Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. P-7268-AR

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED SPECIAL STRUCTURAL ADJUSTMENT LOAN

IN THE AMOUNT OF US$ 2.52525 BILLION

AND ON A

PROPOSED SPECIAL REPURCHASE FACILITY SUPPORT LOAN

IN THE AMOUNT OF US$505.05 MILLION

TO THE

ARGENTINE REPUBLIC

November 3, 1998

Poverty Reduction and Economic Management UnitLatin America and the Caribbean Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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CURRENCY EQUIVALENTS(as of November 3. 1998)

Currency Unit = Argentina Peso (ArgOSArg$1 US$1

WEIGHTS AND MEASURESMetric System

FISCAL YEARJanuary I - December 31

ABBREVIATIONS AND ACRONYMS

AGN - General Auditor's OfficeASOMA - Solidarity Assistance to the ElderlyATN - National Treasury GrantsBCRA - Central Bank of ArgentinaBANADE - National Development BankCAMEL - Capital Assets Management Earnings and LiquidityCAS - Country Assistance StrategyCNV -National Securities CommissionEFF - Extended Fund FacilityFEDEI - Federal Rural Electrification FundFONAVI - National Housing FundFOPAR - Participatory Social Investment FundGDP - Gross Domestic ProductIBRD - International Bank for Reconstruction and DevelopmentIDB - Inter-American Development BankIMF - International Monetary FundINDEC - National Institute of Statistics and CensusINDER - National Reinsurance AgencyLIBOR - London Interbank Offer RateLIL - Learning and Innovation LoanLSMS - Living Standards Measurement StudyMEyOSP - Ministry of Economy and Public Works and Seri'icesNBI - Unsatisfied Basic Needs IndexOECD - Organization for Economic Cooperation DevelopmentPAMI - Integrated Program of Medical CarePRANI - Youths Nutritional ProgramPROMIN - Program for Maternal and Child Health and NutritionSAFJP - Superintendent of Administrators of Pensions and Retirement

FundsSAL - Structural Adjustment LoanSART - Superintendent of Workers' CompensationSCL - Single Currency LoanSECAL - Sectoral Adjustment LoanSEDESA - Deposit Insurance CorporationSIEMPRO - System of Information, Monitoring and Evaluation of Social

ProgramsSISFAM - Social Program Targeting SystemSME - Small and Medium Enterprise

SSAL - Special Structural Adjustment LoanSSN - National Superintendent of InsuranceTRABAJAR - Employment Support ProgramVAT - Value Added Tax

Vice President: Mr. Shahid Javed Burki, LCRVPCountry Director: Ms. Myrna Alexander, LCC7CSector Manager: Mr. Guillermo Perry, LCSPRLead Economist: Mr. Paul Levy, LCC7A

FOR OFFICIAL USE ONLYARGENTINE REPUBLIC

SPECIAL STRUCTURAL ADJUSTMENT LOAN

AND REPURCHASE FACILITY SUPPORT LOAN

Loans and Program Summary

Borrower: Argentine Republic

Amount and Terms: SSAL:$2.52525 billion-LIBOR-based Single Currency Loan(SCL) in US Dollars. with special terms: 5-vear maturity.including 3 years of grace. at 400 basis points overLIBOR. A I percent front end fee. and a 75 basis pointcommitment charge will apply, without waivers.

Special Repurchase (Repo) Facility Support Loan:$505.05 million -Contingent Loan with the same specialterms as above.

Description: The proposed loans will support the continued efforts ofthe Government of Argentina to transform its economyand to protect the gains achieved thus far. As one of LatinAmerica's most successful reformers. Argentina hasachieved price stability, opened its borders to trade,privatized public enterprises, restructured publicadministration, reformed the pension system and hasstarted the process of restoring social services. Argentinais now focusing on reforms on investment in humancapital, improved regulation, modem financial marketsupervision, and quality public administration andgovemnance.

The government showed its resolve during the 1995Tequila crisis, not only to continue with but to acceleratereforms particularly in terms of the financial sector. Theresult has been a much stronger banking system which hasheld firm despite recent problems encountered byArgentina and all emerging markets in accessinginternational capital.

The operations are preventive, aimed at mitigating thedeleterious effect of the current international financialinstability on the economy and protecting vulnerablegroups. Preventive actions are advisable due to

iii

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

Argentina's currency board arrangement, and the fact thatforeign reserve losses translate into a liquidity crunch inthe banking system. The authorities have taken additionalprecautionary actions, including an innovative contingentrepurchase facility with private banks, measures to restrainfiscal expenditures, and a precautionary Extended FundFacility with the IMF. The Bank's support would be co-financed by the Inter-American Development Bank (US$2billion for the SSAL, and US$0.2 billion for the repofacility).

Benefits and Risks: The SSAL loan will help meet critical foreign exchangeneeds of the Government and allow it to remain focussedon longer term reform issues. This would prevent thedrastic negative impacts. especially on vulnerable groups,that the abrupt absence of external financing would haveon the economy and the social gains achieved thus far. Inconjunction with the SSAL, the contingent loan in supportof the "repo" facility will strengthen the financial system'ssafety net and similarly safeguard economic and socialachievements.

A risk is that reforms could be delayed due to theupcoming elections. However. this is offset by the senseof urgency and consensus that measures must be taken toavoid a repeat of the Tequila crisis. In addition, if accessto international capital markets is not restored by mid-1999, the financial package currently assembled might notbe sufficient to meet external needs resulting in a severeeconomic adjustment. The Bank and the otherinternational financial institutions will continue to workwith Argentina, as well as globally, to react to anydeepening of the global financial crisis.

Poverty Category: Program of Targeted Intervention

Estimated Disbursements: SSAL:FY99-US$ 2.02525 billion (including capitalized front-end fee)FY00 - US$ 0.5 billion

Repurchase Facility Support Loan:FYOO-US$ 505.05 million

Project ID Number: SSAL -- AR-PE-62991Repurchase Facility Support Loan - AR-PE-62992

iv

ARGENTINE REPUBLIC

SPECIAL STRUCTURAL ADJUSTMENT LOANAND SPECIAL REPURCHASE FACILITY SUPPORT LOAN

CONTENTS

1. INTRODUCTION ............. , . .............................. 12. THE ECONOMY ............. . . . ............................... 2

A. The Convertibility Plan .....................................................B. The 1994-1995 Regional Crisis .................................................. 2C. Recent Economic Performance .................................................... 4D. The Current International Crisis and Its Impact on Argentina ....................5E. Medium-term Prospects and Financing Plan ................................................6

3. THE COUNTRY'S ADJUSTMENT PROGRAM ................... 9A. Advancing The Reform Agenda .................................................... 9B. Quality Investment in Human Capital ................................................... 10C. Efficient Financial Markets ................................................... 17D. Enhanced Regulatory Environment ...................................... 25E. Quality Public Administration and Fiscal Strengthening ........................... 27

4. THE PROPOSED LOANSS .................................................... 31A. Rationale and Objectives ................................................... 31B. Terms and Conditions ................................................... 33C. Benefits and Risks ................................................... 35

5. BANK GROUP STRATEGY .................................. 376. RECOMMENDATION ...................................... 38

TABLES

Table 1: Argentina - Key Macroeconomic Indicators ............. ................. 8

ANNEXES

Annex A: Social Indicators of DevelopmentAnnex B: Key Economic IndicatorsAnnex C: External Financing Requirements and Sources of FinancingAnnex D: Status of Bank Group OperationsAnnex E: Matrix of Policy ActionsAnnex F: Letter of Development PolicyAnnex G: Argentina at a Glance

v

ARGENTINE REPUBLICSPECIAL STRUCTURAL ADJUSTMENT LOAN

AND SPECIAL REPURCHASE FACILITY SUPPORT LOAN

1. INTRODUCTION

1. I submit for your approval the following report and recommendation on twoproposed loans: (1) a Special Structural Adjustment Loan (SSAL) to Argentina ofUS$ 2.52525 billion (single currency) in support of continued economic reforms; and (2)a contingent loan of US$ 505.05 million (single currency) to strengthen the repurchase(repo) facility that the Central Bank has with commercial banks. Both loans would be atthe special rate (LIBOR + 400 basis points), with a maturity of five years, including threeyears of grace, a one percent up-front fee and a commitment charge of 75 basis pointswithout waivers. The SSAL would be disbursed in three tranches: a first and secondtranche of US$1.0 billion each; and the third tranche of $500 million. Effectiveness ofthe repo facility loan would be based on the effectiveness of the SSAL, satisfactoryprogress in carrying out the adjustment operation, and a macroeconomic policyframework that is consistent with the objectives of that operation. The contingent loanwould disburse on activation of the repo facility, but not before July 1, 1999.

