Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 14782

IMPLEMENTATION COMPLETION REPORT

URUGUAY

DEBT AND DEBT SERVICE REDUCTION LOAN

(LOAN 3323-UR)

JUNE 12, 1995

Country Operations Division

Country Department I

Latin America and the Caribbean Regional Office

This document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY UNIT - Uruguayan Peso (Ur$)

Ur$1.00 = US$0.167 (as of March 8, 1995)

FISCAL YEAR

January 1 - December 31

ABBREVIATIONS

BROU - Bank of the Republic of UruguayDDSR - Debt and Debt Service ReductionDRE - Debt Reduction EquivalentIDB - Inter-American Development BankLDC - Lesser Developed CountriesIMF - International Monetary FundIFIs - International Financial InstitutionsLIBOR - London Inter-Bank Offered RateMYRA - Multi-Year Rescheduling AgreementSAL - Structural Adjustment Loan

FOR OFFICIAL USE ONLY

Table of Contents

Table No.

Preface . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i

Evaluation Summary ........................................ ii

PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE

A . Project Identity ..................................... 1B. Background ........................................ 1C. The Program ...................................... 3D. The Debt Agreement ................................. 5E. RoleoftheBank .................................... 5F. D DSR Loan ....................................... 7G. Program Results ..................................... 8H. Bank and Borrower Performance .......................... 11I. Conclusions . ... ... .. .... .. .................. .. ... .. 12J. Lessons Learned ..................................... 13

PART H1: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE(To be completed)

PART III: BASIC DATA

Table 1. Uruguay DDSR AgreementTable 2. Costs and FinancingTable 3 Debt Reduction Equivalent of DDSR OperationsTable 4. DDSR Operations - "Forgiveness"Table 5 . DDSR Operations - Liquidity ReliefTable 6 Decomposition of Increase in Portfolio Inflows after 1989

STATISTICAL INFORMATION

Table 1. Summary of AssessmentsTable 2. Related Bank LoansTable 3. Project TimetableTable 4. Bank Resources: Staff InputsTable 5. Loan Disbursements: Cumulative Estimated and Actual

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed wiLout World Bank authorization.

IMPLEMENTATION COMPLETION REPORT

URUGUAY

DEBT AND DEBT SERVICE REDUCTION LOAN(LOAN 3323-UR)

PREFACE

This is the Implementation Completion Report (ICR) for the Debt and DebtService Reduction Loan (DDSR Loan) to the Republic of Uruguay in the amount of US$65million equivalent. The Loan was approved on May 14, 1991 and fully disbursed on July25, 1992.

The ICR was prepared by the Country Operations Division of CountryDepartment I of the Latin American and Caribbean Regional Office (Preface, EvaluationSummary, Parts I and III). The Borrower's comments on Parts I and m and contribution toPart I have not yet been received. Of the co-financiers, the IMF's views have beenincorporated, while the IDB has not furnished any comments. Preparation of this ICRstarted in April 1995. It is based on the Report and Recommendation of the President, LoanAgreement, Letter of Development Policy and internal Bank memoranda.

The Loan was the fifth in the IBRD program of debt and debt service reductionactivities, and nine additional DDSR operations have since been approved. Theseexperiences (including Uruguay's) have been extensively assessed in reports to the Board(ref. "Analytical Aspects of Debt and Debt Service Reduction Operations", March 9, 1992,and "Review of IBRD Debt Reduction Program", April 4, 1995). In addition, the "WorldDebt Tables 1992-93" contained a special analysis of these activities. Further, there havebeen Project Completion Reports distributed covering similar operations in several othercountries. This documentation has elaborated in considerable detail on the underlyingassumptions, methodology, evaluation and other aspects of DDSR operations.

This ICR thus concentrates mainly on the significance of the Loan withinUruguay's economic experience, with less attention to the internal aspects of the DDSRoperation. In addition, the Loan was approved after the debt restructuring transaction wasclosed and the Government provided its financing. Its President's Report provided acomprehensive description and evaluation of the transaction, its assumptions and underlyingfinancial parameters. This ICR therefore does not re-examine these matters in depth.

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IMPLEMENTATION COMPLETION REPORT

URUGUAY

DEBT AND DEBT SERVICE REDUCTION LOAN(LOAN 3323-UR)

EVALUATION SUMMARY

Project Objectives

The Debt and Debt Service Reduction Loan (3323-UR) of US$65 million equivalentwas designed to support the Debt and Debt Service (DDSR) Agreement reached betweenUruguay and its commerical bank creditors in late 1990 and implemented in February 1991.(DDSR). This agreement covered the US$1.6 billion of Uruguay's medium- and long-termcommercial bank debt which had previously been rescheduled. Of this, US$628 million (39percent) was bought back at a discount, US$535 million (33 percent) converted tocollateralized par bonds at a below-market interest rate, and US$447 million (28 percent)rescheduled and converted into new money.

Implementation Experience and Results

The Loan was fully disbursed on July 27, 1992. The DDSR activity achieved a debtreduction equivalent of 50 percent of the aforementioned eligible debt. The operation alsoresulted in a debt "forgiveness" fraction of slightly over 31 percent (an alternative calculationdesigned to capture the size of the windfall transfer from creditors to debtors compared to theoriginal terms). The benefits of this reduction/forgiveness were limited however, partlybecause the commercial bank claims in the DDSR package were only about half of totalexternal debt.

The corresponding financial returns amounted to a relatively small percent of GDP.DDSR-fueled savings were estimated at 4.5 percent of 1991 exports. An assessment ofbenefits against a counterfactual based on extrapolation of Uruguay's historic payment recordcalculated subsequent cash flow savings at 4.4 percent of consolidated public sector revenues(after the Government's initial up-front payments for collateralization of the instruments andthe buyback). Significantly too, the subsequent savings were also equivalent to 34.5 percentof the consolidated fiscal deficit prior to the operation.

The DDSR arrangement stabilized the level of long-term debt. It increased by 8percent in the three years after the agreement, compared to 42 percent in the three previousyears. Public and publicly guaranteed external debt only increased by two percent in theformer period. Further, debt service on long-term obligations to private creditors fell in1992-93 to two-thirds its level in 1990-91. The ratio of debt service to exports of goods andservices was 31.4 percent in 1993, nearly 40 percent smaller than before the DDSRtransaction.

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Its other attendant benefits included the improved matching of future debt servicewith Uruguay's payment capacity as a result of an upside recapture clause. It provided thatthe value of the par bonds would rise with higher prices for the country's three principalexports divided by oil prices. In addition, the DDSR operation was followed by thesubstitution for local short-term borrowings by longer term bill placements in internationalmarkets and at lower costs. Furthermore, the transaction moved the bulk of the US$1.6billion external debt it encompassed from floating to fixed nominal interest rates, also helpingto stabilize the Government's financial risk management.

