restructured private sector debt portfolios of closed banks held in the AGD (Paragraph 10).

At least five business days prior to the Board meeting for the first review.
7. Issue a decree establishing a high level advisory committee, for the implementation of reforms in the oil sector. (Paragraph 11). Observed.


ANNEX II

Ecuador—Revised Structural Performance Criteria (PC) and Benchmarks (SB)

A. Structural Measures Envisaged for the First Review

Objective Original date PC/SB Status/Comment

1. Auction off all restructured private sector debt portfolios of closed banks held in the AGD (Paragraph 10).

 By March 31, 2003. SB Missed. First auction as a prior action for the completion of the first review.
2. Sign contract with an international investment bank to prepare Banco del Pacífico for sale (Paragraph 10). By March 31, 2003. SB Missed. Implemented on May 7, 2003.
3. Sign contracts to conduct independent audits of at least eight closed banks in the AGD (Paragraph 10). By April 5, 2003. PC Missed. Implemented on May 7, 2003. Waiver requested.
4. Sign contract with independent international firm(s) to manage the Filanbanco liquidation trust fund containing the loan portfolio (Paragraph 10). By April 5, 2003. PC Missed. Implemented on May 5, 2003. Waiver requested.
5. Passage of legislation to transfer control of the customs administration to the SRI (Paragraph 9). By April 30, 2003. PC Missed. Two corrective measures to be included in Civil Service Reform bill. Waiver requested.
6. Submission to Congress of legislation for public sector wage unification and civil service reform (including amendments to the Ley de Servicio Civil y Carrera Administrativa), to reduce employment in the public sector and to achieve a lower nominal wage bill in the central government 2004 budget compared with the 2003 budget (Paragraph 9). By April 30, 2003. PC Missed. Submission to Congress of the civil service reform part, as emergency legislation, is proposed to be converted into a prior action for completing the first review. Waiver requested.


B. Structural Measures Envisaged for the Second Review

Objective Original date PC/SB Status/Comment

1. Auction off all restructured private sector debt portfolios of closed banks held in the AGD (Paragraph 10).

By March 31, 2003.

SB

Auctions to be completed by August 31, 2003.

2. Enter at least 8 closed AGD banks into liquidation (Paragraph 10).

By June 30, 2003.

PC

Missed. Proposed to be rescheduled to August 31, 2003. Waiver requested.

3. Sign contract to concession the management of the electricity distribution companies and Andinatel and Pacifictel to reputable international firms (Paragraphs 12 and 13).

By June 30, 2003.

 PC

Missed. Proposed to be rescheduled to August 31, 2003. Waiver requested.

 

4. Submission to Congress of the tax reform law including the elimination of revenue earmarking not mandated in the Constitution, and tax exemptions.

By August 31, 2003.

 PC

Unchanged.
5. Passage of the law for civil service reform, including two provisions to remove customs office personnel from the civil service labor code, and to eliminate the sharing by the customs office personnel in the proceeds from the auctions of confiscated goods. (Paragraph 9) . By August 31, 2003. PC Date is unchanged. Proposed to be modified as specified in paragraph 9 of the SMEP.


C. Structural Measures Envisaged for the Third Review

Objective Original date PC/SB Status/Comment

1. With technical assistance from international institutions, conduct an assessment of the operating procedures and actuarial balances of the IESS, ISFA, and ISPOL (Paragraph 9).

 

 

 

By September 30, 2003.

SB

Unchanged.

2. Sign contract with independent firm(s) to manage the Filanbanco liquidation trust fund containing the real estate assets (Paragraph 10).

By June 30, 2003.

PC

Missed. Proposed to be rescheduled to September 30, 2003. Waiver requested.
3. Sign contract with large international auditing firm to conduct an independent external financial audit of PetroEcuador (Paragraph 11).

None.

PC

By September 30, 2003.
4. Sign contracts with independent firm(s) to manage the liquidation trust funds of the AGD banks (Paragraph 10).

By June 30, 2003.

SB

Missed. Proposed to be rescheduled to September 30, 2003.
5. Bring Banco del Pacífico to the point of sale (Paragraph 10).

By July 31, 2003.

SB

Proposed to be rescheduled to September 30, 2003.
6. Conduct and publish an economic and environmental analysis, and prepare an action plan with time table for the cost effective production, distribution, and sale of fuels and other petroleum products in Ecuador (Paragraph 11).

By June 30, 2003.

PC

Missed. Proposed to be rescheduled to October 31, 2003. Waiver requested.
7. Passage of the tax reform law, including the elimination of revenue earmarking not mandated in the constitution, and tax exemptions.

By November 30, 2003.

 PC

Unchanged.
8. Conclude returning all blocked deposits in Filanbanco and the AGD banks in liquidation to depositors. By December 31, 2003. PC

Unchanged.


Ecuador—Technical Memorandum of Understanding

1. This Technical Memorandum of Understanding (TMU) defines the quantitative performance criteria under the program presented in Tables 1 and 2 attached to the Letter of Intent (LOI) and the Supplementary Memorandum of Economic Policies (SMEP) of July 23, 2003.

