STRICTLY CONFIDENTIAL ahl 1

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized

Washington, D. C.

The meeting of the Executive Directors of the Bank Public Disclosure Authorized and IDA convened at 3:30 p.m. on Tuesday, May 19, 1987, in

the Board Room, 1818 H Street, Northwest, under the Chairman­

ship of Mr. Barber Conable. Public Disclosure Authorized Public Disclosure Authorized

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C O N T E N T S

AGENDA ITEM: PAGE

3. Proposed Loan - Argentina (A Trade Policy and

Export Diversification Loan)

Mr. Carling ...... 45

Mr. Draghi...... 4 7

Mr. Haxthausen ...... 60

Mr. Malan ...... : 67

Mr. Woodward ...... 68

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AGENDA ITEM:

3. (Continued) :

Mr. Boehmer ...... 7 0

Mr. Yamaguchi ...... 72

Mr. Arlman ...... 75

Mr. Keating ...... 80

Mr. Soe Lin ...... 84

Mrs. Rubio...... 88

Mr. Jembere ...... 90

Mr. Mar ion...... 91

Mr. Al-Sultan ...... 92

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Next we have the aforementioned loan to Argentina,

Item 3 on the Agenda. It is a Report and Recommendation on a

Trade Policy and Export Diversification Loan in the amount of

$500 million equivalent to the Argentine Republic.

Mr. Neuhaus, Assistant Division Chief, Western

Hemisphere Department of the IMF, is attending this meeting.

We are pleased to welcome him.

Mr. Sokol of the LAC Region will introduce the

proposal. Mr. Sokol, as you know, is the Country Economist.

Mr. Sokol?

MR. SOKOL: Thank you.

Mr. Chairman, members of the Board, as background

for the proposed trade policy and export diversification

loan, I would like to report to you today on the goverrunent's

economic policies and recent economic developments in

Argentina.

The challenge facing the government continues to be

bringing down inflation while maintaining economic growth.

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Last year the government was successful in this effort. Real

economic growth reached 5.5 percent following a 4.5 percent

drop in 1984 while yearly inflation was brought from triple­

digit levels during the last decade down to 80 percent. In

early 1987, there was a resurgence of inflationary expecta-

tions.

The government, however, reacted inunediately. It

introduced another wage and price freeze and tightened its

monetary and fiscal policies. As a result, inflation was

brought down from 8.2 percent in March to 3.5 percent in

April of this year. The government has concluded successful

wage negotiations with the trade unions and industrialists,

thus containing wage pressures on prices.

Now that inflationary expectations are subsiding and

relative price are reasonably in line, the government is in a

position to phase out the wage and price freeze again and to

move to a system of flexible price administration.

The government has initiated a far-reaching trade

policy reform as a centerpiece of its structural reform

program which would reverse the anti-export bias of the

economy. The government intends to maintain the real

e xc hange rate bay devaluing the Austral by the d ifference

between domestic and international inflation based on a basket

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of currencies.

In its efforts to increase efficiency in the

economy, the government has accelerated the pace of the trade

reform and eliminated non-tariff restrictions by moving

additional tariff positions equivalent to some 10 percent of

the value of industrial production out of the prior consulta­

tion list and into the automatic list, without increasing

nominal tariffs.

The government has also begin to phase out pre­

export financing subsidies. Manufactured exports have been

picking up as a result of the new policies.

Beyond trade reforms, the government is moving into

structural adjustment programs in the financial sector,

energy, public sector rationalization,industrial incentives,

and the elimination of price controls. The Bank strategy is

to support the government's medium-term progr am of structural

adjustment. The proposed Trade Policy and Export Diversifica­

tion Loan which is before you today is the centerpiece of

this strategy.

This operation forms part of a concerted interna­

tional effort. You will recall being advise d recently of the

conclusi on of negotiations on Ar gentina's 1987 financial

package covering rescheduling of about $30 billion of

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existing debt and the provision of new money loans totally

$1.9 billion.

The commercial banks have expressed interest that

approximately $500 million of their new money be provided as

cofinancing with the proposed Trade Policy Loan. It is

proposed that the cofinancing take the form of a traditional

parallel cofinancing. The World Bank thus will not take on

any exposure to the credit risk of the commercial banks. We

believe that the proposed traditional, parallel cofinancing is

feasible and appropriate in this case since it does not

provide any form of security by the World Bank and leaves the

Bank complete discretion regarding remedial action in the

event of default.

I might add that we have done several such tradi­

tional, parallel cofinancing operations in the past, par­

ticularly in the period prior to the introduction of the B­

loan instruments.

Thank you.

MR. CONABLE: Thank you, Mr. Sokol.

Mr. Carling will open the discussion.

MR. CARLING: Thank you, Mr. Chairman.

In looking at this loan, it is relevant to recall

the discussion in the Board last Thursday of the World

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Development Report. In that draft, Argentina was classified

as one of the strongly inward-oriented economies, and the

objective of this loan is to support the government's

adoption of an outward-oriented strategy.

The WDR provided strong support for such a shift,

and there is every reason to believe that if implemented, it

would be of major benefit to the Argentine economy. Indeed,

Argentina seems to have little choice but to turn in this

direction if it is to achieve economic growth with external

debt alleviation. And the urgency of such policy action has

been heightened by Argentina's terms of trade loss. It has

been one of the economies hardest hit by the distortion of

world agricultural markets.

For these reasons this Chair supports the loan. I

have to say, though, with some hesitancy, based on Argentina's

very uneven economic policy record, that this raises a

question about the government's ability to sustain desirable

policy changes. In this regard, the trade policy reforms

cannot be viewed in isolation. Accompanying structural

reforms will help determine the effectiveness of the trade

policy reforms while the pursuit of macroeconomic stabiliza­

tion policies will be an important determinant of the

sustainability of the trade policy reforms. The government

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will need to be committed to policy changes in all these

areas, and it is appropriate that the continuation of

stabilization policies will be a condition for the release of

the second tranche of this loan.

Even after this package of trade liberalization

measures is implemented, substantial trade distortions will

remain. A second-stage trade policy loan is foreshadowed.

This gradual approach is a defensible strategy, but clearly,

Argentina's commitment to policy reform under the current

program will determine whether a second loan is possible.

Finally, Mr. Chairman, the course that Argentina is

embarking upon involves a 180-degree shift from the policies

of the past, and we wish the Argentine authorities well as it

works towards an outward economic orientation.

Thank you.

MR. CONABLE: Thank you, Mr. Carling.

Mr. Draghi?

MR. DRAGHI: We wish to express our strong support

for this trade policy loan to Argentina. We fully share the

objectives of the program and welcome the adoption of an

outward-looking strategy to improve export competitiveness

and to increase the efficiency of the Argentine industry.

