-V -> f C;' -7-Documst of

The World Bank

FOR OFMCLAL USE ONLY

Rqwt No P-6161-AR

OF THE

PRESIDENT OF THE

INTERNATIONL BANK FOR RECON0SC AD ADE

TO THE

EXCTVE DIRECTORS

ON A

PROSED SINGLE CURRENCY LOAN

IN THE AMIINT OF US$500 MILLION

TO THE ARGENTINE REPUBLIC

FR A

CAPItAL MARKEZ DEVELOPMENT PROJECT

BRUARY 4j 1994

MICROGRAPHICS

Report No: P- 6161 ARType: HOP

This doemot has a resticted dilbibntio Mad may be nsed by epiet only In th pouace o ftdeir offical duties. Its cone may lWt othewis be dilosed widxtt Wold Bank *utworiztko.

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CRECY EQMl)PM

Crreny Unit = Peso

US$1.0 = Peso $1.0

GLOSSAR-Y OF ABRDEIAIO_N_S

BANAf)E Banco Nacional de Desarrollo National Development BankBCRA Banco Central de la Repliblica Argendna Cental Bank of ArgentinaBICE Banco de Inversi6n y Comerio Exterior Investen and Trade BankBF pacilidad de Respaldo Fancieo Backstop FacilityBHN Banco Hipoario Nacional National Mortgage BankBNA Banco de a Naci6n Argentina Bank of the Argentia NationBPBA Banco de la Provincia de Buenos Aires Bank of the Province of Buenos AiresDON Bonos con Respaldo del Fondo Bonds under Backstop CommitmentsBONEX Bonos Extemos. External BondsCNAS Caja Nacional de Ahorro y Seguros Nationa Insurance and Savings BankCMTAL Pr6stamo de Asistencia Tecnica al Capital Market Technical Assistance

Darrllo del Mercado de Capitales LOaCNV Comisi6n Nacional de Valores National Securities CommissionCPI Indice de Precios al Consmidor Consumer Price IndexFON Bonos Adquiridos por el Fonldo Bonds purchased by Backstop FundFI Instituci6n Financiera Financial InsttutonPSAL Pr6stamo Sectorial Financiero Financial Sector Adjustmen LoanGDP Producto Interno Bruto Gross Domestic ProductINDER Insdwo Nacional de Reaseguro National Reinsramce InstiteLFE Ley de Entidades Financieras Law of Financial EniiesON Obligacin Negociable Negotiable ObligationOTC Mercado Exrabursail Over-the-Counter MarketPAYG Pago por Sislema de Reparto Pay-as-you-goPB Banco Participante Participating BankPE 1mpresa PNblica Public EnterpriseSCL Pro en Moneda Unica Single Currency LoanTEL Pr6stamo a Tennino Elegible Term Eligible Loan

IOL OFFICIAL USE ONLY

ARGENIN

CAPfAL ACARIGB DEVELODPNMEN PIIET

L4*9 and Prec &M_

Borrwer: Argentite Republic.

Bugdwg cvm: The Fund, an independent corporation to beesablished by the Government. The fancialmanager of the Fund would be an inernationalfinancial instidon witfi a proven sucessfurecord. The o de Inr ComercioExteror (BICE), a Government-owned second-tierbank, would perform adm=stratve and oversightnctions.

endidaries. Prime-rated commercial bank, medium and smalprivate enterprises in all sectors, and buyers ofnew commercial or residential buidings.

US$500 million.

Terms US dollar, single-currency loan, repayable over 15years at the Bank's standard LIBOR-based vaiableinterest rate for US dollar, single-cur y loans.Grace period: 7 years.

QjleIiing The Argntine Republic would onlend the proceedsof the Bank loan to the Fund. The Fund wouldimplement a Backstop Facilty (BF) that wouldoffer prime-rated banks the option to sell to theFund medim-term US doll-denominated bondsissued to roil over prior dollarn ed bondsthat banks had issued to support thir longer termloans for productive purposes.

Otr i: A companion Capital Marlkt DevelopmentTechnical Assistance Loan (CMTAL) wouldprovide complementary support (see to nbelow) in the amount of US$8.5 millionequivalent. IDB has approved a credit line in theamount of US$300 million for productivepurposes, that will be cofinanced by the Export-Import Bank of Japan in an equivalent amount.

This document has a resctted distribution and may be wed by recipients nlb in th eof their oficil du#'s. Its contents may not othorwis be disclosed without Wold udto on.

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QkIectIi": The proposed operation aims to accelerate capitalmarket development to help Argentina meetgrowing investment demand.

Deption: The operation includes the Backstop Facility (seeQhndldng), and an agreed policy and institutionaldevelopment progrm. The Backstop Facilitwould support long-term lending for productivepurposes, by ensuing liquidity to banks in theevent of bond market disruptions. An agreedpolicy and institutional develoment rom,including macroeconomic stability, freelydetermined interest rates, the removal of exitiginterst rate subsidies, and stre-gthened capitalmarket regulation, supervision and enforcement,would also help increase market conidence.Progress i the agreed policy and istitutionaldevelopment progrm would be reviewed duringtwo paLses in commitments, to be implementedafter 30 percent and 60 percent of the loan hasbeen committed or after 18 and 36 months ofeffectiveness, whichever comes first. Theaccompanying CMTAL would help financeinprovements in capital market supervision andregulation; training of commercial banks' staff inproject financing; and implementation andoperation of the new, reformed pension system.

The main benefit of the project would bedevelopment of the capital market, includigincreased availability of long term financing forprivate sector investment, longer bond maturities,development of rating agencies, increased liquidityof the bond market, and improved quality ofcommercial banks.

RiLsks: The main risks are resumption of sustainedmacroeconomic instability, including further strainon the banking system; extended governmentinterventions to lower interest rates; weak progressin bank supervision; weak demand for theBackstop Facility; and non-development of BICE.

Estimated Coht: The total amount of bank bond issues that theBackstop Facility would support over the life of

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the Bank loan depends on the maturities of thebackstopped bonds and the percentage of backstopcommitments exercised by banks. The longer themaurities and the higher the percetage of totalbonds sold to the Fund, the lower the amount ofbond issues that the Fund would be able tosupport.

l sing Pian: Not applicable. Financing of bond purchaseswould mateialize only in the event of a possiblefinancial disruption or market developments thatundermined a PB's ability to rollover its bonds at arate below the backstop price.

lie of Return: Not Applicable.

Not Applicable.

MEMORANDUM AND RECOMMENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR RECONSTRUCTION AN) DEVELOPNT

TO THE EXECUTIVE DIRECTORS ON APROPOSED SINGLE CURRENCY LOANIN THE AMOUNT OF US$500 MILLIOk

TO THE ARGENTINE REPUBLICFOR A CAPITAL MARKET DEVELOPMENT OPERATION

1. I submit for your approval the following memorandum and recommendation on aproposed loan to the Argentine Republic in the amount of US$500 milion to help finance aproject for the dev'~lopment of the capital market in &rgentina. The loan would be a SingleCurrency Loan in dollars at the LIBOR rate, with a maturity of 13 years, including seven yearsof grace.

Part I: COUNTRY ASSISTANCE ST1RATEGY

A. Historidal lPersec0tve and Recent Eoonmic Peormance

2. By the early part of this century, Argentina had become one of'the more develdpedcounries in the world. Its per capita icome, inftrtr and institutions rivalled those ofmany European and North American countries; its vast fertile pampas and migrt-based workforce held the promise of increasing prosperity. However, since the Great Depression, relianceon increasingly statist and inward-looking growth stategies gradually resulted in masive publicsector deficits, accelerating inflaton, and economic stagnation. Pervasive growth of the stateeventally brought public expenditures to over 50 percent of GDP. Although industrialpromotion programs were initially popular among the growing pool of urban workers, theyultimately led to an onerous taxation of agriculture, Argentina's prmne source of wealth, andcontributed to major misallocation of resources. The debt crisis of the early 1980s led theGovernment to resort increasingly to money creation to shoulder its mushrooming financialresponsibiliies. To avoid a growing inflation tax, Argenies withdrew their resorces from thefinancial system, saving and investing abroad at record levels. Economic stagnation ensued.By the end of the 1980s, labor productivity had fallen, social services and basic infrastructuredeteriorated, and poverty had become a serious and growmg problem.

3. When the Menem Administration took office in July 1989, Argentina was gripped byrecession and monthly inflation of up to 200 percent. To eliminate the fiscal deficits that werefueling the inflationary spiral, the new Government initiated profound structral reforms thatwere remarkable both for their scope and the speed with which they were implemented. Overthe following 2-3 years, the public admistation was stramlined by reducing the total numberof federal employees by over 103,000 (about 15 percent of total), and transferring another284,000 positions (40 percent of total) to the provinces; legislation suspending costly subsidies

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was enacted; and nearly all public enerprises at the natuonal level were privatized. The baseof the value added tax was expanded and inefficient taxes on exports and fmancial inediatonwere removed; tax administation was modernized. To stengthen incentives for privateinvestment, trade liberalization and deregulation of market for goods and services wereaccelerated. Primary responsibility for future price stabilt was shifted to the monetaryauthority. At end-1989, the Central BWnk's quasi-fiscal deficit was eliminated through the forcedconversion of short-term, high-interest deposits into long-term dollar bonds. The April 1991Convertibility LaW fixed the exchange rate at the equivalent of one peso to the U.S. dollar,formally deindexed contracts, facilitated a dual currency system, and required the monetary baseto be fully backed by intemational reserves.

Receut Economic Developments

4. The curmnt macroeconomic program has brought to Argentina price stability andeconomic growth unknown for several decades. Following growth rates of 8.9 and 8.7 percentin 1991 and 1992, respectively, GDP is esfimated to have grown at about 6 percent in 1993.Stability and decining interest rates have cnntibuted to the recovery of investme, albeit froma low base. Inflation has decelerated from a monthly 200 percent in July 1989, to an anmal rateof 7.5 percent in 1993. The Argentine peso has appreciated by about 30 percent since thebegining of the C^avertibility Law regime, but adjusting for tax riductions, efficiency ginsand productivity improvements Jp the economy, losses to expi competitiveness may be lessthan half that

.5. Fical performance at the-level of thenational governmnt continued being _ d

satisfactory into the third year of theadjustment program. EFF targets were 40 0

exceeded in 1992 and privatizations pusbedthe primary surplus to .2.2 percent of GDP; .0

performance under the EFF agreement hasremained broadly satisfactory in the firstthree quarters of 1993. However, theallocative efficiency of provincial finances E wremains poor; addressing this isspe is now -toone of the national Government's top . 1 10 180 13 1803

priorities. In August 1993 a new two-year. - -l

revenue sharing agreement was announced, as r__ _ __-_ _

a fis step towards stengthening theadjus,tment process at the provincial level. Finally, in September 1993 social Lewrity reformwas approved, introducing an optional capitalized private pension system.

6. The external debt agreement with, commercial creditors, consummated in April 1993,ended the accumulatiofi of arrears, regularized existing arrears, reduced interest obligations froma projected US$2-3 billion to US$1.4-1.6 billion in the initial years, and wiUl sharply limitinternational interest obligations if international rates rebound from their present low levels.Debt-equity conversions in 1990-92 reduced debt by about US$14 billion. The successfulprivatization of the state-owned oil company (YPF) in July 1993 also enabled the Government

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to cancel domestic obligations to pensioners (about US$2.7 billion) and to oil producingprovinces (about US$1.2 billion).

7. Continued capital inflows havesustained the growth in aggregate demand. LMOf .. RGross intervational reserves at mid-December ,7stood at US$15.4 billion, a US$2.9 billion netincrease since the end of 1992. With theincrease in reserves, and the reduction in O bank reserve requirements earlier in the year,monetay aggregates have been expanding ata fast pace. Bank credit has grown at aneven faster rate, reflecting the sub-par, butfast ioving, monettionof the economy. .. E EInterest rates on peso deposits declined to 8.9percent by end-1993 (Amex E). Interest rate |*W*_" za,of St]sreads, although also declining, remainedhigh, reaching 12 percent, indicative of thesegmentation and contnued shallowness of the finanil systm.