2. Argentina is in the latter stages of a successful economic transformation. Since1989, the government has shed public enterprises and removed barriers to domestic andinternational trade and capital. It instituted monetary and fiscal discipline, transformingthe hyperinflation of the 1980s into one of the lowest inflation rates in the world.Productivity gains and rapid economic growth have followed. The government tookadvantage of the Tequila crisis in 1995 to take stringent measures to strengthen thebanking system. At the same time, the government began the process of restoring socialservices, especially social safety nets, education and health, with attendant impacts on thepoor, especially women and children. Public spending on social programs has increasedconsiderably, up 20 percent per capita in real terms since the mid-1980s.

3. Despite these achievements, the country's history of high external indebtednessrelative to its export base leaves it exposed to the effects of the present turbulence ininternational financial markets. Special support serves the purpose of mitigating anunnecessary setback to the country's economic progress. Concomitantly, it supports thegovernment's efforts to move ahead with the structural reforms.

4. The Inter-American Developmeat Bank (IDB) is cofinancing the Bank's loans. Inaddition, the Bank proposes to support complementary reforms at the provincial level viaa proposed Third Provincial Reform Loan, scheduled for FY 00. Argentina is currentlyin the first year of a three-year Extended Fund Facility with the International MonetaryFund (IMF), and Argentina is in compliance with IMF conditions to date.

1

2. THE ECONOMY

A. THE CONVERTIBILITY PLAN

5. Argentina's reform agenda builds upon a successful program of "first-generation"reforms accomplished under the government's convertibility plan. The plan'. launchedin March of 1991, consisted of the following five main pillars:

(a) monetary reform, through the Convertibility Law, subsequentlysupplemented by the new charter of the Central Bank;

(b) fiscal reform, initially through a sharp improvement in the administrationof the tax system and later through a redefinition of tax instruments and rates;

(c) public sector reform, through debt restructuring, civil service reform,fiscal restructuring and an ambitious and successful plan of divestiture andderegulation of factor and product markets;

(d) social security reform, allowing for a new capitalization mechanismoperated by the private sector; and

(e) trade reform, through the elimination of export taxes and most quantitativerestrictions on imports, and the reduction of the level and range of import tariffs.Entry into MERCOSUR followed.

6. The monetary reform established a currency board-type arrangement and fullconvertibility of the peso. The monetary base must be backed by foreign exchangereserves by at least a two-thirds ratio (up to one-third may be dollar-denominatedgovernment bonds), thus strongly restricting financing of fiscal deficits.

7. Long-sought stabilization of prices followed the implementation of the reform.The fiscal, public sector, and social security reforms led to a re-definition of the role ofthe state, dramatically improving economic efficiency and allowing the government tofocus on the core social safety net and regulatory functions. Trade reform allowed localcompanies improved access to state-of-art foreign technology, and it unleashed a reneweddynamism in exports, with exports doubling from 1992 to 1997. The immediate impacton economic performance was to achieve average annual GDP growth of 8.5 percent overthe 1991-1994 period. Consumer price inflation fell to less than 4 percent by mid-1994.

B. THE 1994-1995 REGIONAL CRISIS

8. Argentina's macroeconomic stability depends on both foreign and domesticconfidence in the currency board arrangement instituted under the convertibility plan.Under this system, a decline in international reserves translates into a monetary

Two prior (1989) pieces of legislation had opened the road to deregulation and privatization: "Ley de EmergenciaEconomica."'and "Ley de Reforma del Estado."

2

contraction, as occurred in 1995, during the aftermath of the Tequila crisis.2 As aconsequence, there is a symbiotic relationship between the convertibility plan and thefinancial system, requiring strength to the financial system. Weaknesses in the bankingsystem were quickly revealed in 1995, and emergency actions were required to stabilizethe situation - with support from the IMF, IDB and the Bank. The economy contractedby 4.0 percent in 1995, and the unemployment rate soared to 18.4 percent. Nevertheless,the government's commitment to the currency board arrangement was reaffirmed and theConvertibility plan emerged stronger from that crisis.

9. The Tequila crisis, as the first true test of the convertibility plan, brought to lightimportant lessons for Argentina:

(a) as for any emerging country, it highlighted the importance of a sound bankingsystem supported by strong, prudential regulation and banking supervision. Thecrisis revealed weaknesses related to the limited nature of a dollar lender-of-last-resort in an increasingly dollarized system, particularly when the government'saccess to international credit is interrupted (although the absence of a full safetynet was a strong incentive for responsible belhavior by the banks). Increasedcapital mobility, while welcome in re-monetizing the Argentine economy, hasalso made the economy more vulnerable to external shocks and the bankingsystem, the agent of transmission of financial crises;

(b) it reemphasized the need to sustain sound macroeconomic policies. Justbefore the 1994-1995 crisis, there was a slippage in the fiscal accounts and agrowing current account deficit, both impacting the credibility of theconvertibility plan;

(c) it highlighted the extent of the real economy's vulnerability to volatile capitalflows under a currency board, particularly in view of remaining rigidities in factormarkets (labor markets in particular);

(d) the Mexican experience highlighted the difficulties in changing theexchange rate regime during periods of crisis, particularly in a highly dollarizedeconomy where the majority of private sector liabilities, government debt, andbanking credit is in US dollars. It was a widely held belief in Argentina duringthe crisis, and rightly so, that a devaluation of the currency would have had muchworse consequences than the ensuing recession. As a consequence, during thecrisis, no serious proposal was raised to abandon the currency board; and

(e) lessons for the banking system underline the need for substantial liquidassets to withstand liquidity shocks and the lack of access to international credit.Some contagion effects were observed and a limited privately funded depositinsurance scheme was introduced to limit that problem among depositors. Otherrelevant experiences include: (i) time deposits proved more fickle than sight

2 The Central Bank has some flexibilitv. in that its charter allows it to substitute up to one-third of foreign reserves withdollar-denominated govemment bonds.

3

deposits, and banks with no sight deposits suffered acute liquidity problems; (ii)banks with standardized loans and good documentation marketed loan portfolioseasier; and (iii) market risk capital requirements were seen as an importantcomplement to the high counter party risk capital requirements that had alreadybeen implemented.

10. Argentina's reaction to the 1995 crisis sent strong signals to the markets about itslong-run credibility. This was specially true with respect to its decisions to: (a) remainwith the currency board despite a rapid decline in the money supply and highunemployment; (b) allow some banks to fail and some bank depositors to lose money;and (c) react to the crisis by tightening market discipline over banks and moving tostrengthen the credibility of the currency board (for example, by moving bank andCentral Bank effective 'reserves' offshore). Even at the worst moments of the 1995crisis, the Convertibility Law (in particular its mandated coverage of high poweredmoney by international reserves) was never breached. While at the heiglht of the crisisusage of dollar denominated bonds reached its legal limitations as a share of totalreserves, the usage of bonds was quickly reduced following the crisis.

11. Aftermath to the 1995 Crisis. Despite serious prior efforts to strengthen thefinancial system, the 1995 crisis increased the urgency for reform since the financialsystem came close to the point of collapse. As a result, following the crisis, Central Bankauthorities took a number of measures to build on the growing strength of the bankingsystem both from the regulatory and supervisory perspectives (which also mitigate theneed for lender-of-last-resort functions). and increasing the liquidity in the system, actualand contingent.