This Bank loan is the right complement to the

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successes of Argentina's government in dealing with the

extremely difficult economic situation, and the macroeconomic

indicators speak quite clearly. Differently from other

countries of the area, between '83 and '86, the debt service

to export ratio has decreased from 134 percent to 76 percent.

The debt service to GDP ratio has likewise decreased from 20

to about 9 percent in the same period of time.

The adjustment effort has been massive, with great

sacrifice of investment expenditure and an impressive

reduction in the budget deficit.

We believe that this loan constitutes a fundamental

stage in the collaboration between the Argentine government

and the Bank which can play a key role in the country's

economic recovery and future development, and we are strongly

in favor of further lending to support Argentina's efforts to

achieve sustained and satisfactory rates of economic growth.

However, we would like to make some specific

observations on the project. The first is on the social

impact; the second, on procurement ; the third, on the

conditions for the release of the second tranche; the fourth,

on the medium-term framework.

The social impact analysis fails to address the

issue of unemployment resulting from reduced protection. The

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restructuring of Argentine industry toward more export­

oriented activities will certainly create new jobs, but it

will force rationalizations in the protected sector. In the

short run, this is likely to entail a serious job relocation

problem with budgetary and social consequences that are not

discussed in the document, and we would like to have staff

opinion on this subject.

On procurement, the document recommends retroactive

financing. It is our understanding that in the case of

adjustment loans, according to the Operation Manual statement

2.01, Annex D, retroactive financing is normally not to

exceed more than 20 percent of proposed Bank lending. It

seems that the document does not mention any such limit. We

would like assurances from the staff that no more than 20

percent of the loan will be applied toward retroactive

financing.

On the second tranche, Annex III states that one of

the conditions for the release of the second tranche of the

loan would be, "evidence satisfactory to the Bank that the

government's macroeconomic policy framework including its

external borrowing policy is consistent with the trade policy

reform program being supported by this loan."

We find this condition somewhat vague and would

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have preferred a more explicit and monitorable formulation.

On the medium-term framework, section 2(a) of the

document shows room for improvement. First, the projections

presented are based on a framework paper prepared by the

Argentine government, but no indication is given to the

reader about what this framework paper says or where it can

be found.

Second, no comparison is made between the projected

macroeconomic indicators for '87-'91 and the pre-crisis

performance of the Argentine economy. Indeed, Table 1, page

7, contains no data preceding 1983.

Third, Paragraph 26 makes two claims--first, that

the overall debt service ratio has been projected to decline

from 76 percent in '86 to 62 in 1990; and second, that the

major improvements will become apparent during '91-'95, when

around 75 percent of interest payments could be met by the

surplus in the resource balance.

However, on the first claim, Table 1 shows that the

debt service ratio improves only until 1988 and that by 1991,

we are back to the very high 1987 level. And on the second

claim, there is no way to say anything since Table 1 projec­

tions end in '91.

Thank you, Mr. Chairman.

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MR . CONABLE: Thank you, Mr. Draghi.

I think Mr. Scherer wishes to answer the question

about retroactive lending.

MR. SCHERER: Yes, Mr. Chairman.

We face in Argentina a statistical problem that

does not allow to produce the document that is required in

order to disburse a policy-based loan quickly in time. For

this very reason--and if you want me to elaborate--the

information that the World Bank requires includes, among

other s, the origin, for example in the United States, of the

different--excuse me--the requirements that the World Bank

has for documentation in order to disburse are very specific.

And in Argent ina, the Central Bank collects one set of

information and the commercial banks, another set of informa­

tion, and it takes about three months to reconcile this

infor mation. And for this very r e ason, in order to allow the

government in view of the urgency to make the loan available,

it was agreed to backdate the retroactive financing to March

1st.

MR. CONABLE: Mr. Sokol, do you wish to comment?

MR. SOKOL: Thank you, Mr. Chairman.

With r egar d t o the social impli cat ions of the

program, the program has been designed in such a way as to

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have positive effects in terms of social implications.

First, consumption per capita is projected to

increase by over one percent per year, on average.

Second, the program has not been produced to produce

unemployment. This is a very important part of the gradual

nature of the liberalization effort; it will allow firms

sufficient lead time to restructure their operations and to

adjust to international competition. And the initial effects

that we have been able to observe from the liberalization

that has already taken place points to this direction. There

have been so far no adverse employment effects.

Third, the expansion of exports will increase

capital utilization and productivity for workers, leading to

increases in real wages coming out from productivity in-

creases.

And fourth, the expansion of output is likely to

create new job opportunities.

With respect to the macroeconomic policy framework

paper that the Argentine government has prepared, the paper

is available upon request, and we would willingly make it

available to the Board.

MR. SCHERER: One might add to this that the

Minister of Economy in a recent statement said that only the

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opening of Argentina to the international world economy would

allow the population to increase consumption and improve its

well-being. And one could say that during the period while

Argentina's economy was highly protected, industrial employ­

ment was reduced by a full one-third without major negative

social consequences other than those implied by the general

reduction in economic growth.

MR. SOKOL: With respect to the assessment of the

macroeconomic policy framework as a condition for second

tranche release, in Annex IV, page 1 of the Summary of ?

Implementation of Trade Policies, we indicate a satisfactory

assessment of 1986 performance and 1987 plans in fiscal,

exchange rate, trade, public investment and external borrowing

policies.

With respect to the projected debt service ratio,

the debt service of exports--debt service ratio--Table 3,

Annex VI, shows that from 79.5 in '85, we moved to 62.3 in

1990 and to 54.3 in 1995.

MR. SCHERER: Yes. The reason why in two years,

the debt service ratio would go up is that some grace periods

would expire, and at that time, some payments of principal on

some important loans were left to be made.

MR. CONABLE: Thank you, Mr. Scherer and Mr. Sokol.

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Mr. Draghi, do you want to follow up?

MR. DRAGHI: Yes, definitely.

I have the feeling that I have not received full or

satisfactory answers, so I will simply list where I am not

yet satisfied, and we can continue the conversation at

another time.

MR. CONABLE: Thank you.

MR. DRAGHI: On retroactive financing, the answer

said that basically, there were reasons--which I did not

fully understand, in fact--that there are reasons for backdat­

ing the disbursement time to March 1st. But I asked a

different question. I asked whether this retroactive

financing was going to exceed the 20 percent, which is the

Bank's rule, or was within the 20 percent. So I would like

to be reassured that it is within the Bank's rule.

On the social impact, the answer said that this

program allows an increasing consumption per capita by one

percent. Now, how much is the projected income per capita

growt h rate in the period considered? I f it is more than one

percent, we have a decline in the average propensity to

consume. So to say that consumption per capita increases by

one percent does not imply necessar ily that the program has

no social impact.

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Third, I am fully convinced that outward-looking

programs have a positive effect on employment in the long

run, but everywhere in the world, they have more or less

serious transitional costs, and this was my question--how

does the project deal with the transitional costs, unavoidable

transitional costs, caused by this program in the short run.

