Uruguay and the IMF Press Release: IMF Completes Fourth Review of Uruguay's Stand-By Arrangement and Grants Waivers February 20, 2004 Country's Policy Intentions Documents Free Email Notification Receive emails when we post new items of interest to you. Subscribe or Modify your profile

Uruguay—Letter of Intent, Memorandum of Economic and Financial Policies, and Technical Memorandum of Understanding Montevideo, Uruguay February 6, 2004 The following item is a Letter of Intent of the government of Uruguay, which describes the policies that Uruguay intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Uruguay, 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 U.S.A. Dear Mr. K?r: Since the completion of the third review under the Stand-By Arrangement last July, the Uruguayan economy has continued to strengthen, and financial indicators have further improved. The government of Uruguay remains firmly committed to achieving the objectives of the program, through fiscal consolidation and structural reforms. Available data indicate that all quantitative performance criteria under the program for end-September have been observed, except for a small shortfall in the combined public sector primary balance, which was more than offset in the overall balance by lower interest payments. The attached Memorandum of Economic and Financial Policies presents the policies of the government of Uruguay for 2004. In support of its program, the Government of Uruguay requests: (i) completion of the fourth review under the Stand-By Arrangement, with availability of a purchase equivalent to SDR 93.2 million; (ii) rephasing of all remaining purchases under the arrangement, in an amount equivalent to SDR 559.2 million (Table A); (iii) a waiver of nonobservance of the end-July 2003 structural performance criterion to outsource to third parties the disposal of the assets of liquidated banks in at least two asset groups; (iv) a waiver of nonobservance of the end-December 2003 quantitative performance criterion on the cumulative primary balance of the combined public sector; and (v) waivers of applicability of the end-December 2003 quantitative performance criteria on the nonfinancial public sector gross debt and on general government noninterest expenditure. These waivers are requested on the basis of the strong policies that will be maintained for 2004, in line with the original design of the program. We also request that the repurchase expectations arising during 2004 be moved to an obligations basis. There will be four program reviews in 2004, to be held in February, May, August, and November. We are confident that the policies set out in the attached Memorandum will ensure the success of the program and justify the requested waivers and completion of the review. The continued support of the international financial institutions will be fundamental in underpinning economic recovery. The government stands ready, in consultation with the Fund, to take any additional measures necessary to ensure the success of the program. Sincerely yours, /s/ Julio de Brun President Central Bank of Uruguay /s/ Isaac Alfie Minister of Economy and Finance Oriental Republic of Uruguay Attachments: Memorandum of Economic and Financial Policies Technical Memorandum of Understanding

Memorandum of Economic and Financial Policies for 2003

I. Background

1. In recent months, Uruguay's economy has gained significant strength and financial indicators have continued to improve. On a seasonally adjusted basis, real GDP expanded by over 3 percent (quarter-on-quarter) during each of the first three quarters of 2003, and partial data point to a further strengthening in activity during the fourth quarter. For 2003 as a whole, growth is estimated to be about 1 percent, reflecting strong export performance and a recovery in domestic demand. Inflation has declined to about 10 percent, bank deposits have continued to increase, and gross international reserves have risen fourfold since mid-March, to US$2.1 billion at end-December (equivalent to 9¼ months of imports of goods and services). All end-September quantitative performance criteria under the program have been observed, except for a small shortfall in the combined public sector primary balance, which was more than offset in the overall balance by lower interest payments.

II. Economic Program for 2004

2. The government has laid out policies for 2004 aimed at consolidating the gains made in 2003, with a strong improvement in economic activity, a further reduction in inflation, and a strengthening in external balances. The economy is assumed to grow by 5 percent, led by the ongoing recovery in exports and domestic demand, and inflation is projected to decline to 7-9 percent by year-end. The external current account surplus would improve slightly in 2004 to about ½ percent of GDP, and the program aims at a modest increase (US$100 million) in net official international reserves.

