DOCUMENTOF THE WORLDBANK
FOR OFFICIAL USE ONLY Public Disclosure Authorized
REPORTNo. 25860-AR
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
PROGRAM DOCUMENT
FOR A PROPOSED Public Disclosure Authorized
ECONOMIC AND SOCIAL TRANSITION STRUCTURAL ADJUSTMENT LOAN
IN THE AMOUNT OF US$500 MILLION
TO THE
ARGENTINE REPUBLIC Public Disclosure Authorized
DATE:MAY 2,2003
COUNTRYMANAGEMENT UNIT
Public Disclosure Authorized ARGENTINA, CHILE, PARAGUAY,URUGUAY LATINAMERICA AND THE CARIBBEAN REGION CURRENCY EQUIVALENTS Currency Unit : The Argentine Peso
EXCHANGE RATE End-2001 Argentina $1 = US$1 End-2002 Argentine $3.5 = US$1 April 30,2003 Argentine $2.8 = US$1
WEIGHTS AND MEASURES Metric System
FISCAL YEAR January 1 - December 3 1
ABBREVIATIONS AND ACRONYMS
EPH Permanent Household Survey ESW Economic and Sector Work GDP Gross Domestic Product GNI Gross National Income IDB Inter-American Development Bank IFC International Finance Corporation IF1 International Financial Institutions IlMF International Monetary Fund INDEC National Institute of Statistics PFO Financing agreements between provinces and the federal Government
Vice President David de Ferranti Country Director Axel van Trotsenburg Lead Economist Paul Levy Sector Management Units PREM/HD
I I FOR OFFICIAL, USE ONLY TABLE OF CONTENTS
.. CURRENCY EQUIVALENTS ...... 11 LOAN AND PROGRAM SUMMARY ...... V
I. INTRODUCTION...... 1
11. RECENT ECONOMIC AND SOCIAL DEVELOPMENTS ...... 1
A. RECENTECONOMIC DEVELOPMENTS ...... 1 B. THE SOCIAL SITUATION ...... 7
111. COUNTRY ASSISTANCE STRATEGY ...... 9
IV. THE GOVERNMENT’S TRANSITION PROGRAM ...... 13
A. PUBLIC FINANCES...... 14 B. PROVINCIAL FINANCES...... 15 C. THE ORDERLYFINANCING PROGRAM (PFO) ...... 15 D. ADDRESSING THE QUASI-MONIESCHALLENGE ...... 18 E. SOCIAL SECTORS ...... 25
V. THE PROPOSED LOAN ...... 29
A. OBJECTIVES OF THE PROPOSED LOAN...... 29 B. DESCRIPTIONOF FINANCIAL ASSISTANCE...... 29 c. TRANSITION PROGRAMSUPPORTED BY THE BANK...... 29 D. RATIONALE FOR BANKINVOLVEMENT/ADJUSTMENT LENDING...... 30
VI. TERMS AND CONDITIONS ...... 31
A. PROGRAM MANAGEMENTAND LOAN ADMINISTRATION ...... 31 B. DISBURSEMENTAND AUDITING ...... 31 C. ENVIRONMENTALASPECTS ...... 31
VII. BENEFITS AND RISKS ...... 32
VIII. RELATIONS WITH THE IMF AND IDB ...... 34 ... 111
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed lwithout World Bank authorization. LIST TABLES Page
Table 1: Argentina: Macroeconomic Indicators ...... 5 Table 2: Financial Relations with the World Group ...... 7 Table 3 : Social Indicators ...... 11 Table 4: Federal Government Fiscal Performance ...... 15 Table 5: Provincial Fiscal Performance.,...... 15 Table 6: Provincial Finances (2002) ...... 17 Table 7: Quasi-monies in circulation ...... 19 Table 8 : Provincial Quasi-Monies and PFO ...... 22 Table 9: Social Emergency Program ...... 28
FIGURES
FIG . 1: Economic Indicators ...... 6 Fig. 2: Evolution ofUnemployment and Poverty Rates ...... 7
ANNEXES
Annex 1: Argentina: Assistance Strategy ...... 36 Annex 2: Policy Matrix ...... 37 Annex 3: Letter ofDevelopment Policy and Addendum ...... 39 Annex 4: Key Economic Indicators ...... 60 Annex 5: Key Exposure Indicators ...... 62 Annex 6 Argentina - Financial Position in the Fund ...... 63 Annex 7 Status ofBank Group Operations ...... 65 Annex 8 Statement of IFCs Held and Disbursed Portfolio ...... 66 Annex 9 Argentina at a Glance ...... 67
was prepared by a World Bank team composed of: Paul Levy. Ariel Fiszbein. Theresa Jones. Pabro Uribe. Marcel0 Becerra. Alejandro Guerson. Maria Luisa Masutti. Daniel Oks. and Paul Sisk. Reynaldo Pastor was legal counsel.The team was co-led by Axel van Trotsenburg and Paul Levy (LCC7) . Valuable assistance was provided by Maria L. Estrella. Karen Borges. Veronica Salatino and Elizabeth A . de Lombard0 .
iv ARGENTINA ECONOMIC AND SOCIAL TRANSITION STRUCTURAL ADJUSTMENT LOAN
LOANAND PROGRAM SUMMARY
Borrower Argentine Republic
Implementing Ministry ofEconomy Agency
Poverty Category Not applicable
Amount US$500,000,000
Terms US Dollar Fixed Spread Loan, 15 year maturity including three years grace, commitment linked, annuity repayment structure.
Commitment The Borrower shall pay to the Bank a commitment charge on the principal Charge amount ofthe Loan not withdrawn from time to time, at a rate equal to: (i) eighty five one-hundredths ofone per cent (0.85%) per annum from the date on which such charge commences to accrue in accordance with the provisions ofSection 3.02 ofthe General Conditions to but not including the fourth anniversary ofsuch date; and (ii)seventy five one-hundredths ofone per cent (0.75%) per annum thereafter.
Front-End Fee One percent (1%) ofthe amount ofthe Loan.
0b j ective The proposed loan would support the country by (i)taking incremental steps towards the reestablishment of a sound basis for growth and development, and (ii)strengthening efforts to protect social programs, thereby helping to mitigate the adverse effects of the economic crisis on the poor in Argentina. The proposed operation is part ofa concerted effort by multilateral institutions to help Argentina during the transition period and lay the groundwork for a more comprehensive reform program to be developed and implemented with the new administration scheduled to take office at the end ofMay 2003.
Description The proposed transition loan would help strengthen Argentina’s ability to resume growth and protect its human capital through a series ofinitial reform steps taken by the current Government. These steps support (i) the continued deficit reduction efforts by the provinces, (ii)the elimination ofquasi-monies, (iii)measures to ensure that social protection programs respond adequately to the economic and social crisis, and (iv) measures to ensure coverage ofbasic health services to the most vulnerable through increased budget allocations to priority programs and improved access to
V pharmaceuticals.
Benefits The transition program will contribute to the consolidation ofthe incipient economic recovery and set the basis for a longer-term reform program with the new government. First, improved provincial finances will directly contribute to the attainment ofa primary surplus in the consolidated public sector, thus contributing to the resumption of sustainable growth, which is crucial for the reduction ofpoverty. Second, the elimination ofquasi-monies will have the following benefits: (i) provincial governments have committed to stop any new issuance of quasi-monies; (ii)it would accelerate the return to a normal payment system based on the peso, thereby strengthening the ability ofthe Central Bank to conduct monetary policy, (iii)it would help lower income families, including retirees, who often were forced to accept these quasi- monies as payments, (iv) pave the way for normalizing federal provincial fiscal relations, and (v) reduce perverse incentives to economic activity towards the informal sector, and improve inter-provincial trade, thus promoting overall economic growth. Third, the social safety net measures are helping the poor in meeting their basic social needs. In addition, the Heads ofHousehold program has contributed to calm down the high social tensions that existed in the first half of2002 as well as to provide temporary and part-time employment opportunities.
Risks The risks to this program are high. Sustainability ofthe program could be undermined by the upcoming presidential elections which may not result in a government that is willing andor able to develop and implement a comprehensive economic and social reform program. This may undermine the incipient recovery and increase economic and political uncertainty, with possible negative consequences for the on-going efforts to improve the fiscal situation at both the federal and provincial levels.
Beyond these risks, a slower than expected level ofeconomic activity, including the impact ofthe general world economy, would also present serious risks to the sustainability ofthe program. Attaining higher primary fiscal surpluses - as required for dealing with the debt problem and the current default status -will demand political leadership and cohesion. The social depth ofthe crisis - unemployment and poverty - and the rapidity ofthe required reforms, including the strengthening ofseriously deteriorated institutions may challenge the new government’s ability in building a consensus approach to policy making.
Adherence ofindividual provinces to the redemption ofquasi-monies program depends on a number offactors, including the distribution of costs ofthat exchange, and the risk offuture changes in the design ofthe program, which could be affected by the imminent presidential elections, and provincial elections in the second halfof 2003.
vi Another potential risk is that the social safety net measures, implemented during the emergency, are not followed up by deeper structural and programmatic reforms the enable both sustainable poverty reduction and efficient social protection.
Should such risks materialize, the country risks falling back into recession and confronting an even deeper social crisis.
Mitigating these risks is the commitment by the provinces to reduce the overall provincial deficit zind produce primary surpluses, their commitment to unify the national currency, and Congressional approval of the national budget. The much better than anticipated fiscal performance in 2002 by the provinces and their commitment to implement the 2003 targets are hopeful signs that the provinces will carry out the 2003 bilateral fiscal agreements. In the social safety net area, the Government has been strongly committed to implement these social programs and there is general support in Argentina, including among presidential candidates, for the continuation ofthose programs.
Financing Plan Not Applicable
Net Present Value Not Applicable
Project Identification PO8 1395 Number
vii
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR AN ECONOMIC AND SOCIAL TWSITION STRUCTURAL ADJUSTMENT LOAN TO THE ARGENTINE REPUBLIC
I. INTRODUCTION
1. The proposed Economic and Social Transition Structural Adjustment Loan for US$500 million to the Argentine Republic would strengthen an ongoing program in support ofthe incipient economic recovery in Argentina. It would help facilitate ongoing reforms during the transition period ofthe administration ofPresident Duhalde to a new administration scheduled to take office on May 25,2003. This loan follows up on an investment loan approved in January of 2003, which provides support to the country’s largest emergency program for unemployed heads ofhouseholds.
11. IRIECENT ECONOMIC AND SOCIAL DEVELOPMENTS
A. Recent Economic Developments
2. The Argentine economy is emerging from the deepest recession in generations, with its GDP having fallen by 20 percent in the last four years and by 10.9 percent in 2002 alone. Per capita income at the end of2002 stood at an estimated US$2,695, down from over 8,000 in the 1997/98 period’. Poverty has increased to 58 percent, with indigence levels affecting 28 percent of the population or about 9 million.
3. The culmination ofthis crisis is associated with the collapse ofthe Convertibility Plan, which extracted an increasingly and finally unsustainable high social and economic costa2 Compounding this was the declaration ofdefault on Argentina’s public debt, the ill-prepared devaluation, and the asymmetric pesification ofthe financial system, all ofwhich have had damaging effects on macroeconomic management, viability ofthe financial system, credibility of government action, and the rule oflaw.
4. After an initial period ofheightened economic, social, and political uncertainty, the Argentine economy displayed signs of bottoming out around the middle of2002. Since then indications ofan incipient recovery based on improved consumer sentiment and import substitution have multiplied, with positive developments becoming clearer and stronger in recent months. These were reflected in the trend ofthe quarterly GDP in 2002 which contracted by over 16 percent during the first quarter compared to the same period ofthe previous year, but improved about equally, on a seasonally adjusted quarter to quarter basis, by 0.7 percent in each of the three subsequent quarters3. Consequently, economic growth in 2002 declined by 10.9
According to the Bank’s Atlas methodology, per capita GNI in 2002 declined to $4,060 from $8,030 in 1998. For an evaluation of the causes of the Argentine crisis please see “Argentina; A Retrospective Review”, distributed to the Board in July 2002. Quarterly growth figures for 2002 were -16.3%, -13.5%, -9.8%, and -3.6%, in that order.
1 percent. Industrial production also showed an accelerating positive monthly trend since the second quarter of2002, with year on year indicators signaling positive growth starting in the fourth quarter of2002.
5. The current Government has made important strides towards reverting some ofthe negative impact ofthe crisis under very difficult social and political conditions. Key to this achievements have been the controls over the fiscal situation as well as the pursuit ofa restrained monetary policy. There is, however, a broad and substantial agenda for structural reforms that remains to be tackled in order to insure that the recent signs ofeconomic improvement can be sustained and accelerated. Reforms in areas such as the financial sector, corporate restructuring, public utilities services, public sector management, reform in fiscal relations with the provinces, extemal debt restructuring, and investment climate will have to wait until a new administration takes office.
6. With regard to fiscal policy, the Government tightly controlled expenditures, especially ofwages and pensions, but relied on export taxes and the financial transaction tax to collect more than 3 percent ofGDP in revenues. Average monthly revenues rose from Arg$3.4 billion in the first four months of2002, coinciding with the depth ofthe recession, to Arg$5.2 billion in the following eight months, marking an average increase in revenues of53 percent, which surpassed the rate ofinflation, and reflects the gradual improvement in economic activity and tax collection efforts. As a result, the primary deficits ofthe first four months of2002 turned into surpluses in the remainder ofthe year, generating a primary surplus of0.7 percent ofGDP for the year as a whole. Nevertheless, the overall cash balance ofthe Federal Government remained in deficit (- 1.6 percent ofGDP), despite the non-payment ofinterest obligations because ofthe default conditions.
7. On provincial finances, the Central Government signed agreements with the provinces on reducing the combined provincial deficit by 60 percent during 2002. The outcome ofthe agreement has been better than expected, with the combined provincial deficit having been cut by 74 percent from Arg$6.8 billion in 2001 to Arg$1.8 billion by eliminating a primary fiscal deficit of0.5 percent ofGDP during 2002. For 2003, it is planned that the provincial deficits will be cut firther to Arg$l.l billion. To this end, the Government has already signed agreements with eleven provinces representing 95 percent ofthe overall 2002 provincial deficit. Further improvements in provincial fiscal performance are needed to obtain fiscal sustainability ofthe consolidated public sector, and reform ofthe federal-provincial fiscal agreement (coparticipacion) is a challenge for the immediate future.
8. Monetary policy has contributed significantly to the improvement in the macroeconomic situation. Key to this has been the change in rediscount policy, which increasingly sterilized the liquidity support extended towards banks in response to the judicial rulings in favor of liberalizing blocked deposits, so called “amparos”. The decline ofintemational reserves during the first half of2002 was another source ofmonetary absorption. The fiscal and monetary policy stance have resulted in a significant lowering ofthe monthly inflation rate from about 4 percent in the first half of2002, to 1.3 percent during the second halfyear, to about 1 percent during the first quarter of2003. Interest rates have also fallen significantly since the middle ofthe year, with fixed term deposit rates having declined from about 80 percent in July 2002 to 15 percent in January 2003 and the prime rate from 90 percent to 27 percent during the same period.
2 9. Progress has been made in other areas as well. A flexible exchange rate has been established following the temporary introduction ofmultiple exchange rates. The fiscal and monetary policies together with capital controls that were re-introduced extensively in 2002, supported an exchange rate policy that resulted in a relatively stable exchange rate of Peso 3.66 per US$1 from June through November 2002. Towards the end of2002, the incipient recovery and the increasing international reserves position, in part due to the accumulation ofpayment arrears and a large trade surplus started to exert appreciating pressures on the exchange rate. To arrest a too quick ofan appreciation, the Central Bank has increasingly lifted capital controls since the end oflast December. At mid-April, the exchange rate stood at around Arg$2.9 to US$1, and foreign reserves had reached US$10.5 billion.
10. The external financing crisis and recession was reflected in the swift reversal in the external accounts. With a precipitous decline in imports of55.8 percent, and despite a lackluster export performance, the trade balance in goods and services improved from a US$3.5 billion surplus in 2001 to US$15.4 billion last year, helping generate a US$13.5 billion swing in the current account. The traded goods balance continued to be in large surplus in January 2003, when it reached US$1.3 billion compared to US$970 million in the same month of2002. A similar surplus was obtained in the month ofFebruary.
11. To summarize positive developments in thefirst months of 2003, the economy stayed on its recovery path. By March 2003, industrial production was 21.4 percent higher than a year ago, albeit from levels that characterized the trough ofthe economic crisis. Inflationremained moderate, and trade balances exhibited large surpluses. Fiscal performance improved further, principally from improved income tax collections, with revenues coming better than expected in the Fund’s program. Exchange controls were further eased, and banking deposits were liberalized. Commitments to improve fiscal performance in the provinces were reached, and the Government launched a program for the monetary unification. Between the beginning ofthe year and mid-April, the peso appreciated by 15 percent, and international reserves continued to build up.
12. These impressive achievements however remain fragile as long as important issues have yet to be resolved. The Argentine banking system has been significantly weakened, first by the massive withdrawal ofdeposits in 2001, and second by the loss ofconfidence resulting from the partial freeze ofbank accounts, the forced conversion ofdollar deposits, and associated policy decisions (asymmetric pesification, preferential treatment ofdebtors, etc.). With about 50 percent ofbank assets currently held in the form ofgovement bonds, the future viability ofthe banking system depends, among other factors, on the outcome ofthe public debt workout, and valuation ofsuch bonds. Depositors have suffered significant losses, and access to the remaining deposits were circumscribed. Important economic dislocations occurred with the imposition of restrictions on access to banking deposits. Nevertheless, gradually, sight and savings deposits and more recently time deposits have been liberalized. But, the financial intermediation process has been severely disrupted. No credible resolution to the banking crisis has yet been defined, and the future ofthe banking system is uncertain. Confidence on the banking system has plummeted, as banks suffered high operational losses and a sharp increase in their non- performing loans. The weakening ofthe banking system, and the continuous decline in credit associated with significant contraction ofinvestment, are limiting factors to a sustained economic recovery. While cautious measures are being taken to strengthen the banking system,
3 the redollarization ofdeposits (ruled by the Supreme Court in one case only, but opening the door for more widespread application) remains a risk to the banking system, as it could increase its losses, and dependence on public transfers.
13. Private contracts have been breached - for example, all private contracts denominated in dollars were converted into Argentine pesos at the old exchange rate ofone-to-one and mortgage executions were suspended - and the legal framework for their renegotiation has been undermined through inopportune legislation (only recently new bankruptcy legislation established a minimum acceptable legal framework for the protection ofcreditors and debtors). Utility rates have been frozen, threatening the future provision ofpublic services (recent minimal price adjustment in utilities have been suspended by a court decision). Property and creditor rights have been violated in a wholesale manner, and unless such rights are credibly reestablished, economic recovery will be curtailed.
14. The Government has defaulted on various domestic and most international obligations. Consequently, Argentina has no access to the international financial markets. Currently, the authorities have began the long process or reaching out to intemational creditors. However, the process ofdebt renegotiation promises to be long and arduous, and some creditors have initiated legal action to attach Argentine assets abroad. In the process ofpesification, massive wealth transfers from creditors to debtors and, in particular, from the state to debtors have occurred. As a result ofthe compensations to banks and depositors the state has already issued sizable amounts ofnew debt, thereby increasing difficulties for the future servicing ofdebt in default.
15. Argentina’s prospectsfor 2003 are for the continuation ofthe current recovery in output and the maintenance ofthe fiscal and monetary stability reached over the second half of2002. The prospects for output recovery reflect the depth ofthe output decline ofthe last four years, and the opportunities provided by the sharp devaluation ofthe currency. The recovery in consumption, and import substituting activities could be leading the recovery, with real GDP growth projected to reach about 4 percent. However, significant uncertainty accompanies any such expectations, given the need to address urgently fundamental structural reforms. In the absence ofnormalization ofrelations with the international financial community, which would require both a debt restructuring and a sustainable fiscal framework, the reestablishment ofa functioning financial system, and renewed credibility to public institutions, the ongoing economic recovery is unlikely to translate into sustained economic growth.
