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
Country's Policy Intentions Documents
of Intent, Supplement to the Memorandum of Economic Policies, and Technical
Memorandum of Understanding|
July 23, 2003
Mr. Horst Köhler
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.
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.
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:
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.
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
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.
Ecuador—Prior Actions for the Completion of the First Review
A. Structural Measures Envisaged for the First Review
B. Structural Measures Envisaged for the Second Review
C. Structural Measures Envisaged for the Third Review
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.