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Ecuador—Supplementary Letter of
Intent Mr. Horst Köhler 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. Sincerely,
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