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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