And finally, on the last point on debt, I was

simply observing two data in ~he same document which did not

agree with each other. In one part of the document, Para­

graph 26 gives certain numbers for the overall debt service

ratio. In fact, it says that it declines from 76 percent in

'86 to 62 percent in 1990. But then, when we go to Table 1,

it gives a different number for the debt service ratio. So

that is the only thing I was saying.

MR. CONABLE: Mr. Karaosmanoglu would like to take

part of that.

MR. KARAOSMANOGLU: On the retroactive financing,

Mr. Draghi, we usually try to keep within those limits. But

in this particular instance, in view of the urgency o f the

situation and the difficulties in providing the necessary

documentation which would cover the disbursement of amounts

which would be necessary to have the financial package

arrangements to work, we will have to go beyond 20 percent.

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MR. CONABLE: To how much?

Mr. KARAOSMANOGLU: To the full amount of the first

tranche.

MR. DRAGHI: I would consider this as quite an

extraordinary precedent that would deserve a much fuller

discussion than being simply sort of slipped under the rug

this way, no--don't you think so, Mr. Chairman?

MR. CONABLE: Mr. Scherer?

MR. SCHERER: As I mentioned earlier, some countries

have better statistical information, and this information

allows the immediate drawdown of a policy-based loan, which

is the intention; whereas in Argentina, the statistical set­

up does not provide to give this information in a short

period of time. And for this very reason it was considered

prudent and consistent with the purpose of the loan to allow

accumulating import receipts since March the 1st to allow

that this loan would be disbursed pretty rapidly after it has

been declared effective.

MR. CONABLE: Mr. Draghi?

MR. DRAGHI: I definitely think this is a very

important point which will deserve much fuller discussion.

Thank you.

MR. CONABLE: Mr. Karaosmanoglu, do you have

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anything to add?

MR, DRAGHI: The statistical answer is frankly--!

don't think that Argentina's statistical system is worse or

better than many other countries to which we give policy­

based lending, in which case we are not applying retroactive

financing to such an extent.

Thank you, Mr. Chairman.

MR. KARAOSMANOGLU: I would just like to assure Mr.

Draghi that there is no intention of sweeping anything under

the rug. I mean, there is a situation here where a financial

package has been worked out, and there is an immediate need

of the country to have the access to foreign exchange

resources. A certain program has been put in place, and for

the carrying out of that program with the minimum cost, the

ability to disburse in a short period of time is essential.

We could have done it in a longer period of time by

making sure that the necessary documentation has been

prepared, but then it would not be realistic in terms of the

circumstances that are met.

As I said, we tried not to go beyond the 20 percent

limit, but this is a case where we have to make an exception.

A longer and fuller discussion o f this, we can do on a

general basis.

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MR, CONABLE: Mr. Sokol?

MR. SOKOL: Mr. Chairman, to clarify the differences

in Table 1 on page 7 and Table 3 on page 53--Table 1 on page

7 relates debt service to exports of all goods and services;

while Table 3 on page 53 relates debt service to exports of

goods and nonfactored services. That is why there is a

difference between the figures in one table with the figures

in the other table.

MR. CONABLE: Mr. Scherer, did you want to add

anything further?

MR. SCHERER: No.

MR. CONABLE: Mr. Draghi?

MR. DRAGHI: The problem concerning retroactive

financing, I insist, is quite serious. This is a major

change in our disbursement policy. And it is not a light

exception; it is a $500 million loan. And this has not been

explicitly stated in the document. As this discussion has

shown, I had to ask a specific question about the amounts.

So I would simply want to alert my colleagues on

this point. And if we decide, if we realize, that structural

adjustment lending requires retroactive financing to such an

extent, then we should have a policy discussion on this

point. We cannot go on with--

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MR. CONABLE: Mr. Haxthausen, on this point.

MR. HAXTHAUSEN: We wish to fully support Mr.

Draghi. I think it is astonishing that we find that here, we

do not follow established rules. And if it should be

necessary to change the rules or to make an exception here,

then we should have been informed of it in a less casual way.

Thank you.

MR. CONABLE: Mr. Yamaguchi, on this point.

MR. YAMAGUCHI: Thank you, Mr. Chairman.

I share entirely wi th Mr. Draghi and Mr. Haxthausen.

Thank you.

MR. CONABLE: Mr. Soe Lin, on this point?

MR. SOE LIN: Yes. We would also like to a dd our

support to Mr. Draghi's point on this issue, particularly

because of the size of the loan and because of the importance

that the loan plays in the structural adjustment process f o r

Argentina at this stage.

MR. CONABLE: Mr. Al- Sultan?

MR. AL-SULTAN: Mr. Chair man, I fully support t he

approach t aken by management in being flexible, particularly

in the circumstance s of a countr y that is taki ng particular

adjustme nt policies.

If the fault is that it is not i n t he document s, I

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suggest it be put in the documents. But I think that the

major policy issue should be passed on.

Thank you, Mr. Chairman.

MR. CONABLE: Are there further comments on this

point? There are other people who wish to be heard on the

issue generally, so let us continue with the discussion.

Mr. Haxthausen?

Mr. HAXTHAUSEN: Mr. Chairman, we welcome and can

support this trade policy and export diversification loan in

support of Argentina's structural reform program.

I have, however, a number of comments regarding

this very big loan of half a billion U.S. dollars.

Firstly, the economic situation in Argentina and

the government's economic policies have been fairly unstable

in recent years. Given the unstable environment of the

reform program and the magnitude of the loan, I would

certainly much have preferred smaller tranches--for instance,

$200 million in the first tranche followed by three tranches

of $100 million each, on the condition of a satisfactory

implementation of the program.

Secondly, given the mixed experiences from the

past, I find it essential to stress the need to limit the use

of the loan to cover only imports that are essential for

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increasing productivity and economic growth. This is

necessary in order to draw the line between supporting

Argentina's medium- and long-term development, which is the

Bank's business, and plain balance of payment support, which

is not the Bank's business.

On that point, I would like to know if there is a

specific list of which products can qualify for financing

under the program.

Thirdly, I note it is the overall ambition of the

Argentine government to alleviate poverty. I wonder to what

extent it would have been appropriate within the context of

this loan to target projects for poorer groups or the poorest

groups, to protect them during this adjustment period.

Fourthly, I assume that this loan will basically

affect urban areas. I would like to ask if this loan to any

significant extent will also affect rural areas.

Finally, I note that the figures for the debt

service in the report exclude short-term principal repayments.

Is nonpayment of this short-term debt something which is

agreed upon by the creditors, and how much is it in relation

to total debt?

Thank you, Mr. Chairman.

MR. CONABLE: Thank you, Mr. Haxthausen.

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There are some additional questions for you

gentlemen. Would you please respond?

MR. SOKOL: Thank you, Mr. Chairman.