16. In the meantime, an interim economic and financing program has been agreed with the IFIs, covering the January to August 2003 period. The Government estimates that the total external financing gap during this period is in the order ofUS$l 1.6 billion. This financing gap is expected to be met by new disbursements ofthe IMF ofabout US$2.9 billion and the extension of repurchase expectations amounting to US$3.7 billion as well as by disbursements from the World Bank and IDB in the order ofUS$2.2 billion each. In February 2003 the Paris Club agreed to a rescheduling ofdebt service amounting to about US$0.7 billion.
4 Table 1 Argentina Macroeconomic Indicators
1997 1998 1999 2000 2001 2002 Est. 2003 Proj.
Economic Activity GDP at current Prices, billion pesos 1/ 293 299 284 2 84 269 3 13 375 GDP at current Prices, billion US dollars 1/ 293 299 284 284 269 102 115 GDP per capita, US dollars 1/ 8210 8275 775 1 7675 7169 2695 3010 real growth rates(%) GDP at market prices 8.1 3.9 -3.4 -0.8 -4.4 -10.9 4.0 GDP per capita 11 6.8 2.6 -4.6 -2 .o -5.6 -12.1 2.9 Consumption 8.0 3.1 -2.6 0.2 -4.4 -13.5 4.2 Investment 17.7 6.5 -12.6 -6.8 -15.7 -36.1 2.4
Prices year-over-year change (%) Consumer Price Index 2/ 0.3 0.7 -1.8 -0.7 -1.5 41.0 15.2 Wholesale Price Index 31 -1.1 -3.3 -1.2 3.7 -2.0 78.3 6.1
Financial System year-over-year change on values in local currency (%) Broad Money (M2) 25.5 10.5 3.9 1.7 -19.4 -58.4 Total Credit 13.9 15.3 0.3 -0.4 -6.5 -7.5 Total Deposits 31.2 14.5 4.6 5.3 -19.2 -2.3
Fiscal Accounts shares to GDP (%) Federal Govemment Overall Balance 4/ -1.6 -1.4 -2.5 -2.4 -3.3 -10.2 -9.9 Federal Govemment Primary Balance 0.4 0.8 0.3 1.o 0.5 0.7 2.1
Consolidated Public Sector Overall Balance 41 -2.4 -2.0 -4.1 -3.6 -6.8 -12.0 -10.2 Consolidated Public Sector Primary Balance -0.6 0.6 -0.7 0.4 -1.4 0.4 2.5
External Accounts billion US dollars Exports ofgoods and services 30.9 31.1 27.9 31.1 31.0 28.3 27.3 Imports ofgoods and services 37.4 38.7 32.8 32.9 27.4 12.9 12.9 Trade Balance -6.5 -7.5 -4.9 -1.7 3.5 15.4 14.4 Current Account Balance -12.2 -14.5 -11.9 -8.8 -4.5 9.0 5.8 Stock ofIntemational Reserves 22.5 24.9 26.4 25.1 14.5 10.5 shares to GDP Current Account Balance 1/ -4.2 -4.9 -4.2 -3.1 -1.7 8.8 5.0 Stock of Intemational Reserves 1/ 7.7 8.3 9.3 8.8 5.4 10.3
Nominal Exchange Rate, pesos per US dollar 5/ 1.o 1.o 1.o 1.o 1.o 3.3
Total Extemal Debt, billion USD 6/ 7/ 125.1 141.9 145.3 146.6 140.3 134.3 Total Extemal Debt, as a share ofGDP (%) 1/ 61 42.7 47.5 51.2 51.6 52.2 131.5
Total Public Debt, billion USD 8/ 101.1 112.4 121.9 128.0 144.5 155.0 Total Public Debt, as a share ofGDP 1/ (%) 6/ 34.5 37.6 43.0 45.0 53.8 151.7
1/ Based on real GDP growth of4%. 2/ Accumulated CPI inflation in the period January-February 2003 is 1.9%. 3/ Accumulated WPI inflation in the period January-February 2003 is 0.9%. 4/ In 2002 and 2003 includes interests on an accrual basis. Includes estimated capitalization. ofinterests for AR$ 1429 bn in 2001 (0.5% of GDP), AR$27075 in 2002 (8.5% of GDP) and AR$46935 in 2003 (9.6% ofGDP) as estimated by IMF staff. 5/ End-of-period value. 6/ Estimates for 2002 include debt in arrears. 7 / Stock of extemal debt as of end 2002. Source: Ministry ofEconomy. 8 / Estimate as ofend 2002.
5 Figure 1 Economic Indicators
Industrial Production Federal Government Fiscal Accounts (Jan01-Mar03, y-0-y YOchange) (Oct01-Mar03, million AR$) 8000
6000
10 4000
2000
0
-2000 .... ,.
BBaU-, t Total Revenues -S- Tax Revenues --Pr Total Expenditures 46 Overall Balance
Peso-Dollar Exchange Rate Consumer and Wholesale Inflation (Jan01-Mar03) (Jan01-Mar03, index y-0-y YOchange) 11
80
60
1 I-- CPI Inflation -WPI inflation I
International Reserves Total Deposits in the Financial System (Jan00-Mar03, US$ billion) (Jan00-Feb03, million AR$ and US$) ,."""tl""_.." ...... "",.~""_.."..l".._ "_ll-"_"..-"".."" "" 100,000
1 1 I :o - A
60,00080'ooo ~ 5- YA/\ 0-
0 ~
-measured in ARS - - - measured in US$I
6 B. The Social Situation
17. The social impact ofthe crisis has been devastating. Using data from the official household survey and recently compiled World Bank household survey (with greater geographical coverage), this section documents the effects ofthe crisis on poverty, and labor markets (see Figure 2 and Table 2). During 2002, poverty trends worsened dramatically. The share ofpopulation considered poor grew to approximately 58 percent while the number of extreme poor nearly doubled.
Figure 2: Argentina - Evolution of Unemployment and Poverty Rates (in percent)
60 Unemployment rate
50 H Poverty (population)
40
30
20
10
0 1992-1995 1996-1999 Oct-00 May-01 Oct-01 May-02 Oct-02
Table 2. Argentina: Social Indicators 11
1992-1995 1996-1999 2000 2001 2002 Mav October Mav October Unemployment rate 11.3 14.3 14.7 16.4 18.3 21.5 17.8
Households below Poverty line 16.3 21.5 23.2 27.3 28.0 41.4 45.7 Extreme poverty line 3.7 5.7 6.4 9.53 9.4 18.0 19.5
Population below Poverty line 22.0 29.5 31.8 37.0 38.3 53.0 57.5 Extreme poverty line 5 .o 8.0 9.0 12.8 13.6 24.8 27.5
Gini coefficient 21 0.434 0.462 0.478 0.489 0.497 0.512 0.505
Source: Official Household Survey, Encuesta Permanente de Hogares for total urban areas
1/ Data were compiled during the month of October, unless otherwise stated. 2/ Using family income adjusted by adult equivalent 3/ Annual rate of growth (2002 is an estimation).
7 18. The economic crisis has had a strong negative impact on the access and use of education and health services and there is growing evidence ofthe deterioration in service delivery and key indicators ofwell-being.
19. Coverage and financing of formal health insurance has dropped significantly, following the destruction ofjobs in the formal sector. Roughly 12 percent ofindividuals with fomal health insurance either discontinued (60 percent ofthe total), or reduced their coverage. The trend has contributed to an increase in the use ofalready financially strapped public hospitals, the traditional provider for the uninsured. The crisis has forced families to cut down on health services. More than one-third ofhouseholds with children under the age of 12 reported having reduced the fkequency with which they take their children for medical checkups (roughly half of those households belong to the lowest quintile ofthe income distribution). There are concerns about the emergence ofcases ofchild malnutrition.
20. In the education sector there are no indications ofaggravated dropout and desertion rates due to the crisis. On the other hand, a large proportion ofhouseholds report that they have reduced school and learning material purchases. The most serious negative effects ofthe crisis on the education sector are linked to the fiscal provincial crisis. The lack offinancing experienced by several provinces has generated difficulties to comply with payments to their employees, including teachers. Delays in wage payments has had an impact on the continuity of classes. While experiences have differed within the country due in part to the higher or lower solvency in each state, the 2002 school year was irreparably affected in some provinces (Sm Juan, Entre Nos), very seriously affected in others (Tucumhn, Jujuy, Rio Negro), and had partial scope in a third group ofprovinces (Misiones, Formosa, Chubut). The difference among them is the number of school days lost, ranging from about a quarter to almost half ofthe school year.5
21. Many ofthe social problems have existed before in Argentina. What is different is that 2002 has made the social situation even more difficult for the majority ofthe population and the need for action more urgent. Discussions and reform proposals to correct the underlying problems have been ongoing for several years without reaching a conclusion as a result of insufficient political support and social consensus. The Government now faces a particularly difficult challenge: increasing demands for social assistance in the context offalling fiscal resources and extremely limited administrative capabilities to innovate and coordinate responses.
22. Nevertheless, recognizing the seriousness ofthe social situation, the Government has moved decisively to expand key safety net programs, including the Heads ofHousehold program, prioritizing spending on them and consolidating social programs around a smaller
While there is no updated aggregate official data that would allow to determine the extent to which there has been a deterioration in infant mortality and malnutrition, evidence of serious child malnutrition (and a failure ofexisting programs to identify those cases in time) has emerged recently in several provinces raising the concern that, if left unattended, this could develop into a graver health emergency.
The interruption of the educational process has a strong impact on students' learning processes. The abandonment ofthe "school routine", the fewer school days, the impossibility to consolidate and correct leaming, the tension in the relationship of schools with families, are all factors that seriously affect schooling attainments. The responses to these situations has led some school systems to lower academic requirements by promoting students who have not reached the minimum level for each grade/ year.
8 number ofkey initiatives. In addition, the recent creation ofthe National Coordination Council for Social Policies constitutes an important step in the direction ofimproving the effectiveness of social policies as it allows for better coordination among the various actors at the national level between different jurisdictions.
111. COUNTRY ASSISTANCE STRATEGY
23. The last Country Assistance Strategy (CAS) was presented to the Board on September 8, 2000, and was subsequently updated6. In light ofthe dramatic events at the end of2001 and their impact on economic, political, and social policy making, Bank staff have regularly briefed the Board on the latest developments and the Bank’s strategy in providing financial support and technical assistance to the country during this period oftransition.
24. The key challenge for Argentina is to get back to a comprehensive development agenda that is focused on a restoration ofsustainable growth and a major reduction ofpoverty. At the same time, there is also a recognition that comprehensive reform and its implementation will need to wait until the new administration takes office at the end ofMay 2003, after presidential elections were held on April 27, with a second round scheduled for May 18.
25. Current Bank strategy is geared to helping Argentina tackle these challenges by (i) assisting efforts focused on the longer-term development agenda and also (ii)laying the ground work for a dialogue and program with the forthcoming administration. In addition, the Bank has been pro-actively responding to urgent needs to address the social emergency situation, and to requests by the Government for technical assistance in areas ranging from financial sector, corporate restructuring, and renegotiations ofconcession contracts in infrastructure and public services.
26. The Bank’s response to the social emergency situation has included two major steps thus far, In 2002, US$270 million were re-allocated from existing projects to emergency social programs, including in the areas ofnutrition, health, and education. Second, in January 2003 the Board approved the Heads ofHousehold loan for US$600 million, which has already been made effective and is disbursing as pr~grmed.~
27. As ofmid-March, 2003, the Bank portfolio has undisbursed balances ofUS$2.1 billion, including 32 investment loans and adjustment operations. Investment operations have undisbursed balances ofabout US$1.6 billion. Within this category, the most recent portfolio review identified the potential ofmonthly disbursements ofUS$40 million, compared to US$14 million in 2002. We are currently working with the Government to expedite the implementation ofthis portfolio. To help support economic recovery, the Bank has been restructuring its adjustment and investment loans portfolio. The results ofthe joint portfolio review with the Government have clearly revealed how Bank projects and their potential disbursements could be helpfbl in addressing different aspects ofthe current crisis. It also underlined that the crisis has had a major impact on the performance ofthe portfolio, with an increasing number ofprojects
Country Assistance Strategy Progress Report, No. 22049-Ar., July 19,2001. ’ See Argentina: Jefes de Hogar (Heads of Household) Project: Project Appraisal Document; R2002-0199/1, 10/31/02.
9 with unsatisfactory ratings. In response to the need to redress this deterioration ofthe portfolio the Bank has made a series ofconcrete proposals, including appropriate levels ofbudgetary resources to accommodate the execution ofBank projects that is consistent with the overall fiscal program. Particular emphasis was laid on the Bank’s potential support ofthe Government’s emergency program that seeks to deal with the serious poverty situation in the country.
28. With regard to the current adjustment loan portfolio, a Structural Adjustment Loan, and three Provincial Reform Adjustment Loans to the provinces ofSanta FeyCordoba, and Catamarca are under implementation. The final tranche ofthe SAL disbursed in the third week ofApril 2003, and the second and third tranches ofthe Cordoba reform loan are in the process of being disbursed. The remaining tranches ofthe three provincial operations are expected to disburse during the next few months, subject to compliance with pending conditions. These loans are considered relevant in supporting the recovery ofthe national and provincial economies.
29. We estimate that new and ongoing operations could accelerate disbursements, which would help the government in addressing its large financing needs, including debt service to the World Bank. Such disbursements are subject to the incoming Government’s ability to prepare in a timely fashion new operations, and implement the agreed actions ofthe new and existing loans.
30. In addition to lending operations, the Bank has remained actively engaged with the authorities in the provision of technical assistance in areas such as the financial sector, corporate restructuring, and the renegotiation ofpublic services contracts. For example, at the request of the Argentina government, a joint Bank-IMF mission, led by the Bank, visited Argentina in February 2003, to review progress in the renegotiation ofpublic service concessions, assess the current legal and regulatory framework in which the renegotiation is being conducted, and to assess the key financial indicators ofthe concessionaires, the social impact ofchanges in tariffs, and the application ofsocial tariffs.
3 1. Beyond such technical assistance, and in anticipation ofa dialogue with the forthcoming administration, the Bank is preparing economic and sector work in a number ofareas, focusing primarily on the themes ofeconomic growth and poverty reduction. Reports currently under preparation include those on the Sources ofEconomic Growth, a Public Expenditure Review, a Health Sector strategy, and a Poverty Update. All these reports will be contributing to the preparation ofPolicy Notes, which we intend to share and discuss with the new administration upon assumption ofpower. Furthermore, this work is expected to guide the Bank’s future strategic direction in Argentina.
32. Charting the road beyond this transition period will have to be discussed with the incoming administration in the context ofpreparing a new CAS. The challenges ahead are significant, and the Bank is expected to remain actively engaged in Argentina’s stabilization and recovery phases, through ESW, provision oftechnical assistance, adjustment lending and investment operations. Key areas for reform under the new administration, in addition to the areas just mentioned, would include reforms supporting an enhanced investment climate, comprehensive debt restructuring, public sector reform both at the federal and provincial levels,
10 and social sector reform as key elements required for a sustained recovery in Argentina (See Attachment: Argentina Assistance Strategy in 2003).
Table 3 World Bank Group Lending to Argentina (In millions of U.S. dollars)
Commitments (Net of Disbursements Undisbursed Cancellations) Amount
I. IBFW Operations (as of March 31,2003)
Fully Disbursed Loans 13,512.7 13,512.7
Loans in Process of Disbursement 4,260.7 2,119.8 2,140.9
A. Investment Operations 3,157.7 1,637.8 1,519.9 Social Sector 1,185.8 519.6 666.2 Finance, Infrastructure & Natural Resources 1,464.0 709.2 754.8 Public Administration 507.9 409.0 98.9
A. Adjustment Operations 1,103.0 482.0 621.0
Total Loans 17,773.4 15,632.5 2,140.9
11. IFC Operations (as of March 31,2003)
Loans Equity Quasi-Equity Participation Held 657.2 195.7 208.1 870.8 Disbursed 646.7 138.5 208.1 870.8 Pending Commitment 60.0 0.0 0.0 90.0
111. IBRD Loan Transactions (Calendar year)
1997 1998 1999 2000 2001 2002 2003 Jan-Mar Disbursements 796.9 2030.6 1572.9 1018.8 1328.9 424.5 236.6 Debt Service Payment 634.5 725.1 997.9 1238.8 1388.3 1869.8 1120.6 Net Transfers 162.4 1305.5 575.0 -220.0 -59.5 -1445.3 -884.0
Sources: World Bank (IBRD data); and IFC (IFC data).
11 IFC
33. Early in 2002, IFC’s Management incorporated the Argentina Recovery Team, a small group ofinvestment officers, based in Buenos Aires, with strong expertise in the financial sector, privatized service companies and workouts to handle the crisis proactively from the field. Under the leadership ofthis team, IFC is working closely with all the clients to help them overcome the crisis. IFC has been asked to take a lead role in some important restructurings as chair ofthe creditors committee. As the renegotiation ofutilities contracts and reform ofthe banking sector progress, IFC expects to be actively involved through its important exposure in the banking and utilities sector to seek fair outcomes in the ensuing restructuring process. As ofend February 2003, IFC’s total disbursed loan portfolio amounts to US$S59 million and the equity exposure amounts to US$138 million.
34. IFC will also continue to focus on alleviating the credit crunch that prevents the export sector to take full advantage ofthe devaluation. While IFC has in other crisis countries traditionally sought to leverage its trade financing lines by channeling these through the financial sector, the uncertainty and in definition ofthe future ofthe Argentine financial sector has prevented similar structures to be set up for Argentina. IFC has therefore sought to provide immediate relief to some key exporters and client companies, closing a first operation in June 2002 for US$60million (consisting ofa US$30m A loan and a US$30m B loan) with Argentina’s largest local exporter ofoilseeds and its byproducts. It should be highlighted that this was the first new extemal financing for an Argentine company since the devaluation. IFC also obtained board approval in January and in February 2003 for two similar pre-export financing facilities for gross amounts ofUS$120 million, as well as for an increase ofUS$50 million for the first facility closed in June 2002. IFC will also seek other innovative forms ofproviding support to Argentine large companies exporting their services abroad such as providing performance bonds.
35. IFC will also seek to carry out few select equity investments, that may or not be combined with A&B loans, in order to provide sound, export-driven companies with the necessary capital and balance sheet strength to increase their export oriented capacity while at the same time offering IFC upside potential to compensate for the high risk ofcarrying such investments. Finally, IFC will seek to advance, in close cooperation with other multilaterals on the design and set-up ofa restructuring fund to help restore the health ofilliquid but solvent Argentine companies, considered blue chip companies before the devaluation.
36. It should be highlighted that in order to carry out the activities and operations listed above, IFC will look for strong assurances that the incoming administration will ensure that IFC’s privileges and immunities continue to be respected and that any challenge thereto that might affect its operations in Argentina will be solved promptly and satisfactorily.
MIGA
37. As ofJanuary 31St, 2003, MIGA’s gross exposure’ in Argentina stood at US$320.8 million, representing 6.32 percent ofMIGA’s gross portfolio. Net exposure stood at US$155.1
’ Gross exposure includes the risk assumed by MIGA on its own account plus the risk ceded to reinsurers.
12 million, representing 4.81 percent ofMIGA’s net portfolio. These figures compare with a gross exposure ofUS$591 million (accounting for 11.02 percent ofgross portfolio) and net exposure ofUS$208.2 million (accounting for 6.5 percent ofnet portfolio) at the end ofFY02.
38. In FY02, under Specific Claims Reserves, MIGA introduced a new account named Special Reserves, for contracts in countries that are experiencing heightened risk and for which MIGA Management believes that claim notification may be imminent. Various Argentina contracts were considered for such an account, so that at the end ofFY02 this reserve account stood at US$44.4 million, and stood at US$39.7 million at the end ofQ2 ofFY03 (including one formal claim notification mentioned below).