C. RECENT ECONOMIC PERFORMANCE

12. Investment-led growth returned quickly following the 1995 crisis. The Argentineeconomy expanded by 4.3 percent in 1996 and by an impressive 8.6 percent in 1997. ByMay 1998, the unemployment rate had improved to a still-high 13.2 percent. Preliminaryestimates for the first half of 1998 indicate GDP growth of 7 percent.

13. External Balance. After running small trade surpluses in 1995 and 1996, a tradedeficit of under 1.5 percent of GDP appeared in 1997, partially driven by boomingimports of capital goods. A terms-of-trade shock related to primary commodity pricedeclines has played a role: the IMF estimates a decline of 1.5 percent and 4.1 percent inthe terms of trade in 1997 and 1998 respectively. So far in 1998, there has been a furtherdeterioration in the trade balance, as well as some deterioration on services accounts.The government estimates that the fall in the value of exports due to lower export priceswill total about $2.5 billion, or about 0.7 percent of GDP. The current account deficitreached 3.5 percent of GDP in 1997, and it could reach about 4.3 percent of GDP thisyear. About one-third of the current account deficit was financed by foreign directinvestment in 1997, and this share may be maintained this year.

14. Improved Fiscal Balance. The government has attempted to relieve demandpressures on the current account through an improved fiscal balance. The overall public

4

sector deficit (federal plus provincial) has declined from just over 3 percent of GDP in1996, to about 2 percent in 1997. The federal deficit, driven largely by the transitioncosts of the newly "privatized" pension system, constituted about three-fourths of thatdeficit, while the provinces' deficit constituted one-fourth. For 1998. the consolidatedfiscal deficit is projected to fall to about 1.5 percent.

D. THE CURRENT INTERNATIONAL CRISIS ANDITS IMPACT ON ARGENTINA

15. The recent turmoil in international financial markets is having an impact on theArgentine economy in various ways: the temporary closing of access to foreignborrowing; a fall in the prices of major exports; and a sharp decline in the local stockmarket. Confidence in the currency board and in the banking system, however, remainsstrong. International reserves have held fairly steady, at about $24 billion. Although thislevel is slightly lower than the $25 billion reached in early August, it is still about 7percent higher than the level of reserves held at the end of 1997. Deposits in the bankingsystem have also held steady, but the rapid expansion of credit in the first half of 1998has now slowed to near zero.

16. Argentina is highly dependent upon access to international capital markets due toits large foreign debt relative to its export base. Foreign debt service-to-export ratios forupcoming years are projected to be over 60 percent, despite the lengthening of maturitiesof public external debt. Prior to the current crisis, Argentina had been able to lengthenthe average maturity of its stock of public debt to over eight years. In recent weeks,however, foreign private lenders have expressed no interest in extending new credits toemerging markets, including Argentina. Although the export base doubled from 1992 to1997, exports of goods and non-factor services represent only about 9 percent of GDP, upfrom 6.3 percent in 1993, and it will take sustained fiscal discipline and continuedproductivity improvements to lower Argentina's high debt-service-to-export ratio.

17. The domestic stock market has fallen dramatically. The Merval stock index hasfallen by about one-third over the last six months (as of mid-October). The uncertainbusiness environment and restricted access to foreign capital have driven up domesticinterest rates sharply. Spreads on Argentine Brady bonds soared to well over 10 percent- compared to the 3-4 percent spreads during much of 1997. The prime rate for 30 dayloans in pesos reached 17.5 percent (mid-September). This figure compares to 9.1percent on average during 1997. Deposit rates have increased to a much lesser degreethan lending rates.

18. The adoption of important reforms in the financial system, further fiscalstrengthening, and the deepening of structural reforms, have been instrumental indeflecting the critical early stages of the recent Asian crisis. Despite the decline in equityand bond values, and the initial brief dip in reserves, the financial markets have remainedrelatively stable. The government has taken additional fiscal measures, reducing inAugust planned expenditures in 1998 by one billion pesos from what was approved in the1998 budget. These same levels - or less if need be-were presented to Congress in the

5

draft 1999 budget. This has sent a clear signal to the markets that the government isprepared to maintain fiscal discipline.

19. With markets closed and capital flows disrupted, Argentina will not be able tofinance its deficit nor refinance its external debt as maturities come due. In order to makethese payments, there would have to be a significant contraction in international reserves,starting in the fourth quarter of 1998. Such contraction would produce a severerecession, increases in unemployment, and would result in fiscal cuts that would gobeyond what is feasible or advisable given the timeframe available for making theadjustment. Such drastic action would result in a collapse of government services andcritical social programs. The significant loss of reserves would threaten monetary andfiscal stability. The financial system would come under stress. It is not unlikely for theeconomy to experience a repeat of the Tequila crisis, when the economy contracted by 4percent, and unemployment rose to over 18 percent. Under extreme circumstances, sucha scenario could undermine the viability of the convertibility plan.

20. To avoid this severe scenario, the government has requested extraordinaryassistance from the Bank and IDB to complement the precautionary Extended FundFacility (EFF) put in place with the IMF. The request is based on the country's strongtrack record in undertaking reforms and the quality of its macro-economic policies. It isalso prepared to undertake additional measures to advance to the next stage of structuralreforms. With the requested assistance, the government would be able to transcend theimmediate disruption of the international capital markets, facilitate reentry, and mitigatethe effects of the financial crisis on the economy, especially the poor and vulnerablegroups.

E. MEDIUM-TERM PROSPECTS AND FINANCING PLAN

21. Although GDP growth for the first half of 1998 was about 7 percent (preliminaryestimates), there are clear signs the economy is decelerating rapidly. Industrialproduction growth has fallen to less than 2 percent annual growth in recent months andpreliminary figures for employment growth indicate that it has fallen to zero. Fourthquarter economic growth will likely be close to 2.5 percent, with no improvementexpected for next year, depending upon external circumstances.

22. Argentina's financing needs are significant but manageable under normal marketconditions. For the fourth quarter of 1998, public sector financing needs amount to $4.9billion. While prudent prior borrowing and other sources of financing has secured $1.7billion of such financing, the government still requires another $3.2 billion to satisfy itsfinancing needs in 1998. Based on the official economic program, the public sectordeficit for next year would amount to $2.7 billion. Amortization of $1 1 billion, and otherfinancing needs of $0.5 billion bring the total public financing requirement to $14.2billion in 1999.

23. Total external financing needs -via the balance of payments are larger. Capitalinflows required to finance 1999 foreign debt amortizations (private and public), as wellas a projected current account deficit of US$14.8 billion, amount to about US$28 billion.

6

The government has access to a US$ 2.8 billion Extended Fund Facility with the IMF.With support from the World Bank, the IDB, and bilateral agencies, along with theabove-mentioned facility, the external financing needs for the first half of 1999 could bemet. More details of the financing plan are provided in Annex C.

24. The following is considered a likely macro-economic scenario. It assumes thatinternational markets remain closed in the first part of 1999 but that extraordinaryfinancing from multilateral organizations and other sources, such as the domestic pensionfunds, enable Argentina to meet its financing requirements. It further assumes that, inthe second half of the year, international markets gradually reopen to emergingeconomies but continuing support from the multilateral organizations, especially from theIMF, would be available. In such a scenario, the planned multilateral support (includingthe IDB and IMF) aims at keeping Argentina from losing reserves to any significantdegree, and thus prevent a severe contraction and demonetization of the economy, or theweakening of the convertibility plan. At the same time, economic activity would bemaintained, albeit at more moderate rate, with 1999 growth projected at 2 percent (seeTable 1).

25. There are many uncertainties to this scenario. Argentina must continue todifferentiate itself in the market in order to regain its access to international capital.Clearly, if access to those markets is not restored in the second half of 1999, financingneeds would go beyond what is presently covered in Argentina's financing plan andlikely sources, including augmented support by the IMF. A decline in foreign reservesmight be inevitable. A monetary shock and a much more severe recession could result.On the other hand, an earlier opening of the financial markets would allow Argentina toregain more normal financing and to grow faster. Such a scenario could result in growthin the range of 4 to 5 percent for 1999.