3. Toward these ends, the program will maintain prudent fiscal and monetary policies and take further steps toward ensuring banking sector soundness, while adopting structural reforms to underpin medium-term growth. Its main components are: (i) the 2004 budget, which seeks to achieve a primary surplus of the combined public sector of 3.2 percent of GDP; (ii) a monetary program aimed at limiting base money growth to about 15 percent; and (iii) a deepening of the restructuring of the banking system, with emphasis on the public bank BROU. The performance criteria are set out in Table 1 and defined in the attached Technical Memorandum of Understanding, and Table 2 presents the prior actions and structural benchmarks under the program. The government will also observe the standard performance criteria regarding exchange restrictions, multiple currency practices, and import restrictions for balance of payments reasons.

III. Fiscal and Monetary Policies

4. The government is firmly committed to achieving the primary surplus objectives of the program, as a key component of our strategy to ensure debt sustainability. During 2003, the primary balance of the combined public sector improved significantly, shifting from equilibrium in 2002 to a surplus of close to 3 percent of GDP. Building on this achievement, the primary surplus is projected to increase to 3.2 percent of GDP in 2004, rise further to about 4 percent of GDP by 2007, and remain at about that level over the ensuing several years. To ensure debt sustainability, however, we will keep the adequacy of the fiscal surplus target under continuous review to ensure that it is sufficient to address the additional fiscal costs that could arise from contingent fiscal liabilities associated with the restructuring of the public banks. Over the medium term, if economic growth turns out to be significantly higher than presently envisaged, the government would be ready to further improve the primary surplus of the combined public sector, to ensure that the overall balance is in equilibrium.

5. In 2004, expenditure restraint will remain at the core of the fiscal program. In nominal terms, the growth in central government noninterest expenditure will be limited to about 9 percent, or close to projected inflation. This increase includes one-time expenses of about 0.4 percent of GDP to cover the cost of the national elections and provide for the payment of deferred expenditures, including food vouchers granted in 2003. Wage and pension increases will remain moderate, and the wage bill of the central government will amount to Ur$15 billion in 2004. The program, however, allows for some room in discretionary spending if tax revenue turns out to be higher than envisaged, provided that the program objectives are met. Social expenditure will be protected, and capital expenditure is programmed to recover somewhat in 2004.

6. Revenue of the consolidated public sector is projected to increase slightly as a proportion of GDP, to 30.6 percent in 2004. This performance will be supported by a current surplus of public enterprises of 3.3 percent of GDP (excluding interest), reflecting adjustments in public tariffs consistent with changes in operating costs. Steps have been taken to strengthen tax administration. To reduce evasion, responsibility for supervising the tax-free zones has been transferred from the Ministry of Economy and Finance to the Tax Administration Department (DGI). In November 2003, congress approved a law providing additional resources to the DGI and enhancing its ability to modernize its internal structure, in line with FAD technical assistance recommendations. As part of its modernization, the DGI will complete a master plan to reengineer its processes and systems, and will establish a Large Taxpayer Unit by end-September 2004 (a structural benchmark).

7. The government remains committed to a floating exchange rate policy. To improve the transparency of exchange market operations, the Central Bank of Uruguay (BCU) has separated its foreign exchange operations from those of the central government. In October, the BCU began conducting most of its foreign exchange operations through preannounced auctions on the electronic stock exchange.

8. The BCU will continue to implement monetary policy in line with targeting base money growth, to anchor inflation expectations and further enhance monetary policy credibility, thereby paving the way for future adoption of inflation targeting. For 2004, base money is targeted to grow by 15 percent, consistent with the macroeconomic framework and a moderation of the remonetization process. Quarterly base money targets are being announced, in line with the desired annual path, and short-term monetary instruments are being used to minimize intra-month volatility. To improve the transparency of monetary policy, the BCU will continue to publish daily information on base money developments. In January 2004, the BCU initiated a regular survey of inflation expectations. The BCU will also continue to promote the use of peso instruments, including inflation-indexed notes. The NDA and NIR performance criteria of the program are presented in Table 1.