2. Floor on the NFPS overall balance. The NFPS comprises the central government, the municipal and provincial governments, the public sector enterprises, the social security institute (IESS), the Development Bank of Ecuador (BEDE), port authorities, universities, and NFPS autonomous agencies and funds. The NFPS overall balance is measured as the change in the NFPS gross debt (an increase in the debt indicating a deficit), minus the change in public sector deposits in the Central Bank of Ecuador (BCE), and in the commercial banks (as defined in point 4; an increase in deposits indicating a surplus). NFPS gross debt comprises total registered NFPS gross debt (defined in point 6), and arrears in interest payments on external debt, as well as all domestic arrears (principal and interest) and accounts payable. For purposes of measuring the NFPS overall balance, the debt outstanding at end-December of the previous year is valued during the present year at the constant U.S. dollar-third currency exchange rate of end-December of the previous year. New debt flows incurred during the program period are valued at the exchange rate of the day the debt is issued. Privatization receipts and other forms of below-the-line debt reduction are excluded for purposes of measuring compliance with the NFPS overall balance. For purposes of measuring the NFPS overall balance under the program, the amount of any forward sale of oil will be added to the registered debt; this debt will be considered amortized at the moment the oil is delivered (i.e., any nonspot oil sales are treated as asset-backed debt financing).

The NFPS overall balance will be adjusted upward by the amount of petroleum revenues accrued to the budget that are in excess of those assumed in the program (shortfalls of petroleum revenues must be compensated by expenditure cuts). The cumulative amount of petroleum revenues accruing to the budget, as assumed in the program, is US$429 million for the period January-March 2003; US$803 million for the period January-June; US$1,209 million for the period January-September; and US$1,595 million for the period January-December 2003.

3. Ceiling on the NFPS noninterest expenditure. NFPS noninterest expenditure comprises all current spending (including, among other items, wages and salaries, purchases of goods and services, social security benefits, and social spending in FEIREP), and capital spending (including net lending) of the public sector.

4. Floor on the stock of public sector deposits in the BCE and in the commercial banks. Public sector deposits are defined as all deposits held by the NFPS in the BCE and the commercial banks. The floor applies to the average of end-of-month deposits during the relevant calendar quarter.

5. Floor on the central government deposits in the cuenta única in the BCE. This stock of deposits is defined as those deposits owned by the central government and held in the cuenta única in the BCE, excluding amounts held in the oil stabilization (FEP) provisioning account. The floor applies to the average of end-of-month deposits during the relevant calendar quarter, as reported in line 231105 (cuenta corriente única) of the central bank Fund reporting Table 10-R.

6. Ceiling on the stock of registered public sector gross debt, recorded on a disbursement basis. The public sector comprises the NFPS (as defined in point 2) and the financial public sector (comprising the Central Bank of Ecuador (BCE), the National Development Corporation (CFN), The National Development Bank (BNF), and The Housing Bank of Ecuador (BEV)). The stock of registered public sector gross debt is defined as all external debt (including principal in arrears, and as defined by the residency of the holder), domestic debt (as defined by the residency of the holder) issued by the NFPS held outside the NFPS, and government guaranteed debt, as reflected in the below-the-line fiscal accounts. For purposes of measuring the stock of public sector debt at the end of each period, the debt outstanding at end-December of the previous year is valued at the constant U.S. dollar-third currency exchange rate of end-December of the previous year. New debt flows incurred during the program period are valued at the exchange rate of the day the debt is issued. The term debt will be understood to mean a current, i.e., not contingent, liability, created under a contractual arrangement through the provision of value in the form of assets (including currency) or services, and which requires the obligor to make one or more payments in the form of assets (including currency) or services, at some future point(s) in time; these payments will discharge the principal and/or interest liabilities incurred under the contract. Debts can take a number of forms, the primary ones being as follows:

    (i) loans, i.e., advances of money to the obligator by the lender made on the basis of an undertaking that the obligor will repay the funds in the future (including deposits, bonds, debentures, commercial loans, and buyers' credits) and temporary exchanges of assets that are equivalent to fully-collateralized loans under which the obligor is required to repay the funds, and usually pay interest, by repurchasing the collateral from the buyer in the future (such as repurchase agreements and official swap arrangements);

    (ii) suppliers' credits, i.e., contracts where the supplier permits the obligor to defer payments until some time after the date on which the goods are delivered or services are provided; and

    (iii) leases, i.e., arrangements under which property is provided which the lessee has the right to use for one or more specified period(s) of time that are usually shorter than the total expected service life of the property, while the lesser retains the title to the property. For the purpose of the guideline, the debt is the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property.

7. Under the definition of debt set out above, arrears, penalties, and judicially awarded damages arising from the failure to make repayment under a contractual obligation that constitutes debt are debt. Failure to make payment on an obligation that is not considered debt under this definition (e.g., payment on delivery) will not give rise to debt. For purposes of this ceiling, the debt includes any amount of oil sold forward; this debt will be considered amortized at the moment the oil is delivered (i.e., any nonspot oil sales are treated as asset-backed debt financing).

8. External and Domestic Arrears and Arrears Clearance. Table 2 of the SMEP on the arrears clearance program for 2003 presents the stocks, at end-of-period, of external and identified domestic arrears, and a schedule of the reduction in these arrears. Domestic arrears are those identified by the treasury of the central government only. The public sector (as defined in point 6) will not accumulate at any time during the arrangement period any new external arrears, or increase the stock of domestic arrears.