7

Table 1: Argentina - Key Macroeconomic IndicatorsBase Scenario

(Percent of GDP)

Projected:1997 1998 1999 2000

National AccountsReal GDP growth 8.6 5.0 2.0 4.5Total Investment 20.1 21.5 21.1 22.5National Savings 16.6 17.1 16.8 18.2Foreign Savings 3.5 4.4 4.3 4.3

Public SectorPrimary Surplus (- indicates deficit) 0.4 1.0 1.1 I .1Interest Payments 1.8 2.2 2.5 2.4

Domestic 0.4 0.6 0.6 0.5Foreign 1.4 1.6 1.9 1.9

Balance (- indicates deficit) -1.4 -1.2 -1.4 -1.3

Balance of PaymentsResource Balance -1.7 -2.5 -2.3 -2.2Current Account Balance -3.5 -4.4 -4.3 -4.3Capital Account/b 4.4 4.8 3.8 5.3

Gross International Reserves in months of 6.0 5.7 5.5 5.6imports (of goods and services /c)

Memo: GDP (US$ billion) 325.0 345.0 356.5 378.1

a! Federal Government. Provincial govemments' aggregate deficit was 0.4 percent of GDP in 1997,and it is projected to be in the 0.4 to 0.6 percent over the 1998-2000 period.

b/ Net flows. Difference between current account deficit and capital account surplus is change in netinternational reserves, as a fraction of GDP.

C/ Goods, non-factor services and factor services

8

3. THE COUNTRY'S ADJUSTMENT PROGRAM

A. ADVANCING THE REFORM AGENDA

26. The Argentine experience so far centered in changing macroeconomic rules,reducing the size and drastically narrowing the scope of the state by dismantlinginstitutions that promoted protectionism and statism. In the case of Argentina.privatization of state assets has been far reaching. and far more successful than expected.The effort to curtail an inefficient state apparatus was the result of the prior discreditingof the state, both in Argentina and broadly in Latin America, following a long period ofeconomic decline.

27. Argentina has embarked upon a new stage of reform which shifts priorities to theconsolidation of macroeconomic stabilily'. sutstcaining high r ates of growth, and thechallenge oflpoverty reduiction. The pursuit of poverty reduction has been elusive inArgentina despite relatively high growth. Following a dramatic decline in poverty in thefirst years of the convertibility plan from a peak of over 40 percent of households in 1989to about 17 percent in 1993, it started rising again, reaching about 26 percent ofhouseholds in 1997. This happened for two reasons: the lack of flexibility in the labormarkets to absorb the reallocation of resources set off by reforms requiring firms to beefficient and the recession following the Tequila crisis. Both factors contributed to agrowth in unemployment, which peaked at 18.4 percent in May 1995, and has sincedropped to 13.2 percent.

28. The challenge of poverty reduction in the context of a stable and growingeconomy is the priority for the next several years. The agenda comprises the followingfive broad policy areas:

(a) Quality Investment in Human Capital(b) Efficient Financial Markets(c) Enhanced Regulatory Environment(d) Quality Public Administration and Fiscal Strengthening

29. The proposed reforms are embedded in global trends and sustainability of reformsalready implemented, and address issues in some of the remaining structural deficienciesin the economy. The proposed reforms reflect not only Argentina's own experience buthave been enriched by the experiences of other Latin American, East Asian, and OECDcountries. There is a very close interconnection among the reforms: both the reductionin poverty, which is the first priority of the Argentine Government, and economic growth

9

would depend on reforms in the above five areas. Ultimately, the reforms can be seen asinstruments for achieving the primary goals of sustainable growth and poverty reduction.

30. The government is committed to pursuing this new, expanded reform agenda.Below, more details are provided for each of the five general categories of reform. Thegovernment's commitment is expressed in the Letter of Development Policy (Annex F)and the Policy Matrix (Annex E).

B. QUALITY INVESTMENT IN HUNMAN CAPITAL

31. For a long time, Argentina has enjoyed a high quality of humnan capital asreflected in social indicators which are ahead of many of its Latin American neighborsand other merging markets. This is especially true in terms of access to education,literacy, and average life span, thanks to social investments made early in itsdevelopment and an abundance of natural resources which have allowed high standardsof living. With a per capita income of about $8,600 in 1997, Argentina ranks among theupper-middle income countries in the developing world.

32. Despite a relatively high level of per capita income, Argentina has significantlevels of poverty and a highly skewed distribution of income which are exacerbated bythe impact of globalization on the demand for low-skilled workers and labor marketrigidities. In the area of greater Buenos Aires alone, 26 percent of the population isestimated to be in poverty (October 1997). This is an increase from 17 percent in 1993.Poverty rates outside of greater Buenos Aires are no doubt even higher: a survey of ruralpoverty carried out by the Bank in two provinces showed rates twice the urban levels.Income distribution is characterized by an upper decile with 44 percent of total income,while the lower three deciles receive approximately II percent of total income. (Incomefigures, however, exclude the impact of many social programs that deliver services freeor below cost.)

33. Argentina has an extensive system of public social programs, including healthcare, housing, nutrition and education that are often available without charge and it hasthe means to make the needed investment in human capital. But there is an importantagenda ahead to restore the quality social services, to instill greater equity in thoseservices and to reduce poverty through concerted and expanded investment in humancapital. Targeting of existing programs tends to be inefficient, and in some cases themajority of the benefits go to the non-poor. Access to clean water and sanitation, amongother things, lags far behind. Health services, especially for the poor, are inadequate andeducation has lost its relevance especially for those in lower income groups. Thedeterioration in social services and conditions has been a long process: it is primarily theresult of under investment during the protracted period of economic and politicalinstability and the failure of the state to fulfill its mandate especially in terms of theinequalities in public spending that have persisted for many decades.

34. Addressing these issues, the government has moved ahead on reforms in thesocial sectors and there have been a number of dramatic changes. Social spending hasincreased considerably from the lows in the mid 1 980s: per capita spending is up 20

10

percent on average. Social programs now account for 78 percent of total publicexpenditures by the federal and provincial governments.

35. One of the important areas of reform has been the social security system. Thepublic, pay-as-you- go system, which at the worst point of macro-crisis of the early 1 990swas badly in arrears and not adjusted to changes in cost of living, represents the largestshare of this spending. A private system has been put in place; some provincial pensionshave been included in the national system with the support of the Bank, while theminimum benefits for the continuing public system, albeit still relatively low compared tothe cost-of-living, have been increased to $ 152 per month. Beneficiaries receive theirpublic payments on time. Social security is now the single largest social program,accounting for 40 percent of total federal public expenditures.

36. Turning to the other major sectors-first. social safety nets--there have beensignificant improvement in the design and impact of these programs, especially to sincethe Tequila crisis. That crisis served to concentrate government attention to vulnerablegroups, with Bank support under the first of a series of Social Protection loans. Aninformation system on social programs and beneficiaries (SIEMPRO) has been put inplace; impact evaluations of a several social programs (TRABAJAR, FOPAR, ASOMA,PROMINE, etc) have been completed; and a new social survey (Encuesta Social- aLSMS-type survey) has been conducted.

37. These efforts are starting to have an impact on the quality of social expenditures.The government's TRABAJAR program, which funds the wage component of localpublic works in high poverty areas, provides employment for about 1-2 percent of thecountry's labor force. Recent impact evaluations indicate that it is extremely welltargeted with some 40 percent of the resources supporting the unemployed from thebottom 5 percent of the income distribution. The Bank has supported the TRABAJARprogram with three loans (the most recent was approved in June 1998).