Moreover, a 1994 study of recent increases in net portfolio inflows in 13 middle-income developing countries found an 0.72 percent of GNP rise in such inflows for Uruguay(compared to 0.69 percent for the entire sample). The study concluded that Uruguay'simproved domestic investment climate figured importantly, although the capital inflow surgeappeared to have largely been driven by low returns in more industrialized nations. In thisconnection, private investment in Uruguay in 1992-93 averaged 53 percent greater than in thenine years before the DDSR transaction.

The Government's effective design of the DDSR package, together with its steps totighten macroeconomic management at key intervals, combined to speed the debt reductionoperation. It could not have been concluded without the support of the Bank and the otherdonors. The Bank and the Government collaborated closely during the processing of theDDSR Loan. Its delayed disbursement for over a year until Uruguay regained access to IMFresources, however, caused some strain between the two, when the Bank insisted in"maintaining parallelism with the Fund".

Summary of Findings

The Loan made a valuable contribution and led to significant macroeconomicimprovements. It accomplished less in advancing pivotal long term reform measureshowever, and several core developments constraints still remain formidable. These couldultimaelty undermine the benefits of the Loan and make sustainability uncertain.

The analysis of Loan 3323-UR did not add any particularly new findings to thealready well documented assessments of the methodology and other aspects of the Bank'sDDSR operations. However, Uruguay's success in gaining eligibility for DDSR assistance,and in obtaining the market-based resolution of its external debt problem demonstrated that,when debt workouts are needed, it is important to adhere to at least quasi-voluntary ratherthan mandatory solutions.

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IMPLEMENTATION COMPLETION REPORT

PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE

A. Project Identity

Name: Debt and Debt Service Reduction ProjectLoan Number: 3323-URRVP Unit: LAICOCountry: UruguaySector: Non-sector specific (DDSR)

B. Background

1. This project originated from the adversities which beset Uruguay and other LatinAmerican nations in the early 1980s. Nonfuel commodity prices fell during a globalrecession while world borrowing costs reached historic highs. Underlying these were the oilprice shocks and the unprecedented international lending to LDCs in the late 1970s.Uruguay's unwise domestic policies exacerbated the situation. It had adopted a decliningpreannounced rate of nominal devaluation to stem inflation--but without first controllingpublic finances. The exchange rate then became overvalued, and the stabilization andliberalization programs lost credibility.

2. Simultaneously, the external resource flow that had provided the equivalent of 5.5percent of GDP in 1979-81 suddenly halted. Uruguay, along with other Latin Americancountries, saw their international reserves depleted. Then, after Mexico suspended paymentsin mid-1982 and over 30 countries representing half of LDC debt fell into arrears, the "debtcrisis" was underway.

3. Uruguay for a decade had averaged 3 percent growth p.a. with moderate inflationrates and balance of payments equilibrium. These trends now reversed. Output fell 4.1percent a year on average through 1985; per capita GDP in 1989 was still 6 percent lowerthan when the decade began. Large fiscal imbalances surfaced and inflation accelerated.The some 60 percent devaluation in 1982 provided the adjustment. But it made heavilyexposed private borrowers insolvent and further weakened the banking system.

4. By 1982, the country's gross external debt was more than twice its 1980 level.Midway through the decade, it had further increased to over 70 percent of GDP and over250 percent of exports. The debt service ratio similarly rose from 17.5 percent of exports in1981 to over 45 percent in 1985. Simultaneously, there was an over one half billion dollarreduction in net transfers between 1980 and 1986, which turned substantially negative. Net

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outward resource transfers rose to 7.7 percent of GDP in 1985, while debt payments abroadrose by over 300 percent.

5. In order to remain current on debt service, the authorities reduced the public sector'swage bill, took other steps to cut the fiscal deficit and restrained monetary aggregates. Thenecessary internal resource transfer was brought about by constraining domestic consumption(-12 percent during 1982-84) and public investment (from 8 percent of GDP in 1982 to 3percent in 1985). There were also heavier short-term borrowings in the Montevideofinancial center. In 1985, gross capital formation was less than half of its 1981 value as ashare of GDP, making the capital stock even more obsolescent. Imports fell to about half (invalue) their level of 1980.

6. The Government also undertook to expand exports, fortify the balance of paymentsand make public finances more sustainable. It moved to rehabilitate the banking system andcurb social security benefits, with secondary attention to modernizing the economy andmaking it more competitive. It also continued timely debt service payments andcollaborating with creditors in order to regain access to voluntary capital markets (andsafeguard the regional financial center).

7. The results were mixed. Through 1987, an initial strong recovery enabled real GDPto grow at roughly 10 percent yearly with large increases in investments and exports.Unemployment dropped to 9 percent, inflation to 57 percent. However the situation thenagain worsened. At the end of the 1980s, the combined public sector deficit increased to 7.8percent of GDP. It consequently appeared that the adjustment effort was badly flawed by theabsence of sustained basic reforms.

8. Meanwhile, under the then-limited response to the global debt problem, Uruguay hadwon a deferral in 1983 of two years' service on a small part of its obligations. Soonafterwards, it became apparent that the restoration of LDC debt servicing capacity was notcoming about as hoped; nor was the envisaged world-wide economic recovery. The strategythen shifted to longer-term consolidations. In 1986, over US$1.7 billion of Uruguay'sobligations were postponed on softer terms than before, and this multi-year reschedulingagreement (MYRA) was improved in 1988. But these applied to less than half of the debtand only briefly contained rising interest payments.

9. Nonetheless, these measures temporarily eased the problem, as did stabilizationprogram gains and lower international financing costs. The debt-to-GNP ratio decreasedfrom 70.3 (1986) to 52.5 (1988), and the latter year's total debt level was only 3 percenthigher than 1986's. Unfortunately though, Uruguay's debt service-export ratio soon againrose, as did the ratio of interest payments to GNP. Thus, when the 1980s ended, Uruguaystill faced severe macroeconomic problems while its debt payments took over 45 percent ofexport returns. With low savings, the country foresaw implementing even morecontractionary policies to service its debt although per capita consumption was still below its1980 level.

10. As the same conditions applied to many highly indebted nations, the "growing out ofdebt" strategy had failed. Also, the magnitude of--and the responses to--the crisis had beenseriously underestimated. The result was the evolution of a new international approach

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which switched from debt management to debt resolution. The Brady Plan accepted theconcept of reducing debt, abetted by greater official financial resources, linked to growth-oriented policy reforms.

11. Shortly after its March 1989 announcement, the Uruguayan officials sought to beincluded among the Plan beneficiaries, but they were rebuffed. There was then praise forthe 1986-87 recovery, competitive exchange rate regime and unrestricted internationalpayment, transfer and transaction policies. But developments showed a widening of thefiscal deficit, intensified wage indexation and inflation pickup. Accordingly, the creditorsinsisted on an IMF standby as a pre-requisite to a debt deal.