The loan will finance imports which have been

freed. And in this category, there is the whole temporary

admission regime, which are inputs and machinery required for

export production. So the loan is designed in such a way

that the imports come in which are necessary for growth and

which are necessary for the production of exports.

The project will affect the whole country. Since

these are broad-based policies, it will affect both the rural

and the urban parts of the country.

However, it is very important to note that the

trade liberalization program of the Argentine government has

as a key element the maintenance of an adequate exchange

rate. And this is very, very crucial to the loan. Therefore,

it enables the Argentine economy to compete with foreign

goods, and the exchange rate at this point, as of the end of

March, was a good exchange rate; it was in real terms about

the level of the real exchange rate following the introduction

of the Austral Plan.

MR. CONABLE: Thank you.

Mr. Scherer?

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MR. SCHERER: Mr. Chairman, I would like to answer

the question on the loan amount, on the social effects of the

program, and on the questions with respect to the figures.

With respect to the amount of the loan, it should

be recalled that the trade reform signifies a drastic

departure in Argentine economic policies. It is the center­

piece of the government's reform program, and as a reflection,

it is also the centerpiece in the World Bank's lending

program towards Argentina which, as you know, should reach

about $2 billion over calendar year '87 and '88.

The amount of the loan is large, but it is, as I

said, not only a very important element, in fact, the most

important one of our lending program, but it also constitutes

a very powerful signal to the commercial banks during their

deliberation on the new financing package that this reform

being undertaken by the government will allow Argentina to

grow, while at the same time strengthening the debt-servicing

ability of the country in the medium term, and thus make

Argentina a most attractive client in the medium term.

With respect to the social effect of the program,

it cannot be said at all that the opening of the economy will

lead to massive unemployme nt; quite on the contr ary. Those

firms that are highly capital-intensive and inef ficient will

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be hit first, and the employment in these companies typically

is very low, whereas the companies that are labor-intensive

in fact are expected to benefit from the reform of the trade

regime through increased exports.

And as Minister Surial (phonetic) has said, the

opening of the economy is a sine qua non for improving the

well-being of the Argentine population, and it is in fact not

expected that in the short-term there will be major social

negative consequences.

With respect to--there was a question with regard

to the figure, which I now--

MR. HAXTHAUSEN: Sir, in the figures on the debt

service, ther e is c r ude short-term princi pal repayment .

MR. SCHERER: If you would be so kind as to refer

to Annex I, page 3. There, the short-term debt is indicated

i n a s e parate item, and it i s clear that short-term debt is a

f airly small share of total Argentine debt--below 10 percent.

MR. HAXTHAUSEN: But my questi on was, this non­

r epayme nt, is that something that i s agreed upon with

credit ors?

MR. SCHERER: The short- term debt, o f course , would

be r epaid, and Argentina in its agreement with t he Interna-

t ional Moneta ry Fund c ommitted to repay quickly a ll a rrears

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and, of course, the short-term debt as it falls due.

MR. CONABLE: Mr. Haxthausen?

MR. HAXTHAUSEN: Excuse me for reverting. I did

not say that the loan was too big. I think that for a big

country like Argentina and its present situation, it is very

adequate. But I said it would be more prudent not to pay out

half of the loan now and then half of the loan perhaps in six

months' time, but it should be tranched a bit more to have

some leeway.

MR. CONABLE: Mr. Gay?

MR. GAY: Thank you, Mr. Chairman.

I think to come back to the question on the amount

of the loan and the tranching, as Mr. Scherer has said, and as

we said in our opening statement, this is really a key

structural reform in Argentina. It is the major, if you

like, part of the entire adjustment program for the country.

Now, the loan is large indeed, but we wanted to

express our full support to the government of Argentina, who

has embarked on this very difficult adjustment program, and

this is why we made this loan perhaps a little larger than

usual.

Now, why only two tranches? Again, Argentina is

faced with very important difficulties, and needs to have

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foreign exchange available in particular because the terms of

trade recently in recent years, as you know, because Argentina

is a major trader in wheat, and the terms of trade have been

adverse to them, so they do need reinforcement in foreign

exchange, and that was again a reason why this loan was made

as large. For the same reason, we did not think it would be

advisable to have several tranches. Normally in a loan like

this, we have two tranches, and we didn't feel that we should

have more than two, because we are fully confident that the

government will indeed pursue the structural adjustment

program as agreed, and in fact, we are confident that it will

pursue it in the following three years. And as you know, as

a second tranche condition, we are in fact working already

with the government to go beyond what they have agreed in

this loan.

MR. CONABLE: May I ask with respect to the second

tranche, will there be more documentation available? Mr.

Draghi's point is an important one about the manner in which

these things are presented. I think it appears that there

has been some slipping over of the normal rule on such

things, and I think the Board needs some reassurance on this.

Yes?

MR. GAY: Well, on retroactive financing, you know,

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as Mr. Scherer has explained and for the reasons that he has

stated--and we discussed this at length--we had decided that

in order to be able to accelerate the disbursements, which

after all is the fundamental purpose of this kind of opera­

tion, and given that there are these difficulties of collect­

ing information in Argentina, trying to postpone, if you

like, the period before which they can in fact collect

information, which appears to be retroactive financing, but

really is not, because in fact it is only to collect all this

information that we need this very long-time period.

MR. CONABLE: Well, thank you. Let's move on with

other questions. I'd like to be sure the Board all has a

chance to participate.

Mr. Malan?

MR. MALAN: Thank you, Mr. Chairman.

I should like to commend the Argentinean government

and in particular its outstanding economic team for what has

been, given the stringent economic constraints under which

they have been operating, a remarkably promising pe rformance

since the emergence of the democratically-elected administra­

tion of President Raoul ?

I should also like to commend the World Bank staff,

in pa rtic ular Me ssrs. Ernest Stern, David Knox, Mr. Gay,

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Peter Scherer, and Jose Sokol, for their clear understanding

of the nature of the constraints faced by Argentina and for

their ability to focus on immediate, pressing policy problems

without losing a longer-term view of World Bank-Argentine

partnership in the promotion of economic, sound and broadly­

based economic development. Flexibility and judgment are

absolutely indispensable here.

What matters most is the perception of the sense of

direction in which things are moving, and I do believe the

recommendation before us indicated they have been moving in

the right direction.

The particular loan proposal before us has unequivo­

cal merits and plays a central role in Argentina's comprehen­

( sive program of economic policy reform. This loan deserves

the full and hearty support of this Chair.

Thank you, Mr. Chairman.

MR. CONABLE: Thank you, Mr. Malan.

Mr. Woodward?

MR. WOODWARD: Thank you, Mr. Chairman.

This loan provides very welcome support for a

critically important part of Argentina's efforts at structural

reform. As the paper notes, the Argentine economy has great

potential in both resource and skill-intensive sectors, and

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the trade reform associated with this loan will make a major

contribution to the effective development of these sectors

for export.