IV. Restructuring of the Banking System.

9. Reform of the public banks and disposal of the remaining assets in the liquidation funds are key priorities under the 2004 program. A comprehensive plan for restructuring BROU was finalized in December 2003. The main elements of this plan are to: (i) strengthen BROU's commercial focus and redirect its operations toward business segments where it has a competitive advantage; (ii) improve credit risk management and loan monitoring; (iii) reduce operating costs through the implementation of a rationalization plan; and (iv) provide for the phased removal of nonperforming loans. Progress in the implementation of this plan, designed to ensure BROU's sustained viability and continued compliance with all prudential norms and obligations, will be monitored under the program reviews.

10. BROU is committed to achieving financial viability by end-2004. In mid-December 2003, BROU's Executive Board declared its intention to move all nonperforming loans in Category 5 and most loans currently in Category 4 into a special workout vehicle (fiduciary trust). The main lines of the action plan are as follows:

• A first tranche, including all Category 5 loans above US$100,000, has been legally removed from BROU's balance sheet by end-December 2003, and transferred to the fiduciary trust. The book value of these loans is estimated at US$370 million.

• All Category 4 loans above US$100,000 that fall into Category 5 during January-March 2004 will be transferred to the fiduciary trust by March 31, 2004 (a performance criterion). In addition, all Category 4 and 5 nonperforming loans above US$50,000 will be transferred to the fiduciary trust by June 30, 2004 and all new and remaining Category 4 and 5 nonperforming loans, regardless of amount, will be transferred to the fiduciary trust by December 31, 2004 (performance criteria).

• As required under Uruguayan prudential norms, the value of all assets in the fiduciary trust will be reassessed within six months by an internationally reputable audit firm.

• The fiduciary trust, established in December 2003, will be administered by an entity owned by BROU. To allow for effective asset recovery, the manager of the trust will contract the specialized services of professionals experienced in dealing with nonperforming loans to implement the government's asset recovery strategy (an end-March performance criterion).

• In return for the loans it receives, the entity in charge of administering the fiduciary trust will issue notes which will be fully backed by a government guarantee. These notes will be amortized over a four-year period under a schedule determined by loan recovery expectations, and pay interest. The government guarantee, provided upfront, will cover the entire book value of the loans to be transferred.

11. BROU will continue to build up liquidity for the repayment of reprogrammed deposits. The government will continue to use the resources of the Fund for the Stability of the Banking System (FSBS) as originally envisaged―to provide backing for sight and savings deposits at qualifying banks. The government is also taking steps to ensure that the claim of BROU on Banco Hipotecario del Uruguay (BHU), originating from the 2002 transfer of reprogrammed time deposits, is serviced on time. In December 2003, all arrears were cleared, and the timely service of this note (consistent with the government guarantee, if necessary), restructured in line with BHU's payment capacity, is proposed as a continuous performance criterion under the program.

12. Progress is being made in the resolution of the assets of liquidated banks. Nuevo Banco Comercial (NBC), the government-owned bank created in early-2003 with part of these assets, has proven quite successful at attracting new private sector deposits, and has been able to make significant progress in the restructuring of its NPL portfolio. As envisaged, NBC has fully exercised its option to return to the liquidation funds all loans that are not performing by December 31, 2003. Meanwhile, the government is completing the sale of the remaining assets of Banco de Crédito, which had been liquidated in February 2003. The government continues to intend to outsource the administration of the remaining assets of the other three liquidation funds. To that effect, several private entities have been prequalified to participate in a competitive bidding to administer these assets, with final selection scheduled for no later than end-February 2004 (a performance criterion).

13. The recommendations of the on-site Safeguards Assessment completed by the Fund in 2002 are being implemented. In particular, an external audit of the 2003 central bank accounts is under way, and the BCU has asked an external audit company for additional work on the FSBS audit completed last August. This supplemental audit, which will focus on use of FSBS funds by recipient banks, is to be completed by end-March 2004. In October 2003, Uruguay also ratified the International Convention for the Suppression of the Financing of Terrorism.