12. There were also questions raised about the balance-of-payments justification for debtrelief in a country which was current on its obligations (after MYRA reschedulings).Moreover, Uruguay then had both significant gold and several months of foreign exchangereserves. (These were defended on the grounds of the volatility of dollar deposits in theMontevideo banks, the need for a cushion against possible higher global interest rates, andadequate liquid cover to maintain foreign depositors' confidence.) In September 1989, thebanking advisory committee adopted a wait-and-see stance, pending the results of theupcoming national elections and Government-IMF negotiations.

C. The Program

13. The new administration that assumed office in March 1990 immediately began to re-tighten macroeconomic management, while simultaneously preparing a comprehensive,ambitious debt resolution plan based on the Brady formula. It successfully laid thegroundwork for this scheme by strengthening the fiscal position and Uruguay's relations withthe IMF.The authorities knit better ties thereby with the commercial banks, abetted by support forUruguay's case from the Brady Plan sponsors and the IFIs. In June 1990, the creditorssanctioned the repurchase of some of the US$1.6 billion rescheduled debt, clearing the wayfor a DDSR package.

14. The Government's strategy in designing the package was based on:

(a) relieving Uruguay from making any principal payments on its commercial debtover an extended period. (Amortization under the MYRA agreements was dueto resume in 1991.) This was intended to provide time for strengthening thecountry's capacity to repay;

(b) reducing by nearly half interest payments on the debt covered during 1991-96;

(c) retiring as much as possible of the commercial debt stock; and

(d) on the basis of the above, generating sufficient savings to permit attainment ofpublic sector deficits consistent with long-run debt equilibrium, and withoutfurther squeezing public investment.

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15. During its preparations for the DDSR transaction, the Government altered thecomposition of the package, originally limited to cash buybacks at the secondary marketprice and new money offers. Uruguayan strategy had for some time concentrated on thebuyback device (originally they had been seeking to repurchase some 60 percent of the debt.)However, about this time, the interests of the creditor banks diverged increasingly,particularly on debt reduction as opposed to rescheduling. The Government thereforeenlarged the menu (an approach which was devised to reconcile these differences) so as toinclude the option of par bonds.

16. Another change also demonstrated the Government's eagerness to ensure substantialparticipation in the program. This was fixing the cash buyback rate somewhat higher thanthe then secondary market price (52-54 cents on the dollar). Before then, the secondarymarket discount on Uruguayan debt had already long been either the lowest in Latin Americaor second only to Chile's. The Government was aware that offering prices above the marketlevel would be costly because of the reduced yields resulting from the lower discount. Butbecause of their priority on debt reduction, the authorities felt it necessary to enhance theattractiveness of this option.

17. The design strategy also called for liberalizing debt conversions, following severalother heavily indebted countries' successes with this device for retiring borrowings. Theauthorities feared these instruments' impact on monetary expansion but recognized the BradyPlan's impetus for market-oriented devices. (They later set a ceiling of US$40 million onthese operations for 1991-92).

18. A further change stemmed from the new administration's decision to speed privateenterprise entry and competition in areas hitherto restricted to the public sector. All newdebt issued through the DDSR program was declared eligible for participation in debt-equityswaps without sectoral restrictions. The "new money" offer permitted 30 percent of thesenotes to be converted at par over three years for sums applied to debt-equity swaps orprivatization. This was designed to protect investors from declines in the secondary marketvalue of these (uncollateralized) notes as long as they opted to participate in theGovernment's new initiatives.

19. The package encompassed all of the US$1.6 billion 1988 MYRA debt, which coveredabout half of Uruguay's outstanding medium and long-term public and publicly guaranteedexternal debt. In keeping with the new market-oriented mode, the menu presented threeoptions:

(a) tender the debt for a buyback at 56 cents on the dollar;

(b) exchange debt into par bonds with a 30 year bullet maturity and 6.75 percentfixed interest rate; and

(c) reschedule existing claims and provide 20 percent of their amounts with 15-year maturities (including 7 years of grace) at interest of LIBOR plus 1percent.

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The par bonds had principal and 18 months of interest payments collateralized. In addition,the par bond offer contained an upside recapture clause providing for additional debt servicekeyed to possible terms of trade improvements. The value of the bonds would riseproportionately with higher prices for Uruguay's three principal exports divided by the priceof oil. This recapture clause was then unique, as previous Brady deals only included ahigher export price formula.

D. The Debt Agreement

20. In November 1990, the authorities and the banks concluded negotiations on a BradyPlan agreement and the associated financing plan. One month later, the Fund approved astandby with elements of support for the plan and all 69 creditor banks had committed to oneor more of the options. The banks' elections resulted in 39 percent being subjected to thecash buyback (US$628 million); another 33 percent (US$535 million) being exchanged forfixed rate notes; and the remaining 28 percent (US$447 million) converted into new money(effectively US$89 million). The details are shown in Table 1.

21. The choices showed the banks' preferences for maintaining claims on Uruguay: 61percent of the debt would be exchanged for instruments involving no reduction in principalvalue. The substantial outturn for uncollateralized new money notes pointed in the samedirection. The banks opting for these notes were effectively maintaining roughly one-third ofUruguay's exposure.

22. The financing requirement for the DDSR operation amounted to US$463 million($352 million for the buyback, $57 million for collateral on the principal, and $54 million forcollateral concerning the three semi-annual interest payments of the fixed rate notes). TheGovernment was the sole source of this funding, for which it employed the new money, goldswaps and sales, and reserves drawdown. Incidentally, Uruguay's operation was atypical inthe relatively high portion of the financing costs which the debtor bore. Domestic resourcesfinanced 67 percent of the deal, substantially more than Costa Rica, Mexico, the Philippinesand Venezuela, partly because of the Government's desire to minimize new borrowing forthe deal (ref. Table 2).

E. Role of the Bank

23. IBRD adjustment support to Uruguay began in the late 1980s after the Governmentundertook the stabilization and revitalization of the economy. The Bank continuedsubsequently to be extensively involved in adjustment measures and aspects ofmacroeconomic management aimed at stimulating renewed growth and strengtheningcreditworthiness. On the latter incidentally, the 1985 Power Sector Rehabilitation Project(Ln. 2622-UY) and the followup "B" Loan Guarantee helped cover the foreign exchange gap,thereby facilitating the 1986 stand-by and MYRA.

24. SAL I (Ln. 2836-UY) was designed to support actions strengthening public sectorfinances, reforming the financial sector, enhancing export-led growth and improving publicinvestment. Its balance of payments assistance and Bank backing of the Governmentprogram facilitated the maintenance of an effective exchange rate. The SAL also wasinstrumental in advancing to the forefront of Government policy consideration the most

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important structural reforms needing to be addressed. These included the social securitysystem, the inefficient public enterprises and the revitalization of the banking system. SALI did not help solve these problems. Rather, it was limited to enhancing local capacity toanalyze and design constructive approaches to these problems, as well as drawing greaterpublic attention to the underlying issues. It did though usefully improve public investmentplanning.