38. In addition, more social programs are being done in a participatory manner,involving local communities. The FOPAR program, which finances basic health, watersupply and other social projects responding to local initiatives, shows a very high level ofcommunity ownership and satisfaction. Some 95 percent of FOPAR's beneficiaries arebelow the poverty line. The Bank has supported FOPAR with two loans (the most recentin October 1998). There are several other important targeted social programs, such asASOMA, a nutrition program for the elderly, PRANI, providing nutrition support forchildren, slum upgrading programs, and programs for youths and children living in thestreets, which are clearly needed to protect vulnerable groups.

39. In education, there have been significant changes in the structure of the system,especially at the secondary level. Secondary schools were decentralized to the provincesin 1991. Compulsory education has increased from seven to ten years; changes to thecurricula for primary and secondary education began in 1996 and the content is in theprocess of being modernized; a network of continuing teacher training has been put inplace; standardized testing has been introduced; and administrative reforms, particularlyaddressing abuse of medical absences and poor control over attendance, are being

11

implemented. In order to accommodate the school population because of the extension ofthe mandatory years of schooling and more generally to upgrade the system and instillgreater equity, the government has also helped the provinces with additional financing.Under the Pacto Federal Educativo, $ 400 million has been provided from 1995 to 1998for secondary school expansion and, under the Plan Social Educativ'o, $ 300 million hasbeen spent to upgrade schools and to provide texts and other pedagogical resources indeprived areas.

40. At the same time as these system-wide reforms are taking effect, additionalcompensatory programs to retain students from low-income families and to provideremedial support have been started in disadvantaged areas. Only 50 percent of youthlsfrom poor households are enrolled in secondary schools and the graduation rate forsecondary students is very low, at about 33 percent. as compared to 80 percent in OECDcountries. This high drop-out rate is of particular concern. Among the programs in placeto address these problems, a IDB-funded program, Prograina Ncicional de BecasEstudiantiles, of direct subsidies of $ 600 per year to poor families with studentsattending schools seems to be having the desired effect of keeping these students inschool. A pilot program of full-day classes, patterned after Chile's experience, is alsobeing implemented, with Bank support. in the Province of Buenos Aires in order to offsetthe learning disadvantages that students from poor families encounter.

41. The results of these efforts are starting to bear fruit: recent evaluation of studentachievement at the primary level show that attainment among students in the poorestprovinces has increased even though their overall achievement still trails that of studentsin wealthier provinces. Still. Argentina is working against the clock. In particular,investment in the educational system has been historically low since the 1 980s. A thesame time, the demand for skilled workers continues to rise and average educationattainment levels are low, especially in public schools. Unemployment among workerswith tertiary education is thirty percent less than the level for workers with onlysecondary education while the differential in unemployment rates between those with lessthan secondary education and completed secondary education is very little indicating,among other things. the poor quality and relevance of secondary education and the highexpectations of the market place. A recent review by the Bank of the status of educationin Argentina is presently being shared with local authorities with the goal of both takingstock of where we are and to highlight the challenges ahead.

42. In the health sector, there have also been major changes. While total health careexpenditures have long been high, some seven to ten percent of GDP, the results asmeasured in terms of indicators or public satisfaction with quality of care do not matchthe level of spending. Since the early 1 990s, the government has been implementing aseries of sweeping and promising reforms to improve the efficiency of the healthfinancing and delivery systems. In the area of health financing, the main reform has beento liberalize the market for health insurance among workers who contribute to themandatory union-run health system. This reform, supported by the Bank, allows choicefor workers, thereby creating competition among the union-run health plans. The reformalso mandates a minimum health care package that must be provided; thus guaranteeingworkers a specific level of service from their health plan. Finally the reform improved

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the system of off-setting automatic subsidies in the case of poor workers whosecontributions are not sufficient to finance the minimum package. At the same time, thiswas intended to curb the use of these funds to finance the operating deficits andcompensate for poor management by the health plans, as happened in the past. A seriesof regulations are being adopted to ensure portability of service, quality of service, andminimum prudential and financial standards for the union-run insurance system. Theseunion plans themselves have been the object of restructuring and consolidation. So far,some 28 health plans, with 3.4 million beneficiaries (43 percent of total), have beenrestructured, with attendant improvements in their financial situation and quality ofservice. This has restored faith by the workers that they will be able to receive medicalattention and by the health providers that they will get paid. A similar restructuring efforttook place with PAMI, the health insurer/provider for the retired. Through cost cuttingmeasures, PAMI has reduced costs by almost $ 1 billion per year.

43. Other reforms have focused on health care delivery in the public sector andprograms for the poor. The major change has been the introduction of hospitalautonomy: public hospitals, all operated at the provincial level following decentralizationin the early 1 990s, are now allowed to collect and retain fees paid by insurers (whetherunion-run or otherwise). This has been coupled with programs, financed by the Bank, totrain hospital managers. implement cost-accounting systems, license health careprofessionals, and ensure quality assurance and accreditation. While still young, thesereforms are gradually permeating the system and more than 70 percent of the publichospitals have introduced cost-recovery.

44. The program which has had the most visible impact thus far in terms of quality ofpublic health care especially for the poor is that for maternal and child care services.This program, launched in 1993 with Bank assistance, finances facilities and services inthe poorest communities in 15 provinces. In addition to improving access and utilizationamong the poorest, the program has been successful in shifting health care delivery frompassive, on-demand, clinical ambulatory care towards more effective, pro-activecommunity and family interventions which focus priority on health promotion anddisease prevention. In part, this explains the dramatic reduction in infant mortality from26 deaths per 1000 births in 1990 to 19 deaths per 1000 births in 1997.

45. Against this backdrop of many good initiatives but with more time needed forresults, the government intends to take actions to advance the agenda in several key areaswhile continuing to work on systemic institutional changes under on-going operations.The key areas are: (i) to improve the targeting of social programs for the poor, includingadding to our understanding of who are poor; and (ii) to increase the equity andefficiency of existing social sector programs in education, health and nutrition. Inparallel, the Bank is undertaking a Poverty Assessment (the previous poverty report wasprepared in 1995) which would be used as the basis for engaging the government in apolicy dialogue on further improvements to its poverty-related policies and programs.Among other things, the poverty assessment will examine access to social programs bythe poor and the role of gender in the effectiveness of social programs.

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46. Poverty Measurement. Targeting of social programs has been hindered by theabsence of a national poverty line and data on poverty outside of greater Buenos Aires.Many of the survey tools used by the national statistical agency (INDEC) have not beenrevised for more than 25 years. Improvements are underway with support from the Bankand IDB, under the regional program to strengthen poverty related data as well as underspecific social protection operations. Data on 1996 and 1997 consumption and prices(Encuesta de gastos) outside of Buenos Aires have recently become available. Withthese data, the government will be able to construct poverty line for six regions and, inconjunction with the existing household survey, provide poverty estimates for all urbanareas. In addition, it will undertake an evaluation of its unsatisfied basic needs index(NBI - Necesidades Bisicas Insatisfechas), in order to improve its utility as a povertymeasure. The Bank undertook a critique of the NBI, at the request of the government,and proposed several areas for improvement. The current index combines various indicesof basic needs, but excludes measures of health and education. A working group hasbeen established to agree on revised national poverty lines (for both urban and ruralareas) and the revision of the components of the NBI index. This will be done as acondition of third tranche. A new Poverty Map. based on the new NBI. will be availablefor the targeting of social programs after the census in 2000.

47. In the meantime, more extensive use will be made of other measures of socialneeds and tracking of program participants. At present, SISFAM, basically a system fordetermining eligibility for social programs, is being used successfully in four IDB-financed social programs. The government has prepared a plan to expand the use ofSISFAM and will progressively expand its use in at least six other programs according tothat plan by third tranche.

48. Social Sector Expenditures. While overall social spending levels have increasedsignificantly, there are concerns about efficiency; the potential for duplication is highamong diverse agencies; and targeting is not always present, or according to an explicitcriteria or systematically applied across programs. At the federal level, these targetedprograms, in total about $ 2 billion per year including unemployment insurance, accountfor a relatively small share of total spending (in contrast to social security and universalprograms in health and education) but they are important in terms of poverty reduction.Because of this, the government has undertaken a review of the beneficiary incidence ofsocial spending, financed under the Social Protection I Loan, and plans to undertake acomprehensive review its public spending, with financing provided under the PublicInvestment Strengthening Loan, in 1999. The Secretariat of Social Development, withBank support, has already contracted an external review of its programs to ensure thatthey are being efficiently managed. Based on that review, a time-bound action plan willbe agreed to implement administrative and managerial improvements.