39. Since December 2001, MIGA has been closely monitoring all relevant legal measures and other developments in Argentina, and has maintained contact with guaranteed investors as well as with pertinent Argentine authorities. Out of24 guarantees issued before the crisis started, MIGA received notification of only one claim, with a maximum liability ofUS$5 million for an infrastructure project. The claim, based on expropriation, was filed on July 18,2002. According to MIGA’s contract ofguarantee, payment ofa claim may be made by MIGA after a waiting period (365 days in cases ofexpropriation) has elapsed, and MIGA has determined that it is liable to pay a claim. In addition, MIGA has a 60-day period to pay a claim since its determination ofliability. To date, no claims have been paid by MIGA.
40. Up until the present, four contracts ofguarantee have been cancelled. Thus, MIGA’s portfolio currently is comprised of20 projects. Some investors have communicated to MIGA that they have suffered losses as a result ofthe measures implemented by the Government of Argentina since December 2001, It is likely that MIGA may receive other claims through the course ofthis calendar year.
41. MIGA remains open for projects in Argentina and will continue to issue guarantees on a case-by-case basis. MIGA has received preliminary indications from investors that are exploring opportunities in various sectors such as mining, services and export oriented agro-industry and industry.
IV. THE GOVERNMENT’S TRANSITION PROGRAM
42. In the Letter ofDevelopment Policy, complemented by an updated Addendum (see Annex 3), the Government detailed its short-term transitional program aimed at maintaining macroeconomic stability, strengthening economic recovery and monetary policy, and dealing with the social emergency, during the upcoming political transition. The transition program seeks to build a bridge to a more comprehensive program offimdamental reforms that is expected to be developed after the elections and that is needed to tackle the deep structural problems that confront Argentina. According to the Government, the key objectives ofthe transitional program are to ensure fiscal, monetary, and banking soundness and to rebuild domestic and foreign investor confidence by maintaining equal treatment ofall parties, protecting contract rights, and defending the rule oflaw. This short-term transition program has been endorsed by the IMF. In addition, the Government designed an Emergency Social Program in response to the increasing poverty situation. The main interventions have been (i)subsidy for
13 unemployed heads ofhouseholds, (ii)food aid, and (iii)provision ofbasic goods and services in the health sector.
43. The main components ofthe transitional program are: (i)the 2003 budget, which seeks to keep the federal deficit under control; (ii)implementation ofthe federal-provincial bilateral pacts; (iii)a monetary program to maintain inflation at a low level; (iv) preparatory steps toward structural measures needed to strengthen the fiscal position over the medium term; (v) progress toward debt restructuring; (vi) a strategy to restore the health ofthe banking system; and (vii) ensuring full respect for the rights ofcreditors, restoring legal certainty, and making a start on corporate restructuring.
A. Public Finances
44. A series ofexternal and domestic factors contributed to the deterioration ofconsolidated public finances since 1998. The consolidated fiscal deficit increased from 2.0 percent ofGDP in 1998 to 6.8 percent ofGDP in 2001, before changing political leadership resorted to a default on Argentina’s internal and external obligations. While revenues, over that period leading to the crisis remained relatively constant as a share ofGDP, non-interest expenditures increased by 1.9 percent ofGDP (all in the pre-electoral period of 1999), while interest payments increased significantly by 2.8 percentage points ofGDP, as both interest spreads and indebtedness grew. Bothnational and provincial finances faced similar difficulties. While federal deficits increased from 1.3 percent to 4.4 percent ofGDP between 1998 and 2001, over the same period provincial deficits increased from 0.8 percent to 2.5 percent ofGDP.
45. Following the default and devaluation of2002, in that year the consolidated deficit grew to 10.3 percent ofGDP, but on a cash basis that deficit was limited to 2.5 percent ofGDP, due to the non-payment ofinterest. However, it was not only the sharp increase in interest obligations that led to that fiscal outcome. In 2002, there was a severe adjustment in non-interest expenditures, which fell, at the federal level, from 18.6 percent ofGDP the year before, to 17.1 percent of GDP. This adjustment, more than compensated for the decline in revenues, resulting in a federal primary surplus of0.7 percent ofGDP, and approximate balance in fiscal primary accounts. On the revenue side, following a precipitous decline in tax revenues in the first four months of2002 (the height ofthe crisis), revenues recovered on average by a nominal 52 percent in the remaining eight months ofthe year.
46. Fiscal targets for 2003 aim to a further improvement in the fiscal accounts, with the federal primary surplus expected to increase to 2.1 percent ofGDP, and provincial primary surpluses to 0.6 percent ofGDP. For the first two months of2003, primary expenditures in real terms declined by a real 22 percent fiom the same period in 2002, and a 37 percent real decline from January-February of200 1. Nevertheless, to attain fiscal sustainability, Argentina’s primary surpluses would need to increase further in the coming years, with greater effort needed to improve revenues both as a consequence ofan economic recovery, and tax reform measures.
14 Table 4: Federal Government Fiscal performance (as share of GDP)
1999 2000 2001 2002 2003 (estimated) (targeted) Revenues 19.4 19.6 18.7 17.8 15.7 Non-interest Expenditures 19 18.6 18.6 17.1 13.6 Primary Balance 0.4 0.9 0.1 0.7 2.1 Interest (obligations) 2.9 3.4 5 10.6 12.0 Overall Balance -2.5 -2.4 -4.4 -10.2 -9.9 Interest Capitalization 0.5 8.5 9.6 Overall Cash Balance -2.5 -2.4 -3.9 -1.6 -0.4
Source: IMF.
13. Provincial Finances
47. The deterioration ofprovincial finances over the recent years undermined the country’s fiscal sustainability. Furthermore, the lack offinancing options since mid-200 1 led the provinces to issue quasi-monies (addressed below). As part ofthe overall effort to rebuild the bases for fiscal sustainability, during the remainder ofthe current government administration, efforts will be focused on deficit reduction ofthe consolidated fiscal accounts, including those ofthe provincial governments. These efforts at the provincial level are being implemented via bilateral fiscal agreements between the Federal government and the provinces, called “Orderly Financing Programs” (PFOs).
Table 5: Provincial Fiscal Performance ASYo of GDP 2001 2002 2003 (actual) (estimated) (targeted)
Revenues 11.2 10.5 10.5 Primary Expenditures 13.5 10.6 9.9 Primary Balance -2.4 -0.1 0.6 Overall Balance -2.5 -0.6 -0.3
Source: Ministry of Economy, Argentina; IMF
C. The Orderly Financing Program (PFO)
48. The primary objectives ofthe PFOs is to secure a consistent improvement in fiscal and financial performance in the provinces, and eschew the need to resort to money printing. For
15 that purpose, these orderly financing agreements commit the Federal Government to finance provincial deficits (on a cash basis), amortizations, and in exceptional cases the payment of arrears. In turn, the provinces commit on specific targets for the improvement in their fiscal performance, non-recurrence to new indebtedness, and the nom-issue ofquasi-monies. Additionally, provinces are subject to information reporting requirements, and regular monitoring by federal officials. Financing to the provinces would be provided at interest rates that range between a real 2-4 percent (depending on the size ofthe deficit), and will be amortized in 3 years with one year ofgrace.
49. The PFOs incorporate penalties for non-compliance oftheir conditions. In case ofnon- compliance with quarterly fiscal targets, leading to the issue ofquasi-monies, federal financing to that province is suspended, and additionally coparticipated funds are withheld to the amount ofquasi-monies issued. Ifthe province issues new debt, federal financing is again suspended, until the province reaches the agreed fiscal deficit levels. Should the province fail to provide required financial information on a timely basis, federal financing is suspended, until such information is provided. Orderly financing agreements require approval by local legislature.
50. In 2002, the PFO agreements included deficit reduction targets that ranged from forty to sixty percent of the 2001 deficits. In 2002, 17 provinces signed PFO agreements, accounting for the totality ofthe 2001 deficit (the remainder provinces did not require financing). Actual provincial fiscal performance in 2002 was better than anticipated, with provinces broadly achieving primary balance (deficit of 129 million pesos), compared to a projected primary deficit of 0.5 percent ofGDP. The reduction in provincial consolidated deficit in 2002 amounted to 72 percent ofthe 2001’s deficit, compared to the targeted decline of60.5 percent. The improvement in primary fiscal performance was mainly attributable to three factors, each ofabout equal importance - an increase in provincial own tax revenues (reflecting the impact ofinflation), an increase in royalties from oil and hydroelectric production (reflecting the impact ofdevaluation), and a decline in capital expenditures. In addition, the provinces benefited from lower interest costs as a result ofthe Federal government restructuring most oftheir debts with commercial banks. Taking interest expenses into account, the consolidated overall provincial deficit declined from 2.4 to 0.6 percent ofGDP.
5 1. The Federal Government is well advanced in negotiations with provinces establishing new performance targets and bilateral agreements for 2003. The agreements would be similar in structure to the 2002 agreements, but the overarching fiscal objective for 2003 to reduce the overall deficit to about 1.1 billion pesos, by generating a primary surplus of2.1 billion pesos. AS of April 11,2003, eleven provinces signed such bilateral agreements, accounting for 95 percent oflast year’s deficit ofthe provinces with deficit (110 percent of2002 consolidated fiscal deficit). These provinces are: Buenos Aires, Cordoba, Chaco, Formosa, Jujuy, Misiones, San Juan, Tucuman, Rio Negro, Mendoza, and Entre Rios, ofwhich the first seven have already ratified these agreements in the local legislatures. Preliminary fiscal and financial results for 2002, and targets for 2003 are summarized in the following tables. On the basis ofthe new agreements, the eleven provinces will cut their overall deficits for 2003 by an additional 5 1 percent, principally by eliminating their primary deficits (surplus of5 10 million pesos).
16 Table 6 Provincial Finances AR$ million, accrual basis
2001 zoo2 2003 %change (03/02) Primary Overall Total Primary Primary Overall Total Primary Primary Overall Total Primary Balance Balance Revenues Expenditures Balance Balance Revenues Expenditure! Balance Balance Revenues Expenditures
Provinces with PFOs in 2003
Buenos Aires -2475 -3059 8752 9600 -849 -1294 10046 10289 -243 -801 14.8 7.2 Chaco -94 -231 912 927 -15 -65 1049 1016 33 -62 15.0 9.6 Cordoba -499 -702 2322 2523 -201 -317 3074 2835 240 27 32.4 12.3 Entre Rios -133 -278 1014 1138 -123 -167 1327 1321 6 -75 30.8 16.1 Formosa -1 -158 570 580 -10 -52 678 62 1 57 -26 18.8 7.0 Jujuy -61 -176 585 612 -27 -63 618 615 3 -60 5.8 0.6 Misiones -14 -127 746 734 13 -46 884 836 48 -40 18.4 13.9 Mendoza -93 -226 1381 1278 103 -18 1713 1553 160 -31 24.1 21.5 Rio Negro 9 -108 689 634 56 -5 839 752 87 1 21.7 18.6 San Juan -81 -157 576 663 -87 -132 723 653 70 -5 25.6 -1.5 Tucuman -72 -182 1019 1062 -43 -1 19 1151 1103 48 -45 12.9 3.9
Total with PFOs -3513 -5404 18567 19751 -1184 -2279 22103 21593 510 -1117 19.0 9.3
Provinces and Capital Federal without PFOs
Capital Federal -178 -247 2893 2953 -59 -110 Catamarca 0 -62 486 475 12 -4 Corrientes -2 -64 666 633 34 -11 Chubut 37 -19 855 664 191 153 La Pampa -124 -146 631 524 107 76 La Rioja -33 -61 593 550 43 29 Neuquen -22 -109 1272 1135 137 114 Rio Negro 9 -108 689 646 43 -18 Salta 221 -77 782 699 83 52 San Luis -72 -80 631 607 24 19 Santa Cruz -56 -72 817 762 55 39 Santa Fe -188 -248 2656 2538 118 20 Santiago del Estero -9 -34 891 762 130 113 Tierra del Fuego -5 -24 434 400 34 24
TotalwithoutPFOs -421 -1350 14298 13347 952 497
Total Provinces -3934 -6754 32865 33097 -232 -1781 39333 37235 2098 -1059 19.7 12.5 SharetoGDP(%: -1.5 -2.5 10.5 10.6 -0.1 -0.6 10.5 9.9 0.6 -0.3 -0.1 -6.1
1/ 2003 estimate assumes real GDP growth of4% and an increase in GDP deflator of 15%. m:Ministry of Economy, Argentina
52. From its 2001 peak ofan overall deficit of2.5 percent ofGDP, provincial deficits in 2003 are projected to decline to 0.3 percent ofGDP. Financing to the Federal government for its provincial deficit financing obligations under the PFO would be provided by IFIs, as part ofa broader financing program agreed with the MF.
Assessment
53. For the period of2002 and 2003, the PFO agreements have been instmental in putting order in provincial finances. These programs have eliminated aggregate provincial deficits, and for those individual provinces with residual but declining deficits, the agreements have provided federal financing, obviating the need for additional issues ofquasi-monies, at a time where no
17 alternative financing sources are were available to the provinces. Federal financing to the provinces has been financed by multilaterals, to mitigate the risks ofinflationary financing. It is expected that these PFO agreements will be followed by a more fundamental reform in the federal-provincial fiscal relations, called coparticipacion. A new coparticipacion agreement will normalize on a permanent basis fiscal relations with the provinces, and will be part ofa comprehensive reform program to be reached with the new administration following the elections and change in government.
D. Addressing the Quasi-Monies Challenge
54. Since mid-2001, 12 out ofthe 24 provinces and the Federal government have resorted to the issue ofquasi-monies. Provinces used such monies to pay wages, pensions and other expenditures, and the Federal government to settle minimum guaranteed revenue sharing obligations with the provinces. Quasi-monies are used as a means ofexchange in various degrees according to the province ofissue. Federally issued quasi-monies and those from the province ofBuenos Aires are accepted for the settlement offederal tax obligations, and other financial transactions, and hence have greater acceptance as a means ofexchange with their market value retaining approximately their nominal value. Those ofother provinces are accepted as payment ofprovincial tax liabilities, and hence their use as means ofexchange are limited to the province ofissue. Their limited use, and amounts issued by respective provinces, have contributed to the trading ofsome ofthose quasi-monies at significant discounts. For example, quasi-monies in the province ofCorrientes traded at end-February at 5 1 percent offace value, and those ofEntre Rios at 57 percent offace value (see Table 7).
55. While emergency conditions led to the creation ofquasi-monies, their drawbacks are broadly understood, and consequently, with some normalcy returning in fiscal affairs, the authorities have expressed an interest in eliminating them. Among the drawbacks created by the issue ofquasi-monies are limits to the ability ofthe Central Bank to conduct monetary policy. Quasi-monies also create difficulties in fiscal management at all levels ofgovernment. Additionally, quasi-monies contribute to the growth ofthe informal economy and tax evasion, and affect negatively inter-provincial trade. Finally, quasi-monies may unduly penalize low income individuals who receive salaries and pensions in currencies that trade at a discount. While initially quasi monies were issued to help sustain levels ofeconomic activity, currently, with the gradual normalization of conditions, quasi-monies are perceived as detrimentally affecting the economy.
56. At the end of2002, Arg$7.7 billion have been issued in the form ofquasi-monies, accounting for a third ofcurrency in circulation (including quasi-monies in a broader definition ofcurrency in circulation). While special banking accounts can be opened with quasi-monies, banks are prohibited from lending in such currencies, thus limiting their monetary impact.
18 Table 7: Quasi-Monies in Circulation: December 2002 in Arg%million Name ofbond Issued Market value-, % (3/2/03) Total quasi-monies 7,710.79
Federal Government LECOP 3,270 100
Provincial 444 1 1, Buenos Aires PATACON 2754 98 2. Catamarca Ley 4748 & Ley 5066 40 100 3. Chaco QUEBRACHO 100 80 4. Cordoba LECOR 656 91 5. Corrientes CECACOR 250 51 6. Entre Rios FEDERAL, 260 57 7. Formosa BOCANFOR 60 87 8. Mendoza PETROM 120 95 9. La Rioja Letra de Cancelacih de Deudas 27 100 10. Tucumbn BOCADE 173 88
Source: Ministry of Economy, Argentina
The Program of Monetary Unification (the redemption of quasi-monies program)
57. The Government has announced a Program ofMonetary Unification, through the elimination ofall quasi-monies. The intent ofthis program is to redeem the total amount of quasi-monies circulating in the country, and forbid the fktwe issues ofquasi-monies, in order to secure that the Central Bank will have the means ofcontrolling more effectively the money supply, and preserving the value ofthe currency, which is the primary mission ofthe Central Bank, according to its Charter (Carta Organica). Additionally, the elimination ofquasi monies would have positive distributional consequences, as low income pensioners and public employees are the main primary recipients ofquasi monies trading at a discount.
58. The Federal Government has issued an emergency decree (carrying the force ofLaw) on March 28,2003 (Decree No 743) creating the Monetary Unification Program, authorizing the redemption ofquasi-monies often provinces: Buenos Aires, Catamarca, Cordoba, Corrientes, Chaco, Entre %os, Formosa, LaRioja, Mendoza, and Tucuman. These provinces have approximately 4.5 billion quasi-monies in circulation. Subsequently, on April 11 , the Federal Government published the regulatory note on this decree (Resolution 266), clarifying procedural steps for its implementation. As ofApril 29,2003, according to the Government, the provinces of Cordoba, Santa Feyand Formosa had formally adhered to the redemption program. Other provinces (including Tucuman and Chaco) were in the process ofobtaining the necessary legal authorization for adhering to the program as well.
19 59. Redemption Mechanism for provincial quasi-monies (under Decree 743 and Resolution 266) The exchange ofpesos for provincial quasi-currencies will generate a debt to the provinces with the Federal Government, with the latter extending pesos in exchange for a loan to the provinces. In tum, the Federal Government will borrow the pesos from the Central Bank to execute this operation, in exchange for new bonds to be issued for that purpose (peso BODEN 2007, and dollar BODEN 2012). According to the issued decree, the Central Bank will receive such bonds at market value, as prescribed in the Central Bank’s charter, in order to preserve the net worth ofthat institution. According to the issued decree, the cost ofthat exchange/program will be bome by the provinces exclusively and in its entirety. Provinces will assume the servicing and amortization of their assumed loan from the Federal Government for the same amount and in the same terms the Federal Government issued BODENs to the Central Bank.
60. For holders ofquasi-monies not participating in the exchange, they will be issued an obligatory bullet provincial bond maturing in 2006 which would not pay interest and cannot be used as a means ofexchange (Le. cancel provincial taxes or become another form ofquasi- monies). The inferior quality ofthis bond is a key incentive for quasi-money holders to participate in the exchange. The issue and servicing ofthe BODENs to the Central Bank, new loans to the provinces, and the 2006 residual bond, will affect the finances ofthe Federal and provincial governments, and authorities will need to make appropriate budgetary allocations.
6 1. The exchange value ofquasi-monies will be established in the marketplace, through an auction mechanism to be conducted by the Central Bank but managed by and under the full responsibility ofthe Ministry ofEconomy. This mechanism - is detailed in Resolution 266 issued by the Ministry ofEconomy ) The auction for all quasi monies in a province will take place the same date, and each provincial bond will carry its own price ofexchange.
62. Before the auction, a reference price will be set for these currencies, i.e. that ofthe end- January 2003 market price &e. prior to the announcement ofthis program). While a reference price will determine the ceiling price for the auction, it will not be used as the exchange price, since it is not a price established in an organized exchange (such as a stock exchange), and therefore the authorities believe that a market price needs to be established through an auction. With an initial ceiling in the value ofquasi-monies (the reference price), the authorities will restrict the quantity of quasi-monies that can be redeemed through the auction to 60 percent of the outstanding stock of quasi-monies - this is expected to prevent the price from reaching the reference price/ceiling. Once the price and quantity offers are received, the authorities will establish the cut-off price, taking into account market indicators and the fiscal situation ofthe province. All offers below the cutoff price - as long as total offers ofeach quasi-money don’t exceed 60 percent of the outstanding stock ofthe respective quasi-money - will be accepted. Offers that were rejected can still be exchanged for pesos at a price set to be 5 percent below the cutoff price ofthe auction. Public institutions and minority holders will be allowed to redeem the quasi-monies at the cutoff price ofthe auction. Only holders ofpublic sector salaries and pensions paid in January, 2003 will be able to exchange their quasi-money holdings at par.