25. From the outset, the Bank had contemplated a series of adjustment operations. Thisplan was given more impetus with the resurgent fiscal deficits and high inflation, and the1985-90 administration's slippage on long-term reforms. It was clear that further policy-oriented assistance would be required to keep the adjustment process alive. Thus, SAL Hwas provided to extend the previous gains over the term of the new Government. Apartfrom further opening the economy, it focused on the financial sector's problems:rehabilitation of failed banks, inadequate regulation and supervision, and the specialadvantages of the state commercial bank (BROU). Program results were mixed. There wasgood progress in tackling some of the systemic problems of the financial system, much lessin privatizing the intervened banks.

26. Consequently, when the question of Uruguay's participation in the Brady Planprogram arose, the Bank had been intensively monitoring the country's performance andcarrying out a dialogue on important macroeconomic issues for some time. This facilitatedthe preparation of the economic program underpinning the DDSR package, which resultedfrom considerable discussions among the Uruguayan authorities, the Bank and the IMF. TheFund took the lead role in defining the macroeconomic aspects of the economic program andthe related financing package, with the Bank concentrating on sectoral issues.

27. The Bank focussed most of its attention in defining the conditionality of the DDSRLoan on two targets. One was further liberalizing Uruguay's trade regime through thereduction of import surcharges and the modification of reference and minimum export prices.The second was rationalizing banking system reserve requirements by reducing thedistortions favoring BROU in order to level the conditions governing private and statecommercial banks, together with further strengthening Central Bank supervision. Thesegoals, which were met before Board Presentation of the Loan, signified a continuation of thereforms fostered by SAL II. At the same time though, these were not very far reaching,which circumscribed the Loan's contribution to advancement of Uruguay's reform agenda.But this was not unique, as other Bank DDSR operations also had relatively limitedconditionality. Still, in the case of Uruguay, failure to advance on structural reforms inpublic admistration and social security make sustainability of the achievements of this Loanuncertain.

28. Additional measures for tackling financial system problems were to be undertaken byIDB. Its pending adjustment loan was designed to advance the sector improvements madeunder the SALs, and to provide a vehicle for IDB's set asides for the Brady operation.Similarly, the Loan envisaged the development of a subsequent IBRD activity forimplementation of the Government's proposals for private enterprise competition ininfrastructure and services ("Public Enterprise Reform Project"). These initiatives were laterto be derailed by the Congress and a referendum which halted privatization of the

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telecommunications company. Similarly, there was then legislative opposition to cuts in thesocial security system.

29. The debt restructuring itself was negotiated by the authorities and the commercialbank creditors, with sideline support from the Fund and minor Bank involvement. In thedesign of the financing package for the debt restructuring, there was continuous collaborationbetween the IMF and the Bank. There were initially some differences between the two overthe arrangements for the set-asides. Nonetheless, the respective set asides were processed intandem in order to seek to ensure their timely availability for financing the enhancements andbuyback.

F. DDSR Loan

30. Uruguay's package was facilitated by the waiver of the Bank's negative pledgeprovisions, consenting to the pledge of collateral required for the fixed rate notes. TheBank's principal support though was the subject quick-disbursing loan of US$65 million(Ln.3323-UY). The latter was an integral part of the support mobilized in concert with theIDB and Fund for implementation of the debt restructuring agreement. The IBRD fundswere used in line with Bank guidelines, and were marked by the following:

(a) Both the negative pledge waiver and the Loan were speedily processed,paralleling the Government's pace in carrying out the operation. The Loanwas initially discussed with the Government in December 1990, appraised inFebruary 1991, negotiated in April, and approved on May 14, 1991. Howeverit took over a year to sign the Loan. The delay to June 1992 arose from theGovernment's loss of eligibility for making an additional purchase under theIMF standby arrangement (which provided for set-asides equivalent to 25percent of each purchase). The Fund considered that Uruguay was ineligiblebecause of delays in "completing the midterm review" under the arrangementthen in force (ref. para. 46).

(b) The Loan was of a "stand alone" character, divided equally between supportfor principal reduction and interest collateral. It was the first Bank DDSR loanso structured. The parallel IMF support contained no explicit interest support(but contemplated adjustment of reserve target levels for this purpose). Inaddition, the half of the Loan that helped finance the cash buyback was a setaside against a planned adjustment loan, rather than one already approved, asthere was no adequate alternative fast-disbursing lending vehicle available.(These types of difficulties contributed to the later liberalization of the DDSRguidelines on lending instruments.)

(c) Since the debt restructuring transaction and its financing were completedbefrQ the Loan was made, it was designed to help reimburse theGovernment's payments. Accordingly, it called for a one-tranchedisbursement, an exception to the phased expenditures norm.

31. The President's Report concluded that the DDSR agreement reflected acomprehensive restructuring operation which would yield substantial benefits. It underscored

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the: (i) retirement of US$628 million of the debt; (ii) deferral until 1998 of principalpayments on US$447 million, and their subsequent 10-year amortization; and (iii) thereduction by nearly half of interest payments on eligible debt in 1991-96. It calculated theinternal rate of return on the direct debt service savings at 28 percent, and their present valueat equivalent to 32 percent of the face value of MYRA debt. The Report also compared thereturns of the DDSR package with the situation under which Uruguay would have continuedfully honoring MYRA commitments. On this basis, there was projected a net reduction inexternal payments equivalent to five percent of exports and 25 percent of public capitalspending. It further concluded that the smaller debt service would lead to a leaner fiscaldeficit and lower inflation, while also making possible higher private investment andaccelerated growth.

G. Program Results

32. Debt Reduction. Uruguay obtained a debt reduction of 50 percent, a considerabletrimming of its debt overhang. The Government therefore achieved the main objective whichit had set for the DDSR operation. The 50 percent debt reduction equivalent ("DRE") cutincidentally compared favorably with the average reductions achieved under the rest of the 14officially supported Brady packages. The Bank's study of the latter ("Review of the IBRDProgram to Support Debt and Debt Service Reduction", dated April 4, 1995) showed a 39percent reduction average for these countries (ref. Table 3).'

33. Similar results emerged from a parallel assessment of the "debt forgiveness" characterof the DDSR operations based on an alternative formula. This was designed to capture thesize of the windfall transfer from creditors to debtors compared to the original terms.2 The"forgiveness" calculation hinged on the reduction in face value (mainly the cut on discountbonds) plus the present value of interest service reductions less resources spent on buybacks.This study calculated Uruguay's "forgiveness" benefit at 31.3 percent, substantially below the"DRE" score but still a considerable gain.