49. One specific area-nutrition--has been highlighted as having a high potential forimproving impact and efficiency. There has been a rapid expansion and proliferation ofthese programs in recent years and the knowledge base on which to design theseprograms is weak. Under the Bank-financed Maternal and Child Health Loan, thegovernment expects to undertake the first ever national survey of nutrition. As a first stepin improving the management of these programs, the government will consolidate

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nutrition programs under one management unit in the Secretariat of Social Development,as a condition of second tranche, and eventually consolidate all nutrition programs into asingle program, targeted on the basis of beneficiary income levels and health or nutritionindicators, as a condition of third tranche. Another program which has been identified ashaving a high potential for improved efficiency and targeting is the government'sprogram of non-contributory pensions which are granted at the discretion of the executiveand legislative branches. The government will undertake a review of the program, as acondition of second tranche, and prepare new criteria on the allocation and eligibility ofbeneficiaries according to poverty criteria as a condition of third tranche.

50. At this time of crisis, it is also important to safeguard those programs which arecritical for the poor. The government has identified a select number of health, educationand social development programs, on the basis of their effective targeting andacknowledged quality, to be safeguarded during this time of fiscal restraint. Theseprogams include spending on basic education, maternal and child health care, nutrition,vaccination, chagas eradication, AIDS, rural poverty and emergency employmentprograms (Policy Matrix, Table 1 of Annex D). The total amount dedicated to theseprograms will be protected from any new budget cutbacks relative to the amount spend in1998, estimated to be at least $ 680 million. This would be verified as conditions ofboth second and third tranche. In parallel, as part of the provincial programs, budgetreforms will be made to ensure that funds transferred to the provinces for social programsare not diverted to other purposes.

51 Education. Existing Bank and IDB loans are helping to improve the quality ofeducation in the primary and secondary education areas-working directly withprovincial governments. There is still a long way to go to improve educational quality atall levels and it will take time and cost money. At present, spending on education at 3.4percent of GDP is lower than the average for the region and significantly below spendingby OECD members. To address this, the government is committed to increase spendingand has done so: as a percentage of total public spending, education's share hasincreased from 11 percent to 13.4 percent. However, the demand for additional resourcesfor the system-including that needed to improve teacher incentives and to cope withdemands for skilled labor-are increasingly difficult to accommodate within the publicresource envelop.

52. Besides striving for continued efficiency improvements throughout the system,additional cost recovery is necessary in tertiary education. Savings should be channeledinto the lower levels and to scholarships for poor students. At present, substantialresources from the education budget go to support an expensive system of highereducation, which for most students is virtually free, and benefits largely the non-poor.Per student spending in universities is estimated to be 2.5 times what it was in 1980,while per student spending on primary and secondary education are below 1980 levels inreal terms. Moreover, this spending is increasingly regressive: recent statistics indicatethat only 10 percent of the youths from the poorest families attend university--this isdown from about 21 percent in 1990-while almost 50 percent of students from therichest families attend university, up from 38 percent in 1990. The dependence onpublic universities remains high: while some 30 percent of student attend private primary

15

schools, only 12 percent of students attend private universities. At the same time,university students are taking longer and longer to complete their studies (the average isnow more than eight years) adding to the cost of the system.

53. A serious debate on the equity of the present system, the level of public fundingfor universities and the role of tuition fees to recover costs has yet to take place inArgentina. A start has made with the passage of the new federal law in 1995: this lawprovides for quality assurance and accreditation of institutions of higher learning andallows universities to charge fees, especially for post-graduate studies. In addition, theBank has provided financing, under the Higher Education loan, to support improvementsin the quality of public university education through a competitive fund, FOMEC.However, there is a need to move more rapidly on transforming the system. Thegovernment will formulate a specific policy and strategy, as a condition of secondtranche, to carry the debate forward.

54. Although the bulk of public university funding (about 85 percent) is directlyallocated by the Congress. the government has begun to apply eligibility criteria to thedirect funding by the Ministry of Education. Since 1997, it has been agreed that anybudget increases to universities will be managed by the Ministry and allocated accordingto specific criteria. Besides criteria such as quality and accreditation, the governmentproposes that the allocation of funds under two programs (quality improvements andinfrastructure) totaling $ 10 million per year in 1999 (because of budget cuts, the level ofspending has been reduced from $ 50 mlillion in 1998) will be based on measures by therecipient universities to cost-recovery for post-graduate programs, provide scholarshipsbased on merit for students from low income families, and present a consolidated budgetwhich indicates all sources of revenues and expenses. These revised criteria will beapplied to the budget for 1999 and will be verified as a condition of second tranche.Extended the recently introduced national evaluation system, the government willundertake an evaluation of all fifth year secondary students, as a condition of secondtranche, and extend that evaluation for third year poli-modal students in 1998 and 1999and record the results of the evaluation in the respective official school records, as acondition of third tranche.

55. Health. As noted above, Argentina has underway a program to reform the healthinsurance system. The strategy is to continue to support that process by extending it toprovincial health insurance programs (for provincial government employees) and otherspecialized programs (e.g., the Armed Forces) later in 2000. In parallel, the strategy is towork with a few provincial governments to pilot programs to put provincial spending forthe uninsured poor on a capita basis and offer more choice in services to the poor. Whilethis strategy is being put in place, there are several refinements to the on-going reformprogram which would enhance its effectiveness.

56. First, efforts to improve the cost-effectiveness of the government's healthprogram for the retired. PAMI, will be expanded by the competitive out-sourcing ofhealth care among major private health providers. As a condition of second tranche, areputable external consultant will have been contracted to undertake the evaluation of thebids received for the out-sourcing and, as a condition of third tranche, the related

16

contracts would have been signed. The governrment will also ensure that new regulations.designed and issued under the on-going reform program, with Bank support, will beapplied consistently. The application of specific regulations will be verified as acondition of second and third tranche. In addition, the Superindency will issue norms oncrisis resolution of the health plans as condition of third tranche. Finally, to add to thetransparency and increase consumer awareness, the government will prepare and publiclyrelease a report on the status of the restructured union-run health plans, as a condition ofsecond tranche. It will carry out a survey of consumer satisfaction, as a condition ofsecond tranche, and make the results publicly available as a condition of third tranche.

57. Unemployment Insurance and Labor Reform. A major concern in Argentina,because of the currency board arrangement, is how to enhance productivity, especially inview of the country's traditionally strong labor unions, rigidities in the labor market andexisting highly centralized collective agreements. On the fiscal side, the government hastaken steps to reduce non-wage labor charges and plans to continue that process as part ofa new tax reform. However, as of now, there is no national consensus on the next stepson labor reform, and groups which desire to liberalize the current labor law arecounterbalanced by those which seek an even more restrictive environment which wouldprotect existing employment and further raise labor costs. A reflection of this debate isthe recent adoption of a new labor law that eliminated temporary contracts, reduced theprobation period for new employees, and further centralized collective bargaining at thesame time as reducing severance costs for workers with little seniority, eliminatingselected special regimes (e.g., taxi drivers, domestic workers), and mandating arbitrationfor expired collective agreements to be started in two years. While there are somepositive features, the negative impact of these reforms on temporary contracts isparticularly worrisome in the current economic environment. A window of opportunityexists to continue to lower severance costs, through the introduction of a new fullycapitalized unemployment insurance scheme based on individual accounts. A study ofsuch a scheme will be done by the government as a conditon of second tranche and basedon that study a proposal prepared on how to enact the scheme as a condition of thirdtranche. Care has to be taken to ensure that the new scheme would eliminate severancepayments, and lower overall labor costs and uncertainty.