8. In the first nine months of 1993, the trade deficit reached US$1.9 billion, about 20percent higher than one year earlier. However, the rate of increase in imports decelerated vis-a-

vis the prvious two years, and exports grewat 6.3 percent, after a slight decline in 1992.Low international interest rates havecontributed to improvement in net factor

-wO I,^ / \ 200 . payments. The current account deficit thisyear is rnning below last year's rat, at

low Te bono , . .approximately 3.3 percet of GDP.,eoo 1 1, l ~ -- at,*w Fina g this deficit has not been difficult,

° -^>1 L .. *.i in light of Argentina's impved access tointeruation&I financial markets.

.. ~ O9. Concern about alleged unfair tradeI hI h | § § § § i i g g §practices has contributed to temporary

.-- . . , . ,, increases in trade bafriers over the past year.These included a July 1993 reintroduction of

limited quantitative restrictions on paper imorts for one year, and taiff surcharges on textiles,sport shoes, sweets, and tariff-quotas on refigerators. The majority of these measures havebeen aimed at Brazil and are generally consistent with remedies afforded under the MERCOSURagreement (para. II). Continuation or expansion of such meas could undermine thetranparency of the trade regime, although the Government has repeatedly emphasized its firmcommi:ment to the trade liberalization process initiated in 1988.

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B. External Enironment

10. Three interlated aspects of the external environment affect Argentina's macroeconomicprospects: (i) the growth of the world economy; (ii) developments under international andregional trade agreements, and Argentina's terms of trade; and (iii) the cost of internationalcapital. Following the stagnation of 1991-93, world economic growth is expected to recoverat the moderate pace of 2.5 percent in 1994, and average 3 percent for the 1993-2002 period(IEC projections, Fall 1993). Consequently, the demand for Argentina's exports shouldstngthen,¢ facilitating the fmaning of sustainable economic growth.

11. Wit repect to intenational and regional trade agreements, prospects for higherglobal economic growth have been strengthened with the conclusion of the Umguay round ofGAIT negotiations. As a major agricultural exporter, Argentina should achieve some moderatebenefits from the inclusion of agriculbtual tade irn the GATT, particulaly from the gradreduct-4 of European aind North American grain export subsidies. Argentina's efforts toestablish a regional common market with Brazil, Uruguay and Paraguay-the MERCOSURarea-would also provide an impetus for growth, althdugh varying degrs of macroeconomicstability among members and difficulties in harmonizing tax and regulatory polcies m theshort-ru, are complicaing the adoption )f a common extal uariff. Since-Argentina's tradein MERCOSUR is primarily with Brazil, its best prospects in the region are closely tied to thestabilization of the Brazilian economy and remption of sustaimble economic growth. Finally,the recent al)roval of NAPTA by Canada, Mexico and the U.S. also creates new challenges andopportunities. The overall short-term tade diversion impact is likely to be smal because only12.5 percent of Argerdne -exports go to NAFTA countries. Over the longer-term, the benefitsthat Argentina might enjoy from evenatual accession to NAFrA relate more to improvedinvestment prospects and the likelihood that membership in NAFTA could stengten incentivesto continue the pursit of stable domestic economic policies.

12. Argent's term-of-trade are near their lowest level m this ceary, having declinedby approximately 30 percent since 1970. Bank commodity price forecasts suggest that e priceindex of Argentna's main exports is expected to improve through the year 2002 at a slightlyfaser rate than the increase in its import price index (32.7% vs. 28.1%). This is because theprices of cereals, other agriculturaigoods and livestock, which weigh heavily in exports, areexpected to have reached a trough and outerform dte price of manu s, which weighheavily in imports. Overall terms-of-trade are thus expected to improve gradually over theforecast period, by 3.6 percent.

13. Slow global economic growth, although contributing to the softening of Argentina'sexport prices, has had the beneficial impact of sharply reducing the cost of itcapita. The UIBOR in 1993 was 3.4 percent, less than half the 8.4 percent rate prevailing in1990. LIow international interest rates, compounding the hiproved domestic economic policyenvironment, contributed to significant capital inflows to Argentina. . At the same time,Argentina's rapidly improved access to the -iternational capital markets has been impressive.Following the consmmation of the debt reduction agrement earlier in the year (para. 6), termshave improved rapidly. Repeated bond issues abroad, by both the state and private corporations,have been madewith expanding maturities at declining spreads.

14. Total public and private foreign debt in 1993 is estimated at 29.8 percent of GDP.Wbile this ratio is not particularly high, the narrow base of Argentine exports brings foreigndebt service to 46 percent of goods and services exports, and makes Argentina quite susceptibleto international interest rate gyrations. Private debt service requirements, however, may besomewhat overestimated since at least some part of recent significant capital inflows isrepatriated Argendne capital -for which no accurate data are available-that would not have thedebt serviting charactristics of other forms of capial inflows. Each percentage point changein international interest rates would produce approximately a US$830 million annual change ininterntional interest payments (average for the 1994-97 period), the equivalent of 4.1 percentof the period's average estimated exports of goods and services, or S.5 percent of interationalreserves. While higher than anticipated international interest rates are a risk, they are likelierin the near future to be associated with stronger world economic growth and trade. The DDSRagreement wbich limits interest rate increass on a substantial (UTS$13.6 billion) portion ofArgentina's exenal debt, softens the direct impact of higher inational interest rates. Theindiect impact of higher internationa interest rates on capital inflows r- ' be mitigated throughthe automatic adjustment features of the Convertibility Plan, and by d,mestic economic policies.

C. . .

15. President Menem has made it a national goal to return Argentina to the ranks of theworld's more developed economies by the earl; 21st ceury. He recognized at the start of hisadministration tt this required a fumdamental redrawing of the boundares between the publicand ptivate sectors, elimination of the chronic imbalances within the public sector to endinflation, and acceleration of Argentina's intation into the world economy. The first yearsof the Menem adminisation witnessed a massive reform of the federal public sector to lay thebasis for price stability, coupled with an ambitious privatization program. With the mainpolicyactions now in place, the Government has charted an agenda with the following objectives:

* the consolidation of stability mrough strict compliance with the Convertibility Law, thepreservation of fiscal effibrium, and the operation of a market economy withderegulated and unrestricted competitive markets, and regulation by the state ofnon-competitive markets;

* the strengthening of economic growti through inceased levels of savings, investment andexports, and an intensification of trade, fimancial and technological integration of theArgentine economy into world markets; and

o the achievement of higher levels, of employment and a more equitable distribution ofincome, both at a personal and regional basis, through consolidation of economic stabilityand growth, substantially increased public investment ink .Anan resource development andsocial services, and measures to promote regional development.

6

Macioeconomic Prospects

16. The Government's central macroeconomic objective is to achieve robust long-tenngrowth, with exandig employment and inflaton held to tenatonal levels. The Atgentineeconomy could grow at a medium-term rate of about 4-4.5 percent anmually, assmmg thatdomestic inflation con.erges in 1994 to international inflation, private capital inflows providea smooth transition to a sustainable balance of payments, and efforts to expand the country'sexport base are successful. Impoved competitiveness through economic restructuring, growinginvestment and slowing domestic consumption would facilitate switching of resources fromnontaeables to tradeables. Investment, already on the rise, will benefit from growingconfidence in the sustainabitity of the adjustment program. Deceleration in the growth ofdomestic consumption will reflect both the slowdown in exogenous capital inflows associatedwith the privatization program, and the atent of a new, and higher, permanent level ofincome resulting from strudtural adjustment, which in the past three years favored consumptionover savings. Slower growth in the domestic market would shift more production towardsexports, aided by deregulation and other measures enhancing productivity in the tradeablessector, and cnges in relative prices. The privat sector would be the leading expansionaryforce; public investment would grow from its depressed levels, but be concentrated in feweractivities within the now smaller public domAin.

17. The savings perforance tht emerges fom the maro-consistey projections largelyreflects inreases in domestic private savings. Gross. natonal savin3s would increase from 13percent of GDP in 1992 to 16.4 percent in the 1994-97 period. Public savings have led therecovery of savings in the miitial phase of recovery, but private national savings should increasefrom 1994 as condnued macroeconomic stabilit encourages residen to hold domestic financialassets rater than foreign assets. Contbutions to the new capitalized pension funds are unlikelyto be offset one-to-one by reduced savings in otber intuments. In addition, the low savingsrates in the 1991-93 period accommodated a once-and-for-all adjustment of consumption to ahigher level of income.

18. The consolidated pubLic sector accounts are projected to be basically balanced during the1994-97 period. This is consistent with macreconomic objectives and projected net financing,on the assumption that the Government adheres to its present policy framework and the economyexperiences no unforeseen shocks. The overall 1.7 percent to GDP surplus anticipated for 1993ib expected to decline in 1994-97 due to: (i) the substantial achievement of the privatizationprogram by end-1994; (ii) the fiscal costs of the transition to a capitalized pension system; and(iii) higher capital expenditmes by both' federal and provincial governments. Moreover,increasing transfers to the provinces, and the elimination of several distortionary taxes as wellas tariffs within MERCOSUR, are expected to reduce federal government revenues. In conrast,provincial fimances are expected to improve progressively over the 1994-97 period, due both tothe new revenue sharing agreement (para. 5) and much needed civil service reforms that wouldreduce or stabilize personnel expenditures.

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Table 1: Argentlna - Key Macroeconomic Indcators(Percent f GDP)

1992 1993 Average Average(est.) 1994-97 1998-2002

NatiorAl AccounteGDP Average Aunual Growth 8.7 6.0 4.0 4.7Total Investment 16.7 18.0 19.5 20.6National Savings 13.0 14.8 16.4 18.2Foreign Savings 3.7 3.3 3.2 2.4

PubBc Sector ' Pdrmay SWuplus 2.2 2.7 1.5 1.3Iuerepayments 1.6 1.0 1.0 0.9Domatic 0.3 0.1 0.1 0.3Foreign 1.3 0.9 0.9 0.6

Balance (- deficit) 0.6 1.7 0.5 0.4

Bale of PaymetsTrade Rance (1.2) (1.2) (0.8) 0.2Cuarrt Account Balance (3.X) (3.3) (3.2) (2.4)Capital Accoumt 5.4 4.6 3.4 2.6Publi Sector (0.2) (0.0) (0.1) 0.0Private Sector 5.6 4.6 3,S 2.6

Liquid IMt. Reserves in months of imports 6.4 7.9 7.7 6.7

Memo:GDP (US$ billion) 228.8 2S7.6 309.0 421.4

a/ Udess ot ie stated, all figues for public finances and bahace of payments are netbI Natn Adminisation.e/ Includes quas-fiscalbalance of Cental Rank.d Includes reserve fnancing of ThtF.e/ Im-ports of goods and nofcor services. -

19. The adjustment process has progressively shited the needs of external fmncg from thepublic to the private sector. Therefore, financing in the balance of payments will be mainly afuntn of the desired savings-investmet in the private sector. ]mprwed internaional financingof private mvetment, the renewed ability to roll-over maturing international obligains, andgrowing foreign direct investment, should modeate the expected slowdown in ceptionalprivatization proceeds from abroad oberved in the last th years. Investment opportniescreated by the privatizaton program, and potential repatriation of earnings of foreign-heldprivate assets, will contribute to the changing nature of capital inflows to Argentina.

20. The World Bank and IIDB will increase their exposure in Argenia, but not substnllyso after the mid-1990s. The IS's expoure will likely decline after the expiration of the EFF.Foreign direct investme should remain relatively stable in the 1994.97 period, with the sharederiving from privatizations declining significantly. Private short-term capital inflows, includingtrade credits, would average about US$5.1 billion-about 1.7 percent of GDP-to finmc. Fieprojected current account deficit of 3.2 percent over the 1994-97 period. With consil .ntmacroeconomic policies, a stable internaional envroment, and the condnuous finaialassistance of multilatal organizations, Argentina's external financing emen forsustainable growth are likely to be met.