34. By comparison, Uruguay's "forgiveness" fraction was slightly below the grossaverage---31.9 percent-- attained by 17 other countries for which Brady-type deals had beencompleted or announced by mid-1994. (This larger sample included beneficiaries of IDA

1. The "DRE" determination is defined as the reduction in the face value of debt plusan adjustment term. The first term comprises the face value of debt retired inbuybacks and exchanged for discount bonds minus the present value of additionalnew money provided by commercial banks. The adjustment term comprises thepresent value of interest service reduction (net of increases due to recapture clauses)and of country-provided collateral.

2. The major difference between the "debt forgiveness" and "DRE" calculationscentered around the question of whether the latter rightly excluded new money. Theproponent of the "forgiveness" formula alternative contended that new moneyconveyed an additional asset that offset the additional liability. He thereforeconcluded that it was a wash with respect to debt burden (ref. "International DebtReexamined," W. Cline,1995).

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Debt Reduction Facility operations and Eastern European states). The other Latin AmericanDDSR participants by and large won still smaller "forgiveness" percentages--Mexico (30),Argentina (28.7), Brazil (28), Venezuela (19.8)--but Costa Rica netted 60.9 (ref. Table 4).

35. The benefits of this debt reduction/forgiveness however were limited as the size ofBrady relief was relatively small. As the long-term bank claims on Uruguay included in theDDSR program were only about half of total debt, the reduction/forgiveness of one-thirdmeant removal of only about one-sixth of the global debt burden. The correspondingfinancial benefits amounted to a relatively small percent of GDP.

36. "Savings". The "Analytic Aspects of DDSR Operations" report examined thebalance of payments and fiscal impacts of the package. Using the counterfactual ofUruguay's historic payment record, it estimated the attendant cash flow savings at 4.4percent of exports and public revenues after the initial up-front payments (ref. para. 38).They were larger than the cash flow savings in the previous Brady Plan cases (Costa Rica,Mexico, the Philippines and Venezuela) but all were generally modest. Further, Uruguay'ssavings were calculated to be equivalent to 34.5 percent of the consolidated public deficitprior to the operation (ref. Table 5). In this connection, it is pertinent to take into accountthe following:

(a) Uruguay's DDSR package dealt only with debt principal, since as the countryhad remained current on interest payments. The potential for financial benefitswas consequently smaller, especially compared to other beneficiaries whoobtained relief on interest arrears.

(b) Since Uruguay's debt price in the secondary market was relatively high, theBrady package cost more. It thus also netted smaller savings on this account.However, the Government still felt the deal was a good one, apparently on thegrounds that it would lead to larger offsetting benefits.

(c) A somewhat overlooked aspect of the transaction was that the amount of reliefon the interest burden was effectively understated. In order to service itsexternal debt, Uruguay had been selling dollar-denominated treasury billsdomestically. However, the sizeable sums involved were not fully counted inthe DDSR debt figures. One benefit of the Brady package was that thisborrowing could be better contained. In fact, short-term Government treasurynote emissions thereafter diminished. They were progressively replaced byseven-year bill placements in international markets. Moreover, besidesmobilizing funds for longer periods after the DDSR operation, the Governmentwas able to obtain declining spreads (from 275 to 235 to 168 base points).

37. Debt Indicators

(a) The level of long-term debt has stabilized. It increased by 8 percent from1990 through 1993, compared to 42 percent in the three previous years. Inaddition, public and publicly guaranteed external debt increased by only twopercent from 1990 to 1993. This indicates that the Brady Plan reduction inUruguay's case effectively served to arrest the growth of debt. It did not, on

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the other hand, lower it substantially, partly because, as mentioned above, the

DDSR-eligible long-term debt was only about half of the entire amount.

(b) Debt service on long-term obligations to private creditors has declined. It fell

in 1992-93 to two-thirds of its levels in the two previous years. Also, the ratio

of debt service to exports of goods and services was 31.4 percent in 1993,nearly 40 percent smaller than in 1990. Further, the 1994-95 "World Debt

Tables" calculated Uruguay's average ratio of the present value of total debt

service to GNP (the broadest measure of the economy's income-generatingpower) for 1991-93 at 56 percent. By the Bank's criteria, this would place

Uruguay well below the "severely indebted" level (for which an 80 percent or

higher value was required). These suggest that the country's capacity to

service its long-term debt has been strengthened--but this needs to be

interpreted cautiously.

The same Debt Tables showed that the ratio of debt service's present value to

exports for 1991-93 exceeded the ceiling for "moderately indebted" countries

in the Bank's criteria. On balance, therefore, Uruguay was judged to still be

"severely" indebted. Several 1993 statistics from the same source moreover

are pertinent to this point. Private creditors' share of Uruguay's total public

debt, while continuing to fall after the DDSR operation, was still a high 71percent of total public and publicly guaranteed debt. This compared

unfavorably to 44 percent for the average of all developing countries and 57

percent for the LAC average. So too did the grant element of new

commitments to Uruguay, which averaged only 24 percent in contrast with the

region's mean of less than 15 percent.

(c) By the fourth quarter of 1993, Uruguay's secondary market price had risen by60 percent. By later that year, the prices were in the range of 80-82 cents on

the dollar. This was consistent with other experiences. A Bank study of

secondary market price trends after 1986 showed that "..for all (Brady Plan)countries, (these) prices rose quickly after the conclusion of debt reductionoperations" (ref. "Analytic Aspects" report). Similarly, credit ratings byprivate market participants (taken from the "Institutional Investor") rose

significantly after the Brady operations was concluded. However, thesecondary market improvements have been judged to be more attributable to

post-1990 international interest rate changes than to the DDSR operations (ref.

"Recent Private Capital Inflows" working paper, National Bureau of Economic

Research, July 1994).

38. New Money. The new money was immediately beneficial in affording some timely

relief because of its substantial frontloading: the entire amount was disbursed in 1991. This

proved to be especially useful as a result of delays in the planned IFI reimbursements of the

Uruguayan Government's drawdown of foreign exchange reserves to carry out its buyback.

In fact, the new money disbursements served primarily to reduce the immediate liquidity

Il= which Uruguay suffered in 1991 as the "cost" of the Brady deal, as other DDSRbeneficiaries also experienced.

- 11 -

39. The new money's other benefits were limited, however. For all the Brady dealsin 1989-94, the amount of new money provided was minute: equivalent to about two percentof the debtors' exposure. The US$90 million the Uruguayan Government obtained amountedto just six percent of the external debt involved. Further, in numerous cases, the trend of the1990s has been one of the commercial banks' turning away from their past practices of longterm lending to LDCs. At the same time however, the broadly cooperative, market-orientednature of the Brady Plan apparently contributed to an atmosphere of confidence for othertypes of creditors, as discussed below.

