STRICTLY CONFIDENTIAL ahl 1 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Public Disclosure Authorized Washington, D. C. The meeting of the Executive Directors of the Bank Public Disclosure Authorized and IDA convened at 3:30 p.m. on Tuesday, May 19, 1987, in the Board Room, 1818 H Street, Northwest, under the Chairman­ ship of Mr. Barber Conable. Public Disclosure Authorized Public Disclosure Authorized MILLER REPORTING CO., INC. 507 C Street, N .E. Washington, D.C. 20002 I 2021 ,46-6666 STRICTLY CONFIDENTIAL ah2 2 C O N T E N T S AGENDA ITEM: PAGE 3. Proposed Loan - Argentina (A Trade Policy and Export Diversification Loan) Mr. Carling ............... 45 Mr. Draghi. 4 7 Mr. Haxthausen ............ 60 Mr. Malan ................ : 67 Mr. Woodward .............. 68 MILLER REPORTING CO., INC. 507 C Street, N .E. Wa.shington, D.C. 20002 ' 202\ 546-6666 STRICTLY CONFIDENTIAL ah3 3 AGENDA ITEM: 3. (Continued) : Mr. Boehmer . 7 0 Mr. Yamaguchi ............. 72 Mr. Arlman ................ 75 Mr. Keating ............... 80 Mr. Soe Lin . .............. 84 Mrs. Rubio. 88 Mr. Jembere ............... 90 Mr. Mar ion. 91 Mr. Al-Sultan ....... ..... 92 MILLER REPORTING CO., INC. 50 7 C Street, N .E. Washington, D.C. 20002 ( 202) 546-6666 STRICTLY CONFIDENTIAL ah42 42 Next we have the aforementioned loan to Argentina, Item 3 on the Agenda. It is a Report and Recommendation on a Trade Policy and Export Diversification Loan in the amount of $500 million equivalent to the Argentine Republic. Mr. Neuhaus, Assistant Division Chief, Western Hemisphere Department of the IMF, is attending this meeting. We are pleased to welcome him. Mr. Sokol of the LAC Region will introduce the proposal. Mr. Sokol, as you know, is the Country Economist. Mr. Sokol? MR. SOKOL: Thank you. Mr. Chairman, members of the Board, as background for the proposed trade policy and export diversification loan, I would like to report to you today on the goverrunent's economic policies and recent economic developments in Argentina. The challenge facing the government continues to be bringing down inflation while maintaining economic growth. MILLER REPORTING CO ., INC. 507 C Street, N .E. Washington , D.C. 20002 ( 202) 546-6666 STRICTLY CONFIDENTIAL ah43 43 Last year the government was successful in this effort. Real economic growth reached 5.5 percent following a 4.5 percent drop in 1984 while yearly inflation was brought from triple­ digit levels during the last decade down to 80 percent. In early 1987, there was a resurgence of inflationary expecta- tions. The government, however, reacted inunediately. It introduced another wage and price freeze and tightened its monetary and fiscal policies. As a result, inflation was brought down from 8.2 percent in March to 3.5 percent in April of this year. The government has concluded successful wage negotiations with the trade unions and industrialists, thus containing wage pressures on prices. Now that inflationary expectations are subsiding and relative price are reasonably in line, the government is in a position to phase out the wage and price freeze again and to move to a system of flexible price administration. The government has initiated a far-reaching trade policy reform as a centerpiece of its structural reform program which would reverse the anti-export bias of the economy. The government intends to maintain the real e xc hange rate bay devaluing the Austral by the d ifference between domestic and international inflation based on a basket MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D .C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL ah44 44 of currencies. In its efforts to increase efficiency in the economy, the government has accelerated the pace of the trade reform and eliminated non-tariff restrictions by moving additional tariff positions equivalent to some 10 percent of the value of industrial production out of the prior consulta­ tion list and into the automatic list, without increasing nominal tariffs. The government has also begin to phase out pre­ export financing subsidies. Manufactured exports have been picking up as a result of the new policies. Beyond trade reforms, the government is moving into structural adjustment programs in the financial sector, energy, public sector rationalization,industrial incentives, and the elimination of price controls. The Bank strategy is to support the government's medium-term progr am of structural adjustment. The proposed Trade Policy and Export Diversifica­ tion Loan which is before you today is the centerpiece of this strategy. This operation forms part of a concerted interna­ tional effort. You will recall being advise d recently of the conclusi on of negotiations on Ar gentina's 1987 financial package covering rescheduling of about $30 billion of MILLER REPORTING CO., INC. 507 C Street, N .E. Washington, D .C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL ah45 45 existing debt and the provision of new money loans totally $1.9 billion. The commercial banks have expressed interest that approximately $500 million of their new money be provided as cofinancing with the proposed Trade Policy Loan. It is proposed that the cofinancing take the form of a traditional parallel cofinancing. The World Bank thus will not take on any exposure to the credit risk of the commercial banks. We believe that the proposed traditional, parallel cofinancing is feasible and appropriate in this case since it does not provide any form of security by the World Bank and leaves the Bank complete discretion regarding remedial action in the event of default. I might add that we have done several such tradi­ tional, parallel cofinancing operations in the past, par­ ticularly in the period prior to the introduction of the B­ loan instruments. Thank you. MR. CONABLE: Thank you, Mr. Sokol. Mr. Carling will open the discussion. MR. CARLING: Thank you, Mr. Chairman. In looking at this loan, it is relevant to recall the discussion in the Board last Thursday of the World MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL ah46 46 Development Report. In that draft, Argentina was classified as one of the strongly inward-oriented economies, and the objective of this loan is to support the government's adoption of an outward-oriented strategy. The WDR provided strong support for such a shift, and there is every reason to believe that if implemented, it would be of major benefit to the Argentine economy. Indeed, Argentina seems to have little choice but to turn in this direction if it is to achieve economic growth with external debt alleviation. And the urgency of such policy action has been heightened by Argentina's terms of trade loss. It has been one of the economies hardest hit by the distortion of world agricultural markets. For these reasons this Chair supports the loan. I have to say, though, with some hesitancy, based on Argentina's very uneven economic policy record, that this raises a question about the government's ability to sustain desirable policy changes. In this regard, the trade policy reforms cannot be viewed in isolation. Accompanying structural reforms will help determine the effectiveness of the trade policy reforms while the pursuit of macroeconomic stabiliza­ tion policies will be an important determinant of the sustainability of the trade policy reforms. The government MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL ah47 47 will need to be committed to policy changes in all these areas, and it is appropriate that the continuation of stabilization policies will be a condition for the release of the second tranche of this loan. Even after this package of trade liberalization measures is implemented, substantial trade distortions will remain. A second-stage trade policy loan is foreshadowed. This gradual approach is a defensible strategy, but clearly, Argentina's commitment to policy reform under the current program will determine whether a second loan is possible. Finally, Mr. Chairman, the course that Argentina is embarking upon involves a 180-degree shift from the policies of the past, and we wish the Argentine authorities well as it works towards an outward economic orientation. Thank you. MR. CONABLE: Thank you, Mr. Carling. Mr. Draghi? MR. DRAGHI: We wish to express our strong support for this trade policy loan to Argentina. We fully share the objectives of the program and welcome the adoption of an outward-looking strategy to improve export competitiveness and to increase the efficiency of the Argentine industry. This Bank loan is the right complement to the MILLER REPORTING CO., INC. 507 C Street, N .E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL ah48 48 successes of Argentina's government in dealing with the extremely difficult economic situation, and the macroeconomic indicators speak quite clearly. Differently from other countries of the area, between '83 and '86, the debt service to export ratio has decreased from 134 percent to 76 percent. The debt service to GDP ratio has likewise decreased from 20 to about 9 percent in the same period of time. The adjustment effort has been massive, with great sacrifice of investment expenditure and an impressive reduction in the budget deficit. We believe that this loan constitutes a fundamental stage in the collaboration between the Argentine government and the Bank which can play a key role in the country's economic recovery and future development, and we are strongly in favor of further lending to support Argentina's efforts to achieve sustained and satisfactory rates of economic growth. However, we would like to make some specific observations on the project. The first is on the social impact; the second, on procurement ; the third, on the conditions for the release of the second tranche; the fourth, on the medium-term framework.