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Risks

21. Several risks, both external and domestic, could alter Argentina's economic horizon.On the external front, higher than expected international interest rates could slow down theinflow of foreign capital, causing a rise in domestic interest rates and moderating economicgrowth. While a moderate slowdown in capital inflows would not pose a serious threat, areversal in capital inflows could induce a sharp economic contraction, straining a still weakfiancial system and public finances. Secondly, the pace of economic adjustment, and morespecifically expected increases in productivity, are crucial factors for the long-term- success ofthe current economic program. Future financing needs have to be met in large measure throughgrowing exports. The narrowness of Argentina's export base makes this challenge a}l thegreater. Gains in productivity, therefore, are a prerequisite for improving the competitivenessof Argentine exports, in the context of a fixed exchange rate regime. Should productivity gains,lower domestic taxes, and factor market improvements fail to raise exports sufficiently, thenimproved longer-term economic growth prospects may require an effective realignment of pricesbetween tradeables and non-tradeables. That in itself would, however, carry its own inflationaryrisks, in the context of a highly dolarized economy. Finally, unforeseen political developmentscould tbreaten sustainabilty of the current fiscal equilibrium. In such an event, high capitalmobility could produce a sharp decline in international reserves, severely testng theconvertibility program, as the temptation to engage in a more expansionary monetary policywould be stong. However, memories of the 1989-90 hyperinflation and economic chaos of thepreceding years also make it unlikely that populist policies would undermne the hard-won gainsin fiscal discipline. Impressive mid-term election results in October 1993. even in areas oftraditional opposition to the ruling party, suggest a widespread acceptance of the basic tenets ofthe Government's economic program, which bodes well for its future sustainability.

D. The Bank's Country AAec Ste

Stte

22. The Bank has been, and will remain, a strong supporter of the ambitious Argentinereform program. Consistent with last year's CAS, our strategy focuses on: (i) efforts toconsolidate macroeconomic reforms; (ii) strengthening greatly weakened public institutons, withincreasing attention to those responsible for social service delivery; (iii) rebuilding Argentina'sgreatly deteriorated infrastructure base; and (iv) fostering private sector development, inparticular, fiancial intermdiation and capital market development.

23. Consolidatng Economic Reform. Although the speed of fiscal, monetary and publicenterprise reforms has been impressive, the adjustment process requie contued very closeattention to the fiscal fundamentals. In addition, the Government needs to deal with pendingissues of extending the adjustment process from the national to the provincial level, and ofimproving the overall compettiveness of the Argentine economy. Besides our normalmacroeconomic work program and related dialogue with economic authorities, a proposed finalBank adjustment operation would support fiscal reform efforts at the provincial level; ESWwould address labor market policy and related compeWtveness issues; and a technical assistanceloan would support the implementation of social security reform.

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24. Provincial governments account for almost 40 percent of total public expenditure andare now responsible for many core public services. Tnroughout the 1980s, provincial deficitscontributed to the chronic instability of the Argentine public sector because of perverseincentives to spend, financed by discretionary grants from the federal government andrediscounts from the Central Bank. Since 1991, the recovery of national tax collection hasincreased the revenue shared with the provinces, while discrttiona transfers have been largelyeliminated, and fianing from provincial banks has been cut. Nevertheless, local revenuecollections have lagged, and the number of employees and wages and pensions have beenincreasing at a fast pace. With additional responsibilities, particularly in the provision of socialservices, transferred to the provinces, most of them have accumulated arrears with suppliers andemployees. Overall capital outlays have decreased by about 50 percent since the early eighties,resulting in a severe deterioration in public infrastrucure. The solutions lie, as they did at thenational level over the past few years, both in reforming provincial public finances to ;reate thefiscal space to address essential social and infrastructure needs, and in upgrading institutionalcapacities to manage priority development activities. An ongoing Povincial Development Loanis improving financial planning and inwestment programming in the provinces, and providessupport for some infrastructure investments. Most future Bank sector projects will also include

bpo t instituidonal development components to assist the provinces in modermizing theiradministtive apparatus (paras. 27-32). Finally, a proposed Provincial Adjustment Loan wouldsupport structh reforns in provincial public fmances, reductions in staffing, deregulation, andprivatization of provincial enterprises and banks.

25. Enhanci the competitiveness of the Argee economy is being pursued, inter alia,through labor market reforms and implementation of a recently approved reform of the nationalsocial security system. Other efforts include reform of the health financing system andreductions in inefficient taxes-all designed to reduce production costs and improve incentivesfor new productive investment. With regard to labor market issues, Argentine law accordsindustry-specific collective bargaining at the national level the dominant role in determiningwages and work conditions. The Ministry of Labor (MoL) may arbitrate and evenally imposea settlement, but must enforce agreements industry-wide, an arrangement which has severelylimited aggregate and relative wage flexibility, mobility, labor demand and total factorproductivity. The Government is attempting reform of labor legislation, which would enhancerelative wage flexibility by allowing firm-level agremnts, improve the flexibility of workorganization through less restrictive work-time rules and clear expiration dates for all collectiveagreements, and reduce turnover costs. The wedge between labor costs and the take-home payof workers is also being reduced by reductions in payroll taxes. Bank ESW is assessing labormarket and related competitiveness issues in more detail, through a review of relevantinternational experiences, as an input to Government analytical efforts in this area.

26. Finally, a major reform of the national social security system will establish a combinationof public schemes on a pay-as-you-go basis with private or public pension funds in an integratedsystem of mandatory pension insurance. The new system is expected to lower evasion bylinking expected benefits to contributions. Further measures to reduce the dependency ratioinclude a gradual increase in the retirement age by 5 years, an increase in the minimum yearsof contributions to 30, and stricter requirements for disability claims. Pension fund savings areexpected to accumulate at a rate of about. 1.4 percent of GDP annually. Congress will alsoconsider supplemental legislation which wou' d remove certain problematic provisions of the

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recent reform law, including a guarantee of returs in dollars in the pension fund of Banco dela Nacion. The Government is targeting July 1, 1994 to begin implementation of the newsystem, but must first issue detailed regulations and establish an effective superintendency forthe pension fund management insitutions. The proposed Capital Market Development TechnicalAssistance Project wifl assist this process.

27. Sfrengthening of Public Instions. After years of neglect and politicization,Argendna's pubiic institutions remain weak. The social services have been particularly affected.For example, service delivery capacity in the health sector is seriously eroded. Per capitaoutlays on health are well above those of odter middle income countries in the region, yetmaternal and infant mortality rates and mlutition remain unacceptably high, and many chronicdiseases are still prevalent. The provinces, which now bear the major responsibility for healthservice delivery, require assistance in the organization and management of services-particularlyof public hospitals. Improvements in sector financing are also necessarily linked to the reformof the mandatory, and in many cases virtually bankrupt, health insurance institutions controlledby the labor unions.

28. In a first stage, Bank assistance for the health sector is targeting vulnerable groups in theurban poverty belts and the underdeveloped northern provinces. The new ongoing Maternal andChild Health and Nut,ition Project will help selected provinces provide better services tomothers and young children, and a follow-up operation will provide similar support to anothergroup of provinces. In a second stage, a more comprehensive Provinci Health Project wiladdress wider sector efficiency issues involving health fiancing reform, the definition of a basicpackage of health services and the design of a health insurance system for public sectorbenefic.aries, the establishment of public hospitals as independent trust, the development ofhospitai accreditation systems, and the development of new hospital reimbursement systems.

29. The quality of public education in Argentina has deteriorated due both to a decline inreal public spending and weak sector management. The Federal Education Law of 1993devolved the administrative responsibility for delivering secondary educational services to theprovinces, which were already responsible for pre-school and primary education. The Bank ispreparing a proposed Secondar, Education Project to support decentralization of the system inseven provinces and strengthen their capacity to deliver cost efficient education. A follow-uploan would assist an additional set of provinces. The IDB is supporting primary education. Atthe level of higher educaton, state funding of the national universities has declined in real termswhile enrollments have mushroomed, leading to very low efficiency (the annmal number ofgraduates is only 4 percent of total enrollment), undermining Argentina's productivity andinternational competitiveness. The authorities have proposed a major higher education reform,including increased financial autonomy of universities, the introduction of tuition for publicuniversities, accreditation of new private institutions of higher learning, and the establishmentof a more transparent mechanism for allocating resources to universities. The Bank has initiateda Higher Fx!ativn Sector Study and the preparation of a proposed Higher Education ReformProject, wnich will help to strengthen institutional capacity at the national level and developplans to restore quality and efficiency in selected universities.

11

30. Rcbuidng Deteriorated Infaructure. For decades, fiscal crises have led tounderfumding and deterioration of Argentina's infrastrucure. Public investment intransportation and water has been too low, so that public assets and the quality of serviceshave eroded. There is a need for a massive effort in physical reconditioning and expansion ofinfrastructure, in tandem with rebuilding the institutional capacity to handle such expansion,particularly at the provincial level. Institutional responsibilities for these sectors have beencompletely reorganized through privatization--railways, airlines, Buenos Aires' water andsewerage, ports, and selected road concessions--and decentralization of most remaining publicsector responsibilities to the provinces. Although provinces have important responsibilities inroad transport, port operations, and water supply and sewerage, the entities concerned normallylack financial and administrative autonomy, have weak accounting and auditing systems, areoverstaffed, and have deficient management and technical staff.

31. With regard to energy, Argentina has undertaken major changes in its sector institutionssince 1989, and is now among the most advanced of developing countries in privatizing energysuppliers. New legislation has been passed for electricity, gas and petroleum, promotingcompetition among producers. In electricity and gas, the transmission systems have been soldto owners with limited links to production firms; the distribution systems for gas and pardy forelecticity have been sold subject to public oversight of prices and quality. The international anddomestic sale of petroleum and petroleum products was liberalized. The state oil company,YPF, was restuctured and substantally privatized. For the new systems to work, theGovernment must rapidly develop and strengthen the new regulatory institutions, and substalprivate financing must be mobilized for expansion of estng capacity.

32. As part of a major new initiative to assist in infrastuc rehabilitation and developmentin Latin America, the Bank would seek to assist Argentina through a series of loans to enablethe cental and provincial governments to cope with their infrstur responsibilities. Anongoing Road Maintenance Project and Water Supply Project would be followed by new projectsin both sectors. To facilitate the rationalization of the water supply sector, the Bank is curentlycompleting a Water Supply Sector Study with a focus on institutional and financil issues. Wewould also continue to support completion of the ongoing Yacyreta I Hydroelectric Project.Concernmg private in development, we recently completed, jointly with a majorresearch institution in Argentina, an ESW task on Financing Newly Privazed Inftraxtur.We are also working on the development of a proposed Regulatory Reform Techical AssitanceProject for newly privatized infrastrc, and facilitatng their financing through capitalmarkets development (para. 33). Over the medium-term, it is possible that other instrumentsmay need to be considered as well, if the fmancing for essential infrasuctur investments is notforthcoming on the scale necessary.

33. Fostering Private Sector Growth. Argeina's future growth will depend on anexpanding and dynamic pnvate sector to lead the country's economic recovery. TheGovermnent has begun a process to end the ny distortions that repressed and misguided pastprivate economic activity. But the key to successful recovery will be the capacity of privateinvestors to marsball unprecedentd sums from Argentina's still weak capital markets. The Bankis stongly supportng efforts that strenghen the mobilization of domestic savings and theirefficient intermediation to investment. The reform program embodied in the ongoing Financial

12

Sector Adjustment Loan, encompassing the reduction in the role of the state in the financialsector and strengthening the banking sector and its supervisory framework, is central to thatstrategy. The proposed Capital Market Development Loan and its companion Capital MarketTechnical Assistance Project would support efforts to extend the maturites of fmancialinstruments and improve the regulatory framework of capital markets.