40. Improved investment attractiveness. An important measure of DDSR benefits isthe extent to which the attendant improved creditworthiness and more attractive investmentconditions increased the availability of external financial resources. On this, a 1994 Bankstudy analyzed the recent increases in net portfolio inflows in 13 middle-income developingcountries, more than half of whom had Brady-type debt reduction operations.' The studyassessed inflows after 1989, and sought to gauge the relative contributions in their increasesattributable to better domestic investment climates, rising creditworthiness and fallinginternational interest rates.

41. The figures for Uruguay showed a 0.72 percent of GNP increase in portfolio inflows,compared to the average of 0.69 percent for the entire sample (ref. Table 6). The analysisalso concluded that Uruguay's improved domestic investment climate had positive effects. Itwas judged to have contributed more to Uruguay's expanded portfolio receipts than it did onaverage among all the countries studied. However, the study's main conclusion was that thecapital inflow surges appeared to have been largely driven by low returns in the industrialcountries.

42. Nonetheless, Uruguay's attractiveness to private investment increased absolutely, aswell as somewhat slightly more than peer countries, after the DDSR operation. Privateinvestment in 1992-93 averaged 53 percent greater than in the nine years from the 1982 crashuntil the DDSR operation was agreed (calculated in 1983 Ur$). Following the Government'sencouragement under its DDSR program, debt conversions in 1991-93 produced US$800million investments, contributing to the reduction of the debt total.

43. Stabler Risk Management. Another aspect of the DDSR operation's consequencesrelated to Uruguay's condition as a small economy whose exchange reserves are vulnerableto sudden shifts from foreign depositors. It had no prior protection moreover againstfluctuating short-term international interest rates on its external debt obligations. Thesecaused considerable (and unforeseeable) problems in meeting service payments on a timelybasis. Correspondingly, the DDSR package reduced from 100 to 28 percent the share of theUS$1.6 billion half of external debt with these floating rates. This moved its bulk under fixednominal interest rates. Lessening the Government's exposure to interest rate risk thus easedits financial risk management. So too did the aforementioned recapture clause of thepackage, which helps matching debt service and payment capacity (ref. para. 19).

3. Policy Research Working Paper No. 1312, June 1994

- 12 -

H. Bank and Borrower Performance

44. The Bank demonstrated substantial flexibility in making the DDSR loan to Uruguayunder circumstances of sharp differences of opinion regarding the adequacy of the underlyingmacro justification. There were also considerable uncertainties within the Bank thenregarding policies governing such operations. Questions had been raised about Uruguay'sneed for Bank resources for financing the debt package, in the light of its then about US$1.3billion foreign exchange reserves (ref. para. 12). Also, the 1990 balance of paymentsperformance was stronger than anticipated. In this connection, Bank support for DDSRoperations depended centrally on the existence of a balance of payments need. Moreover, atthe time, the Bank's Directors had expressed concern about several aspects of DDSRoperations, including the need to demonstrate that a proposed loan would have a materialimpact on the borrower's development prospects.

45. Under these conditions, the already difficult task of estimating the isolated effects ofDDSR support and judging the likely results became even more complicated. In the face ofthese problems, the Bank's case-by-case approach was commendable in the flexible mannerin which these tests were applied, as well as in the aforementioned frontloading and set asideprovisions.

46. Notwithstanding the changes in political administrations in Uruguay during theprocess, the Government maintained a highly competent team for negotiating andimplementing the operation. The Borrower and the Bank collaborated closely during theprocessing of the Loan. There was also smooth cooperation in designing the Loan andachieving the very brief interval between the conclusion of the Brady package and the Boardapproval of the Bank Loan. Unfortunately however, the subsequent processing of theenvisaged single Loan disbursement was delayed until the Government regained access toFund resources.' The Bank's insistence in this situation on "maintaining parallelism withthe Fund" caused some strain in relations.

47. The Government conscientiously fulfilled the policy undertakings which constituted theconditionality of the Loan. Its constructive progress in further trade liberalization andreducing distortions in the financial sector extended and deepened the reform program whichthe Bank had been supporting, albeit to an only limited extent.

I. Conclusions

48. The comprehensive debt restructuring which Uruguay obtained under the Brady Planwas a costly operation and its financial benefits were moderate. However, it enabled thecountry to largely resolve its external debt problem of the 1980s, graduating from periodic,short-term reschedulings. More significantly, Uruguay regained access to private capital

4. The December 1990 standby lapsed in 1991 after only the initial SDR 9 millionpurchase had been made. It was replaced by the standby approved in July 1992, atwhich time the Government purchased the equivalent of SDR 15.95 million. Thisled to the declaration of effectiveness of the Bank Loan.

- 13 -

resources, which is pivotal for the economy. Moreover, while relatively small, theUruguayan DDSR operation contributed to concluding the systemic international debt crisis.

49. The Loan was effective in helping the Government make these advances. Inparticular:

(a) The enhancements which the Bank loan helped finance--which would not havebeen forthcoming without the Bank's participation--provided a total of US$130million to collateralize the equivalent of US$1.1 billion in remaining debtequivalent. The corresponding forgiveness purchased amount to about US$500million. Thus the ratio of enhancement to conveyed forgiveness was 45percent.

(b) These enhancements were also equivalent to an investment with an immediatereturn of 285 percent (US$370 million social profit to the debtor in exchangefor an outlay of US$130 million).

(c) The official support to which the Bank loan contributed financed 38 percent ofthe Government's upfront cash outlays, reducing its immediate negativeliquidity impact.

50. Furthermore, the conclusion of the Brady Plan operation, combined with improvedpolicy implementation, was followed by encouraging economic and financial developments.GDP growth in 199 1-94, although still uneven, was substantially above that in the previousdecade. Gross domestic investment, which had long languished (averaging 8.2 percent in1986-93), rebounded. It grew by 20 percent in 1993. Inflation has slowed, falling in 1994to the lowest levels since the early 1980s. Meanwhile, the sensitive public sector deficit,relieved of sizeable debt service obligations, declined; in fact, there were small surpluses in1990-92. The external accounts also strengthened as net foreign debt increased only as fastas output. It is questionable whether these improvements could have been accomplishedwithout the reduction of Uruguay's debt and debt service.

51. At the same time, Uruguay has not achieved sustainable economic growth and severalof its core development constraints still remain formidable. As indicated above, despitesome notable advances, the conditionality of the Loan was not substantial enough to make ittruly significant in advancing pivotal long term adjustments. This was consistent with thenature of DDSR operations' design. Moreover, the Government's firm 1990 adjustmentmeasures and their reaffirmation in 1991 indicated its commitment to invigorate privatesector-led growth. However, later developments demonstrated the minority government'sinability to carry out many of its policies, especially for unpopular changes. On balancetherefore, the DDSR Loan made a valuable contribution and led to significantmacroeconomic improvements. But its beneficial results could ultimately be dissipatedwithout more structural reforms in key areas.

