Conformed Copy - C2384 - Economic Recovery Credit - Amendment

Page 1 August 11, 1993 His Excellency Adriano Maleiane Governor Bank of Mozambique Maputo, Mozambique Dear Governor Maleiane: MOZAMBIQUE: Economic Recovery Credit Amendment to Supplemental Letter No. 2 (Financial Management Plan) dated June 19, 1992 This is with reference to your letters of July 7 and 22, 1993, concerning the release of the second tranche of the Economic Recovery Credit (Cr. 2384). I sincerely regret if there has been any lack of clarity on our part concerning the conditions for the release of the tranche. The object of this letter is to clarify the conditions set forth in Section 3.04 of the Development Credit Agreement and in the Financial Management Action Plan (FMAP) set forth in the Supplemental Letter No. 2 to the ERC. While we understand that significant progress in accounting has been recently made, the 1990 and 1991 audits for the Second and Third Rehabilitation Credits (Cr. 1841 and 2021) were submitted by the auditors with a qualified opinion and a statement of procurement not in accordance with World Bank guidelines, including missing supporting documentation for large amounts of funds (about US$4 million for the Third Rehabilitation Credit alone). For these reasons, we are not in a position to release the second tranche, until the action plan described below is carried out in a manner satisfactory to the Association. Second Tranche Release of The ERC Completion of all phases of the FMAP would take a considerable period of time and further delay of the release of the Second Tranche, which would in turn have a very negative impact on the macro-economic situation. To avoid this situation, we would propose to amend paragraphs 2 and 4 of the FMAP to set the following concrete actions as conditions for release of the Second Tranche: (a) submission to IDA of a "progress report" prepared by consultants, satisfactory to IDA, which reviews and describes every item of "irregular procurement" identified in the 1990 audit reports on the Third Rehabilitation Credit and associated financing; such description will include all appropriate reference numbers and dates, identity of the importer and vendor, and amount of procurement in the invoiced currency and US dollars. To that effect, the Government would take all necessary measures to locate the missing documentation (e.g. through GCPI, Ministry of Commerce, Commercial Bank of Mozambique, etc); (b) the Government's proposal on how it will remedy the irregular procurement described in the progress reports from among the following: (i) substitution of complete original documentation from procurement not funded by other development agencies or donors; (ii) reimbursement to IDA; (iii) cancellation from the Third Rehabilitation Credit or associated financing. Page 2 Financial Sector and Enterprise Adjustment Credit (FESAC) We propose that remaining measures concerning the second phase of the FMAP be included as condition of negotiations. We will write to you separately to that effect so that all conditions would be listed together. Please confirm your agreement with the foregoing, on behalf of the Republic of Mozambique by signing, dating, and returning to us this letter. This agreement will become effective on the date of countersignature. I am looking forward to hearing from you so that we can proceed promptly with the release of the second tranche of the ERC. My best regards, Sincerely, Praful Patel Acting Director Southern Africa Department AGREED: REPUBLIC OF MOZAMBIQUE By: Authorized Representative Date: August 24, 1993 Copy to: His Excellency Eneas de Conceicao Comiche Ministry of Finance Maputo, Mozambique