34. Delays in the judicial process also pose enormous transaction costs for the partiesinvolved. The Bank has thus identified judicial reform as an essential complement to its privatesector development efforts. An IDF Judicial Sector Review will examine four main areas:operations of the courts, the Procedural Codes, alternative dispute resolution methods, and legaleducation. The study will provide an upstream diagnostic review of the judicial sector and maylead to a future judicial reform project.

35. With regard to specific productive sector activities and services, there are several areasin which the government still has an important role to play. Besides the problems of expensivelong-term investment credit, poor transport facilities, adverse movements in relative prices, theagriculture sector has an important number of smallholders who either lack the technical skillsor face special agro-ecological problems in remote areas, and therefore face serious difficultiesin adjusting to the new economic environment. A proposed Provcial Agricultural SectorDevelopment Project would support the strengthening of provincial institutions to provide basicservices, with particular attention to the commercial smalholder clientele. A proposed RuralPoverty Alleiaon Project is being prepared to address the needs of low-income small farmersin depressed areas. Under a proposed Forestry Project, we would support sustainable use ofnatural resources by promotng environmentally sound investments. To help restore the supplyof research, technology transfer, and quality control, the Bank is preparing a TechnologyDevelopment Report. Finally, we are also helping prepare a Mining Project to improve nationaland provincial mining legislation and institutions, so as to better promote the development of themining sector in an environmentally sound context.

36. Poverty Alleviion. The proportion of Argentines living in poverty doubled from 1980to 1989,,' as formal sector employment stagnated and high inflation eroded the real wag ss ofthe poor. Inflation also had a disproportionate effect on savings, as the poor were not able toshift out of pesos as rapidly as wealthier Argendnes. At the same time, social services failedto cushion the fall of many Argenines into poverty-because few programs were targeted to thepoor, and fiscal austerity and inadequate budgetary programming contributed to theirdeterioration throughout the 1980s. Evidence points to some recent improvement in the povertysituation as a result of price stability and growth brought about by the structual reforms: theshare of households below the poverty line in the Greater Buenos Aires Metropolitan Areadeclined from 29 percent in October 1990, to 19 percent in October 1992, although less denselypopulated provinces still exhibit higher poverty rates. The inflation tax has been replaced bya more efficient form of taxation. New mvestment also increased demand for low-skldled labor

11 World Bank Poverty and Income Distribution in Lain America: The Stoyy of dte 1980s, based on UNECLA and Govemment household survey. Information on incidence of poverty is bemg updated in theongoing Povert Asessment Study on Argentina.

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in construction in some urban areas. However, recent data also show that, while incomedistribution may have improved since 1989, it is still more skewed than in 1980. Low incomegroups ae lagging behind in recuperating their pre-crisis living standards, and the unmet basicneeds of the poor, especially in areas outside of the Federal Capital, are substantial.

37. As the macroeconomic fumdamentals improve, the Bank is devoting substantially moreresources to assist in social policy and program formulation, and social service delivery. Theongoing Provincial Development Project is fmancing rehabilitation of primary health facilitesand primary and secondary education sub-projects; the ongoing Municipal Development Projectis financing basic service levels of water supply; and the Maternal and Child Health andNtrition Project is assisting mothers and children in six provinces. A better understanding ofthe poverty siution in Argentina will emerge from the ongoing Poveny Assessment Study.Other operations now under preparation will assist improvements in human capital development(educ,tion and health projects), quality of life (water supply and sewerage, directed manlytowards the poor), and nul poverty alleviation in needy provinces.

38. Environment. Argentina has overexploited some natural resources and environmentalconditions are seriously affecting health standards and constraining futur growth. The inventoryof problems includes water pollution, soil losses, deforestation, severe flooding and biodiversitylosses. Little has been done so far to address these issues. Past govermnents had little incentiveto police the industies and service activities generating these problems, which were largely inthe public sector. In more recent years the focus has mainly been on macroeconomic issues.Although stronger Government environmental management is now emerging, the problems ofweak institutional capacity and the limited jurisdiction of the national govermnent underArgentne federalism pose obstacles to rapid progress. With IDB help, a national EnvironmentSecretariat (SRNAH) is beginning to craft more functional sector organizational arrangements.It recently won approval of an Environmental Pact, a Federal-provincial framework agreementaimed at eliciting greater policy and enforcement collaboration. The IDB project wfll alsostrengthen the legal framework and monitoring systems, and should ultimately enable theSRNAH to exercise greater oversight over national policy and activities in this field.

39. Following an initial review of Argentina's requirements in 1989, the Bank strategy hasbeen to encourage definition of suitable environmental standards for specific sector operations,while strengthening those entities responsible for overseeing their compliance. Agricultural andwater and sewerage projects have already included such provisions. Past energy loans firsthelped develop better regulation of hydroelectric facilities' compliance with international norms;the Government later extended these to thermal and nuclear plants. Similar initiatives wereundertaken more recently concerning oil and gas operations, and a full hydrocarbon sectorenvironmental assessment will shortly be undertaken. Environmental problems in Governmentindustrial plants are being overcome under public enterprise reform operations. The YacyretaII Project addressed resettlement and ecological activity related to the hydroplant's construction,in collaboration with IDB. Future Bank assistance would include enhanced flood controlmeasures in the Parana River Basin, incentives to industries to phase out the use ofozone-depleting substances, and health and transport projects with environmental elements.These and other lending prospects will be guided' v the conclusions of an upcoming CountryEnvironment Strategy document.

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Bank Lending vels and ESW

40. Although an early member of the Bretton Woods institutions, Argendtia borrowedrelatively litde from the Bank until the mid-1980s, at which time total lending net ofcancelations was only about US$1.6 billion. Lending picked up during 1986-88, with theapproval of some adjustment operations, contnued heavy support for energy, and a few projectsdistbuted among other sectors (totalling US$2.4 billion net of cancellations). The earlyadjusutent loans, in particular those for trade policy reform, yielded some usefil reforms buttheir overall hipact was constained by the Government's inability to stabilize the economy andcontrol mountng hyperinflation. During 1989-90, a period of hypeilation, new lending wasrestricted. It was during that period, however, that the Bank developed a very close relationshipwith the Menem Government, based on an intensive ESW program and active dialogue onmacroeconomic issues. Since 1991, the Bank has stepped up lending to Argentina, for a totalof about US$3.6 billion for the FY91-94 period, about half of which has been for adjustmentsupport (including debt and debt service reduction) and related technical assistance operations.Assuming strong macroeonomic and policy performance, and continued improvements inproject implementation, Bank lending to Argentina for FY95-97 could reach a maximum ofabout US$2.5 billion. Adjustment lending would be phased out in FY95, and is being rapidlyreplaced by investment operations.

41. The Argentina program is underpinnd by a strong ESW agenda, closely integrated withthe lending program. In that context, we are working to improve our knowledge base in keystrategic areas of health, education, environmental policy, provincial public finance, andregulatory issues. Other ESW tasks are nearing completion in the areas of capital markets,water, poverty and technology development. These efforts will be complemented by regularmacroecononic monitoring and analytical work on Argentine competitiveness and exportprospects. Amnex A.1 provides a matrix of the policy issues which are being, or would be,addressed in the Bank's FY95-97 country assistance program and Annex A.2 provides the likelysectoral distrbution of the lending program.

Portfolio Implem

42. The implementation of investment and technical assistance loans approved prior to 1989suffered from macroeconomic instability, counterpart funding constraints, poor management andfrequent changes in personnel. As the economy stabilized, these difficulties have abated, thoughthe Government still lacks an investment process on a par with those of other hemisphericleaders in adjustment. On the positive side, savings mobilization has improved, relieving theconstraints on counterpart fiunding. Second, the Government has steadily improved itsinvestment programming through preparation of an investmnent program tightly linked to thebudget. Third, through the civil service reform and associated salary increases, managementin the national public sector has been gradually improved, although much remains to be done;and those issues have yet to be seriously addressed at the provincial level. The Government andBank have held three Country Portfolio Performance/Programming Missions since 1990; thisyear's exercise is scheduled for late March 1994.

43. The successes achieved on the macro front have been the main determinants of theperformance of the ongoing portfolio. Improvements were also evident in investment operations,

15

following another year of greater managerial stability and a slowdown of the high turnover rateof project implementing staff. Although there were several high-level changes in variousministies, most core staff were not affected. As a result, the average project rating for overallstatus in Argentina has shown steady improvement over the past three years from 2.2 to 1.6.The country rating would have been better, but Government required actions forrestucturng/cancellations initiated in FY92 for three projects rated "3" or woe were notresolved in a timely manner. With most of these matters now resolved, we expect ratings foroverall status and development objectives to continue improving in FY94. Of the ongoingportfolio, only one project, Water Supply 11, is rated as a problem, mainly dua to institutionalissues emerging from the decentralization process. Efforts to restructure/cancel this operationare underway, both through supervision and ESW on water sector issues (para. 32).

Table 2: Argentlna

Sdected Ictors of Bank Portfolio Performae and Managmen

IY2_ U-L EY2 FM~

Portfolio PerformaneNo. of Projects undr Ilemenion 20 21 26 20Avg. Implemention Period (years) 3.1 3.2 3.3 3.3

Percent of Projects Rated 3 or 4Devdopmen Objectes 20% 14% 15% 5%overall Stats 30% 24% 15% 5%

Avere RadtgsDevelopment Objectives 1.9 1.7 1.5 1.3Overa status 2.2 1.9 1.6 1.3

Canceled during FY (US$ Million) 10.3 39.5 357.9 3.0Disbursement Ratio (%) 39% 21% 100% 33%

Portfolio Managnemet

Suervision Resoures (total staff-weeks) 285.5 395.5 410.6 375.4Average Suprision (staff-weeks/project) 14.3 18.8 15.8 18.7Supervison Resources at Headgut (in %) 160.0 100.0 100.0 100.0Supervision Resources by Rating Category (staff-wee/project)

Projects rated 1 or 2 14.5 0.0 16.9 19.0Projects rated 3 or 4 13.7 15.3 9.5 14.0

Memorandum item: date of lastnext CPPR 3-93 3/94

44. Almost one-third of the curren portfolio volume is associated with adjustment operationsLaunched within the past three years, and more than 80 percent of FY93 disbursemens ofUS$1.4 billion were from these loans, including the DDSR loan and set-asides for debt redctionfrom PERAL H and the FSAL. Disbursements for most investennt operations contied to lag,but both Provvwl and Muncipdp Development Projects committed significant amounts forsub-projects that will begin disbursing in FY94.

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45. Although the quality and pace of implementation has quickened, many tasks still lieahead, such as improving the speed of loan acfivation and initiation, and the monitoring byfederal authorities of large projects and those with external financing to ensure timelyimplementation. Through the Public Sector Reform Technical Assistance Loan, the Bank isproviding support at the federal level for improving procurement, budgeting, and monitoring.At the provincial level, efforts to strengthen public sector management are being pursued throughthe Provincial and Municipal Development Projects, the proposed provincial adjustmentoperation, a follow up municipal development loan, and provincial education, health and roadtransport projects. While supervision at 15.8 sw/project in FY93 represented a decline of almostone-fifth from the FY 92 effort, due largely to the successful cancellations and restucturing ofproblem projects, supervision coefficients will rise in FY94 and thereafter, as new operationsare launched with the provinces.

Cooperation with Other Multlateral Instituions

46. IMF and IDB. The Bank has worked closely with the IMF in the design and supervisionof adjustment operations, in formulating country strategy, and in ESW. The IDB and the Bankcontinue cofiancing and operating closely in a variety of fields (e.g., provincial development,social sectors, environmental rehabilitation, completion of the Yacyreta hydroelectric plant andits resettlement activity) with good results. Annual lending by the IDB over the next few yearsis expected to be in the $700-800 million range.

