Ecuador and the IMF

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EcuadorSupplementary Letter of Intent
Quito, March 13, 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 government of Ecuador wishes to propose some modifications to the letter of intent that we signed on February 10, 2003. These modifications reflect that Congress approved the 2003 budget with small changes, requiring a US$42 million upward revision in the noninterest expenditure ceiling and some associated modifications in the quarterly quantitative performance criteria (Table 1). The revenues also were revised upward slightly, so the program overall and primary balance targets for the year are unaltered. The Government is also requesting modifications to the prior action on the clearance of nonreschedulable external arrears. Finally, the Government is requesting an extension of the time period to complete the signing of contracts with companies to manage the Filanbanco liquidation trust funds and to audit at least 8 closed banks in the Deposit Guaranty Agency (AGD).

2. The proposed modifications based on the amendments introduced to the 2003 budget and the extension of the dates for the completion of the prior actions do not alter the objectives of the economic program described in our Memorandum of Economic Policies of February 10, 2003. The modified budget also remains fully consistent with the fiscal rules in the Fiscal Responsibility and Transparency Law. As you know, we attach great importance to this law as it is the cornerstone of our medium-term economic strategy.

3. The modifications to the budget are:

  • Congress increased revenues and expenditures by about US$40 million reflecting updated estimates for some taxes, interest, and non-interest outlays. The increase in revenues is less than 1 percent of total revenues in the fiscal program.

  • Congress also provided authorization to increase education spending by up to US$165 million if the resources to pay for it can be obtained, and provided that the level of noninterest spending in the budget remain consistent with the limits in the Fiscal Responsibility and Transparency Law. The Government agrees with Congress that we should not, and will not, increase overall noninterest expenditure in excess of what is permitted by law, and, therefore, we will only increase education outlays if it is possible to reduce the same amount of noninterest expenditures elsewhere.

4. The government of Ecuador will not make any changes to the wage structure for public employees ahead of an agreed civil service reform.

5. The Paris Club agreed on March 11 that the payment of all nonreschedulable arrears outstanding at end-February 2003 be deferred by two weeks, and that the payment of all reschedulable arrears be deferred by a maximum of four weeks. On this basis, we would like to request that the prior action on clearance of nonreschedulable arrears be considered met, although the prior action was completed five working days before the Board meeting, instead of two weeks before the Board meeting, as specified in the LOI signed on February 10, 2003.

6. While we have made progress in selecting independent international firms to manage the liquidation of one Filanbanco trust fund containing the bank's loan portfolio, these firms are conducting their own due diligence, which has delayed the completion of the prior action. The signing of the contract to manage this trust fund is now envisaged before April 5, 2003. We also request an extension of the time period to sign the second contract for the Filanbanco trust fund containing the bank's real estate assets to June 30, 2003, reflecting the need for more time for due diligence and legal consultation on this trust fund. Finally, we request an extension of the time period to sign the contracts for audits in at least eight banks in the Deposit Guarantee Agency to April 5. The Government has just appointed new management to the AGD, which has meant a delay in the completion of this objective beyond February 28, as was envisaged. Because the audits will be slightly delayed, we also request that the performance criterion on entering these banks into liquidation, which is the follow-up action, be delayed as well, from May 31 to June 30, 2003.

7. As of March 10, the prior actions, with the above noted modifications to the LOI of February 10, 2003, have been observed, as reflected in the revised Annex I. The shifting of the commitments regarding the two Filanbanco trust funds and the AGD banks from prior actions to structural performance criteria is reflected in the attached revised Annex II.


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

Table 1. Ecuador: Quantitative Performance Criteria under the 2003
Stand-By Arrangement Program1
(In millions of U.S. dollars)
          Dec. 31,


1.  NFPS overall balance (ceiling)   186420552508
2.  NFPS noninterest expenditure (ceiling)   1,2512,7344,2455,860
3.  Stock of public sector deposits in the BCE and commercial banks (floor)2 1,282 1,1501,2261,2751,416
4.  Stock of central government deposits in the "cuenta unica" at the central bank (floor)2 118 89187148192
5.  Stock of registered public sector gross debt (ceiling) 13,730 13,77013,86213,84513,782
6.  Stock of external arrears, e.o.p. (ceiling) 163 0000
7.   Stock of domestic arrears, e.o.p. (ceiling) 452 21122220

1As defined in the attached Technical Memorandum of Understanding.
2For 2002 reflects end-of-period stocks; for 2003 reflects quarterly average stocks.