J. Lessons

53. Uruguay's experience was further testimony to the demonstration from previousDDSR operations of the benefits of market-based resolution of the debt crisis, with particular

- 14 -

emphasis on the advantages of cooperative approaches. The ultimate developments inUruguay's case indicated that, when debt workouts were needed, it was important to adhereto at least quasi-voluntary rather than mandatory solutions. The alternative confrontationalstrategies (e.g., unilateral defaults, debtor cartels) appear in retrospect to have beencounterproductive. One indication of that is in the statistics on 1993 international lendingrates. These showed large differences in spreads between previous non-default debtors andquasi-defaulters, e.g., Chile 70 basis points above US Treasury bond rates, Korea 150,Philippines 600, Venezuela 700, Brazil 750.

- 15 -

PART I. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE

(To be Completed)

Tablc .1': URUGUAY I)ET AND I)E111T SERVICli ltl'I)UC'ION AGIi-MlNT

Agreed in Principle: Oclobcr 12, 1990 Closing date: February 19, 1991Debt retired Share Afaurity/grace Interest rate Principal Iierest

butru1ment (US$ mns) (percent) (years) b (percent) collateral escrow

Principal subject to the menuapproach * 1,610 100.0%

A. Debt reduction

Buyback 628 39%Price: 56 cents

B. Debt service reduction

Par bonds with reduced fixedinterest rates 535 33% 30-ycar 6.75% US Treasury I 8-monli

bulict zero-couponl bonds rolling guaranteeForim: Registered bonds

Recapture clause: See note

C. Conversion bonds combined withnew money

Conversion bonds 447 28% A: 177 LIBOR + 7/8% None NoneForm: Registered B: 16/7

New money bonds (89) 15/7 LIBOR + 1% None NoneRatio: 1:5

Form: Registered

Total Debt Restructured 1,610

4/2/95

Tabic I : URUGUAY DEBT AND DEBTSERVICE REDUCTION AGREEMENT (continued)

Agreed in Principic: October 12, 1990 Closing date: February 19, 1991Debt retired Share Alnturity/grace Interest rate Princil Interest

latrument (S$ nis) (percent) {yars) (piercent) collateral escrow

SOURCE: Itepublica Oriental dl iUSiuguay, "1990 Financing Plan", Novciber 5, 1990.

NOTES:

Recapture clause: The Fixed intcrest rate of 6.75% can be raised in incremenis to 7.50% in response to increases in a pailial conunodily Icrims of lrndc index, composcd of pricesfor wool, beef, rice and oil.

Fiinancing requirements: $463 million, of which $352 million is for tlie buyback and $111 million for par bond collateral ($57 million for principal; $54 million for interest).

Financing sources: Own resources, $340 million (including $89 million of ncw ioncy); external resources, $123 million, comprising $65 million from the World Ilank ($32million set-asides; $33 million additional financing) and $58 million from the 10D (set-asides). The IMF approved set-asides of $35 million, but this facility was not used.

Eligibility for debt conversion: All new debt issued through the financing program (including the debt conversion notes) was eligible to participate in tihe debt conversion programn(debt-cquity swaps), without any sectoral restriction. Up to 30% of new nioncy notes can be convcrtcd at par over a 3-year period if the proceeds mc to be used for debt-cquityswaps or for the privatization program.

Early participationfees: For the cash buyback and the fixed-rate note, 1/8% of debt tendered before Decemnber 7, 1990; for new money, 5/8% of the amount tendered.

Reallocation provisions: None.

1 Eligible debt comprised principal outstanding under the Refinancing Agreement of March 4, 1988 (the MYRA).

Both the par fixed-rate bonds and the conversion bonds were issued in two series. Series A notes were tradeable immediately afler closing dale; series B notes closed 30-daysafler Series A notes and became tradeable 30-days later (60-days aller closing).

' Figures include debts to overseas branches of Uruguay financial institutions. Dcbt owed to non-Uniguayan creditors was $1,284 million, of which $506 million was bought-back, $382 million was exchanged for reduced interest bonds, and $396 million was exchanged for conversion bonds.

N:\dauklcin\brady\agm-uru.doc 3 Apr 95

-18-

Table a Debt Reduction Costs and Financing'S3 millions)

Direct Financing

Cost' Official Set-Asides Official Additional LandingOwn o/w o/w

Country Resources Total World Bank Total World Bank

Mexico 6,031 1,503 1,400 750 3,128 1,260

Philippines b 940 346 192 0 402 200

Costa Rica 226 43 0 0 133 0

Venezuela 1.159 -306 828 163 637 150

Uruguay 374 251 90 32 33 33

Nigeria 1,681 1,681 0 0 0 0

Argentina 3,759 1,230 777 175 1,752 450

Jordan 147 147 0 0 0 0

Brazii 3,447 3,447 0 0 0 0

Bulgaria 715 408 75 75 232 125

Dominican Republic 201 201 0 0 0 0

Poland 1,858 1,038 430 230 390 170

Ecuador 666 97 71 50 498 80

Total 21,204 10,086 3,863 1,475 7,255 2,468

a Net of new money

b. The Philippines operation was concluded in rwo phases.

-19-

Table 3 Debt Reduction Equivalent of Commercial Bank DDSR Operations(USS million)

Face value changes Adustments Debt Reduction

Netface Present Pre-Face value of value of payment Net Debt

value of debt interest equivalent adjust- reduction

debt New reduction service of ments equivalentreducion money (3) reduction" collateral (6) (7)

Country (1) (2) (1)42) (4) (5) (4)+(5) (3)-(6)

Mexico 7,190 1,091 6,099 7,090 7,122 14,212 20.311

Philippines 2,600 850 1,750 1,107 464 1,571 3,321Costa Rica 1,020 0 1,020 122 38 160 1.180Venezuela 1,954 1,212 742 2,494 1,736 4,230 4,972

Uruguay 623 89 539 158 111 269 808Nigeria 3,310 0 3,310 612 357 969 4.279Argentina 3,415 0 3.415 4,797 3,059 7,856 11,271

Jordan 147 0 147 112 118 230 377

Brazil 4,713 353 4,365 3,204 3,800 7,004 11U69Bulgaria 3.130 0 3,130 302 394 696 3,826Dominican Republic 712 0 712 0 56 56 768Poland 6,490 138 6,352 1,425 624 2,049 8,401Ecuador' 1,839 0 1,839 1,031 591 1,622 3,461

Total 37,153 3,733 33.420 22.454 18,470 40.924 74,344. Includes PD[ wrra downs dough lower-da-contracatal interest charges on arres and cash paymnta of PDI at closing.

b. Relative to market rates prevailing at the :ime of the apeement. Market interest rats used for discounting were approximated

by the yield on US. Treasury securities over 30 years (or the relevant period when applicable) plus swap ram to Libor plus thestandard spre:4 of 13116%.

c. The Phlippines operation was concluded in -wo phases

d. The face vaiue of debt reduction includes interest equalization paymens for Scuador.Source: World Bank estmates.