47. ICand MiGA Actiies. IFC's objective in Argentn is to support the private scrin its efforts to adapt and develop under the new open market policies. To achieve this, IFCwill continue to implement a broad strategy which calls for: (i) improving the competitivenessof the private sector through implementaton of industrial reconversion programs, upgrading oflocal infrastuc , developing high value-added exports and fostering regional corporateintegration; (ii) broadening Argentine entewrprises' access to the international fiancial markets,through both traditional financial investments (such as syndications and straightforward securitiesissues) and non-traditional financial instruments (such as convertible, warrants and financialderivatives); and (iii) developing domestic capital markets through establishment of new productsand financial institutions. As of December 31, 1993, IFC's held portfolio (loans and equity) inArgentina was US$567.7 million, with 36 active clients (see Schedule B and Annex A2). PY94approvals are expected to be about US$300 million.

48. Argentina became a member of MCGA in February 1993. As of December 1993, theMIGA portfolio of operations included five guarantees in the areas of residential mortgages,banking and privatization for a total of US$135 million.

E. Agda for Board Considerion

49. Progress toward ataining ountry asitance objectives would be judged in severalareas: (i) macroeconomic management, as measured by the maintenance of an adequateoperational primary fiscal surplus and low inflation; (ii) provincial adjustment, as measured bycontinued improvement in provincial fiscal balances; (iii) improvement in the competitivenessof the Argentine economy, as measured by successful implementation of the new social secarityreform and proposed labor market and health financing reforms; and (iv) project implementaton

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performance, as measured by continued improvement in ratings for overall status anddevelopment objectives. These criteria would govern the Bank's willingness to proceed with theproposed US$2.5 billion three-year lending program for FY95-97 (para 40).

50. The post-adjustment phase in Argentina, with more emphasis on investment lending andthe decentralization of most public services to the provinces, will place greater demands on theinstitutional capacity of the Govenmient, and coordination problems in project design andimplementation will expand with the number of independent actors. They will also pose highercosts for the Bank, both in preparing and supervising projects. Experience with the provincesunder a few ongoing operations suggests that many have only a weak capacity. This puts apremium on designing projects with simple procedures and strong government ownership.Effective Bank assistance may require focusing efforts on selected provinces, with dueconsideration for implementation capacity.

51. Nearly all of Argentina's national power, telecommunications, gas, water, steel,chemicals, and petroleum industries are now in private hands. So are many infrastructure andtransport activities-ports, airlines, and railways. This places a major burden on thestill-developing Argentine capital markets, while limiting the scope for direct Bank lending. TheBank will be strongly supportng the Government's efforts to reinvigorate the capital marketsthrough the proposed Capital Market Development Loan and its companion technical assistanceoperation. It is possible that other Instrumeots may need to be considered as well, if theresources required for essential private infatucture I nts are not forthcoming.

52. Following the recent publication of a new set of nadonal accounts for Argentina, andbased on standard Bank methodology, the country's per capita income for 1992 has beencalculated at US$6,052, and Argentina has therefore been re-classified as a Category VBorrower. Two considerations are relevant. First, although Argenfina has begun to process ofrecovering its relative rankng among the world's more affluent countries, the adjustment processis still relatively young and fragile. The fixed exchange rate regime and contnued differentialsbetween domestc and international inflation, are at least partally responsible for the dramaticincrease since 1991 of Argentina's nominal GDP in US dollars. A second consideration has todo with the nature of the new national accounts. These incorporate comprehensive estimates ofthe infonnal economy, which the national account of most comparators do not. Given theseconsiderations, caution is necessary in drawing comparisons with other countries. Nonetheless.if Argetina continues to expenence success on the macroeconomic front and improved accessto international capital markets over the next few years, it would be appropriate to initiatediscussions concening the phasing down of Bank assistance.

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Part Il: THE PROJECT

Background

53. The present Argentine government has been redressing a legacy of poor policies thatundermined financial and capital market development over the previous four decades. Argentinaachieved credible stabilizaton as a result of the Convertibility Law - which restcted base

money to the level of international reserves and legally made the peso and the US dollarinterchangeable - and of a strucural reduction of the public sector deficit. Transactions, withthe exception of tax and salary payments, can be and are frequently made in dollars.Stabilization has increased resource mobilizaton and maturity terms of fnacial insuuents, anddecreased interest rates. With an improved economic framework, growth has futer increasedthe demand for fimancial assets. Reduced public sector borrowing through finacial institutionshas relieved pressure on real interest rates, inueased credit to the private sector, and increasedportfolio quality. Improved economic incentives are contributing to a better allocation offnancial resources and portfolio quality. Promulgation of the new Central Bank Charter, whichremoved the Central Bank's deposit insurance program and bankruptcy protection throughCentral Bank rediscounts, has encouraged banks to operate more soundly. Stabilization has alsodiscouraged the inordiate physical expansion of private banks aimed at capturing the inflationtax for their owners. Finally, regulation and enforcement of capital adequacy and provisioningrequirements are undergoing improvements that wili contribute to a healtier bankig system.

54. Improved policies have also increased the growth in demand for investment finance.With the public sector reduced, foreign and domestic trade liberalized, and tax and subsidydistortions drastically curtiled, private investment demand is growing rapidly from the lowlevels of recent years. Virtually aDl of Argentina's national power, telecommunications, gas,water, steel, chemicals, and petroleum industies are now in private hands. So are manyiasucture and transport activities-ports, airlines, railways, and highways. Many firms arenow eager to take advantage of the strengthened macroeconomic framework and expand theiractivities.

55. In an effort to lower interest rates and spreads, the Government introduced a ceiling on

the rates charged by public banks on domestic currency loans (public banks account for about61 percent of the total commercial bank credit market) and an interest rate subsidy on a programof small commercial bank loans to businesses. These policies do not address the underlyingcauses of high interest rates and spreads. (Although interest rates and spreads have declined,dollar rates charged by private banks remain far above international rates, peso rates remaintwice as high as rates charged by public banks, and spreads remain above 10 percent per year).They compromise profitability and the transparency of loan pncing m public banks anddiscourage banks from tapping the capital market to provide long term loans. The Governmenthas agreed that it will not renew the major fiscally-subsidized interest rate subsidy programs,which will be filly committed by mid-1994, before the proposed loan becomes operational.High interest rates will decline furter as continued stability further reduces mainingperceptions of country rsk and expectations of currency depreciation, and increases mobilizationof deposits and bonds.

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Objective

56. The proposed operation aims to accelerate capital market development to help Argentinameet growing investment demand. Continued stability will improve the volume and terms ofbonds and loans, but faster growth of long term fiance is still inhibited. Reasons include (a)insufficient development of capital market regulation and supervision and (b) remaining fears ofunpredictable reversals of the fundamentals supporting stability. The operation would notaddress all capital market issues. The objective is to encourage the holding of medium and longterm securities by investors and bankers and longer term lending by prime-rated commercialbanks. This objective would be achieved by improving market confidence and ensuring liquidityto creditworthy banks in the event of market developments that raise or cause spikes in domesticinterest rates. The operation would assist small-and medium-size businesses, which traditionallyhave had little access to term lending from the banking system.

57. The project is designed to introduce and consolidate the necessary capital marketsinfrastructure which, along with developing indigenous skills, can produce a sustinable andorderly national market. This includes the development of standardized debt securities, whichhelp meet the growing needs of issuers and investors for liquid trading markets, and the fiutherdevelopment of existing national credit rating agencies that would enhance the market's abiltto price and trade debt instruments with confidence. Furthermore, the proposed backstop facility(BE) is designed to inject confidence and provide leadership for the development of a longerterm debenture market - without detacting from the natural growth of local and relatedinternational markets and without masking the market's pricing signals. The BF's assurance offuture liquidity will assist banks to issue debenures in local or international markets, and tooffer loans with even longer maturities with the assurance that debentures can be sold in the&ture.

Project Description

58. The proposed loan amount is US$500 million. The loan would support a BackstopFacility (BF) that would offer prime-rated commercial banks the option to sell to the facility US-dollar-denominated ecurities issued to refinance specifically identuied US-dollar-denominatedbank debentures that banks had issued to support their longer term loans, should banks be unableto rollover or extend such debentures in the market. This facility would be implemented througha corporation (the Fund) established and owned by the Government. The reforms supported bythe 1991 Public Sector Reform Loan and the 1993 Financial Sector Adjusment Loan (FSAL)are expected to improve the banking policy framework for the proposed project. An agreedpolicy and institutional development program (Annex A6), including macroeconomic stability,freely determined interest rates, the removal of existing interest rate subsidies, and strengthenedcapital market regulation, supervision and enforcement, would help to increase marketconfidence. A complementary Capital Market Development Technical Assistance loan(CMTAL) would be proposed concurrently to help finance improvements in capital marketsupervision and regulation; to train commercial bans' staff in undertaking project financing; andimplement the new, reformed pension system.

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Investment Demand and Long-Term Funding

59. Participating banks (PBs) would use the proposed facility to increase their portfolio oflong-term fnance for productive purposes. The IDB has approved a wholesale credit linethrough B3anco de InversiIn Comercio Exterior (BICE), a Government-owned wholesale bank,for US$300 million that commercial banks would use to fund private investment projects. TheExport-Import Bank of Japan will cofnance the IDB loan with a siriilar amountY The totalof US$1. 1 billion is only a small part of expected investment demand, and is consistent with thedomestic resources tat commercial banks and final borrowers are expected to provide, as wellas with the intermediating capacity of eligible banks. A recent study estimates that the newlyprivatized public enterprises (PEs) alone will need over US$3 billion yearly in long-term fundsif their investment requirements are to be met. These are being met from internal cash andforeign borrowing. A survey of 250 well-known enterprises estimated that investment by theseenterprises would grow by 19 percent from 1992 to 1997. In fact, total private investmentincreased by about 32 percent and 37 percent in 1991 and 1992 respectively. Furthermore, theappraisal mission estimated that 15-20 banks could be eligible. The eighteen top commercialbanks, which had a portfolio of US$7.6 billion in 1992, have been increasing their long-termoperations, including bond issues of more than US$500 million in 1993 alone.

Project implementation

60. The borrower would be the Argentine Republic. The project is being submitted as aSingle Currency Loan (SCL) in dollars, as it complies with the eligibility criteria for the SCLloan program: (a) the project entity (the Fund) will earn its revenues in dollars; (b) the projectentity is designed to be and is intended to remain, financially autonomous of the Government.The Government expects the Fund to maAage its financial affairs without reliance on the publicbudget; (c) under the financial management &4 administration agreements, the FinancialManager will manage the Fund's commitments with a view to ensuring that its cashflows areswfficient to meet its debt service obligations on the Bank loan; and (d) the project entity's assetsand liabilities will both be exclusively in US dollars. The Argentine Republic would onlend theproceeds of the Bank loan to the Fund on the same terms as those of the Bank loan to theArgentine Republic. The Fund would be the executing agency. The Bank would enter into aProject Agreement with the Fund, setting forth the obligations of the Fund in carrying out theproject. The financial manager of the Fund would be an international financial institution witha proven successful record. Banco de Inversion y Comercio Exterior (BICE) would performadministrative and oversight functons, including the hiring and supervision of the Fund'sfinancial manager.

61. Under the BF, a participating bank would make long term US$ investment loans ("TermEligible Loans" or TELs) funded by its deposit base, its equity, and shorter term US$denominated debenures. These debentures could be bullet bonds or extendable bonds (i.e.,bonds that give the holder the option to extend the maturity thereof). To match the maturities.of its assets and liabilities, the PB could purchase a backstop option from the Fund. If the PB

2/BICE's activities will include foreign trade and investment fiancing. Other sources ofBICE funds will include foreign banks, foreign export credits and the capital market.

21

purchased a backstop contract and maintained a good credit rating but the bonds were notrefinanced in the market in part or in whole, the PB could issue to the Fund within a specifiedperiod of time bonds to replace those bonds that were not refmanced, at a spread over LIBOR(agreed beforehand) above the spread of the initial bonds. For the Fund's commitment, the PBwould pay an annual fee which would cover the Government's commitment fee to the Bank(para. 62). Given the strong market premia on long-term funding, banks would be likely toagree on the higher spread and the commitment fee. The Fund would either keep the bonds inits portfolio until the next maturity date, or it could sell them in the market if and whenconditions warrant. The Fund would not leverage the loan (i.e., its backstop commitmentswould not exceed the size of the loan).