Ecuador-Revised Prior Actions

1.  Clearance of all non-reschedulable external arrears (paragraphs 5 and 11, and as modified by paragraph 5 in the supplementary LOI).1 Observed
2.  Issue regulations, agreed with Fund staff, for theimplementation of the Fiscal Responsibility and Transparency Law (paragraph 14).  Observed
3.  Conelec and Conatel to issue resolutions to restart the price adjustments for electricity andtelephone tariffs (paragraph 20).   Observed
4.  Submission to Congress of urgent legislation to transfercontrol over the customs administration to the SRI. (paragraph 13).   Observed
5.  Issue regulations for the tourism law, discussed with Fund staff and consistent with the objectives of the program, aimed at preventing new tax loopholes from opening up (paragraph 12).Observed
6.  COMEXI to issue a resolution to reverse theselective import tariff concessions issued in the last 4 months of the previous government (paragraph 7).  Observed
7.  Passage of the 2003 budget containing a freeze inwage rates, and an average oil price assumption of US$18 per barrel (paragraph 8 and 12, and as modified by paragraphs 1-4 in the supplementary LOI).Observed

1Unless otherwise indicated, all paragraph reference numbers refer to the Memorandum of Economic Policies.


Ecuador-Revised Structural Performance Criteria (PC) and Benchmarks (SB)
Objective DatePC/SB

   For the first review: 
1.  Auction offnks held in the AGD. (paragraph 18).all restructured private sector debt portfolios of closed ba Before Mar. 31, 2003SB
2.  Sign contract with an international investment bank to prepare Banco del Pacífico for sale (paragraph 19). Before Mar. 31, 2003SB
3.  Sign contracts to conduct independent audits of at least eight closed banks in the AGD (paragraphs 6 and 7 of the supplementary LOI) Before Apr. 5, 2003PC
4.  Sign contract with independent international firm(s) to manage the Filanbanco liquidation trust fund containing the loan portfolio (paragraphs 6 and 7 of the supplementary LOI) Before Apr. 5, 2003PC
5.  Passage of the legislation to transfer control of the customs administration to the SRI (paragraph 13). Before Apr. 30, 2003PC
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 13). Before Apr. 30, 2003PC
   For the second review: 
7.  Enter at least 8 closed banks in the AGD into liquidation (paragraph 15, and paragraphs 6 and 7 of the supplementary LOI). Before Jun 30, 2003PC
8.  Sign contract with independent international firm(s) to manage the Filanbanco liquidation trust fund containing the real estate assets (paragraphs 6 and 7 of the supplementary LOI) Before Jun 30, 2003PC
9.  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 20). Before Jun 30, 2003PC
10.  Concession the management of the electricity distribution companies and Andinatel and Pacifictel to reputable international firms (paragraph 20). Before Jun. 30, 2003 PC
11.  Sign contracts with independent international firm(s) to manage the liquidation trust funds of the AGD banks (paragraph 17). Before Jun. 30, 2003SB
12.  Bring Banco del Pacífico to the point of sale (paragraph 19) Before Jul. 31, 2003SB
13.  Submission to Congress of the tax reform law including the gradual elimination of revenue earmarking not mandated in the Constitution, and tax exemptions (paragraph 13). Before Aug. 31, 2003PC
14.  Passage of the law for public sector wage unification and civil service reform (paragraph 13). Before Aug. 31, 2003PC
   For the third review: 
15.  With technical assistance from international institutions, conduct an assessment of the operating procedures and actuarial balances of the IESS, ISFA, and ISPOL (paragraph 9). Before Sep. 31, 2003SB
16.  Passage of the tax reform law, including the elimination of revenue earmarking not mandated by the constitution (paragraph 13). Before Nov. 30, 2003PC
17.  Conclude returning all blocked deposits in Filanbanco and the AGD banks in liquidation to depositors (paragraphs 16 and 17). Before Dec. 31, 2003PC