I would agree that the need is for a gradual

approach to trade liberalization, as there is a limit to how

fast the economy can adapt effectively to the substantial

changes in economic incentives this will imply. Political

opposition would also be a significant barrier to faster

implementation.

However, it is important that political pressures

be resisted and the momentum of reform sustained in the long

term as well as the short term. The measures to be taken

under this program are only a first step on a very long path

toward external viability.

I would note that the authorities have been very

slow to implement trade reform so far. The process should

have been well-started under the last IMF program, but in the

event, progress was very limited.

The delays so far make it all the more important

that the authorities now move ahead firmly and decisively

with trade reform.

I would also like to stress that the mainte nance of

appropriate macroeconomic policies will be of critical

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importance to the success of trade liberalization, particular­

ly a flexible exchange rate policy.

The inclusion of satisfactory macroeconomic

policies as a condition for release of the second tranche is

therefore very welcome.

Finally, this Chair would welcome an assurance that

there will be no discrimination against individual suppliers

and procurement decisions under this loan. And I would also

echo Mr. Draghi's concerns about retroactive financing,

particularly as we have some doubts about procurement

policies under the temporary admission regime in the recent

past.

Thank you, Mr. Chairman.

MR. CONABLE: Thank you, Mr. Woodward.

Mr. Boehmer?

MR. BOEHMER: Thank you, Mr. Chairman.

It is with great pleasure that we recognize the

strong commitment of the Argentine government to develop and

implement its far-reaching macroeconomic adjustment program.

We take from the government's policy statement

included in Annex V of the document that important parts of

the overall program have been success f ully impleme nted

already.

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We strongly support the proposed trade policy and

export diversification loan as an integral part of the

medium-term macroeconomic policy package because the trade

policy reform program is crucial in bringing about the

opening of the Argentine economy, the very much-needed

improvement in the balance of payments, and the strengthening

of the country's creditworthiness.

The opening of the economy should result in making

the economy more competitive internationally and permit more

liberal forms of trade relations with the outside world and

also with its neighboring countries.

I think that the World Bank is on the right track

in supporting the Argentine government strongly in its

economic reform efforts. By providing its support in a quick,

clear and consistent manner, the Bank is giving the right

signals to the other institutions, particularly the commercial

banks, and I welcome the intention by commercial banks to

cofinance part of the loan.

Moreover, the Bank support could constitute an

effective followup to the discussions with the IMF. I hope

that the other parties involved make their contribution as

efficiently and timely as the World Bank.

Let me conclude in commending management and staff

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for the very excellent policy lending work that they have

done in this case of Argentina.

Thank you.

MR. CONABLE: Thank you, Mr. Boehmer.

Mr. Yamaguchi?

MR. YAMAGUCHI: Thank you, Mr. Chairman.

I support this proposal and appreciate Argentine

authorities in struggling against the difficulties they face

and welcome the introduction of parallel cofinancing, even

though it was not mentioned precisely.

As my colleagues have already expressed and

discussed on the project itself, the lending itself, let me

express my observations on Argentine government policy on

economic adjustment.

Annex Von page 42 eloquently mentions how the

government wants to handle economic policies. I appreciate

highly the spirit of meeting the tranche. However, I have

some doubt on the policy. Of course, this is my personal

view.

First, on wage. Of crucial importance for Argentina

is to restore competitive ness f or export and to curb infla­

tion , there is no doubt. I thi nk essentially i mportant a t

this stage is to endure lower wage, because only by e nduring

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lower wage by many workers can the Argentine economy overcome

inflation and restore international competitiveness of export

products.

The fact that many labor unions achieved agreements

outside authorized wage ? , and the fact that the

government thinks that--! quote--"Argentina cannot compete in

terms of low wages because there has been no historical

experience, and a low wage would endanger social cohesion, et

cetera." With these two facts, I was very disappointed.

I hope the governme nt will change the basic

philosophy on wage. Without some reasonable cost, whatever

it may be, wage or budget outlays, et cetera, it would be

very difficult to reconstruc t the Arge ntine economy.

Second, on meat. Traditionally, Argentina has been

a very strong meat exporter to the world market, if I

understand correctly, and Ar gentina is still e xporting

sometimes even to the USSR.

As a cause of inflation, the policy letter says

that t he supply of foodst u ffs did not increase in paral l el.

An example was meat, where prices rose much more than the

average consumer price increase as a r esult of the gap

between suppl y and demand.

I wonder about this, because one of the strongest

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comparative advantages which Argentina is enjoying is

categorizing, in other words, meat production. I cannot

understand why such a thing happened. Probably occasional

resources or relevant policy might be wrong. In my view,

bare necessities, foodstuffs and meat for workers and

citizens should be provided by giving enough investment at

low reasonable prices, because this is a fundamental of the

national economy.

I feel disappointed at this in two senses--in one

sense, that Argentina may not invest enough to foster and

strengthen the comparative advantage; in another sense, that

this high meat price causes to push up the cost of living of

workers and citizens and leads to high inflation. And it did

happen in 1984-85.

In conclusion, Mr. Chairman, inflation is a real

problem for Argentina. It disrupts sound and positive

investment, and also it is giving adverse impact to stable

and growing production.

But in order to suppress persistent inflation in

Argentina, I have some doubt on the wage policy and meat

policy of the country because this might be making a main

component or vicious circle of the country economy. If I am

wrong, probably I may be corrected by Mr. Camarasa.

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Thank you, Mr. Chairman.

MR. CONABLE: By Mr. Camarasa or by the staff.

Don't put Mr. Camarasa on the spot here, sir.

Is there any comment from Mr. Sokol? ' MR. SOKOL: Mr. Chairman, two points on the wages.

The Argentine worker has suffered a major deterioration in

real wages over the last 15 years. In wage agreements, what

the government wants to move to is to collective bargaining

so that the market determines the price of labor.

With respect to meat, the corresponding paragraph

in the Minister's development policy letter was explaining

the causes of inflation, and meat weights very heavily in the

price index, for two reasons. One is Argentines consume--

that is the staple food--consume 100 kilos of beef per

capita. The other is that the description of the Minister's

letter, what really behind it is it coincides with the cattle

cycle where production was at its lowest. Therefore, demand

was high, and supply was not corresponding to the increase in

demand, so prices went up.

Thank you, Mr. Chairman.

MR. CONABLE: Thank you very much, Mr. Sokol.

Let us move on. Mr. Arlman?

MR. ARLMAN: Thank you, Mr. Chairman.

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Like Mr. Malan and Mr. Boehmer, I can support the

proposal before us. Lacking their eloquence, I will say that

in slightly simpler terms.

There is obviously a very positive turn in Argentine

policies which should be welcomed, should be reinforced and

strengthened. And I appreciate that in the document, the

risks involved have also been discussed and will be very

closely monitored.