C. EFFICIENT FINANCIAL MARKETS

58. The financial sector has made significant progress since the beginning of theconvertibility plan: institutions have adapted their policies and products to a low-inflation environment and the sector is an active participant in global financial markets.A recent review of the financial sector by the Bank (report no. 1 7864-AR, datedSeptember 28, 1998) shows that the system is in a much better shape than at the time ofthe Tequila crisis and, especially in terms of supervision and regulation, standards areamong the highest in the developing world. However, progress has been uneven: whilethe banking sector has been strengthened, development of the capital market has laggedbehind. This has an important impact on the country's long term ability to increase itsdomestic savings rate and to reduce its dependence on foreign capital. Additionalreforms are also needed to improve access to credit for small and medium scale

17

enterprises. The proposed operation provides an opportunity for the government toaddress some of the most pressing impediments to development of a sound and robustfinancial system.

59. The Banking Sector. As documented in the Bank's recent review, Argentina'sbanking sector has gone through a number of changes. In particular, since the Tequilacrisis, there has been substantial consolidation, privatization. and increased entry byforeign institutions. The sector is in the midst of a restructuring process which saw thenumber of financial entities in the banking system cut by a third to about 1 10 entities atpresent. Based on current policy to treat foreign capital in a similar vein to domesticcapital, the additional entry of solid, diversified foreign banks should strengthen thesystem further.

60. In assessing the systemic risks facing the sector, it is important to differentiateamong banks. Relative to domestic banks, foreign ones are larger, are growing morerapidly, and have much higlher portfolio quality than domestic ones (either public orprivate). There is also variation in the quality of the private domestic banlks, and it is thesmallest ones (but certainly not all small banks) that appear to pose the greatest risks offailure. Moreover, the weakest banks, both public and domestic private, tend to besmaller and to have lower ratios of liquid to total assets. The combination of weakportfolios and low liquidity implies that these banks are most vulnerable to exogenousshocks. The portfolio quality results are reflected in 1997 profitability figures. Concernsover the low profitability of the banking system appear to be structural, reflecting morethe problematic state of public banks and small banks, with the ten largest banks having areturn-to-equity of 15.3 percent in 1997.

61. There has been a fast expansion of deposits and credit which in an of itself carriesrisks in terms of portfolio quality and management. In 1997, Argentine depositsincreased by 28 percent and credit, by 16 percent. However, this expansion has to beseen in the context of an economy that still suffers from low monetization (M2 accountsfor only 25 percent of GDP) and relatively low debt-to-equity ratios in the corporatesector. The global financial crisis, moreover, has dampened that expansion and thegrowth of deposits has since been modest and credit expansion halted in mid-1 998.

62. Privatization of Public Banks. Efforts should continue to reduce the presence ofpublic banks in the system, including national, provincial and municipal banks. Thesebanks are still a significant share of total deposits and, in terms of the quality of thesystem, the public banks have posed the biggest problem: The main issues with suchbanks are the misallocation of resources associated with non-performing loans, about 22percent of their portfolios, and the lack of fiscal discipline in the public banks' dealingswith their state owners. Their portfolio quality is low regardless of size, and this couldworsen after more rigorous audits. While posing a lesser systemic risk, they do pose afiscal burden and present a high opportunity cost to the government. If a financial crisisis associated to a fiscal crisis, public banks could create a systemic risk as well.

63. So far, the federal government has taken steps, with Bank support, to cleanup apart of its banking portfolio by closing BANADE (the former development bank) and

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putting its second-tier housing mortgage bank up for sale. The law authorizing that saleof the latter has already been passed and the prospectus ready to go; however, marketconditions are not conducive to the sale, and the government expects to offer the bankonce market conditions are more favorable. This would be done as a condition of secondtranche, subject to market conditions. On the provincial level, fifteen public banks havebeen sold, with the support of the Bank, and several more are possible candidates. Thisprocess will be further facilitated by amending the terms of the agreement with theprovinces to require sale of the residual (poorly performing) portfolios of the privatizedprovincial banks. Additional privatization would be supported as part of the proposedProvincial Reform III operation.

64. Despite advances in provincial bank privatization, there is strong public resistanceto privatize the remaining federal bank, the Banco de la Naci6n, which carries symbolicimportance and is seen by the agricultural sector as its only source of financing. As aresult, it is unlikely that the political support for privatization can be mobilized, despitethe government's willingness. The government, nevertheless, is committed to ensure thatbanking regulations and standards apply equally to both public and private banks and willreview its supervisory practices accordingly as a condition of second tranche, and presenta plan of action by third tranche. The Central Bank is currently completing acomprehensive public audit of Banco de Ia Naci6n, that will provide a clearer picture ofits financial health. That audit is expected to be completed in late 1999. Also as acondition of second tranche, the government will further issue a public documentdetailing all of the explicit and implicit guarantees that it maintains in support of theBanco de la Naci6n.

65. Small Business Access to Credit. Another major weakness in the financial sectorrelates to the access to credit by small and medium scale enterprises (SME). The 1990shave provided significant advances in availability of competitively priced credit for largecorporations, including access to foreign capital markets. However, the middle marketfirms and small businesses have yet to fully benefit from liberalization of the financialsector. Factors responsible for consistently high interest rates and limited availability ofcredit for SMEs include a weak credit culture and legal and institutional constraints.

66. Secured Transactions. One of the most important barriers to the development ofnew credit instruments for SMEs is the inadequate legal protection provided to lenders,especially with regard to secured transactions. The current legal framework restricts theuse of many types of goods as collateral, has high costs for verifying title and registeringcollateral and is difficult and costly to enforce. A modified law for secured transactions,based on the type of legal framework employed in common law countries, has beendeveloped by the Central Bank. The new law would establish a clear legal foundation forlending to SMEs on the basis of equipment purchases, inventories, accounts receivableand letters of credit, which is now almost nonexistent in Argentina. It is thegovernment's intention to submit this law to Congress as a condition of second tranche.

67. Leasing. Small businesses in Argentina also lack access to non-bank sources offinance which may offer more flexible terms than traditional loan contracts. One of themost important of these alternatives is equipment leasing. In 1997, equipment leases

19

worth approximately $250 million were written but, given the size of the economy, this isonly a fraction of potential demand. Both the legal and tax treatment of leasing haverestricted the industry's growth. The 1995 law, which provides the legal foundation forleasing, poses several problems, including a restrictive definition on goods which can beleased, limits on who can extend leases and excessive regulation of leasing contract termsand conditions. The government has drafted a revised leasing law which will besubmitted to Congress as a condition of second tranche.

68. Improving the Regulatory Framework. The Central Bank has introduced a verysound framework of prudential regulations, some of them novel, aimed primarily at thesystemic risks facing the banking system. An international comparison of regulation ofvarious banking systems in Latin America and East Asia by using extended CAMELstandards shows that Singapore, Argentina, and Hong Kong stand out as having thestrongest banking regulations. Across virtually all categories, Argentina dominates theEast Asian countries that have been beset by financial crises. Thus, whereas no bankingsystem is ever immune to sufficiently large shocks, the Argentine regulatory systemappears to be among the most robust, as it needs to be, given the constraint on officialintervention inherent under the convertibility plan.

69. As a key part of the process of improving the framework for sound banking, theArgentine financial authorities made a number of regulatory changes aimed at making thebanking system more resilient to shocks. The principal reforms adopted by thegovernment were:

* the increase in the minimum capital ratio to 11.5 percent of risk weighted assets,to discourage excessive risk-taking;

e a boost in liquidity requirements, to 20 percent of (most) bank liabilities as ofFebruary, 1998, from 15 percent two years earlier. These requirements now canbe held in a variety of forms. Thus, although high liquidity requirementsnormally constitute a burden, these are remunerated and flexible;

* enhanced disclosure on borrowers. Information is collected and distributedthrough two Central Bank facilities - the Central de Riesgo (which tracks largecorporate entities) and the Central de Informaci6n Crediticia (which providesinformation on loans of greater than $50 to individuals and small firms);

* the subordinated debt requirement, which creates a class of bank debt holderswith the incentive to monitor bank performance; and

* a contingent repurchase (repo) facility, which gives the Central Bank the option tosell dollar-denominated bonds to banks subject a buy-back clause.