63. To sum up, the redemption ofquasi-monies will consist ofthe following tranches: a competitive tranche where bidders (through financial agents) offer both quantity and price, for bonds accounting for 60 percent ofthe outstanding stock ofquasi-monies;
20 i. a non-competitive tranche, where the redemption price will be set at 5 percent lower than the price established in the first auction; .. 11. a tranche established for the federal, provincial, and municipal authorities holding quasi-monies, where the redemption price will be equal to that established in the ... auction; 111. a tranche for minority holders who did not participate in the auction, but could exchange up to 500 pesos at the price established in the auction; and iv. a tranche for small holders who received public sector salaries and pensions, who will be able to exchange their holdings ofquasi-monies at nominal value (100 percent of face value). The amounts in this last tranche exchanged at nominal value, will have to be deposited in special quasi-monies accounts, and will be limited to the last monthly payment received by these individuals in such bonds.
64. Procedural steps in the implementation of this program:
Decree 743 establishing the Program ofMonetary Unification has been issued on March 28,2003.
Regulatory note (Resolution 266)of this decree has been published on April 11 , 2003.
To participate in the program, provinces will have up to ten working days (that is, to April 29th ) following the issue ofthe regulatory note to issue a provincial norm, ratified by local legislatures (ifrequired by the province) to adhere to the federal decree in all its requirements. The norm will also provide all relevant information for this exchange (from outstanding amounts ofquasi-monies, special accounts available etc.), approve the guarantee ofthe loan to be extended by the Federal Government by coparticipated funds, and commit to the issue ofa provincial bond, maturing in 2006, for the withdrawal ofremaining quasi-monies that may not be exchanged through the auction process.
Subsequently, the Federal Government will have to issue a presidential decree accepting the provincial agreement, establish the maximum amount to be exchanged per province, and authorizing the Ministry ofEconomy to adjust its budgetary allocations to accommodate this transaction.
The auction will also have to take place within the following ten working days after the provincial norm was send for approval by the Federal Government.
the Ministry ofEconomy subsequently exchanges its bonds with pesos with the Central Bank, signs agreements between the Federal government and the participating provinces for the repayment ofloans (with coparticipacion guarantees, and establishes a special procedure for the exchange ofquasi-monies at nominal value for public employees and pensioners.
21 Table 8 : Provincial Quasi-Monies and PFO in million pesos Provinces with Stock Provinces which Provinces that Signed Ratified quasi-monies qualify for the Agreed to PFOs PFOs redemption of Participate (as of April 10) (as of April 10) auasi-monies
Buenos Aires 2,754 * + + Catamarca 40 * Cordoba 656 * * + + Corrientes 250 * Chaco 100 * + + Entre Rios 260 * * + Formosa 60 * * + + La Rioja 27 * Mendoza 120 * + Tucumhn 173 * * + Jujuy + + Misiones + + Rio Negro + San Juan + +
Total 4,441
Notes: --San Juan, Misiones, and Rio Negro have not issued quasi-monies; --San Luis issued 60 million, but backed by a basket of foreign currencies-not considered for exchange.
65. On the first week ofApril 2003, the Federal Government submitted to the National Congress draft legislation expanding the coverage of the Program for Monetary Unification to its own quasi-monies instrument, LECOPs, thus completing the coverage of this program to all quasi-monies. The same legislation proposed the easing of financing terms to the provinces, by changing the Central Bank’s Charter, in order to allow, once and for all, its acceptance of BODENs at nominal value, thus simultaneously reducing the cost to the provinces, which will be servicing their loans to the Government at the cost ofcarrying BODENs. So far the Law has only received a general approval by Congress but with the specifics not yet approved it is unlikely that the required approval would occur over the coming weeks.
66. In view ofthe likelihood that the Law extending the exchange program to the LECOPs will be delayed in Congress, the Government issued a decree - Decreto de Necesidad y Urgencia No. 957/03(with virtually the same legal status as a law) -which allows the Government to rescue all the LECOPs at par without need to go through an auction process. The LECOPs will be rescued through the tax agency, AFIP, as it is estimated that every month about Arg$500-600 million ofLECOPS are used to pay national taxes. Since about Arg$2,800 million from a total outstanding stock of Arg$3,300 million ofLECOPs were issued by the Federal Government for direct expenditures, and the remainder were provided in the form of a loan to provinces, the decree authorizes the rescue ofthe direct issue. As with the provincial quasi-
22 monies, the rescue will be made with pesos which will be obtained from the Central Bank in exchange for BODENs at their market price. It is estimated that in about 6 months the entire stock ofLECOPs issued by the Federal Government may be rescued through AFIP.
67. Guaranteeing thefuture non-issue of quasi-monies. This is likely one ofthe most important aspects ofthis operation. To secure that outcome, the authorities are seeking bilateral agreements which commit provinces not to issue quasi monies. In case ofnon-compliance, under the proposed agreement, the Federal Government will impose sanctions by withholding the equivalent amount ofissue from coparticipacion transfers. Additionally, provinces participating in this exchange will have also signed PFO agreements (described above), securing a fiscal performance that obviates the need for fiscal deficits which lack financing (see Table 8).
Assessment
68. The benefits ofthe proposed monetary unification are well recognized, particularly if they are secured with guarantees that no new quasi-monies will be issued in the hture. The benefits ofmonetary unification include the strengthening ofthe ability ofthe Central Bank. to conduct monetary policy. It would also eliminate the deleterious impact on commerce between provinces (since quasi-currencies are not exchanged among provinces), and reduce newly created incentives for economic activity to be conducted in the informal sector. The enhancement of formal activities would improve fiscal performance at the provincial at the provincial and Federal levels, impacting positively the overall level ofeconomic activity. The varying discount at which some quasi-monies trade impairs the attribute ofmoney as a store ofvalue, and thereby increase transaction costs and uncertainty. The elimination ofquasi-monies would have a beneficial distributional impact, since, in cases where they were trading at a discount, it was usually low income pensioners and public employees who received payment in such debased currencies. Finally, since some quasi-monies amortize over the short term, their rescue and replacement by a bond oflengthier maturity eliminates a substantial and potentially costly debt refinancing risk.
69. The redemption of quasi-monies program, however, has its costs. Debt implications of the transaction assuming BODENs are valued at market prices. The Federal Government will be issuing debt, in the form ofBODENs at market prices to purchase pesos from the Central Bank. Part ofit is in recognition ofexisting federal debt (about 2.8 billion ofLECOPs), and the remainder would be debt issued to rescue the quasi-monies issued by the provinces (about 4.4 billion excluding Treasury holdings). Since the BODENs will be valued at market prices, and since the average discount on BODENs is higher than the average discount ofquasi-monies, there would be an increase in overall public indebtedness estimated at about 3 percent ofGDP (assuming only the BODEN 2012 is accepted, that the market value ofBODEN is 54 percent, and the average discount ofquasi monies is 5 per~ent)~.Should the proposed Law authorizing
For example, in the case of LECOPs, since they will be rescued at par, if the BODENs issued carry an average 50 percent discount, a total of 6.6 billion pesos of BODENs will have to be issued to rescue 3.3 billion pesos of outstanding LECOPs. Assuming that quasi-monies are trading on average at 95 percent of face value, and provinces accept only dollar denominated BODEN 2012, the equivalent debt to be issued would be approximately 13.5 billion
23 the recognition ofBODEN by the Central Bank at nominal values, be approved, gross federal debt will increase only by the amount ofpesos exchanged for quasi-monies (around 1.6 percent ofGDP since in this case only peso BODENs 2011 will be issued). In addition, however, there might be additional liabilities to the Federal Government, as the case ofthe Cordoba supplementary agreement (Convenio Compkmentario) to the general agreement for the redemption ofquasi-monies, attests. That agreement indicates that should the Law mentioned above is not approved, the Federal Government could be extending terms to Cordoba for the repayment ofits loan, with the Federal Government thus sharing the costs ofthe redemption program with the province. Should such agreements extend to other provinces, the cost sharing ofthis program with the Federal Government would increase.
70. Regarding interest service, for the Federal Government the net servicing ofdebt corresponding to the redemption ofprovincial quasi-monies, would be zero, since debt servicing ofequivalent BODENs to the Central Bank should be matched, under the terms ofthe issued decree, by the servicing ofthe loans issued to the provinces (loans to the provinces carry the same terms as BODENs). However, the Federal Government will need to service BODENs for the equivalent of2.8 billion ofits own LECOPs ( while BODENs carry interest coupons, the LECOPs do not).
71. Regarding the finances ofthe Central Bank, with the placement ofBODENs at market prices in exchange for the issue ofpesos, the Central Bank would not be incurring any costs with this transaction, and could benefit from the seignorage from the new issue ofpesos created. Its net worth can even improve if the market price ofBODENs increases (or decline, otherwise). In case the Law authorizing the Central Bank’s acceptance ofBODEN at face value is passed, the Central Bank will incur as an accounting cost the difference ofthe market value ofBODEN issued and the amount ofpesos issued. In such a case, based on standard accounting practices, the net worth ofthe Central bank could be impacted negatively, even if the Law authorizes the Central Bank to recognize BODENs at face value. The Central Bank estimates that any such once and for all loss would be more than fully compensated by extraordinary profits generated in 2002 from the revaluation oftheir international reserves (following the peso’s devaluation). On the other hand, the redemption ofquasi-monies would enable them to regain full control of monetary policy.
72. For the provinces, financial consequences could be significant. Given that BODENs are trading at deep discounts (in mid-April the dollar BODEN2012 was 54 percent offace value, and the peso BODEN 2007 was 80 percent offace value), and under the scenario ofthe Central Bank receiving BODEN at market value, the nominal cost to provinces could be significant, with their new debt in BODEN exceeding the nominal value ofissued quasi-monies (except in the few provinces in which the discount on their quasi-monies may exceed the discount ofthe BODEN chosen). In addition, since the quasi-monies bear no interest or carry a very low interest rate, the exchange ofBODENs for quasi-monies will imply a sizable increase in interest payments (there is an interest effect and a higher-principal effect). One way ofvaluing the impact ofservicing the new obligations by the provinces, is in relation to their share of coparticipated hnds received from the federal authorities, since the servicing ofthe new debt pesos. Given that LECOPs are already computed as public debt (whereas the other quasi-monies are not) the overall increase in indebtedness would be around 10 billion pesos, or 2.7 percent of GDP.
24 will be guaranteed by the receipt ofcoparticipated hds. According to official estimates, the provinces ofBuenos Aires and Cordoba will need to devote close to a third and a quarter ofthose revenues respectively over the next few years for the servicing ofthese new obligations. Other provinces will need to devote lesser but significant proportions oftheir coparticipated revenues for this operation (Corrientes about 17 percent, Entre Rios between 14 and 15 percent, and others by declining shares). Given that coparticipated funds account the majority offiscal revenues for most provinces, such costs could become a determining factor in their decision to participate.
73. The monetary and inflationary consequences ofthe proposed redemption are oflimited significance (a) because quasi monies are already part ofthe monetary base - the so-called expanded monetary base as agreed in the IMF program - , and the redemption ofquasi monies are contemplated to be done at market rates; and (b) under current market conditions -with virtually no new lending in aggregate - the multiplier effect which otherwise may be created from switching from quasi-monies which cannot be onlend in the banking system, to pesos, which can, is insignificant. Note that (a) implies in fact that some contraction ofthe expanded monetary base will occur since the discount implies that a smaller amount ofpesos will replace the nominal value ofquasi-monies - this is estimated at around $ 300 million assuming an average 7 percent discount on quasi-monies (excluding the LECOPS). It may be argued however that quasi-monies rescued at par may have some expansionary impact to the extent that they are held involuntarily - as they can be rescued at par there could be an excess supply ofbase money. While parity may suggest that quasi-monies are not held involuntarily, the fact that some quasi- monies bear an interest coupon (like the Patacones) may indicate that true demand for money may be less than demand for the same nominal amount ofquasi-monies.
74. Participation. The main risk is that, under the costs implicit in current decrees, provinces may be reluctant to subscribe to the exchange; so far one province (representing 15 percent of provincial quasi-monies) has firmly committed to the exchange. While the potential economic benefits for the provinces are large, so can be the financial costs. The enactment ofthe decree No. 957/03 authorizing the rescue ofthe LECOPs, however, would allow the redemption of45 percent ofquasi-monies in circulation. Ifthe Law authorizing the Central Bank to take BODENs at face value is approved, the incentives for the provinces to participate will be hrther enhanced.
E. Social Sectors
75. In the social area, the Government designed an Emergency Program to provide a response to greater poverty, the increasing demands for health services, and higher unemployment and under-employment levels. As a result, spending by the national Government on social assistance (including both cash and in-kind programs targeted to the poor) and health programs (e.g. immunizations, matemal and child health-care and AIDS drugs) doubled in real terms from Arg$l.3 billion pesos in 2001 and to Arg$2.7 billion pesos in 2002." The approved budget for 2003 includes Arg$2.9 billion for this component ofspending (all numbers in 2001 constant pesos). In terms ofa share ofthe national budget, social assistance and priority
loSocial assistance expenditure includes employment programs, education scholarshps, non-contributory pensions, the Ingreso de Desarrollo Humano program, and all feeding programs. Health emergency expenditure includes programs on HIV/AIDS, immunizations, tuberculosis, dengue and epidemiological surveillance programs, maternal and child health care, Remediar program and PROFE.
25 programs rose from 2.7 percent in 2000 to 9.1 percent in 2002 and is projected to reach 10.0 percent in 2003.
76. This spending pattern reverses a pattem observed in previous crises in Argentina when social spending was not protected from cuts. Indeed, there was sizable co-movement, with indications that (if anything) social spending was more volatile than other types ofspending. By contrast, non-social spending was better protected. There was actually a fall in the share of social spending during fiscal contractions. Both social assistance and work fare programs had a high elasticity to a fall in total spending. During this period targeted social spending was more vulnerable to fiscal contraction. So, the evidence is that in the past the poor were not protected from fiscal contraction. This changed in the period 2002-3, during the sharp economic downturn that accompanied the abandonment ofthe convertibility plan in early January 2002. This was a clear demonstration ofthe high priority the Government ofArgentina gave to addressing a sharply deteriorating social situation, seeking to mitigate the immediate social costs ofthe crisis but also to minimize the potential for persistent or irreversible effects.
77. The main reason for the increase in national spending was the Government’s decision to focus on expanding financial support to families in danger ofeconomic deprivation. Through the creation ofthe Jefes de Hogar Program, the Government ofArgentina launched a large and ambitious safety net program very quickly and in order to do that, established budget priorities. Unlike the previous workfare program which rationed participation because ofinsufficient funding, all those eligible (unemployed adult in households containing minors under 18 years of age, not receiving a pension, unemployment insurance or other significant cash transfer) had guaranteed access. The Program provides a monthly stipend to those meeting the eligibility criteria of 150 pesos (currently equivalent to roughly US$40) in return for participation in mainly workfare activities, but also training, completion ofbasic education and temporary private sector employment.
78. The program started operations in May 2002 approximately a month after being announced. The initial months ofoperation were particularly complex. There were serious difficulties in terms ofregistration ofbeneficiaries, controlling eligibility criteria and establishing a pipeline ofprojects and activities in which beneficiaries could participate. The latter part of 2002 saw a gradual improvement in the operation ofthe program in all these dimensions. Currently approximately 1.9 million individuals benefit from the program.
79. The Government also increased financing for scholarships for needy secondary school students and for a conditional transfer program targeted to poor families with numerous children, particularly female-headed households for whom workfare may not be suitable. Under the latter more than 100,000 poor households were reached in 2002 and 500,000 will be reached during 2003. Spending on feeding programs also rose. In 2002, the Government established a new feeding program (Programa de Emergencia Alimentaria - Emergency Feeding Program) which has functioned as a block grant to provincial governments with flexible policy guidelines. Considering the dire fiscal situation ofmost provinces and the consequent reduction in funding ofmost other feeding programs (i.e. those run by schools and community organizations), the allocation ofnational resources oriented to maintaining service levels is a positive step in the emergency. The Government also expanded spending on feeding programs operated in schools and through community-based organizations. Congress has recently approved a Law on
26 Nutrition and Feeding that will provide a stronger and clearer framework under which feeding programs operate.
80. The delivery ofsocial assistance programs has been characterized in Argentina by their fragmentation and lack ofcoordination. To address these problems, through Decree 357/2002, the Government established the National Council for the Coordination ofSocial Policies. The Council plays a key role in coordinating actions from all Ministries and Agencies involved in social programs at the national level. It has also concentrated some key support fictions (e.g. monitoring and evaluation ofsocial programs, overseeing the registry ofbeneficiaries ofsocial programs) previously dispersed under different jurisdictions
81. Health. During the end of2001 and the beginning of2002, priority programs such as immunizations, tuberculosis (TB), maternal and child health (MCH), and HIV-AIDS, were seriously hampered by the combination ofpolitical crisis, fiscal constraints at the national and provincial levels, price instability (with significant increases in imported inputs) and delays in the payment and provision ofgoods. For example, stocks ofanti-TB medications in many provinces fell to zero for several months. The country was unable to provide fortified milk, a key element ofits child health program. While antiretroviral therapy provided through the national program to its 17,000 patients was maintained, the MOH was unable to respond to the increasing demand.
82. The Government initiated a series of emergency acquisitions (with the necessary increase in budgetary allocations) as a result ofwhich for example, 20.000.000 doses ofvaccines were distributed, increasing immunization coverage to 87 percent.
83. The national Government has continued reversing this situation during the first trimester of2003. The approved national budget guarantees enough resources for the effective functioning ofthe priority public health programs, including immunizations, HIV-AIDS, control and prevention ofpriority infectious diseases (TB, chagas and others) as well as infant and maternal health, which has important and very positive gender implications. Vaccines for the immunization program have been procured and a national vaccination campaign, to take place in April, should bring coverage back to levels above 95 percent. Antiretroviral therapies have been secured for roughly 20,000 HIV positive patients, maintaining the level ofservice provision prior to the crisis; laboratory inputs for screening pregnant women at the public hospital network are in place. Stocks ofTB medications have been ensured and the percentage ofpatients treated with DOTS is increasing. Ongoing efforts are in place to properly anticipate and address the needs for 2004.
84, In addition, during 2002, the Government took several additional measures to address the impact ofthe economic crisis on the health system, seeking to guarantee access to basic health services for all. These efforts involved:
0 A revision ofthe mandatory health benefits package (Programa Medico Obligatorio, PMO), to define better those health services guaranteed to all during the crisis. Roughly, total costs ofthe PMO were cut by 20 percent, due to the elimination ofclose to two dozen medical interventions and the definition of protocols for more than hundred others.
27 0 Measures to increase access to pharmaceuticals, specially for lower income families, including through the support ofthe use ofgeneric prescriptions and funding essential prescriptions in the public health services network.
0 Protection of funds available for reimbursing care for high cost/low incidence events in the National Health Insurance System by elimination all institutional financial subsidies.
Table 9 Social Emergency Program
2001 2002 2003 Indicator (Preliminary) (T arget) accines Total doses distributed (millions) 17.5 21.2 24 imunization Coverage (less than one year) YO % Ya BCG 98 100 100 SABIN (Poliomelitis) 85 92 95 Fourfold (Cuadruple) 84 92 95 Double Viral 89 94 95 Hepatitis B N/a 70 95 IV I AIDS Number of persons attended 10,000 17,000 20,707 :aternal Child Care Kg of fortified milk distributed (in illions) 74 Number of kids receiving fortified milk eovision of Basic Drugs Number of sets (botiquines) distributed 8,195 141,320 Source: Ministry of Health, Argentina
85. Education. The current economic crisis has put the education system under stress. The challenge faced by Argentina is to continue to implement the educational reforms in the context of deteriorating social conditions and limited fiscal resources. One aspect ofthe Government of Argentina’s response is to expand some critical compensatory programs to limit the negative consequences on education achievements of falling family incomes. The expansion of the existing scholarship program for poor secondary students (from 110,443 to 350,000 students), the distribution of school materials to poor schools (covering about 50 percent ofthe students in public schools), as well as the expansion of the program to upgrade facilities in poor localities constitute the key responses in this area. School feeding programs have been expanded in order to encourage attendance and are now covering 1,200,000 additional children throughout the country.