Mr. Chairman, Paragraph 27 and 28 of the document

before us provide a brief overview of a number of structural

reforms already undertaken. I think that is an extremely

important paragraph, and more importantly is what is in those

paragraphs, which I support and welcome very much.

Obviously, for obvious reasons, I also support very

much the last few lines, where it is said that they have

agreed on a framework to settle an investment dispute

regarding ownership and operation of the Center-West gas

pipeline. I hope and trust that the Argentine authorities

will see to it that the speedy resolution of this and any

other outstanding problems will be found quickly.

I do have one or two questions, Mr. Chairman. One

is on the amount. I do take what staff said on the sign that

has to be provided to various interested parties. But r

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haven't heard any justification or to put it more precisely,

any criteria for the amount. I am not against the $500

million. I would not be against $600 million or $400

million. But I haven't heard anything that basically gives a

criterion for why this amount, and to what is the amount

related. And I would like to hear a bit more about that.

In general, by the way, Mr. Chairman, I would like

to underline and echo what Mr. Haxthausen said about tranch­

ing.

On the various points that Mr. Draghi made, I

generally would support him. On the retroactive financing, I

would just like to note that some of my authorities would see

this as a precedent which they would welcome, and some of my

authorities would see this as a precedent which should not be

a precedent. That is another way of saying, Mr. Chairman,

that I would welcome very much to have a policy discussion on

this. And I think Mr. Draghi had a point when he said that

the issue should have been presented more clearly instead of

perhaps giving the impression of wishing it away between the

lines.

On the conditionality, Mr. Chairman, I think Mr.

Carling and Mr. Draghi and others have spoken already, but I

do have one detailed question.

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Mention is made, as for instance on the first page,

of the formulation of an action program of trade reform for

the second phase. That obviously is a different second phase

than the second tranche of the disbursement. But neverthe­

less, r would like to have some elaboration on how far this

action program should be as part of this operation. Or, to

put it in other words, how do we bind the Argentine authori­

ties in their intentions that they have today and the

intentions that we think they should have in, say, two or

three years' time?

Thank you.

MR. CONABLE: Thank you, Mr. Arlman.

Would you deal with that question, Mr. Sokol?

MR. SOKOL: Yes. There is the development policy

statement. There is mention of an Argentine program; there

is mention to undertake the trade liberalization effort of

eliminating most QRs over a three-year period equivalent to

about 80 percent of the value of industrial production.

There is also mention for those tariff positions which are

moved out of the QRs to have a maximum terminal tariff of 40

percent and a minimum terminal tariff of 10 percent over a

three-year pe riod.

There is also mention to the phasing out of export

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subsidies, but that is during this first phase.

MR. CONABLE: Thank you.

Mr. Scherer?

Mr. SCHERER: Yes, I would just like to add to what

Mr. Sokol said. The action program would not be binding the

government in the sense of commitment, but it would provide

for a continued dialogue between the Argentine government and

the World Bank to analyze in more detail the structural

effects that the opening of the economy would have on some of

the sectors that will be more deeply affected, the concern

with respect to unemployment, and major structural imbalances

would have to be analyzed before the government, of course,

would like to make a commitment on how to proceed.

MR. CONABLE: Mr. Karaosmanoglu, yes, about the

amount, the $500 million.

MR. KARAOSMANOGLU: This question about how do we

define amount in these types of loans has been raised several

times at the Board. I am afraid I have to repeat the same

answer which we tried to give. This is not based on a

mechanistic formula whereby we can relate it directly and

systematically to either balance of payments gap or a growth

figure or something which can be defined precisely. It has

to be on the basis of a judgment in relation to both the

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balance of payments prospects, the size of the country, the

strength of the program, and the size of the overall program

of the Bank in the country. In that sense, you have to see

it as the best judgment of the people who are working on

Argentina, in consultation with the Argentinean authorities,

to respond to the needs of the present situation.

Therefore, you have to take into account the

possibility of tranching, or the nonexistence of possibility

of tranching, as well as all other factors, and come to a

basically judgmental conclusion.

There is no formula, and if you press us to develop

a formula, it has to be somewhat artificial and mechanistic a

formula, which would not be satisfactory to any of the

parties involved.

MR. CONABLE: With respect to the issue of retroac-

tivity, I would like to make a statement about some historical

analysis of that that has been made by staff. I would prefer

to hold that, though, and not interrupt the train of inquiry

about this particular loan, and I would do this at the end o f

the discussion.

Mr. Keating wishes to be recognized.

MR. KEATING: Thank you, Mr. Chairman.

We support this loan, and we commend the Argentine

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authorities for their continuing efforts to open up the

economy of their rich and vital country.

We believe that by removing trade barriers and

restoring export incentives, not only will the economy become

more efficient, but that structural tendencies toward high

inflation will be restrained as well. Thus we view this loan

as an excellent first step in advancing the process of trade

reform.

However, I do have some comments and questions. In

going through Paragraph 59, entitled "Phasing Out Import

Restrictions", it would seem that at the end of this loan

period, that tariff positions equivalent to over 41 percent of

the value of production would still be protected by quantita­

tive restrictions. And we would hope that this degree of

protection would be reduced.

In addition, while we consider tariffs superior to

quantitative restrictions, we are concerned that the ultimate

tariff positions may be too high. In going through Paragraph

60, entitled, "Reduction of Import Controls and Import Tariff

Levels and Structure", the loan document doesn't specify what

the distribution of tariffs would be for goods moved out of

quantitative restrictions into the 10 percent to 40 percent

band, and what criteria , therefore, will the Bank use in

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approving the government's schedule to reduce tariffs to this

particular tariff band?

Also, what plans are there to reduce tariffs on

products already free of quantitative restrictions?

And inasmuch as trade liberalization and an

appropriate exchange rate are closely interrelated, we of

course see the need expressed in the report for an evaluation

of the competitiveness of Argentina's exchange rate as a

condition for the second tranche.

A final comment is that this loan does not address

Argentina's use of subsidized export financing, but we

understand that a subsequent loan will tackle this issue and

that a study of Argentina's export financing system will be

prepared shortly as background for this loan.

Thank you.

MR. CONABLE: Thank you.

Mr. Sokol?

MR. SOKOL: Thank you, Mr. Chairman.

The Argentine government would be moving tariff

positions during this first phase, the first year, equivalent

to 58.5 percent of the value of industrial production to the

fully automatic list. The government has indicated in its

policy statement that it plans to move to free tariff

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positions further to about 80 percent of the value of

industrial production in three years. So it is a major

liberalization effort over a three-year period.

The second question with respect to QRs, moving out

of QRs and tariff positions, the maximum tariff in Argentina

is 38 percent of the CIF value of imports, and that is not

high; that is reasonably low. The average realized tariff

rate is 21 percent for imports.