V. Structural Reforms and Data Provision

14. To foster the return to sustained economic growth, the government is deepening reforms aimed at encouraging investment, strengthening the role of the private sector, and furthering Uruguay's integration into the world economy. Toward these ends, we are implementing the following measures:

• The government will continue to promote a business climate that facilitates investment. Efforts to promote foreign direct investment will build on the successful award in August 2003 of the concession to operate the Montevideo airport. Negotiations on a bilateral investment treaty have been initiated with the United States. A two-year extension of fiscal incentives has been granted for investment projects that were delayed during the economic crisis in 2002.

• Recently approved legislation, providing a legal framework for trust funds, will help foster the development of new instruments for corporate financing, including in the export sector. Equity investments in NBC are currently being solicited, including from the IFC and other international investors. The government also plans to present legislation to congress aimed at improving the efficiency and coverage of the existing unemployment insurance scheme.

• A free trade agreement with Mexico has been signed, and further trade reform measures are being implemented, including reductions in tariffs on capital goods for equipment and telecommunications, information technology, and agricultural inputs from 6-9 percent to 2 percent, effective January 1, 2004 for a seven-year period. At the same time, the government will continue to phase out a number of specific import duties on textiles, foodstuffs, and chemical products.

• The government is promoting Uruguay's transformation into a regional distribution and logistics hub. Concessions have been awarded to the private sector to operate the Montevideo and Nueva Palmira ports, two new private ports are being developed, and a tender has been issued for the rehabilitation and maintenance of the public railroad network. In addition, more generous rules of origin that were recently approved by Mercosur will enhance activity in the sector of goods in transit.

15. The government will continue to work toward building consensus for adoption of tax and pension reforms during 2004, in advance of the 2005 budget. In late-June, the government submitted a revised tax reform proposal to congress, aimed at improving the efficiency of the tax system and strengthening tax collection through the elimination of several low yielding-taxes and the broadening of the VAT, excise, and corporate income tax bases. In 2003, congress approved the reform of the specialized pension fund for university professionals, and the government will continue to work actively toward securing congressional approval for the reform of the pension funds for the police, the military, and bank employees during 2004.

16. The process of subscription to the SDDS has been initiated, and data reporting and transparency will be improved. Monthly bank balance sheet data will continue to be published with a lag of no more than two months. Measures are also being taken to improve the timely provision and presentation of fiscal data for program monitoring purposes, including through improved coordination between data sources and the BCU and the allocation of more resources for data collection and analysis.

VI. Financing Assurances

17. The program remains fully financed. Residual financing needs for the near term have been addressed to a large extent by the debt exchange in May. The continued implementation of structural reforms is expected to ensure a significant flow of IFI disbursements, projected to amount to US$270 million in 2004, broadly in line with amortization. In addition, the government plan to use in 2004 part of a cushion built in 2003 with multilateral disbursements and the recent issuance of a US$200 million three-year, inflation-indexed, bond in the international market. Any remaining financing needs for 2004, which appear manageable (around US$200-300 million), are expected to be covered through placement of bills and bonds in the domestic and international markets.