- 20 -

Table i

DDSR Agreements (1989-94): "Forgiveness Equivalent" and other Aspects

Country Eligible Debt Depth of Cut (%) "Forgiveness" New

(US billions) Money(USSbillions)

Ecuivalent Fraction (%)

I__ _ (USSb)**

Mexico 47.17 35 1-.15 30.0 1.03

Philippines 6.60 n.a. 2.38 36.1 0.83

Costa Rica 1.61 n.a. 0.98 60.9 n.a.

Venezuela 19.01 30 3.76 19.8 1.17

Uruguay 1.60 La. 0.50 31.3 0.09

Niger*** 0.11 La. 0.09 82.0 na.

Mozambique 0.19 na. 0.11 57.6 La.

Nigeria 5.34 na. 2.60 48.7 na.

Guyana*** 0.07 na. 0.06 86.0 n.a.

Argentina 29.34 35 8.43 28.7 na.

Brazil 50.00 35 1 .00(est) 28.0 0.50 (est)

Ugandax** 0.17 na. 0.13 78.3 a.

Domin.Rep. 0.80 35 0.40 50.0 na.

Bolivia 0.18 a.a. 0.14 79.0 na.

Jordan 0.30 35 0.26 (est) 35.0 La.

Bulgaria 6.80 (est) 50 3.40 50.0 na.

Poland 14.0 (est) 45 6.30 (est) 45.0 La.

Ecuador 7.60 45 3.42 (est) 45.0 n.a.

TOTAL 191.40 - 61.12 31.9 3.62

* Discount bond basis" Sum of reduction in face value of original debt and reduccion in present value of interest

reductions, less amount spent on buybacksIDA Debt Reduction Facilicy operations

Sources: IBRD debt reports 1990a. 1991a, 1992a. 1993a (all vol. 1); press reports

- 21 -

TableS: DDSR Operations - Liquidity Relief(USS billions)

Liquidity Impact Official Estimated Subsequent Cashflow Savingsof Net Additional (annual avemge)al/

Compensation Supportto Banks

Counter-Counter- factual Counter-factual 2 factual

1 Full 3 As %of As % ofScheduled Interest Historical As % of Public Public

Payments k/ Payments Payments 2 Exports 4/ Revenue e/ Deficit el

Mexico (6.14) 3.73 3.09 1.10 0.35 0.9 0.6 3.2

Philippines 0.20 0.11 0.31 0.05 (0.00) (0.0) (0.0) (0.2)

Costa Rica (0.22) 0.18 0.21 0.09 0.01 0.4 0.5 2.5

VenezueLa (1.21) 0.69 1.67 0.31 0.43 2.8 3.3 75.3

Uruguay (0.37) 0.14 0.13 0.05 0.10 4.4 4.4 34.5

TOTAL (7.93) 4.84 5.41 1.61 0.88 1.3 1.0 6.4

V/ Annual average over the four years subsequent to the year the operation was concluded. Interest due on commercial debt based on PACassumptions at the moment operations were concluded; 8 percent interest on official lending and interest collateral fland.

b/ Scheduled principal repaymenus based on World Debt Tables data.

c/ Based on the average long-term commercial net transfer-dbt ratio in the four years proceding the operation (WDT).

4/ Cash flow savings as a proportion of exports in the year before the operation.

e/ Cash flow savings as a proportion of public revenue and public deficit in the year befbre the operation was concluded. Fiscaldata refers to consolidated public sector (IMF and staff estimates).

Source: Memorandum to IBRD Board, 'Analytic Aspects of Debt and Debt Service Reduction Operations," March 9, 1992

- 22 -

Table 6.: Decomposition of Increase in Portfolio Inflows after 1989(percentage of GNP)

PROXIATEFACTORS

Increase in Improving Domestic Rising Country Falling InternationalIn:ows Investment Climate Creditworthiness Returns

Algeria -0.21 -0.77 0.13 0.43

Argentina 1.76 0.66 .0.67 0.43

Brazil 0.64 0.23 -0.02 0.43

Chile -0.15 -0.94 0.36 0.43

Malaysia 0.53 0.11 0.00 0.43

Korea 1.16 0.73 0.00 0.43

Mexico 3.19 2.37 0.39 0.43

Panama 0.47 -0.48 0.52 0.43Philippines -0.23 .- 0.75 0.10 0.43Poland 0.00 0.07 -0.50 0.43

Thailand 0.47 0.05 0.00 0.43Uruguay 0.72 0.16 0.14 0.43Venezuela 0.59 -0.33 0.49 0.43

Average 0.69 0.09 . 0.18 0.43100% 12% 25% 62%

Note .May not Add up due to rounding errors

Source: ?TU Re searcr--Working Paper-4.34,2: "The New-..Wave of PrimataCapital Inflows," IEC, June 1994

- 23 -

Page 1 of 2STATISTICAL INFORMATION

Table 1. Summary of Asesmats

A. Achievement of Objectives Substqngial i~a o tMbi NtAokable

Macroeconomic Policies x

Sector Policies x

Institutional Development x

Physical Objectives x

Poverty Reduction x

Gender Concerns x

Other social objectives x

Environmental Objectives x

Public Sector Management x

Public Sector Development x

B. Project Sustainability Lik& Jli Eng_

x

C. Bank Performance Highly Satisfactory Saticoy 1Natifactoqw Ihliabl Unaia

Identification x

Preparation/Appraisal x

D. Borrower Performance

Preparation/Appraisal x

Implementation x

E. Covenant Compliance x

F. Assessment of Outcome x

Table 2. Related Bank Loans

Loan Title Purpose Year of Status Purpose ApprovalApproval Status

Preceeding Operation

SAL I Structural Adjustment 1987 Disbursed

TAL I Implementation SAL I 1987 Disbsursed

SAL II Structural Adjustment 1989 Disbursed

TAL II Implementation SAL II 1989 Closing

Following Operation

Public Enterprise Reform Pub. Sec. Modernization 1992 Disbursing

- 24 -

Page 2 of 2

Table 3. Project Timetable

Event Date Planned Actual Date

Identification December 1990 December 1990

Preparation January 1991 January 1991

Appraisal February 1991 February 1991

Negotiations March 1991 April 1991

Board Presentation May 1991 May 1991

Loan Signing June 1991 June 1992

Effectiveness July 1991 July 1992

Tranche Release July 1991 July 1992

Table 4. Bank Resources: Staff Inputs

Stage of Project Cycle Staff Weeks

Through Apprasial 34.8

Board Presentation/Effectiveness 20.0

Supervision 1.6

Total 56.4

Table 5. Loan Disbursements: Cumulative Estimated and Actual(US$ millions)

FY92 FY93

Appraisal Estimate 65.0 0.0

Actual 0.0 65.0

Actual as % of Estimate 0.0 100.0

Date of Final Disbursement: July 27, 1992

IMIAGiN,

Report No: 14782Type: ICR