86. As the 2003 school year starts, a key challenge the education sector faces is the accumulation ofteacher salaries arrears and the consequent risk that strikes and work stoppages will result in many school days lost. The Government is addressing this challenge in a twofold
28 manner. First, some provinces that lost school days due to strikes in 2002 either started the 2003 school year earlier (San Juan) or established special efforts to enhance recuperate the losses during the normal school year (Jujuy and Rio Negro). Secondly, the Government is promoting the reduction ofsalary arrears as part ofthe fiscal regularization plans agreed with provinces.
V. THE PROPOSED LOAN
A. Objectives of the propose loan
87. The proposed structural adjustment loan would support the country in (i)taking incremental steps towards the reestablishment ofa sound basis for growth and development, and (ii)strengthening efforts to protect social programs, thereby helping to mitigate the adverse effects ofthe economic crisis on the poor in Argentina. The proposed operation is part ofa concerted effort by multilateral institutions to help Argentina during the transition period and lay the groundwork for a more comprehensive reform program to be developed and implemented with the new administration scheduled to take office at the end ofMay 2003.
B. Description of Financial Assistance
88. After its arrears clearance towards the Bank and the IDB, the Government has comitted itself not to accumulate new arrears towards the multilateral creditors during the transition program period, lasting through August 2003. World Bank disbursements are expected to be the result ofGovernment action to (i)implement the existing investment and adjustment operations and (ii)to develop new lending operations. The proposed loan amount ofUS$500 million forms part ofthe financing support package by the international community for Argentina’s transition program. It is proposed that the loan be disbursed in one single tranche.
C. Transition Program Supported by the Bank
89. The proposed loan would support a transition program which provides for (i)the continued deficit reduction efforts by the provinces, (ii)the commitment to eliminate quasi- monies, (iii)the enhancement ofthe social safety net, and (iv) measures to ensure coverage of basic health services to the most vulnerable through increased budget allocations to priority programs and improved access to pharmaceuticals.
90. The conditions for the proposed loan are detailed below as well as in Annex 2 (Matrix of Conditionalities). In addition, the proposed loan requires that a satisfactory macroeconomic framework be maintained as evidenced by an active IMF program.
91. Provincial Deficit Reduction: Provincial deficits in 2002 compared to 2001 were cut by 72 percent which is superior to the original target of60.5 percent. In addition, the overall primary deficit was Arg$0.3 billion or 0.1 percent ofGDP, which was also lower than the initial estimate of0.5 percent ofGDP. For 2003, more deficit reduction has been agreed with the provinces and the central Government has signed agreements with provinces representing at least
29 80 percent ofthe total provincial deficit. The fiscal agreements (PFOs) signed already by eleven provinces, reduce their overall deficits needs for 2003 by 5 1 percent.
92. Elimination of Quasi-Monies: The Government has adopted a plan to retire the quasi- monies through buy-backs at the market-price. The ten provincial quasi-monies currently in circulation amount to about Arg$4.5 billion, and another Arg$3.3 billion are in federally issued quasi-monies. Pesos will be exchanged for quasi-monies at a price determined in an auction. The exchange will be voluntary, but no provincial quasi-monies will subsequently be allowed to circulate in provinces that underwent that exchange.
93. Enhancing the social safety net. Government has (i)expanded social assistance programs including the Jefes de Hogar, school scholarships, conditional cash transfers and feeding programs, (ii)instituted measures to seek efficiency ofsocial assistance programs - particularly its flagship program Jefes de Hogar-- through evaluation and quality, and (iii) improved coordination ofsocial assistance programs through the National Coordination Council for Social Policies.
94. Ensure coverage of basic health services for the most vulnerable. The operation will recognize the Government’s efforts to (i)adequately fund priority health programs including immunizations, infant and maternal health, HIV-AIDS, and control and prevention ofinfectious diseases, increasing the budget when and as necessary; (ii)increase access to pharmaceuticals, specially for the poor.
D. Rationale for Bank Involvement/AdjustmentLending
95. The Bank remains committed to assist the stabilization and recovery ofthe Argentine economy. The current transition economic program, which has brought a degree ofeconomic and social stability following the dramatic events ofearly 2002, is broadly regarded as a necessary step towards building a comprehensive reform program, leading to a sustainable economic recovery, and sorely needed improvement ofpoverty indicators.
96. The economic stabilization and early signs ofrecovery observed in the first few months of2003 have been associated with a transitional economic program, supported by the international financial institutions. The January 2003 Stand-By Agreement by the IMF, included a number ofpolicy measures aiming to stabilize the fiscal and monetary conditions in Argentina, and provided, together with the World Bank and the IDB, financing that would cover the transitional needs ofthe Federal Government and the provinces. The policies supported in this proposed loan, and, importantly, its financing, are an integral part ofthat transitional program. Policies supported by this proposed loan are complementary to those ofthe IMF and IDB’s programs. The proposed monetary unification program, included in the present loan, has the support ofthe IMF, as their program contemplated the eventual withdrawal ofquasi-monies from circulation.
97. The macroeconomic and social components ofthe proposed operation are expected to create conditions that would facilitate the subsequent reform program. The measures to improve the fiscal conditions in the provinces (PFOs) would be imperative as stepping stones in reaching
30 a consolidated fiscal performance that would secure sustainable growth. The redemption of quasi monies program would strengthen the Central Bank's ability to conduct monetary policy, as it eventually adopts inflation targeting rules. The transitional social protection programs alleviate the consequences ofpoverty and mitigate social tensions, while conditions for economic growth improve, and unemployment rates decline. Failing to secure further destabilization in any ofthese fronts, economic or social, would make the transition to a new economic program by the incoming administration much more difficult.
VI. TERMS AND CONDITIONS
98. The SAL would be a single tranche loan ofUS$500 million. At the request ofthe Government, the proposed loan would be a fixed-spread, commitment-linked LIBOR-based loan (FSL) in US dollars.
A. Program Management and Loan Administration
99. The Argentine Republic would be the Borrower ofthe proposed Loan. The Ministry of Economy will be the principal executing agency and would have overall responsibility for coordinating and overseeing all aspects ofthe program. The closing date ofthe Loan would be August 29,2003, when the transition program lapses.
100. The proposed operation will disburse to general revenue fund ofthe National Government; the accountability arrangements ofthe National Government were assessed by Bank under the CFAA ( July, 2002) carried out by LCOAA. The CFAA concluded: "This assessment indicates that by and large the Federal Government ofArgentina has the appropriate policies, legal and institutional framework, systems and procedures in place to provide reliable and timely information on public finances and has an appropriate control environment to insure compliance with this framework. The current situation owes much to the reforms implemented in 1992 with the passage ofa new, modern Financial Management Law that put Argentina at the forefront ofsuch public sector management improvements at that time. Since then, there have been continuous improvements". An FM Fiduciary Risk Assessment is scheduled to be completed this fiscal year, complementing the July 2002 CFAA. €5. Disbursement and Auditing
101. Disbursement arrangements will follow the simplified procedures for SALs/SECALs. The Borrower will open an account in the Central Bank ofArgentina. Once the Bank formally notifies the borrower that the single tranche is available for withdrawal, the borrower may submit a withdrawal application so that the proceeds ofthe tranche are deposited by the Bank in this account to be used in accordance with the Loan Agreement. Disbursements would not be linked to specific purchases, and supporting evidence for disbursements is therefore not required. The proceeds ofthe Loan would not be used to finance expenditures excluded under the Loan Agreement. Although a routine audit ofthe deposit account will not be required, the Bank reserves the right to conduct one.
31 C. Environmental Aspects
102. The proposed operation is a structural adjustment loan for which OD8.60 applies, and the environmental rating is not required (Category “U”).
103. The focal areas ofthe proposed SAL do not directly increase public investment programs that could lead to significant negative environmental impacts. In the case ofthe health programs covered in this operation, Argentina has adequate guidelines for the management of health care waste, which were reviewed and approved by the Bank as part ofthe operational manual for the Public Health Surveillance and Disease Control Project (Loan AR-4516). The proposed program has no direct linkages to trade liberalization and policies in the productive sectors (energy, mining, industry) that could induce indirect environmental impacts. The proposed reform program does not include, at this point, tax reforms that would change the structure ofspecific tax policies (e.g., fuels, extractive activities) that could induce indirect negative environmental effects caused by changes in the pattems ofproduction and consumption. On the fiscal side, there is however the possibility that overall reduction ofgovernment budgets at the central and provincial levels will affect the allocation to environmental institutions management. There is no expectation, though, that these cuts will be disproportionately higher in environmental agencies than in the rest ofthe public sector. Bank projects support capacity building at the central and provincial level in addressing pollution problems and natural resource management (e.g., forestry management, biodiversity protection, water resources management).
VII. BENEFITS ANI) RISKS
104. Benefits The transition program will contribute to the consolidation ofthe incipient economic recovery and enhance the conditions for the development ofa longer-term reform program with the new government. First, improved fiscal policies in the provinces will contribute to the consolidation ofthe overall fiscal situation ofthe country and macroeconomic stabilization. The improved provincial finances will directly help to attain the required primary surplus ofthe consolidated public sector. Second, the elimination ofquasi-monies will have the following benefits: (i)provincial governments have committed to normalize their fiscal programs and stop any new issuance ofquasi-monies; (ii)it would accelerate the retum to a normal payment system based on the peso and strengthen the ability ofthe Central Bank. to conduct monetary policy, (iii)ease financial management constraints generated by the use ofquasi- monies, (iv) it would help lower income families, including retirees, who often were forced to accept these quasi-monies as payments; and (v) reduce perverse incentives to economic activity towards the informal sector, improve inter-provincial trade, and thus promote overall economic growth. Third, the social safety net measures are helping the poor in meeting their basic social needs. The increased budgets to the social protection programs will ensure that the poorer income groups have better access to immunizations, infant and maternal health care, and pharmaceuticals. Finally, the Heads ofHousehold program has contributed to calm down the high social tensions that existed in the first half of2002 as well as to provide temporary and part- time employment opportunities.
32 105. Rislns The risks in this program are high. The current transition Government believes it does not have the mandate to implement a comprehensive medium-term growth strategy. Sustainability ofthe program could be threatened by the outcome ofupcoming presidential elections (second round) which may not yield a strong mandate for the winner and may result in a government that is not willing andor able to develop and implement a comprehensive economic and social reform program. A weak electoral mandate may undermine the incipient recovery and leave economic and political uncertainties with possible negative consequences. The new government may be unable to improve the fiscal situation at either the federal or provincial levels.
106. A continued world economic slowdown also presents serious risks, limiting economic growth and hence flexibility for policy reforms and social programs. Attaining higher primary fiscal surpluses - as required for dealing with the debt problem and the current default status - will demand political cohesion. The depth ofthe social crisis - unemployment and poverty - and the pace ofthe required reforms may challenge the new government’s ability to build a consensus behind a medium-term reform program.
107. Adherence ofindividual provinces to the redemption ofquasi-monies program depends on a number of factors, including the distribution ofcosts related to that exchange, and the risk of future changes in the design ofthe program, which could be affected by the outcome ofthe presidential elections, and provincial elections in the second half of2003.
108. A longer-term risk is that transitional measures, like the Heads ofHousehold program, will come to be treated as entitlements, and will crowd out better instruments for addressing poverty and unemployment. This is a risk which will be addressed through policy dialogue after the crisis abates and the program has served its purpose.
109. Another major risk is at the provincial level, where forthcoming elections in the second half ofthe year could continue to undermine the overall macroeconomics reforms. The provinces have announced a commitment to reduce the overall provincial deficits and to produce primary surpluses, but their resolve could be tested if economic conditions deteriorate.
110. Mitigating these risks is much better than anticipated performance in 2002 by the provinces and their commitment to implement the 2003 targets are hopeful signs that the provinces will carry out the 2003 agreements, with key ones already approved by local legislatures. Further, the measures contained in the program to redeem quasi-monies should help to reduce this risk. In the social safety net area, the Government has been strongly committed to implement the described social program and there is general support in Argentina, including among presidential candidates, for the continuation ofthose programs. Finally, whatever party wins the elections, the new leaders would benefit from the support ofthe international financial institutions in restoring relations with private investors.
11 1. This operation is part ofa financing package designed to preserve economic stability through the political transition period and, if the package is not delivered, then there are serious risks ofprolonged political and economic hardships. Despite the above mitigating factors, substantial risks to this operation remain, and would need to be addressed through the
33 development ofa new medium- and long-term development and assistance strategy with the incoming administration.
VIII. RELATIONS WITH THE IMF AND THE IDB
112. The Bank staff has closely coordinated its activities with IMF and IDB staff. This collaboration has intensified since the crisis as evidenced by close coordination including joint missions such as financial sector, corporate restructuring, concessions contracts ofinfrastructure and public services, and emergency social assistance.
IMF
113. On January 17,2003, the IMF Board approved Argentina’s request for a Stand-By Arrangement on a short-term economic program to provide a policy framework for the political transition (see Annex 6 on Fund relations with Argentina). This arrangement was supported by credit tranches ofSDR 2.17 billion, which are sufficient to cover obligations falling due during the period January-August 2003. All repurchase expectations during that period were extended. The economic program focused on core fiscal, monetary, and banking policies for the first half of2003. The expectation for this transitional program is that it will be succeeded by a multi-year Fund arrangement with the new government.
114. On March 19,2003, the IMF Board concluded the first review under the Stand-By Arrangement. While there were some slippages in the implementation ofstructural reforms (the submission oflegislation to Congress to amend the Financial Institutions Law that would strengthen the bank resolution process, and to increase Central Bank autonomy, has been delayed), quantitative targets for end-January both on fiscal and monetary areas were met. Additionally, there were delays in several structural areas, including public bank reform, banking regulations, and out ofcourt workout legislation. A Fund mission is scheduled to visit Argentina between the last week ofApril and first week ofMay, for the second review under the Stand-By Arrangement.
IDB
115. IDB’s activities were adjusted in light ofthis new economic context, so as to: (a) encompass harsher fiscal constraints; (b) protect social expenditure, deepening the actions undertaken with respect to reformulation ofthe social portfolio; (c) support development ofthe productive sectors through loans to the provinces under the new agreement with the Federal Government and support for small- and medium-sized enterprises (SMEs), particularly export- oriented SMEs, and support a review ofthe portfolio relating to the productive sectors; and (d) help maintain political reforms.
116. In March 2002, authorization was given to redirect US$694.2 million from low- performing operations oflesser priority in the context ofthe social and economic crisis now affecting the country to the Argentine Government’s Social Emergency Plan for social protection and containment programs, particularly food, medicines, and education. In a second stage, work
34 is underway on a proposal to redirect resources from active projects that are unlikely to make progress again soon to initiatives that help revitalize economic activity and improve the competitiveness ofthe productive sectors. This revitalization package could total US$SOO million.
117. On February 5,2003 an emergency loan ofUS$1.5 billion was approved to protect social expenditure. This operation will be disbursed in two tranches. Once the new government to be elected in the coming months has taken office, an additional emergency loan in the amount ofUS$l billion may be approved, which could serve the social sectors as an instrument for policy dialogue with the new authorities. Additionally, a financial sector loan is being considered for 2003; a loan for a group ofcomparatively less-developed provinces and direct loans to three provinces (Salta, Rio Negro, and San Luis) that would help revitalize economic growth by supporting sectors with greater comparative advantages. Technical cooperation operations are under preparation, aiming to improve the competitiveness of small- and medium- sized enterprises and strengthen the financial sector.
35
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b M c
a0 S E P - e! 3 C B .I c f z e! 3 .IB Annex 3
Letter of Development Policy (Translation from the Spanish original)
Ministry of Economy
Buenos Aires, March 26,2003
Mr. James D. WOLFENSOHN PRESIDENT THE WORLD BANK Washiupton, D.C.
Ref: Economic & Social Transition Program
Dear Mr. Wolfensohn:
Since the beginning of 2002, the Government of the Republic of Argentina has been confronting the enormous challenge ofreconstructing social peace and the confidence in the institutions. The Government's primary commitment is to redesign a sustainable macro- economic framework, capable of leading the economy towards sustained growth in the medium term, guaranteeing an orderly transition and prioritizing social cohesion.
We believe our country is facing a crisis which in actuality has social roots and it is that what makes it unprecedented in Argentina's economic history, as well as different from other crises that have occurred internationally in recent times. The economic, political and social breakdown that our country has experienced, together with the breakdown of the contracts that were derived from the previous model, continue until this day to test the responsiveness and reaction capacity ofour democratic institutions.
The Government has made tremendous efforts to mitigate the crisis, a crisis characterized by a sharp increase in poverty, unemployment and income distribution inequality. The implementation of the Social Emergency Plan and the start up of programs to provide unemployment protection demonstrate the absolute priority we have assigned to the construction ofa basic social safety net.
Within this framework, the Government request the financial support ofthe World Bank in order to confront this crisis, seeking to consolidate the progress that has been achieved and to deepen the policy lines that have guided its actions, which are intended to bring relief to the most vulnerable households from the dramatic living circumstances in which this crisis has submerged them.
39 I.DIAGNOSIS OF THE ECONOMIC AND SOCIAL CRISIS
1.1 The macro-economic imbalances generated by the policies pursued in the 1990's explain the exorbitant indebtedness, the high fiscal deficits, the fall of production and the social crisis. The end ofthe model that prevailed for over ten years was the logical consequence ofthe application ofan economic plan that, although successful as a short term stabilization program, was erroneously sustained as a program for economic transformation and growth.
1.2 As extemal conditions changed, the limitations inherent to the Convertibility regime became rapidly evident. Its natural consequences have been: a regressive income distribution, growing structural unemployment, unprecedented insecurity and social fragmentation.
1.3 The extemal shocks, the profligate fiscal policy and the importation of a monetary policy alien to the local economic cycle, [all came together] to deteriorate our currency. The massive tax exemption for the import of capital good introduced a huge bias towards capital-intensive investments that caused labor to be expelled, explaining the increase of the unemployment rate even in the initial years of strong growth of economic activities. The high public debt that was used to finance the expansion ofcurrent expenditures ended by setting fire to an explosive combination that was bound to burst sooner or later.
1.4 Argentine confronted an exit from the model with economic and social costs that were substantially higher than had the decision been made in a timely manner. The collapse of Convertibility was the unavoidable result of the limitations inherent to such a scheme, and it was encountered by this Government when taking office in the midst ofa severe political and institutional crisis.
11. THE IMPACT OF THE CRISIS ON THE ECONOMIC STRUCTUlRE AND ITS SOCIAL PLAYERS
2.1 As at December, 2001, Argentina's economy faced three and a half years of recession with a GDP drop of 12% in real terms and a fall of 16% if expressed per capita. Industrial production had shrunk by 21% and construction was down 36%. Investment fell 43% as compared to pre-recession levels.
2.2 The Nation's fiscal deficit was in excess of $13 billion in 2001 (in spite ofthe zero deficit policy) and climbed to almost $18 billion if the provincial deficit is included. The rapid collapse oftax revenue levels caused the fiscal gap to increase, rather than decrease.
2.3 One of the clearest manifestations of these cumulative imbalances was the foreign currency over-indebtedness of both the public and the private sectors. The sudden drop in the level of activity generated a major increase in the trade balance surplus. However, the payment for real services - mainly tourism - interest payments and the
40 remittance ofprofits abroad caused the current account to continue being in the red. This, combined with an important capital outflow, was reflected in the sudden drop ofinternational reserves.