Table 1. Uruguay: Performance Criteria and Indicative Targets Under the 2004 Economic Program 1/
		Dec. 2003 Base		Mar. 31	June 30	Sept. 30	Dec. 31
				Targets
A. Quantitative performance criteria 2/
		(In millions of Uruguayan pesos)
1. Combined public sector primary balance (floor) 3/ 4/				1,897	3,605	6,772	11,585
2. General government noninterest expenditure (ceiling) 3/				10,016	19,757	29,726	40,447
3. Change in the net domestic assets of the BCU (ceiling) 3/				1,480	-750	-550	-900
		(In millions of U.S. dollars)
4. Change in net international reserves of the BCU (floor) 3/ 5/		-1,723		-30	50	50	100
5. Nonfinancial public sector gross debt (ceiling) 4/ 6/		8,772		8,853	8,864	9,004	9,036
B. Indicative targets
		(In millions of Uruguayan pesos)
1. Combined public sector overall balance (floor) 3/ 4/ 7/				-5,171	-7,848	-12,567	-12,007
2. Change in the monetary base (ceiling) 8/				550	800	1,000	2,200
				Date
C. Structural performance criteria
Liquidated banks. Selection of winning bid for outsourcing of assets of liquidated banks.				February 29, 2004
BROU. General manager of fiduciary trust to enter into contract for the specialized services of professionals experienced in dealing with nonperforming loans.				March 31, 2004
BROU. Completion of the transfer to the fiduciary trust of all Category 4 nonperforming loans above US$100,000 (more than 150 days overdue) that have become Category 5 (more than 240 days overdue).				March 31, 2004
BROU. Completion of the transfer to the fiduciary trust of all Category 4 and 5 loans above US$50,000.				June 30, 2004
BROU. Completion of the transfer to the fiduciary trust of all new and remaining Category 4 and 5 loans.				December 31, 2004
BHU. Government to ensure timely service of BHU note to BROU				Continuous
1/ As defined in the Technical Memorandum of Understanding (TMU).
2/ Indicative targets for end-September and end-December 2004.
3/ Cumulative changes from end-December 2003.
4/ Adjusted upward/downward for changes in social security contributions, as defined in the TMU.
5/ Adjusted upward/downward for changes in program disbursements from the World Bank and IDB, as defined in the TMU.
6/ Stock of debt at the end of the period; all maturities. The 2003 base includes all loans guaranteed by the government.
7/ Adjusted upward/downward for changes in interest payments, as defined in the TMU.
8/ Cumulative change from December 2003 average.

Table 2. Uruguay: Structural Conditionality Under 2004 Economic Program
Structural Conditionality		Expected Timing
A. Prior actions
BROU. Selection of general manager of the fiduciary trust
BROU. Issuance of unconditioned government guarantee on the performance of the notes to be issued by the fiduciary trust in exchange for loans transferred from BROU.
Liquidated banks. Call for bids for outsourcing of assets of liquidated banks
B. Structural benchmarks
FSBS. Completion of supplementary external audit		March 31, 2004
BROU. Completion of external audit by an internationally reputable firm of assets transferred to the fiduciary trust		June 30, 2004
Pension reform. Approval by Congress of the reform of pension funds for the police and the military		June 30, 2004
BCU. Completion of external audit of 2003 accounts		June 30, 2004
Tax administration. Establishment of a Large Taxpayer Unit at the DGI		September 30, 2004
Pension reform. Approval by Congress of the reform of pension funds for bank employees		December 31, 2004

This memorandum presents the definitions of the variables included in the quantitative performance criteria and quantitative benchmarks annexed to the Memorandum of Economic and Financial Policies.

1. Cumulative primary balance of the combined public sector. The combined public sector comprises the central administration (including as defined in "Article 220" of the Constitution, Salto Grande, and the funds managed directly in the ministries (Fondos de Libre Disponibilidad), the social security system (Banco de Previsión Social, Caja Militar, and Caja Policial), the local governments (Intendencias), the public enterprises (ANCAP, ANTEL, UTE, OSE, AFE, ANP, INC, and ANCO), and the quasifiscal balance of the Central Bank (BCU). The public sector primary balance, excluding valuation adjustments, will be calculated as the overall balance measured from below the line minus interest payments measured from above the line.

• The below the line overall balance will be measured on the basis of information provided by the BCU on: (i) the change in the nonfinancial public sector debt (defined below), including all short term debt, in foreign currency and pesos; (ii) change in net bank credit to the nonfinancial public sector in foreign currency and pesos; (iii) other nonbank financing including privatization; and (iv) the quasifiscal balance of the BCU (defined below).

• The floor on the primary balance of the combined public sector will be adjusted downward (upward) by the amount by which the actual social security contributions to the private pension system exceeds (falls short of) the projected amounts in the program, specified in Schedule A.

2. Cumulative balance of the combined public sector (indicative target). The combined public sector balance is calculated as the sum of the primary balance of the combined public sector described in 1 and interest payments. Interest payments are defined to exclude commissions and fees. The floor on the balance of the combined public sector will be adjusted downward (upward) by the amount that the interest payments exceed (fall short of) the projected amounts in the program, specified in Schedule B for end-March, end-June, and end-September, and end-December.