62. Part of the Bank loan (US$3 million) would be used, through disbursements into a specialaccount, to provide resources to fmance the Fund's expenses during the initial years.Furthermore, development of the management capacity of the Fund will be financed with theassistance of a Grant from Japan's Policy and Human Rebources Development Fund, in theamount of Y20.6 million (approximately US$190,000). The Govenment could draw on theremainig Bank commitment through a second special account if and as required to honor itscommitments to purchase bonds from PBs. This latter disbursement would be made againstevidence of the Fund's backstop commitments shortly before the Fund is required to purchasebonds from PBs pursuant to backstop options. The undisbursed amount of the Bank loan wouldbe subject to the Bank's standard commitment fee (now, by Board decision, 0.25 percent p.a.),except for funds already committed under backstop contracts, which would eam an additional0.15 percent p.a.. An extended 7-year grace period would both increase the impact of theoperation over the life of the loan and not penalize the Government for using the loan asdesigned. A deadline of commitments at the end of the seventh year would minimize bunchingof amorization toward the end of the life of the loan.

63. The operation would ultimately support the medium and small corporate clients andmortgage borrowers (for the acquisition of new commercial or residential buildings) of PBs,which have not had direct access to the capital market or to long-term lending by commercialbanks. To assist the needs of medim and small firms for term loans, the maximum size of aterm eligible loan (CEL) would be US$10 million, the minimum term of a TEL would be sixyears and the maximum pemissible share of loans for acquisition of new commercial andresidental buildings in a PB portfolio of TELs would be 20 percent. The BF would notbackstop bonds issued by non-bank corporations, including the large privatized utilties.Corporations issuing bonds have a greater capacity to finance investment than the small andmedium-sized enterprises targeted by the small sizes of the TELs. Furthermore, the largeprivatized utilities will benefit from internal funds and important long term funding from theirnew owners as part of the privatization agreemenb and commitments. In contrast, the growthof medium enterprises has not benefitted from long term finance from banks or the capitalmarket. Private banks have focused on short term credit and only recently on mortgage lending.Only now are banks indicating some willingness to extend the terms of their corporate portfolio,provided they can obtain matching funding. The proposed operation would support this newtrend at a time that the capital market has not yet developed to provide the required funding.

22

64. PB eligibility would be determined by BICE, in accordance with strong minimumperformance criteria which was set forth in the Project Agreement. These criteria will focus onthe financial soundness of the PB and include specific financial indicators as well as single Aminimum PB bond ratings by at least two domestic rating agencies. A minimum triple B ratingwould be allowed only for drawdowns and not for new commitnents. This condition wouldailow drawdowns during market disruptions that provoked a slippage of all bank ratings. Thecriteria are described in the SAR (paras. 4.524.61).

65. The Ba-nk would not require that proceeds from the BF be used for specific projects, butrather that a PB increase its portfolio of long term loans for productive purposes commensuratewith its use of the BF. Therefore, the Bank's approval of the use of the proceeds by PBs fromthe bonds purchased by the Fund would not be required and the Bank's procurement guidelineswould not apply to the loan. A drawdown by a PB pursuant to a backstop commitment will beconditioned on the PB's extnding term eligible loans (TELs) in an amount at least equivalentto the amount the PB seeks to draw down. The Fund would maintain a negative list of ineligibleindustries or activities. The project agreement would provide for appropriate reportng to theBank on the TEL portfolios of PBs and for Bank monitoring thereof. PBs would provideinwpection rights to the Fund and its designees with respect to TEL documents. The Fund couldwithdraw eligibility from a PB that included ineligible loans in a TEL .

66. Progress in the agreed policy and institutional development program (para. 58) would bereviewed during two pauses in commitments. The two reviews would be implemented after 30percent and 60 percent of the loan has been committed or after 18 and 36 months ofeffectiveness, whichever comes first. At these times, commitments would be balted until thereviews were completed. Loan performance would also be reviewed through frequentsupervision by both Regional and FSD staff.

67. AuditiDg of the project would cover BICE's financial statements, dhe Fund's accounts,and the two special acouns. The Fund and its designees would be entitled to audit the recordsof PBs to ascertain compliance with the requirement that they increase their portfolio of long-term loans for productive purposes. BICE and the Fund would be audited by auditing firmssatisfactory to the Bank.

68. The project is designed to help prime-rated banks fumd long term loans from the capitalmarket (para. 56). Given that PBs would be prime-rated, it is expected that PBs will befinancially sound. Sustained macroeconomic stability, the expected portfolo investments of theprivate pension administration fimds under the recently approved Pension Reform Law,implementation of the accompanying CMTAL and the related policies (Annex A6 of MOP), andimplementation of the FSAL (with one trance outstanding) will help expand and strengthen thecapital market and the banking system which the project calls upon to expand long term lending.Furthermore, conditions to be imposed on the Fund's management would support the project's

23

imstitutional sustainabiity. BICE's sustainability would be achieved with a profit orientedmanagement, including independent lending procedures and a lean organization.

Rationale for Bank Involvement

69. Given Argentina's increasing private investment demand as well as its limitedintermediation of long term savings, the Country Assistance Strategy calls for stong support ofthe Government's efforts to reinvigorate the capital market. Given the incipient nature of thedomestic bond market and the improved policy conditions, the proposed amount would providesignificant support to accelerate market development. The project would promote thedevelopment of an orderly and efficient market for debt securites of Argentine commetcialbanks and would thus help accelerate capital market development. Policy conditionality (i.e.,macroeconomic stability, stronger final and capital market regulation and supervision, andsupportive interest rate policies) would help strengthen investor confidence. No issues ofconflict of the proposed operation with IFC's operations have been identified. In fact, theoperation complements IFC's assistance to private companies and financial intermediaries inmobilizing resources from the capital market.

Loan Conditions

70. The Government would create the Fund prior to loan signing. Actions required priorto effectiveness, and renewed commitments following the two formal reviews are summazedin Annex A6. Conditions of effectiveness include compliance with the three-yearmacroeconomic program and signature or finalization (as appropriate) of all subsidiaryagreements and documents. Conditions to be reviewed during the two pauses in commitmentswould include compliance with the macroeconomic program, absence of fiscally subsidizedinterest rate programs, improved banking and capital market supervision, regulation, andenforcement, satisfactory BICE perfomance, and satisfactory PB eligibility criteria.

Benefits and Risks

71. The main benefit would be an increased level of capital market development and theprovision of longer term funds for small and medium sized enterprise investments and mortgageloans for acquisition of new commercial buildings and residential housing. The main risks areresumption of macroeconomic instability, including further strain on the banking system;extended government interventions to lower interest rates; and weak progress in banksupervision. If these events led to appreciable interest rate increases, PBs would exercise theiroption to sell their bonds to the Fund. While the risk of default on these bonds would be minor(given the requirement that a PB have a minimum triple "B" credit rating at the time of drawingdown a backstop commitment), these events would undermine the capacity to mobilize long termresources and thus detract from the capital market improvement objective of the operation.

72. Improved public finance, which has mustered considerable public support, will reducethe risk of macroeconomic instability. Furthermore Government commitment to policies that

24

preempt other risks is strong, including the commitment to phase out interest rate interventionsand actions to improve the Central Bank's bank supervision.

73. The SCL feature greatly reduces the risks of the operation. It eliminates the task ofmanaging a multicurrency risk in a dollar-based economy; and helps match the Fund's revenuesand costs as well as its assets and liabilities. All of these reduce risks of cashflow problems forthe Fund and increase its autonomy.

Lesons Learned

74. The proposal embodies several lessons from prior operations. Up-front conditionalityand the two pauses in commitments would guard against policy reversals and encourage goodloan performance. Stronger regulation and supervision and reduced state protection of PBswould encourage sound and prudental banking. Improved economic performance supported bythe operation would catalyze other sources of lending. Market driven pricing of BICE's loansand the removal of credit subsidies would also help avoid the displacement effects that have beennoted with regard to prior operations. Finally, the Govermment's strong commitment to a capitalmarket policy program will improve the contribution of the operation to develop the bond marketand extend lending maturities.

Recommendadon

75. I am satisfied that the proposed loan would comply with the Articles of Agreement ofthe Bank and recommend that the Executive Directors approve the proposed loan.

Lewis T. PrestonPresident

AttachmentsFebruary 4, 1994Washington, D.C.

25

Schedule A

ARGENTINA

CAPITAL MARKET DEVELOPMENT LOAN

Timetable of Processing Dates

(a) Time Taken to Prepare 36 months(b) Prepared by Ministry of Finance, BICE, CNV/ World Bank(c) First Bank Mission November, 1991(d) Appraisal Mission Departure August, 1993(e) Date of Negotiations December, 1993(f) Loan Signing March, 1994(g) Planned Date of Effectiveness April, 1994

-26 - Schedule BPage 1 of 3

The Status of Bank Operatios in ArgetinaStatement of IBRD Loans and IDA Credits

(as of Dwamber 31, 1993)

Undisbusedrelative to Last ARPP

Amount in US$ million amsal sumisi oLoan or LI amg1Icjgi) projction Deelopmeat Ov=HliCreditno. FY Borrw Purpose IBRD Undbued (US$ Million) objectivs sab

Fuly disb&ued Loans (40) 4,625.0

2641 1986 Arntina Water Supply 44.8 12.6 12.1 2 22854 1987 Arg_tina Power Ditbution 276.0 158.3 139.0 1 12920 1988 Aretina Municipal Development 120.0 49.3 38.4 1 12984 1989 Argenta Social Sector 28.0 3.0 1.3 1 13280 1991 Argetina Pwvincl Development 200.0 171.4 95.4 1 23281 1991 Argentia Water Supply 100.0 98.8 14.4 3 33292 1991 Aentina PEREL 23.0 4.6 -5.6 1 13297 1991 Argntina Agitui Services 33.5 22.2 1.4 2 23362 1991 Awetina PNblicSectorelblmT.A. 23.0 16.1 10.1 1 23416 1992 YPF ocrbn Engieering 28.0 18.S 4.5 1 13460 1992 A ina Mm Admin. 11 20.0 11.9 0.9 1 13520 1993 Argenia Ywyreta 300.0 115.1 50.1 I 13521 1993 Argetina Flood Rehabilitation 170.0 154.3 92.3 1 23556 1993 Argetn Public Entepis Reform 11 300.0 100.0 0.0 1 23558 1993 Argeia Fnacial Sector Adjustment400.0 100.0 -47.5 1 13611 bl 1993 Argntina Road Mantance 340.0 340.0 0.0 1 13643 1994 Arnia Maerl & Child Heat 100.0 97.0 2.0 1 I

Total 7,131.2

Of which has been repaid 2,071.4

Total Now Outsading 5,059.8

Amount sold 12.8

Of which repaid 12.8

Total now held by IBRD and IDA 5,047.0

Total undisbured 1,473.3

a/ ating of 1-4; see OD 13.05, Annm D2, Pre _rtio of Implenat Suy (Patn 590).b/ Not yet effective.

a aa .. - -- -- - -- - -- .. . - - - -- .4 -4 a a

g >Uh ~ ~~~~/ I *11 I tt c c S t~1 ~tett te

4. - i i IuIn1 1, fil.uit

* C$ il1l [ ! 1 1 !l WX{I[ il

| : 8°N S all g @8glESlS 2 lil 5;9.sX;o l

I|S 4l Fl1 U 'II', li{ ,0 ;E,l EWEEE { g.s s

9~Eo^gggiigll9*"'8888@|@flZ;|@t a | F $8 88 8 |8 8 8 5 s s8 W 8 s P 4 5 8 |8 0gg gggg||>Y~ur a- A >" E " S S 1

| ~ ~ ~~~ a aaao .4eU

; " l , ; B g g l G B " l ' t ' ' ' ' ' : X; g 1lilE PoBg | { 1 i10 wic~~~~~~~~~~~

1llo | {i ii 1; 2 w | S | $ | Y 11 i; S rh|>~~~~~~~~~~~~~~~~~~~~~~~~I ~~

- 28 -

ARIEMENTOF INC INVESIM Schedule BSTATEMCNTOFIFCINVESTMENTSPae3o3

C_ _ ohqprd Hamd by ld _ pij Yew bY -uI - 4i4is

Yaw" 1am -

fAe. Imung F_RaniihuWdu - 4,00 - 4JO

Eomema. Ia.u Mkmem sUwIS - am =Edaw tX_. Om0 ism 130f0 1600

n "_ S~~~~~~~~~30 - 80QO0 100nbama h* - 20 - 0A.