2.4 The excessive financing ofthe Nation and the Provinces through the local financial system, intended to patch up the fiscal gap, leveraged the dynamics of the crisis by damaging the quality ofbank portfolios. In effect, during 2001, the financial system faced an outflow of deposits for US$ 17.5 billion, 20% of the stock and liquid reserves for 11 billion, 45% of the stock (US$ 16 billion including IMF fimds to reconstruct the reserves). Under these conditions, the previous administration applied a partial freeze on bank deposits via the implementation of the so-called covralito restrictions on bank transactions and foreign exchange controls. The result of all this was a dramatic fall of economic transactions and a shattering impact on the credibility ofinstitutions.
2.5 Thus, this Administration took office in the midst ofan unprecedented economic and social fracture, immersed in the extremely severe political crisis that stemmed from the resignation of the President elected at the end of 1999 as well as that of his successor for a scant seven days, which made it essential to recreate minimum conditions ofgovernability. We were facing an extreme situation: a dramatic descent of production and employment, a default on domestic and international obligations and a collapsed financial system. Argentina currently confronts an actual impossibility of honoring its financial obligations, and requires the support of the international community to reestablish financial relations that are sustainable and compatible with internal economic growth and social equity.
2.6 The Convertibility regime saw the beginnings of a growing precariousness of the levels of employment, even during the expansion phase ofthe economy. As at May 2002, there were 3 million unemployed (21.5% of the active population) and 2.2 million underemployed. Such increases have been the determinant factors for the rise in the number ofpeople who are under poverty and indigence. The share of the population with labor problems has reached the rate of 40% of the active population.'
2.7 During 2002, the incidence ofpoverty reached alarming proportions: 20 million poor - 55.6% of the population - ofwhich 9.6 million are indigent poor. This situation is not homogenous across the country: while in provinces such as Neuquh the poor represent 47.5%, they are in excess of 69% ofthe population in the last ring ofthe Greater Buenos Ares."
2.8 There are also sharp differences in terms ofthe incidence ofpoverty on various age groups: while 41.6% ofthe population aged 50-64 is poor, in the age group up to 5 and 6 and 12, over 70% and 74% ofthe total are poor, respectively.
"Permanent Household Survey (EPH) ofMay, 2002, INDEC. SIEMPRO, based on EPH-INDEC.
41 2.9 Out ofthe total households in the country, 11.6% have metbasic needs (687,000 households) and 17.3% of the people, and there are locations were this figure is above 30% (Jujuy, Form~sa).'~
2.10 Income inequality has increased considerably in the last decade: the 10% richest households receive 30.1% ofthe income, while the poorest 10% only receive 1.8%. The income gap between both groups is in excess of39 times.
111. THE STRATEGY OF THE ARGENTINE GOVERNMENT VIS-A-VIS THE ECONOMIC AND SOCIAL CRISIS
3.1 This inherited context generated the inescapable responsibility of taking emergency measures, putting the economy on a realistic footing and taking decisions that had been stalled, in order to unblock the production process. The Economic Program is divided into three stages: 1) Containment ofthe crisis; 2) Rehabilitation of the basic operation ofthe economy; and 3) Sustained reactivation ofthe economy.
3.2 We are now at the time of the third stage. The 'Action Plan has made it possible to gradually reorder the economy, taking the first steps in the right direction. Thus, this Administration has focused its efforts on the reestablishment of three pillars: the institutions, to guarantee political and social peace; a macro-economic reordering: and the restoration of foreign relations.
3.3 Reconstructing the institutions a. The priority was to bring the institutions back into operation, creating stable and credible rules. Public Emergency law No. 25.561 and the new Organic Charter ofthe Central Bank (Law 25.562) are the two hdamental pieces of legislation ofthe new economic policy. In parallel, the Economic Subversion Law was repealed and the Law on Bankruptcy Proceedings was thoroughly reviewed and brought in line with international standards. b. In response to the social problems, the Government designed a Social Emergency Plan that has the following mainstays: (i)a subsidy paid to unemployed male and female heads ofHousehold; (ii)emergency food care; (iii)the supply ofbasic health inputs and services; schooling support and habitat improvement in the most deprived settlements.
C. In connection with the corralito restrictions: A) the decision was made to convert into Argentine pesos dollar denominated bank assets and liabilities. However, it was decided to do this in an asymmetric manner to avoid the full effect ofthis measure on the depositors of the financial system. At the same time, all those assets and liabilities that had been converted to pesos were adjusted in accordance with the
l3SIEMPRO, based on EPH-INDEC, May 2002.
42 reference adjustment coeficient, CER (for the Spanish language acronym), with interest rate ceilings being set for those loans that had originally been denominated in foreign currency. B) it was decided to reschedule deposits above US$ 5,000 or Arg. $7,000, giving depositors the choice between receiving a public bond denominated in Argentine pesos or in dollars or retaining their rescheduled deposit; C) measures were taken to progress towards a greater relaxation ofthe corralito and a free system has been set up for new deposits, with new legal frameworks being planned in order to rebuild the confidence in the Argentine banking system. Currently, 80% ofall deposits are free.
d. Responding to the social demand for a clean up and reduction ofpolitical spending, the Federal Government and the Provinces signed the Federal Agreement for the Reform of the Argentine Political System, setting guidelines for the reduction of expenses.
3.4 Reordering the macroeconomy
a. On the fiscal front, the Budget bills for 2002 and 2003 were approved, based on the rule of not spending what cannot be genuinely financed, a strong austerity of expenditures and a reduction of the deficit over previous years. All this while protecting social spending.
b. A fundamental progress was the execution of the Orderly Financing Agreements with the Provinces (Law 25,570), insuring that they would be extremely responsible on fiscal matters.
C. Regarding rate of exchange policy, a fimdamental decision was liberalizing the foreign exchange market. It was also sought to design a prudent foreign exchange policy, consistent with the budget and the new foreign exchange regime.
d. In parallel, progress was made in redefming the tax treatment of various sectors or transactions, seeking to increase the efficiency of tax administration and the renegotiation of the contracts with public service utilities has been instrumented, whereby tariff adjustments will be granted in a phased manner.
3.5 Reestablishing foreign relations
a. In connection with the foreign debt problem, the country was forced to resort to a process of deferral of the payments on the public debt, which does not imply a recanting from its commitments but rather stems from the exhaustion of its payment capacity under the terms and conditions that had been agreed with the creditors. The specific strategy was to reorder the relation with the IMF as a basic precondition to negotiate with foreign creditors. In the midst of the 2002 crisis, payments for US$ 4.5 billion were made to the multilateral and bilateral lending agencies. b. The new model seeks to introduce a strong export bias, to foster the recovery ofthe regional economies as well as that ofthe country's industrial base. This Government
43 is committed to promoting commercial integration to favor the insertion of our production.
3.6 Summarizing, the Government has emphasized the recovery of the monetary and foreign exchange policy and strict fiscal prudence as core tools to protect the economy from external shocks and to provide competitiveness to domestic production. However, regaining the path of sustained growth is a process that will bear fruit in the medium term.
3.7 This Administration is klly aware that a free foreign exchange rate is a necessary but not sufficient condition to guarantee the reactivation ofproduction in a sustained manner: a comprehensive coordination of policies and structural reforms are required. In any case, in an environment of social unrest, external isolation and political weakness, it is not feasible to consider a policy scheme with such characteristics. Consequently, the approach selected was one ofgradualism.
3.8 During the first semester of 2002, the pace of decline ofthe GDP continued along the 2001 lines, but three phenomena have been verified that set the basis for a recovery ofthe economy: a) the rate of exchange has stabilized; b) there was a low transfer ofthe devaluation to prices - controlled inflation; c) a floor was reached in the drop of the GDP and there was industrial reactivation in terms controlled for seasonality.
3.9 In spite of such improvements, the Government understands that it has a limited capability to foster expectations regarding an economic recovery in the short term that may have a positive impact on employment levels and wage income. This sets a difficult background for social policy actions and for the possibility of attending to the financial commitments undertaken. Therefore the need of counting with the financial assistance ofthe Multilateral Credit Agencies.
IV. THE SOCIAL PROTECTION STRATEGY
4.1 The economic crisis that deepened at the end of 2001 had a strong impact on the population as a whole and, in particular, on the most vulnerable social sectors. The Government acted in this regard, designing and implementing the Social Emergency Plan (PES, in Spanish Plan de Emergencia Social).
4.2 Within the framework of the PES, the priority was assigned to a set of programs funded by multilateral credit agencies, instrumented on the basis of executive decrees designed to secure the budgetary items required for their execution.
4.3 It is projected that the total spending on the social safety net will be doubled fiom 2001 to 2003, from 0.6% ofGDP to 1.2%, respectively.
4.4 These programs are: (i)the Male & Female Heads of Household Program, which provides an economic assistance ofArg.$ 150 per month, against a labor counterpart in community targeted projects, as well as controlling the school attendance of
44 children and their vaccination; (ii)the Food Emergency Program (PEA, in Spanish Programa de Emergencia Alimentaria), which distributes funds to the provinces to cover the food requirements of poor families; (iii)the Participatory Social Investment Fund (FOPAR), which finances projects for comunity food services; (iv) IDH, granting monthly subsidies to poor families with children under the age of 18, who in exchange have to submit to health and school attendance controls; (v) the Neighborhood Improvement Program (PROMEBA), which funds basic social infrastructure projects, and (vi) the Mother & Child and VIGI-A programs, which supply medicines, vaccines and milk to the more deprived population.
4.5 In order to start it up, a unified roster of beneficiaries was created, a system of monitoring and evaluation of social programs was implemented, transparency criteria were defined for the allocation of resources among provinces and municipalities and the obligation ofpublishing information on the beneficiaries, the use offunds and procurement processes was mandated.
4.6 Another fundamental measure adopted within the framework of the social policy implemented by the Government was setting up the National Council for the Coordination of Social Policies (CNCPS), made up of the Ministries of Finance, Labor, Education, Health and Social Development.
4.7 The CNCPS adopted concrete measures to reduce the fragmentation ofsocial policy: importantly, the strategic planning of national social policies and programs, the coordination among agencies responsible for social policy and the setting up of arrangements that ensure social control over the use ofpublic funds.
4.8 The financial crisis which affected the country as a whole and some provinces more particularly worsened the delays in paying teachers' salaries with arrears that now amount to Arg. $ 184 million country-wide, with variations from province to province. Within the framework of the Orderly Financial Plan (PFO), the National Government aims at preventing new delays in the payment ofsalaries as well as the elimination the existing debt.
4.9 The basic principles that rule social protection policies are as follows:
Social control over the use ofpublic funds Civil society participation in the design and implementation ofsocial policies Equity in the actions deployed Long term sustainability
45 V. HEALTH SECTOR STRATEGY
5.1 The strategy defined by the Government for the health sector includes operating both in response to the emergency and at the level of a reform, with focus on the following issues:
9 Strengthening the level of governance in the sector and the guiding role of the Health Ministry
9 Improving access to the essential pharmaceuticals as well as their quality
> Implementation of a Mother & Child Health Insurance Scheme
> Protection and strengthening ofpriority programs
9 Actions in the field ofSexual and Reproductive Health
5.2 The efforts to improve the governance of the system consists of a two- pronged approach: on the one hand, it comprises the strengthening of the Federal Health Council (COFESA, for the Spanish language acronym), to improve its operation. This is reflected in the application of COFESA indexes for the distribution of milk, medicines and other national transfer funds and donations, as well as the consolidation of agreements to reform its framework ofnorms, including aspects of (i)organization and operation; (ii)legal framework; and (iii)definition of priority areas ofpublic policy competence and interest.
5.3 On the other hand, progress has been made in setting up and implementing a space for a plural dialogue on sectorial policies. This is evidenced in the actions implemented within the flamework of the Argentine Dialogue and, in particular, in the agreements of the Health Dialogue, together with the creation of the Crisis Committee.
5.4 With respect to the price of pharmaceuticals, in Argentina, during the last decade, they grew well excess ofinflation; this situation became worse with the modification of the rate of exchange. Consequently, in the first months of 2002 the private consumption of pharmaceuticals fell around 25%; faced with this situation, the Argentine Government designed as one ofits priorities to promote the population's access to essential pharmaceuticals, based on two premises: the use ofthe Generic Designations and Public Supply.
5.5 The policy on the use of generic designations began with the passing of Decree 486/02, declaring a sanitary emergency in the national territory and basically mandating that the prescribing professional (medical doctors and dentists) had to indicate the generic name ofthe drug in their prescription, thus giving the pharmacy professional (and only such professional) the choice of providing the commercial altemative chosen by the patient, provided it contains the same active principle, concentration, pharmaceutical form and quantity of units per package. Also,
46 legislation was promoted to implement the prescription on the basis ofgeneric drugs in 18 provinces.
5.6 Regarding the Public Supply of medicines, the most important initiative is the Remediar Program, that is supplying essential medicines to all provincial and municipal Primary Health Care Centers (CAPS, for the Spanish language acronym) throughout the country. The list is designed to cover between 70% and 80% of the most fkequent pathologies at this level ofcare.
5.7 In connection with the policy on the quality of pharmaceuticals, to support the prescription of generics, the National Administration of Drugs, Food and Medical Technology has made strides in verifying conformity with the Good Practices of Manufacturing and Control and with the development of standards leading to the implementation ofbio-equivalence and bio-availability studies in the country.
5.8 In the area of Mother & Child care, the National Government is working together with the provinces in creating a National Public Health Insurance Scheme for women of a reproductive age and children up to age 5, under the principles of universality, solidarity and equity. Among the actions initially implemented we should note: (i)a ministerial resolution creating the Mother & Child Health Insurance Scheme (SMI, for the Spanish language acronym); (ii)the proposal of setting up a National SMI Coordination Unit within the structure ofthe Ministry of Health, (iii)the allocation ofthe budget appropriations required for FY 2003; (iv) the SMItechnical design proposal; and (v) its implementation plan.
5.9 By protecting priority programs, the aim is to ensure that public spending on national programs for the delivery ofbasic health services is maintained at adequate levels, including the actions needed to guarantee that each of these programs receives sufficient budgetary allocations and the execution of sufficient resources to achieve the physical delivery targets according to the plan.
5.10 The National Government has taken effective steps to guarantee the population's Sexual and Reproductive Health rights (SSR), including (i)passing Law 25.673 on Reproductive Health and Responsible Procreation; (ii)the development of the National Reproductive Health Program; and (iii)the definition ofits implementation plan. Among fbture actions to be implemented we note: the definition of administrative measures to guarantee (a) the inclusion ofthe SSR national program services and inputs in Social Security's Mandatory Health Care Program (PMO, for the Spanish language acronym) and b) the articulation with the education sector, through an inter-ministerial agreement.
47 VI. MACROECONOMIC ASPECTS
6.1 The Government has formulated a short term transition program designed to maintain macroeconomic stability and strengthen the recovery of the economy during the impending political change. The Presidential elections are scheduled to be held in April, 2003 and a new elected government will take office at the end ofMay. The transition program shall lay the foundation for a more comprehensive program of fimdamental reforms that will be developed after the elections and which is necessary in order to address the accumulation of long years of mistakes. The key objectives of the transition program comprise: guaranteeing fiscal, monetary and banking robustness and regaining the confidence of domestic and foreign investors while maintaining equal treatment for all parties, protecting contractual rights to uphold the rule oflaw.
6.2 The major components of the transition program are: I) the 2003 budget, which seeks to maintain under control the federal fiscal deficit; II)the implementation of the bilateral pacts between the national and the provincial governments; HI) a monetary program to maintain inflation at a low level; IV) preparatory steps for the structural measures that are required to strengthen the fiscal position in the medium term; V) progress towards a restructuring of the debt; VI) a strategy to reconstruct the banking system; VII) ensuring full respect to credits, restoring legal certainty and advancing towards corporate restructurings.
6.3 The macroeconomic framework for 2003 assumed that the real GDP will grow by approximately 3% (with recent data opening up the possibility of attaining values slightly above 4%) and that consumer price inflation for the 12 month period could be around 22% at year end. A significant current account surplus is projected, in the order of US$ 6.5 billion, for 2003. Gross intemational reserves will be maintained approximately unchanged during the term of the agreement. This is based on the assumption that the intemational lending agencies will extend loans to Argentina to cover the sums that will become due to said agencies during the period January - August, 2003, including the regularization of arrears, a hypothesis stemming from the agreement with the MI?.
VII. THE SITUATION OF PROVINCIAL GOVERNMENTS
7.1 The adjustments in the provinces are backed up by the Federal - Provincial Pact on temporary tax-sharing agreements signed in February 2002, whereby the transfer floors to the provinces were suppressed and which sought to eliminate provincial deficits by 203. The adjustments in the provinces are occurring on the basis of the control ofexpenditures, administrative reforms, reporting standards and penalties for lack ofcompliance.
48 7.2 The provinces that signed bilateral agreements have stopped the issue of new provincial treasury bills and quasi-monies and the Federal Government has likewise stopped the issue ofLECOPs.
7.3 The governors of provinces representing 80% of the 2002 consolidated provincial deficit have signed bilateral agreements for FY 2003, undertaking to comply with fiscal targets.
VIII. ORDERLY FINANCING PROGRAM
8.1 The collapse ofthe Gross Domestic Product, together with a pro-cyclical tax system both at the National and the provincial levels, lead to an important drop of tax resources. Towards the end of 2001, Argentine had no access to extemal financing and the tax resources were falling at the pace ofthe crisis.
8.2 The provinces saw their tax sharing guaranteed income dwindle. In FY 2001, the provincial deficit reached ARG. $ 6.645 billion and the stock ofprovincial debt was close to US$29 billion. The economic and financial crisis triggered the institutional crisis that brought about a high level ofsocial unrest.
8.3 Given the complexity ofthe situation stemming from the financial imbalances ofthe provinces, the accumulated debts, the extension of the quasi-monies and, fkdamentally, the lack of financing for the public sector, the National Government instituted the Orderly Financing Program through Decree No. 2263/02, designed to provide financial assistance to the 24 jurisdictions, provided they demonstrate a fiscal and financial behavior intended to reduce the 2001 deficit by 60% and balance their fiscal accounts by FY 2003.
8.4 The guidelines of the program are: fleezingheduction of primary expenditures; refraining from resorting to new debt and not issuing new bonds outside the program. The program finances financial deficits - on a cash basis, debt service (year 2002) and justified cases offloating debt.
8.5 The program is based on two major pillars: transparency of provincial fiscal information and compliance ofthe agreed targets.
8.6 During the year 2002, the consolidated deficit ofthe 24 jurisdictions amount to 1.77 billion. Seventeen provinces adhered to the program, representing 100% of the deficit, with another 7 provinces remaining outside the PFO; those provinces that had a situation ofbalanced or surplus accounts.
8.7 The program contemplated a total financing close to ARG33.95 billion, founded on the expectation ofbeing able to rely on fkds from the multilateral lending agencies, with a prior agreement with the IhlF. But the year ended without said agreement and for that reason the PFO operated with own resources and at a scale lower than the
49 agreed one. However, the results obtained demonstrate that the provinces over- performed against their targets since the deficit reduction was from ARG$ 6.379 billion in 2001 to ARG$ 1.77 billion in 2002 (a 72.3% drop). See annex.
8.8 In light ofthe agreement reached with the IMF in January, 2003, it is expected that during the current year the PFO will accelerate and the target of eliminated the consolidated provincial deficit will be met.
IX. MONETARY UNIFICATION
Redemption of Quasi-Money Bonds
9.1 The creation of quasi-money was a way of mitigating the financial crisis and its impact on the finances ofthe provincial public sector, especially as fiom the second half of200 1.
9.2 In fact, they would not have been created had there existed an orderly exit fiom the Convertibility law, and it prevented an even sharper downtum in the levels of economic activity.
9.3 This defensive response fiom the provincial public sectors was encouraged by the Federal Government in a last attempt to maintain convertibility. In fact, the LECOP bonds issued by the National Government for and on behalf of the provinces, became the main quasi-money in circulation (approximately ARG$3.3 billion).