3. The quasifiscal balance of the BCU is defined as interest earnings on gross international reserves, as defined below, and other earnings including those on other foreign and domestic assets minus operating expenses, commissions paid, and interest paid on domestic and foreign debt administered by the BCU.

4. Cumulative ceiling on general government expenditure applies to total (current and capital) noninterest expenditure of the central administration (includes Fondos de Libre Disponibilidad but excludes transfers to the social security system, automatic transfers to the private pension funds (AFAPs), and earmarked revenue) and the social security system (BPS).

5. Cumulative changes in net domestic assets (NDA) of the BCU is defined as the difference between end-of-period monetary base and net international reserves (NIR) of the BCU as defined in 6 and 7 below. The flow of NIR will be valued at the accounting exchange rate of Ur$31 pesos per US$1. The limit on the change in the NDA will be adjusted by the difference between actual program loan disbursements by the World Bank and IDB and scheduled loan disbursements as reflected in Schedule C:

• The NDA ceiling at end-March, end-June, end-September, and end-December will be adjusted upward in the event of shortfalls compared with projected program loan disbursements, up to a limit of US$50 million.

• The NDA ceiling will be adjusted downward in the event of excesses over projected program loan disbursements by their full amount.

6. Monetary base (indicative target) is defined as the sum of (i) currency issue; (ii) nonremunerated and remunerated peso sight deposits of BROU, BHU, private banks, and other institutions defined below at the BCU; and (iii) call deposits of BROU, BHU, private banks, and other institutions at the BCU. Other institutions include pension funds (AFAPs), local governments, public enterprises, trust funds of the liquidated banks (FRPB), investment funds, offshore institutions (IFEs), insurance companies, exchange houses, stock brokers, and the nonfinancial private sector. The monetary base excludes central government deposits held at BROU subject to a 100 percent reserve requirement. The indicative target is defined as the cumulative change calculated using the monthly averages relative to the base month average.

7. Cumulative changes in net international reserves (NIR) of the BCU. NIR is defined as the difference between the gross international reserves and BCU reserve liabilities. Gross international reserves include all foreign exchange assets that are in the direct effective control of the BCU and are readily available for such purposes of the BCU as intervention or direct financing of payment imbalances. Such assets may be in any of the following forms, provided that they meet the test of effective control and ready availability for use: currency, bank deposits in nonresident institutions and government securities and other bonds and notes issued by nonresidents (with a rating not below "A" in the classification of Fitch and IBCA and Standard and Poor's or "A2" in the classification of Moody's). In addition, holdings of SDRs or of monetary gold would be included under gross international reserves (provided they meet the test of effective control and ready availability of use) as would the reserve position in the IMF.

• Excluded from gross international reserves are all foreign currency claims arising from off-balance sheet transactions (such as derivatives instruments), claims on residents, capital subscriptions to international financial institutions, any assets in nonconvertible currencies, claims on any nonresident Uruguay-owned institutions, or any amounts (in all components of assets, including gold) that have been pledged in a direct or contingent way.

• Also excluded from gross international reserves are foreign exchange assets in the escrow account at the BCU created to provide backing to sight and savings deposits at the public banks and the closed domestic banks (the escrow account at the BCU). Funds not used to support banks will be invested in highly liquid and secure international assets to be reported daily to the IMF and will be subject to periodic special audits.

• BCU reserve liabilities include all foreign currency-denominated liabilities of the BCU with original maturity of one year or less to residents and nonresidents, all certificates of deposit used to constitute reserve requirements against bank deposits, the use of Fund resources, any net position on foreign exchange derivatives with either residents or nonresidents undertaken directly by the BCU or by other financial institutions on behalf of the BCU.