The government has moved already 833 tariff

positions, moved them out of the QRs, and has not increased

the tariffs. Therefore they are below the 38 percent tariff

rate which I mentioned earlier.

With respect to the exchange rate, we will review

with the government the exchange rate, the position of the

exchange rate before second tranche release on the basis of

adequate export performance. And the government continues

with a policy of maintaining the real exchange rate of June

1985, and so far, the effects have been positive.

With respect to export subsidies, I would like to

mention that export subsidies in preshipment financing, the

total amount of subsidized credit lines last year was about

$500 million. The total amount of the subsidized credit line

t his year has been reduced to $25 0 milli on. And t he new

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credit lines that have been granted by the Central Bank are

at market rates linked to LIBOR.

MR. CONABLE: Thank you.

Mr. Soe Lin?

MR. SOE LIN: Thank you, Mr. Chairman.

Trade policy reform is a political policy area in

the government's medium-term economic adjustment program, and

therefore we join our colleagues in supporting this loan to

Argentina.

The loan, in our view, is significant in that it

spearheads a country-strategic approach in the Bank's lending

program to Argentina. Relying on operationally-oriented

economic and sector work, the Bank has designed the program

as an integrated whole, building into it key sectoral policy­

based loans.

This is an approach that is fully consistent with

the country focus incorporated under the new reorganization,

and we would therefore like to encourage staff to develop and

refine these types of loans, particularly in the major

borrowing countries.

We also know that these loans are being deliberately

sequenced to achieve mutually-reinforcing effects. Specifi­

cally the loan under discussion, while contributing t oward

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the transition to the outward-looking trade regime, con­

centrates on export promotion and diversification. This will

be followed by another loan that will concentrate on import

liberalization.

There are no clearcut rules whether this gradualist

approach is superior or inferior to the shock treatment

approach normally associated with trade reform processes. It

is, however, noteworthy that in Argentina, the gradualist

approach has seldom worked and has often lapsed into damaging

stop-go policies.

However, in taking this gradualist approach, we

would therefore emphasize that a macro policy environment

becomes absolutely critical. In this respect, we note that

the monitoring conditions seem to be sufficiently tight and

second tranche release conditions require satisfactory

evidence that the government's macro policy framework be

consistent with trade policy reform. Much has been said on

this point by previous speakers, but we still are left with

wondering why in a loan of this size and a loan that is

oriented toward trade policy reform, export competitiveness

is not a specific condition of the second tranche release.

One final comme nt. We would like to see a more

explicit treatment of the linkages between the sectoral loans

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to one another, to see how they are integrated. In this

respect, we would particularly like to mention that the

agriculture sectoral policy loan approved last year deserves

much elaborate treatment in terms of how it links onto this

loan.

Thank you very much.

MR. CONABLE: Thank you, Mr. Soe Lin.

Any comment on that, gentlemen?

Mr. Sokol?

MR. SOKOL: Yes. With respect to export competi-

tiveness, part of the review of macroeconomic policies during

second tranche release is to look at export competitiveness,

and that is the major thrust in the policy conditionality.

With respect to the agricultural sector loan, Mr. Scherer

will comment.

MR. SCHERER: Yes, Mr. Chairman. The strategy of

the Bank has been to assist the government efforts to promote

agricultural exports and industrial exports through two

separate operations. One was the agriculture sector reform

loan, which the Board approved some time ago, and now for

industry, essentially, the trade reform loan which is

presented to you today.

The second tranche of the agriculture sector loan

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has not yet been released, for a very simple reason--the

deterioration in the agricultural terms of trade has been so

significant that the government has found it not convenient

to introduce the land tax as early as had been expected.

This, however, does not mean that the government is less

determined to substitute the presently still in effect export

taxes that are still on agricultural products in effect by a

land tax. And we would expect that the government will

pursue with us toward the end of the year, and that by that

time the World Bank would be able to release the second

tranche.

And the industrial sector and the incentives for

industrial exports are essentially covered under this trade

reform loan. And I would like to add to what Mr. Sokol has

said, that it is very difficult, of course, to measure export

competitiveness unless one sees the results, and these

structural reforms will take some time to work their way

through, but we know already that through the measures that

are supported by this loan, the terms of trade for, or the

effective exchange rate, if you wish, for the exporter has

increased by rough estimates would be about 20 percent or

more during the initiation of this program.

MR. CONABLE: Thank you, Mr. Scherer.

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Mrs. Rubio?

MRS. RUBIO: Thank you, Mr. Chairman.

we must welcome and support this trade policy and

diversification loan for the Republic of Argentina.

The Argentine economy, like most if not all in

Latin America, has been suffering from major disequilibria

during recent years, especially since 1982. The new Argentine

administration that took office in 1984 embarked on policy

adjustment and reforms. With the introduction of the Plan

Austral, the Argentine economy started a new phase of

economic policy that combined land management policy and

monetary reform.

The macroeconomic policy already introduced during

early '87, followed by the outward-oriented economic policy

or export diversification plan adopted by the Argentine

government, are most welcome.

It became a major challenge to embark on export

promotion policy and liberalization of imports at the time of

financial difficulties in the internal and external front of

the economy. None of the above-mentioned policy reforms

could be achieved without the appropriate financial resources.

In this respect, I am glad that both the expor t promotion and

import liberalization policies have been supported by a

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financial package and would like to emphasize the importance

that the World Bank placed on supporting these major reforms.

Here, Mr. Chairman, I would like to refer to the

issue of retroactivity that has been mentioned by other

Directors. Maybe the discussion on policy suggested by Mr.

Arlman could be appropriate. The way it looks today to me is

that if we apply the policy in the sense supported by Mr.

Draghi, wouldn't we be penalizing the Republic of Argentina

for having taken steps in the right direction early or on

time?

So that basically what I want to say is I support

very strongly the management proposal, particularly the

statement of Mr. Gay.

With respect to the export incentive package, the

introduction of a new tariff system and extension of the

previous one, which includes the automatic duty-free access

to all imported input required in the production of exports

is a step in the right direction.

In general, Mr. Chairman, let me say that I like

the design of the trade policy reform v ery much, for two

reasons: a) It emphasizes an outward orientation approach

versus a mere liberalization one. We recognize the very

important effort of liberalization undertaken by the Argentine

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government, but we can also see the outward orientation bias

which inspires it. And b) or the second reason, this trade

policy reform also seems to be based more on a trend toward

effective protection as opposed to purely nominal protection.

We wish the Argentine government great success in

the implementation of this project.

Thank you, Mr. Chairman.

MR. CONABLE: Thank you, Mrs. Rubio.

Mr. Jembere?

MR. JEMBERE: I will be brief, Mr. Chairman.

We also would like to lend our support to the trade

policy and export diversification loan to Argentina, in

support of the country's efforts toward structural reform, to

improve its economic growth prospects in the medium term. We

welcome the Bank's active involvement in this and hope that

the international financial community will provide continued

assistance to Argentina during this major effort toward

sustained growth.