-Undwe - 0 - 3m

ub-ftW 1. 74.60 3UO SU6

..... ' X \.. =

bl .iCsa mutdapeumdipedp_ebdI Hed Cii. __b_mbid ad idawedbwsar_el _ d niEm I .

sI n2 m dlb st4 m _* _l dplliU;ndnGf MOFSI

29

Annex AlPage 1 of 2

ARGENTINA: Polcy Objectives of Bank Assistance Progra

Area/Sector Objectives

Consolidatng Macroeconomk Reforn

Provincial adjustment * Reform of provincial finances* Downsizing of provincial governments* Transfer of public service responsibilities to provinces* Privatizion of provincial enterprises and banks

Privatization 0 Divestiture of PEs owned by Ministry of Defense* Improved anti-trust legislation* Strengthen Reguatory Agencies

Enhancing Competitveness * Support for labor narket reforms* Reduce taxation on labor* Implementation of social securty reform

Insdagtonal Stretheng in the Social Secto

Health 0 Facility transfer of public services to provinces* Refocusing on basic health care* Reforming national health insurance program

Education * Facility transfer of secondary education-to provinces* Financial and adminishtative reforms* Quality improvements at secondary and higher education

levels

Rebudn Inftwtnre

Energy and Power * Privatization/concessioning of electricity transmission anddisibution

* Restructuring of National Nuclear Commission;privatization of unfinished nuclear power project

* Completion and privatzation of Yacyreta* Establishment of regulatory fraeworks and agencies

Transport * Road concessioning/transfer to provinces* Privatization of ports* Removal of bottlenecks in export corridors* Consolidation of infrastce management capacity* Rehabilitation of national and provincial road networks

30

Annex AlPage 2 of 2

Area/Sector Objectives

Water supply and sewerage * Improved rural infrastructure (irrigation, drainage and floodcontrol)

* Improved water management* Improved sanitation in urban and rural poverty areas and

strengthened institutions* Promote private sector participation

Fostering Private Sector Development

Financial sector adjustment * Liquidation, privatization or downsizing of federal andprovincial commercial banks

* Enforcement of minimm capital and provisioningrequirements

* Improved disclosure of bank financial statements* Implementation of Cental Bank reform

Capital markets development * Improvement in term intermediation performance* Secondary market development* Improved regulatory management and enforcement* Implementation of social security reform

Agricultural, industrial services 0 Strengthen regulatory framework for privatized systems* Restoration and reform of applied research, extesion,

vocational training and quality control* Restructuring of agricultural services involving participation

of private sector and including partial user fee financing* Liberalization of trade in consultant services* Development of improved national and provincial m

legislation and institutions

Povefly Alleviaion - Targeting of social assistance towards vulnerable groups* Improved delivery of social assistance* Reduction of matemal and infant morta'Ity and

malnutrition* Poverty alleviation in rural areas

Environmenl Management and Protection * Sustainable use of natural resources* Pricing and regulatory framework in forestry* Management of native forests* Soil conservation and chemical use* Property issues* Expanded access to rural credit* Market-based solution to water pollution problem

- 31 -

Oo. 1SAnam AtPnge I ot 2

Argfta - Bank Group Fact 8heete FY91 -97

IBeD Lending Progam, FY91 -97

Past Co- . PlaedFun . FM2 FM FN FM FM

Oo w _nggnena (USa.) 070.5 373.0 1060. 610.0 705.0 8W5.0 II0

AgiLaU 4.0 .. .. _ .. 20.0bus" end F .. .. 20.4 8...

Ene _rJ, .. .. 183.Powe .. 7. ., ,.

Publ S Maaeme 80.4 38.3 0.0 .. 20.0b*auwr& Un Oe. 14.7 20.0 .. *- 40.0 $0.0Human R .. .. .. 16.4 40.0 40.0 40.0Envonment .. .. .. .. .. 10.0MbN & OerEa .. .. .. .. . . .

u Iiu ~ ~ _ .. .. .. ..__ _ .._ _..

TOW 100.0 100. 100.0 100.0 100.0 100.0 10A0

Audmusnt Loan aO.4 92.5 58.7 .. 56.0Spefalltw. ans&O s 10.0 7.8 41MA 100 450 1000 100t

Tw 100.0 1000 100.0 100 100.0 10.0 100.0

blws.ntmnu (USa.) 480.0 255.8 1M27. 4t0.0 S20.0 700.0 750

Adjusent Loansal 2W5 169.1 1165.1 200.0 100.0 1sn 1S0.0speaft kw. Loans& Oft" 161.0 116.8 261.2 250.0 420.0 5o0 600

In s(48m) 109.6 216.7 207.3 2S2 285 3t8 330.7

af Progran ana StrtalAd sunstLans. Secr Ajusbont Loans. andS O mst MLans.

- 32 -

Dec. lo=Anumx A2Page 2 of 2

Argentina - IFC and MIGA Progam, FY81 -94

Past CuroatFY91 FY92 FYS93 FY94

IFC Approvas (US$m) 622 174.2 155.6 500.0

Sector)

Agri-buinoss .. 26.0 .. 10.0Cap. Makets 10. 12.0 3.0 2.0Chem-Ferilhzr 26.0 .. 3.0flf-tructur. 7.0 67.0! 50.0Matung 22.0 17,0 22:0Oil-minn 42.0 51.0 t3.0 13.0

Tota 100.0 100.0 100.0 100.0

lavoetumt Instumen (I

Loins S3.0 69.0 53.0 75quIty 14.0 13.0 9.0 10

Quasi-equity al 30.0 13.0 35.0 15Oter 3.0 . 3.0 ,._Toti 100.0 100.0 100.0 100.0

MIGA Guantes (US$m) .. 50.0 96.0 U3S.0MIJGA Comuutmeame (USm) ..

a/ Includes both qua-equity an and qu-equity equWtypes

- 33 Annex A3Page 1 of 2

A'gd Prior*it Porty milcat

31S0 t_k u_

ro~~~~~~~~~~~~~~~d w~goUtpow# .mt -_I _ _

oJwpseuia 1a.IuuN.2-410- -

so= ihim W.4M a - a - a

t%" Ioba. - _ _ _ _ a31s -hS -PX a .. . a _

11937-10SS 10 3,830 710 430

RuaU 1sedb,b hmI. -a - - - -C m v 0 0 0 923,10 _ . -

Feo -.a 311,44 . _ -

b _PiU0 *S6 Zi.i %dGDP . _ _ _ _ _

. ~~~~%~dagspp 101 106 111 107 107 305M* * 101 tOS 10? _ a 103?am& 102 106 114 - 103km bI _ bw So 44 2 43 33 3ws_9ft ' _ _ 30 3 40

mm" % I a_ 7_ _ _Orr a 8 77 StU

TOWl St 6 71 48 a 7nF-ImoaI s3b Lt0 10 1i10 t 0 t LOsTo<l btE bl,w _ 31 3.3 2.3 a 6 =UmIU- * 10n,000 UObtUa _' 140 _

hPuPOdou gmowt Auto .faut mrtaly raftoPiay.u e,6+ 250 120

S 100

4 80

130~ ~~1

3 G0

2 40

1I5 20

00 0

roMEO. *dd7O. .me oMEb inM7Os - add~ .1650. -.~~~~~~~~~~~~~~1

Annex A3Page 2 of 2

A ~Rusmrr And Expnd~Wu

UM £1v No

Inodkxw -&NO d*e"ws b w cHUMAN REPsUoPop.bdkft(auhII5) 2 .242 2652 U 445 02M0 CW,AVqud-yflo "de i 07 0n an7 oa4 A4Urban %of 7AU . 17* 7.3 72. 77.APopUltion powtkh rds, iS 1.7 la L7 Li W.Urbn * 1t 2.3 2* 19 21 0.7To tote.144) 9 1o 12 1i2 20 313Auinwe %fikm 13 1i s _

- am 34.- 34Fea. 13 26 23 27 30 3$Fauo pat 100 anusUrban - - 104 106 .o

Rural - so~~~~~~~~~--

NATURALRBSOURC:An. 6msc.qkm 2.767 2767 2%767 2W7 3944 3W

Donaty ~ ~ ~ ~ qF* t0 2. 2, .0 168".1"1 V ef am 65. OA3 40.3 43 44.CmarpimkmuIleak _tl Q1 OA 41 02 0.1 43A.lmUa lu d wiaied 0. Q0.3 LO 32 3.3 #L?.weaaamdwod4h~ tI6~km 09 403 593 9X333 7.70D _ma(n5 41 42 *IU2 _ _ _INCMEHtomebMoimSbinoftWW20%d_b %a a _ -mo_

Shwaofba%0dbwmm f _ _

e 2-3$s 6-7 --"~~~~~~~~g on to _ W 3f-L 20 4 L 23 320 2.70

SsofauiaaIblresOOP 112 I 12." 9.4 U 2.:2_in %otOD - _ _ _ _

Avugbom.cis pmab.nl ---

Fudai pow %ofODP _ -!mpo.anFm paou lkg of Oilp 975 1.316 1.01 1.061 1,701 ,322Fll oad da

TeA__ %aoum"fGDP . _ _ _ - -

To lroadudib k 211.30 _ _ DrVZSrMINT IN HUMAN CAPITALHe"

Aoomg _ehag %ofpop. * * _ 'oulsoaepb,ui p e (00 53 355 _ _ ?apulatiemparmm f610 ffO 1 _ _ _Poaazomebaq' _ _ 216 510 _ 144

a X ~ ~ ~ ~~~~ ~~~~ 76 -<p _ 42_7.4 _ _

OISIhdedShIYOdW ) %Od a -_0 _1 a aI_Otamguo~~~~~~~~~Ot%g"O"

Sr %OfSdWppUF. 23 $4 74 43 _ 92F_ * 31 $7 78 3 _ 94PuaplLtadwr.pdauagi p 29SZs 1 VUt'9ll4Cinx_idatin@gidty w6 7 7 _ _PU9IhI¶W,nsVi4 %afcc- 73 4 n 961 %qCI. S 12 9 a14 _

%d*(Sp W) - - is _A Ndxt pq(. -_ to a 112 . 3Sowes Would DmR Igam_uwi EU D _stmmt, ApI 199 1

13

-35 - APatol2et

Aradn toKy S_MOmi _udIiat

>_^_~~~~~~~~~~~~~~~AO

AV*Uk" 0. 0.1 6.7 6O 6.0 t60 o0 .0b _emu 414 360 37 36.7 3Qr 30.T 17T 3L?Se0ife 460 6L u. as Su 6" 63. 6. 6

Co_iut m 70 . 6" 64.5 3. 6te 61. 1.8ate, 1 1 14.6 t.7 1. 109. 10.4 tat

PtIlwowe" t 12.2 II 1Z4 4.S 1., 1ts 17* 17.4GooMflIMIfit,VOIW11 is to6 Zs3 Is as 12 Zs 2.3e0Fo amps 1 10.4 7.7 t. 6.1 0 . 0#A

ItPu ampS 6.6 46 61 6.1 7. 7.8 7.6 7.