9.4 The use of quasi-monies, among other consequences, causes an erosion of the tax basis, since their greater use in the informal economy has devaluation and distortion effects in the local economies and their quotation under par directly affects the sectors ofthe economy that have the lowest income and bargaining power.
9.5 Therefore, the redemption of quasi-monies is strategically importance to attain fiscal balance, the orderly financing of the provinces and the nation and the reduction of inequity towards the more deprived sectors.
9.6 On the other hand, the redemption of quasi-monies will have a neutral effect fiom the monetary point ofview.
9.7 Both the Monetary Unification Program and the Orderly Financing Program and the decision of reducing the provincial arrears with social sectors until their complete elimination, are in line with the agreement reached between the Government of Argentina and the Intemational Monetary Fund. Also, these economic policy measures enjoy a political and social consensus.
9.8 The main comments drawn fiom the document drafted by the IMF's expert panel in July, 2002 regarding quasi-moneys, are the following:
50 The issue of quasi-moneys both at the Federal and Provincial level represents a problem for monetary and fiscal policy because:
I. They reduce the Peso demand for transaction purposes, contributing to an "overhang" ofthe Peso;
II. the provincial quasi-moneys have a high circulation rate because in terms of value reserve they are inferior to the Peso (they have differing acceptability values in the jurisdictions where they circulate); and
III. they are extensively used in the informal economy, contributing widely to tax evasion.
Redemption Methodology
9.9 Article 1 of Law No. 25.561 provides the following basis: 1) Proceed to the reordering of the financial, banking and foreign exchange market system; 2) reactivate the operation of the economy and improve the level of employment and income distribution, with a focus on a program for the development of the regional economies; 3) Create the conditions for a sustainable economic growth that is compatible with the restructuring ofthe public debt; 4) Rule on the restructuring of those obligations [that are] in the process of being executed, which are affected by the new foreign exchange regime instituted by Article 2.
9.10 Article 12 of the same law establishes that within the term and in a manner to be duly determined by the regulations, the National Executive Power will create the necessary arrangements to proceed to a swap ofthe national and provincial securities that were issued as substitutes for the national legal tender throughout the country's territory, under a prior agreement with all provincial jurisdictions.
9.11 The provincial jurisdictions will have to adhere to the swap instituted by the National Government with the purpose of materializing the agreement to which Article 12, Law No. 25.561 refers and entrust the National Government with the respective swap, binding themselves to undertake the whole of the debt arising therefrom and securing it through their Federal tax sharing resources.
9.12 Once the program is finalized and in the assumption that a remainder ofbonds are still in circulation, the provinces have to undertake to issue the necessary rules to revoke the settlement power of said remainder and to issue a substitute provincial secured bond, with due date on the year 2006.
9.13 Given that the public bonds involved in the swap are atomized in the hands of private holders and financial institutions throughout the national temtory, it is necessary to instrument it in such a manner that an effective and transparent procedure is guaranteed, to be implemented in a short period oftime. The decision has been made to carry it out through a system ofpublic bids that will be conducted by the Central Bank of the Republic of Argentina or the Ministry of Finance, the
51 later will establish and implement a special procedure that contemplates the situation ofthe small provincial bond holders.
9.14 According to Article 3 of its charter, the B.C.R.A. (Central Bank of Argentina) is empowered "[the] primary and findamental mission of the Central Bank of the Republic ofArgentina is to preserve the value ofthe currency" and it has the power of regulating "the quantity of money... in the economy" and issuing "rules on monetary, financial and foreign exchange matters, pursuant to the legislation in force."
9.15 Article 30 thereof establishes that Yhe bank is exclusively responsible for issuing the bills and coinage of the Argentine Nation and no other agencies of the national Government, Provincial or Municipal govements, banks or other institutions whatsoever, shall be empowered to issue bills or metal coins or other instruments susceptible to circulate as currency.
9.16 Article 18 ofthe Organic Charter provides that the Bank shall have powers to "buy and sell at market prices, in cash and term transactions, public securities, foreign exchange and other financial assets for monetary and foreign exchange regulation purposes.
9.17 Within this framework, the Ministry ofFinance establishes, for the purpose oftheir internal use, the technical value and the reference cash price of each quasi-money. The indicative prices are set on the basis of the prices prevailing as at 01/31/2003 and the historical prices, in those cases where such information is available. The Ministry ofFinance can establish the indicative amount to be redeemed in each bid. To this purpose, the fiscal situation ofthe corresponding province shall be taken into account.
9.18 The bidding process is fblly multi-price and multi-bond. That is to say that the bidding is for all bonds at the same time and there is a single cut-off price set per security and per province, since this redemption methodology makes it possible to capture the best market conditions.
9.19 There is a redemption tranche called competitive where the bidder indicates the amount with which it joins the redemption and the price. Then, a non-competitive tranche is opened at the same cut-off price as for the first tranche, or lower; and finally, there is a retail tranche opened with an amount limit, at the same cut-off price as for the first tranche.
9.20 The cut-off date establishes the maximum amount (in nominal values) to be swapped per Province, since the Treasuries have to officially report on their position in quasi-money as at said date prior to the creation ofthe Redemption Program.
9.21 The bids have to be submitted through the Electronic Open Market Trading System (MAESOP) or another electronic medium, and the bidders are liable for the validity and the authenticity ofthe bonds they offer for redemption.
52 9.22 The Financing Secretariat or the Central Bank ofthe Republic ofArgentina shall be responsible for conducting the reception of bids through the MAESOP or the respective electronic means. The acceptance of bids shall be a joint decision ofthe above Secretariat and the Treasury Secretariat, the later with the involvement ofthe Under secretariat for Relationships with the Provinces. In any case, the Ministry reserves the right ofrefixing in total or in part any ofthe offers.
9.23 The bids can only be made by banks that are the provincial financial agents of each jurisdiction that has issued the quasi-money bond to be swapped or by the other banks under Law No. 21.526.
9.24 In case the physically transferred nominal bonds are less than the nominal bids sent though MAESOP or the respective electronic means, the Ministry of Finance shall determine the penalties to be applied to the Bank that is the provincial financial agent.
9.25 No delivery of physical bonds will be accepted if they have not been offered through the MAESOP or the respective electronic means.
9.26 Once the award has been made and after the delivery and control of the physical bonds takes place, the Ministry ofFinance shall credit through the financial agent of the transaction as appointed the amount corresponding to the accepted offer made through each Bank that is the provincial financial agent. If the redemption is made through the BCRA, the securities will simultaneously be exchanged for National Government bonds pursuant to the rules in force.
9.27 In case there exists a remainder, the provincial jurisdictions shall issue a secured bond with due date in 2006.
Sincerely,
Roberto Lavagna (Minister ofEconomy)
53 ADDENDUM TO THE LETTER OF DEVELOPMENT POLICY (translated from the Spanish original)
MINISTRY OF ECONOMY
Buenos Aires, April 30,2003
Mr. James D. WOLmNSOHN PRESIDENT THE WOIUD BANK WashinPton, D.C.
Ref: Economic & Social Transition Program
Dear Mr. Wolfensohn:
Given the time elapsed between the policy letter signed in the month of March and the progress made regarding the Redemption of Quasi-monies, Ideem it is necessary to introduce the following amendment:
IX. MONETAFtY UNIFICATION
9.1 The creation ofquasi-money was a way ofmitigating the financial crisis and its impact on the finances ofthe provincial public sector, especially as from the second half of2001.
9.2 In fact, quasi-monies would not have been created had there been an orderly exit from the Convertibility law, preventing an even sharper downtum in the levels ofeconomic activity.
9.3 This defensive response from the provincial public sectors was encouraged by the Federal Government in a last attempt to maintain convertibility. In fact, the LECOP bonds issued by the National Government for and on behalf ofthe provinces, became the main quasi-money in circulation (approximately ARG$3.3 billion).
9.4 The use ofquasi-monies, among other consequences, cause an erosion ofthe tax basis, since their extended use in the informal economy has devaluation and distortionary effects on the local economies and their quotation under par directly affects the sectors of the economy that have the lowest income and bargaining power.
9.5 Therefore, the redemption ofquasi-monies is strategically important to attain fiscal balance, the orderly financing of the provinces and the nation, as well as the reduction of inequity towards the more deprived sectors.
54 9.6 On the other hand, the redemption of quasi-monies will have a neutral effect from the monetary point ofview.
9.7 Both the Monetary Unification Program and the Orderly Financing Program and the decision of reducing the provincial arrears with social sectors until their complete elimination, are in line with the agreement reached between the Government ofArgentina and the International Monetary Fund. Also, these economic policy measures enjoy political and social consensus.
9.8 The main observations drawn from the document drafted by the IMF's expert panel in July, 2002 regarding quasi-moneys, are the following:
The issue ofquasi-monies both at the Federal and Provincial level represents a problem for monetary and fiscal policy because:
I.They reduce the Peso demand for transaction purposes.
11. The provincial quasi-monies have a high circulation rate because in terms of value reserve they are inferior to the Peso (they have differing acceptability values in the jurisdictions where they circulate), and
111. They are extensively used in the informal economy, contributing widely to tax evasion.
Redemption Methodology
9.9 Article 1 of Law No. 25.561 provides the following basis: 1) Proceed to the reordering of the financial, banking and foreign exchange market system; 2) reactivate the operation ofthe economy and improve the level of employment and income distribution, with a focus on a program for the development of the regional economies; 3) Create the conditions for a sustainable economic growth that is compatible with the restructuring ofthe public debt; 4) Rule on the restructuring of those obligations [that are] in the process of being executed, which are affected by the new foreign exchange regime instituted by Article 2.
9.10 Article 12 of the same law establishes that within the term and in a manner to be duly determined by the regulations, the National Executive Power will create the necessary arrangements to proceed to a swap of the national and provincial securities that were issued as substitutes for the national legal tender throughout the country's territory, under a prior agreement with all provincial jurisdictions.
9.1 1 Decree 743 dated March 28, 2003 created the Monetary Unification Program with the purpose of redeeming those provincial public securities which meet the characteristics indicated in Article 12 ofLaw No. 25.561 and their replacement by the legal tender national currency. Due to the characteristics oftheir bonds, the Program is designed for the provinces of Buenos Aires, Catamarca, Cbrdoba, Corrientes, Chaco, Entre %os, Formosa, La Rioja, Mendoza and Tucumh.
55 9.12 To participate in the Program, the provinces are required to issue the necessary provincial legislation to adhere to the Decree, assign the redemption ofthe bonds to the National State, for a par value equivalent to the stock outstanding as of January 31, 2003 (cut-off date), assume with the National State the debt resulting from the redemption and secure the debt with the allocation ofFederal Tax-sharing resources, as well as provide information on the quasi-monies as at the cut-off date.
9.13 They also have to undertake that, once the program has been finalized, should there remain a balance of outstanding bonds, each Province will make the necessary arrangements to revoke the payment capacity of such remnant and issue a substitute book-entry provincial bond, with due date on 2006.
9.14 The decree of reference authorizes the Ministry of Finance to issue Bonds ofthe National Government denominated in US. Dollars LIBOR 2012 and/or Bonds of the National Government denominated in Argentine pesos, 2% 2007, with a par value equivalent to AR$4.5 billion to be used in the above Program, while authorizing the Ministry ofFinance to agree with the Central Bank of the Republic of Argentina on the purchase of the provincial bonds acquired by the same within the framework ofthe Program.
9.15 Since the public securities involved in the Swap are dispersed in the hands of individual holders and financial institutions throughout the national territory, it is necessary to instrument it in a way that guarantees an effective and transparent procedure to be carried out in a short time. It was decided to implement it through public tenders that will be conducted by the Central Bank ofthe Republic of Argentina together with the Ministry of Finance. The later will establish and implement a special procedure that takes into account the situation of small holders ofprovincial bonds. It also contemplates the implementation of a direct redemption in those cases where, through the application of the tender mechanism, a parity is observed between the bond's par value and the national currency.
9.16 The cut-off price of each tender will be defined by the Ministry of Finance, using market references as at 01/31/03, while also taking into account the fiscal situation of the corresponding province.
9.17 Resolution No. 266/2003 regulating the Decree established that the Program is to be implemented through public bids with the following guidelines: a) bids will be received from authorized financial institutions, for their holdings as well as for those holdings ofthird parties that designate them as agents, b) there will be a single tender per province.
9.18 The Central Bank's organic charter authorizes it, in article 3, "it is the primary and hdamental mission of the Central Bank ofthe Republic ofArgentina to preserve the value ofthe currency" and among the powers vested on the same is that ofregulating Yhe quantity ofmoney ... in the economy" and issue "norms on monetary, financial and foreign exchange matters pursuant to the legislation in force."
9.19 Article 30 thereof reads "the bank is the sole issuer of bills and coins of the Argentine Nation and no other agency of the national govemment, or the provincial governments, or
56 the municipalities, banks or other institutions whatsoever, shall have powers to issue bills or metallic coins or other instruments that are liable to circulate as money."
9.20 Article 18 of the Central Bank's charter provides that the Bank will be authorized to "buy and sell at market prices, in cash and term transactions, public bonds, foreign exchange and other financial assets for monetary and exchange regulation purposes.
9.21 Resolution No. 266/2003 provides for a tranche of so-called competitive redemption for 60% ofthe respective issue in which bidders shall indicate the amount with which they joint the redemption and the price. Next, there is a non-competitive tranche, where the redemption price shall be the cut-off price defined in the main tranche with an additional discount of 5%. A special tranche has been designed for the National, Provincial and Municipal Public Sector, where the redemption price will be defined by the main [tranche].
9.22 There is also a retail tranche for holders of a par value equivalent ofup to AR$500 of the respective bond, in which the redemption price shall be defined by the main tranche and a special retail tranche reserved for those beneficiaries which effectively credit that they have received bonds as the result ofa public employment or social security relationship, up to the amount oftheir holdings in accounts ofthe financial agent ofthe provinces as ofthe date of the tender, not in excess ofthe par value equivalent to the last payment received by them in bonds. Such tranche is to be redeemed at its par value.
9.23 Once the award has taken place and the National Government's bonds have been deposited with the Central Bank, the Bank will credit the equivalent in pesos of the total awarded in the current accounts ofthe bidding institutions that have been awarded in the tender process. Prior to that, the provincial bonds will have been annulled.
9.24 Decree 957 of April 23,2003 includes in the Monetary Unification Program, the Provincial Obligations Cancellation Bills (LECOP, for the Spanish acronym). The provinces will assign the redemption of LECOPs for the corresponding amounts pursuant to Decree No. 1261/02. The Treasury Secretariat of the Ministry of Finance will provide for the redemption ofthose securities that are not comprised in the previous paragraph.
9.25 The above Decree authorizes the Ministry of Finance to issue Bonds of the National Government denominated in U.S. dollars LIBOR 2012 andor Bonds of the National Government denominated in Argentine pesos 2% 2007 for a par value equivalent to AR$3.3 billion to be used in said Program.
9.26 The LECOPs shall be redeemed directly at their par value on a daily basis for an amount equivalent to the revenues received in LECOPs by the Federal Administration of Public Revenues in payment for national taxes.
9.27 On April 3, 2003, the provinces reaffirmed their will to achieve monetary unification, materializing the consent to which Article 12 of Law No. 25.561 refers through the Covenant on Monetary Reunification executed on said date, declaring that, for the purpose of preventing the Program from becoming excessively burdensome for the Provinces and
57 for the National State, it was necessary to make some regulatory adjustments in order to allow for the use of the Bonds contemplated under the same at their par value.
9.28 In that sense, a draft bill has been submitted to Congress, whereby the Central Bank will be authorized to receive from the National State, for the exclusive purpose ofimplementing the Monetary Unification Program, the "Bonds of the National Government denominated in Argentine pesos 2% 201 1" at their par value and for up to a par value amount equivalent to A.R$7.8 billion. In any case, the Program is independent from the approval of this bill and can be implemented immediately, as it is already the case. The law only modifies aspects connected with the relationship between the Central Bank and the National State.
9.29 In case the National Congress introduces any modifications in the Monetary Unification Program or the instruments defined for its implementation, the necessary adjustments will be made in the Program.
Sincerely yours,
Roberto Lavagna (Minister ofEconomy)
58 (translation from the Spanish original)
Buenos Aires, April 30,2003
Mr. James D. Wolfensohn President World Bank
Dear Mr. Wolfensohn,
Iwould like to ratify the strong commitment assumed by the Government ofArgentina to implement the Monetary Unification Program.
Such program has already involved important efforts carried out by the National Government and Provincial Governments, as demonstrated in the evidence provided to the World Bank (Decretos de Necesidad y Urgencia del PEN Nro. 743/03 - related to the implementation ofthe Unified Monetary Program - and Decree 957/03 -related to the redemption ofLECOPS--, as well as the respective regulations).
Sincerely yours,
Roberto Lavagna (Minister ofEconomy)
59 Annex 4: Key Economic Indicators Page 1 of 2
Actual Estimate Indicator 1995 1996 1997 1998 1999 2000 2001 2002
National accounts (YOof GDP) Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculturea 5.7 6.0 5.6 5.6 4.7 5.0 4.8 10.6 Industry' 28.0 28.4 29.1 28.6 27.8 27.6 26.6 31.9 Servicesa 66.3 65.6 65.3 65.8 67.4 67.4 68.6 57.4
Total Consumption 82.5 82.6 82.9 82.6 83.7 84.4 84.5 72.8 Gross domestic fixed 17.9 18.1 19.4 19.9 18.0 16.2 14.2 12.0 investment Government investment 2.2 2.0 2.0 2.0 1.8 0.9 1.o 0.2 Private investment (Includes increase in 15.8 16.1 17.3 17.9 16.2 15.2 13.2 11.8 stocks) EXPOITS (GNFS)~ 9.6 10.4 10.5 10.4 9.8 10.9 11.5 27.7 Imports (GNFS) 10.1 11.1 12.8 12.9 11.5 11.5 10.2 12.5
Gross domestic savings 17.5 17.4 17.1 17.4 16.3 15.6 15.5 27.2 Gross national savings' 15.9 15.6 15.2 15.0 13.8 13.1 12.5 20.9
Memorandum items Gross domestic product (US$ bn, current prices) 258.0 272.1 292.9 298.9 283.5 284.2 268.7 102.2 Gross national income per 7380.0 7750.0 8160.0 8030.0 7570.0 7450.0 6950.0 4750.0 capita (US$, Atlas method)
Real annual growth rates (%, calculated at 1993 prices) Gross domestic product at market prices -2.8 5.5 8.1 3.9 -3.4 -0.8 -4.4 -10.9 Gross Domestic Income -2.8 5.5 8.1 3.8 -3.4 -0.8 -4.4 -10.7
Real annual per capita growth rates (%, calculated at 1993 prices) Gross domestic product at market prices -4.2 4.2 6.8 2.6 -4.6 -2.0 -5.6 -12.1 Total consumption -4.9 4.7 6.7 1.8 -3.8 -1 .o -5.6 -14.6 Private consumption -5.6 5.4 7.6 1.8 -4.8 -1.1 -6.0 -16.2
Balance of Payments (US$m) EX~O~~S(GNFS)~ 24979 28381 30928 31137 27862 31149 30976 28253 Merchandise FOB 21162 24043 2643 1 26434 23309 264 10 266 IO 25352 Imports (GNFS)~ 26038 30149 37414 38667 32763 32879 27437 12872 MerchandiseFOB 18804 22283 28554 2953 1 24 103 23852 19159 8469 Resource balance -1 060 -1767 -6485 -7530 -4900 -1730 3539 15381 Net current transfers 554 448 464 406 398 294 22 1 395 (including official current transfers) Current account balance -5175 -6822 -12239 -14530 -11900 -8807 -4483 8954 (after official capital grants)
Net private foreign direct 5994 7968 11921 928 1 21147 12645 3067 -2069 investment Long-term loans (net) 372 3399 3465 9303 3473 -141 -7271 -7 144 Official 3516 2027 645 2349 1143 1957 1 I695 -1592 Private -3144 1372 2820 6954 2330 -2098 -18966 -5551 Other capital (net, including -1294 -663 127 -617 -11519 -4136 -3395 -3600 errors and omissions) Change in reserves /d 102 -3882 -3273 -3438 -1201 439 12083 3859
Memorandum items Resource balance (% of -0.4 -0.6 -2.2 -2.5 -1.7 -0.6 1.3 15.1 GDP at current market prices)
Real annual growth rates (1995 prices) Merchandise exports (FOB) 25.3 6.4 13.7 11.7 -0.8 2.9 4.4 -0.1 Primary 29.0 8.0 -1.6 22.6 -0.8 -1.5 22.0 Manufactures 27.9 5.8 13.8 1.6 -11.0 4.4 -1.3 Merchandise imports (CIF) -1 1.4 19.9 31.2 8.9 -13.4 -1.1 -17.3 -54.5
60 page 2 of2 Key Economic Indicators - Argentina
Actual Estimate Indicator 1995 1996 1997 1998 1999 2000 2001 2002
Public finance (% of GDP) Current revenues 19.0 17.2 18.7 18.8 19.6 19.8 19.0 17.8 Current expenditures 18.8 18.1 19.1 19.1 21.2 21.3 21.4 18.6 Current account surplus (+) 0.2 -0.9 -0.4 -0.3 -1.5 -1.5 -2.3 -0.8 or deficit (-) Capital expenditure 1.2 1.3 1.3 1.3 1.1 1.o 1.o 0.7 Foreign financing 2.4 3.2 2.3 3.2 3.6 2.6 -1.2 -1.8
Monetary indicators M2iGDP (at current market 20.8 23.7 27.9 32.1 36.1 38.7 36.0 12.9 prices) Growth of M2 (%) -4.3 20.0 26.9 17.1 6.9 7.5 -12.1 -58.4 Private sector credit growth / -21.7 98.2 106.6 135.0 -93 141.2 -820.1 100.0 total credit growth (%)
Price indices( 1993 =loo) Merchandise export price index 108.8 115.9 111.9 100.3 89.1 98.0 94.7 90.4 Merchandise import price index 106.9 105.6 103.2 97.9 92.4 92.4 89.7 87.2 Merchandise terms oftrade index 101.8 109.8 108.4 102.5 96.4 106.1 105.6 103.7 Real exchange rate (US$/LCU)f 182.98 182.46 192.75 198.76 200.89 206.13 209.95 96.64
Consumer price index (% growth rate) 1.6 0.1 0.3 0.7 -1.8 -0.7 -1.5 41.0 GDP deflator (% growth rate) 3.2 -0.1 -0.5 -1.7 -1.8 1.o -1.1 30.8
a. If GDP components are estimated at factor cost, a footnoote indicating this fact should be added. b. “GNFS” denotes “goods and nonfactor services.” c. Includes net unrequited transfers excluding official capital grants. d. Includes use ofIMF resources. e. Should indicate the level ofthe government to which the data refer. f. “LCU” denotes “local currency units.” An increase in US$/LCUdenotes appreciation.