We do support, Mr. Chairman, judicious application

of retroactive financing, and in saying this, we also share

Mr. Draghi's concern that this particular case should have

been clearly indicated as being outside of the norm.

I thank you.

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MR. CONABLE: Thank you, Mr. Jembere.

Mr. Marion?

MR, MARION: Thank you, Mr. Chairman.

We support this loan, which should help Argentina

widen the range of its exports and embark upon an outward­

oriented strategy.

Indeed, Argentine authorities are strongly committed

in implementing their medium-term structural reform program

and need to be supported by the international financial

community.

We particularly welcome the key role being played

by the Bank vis-a-vis a country which represents one of the

most crucial cases among countries facing serious external

debt problems and pursuing economic recovery programs.

As to the imple~entation of the adjustment program

i,j :2(/ ~~·,.., of Argentina, satisfactory results have been reached .i-ft==:the

.w;e&s of curbing of inflation and the important decrease of

the public sector deficit.

However, it is obvious that the success of this

program will depend mainly on the ability of the authorities

to pursue and to stiffen, in some cases, the policy they are

c ommit t e d in.

I n this respect, in order to contain inflationary

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pressures which otherwise would jeopardize the credibility of

the work program, a tight monetary policy, a further curtail­

ment of the public sector deficit, and especially a cautious

price and income policy must be continued.

Close attention also needs to be paid to the

exchange rate levels so that Argentina's competitiveness is

not eroded by inflation, and repatriation of resident's

external assets is not discouraged.

More generally, the adjustment process has no room

for slippage; its implementation is crucial to gain the

confidence of commercial banks and the private sector.

Thank you, Mr. Chairman.

MR. CONABLE: Thank you, Mr. Marion.

Mr. Al-Sultan?

MR. AL-SULTAN: Thank you, Mr. Chairman.

I just want to strongly support the project and to

add to what my colleagues have said, particularly that the

liberalization measures in this particular loan is expected

to be implemented in a gradual manner, which I thought was

ver y commendable. I would like to say that I would wish that

the same approach is also used in other projects.

Thank you, Mr. Chairman.

MR. CONABLE: Thank you very much, Mr. Al-Sultan.

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Are there further questions or comments?

Mr. Haxthausen?

MR. HAXTHAUSEN: I am sorry to come back. I have a

very short observation. Of the World Bank's loans to

Argentina from '83 or before, more than $300 million are

undisbursed. I hope that something can be done.

MR. CONABLE: Would you care to comment on that,

Mr. Scherer? That is an important comment.

MR. SCHERER: Yes. I would first like to correct

an inadvertent mistake in Annex II, page 1, in which we

indicate that four loans still have not become effective.

All loans except the last one, a small one, power engineering,

are effective. And in fact, the speed of disbursement in

Argentina has accelerated substantially to the extent that

over the last 12 months, a full third of the amount disbursed

and undisbursed and outstanding a year ago has been disbursed.

So the Argenti ne government has more than tripled

the s peed of disbursement.

MR. CONABLE: Isn't it true that there was a very

modest loan program there i n the pe riod '83 to '85 ; a re most

of the undisbursed l oans prior to that period?

MR. SCHERER: We have, Mr~ Chairman, a few old

loan s or date d l o a n s t ha t ha ve s u ffered from the freque nt

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shifts of economic policies in Argentina.

MR. CONABLE: Yes.

MR. SCHERER: But all of those, the new ones as

well as the older ones, are now disbursing very rapidly, and

we would expect that these ones that are dated, like the

grain storage and highways, be now fully disbursed very soon.

MR. CONABLE: I suspect that once a loan gets off

track, it is hard to get back on.

MR. SCHERER: Very difficult, yes.

MR. CONABLE: But that is an important inquiry. I

am glad to know that they are disbursing quickly now.

Friends, before we accept this loan, I would like

to just make a statement briefly, and a very fragmented

statement, about retroactivity, because that is apparently a

question on which there is concern and concern on both sides.

I refer to some historical analysis. Apparently,

that was too strong a word. This note came from Mr. Scott of

the Legal Department and says that he was relying on his

memory, and that that was not necessarily an historical

analysis.

He said, however, that "We have had a number of

rece nt examples of retroactive financing on policy-based

loans. The Brazilian power sector loan in 1986 involved $250

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million expenditures up to six months retroactive. There

were two SALs in Chile in 1985 and 1986, seven months

retroactive, with no limits on amounts. But the Mexican

trade policy loan in 1986 involved eight months' retroac-

tivity, with no limits on amounts."

Now, if it is the desire of the Board to have this

analyzed further and to have policy reviewed and restated, I

am very glad to do it. I think it would be unfortunate if we

were to hold up this par.ticular adjustment loan on the basis

of a violation of a policy, because it is clear that policy

has not been followed strongly in the past.

I will acknowledge Mr. Draghi's important point

that this is something that should have been spelled out in

greater detail in the papers that the staff has presented to

us, and I would urge them to review additional loans that are

coming of a policy nature, to be sure that the Board is fully

informed.

However, I would like to ask if the Board has any

specific desires on this matter--or, Mr. Draghi, did you want

to follow up on that?

MR. DRAGHI: Yes. Thank you, Mr. Chairman.

No, it is absolutely not my intention to hold up

this loan f or this reason. I wish to think about the

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possibility of having a policy discussion on this point, but

I just want to add another consideration which in a sense was

stimulated by your remarks.

I wish to dispense with some confusion that may

have been caused by, perhaps, my sharpness in my statement,

and I wish to stress again that while I am asking that some

details be taken care in the future operations of this kind,

the thrust of my position is one of strong support for this

operation--just to make things clear.

MR. CONABLE: I see. Thank you for that.

MR. DRAGHI: Thank you.

MR. CONABLE: Well, if the Board will consider this

issue and advise us at some time in the future, we could have

a review of this.

Mr. Yamaguchi, do you wish to say something?

MR. YAMAGUCHI: Thank you, Mr. Chairman.

We have seen many financial packages suggested by

IMF or commercial banks, et cetera, et cetera, and on that

occasion, I have heard that the Bank is just deemed to be a

provider, a minor provider of the necessary package. And I

think that we have discussed in the past very many times

conditionality, eve n though it is not welcome d by all

Directors, o r negotiating power of the Bank. And I think

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that it is vitally important, crucially important, for this

Bank to maintain some policy dialogue vis-a-vis client

country and policy advice, or maintain some negotiating power

or, with IMF, some conditionality.

So I think in that context, I would like management

to provide us some policy paper on to what extent this kind

of retroactive financing is possible.

Thank you.

MR. CONABLE: I thank you. We will take that into

consideration, Mr. Yamaguchi, and report back to you.

If there are no further comments, the minutes will

show the Executive Directors approve the loan on the terms

proposed.

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