are" "Wosoo I 0 154 16 1.Q 14.3 1" 16. 1tsSf0.0 domosU.0.g .S od0 1".7 16.. 16.1 16.I 17.6 1 16.7

ago" Og,oum frmood 0~Una Pon*m 740. 141.306 MUG73 62% WOO*6 276*2 2o66.1 316.34GromObPoaepwauea(UO 0.465 t4t, 6.6660 6* 7.711 0*4 6.71 0*10

PUUIJC 01MAR03 1042. SOE4 w4 ". 30kAA)cw tIS 14 16S 14 1" 17.1 17 17.0 17* 17.4cii uwUlog 10.0 I" I" 16 16.4 IM 1ol1 1"OuwpbIg(4) 6 () (LI) 2 j6 1.7 OJ 0.4 QComMapsm 3* 1.4 1. 0 1.0 I 1 .0 1.F_ _ a m tJ 29 0.4 1.5e0 (.4) W0

Gaoso _a_W oll U Qtc 01 6T 60 4.0 4.0 10aeoOmsU , (60 604 4.0 to

GrowOmCSgiW (74) (1.1) 7.0 7.4 60 . 10T C _aiomiI (.q4) (1t 11.0 1. 2.0 e 1. 1.SPoll c e_ umptm 44 61 t1. 103 2.5 1.1 1.7 1.5

MOP 64 7a 6.1 7.7 10.0 113 12.4 1ad,00,0 of 1) 1.01 t.0Qt 10a" 6LJ7 46J 3" 1" 1&S

PWVb area$, No" womsqbfs" M (464 6.7 46.T f14 t6s 6. 4 S

~~~~~~~~~~~~ . .9. . , ,.

- 36 - AauM

Areea -- Ky EoMiO Indbcoo,

- A_ t*060 1060 tggj 160o IsSe t9S4 12S 16S

UAL t4Ep M UNSMasuE i (dopdo a" 11.MOM 14,2 1M 15.046 1. 17.44 19. 21,6

OftmOW: UWmIdIft..b. 0.573 ILt= 12.107 t= 1t2. 14*274 16.7t 17.711

Iv'pmb a" MO 6.064 to"4 itt.SE 10 .t2 21t76 2315 24Of WhiLwI d u an ." &864 4.100 6,100 14.72 18.66 17*66 164466 10.

Reswo" 0m.M t.m 3.000 (3.71 (4.654 (4.340) (4.Gt01 (Not Pase P mata 561 5.0 5. 4,574 %W 4.M S 6.1 5T7

°1t, 7.101 tt4t 3 kg" 6,M3 4,336 Mo1 40f 7.77

tG thumovawea f 71 a0 ( (3 (3t O 3 0Ounestr amun bs 136 1*641 (2.664 (6.361 (6.471 (560 (S.72 (10.16)

P'sAft . - . h,,4st,,we I~~~~m to= 2.461 4.170 3.001 I.On .405 2.=6

ULT toom (MO (t,% .411( 1) 341 PR 2.M666 2 3

a0m"g ht,7t"e1 R4e1) S41 (3.6 .(04 s (4 (615)

a - ( - 9 - _ 1 (^ ZJ asEs ?,~~~~~~~~~~o n & 745t cm 4,m S S35

ftsumW1w. (MOn 1 U2 506 566 17.0t 17.672 t10*

Grame Rm _moalhds posts * 10.7 Mt 7.3 .4 as *

m4apusl.u%osop 15. 10.A 7.3 .6 IL1 6.3 6 6A

IWmp6s aS dfGOP * 40 6* &2 7,0 7. 7 7.A

Ustowe, 0du~~~~~~~~..a. 5. oGOP ~~~~~~7.2 6.5 1.8 t1. n. gap (. f.1

Mba._musein l 6 26. as (.4 p.4 6.4 7.5 7.6 W.

Abmaip 24 4* 12.7 65 * 7.0 71.3 7.5--*g," 6. 14. (Its 4 tJ2 t *.S 6.7a? 4" 1Z" 3 f 2 at US

Umombatindi uspoON =11 O14 au 72 4.1 4 3.t

£xpehp 111.2 112 11 116.3 1144 116. I2O 1tim_ p:hN 106 t17 1 t2 110. 111.6 111*S 11. 116* 16

Tomettrad ra 1l06 ll0l3 10. 101 1022 1.4 104 10u

.1d_ Pm.Rft 404 7S 10tt0 1t6S 121.4 1"L. 11 t"at

COMm. EN "l'(ropeaf 4,. 1to 6O 17.6 to0 4 2. Lt 7Rem' _ s t5 163.2 4t.S 14.0 1 064 Li tU

G0P0data(%_goomote 3.0t145 2 141.0 168 7* 40 2 &

a,unwe .,

- 37 -

ism 1994Anmax ASPae I otf

Argetina -- Key Exposure rdioatots

1000sx 1001 10992 1003 a 1004 lOGS m99e

ToW DebtOubq M M O M" bi a" 62.10 as," 67.610 MM 4w 02aim 10O.7

No obbuwae eJ n" hi o(.5 (2.46) 240) 8.4 MAS 8.175 7.035 7.

TOW Dbt 6 am JSOM 11 8,053 80 e.1## OA0 7.16 8.126 0.118 t

0d.tand 0.6Smile bWumn (S)T00g208 664.7 462.3 440.3 440.0 440.4 41. 41t 42TOI¢OP 81 44.0 5S MS 26* Q0* 31.1 351TO 7GU1 .8 41 4S2 4.8 46 47.2 50.C5on04sianmWFO 0.0 1.0 Oa 0.0 (L8 7 0O 0.6

IURDSO.ibQ

P uWI dCfeol aS 21.1 2Q8 41.1 30O 26* 27A3 26.1 S6.1NsD 06CSSS 3. &4 1. 4.1 SA 4 2. a.3

lORD w. 9 27 24 26 57 &30 4A4 4.

IFC (USa)Lwau M-0*4 3* M us2S 47.057 0 4M. 40Eqldty 211 4 Su 6. tODJ 0. no 2

MIQA

aI E30nWm.el A1u/1m p Sbuwdp i a db p nr ladd t-d AaumishsMlteUU1UWuuS

ANNEX A6A. Condlons f Effeclives and Review Pass

Fmhe*$ Atm Acd|a Take | Du | Forma Review (Sc al Roview

Mhato.. Agreed to aggtegate 3-yea fisca progrm and asern! Anmcb whit Cunplc WhIt 31-ya Ceomminc Wmi 3-ya .acmecmean* pIga (if it tot CazpUtie whit 3-yea macetecnuesc pro rm (if e t

- J~~~B IMP s Bank to can= of EFF nogeetoba ki*dg oparadwAl maractni eorcespd. "aiolkasd smreiancsftablt) CXpireMd, causmiOd maCcacominc sabilty).8am jphuasa rs. _________ _ _ _ _ __ ____________________

Muk4

loWaved GMbA a VAa8 d to coogess ft mak trspnery gm Wmd cMv sW m of agfomma of ft tiws CNV id moboa even of frdcn Cg eF f tf aie

9yevua of bieltales Peoviskha t OM poIer to ae n unkr Rook" 227. weSer Resohnk. 227.

Mescado de sa*er of dbe MCad do Valores ft by ft CNV

Bod of ft ).eeedao Is pesa

CNV ha Ake c a sbd In cooperLtis WM7 ft Sbockto s bto a: a t fusa aSamee af ck ook. awd ft d*s

ftp hc. ki ba dso darled rols Impsadg hl cqal

PA1 1OM CNVs' piseky reguslatwY cefas ja is A mAfly Bp n daupae. ed t p ft CNV sld adept l CV isld nina t captai wae with risk-Repas m s to, I embm Wi1 s a C_apaciy. i at ibi sde wdi fsk-weittog foulse and mg" WliS fosn d am isctesy alens And

fit sp bavnbe es, gi s oic_ariw n to d sWstpf ys and meftd of capal ideqAcy of CAital adeSliacy npVnIL

cmv CNV WiVl bew bepn of t agamizational CNV wl tow aluevcd sasctry prgess

Dearlajana reYaw ad_ OdtVdek ta ppnA m b h ams ft initIal of ft _sgasisia sreview _ Sph Of ft _W s bt poga to he mppotd by deco prrm Dtch forms d Al pha Of Ft

WarM Roak leemca masAce. sanis hai popa to be ipWp by WadBank tdRhaalbaane

Tam No IaSS Ola WAa tri, ad ae atof fo idl M " _

ad P Sabaay a hI swd Ma

|rW Alas | Ark Ta f to Due |f|dvn F7 Fe RSecond Ft a 1 ' Rea

IBw%W*o Fhmd _n _sa"Ma of __m _M __ tl Goement, SICE ad BaDk woud len a OAd MeGioe IE7 eBi o AA Iprw to s*mme tsr review of die Pfn Fu R l Daim review Of de nam d it _ fmizadom (as apIate) of M an sd a Cy YInroduce * - osbl e n.y Age.- ad _

PBs P9 *suifacalina sPBsodology oal has been omcpleed PH dtst regairommm aobsd. Ps D et r--Wr ap

A program to nprove bank sapesule I underway. Ibis prog is Prp in beok a evislns me S& crtra Pros ir bank snpvi me PSAL atomdcfined der dte apwp d FSAL.

Ps ns are m M Main

IntarelA Rate A progan of evretn rats oibidesm for mant buiese a bees Plsally-swi lelle talres rat idabby progans sixwi hav Fisally aWpoeted wt hu rs.s eubaid iamn abeom| Reuse isreodeessi. b_ _ _ _ _ _ bee aended bre bes eae"

NICE BICE bs boeee lsed wIth 100 percet Gowetnmn Ownershp. DICE's PB aw a and e pe eei be MCE s bantk au ee poe sdi becosee wih Rank guidlI. DICE' adid oinisk wth Dank itkies BICE's h BatEodpeofamo sdI be adsbctry to de Ban DICE pefonxusculd be atfactoy toe DaBut DICEoet excbsively an a scene-tier lstlm. operates exels y as a seeed-d Ilc

Marke Pr procedrs on DIC operaed hae been ac eed. Pa i, of BICE oerations *mId be markt d_esied. Prf * of BICE qerations axxd be ms ined.

IBRD 20450X°' i BOLIVIA -. ! 60

I \ LoGwcm 7N1 7S|'t_ \/

PARAGUAY \ /

. R &tJ aLTA/ , j ~~~~~~~~~B R A Z I L'4 tTA~~ LTA~/ -0ROB AI

-.- t-T U C U M A N A C \ / S m f .de

.: ~~~~~~tUC!JMA N X&TAMR / S ! R SI..N..... .. 'IQ-

DEL ~ ~? ORRIENTES

tAUOJA~'~ I A SANTAFE

_ ~~r (SAN JUs l.A.;

\ )MExSAN JUA J D Vttb oo\Nec _ot dle

SAN ~ ~ ~~~SNA P*N

IOA j OiO toSAI3j . ( _C __URUGUAY

CHILE 0 s 0.4 qMENOOZA LUIS VflI : s

- -ANTA ROSA _ )E

S | \ -¢- ~~.: .PAt AO PA .) LT A 4R

x, ( s~~NE QIJEN: \ SI.ANCA C9 0~~~~ E Z .{

{ d f { RIO NEGRO | -

, ., } a W 1\ A R ' 'E '-R';G I N I -"'

.U CHUBUT m aw-. .o ..I D; > (0*gi 0 a~~~~~~~~~~~gvet ,( {; ,}X*,., XB7- Mawr --.- .u

ProAic bwundaries-.- hintmffmWa boWaundr

,AlKIANi S Ai,tAlI'5

'.'t R\,, .':"._ '' '~

.~bffiak~*Iwe. * TlERRA 6 L

' ~ ~ ~ ~ ~ ~ ~ ~ ~ LMR t} 2r 40 'C ',- *O

16S 00' 2~0, 200 A00 560

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a, ? t ju ................. ... . . . .