61 Annex 5: Key Exposure Indicators - Argentina Page 1 of 1
Actual Estimate Indicator 1995 1996 1997 1998 1999 2000 2001 2002
Total debt outstanding and 99.1 110.6 125.1 141.9 145.3 146.6 140.3 134.3 disbursed (TDO) (US$bn) a
Net disbursements (US$bn) a 13.2 11.5 14.4 16.9 3.4 1.3 -6.3 -5.9
Total debt service (TDS) 12.4 15.9 19.9 19.9 27.1 32.3 33.9 29.0 (US$bn)a
Debt and debt service indicators (sl,) TDO/XGS 396.9 389.7 404.3 455.8 521.5 470.6 452.8 475.5 TDOIGDP 38.4 40.6 42.7 47.5 51.2 51.6 52.2 142.5 TDSIXGS 49.6 56.0 64.3 63.9 97.4 103.7 109.6 102.5 ConcessionaVTDO
IBRD exposure indicators (%) IBRD DS/public DS 4.6 3.8 3.2 3.6 3.6 3.8 4.0 6.5 Preferred creditor DS/public 32.4 25.6 17.1 18.7 22.7 DS (%)b IBRD DS/XGS 2.3 2.1 2.1 2.3 3.6 4.0 4.4 6.6 IBRD TDO (us$m) 4913 5316 5816 7417 8596 9054 9673 8513 Of which present value of 245 238 238 guarantees (US$m) Share of IBRD portfolio (%) 4.3 4.9 5.1 6.1 7.0 7.4 8.0 7.0 IDA TDO (US$m) 0 0 0 0 0 0 0 0
IFC (US$m) 788 799 914 880 1019 1196 1095 1008 Loans 655 658 628 592 716 822 723 660 Equity and quasi-equity / 133 141 286 288 303 374 312 348
MIGA MIGA guarantees (US$m) 150 122 169 218 .. a. Includes public and publicly guaranteeddebt, private nonguaranteed,use of IMF credits and net short- term capital. 2002 is as of end third quarter of 2002. Source: Ministry of Economy. b. “XGS denotes exports of goods and services, including workers’ remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements. d. Excludes present value of guarantees. e. Includes equity and quasi-equity types ofboth loan and equity instruments.
62 Annex 6: Argentina-Financial Position in the Fund (as of March 3 1,2003)
I.Membership Status: Joined: September 20, 1956; Article VI11
11. General Resources Account: SDR Million %Quota Ouota 2,117.10 100.00 Fund holdings ofcurrency 12,788.77 604.07 Reserve position in Fund 0.02 0.00 Holdings Exchange Rate
111. SDR Department: SDR Million %Allocation Net cumulative allocation 318.37 100.00 Holdings 800.38 25 1.40
IV. Outstanding Purchases and Loans: SDR Million %Quota Stand-by arrangements 9,988.53 471.80 Extended arrangements 683.16 32.27
V. Latest Financial Arranpements: Approval Expiration Amount Approved Amount Drawn Tme Date Date {SDR Million) {SDR Million) Stand-by Jan 24,2003 Aug 3 1,2003 2,174.50 973.20 Stand-by Mar 10,2000 Jan 23,2003 16,936.80 9,756.3 1 ofwhch SRF Jan 12,2001 Jan 11,2002 6,086.66 5,874.95 EFF Feb 04,1998 Mar 10,2000 2,080.00 0.00
VI. Projected Payments to Fund (Expectations Basis) (SDR Million; based on existing use of resources and present holdings of SDRs): Forthcoming
2003-2004 -2005 -2006 -2007 Principal 3,940.46 4,971.15 1,130.47 507.95 121.65 Charges/Interest --326.84 140.65 31.16 10.30 0.86
Total 4,267.31 5.111.80 1,161.63 518.25 122.51
This schedule presents all currently scheduled payments to the IMF, including repayment expectations where applicable and repayment obligations otherwise. The IMF Executive Board can extend repayment expectations (within predetermined limits) upon request by the debtor country if its external payments position is not strong enough to meet the expectations without undue hardship or risk (see repayment schedules and IMF lending for details).
63 Projected Payments to Fund (Obligations Basis) * (SDR Million; based on existing use of resources and present holdings of SDRs): Forthcoming
2003-2004 -2005 -2006 -2007 Principal 3,256.82 3,714.12 2,132.82 959.68 486.60 ChargedInterest --327.02 172.32 70.83 28.13 10.04
Total 3.583.83 3.886.43 2,203.65 987.81 496.64
* This schedule is not the currently applicable schedule ofpayments to the IMF . Rather, the schedule presents all payments to the IMF under the illustrative assumption that repayment expectations-except for SRF repayment expectations-would be extended to their respective obligation dates by the IMF Executive Board upon request ofthe debtor country (see reDavment schedules and IMF lending for details). SW repayment expectations can be extended by a maximum ofone year, to either a new expectation date or an obligation date. Therefore, SRF repayments are shown on their current expectation dates, unless already converted to an obligation date by the IMF Executive Board.
VII. Implementation of HIPC Not Initiative: Applicable
Prepared by Finance Department
64 0 0 N x 2 R Annex 8: Statement of IFCs Held and Disbursed Portfolio
2000 ASF 20.00 0 0 20.50 20.00 0 0 20.50 1998 AUTCL 5.22 0 0 0.00 5.22 0 0 0.00 199412002 Aceitera General 1.25 0 0 0.00 1.25 0 0 0.00 196Ol1995l199711999 A c indar 74.72 16.43 10.00 22.50 74.72 16.43 10.00 22.50 19941199511996 Aguas 46.62 6.95 0 75.63 46.62 6.95 0 75.63 1977/19841198611988/199411996 Alpargatas 0.00 0.00 0 48.79 0.00 0.00 0 48.79 1999 American Plast 6.00 0 0 0.00 6.00 0 0 0.00 1993 Arg Equity Inv. 0 2.79 0 0.00 0 2.79 0 0.00 2000 Argentina SMMC 23.66 12.50 0 0.00 20.21 12.50 0 0.00 199411999 BGN 0 0 33.00 0.00 0 0 33.00 0.00 2001 BSFE 4.66 0 0 0.00 4.66 0 0 0.00 199611999 Banco Galicia 65.00 0 0 245.00 65.00 0 0 245.00 1996 Bansud 1.51 0 0 0.00 1.51 0 0 0.00 2000 Bco Hipotecario 25.00 0 0 102.50 25.00 0 0 102.50 1996 Brahma - ARC 2.86 0 8.50 0.00 2.86 0 8.50 0.00 1997 Bunge-Ceval 8.57 0 5.00 0.00 8.57 0 5.00 0.00 1996 CAPSA 5.45 0 5.00 15.00 5.45 0 5.00 15.00 1999 CCI 0 20.00 6.00 0.00 0 20.00 6.00 0.00 1995 CEPA 6.67 0 3.00 1.20 6.67 0 3.00 1.20 2000 Cefas 10.00 0 5.00 0.00 6.00 0 5.00 0.00 1999 Correo Argentino 52.18 6.82 5.18 0.00 52.18 6.82 5.18 0.00 1994 EDENOR 3.43 0 15.00 0.00 3.43 0 15.00 0.00 1998 F.V. S.A. 7.50 0 4.00 0.00 7.50 0 4.00 0.00 1998 FAID 0 2.17 0 0.00 0 2.17 0 0.00 2000 FAPLAC 10.00 0 5.00 0.00 10.00 0 5.00 0.00 1997 FRIAR 10.00 0 2.50 7.00 10.00 0 2.50 7.00 1996 Grunbaum 6.00 0 2.00 3.33 6.00 0 2.00 3.33 199511997 HSBC Argentina 19.00 0 20.00 0.00 19.00 0 20.00 0.00 1998 Hospital Privado 9.06 0 0 0.00 9.06 0 0 0.00 1992 Huantraico 0 27.00 0 0.00 0 0.00 0 0.00 199511997 KleppelCaldero 10.21 0 0 0.00 10.21 0 0 0.00 1996 MBA 0 0.16 0 0.00 0 0.16 0 0.00 199211993l1996 Malteria Pampa 3.67 0 1 .oo 0.00 3.67 0 1.00 0.00 199712000 Milkaut 5.63 5.03 10.00 1 SO 5.63 2.86 10.00 1 SO 197811 98 I I1 9 8611 98711 99 1 I1 99311 99611 M inetti 45.00 0 14.00 110.91 45.00 0 14.00 110.91 199311994 Molinos 0 5.55 0 0.00 0 5.55 0 0.00 1995 Nahuelsat 8.82 0 0 0.00 8.82 0 0 0.00 199611999 Neuquen Basin 0 31.40 0 0.00 0 11.62 0 0.00 1993 Nuevo Central 0 3.00 0 0.00 0 3.00 0 0.00 1998 Patagonia 2.36 0 1 .oo 0.00 2.36 0 1 .oo 0.00 1998 Patagonia Fund 0 14.97 0 0.00 0 7.95 0 0.00 1996 Pecom 3.64 0 0 0.00 3.64 0 0 0.00 199011994 Petroken 2.41 0 0 0.23 2.41 0 0 0.23 1994 Quilmes 4.00 0 0 0.00 4.00 0 0 0.00 1992 Rioplatense 5.33 1 .oo 0 1.67 5.33 1 .oo 0 1.67 1999 S.A. San Miguel 7.75 0 0 0.00 7.75 0 0 0.00 1996 SIDECO 0 15.00 0 0.00 0 15.00 0 0.00 1995 SanCor 8.75 0 20.00 0.00 8.75 0 20.00 0.00 1995 Socma 6.26 0 0 15.00 6.26 0 0 15.00 1997/19981199912003 Suquia 32.00 0 10.00 20.00 32.00 0 10.00 20.00 1997 T61 6.67 0 5.00 15.00 6.67 0 5.00 15.00 1987/1989119901199611997 Terminal 6 9.29 0 0 6.50 9.29 0 0 6.50 1995 Terminales Port. 3.50 0 0 0.00 3.50 0 0 0.00 199512000 Tower Fund 0 19.83 0 0.00 0 18.61 0 0.00 1995 Tower Fund Mgr 0 0.07 0 0.00 0 0.07 0 0.00 199611997 Transconor 20.29 0 17.87 157.58 20.29 0 17.87 157.58 2001 USAL 10.00 0 0 0.00 7.00 0 0 0.00 1997 Vicentin 16.56 0 0 1 .oo 16.56 0 0 1 .oo 1993 Yacylec 3.00 5.04 0 0.00 3.00 5.04 0 0.00 1996 Zanon 17 67 n n 000 1767 0 0 0 00 *Q .Hi * % &5s7,1?a 19 885 870.83 646.?.2& \3$,$1 *870.$3
66 Annex 9
Argentina at a glance 5/1/03
Latin Upper- POVERTY and SOCIAL Argentina America middle- (2002) & Carib. income Most recent estimate Development diamond* Population. mid-vear (millions) 37.9 524 504 GNI per capita (Atlas method, US$) 4,060 3,560 4,460 Life expectancy GNI (Atlas method, US$ billions) 154 1,862 2.248 I Average annual growth. 1996-2002 T Population I%) 1.3 1.5 1.3 Labor force I%J 2.1 2.2 1.8 GNP Gross Most recent estimate (latest year available, 1995-2002) per primary capita enrollment Poverty (% of population below national povertv line) 58 Urban population (% of total populat/onJ 88 76 77 Life expectancy at birth h'ears) 74 70 71 Infant mortalitv (per 1,000 live births) 17 29 24 Child malnutrition (% of children under 5) 5 9 9 Access to safe water Access to safe water /% ofpopulafiOnl 79 85 87 Illiteracy I%ofpopulation aGe 15+) 3 11 10 Gross primary enrollment (% of school-age population) 120 130 127 -Argentina Male 120 131 128 Female 120 128 126 Upper-middleincomegroup I KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1981 1991 2001 2002 Economic ratios* GDP IUS$ 6lllionsJ 78.7 189.7 268.7 102.2 Gross domestic investmenffGDP 22 7 14.6 14.2 12.0 Trade Exports of goods and serviceslGDP 69 7.7 11.5 27.7 Gross domestic savingslGDP 22.2 16.2 15.5 27.2 Gross national savinas/GDP 13.4 12.5 20.9 Current account balance/GDP -6.2 -1.3 -1.7 2.9 Domestic Interest pavments/GDP 6.2 3.3 4.5 3.1 Investment Savings Total debt/GDP 45.3 34.5 52.2 131.5 Total debt service/exDorts 45.7 35.6 109.6 102.5 Present value of debffGDP 54.7 Present value of debffexports 401.3
1981-91 1991.01 2001 2002 200246 Indebtedness (avg annual growth) GDP -0.1 29 -4.4 -10.9 -Argentina GNP Der capita -2.5 1.6 -5.6 -12.1 Upper-middleincomegroup Exports of goods and services 4.7 6.5 2.7 3.2
STRUCTURE of the ECONOMY 1981 1991 2001 2002 Growth of Investment and GDP (%) (% of GDP) Agriculture 6.5 6.7 4.8 10.6 Industry 40.3 32.7 26.6 31.9 40 Manufacturing 28.8 24.4 17.0 21.3 Services 53.2 60.6 68.6 57.4 Private consumption .. 80.4 73.9 64.8 General government consumDtion 3.7 10.6 7.9 Imports of goods and services 7.4 6.1 10.2 12.5
1981-91 199141 2001 2002 (average annual growth) Growth Rate of Exports and Agriculture 0.7 3.2 1.1 -2.3 Imports (%) Industry -0.7 2.1 -6.5 -13.5 Manufacturing -0.3 1.1 -7.4 -10.5 50 Services 0.4 3.3 -4.0 -9.2 0 -15.1 Private ConsumDtion -0.4 1.9 -4.8 -50 General government consumption 2.6 1.9 -2.1 -5.1 Gross domestic investment -3.6 3.4 -15.7 -36.1 -100 imports of goods and services -1.3 9.1 -13.9 -49.7 -Exports *Imports
Note: 1998 data are preliminary estimates. * The diamonds show four key indicators in the countw (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.
67 Argentina
PRICES and GOVERNMENT FINANCE 1981 1991 2001 2002 inflation Domestic orices (% change) 50 T Consumer prices 104.5 171.7 -1.5 41.0 40 Implicit GDP deflator 106.4 133.0 -1.1 30.8 30 Government finance 20 (% of GDP, includes current grants) 10 Current revenue 7.0 15.8 19.0 17.8 0 Current budget balance (cash basis) 1.2 1.5 -2.3 -0.8 -10 Overall surplus/deficit (cash basis) -5.1 -0.4 -3.3 -1.6 1 -GDPdeflator IOI-CPI TRADE I 1981 1991 2001 2002 (US$ millions) Exports and Imports Total exports (fob) 12,146 26,610 25,352 (million USS) Food 1.067 2,355 2,243 35,000 Meat 892 946 901 30,000 Manufactures 2,984 15,770 15,733 Total imports (ci0 8,403 20,321 8,989 25,000 Food 20,000 Fuel and energv 564 582 257 15,000 Capital goods 2,874 9,482 4,194 10,000 5,000 Export price index 11993=100) 95 90 97 98 99 00 w 01 02 Import price index (1993=100) 90 87 EXDO~~S W ImDorts Terms of trade /1993=100) 106 104
BALANCE of PAYMENTS 1981 1991 2001 2002 (US$ millions) Current Account BalanceMjDP (%) Exports of goods and services 10,853 14.843 30,976 28,253 ImDorts of goods and services 11,611 11,843 27.437 12.872 I I Resource balance -758 3,000 3,539 15.381 147 Net inwme -3,932 -5.862 -8,243 -6.822 2 Net current transfers -206 420 221 395 0 Current account balance -4,896 -2,442 -4,483 8,954 -2 Financing items (net) 8,089 5,236 -7,600 -12.813 Changes in net reserves -3,193 -2,794 12,083 3.859 -4 Memo: Reserves including gold (US$ millions) 16,516 14,546 10,476 Conversion rate (DEC, local/US$) 1 .o 1 .o 3.1 (8
EXTERNAL DEBT and RESOURCE FLOWS 1981 1991 2001 2002 (US$ millions) Total debt outstanding and disbursed 35,657 65.406 140,273 134,340 IBRD 477 2,790 9,673 8.513 IDA 0 0 0 0 Total debt service 5,391 5,420 33,950 28.959 IBRD 82 567 1,378 2,060 IDA 0 0 0 0 Composition of net resource flows Official grants 1 42 6 0 Official creditors 58 760 10,601 -1.824 Private creditors 7,352 38 -18,762 9.987 Foreign direct investment 676 1.836 3,067 -2,069 Portfolio eauitv 0 13 -7 -6,094 World Bank program Commitments 0 1,004 436 250 Disbursements 120 460 1,329 425 Principal repavments 46 351 680 1,353 A - IBRD E - Bilateral Net flows 74 109 649 -929 B - IDA D - Other multilateral F - Private Interest payments 36 216 699 707 C-IMF G - Shnrt-term Net transfers 38 -107 -49 -1,635 I
Development Economics
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