• For the purpose of the NIR calculation, (i) the gold holdings of the BCU will be valued at the accounting rate of US$42 per troy ounce; (ii) liabilities to the IMF will be valued at the rate of US$1.395 per SDR; (iii) gains or losses from gold swaps and other operations will be excluded; and (iv) non-U.S. dollar denominated foreign assets and liabilities will be converted into U.S. dollars at the market exchange rates of the respective currencies as of December 31, 2003.

8. The NIR floor will be adjusted by the difference between actual program loan disbursements by the World Bank and IDB, and scheduled loan disbursements by the World Bank and IDB as reflected in Schedule C, in the following manner:

• The NIR floor at end-June, end-September, and end-December will be adjusted downward in the event of shortfalls compared with projected program loan disbursements, up to a limit of US$50 million.

• The NIR floor will be adjusted upward in the event of excesses over projected program loan disbursements by their full amount.

9. The nonfinancial public sector gross debt refers to the outstanding stock of gross debt in domestic and foreign currency owed or guaranteed by the nonfinancial public sector, excluding the BCU.¹ Debt in the form of leases will be calculated as 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.² The nonfinancial public sector debt ceiling will exclude the government guaranteed BHU note (estimated at US$610 million at end-December 2003) and the government guarantee covering notes issued by the fiduciary trust associated with the transfer of BROU's NPLs (estimated at US$370 million at end-December 2003). It will include debt issued by the Megaconcesión that has a guarantee of the government.

10. The overall nonfinancial public sector debt ceiling will be adjusted upward (downward) by (i) the upward (downward) revisions made to the actual nonfinancial public sector gross debt stock at end-2003; (ii) the difference between the actual and projected amount of social security contributions that are transferred to private pension funds according to Schedule A, i.e., the debt ceiling will be adjusted upward (downward) by the amount that social security contributions exceed (fall short of) those specified in Schedule A; (iii) the difference between the actual and projected interest payments, specified in Schedule B for end-March, end-June, and end-September, and end-December, i.e. the debt ceiling would be adjusted upward (downward) by the amount that interest payments exceed (fall short of) those specified in Schedule B; (iv) the difference between actual and scheduled program disbursements by the World Bank and IDB as reflected in schedule C above, i.e. the debt ceiling will be adjusted upward (downward) by the amount that program loan disbursements exceed (fall short of) those in Schedule C, and any downward adjustment will be limited to US$50 million; (v) the amount of the government guarantee on the BHU note that is called in 2004, excluding the clearance of existing arrears of BHU to BROU, i.e., the debt ceiling will be adjusted upward by the amount of new debt issued by the government to cover its guarantee (principal plus interest) on the BHU note; and (vi) the amount of the government guarantee on the transfer of BROU's NPLs to the fiduciary trust that is called in 2004, i.e., the debt ceiling will be adjusted upward by the amount of new debt issued by the government to cover its guarantee on the schedule of principal and interest payments owed by the trust to BROU; and (vii) the debt ceiling will be adjusted upward to reflect overperformance with respect to the targets on the BCU's net international reserves up to a limit of US$250 million.

11. The data for assessing observance of the quantitative performance criterion on net international reserves will be provided by the BCU no later than one week after each test date. The data for the assessment of all other quantitative performance criteria and indicative targets will be provided by the BCU no later than two months after each test date.

As anticipated in our letter of February 6, 2004, the call for bids for the outsourcing of assets of liquidated banks, which was a prior action under the program, was issued last week. However, delays were registered in assembling the required bidding information, and bidders will need sufficient time to conduct due diligence prior to the auction. As a consequence, it will no longer be possible to select the winning bid at end-February as originally contemplated. We therefore request that the end-February structural performance criterion on selecting a winning bid for outsourcing assets of liquidated banks be instead established as a performance criterion for end-March 2004. We remain fully committed to the banking strategy set forth in our letter of February 6, 2004.

Sincerely yours,

² The suppliers' contracts of ANTEL with equipment providers Ericsson and NEC, which predate the Fund's consideration of lease contracts for programming purposes, are expensed under goods and services as rental outlays and, therefore, excluded from the definition of nonfinancial public sector gross debt for program purposes.