70. Mechanisms for bank failure resolution are constrained by institutional and legalimpediments. To facilitate the creation of a more effective early interventioninfrastructure, there will be a review and presentation of a plan of action under this loanof such processes, including relations between the Superintendency of Banks, the Central

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Bank, and the deposit insurance fund (SEDESA). Such action will be complemented bypresentation of draft legislation protecting from personal liability financial sectorsupervisors and regulators for good faith actions taken in the performance of their officialduties, a legal impediment which creates moral hazards in current bank failure resolutionefforts. Furthermore, authorities will review regulatory guidelines for proper bankgovernance, affecting owners, management, and outside directors, and present a plan ofaction to strengthen corporate disclosure and governance.

71. The Repurchase Facility. The last item above is one of the most novel features ofthe changes since 1995 in creating confidence in Argentina's banking system. To guardagainst a repeat of the Tequila crisis, when domestic banks lost some 18 percent of theirdeposit base and credit to all but the best borrowers was severely curtailed, the CentralBank (Banco Central de la RepzTblica Argentina-BCRA) has created a new line ofdefense for the financial system. Such defense creates a needed cushion to the system,first by preventing a shock to the system by maintaining confidence and reducing theprobability of a run, and secondly, in the event of an actual liquidity shock, by reducingthe impact on banks' balance sheets. The Central Bank's repo facility acts as the lastline of defense in dealing with such liquidity shocks.

72. The repo facility allows the BCRA to engage in repurchase transactions with asyndicate of private commercial banks. It has the option of selling dollar-denominatedgovernment bonds to the participating banks, with an agreement to buy them back in twoto five years, depending on the terms agreed with the individual banks (with anembedded implicit interest rate). Thus, the facility permits the BCRA to engage indiscount lending effectively without "creating money" and allows the BCRA to act as alender of last resort without violating its commitment to maintain a 100 percent dollarreserve against liabilities. These options may be exercised at any time by the CentralBank, except if Argentina defaults on an international debt commitment. In case thefacility is called, Argentina will have to post collateral in bonds exceeding by 25 percentthe amount of credit provided by the international banks. Also, in case the internationalprice of the bonds held as collateral drops by more than 5 percent, the Central Bank willhave to meet margin calls. Repos are thus over-collateralized by 20 percent to preventthe banks from bearing the risk of loss from depreciation of the underlying securitiesduring the period they hold those instruments. The intent is to move down the liquidityand risk continuum from pure government debt to low-risk private debt.

73. As of June 1998, repo contracts were written on bonds for $6.2 billion with 13banks. The target is to maintain the repo facility equal to approximately 10 percent of thedeposit base of the banking system. The duration of the option contracts - that is theperiod over which the strike price has been locked in - varies from 2 to 5 years,depending on the issuing bank. The contracts bind both sides over their duration.Extensions to the agreements (beyond the contracted durations) can be negotiated everythree months. The BCRA's strategy is to maintain a window of option for a minimum oftwo years.

74. The facility effectively permits the BCRA to borrow at an average of LIBOR plus2 percent but the individual commercial bank contracts are not priced identically. Rather

21

than determine a single price at auction, the BCRA ranked contracts by price andawarded them until it had reached a price that it was unwilling to pay. The Central Bankis likely to exercise its options (if ever) on a pro-rata basis for all the options, rather thanto exercise on a progressive cost basis (using the cheapest ones first).

75. In the event of a liquidity crisis, the Central Bank would transfer the fundsreceived by exercising the facility to domestic banks facing a liquidity crisis, these banksin turn would presumably use the funds to pay deposit withdrawals. Banks wouldtransfer the underlying securities involved in the repo to the BCRA as collateral for theloans offered by the BCRA to the banks, and the funds lent by the BCRA would be thefunds received by the BCRA from the exercise of its options.

76. In this time of increased market uncertainty and volatility, it is important that thefacility be enhanced specially since Argentina has a weak lender of last resort. First, thesize of the facility must keep pace with the size of the deposit base (the target is about 10percent of deposits). The Central Bank is actively engaged in discussions with privatebanks in order to maintain that level, and believes that Bank support is essential inmaintaining the attractiveness of the facility. One of the ways of doing this is to ensurethat there are adequate resources to respect the margin requirements. There are two risksassociated with those requirements: first, that the value of the bonds falls beyond fivepercent; and second, that sufficient bonds or cash would be available for BCRA to makeup the lose in value. To address this latter risk, the government has requested specialsupport from the World Bank and the IDB.

77. Capital Markets. The Argentine capital markets have developed significantly inrecent years but are still less developed than the banking system. Despite the differencein the speed of development, they form an integral part of the Argentine financial system.particularly since financial holding companies provide both investment and bankingservices. While the development of the capital markets has been slow, the futureprospects for capital markets growth are excellent, particularly in view of the emergenceof institutional investors. Since 1994, the emergence of such investors has beenspearheaded by the new capitalized private pension fund system, and more recently bythe increased participation of mutual funds.

78. Insurance. The insurance sector began to modernize in the early 1 990s whichresulted in the closure of the state reinsurance company (INDER), privatization of theCa/a de Ahorros y Seguros (the largest insurance company) and substitution of premiumand product controls with solvency monitoring. Despite these advances, the industryremains one of the weaker segments of the market. Entry of new firms of the insuranceindustry has been prohibited for the past two decades. Although existing firms could besold to new investors, the restriction served to reduce competition and encourage thecontinued operation of more than 250 companies. Many of these firms are no more thanbrokers, selling assets to re-insurers, but the fragmentation of the market has contributedto high operating and marketing costs and poor customer service as measured by low lossratios (ratio of claims settled to net premiums). In 1997, the industry reported losses of15 percent on book value. The lack of development of the sector is also evident in the

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continued dominance of automobile insurance (41 percent of the total insurance market)and low penetration of life insurance (7 percent of the total).

79. The government has taken steps to strengthen the insurance market. It let theprohibition on entry expire in October 1998. Another measure is that it has graduallyincreased the minimum capital requirement for existing firms from $550,000 to $3million beginning September 30, 1998. The government is committed to prepare anaction plan as condition of second tranche and put in place a satisfactory system ofenforcement of these new capital requirements as a condition of third tranche. Thesemeasures will force weak institutions out of the market and encourage consolidations.The transition to a more competitive, open market also requires modernizing the legalframework for insurance. The government also intends to replace the existing legalframework which reflects a market structure based on a state re-insurer and providevirtually no treatment of life and annuity products.

80. The supervision of insurance firms is being strengthened to ensure that regulatorshave access to timely and accurate information and the capability to enforce prudentialrequirements. The government has adopted a "fit and proper" standard for managers andowners and enacted new regulations on reserve management to limit risky investments.The tax on insurance premiums, which represented an excessive tax on the business, isbeing gradually reduced from 8.5 percent to 0.1 percent by July 2002. A review of thelegal framework for insurance and an initial consultancy to strengthen theSuperintendency of Insurance (SSN) have also been undertaken by the government,financed with Bank assistance under the Capital Markets TA loan. The government willsubmit to Congress a draft law which improves the legal framework for the industry,including the solvency monitoring of insurance companies, separating insurancebusinesses from other business units, adopting an early warning/detection system,strengthening the process of resolving insurance companies, and establishing protectionof insurance consumers, as a condition of third tranche.

81. Mutual Funds and Securities. The mutual fund industry has grown very rapidly inArgentina since the Tequila crisis. The industry reported total assets of $ 5.4 billion atthe end of 1997, distributed between approximately 200 funds, up from only $ 300million in assets in 1994. However, the Law for Mutual Funds restricted fundinvestments outside the country to 25 percent of the total. Even though the localsecurities commission, CNV, interpreted this restriction more broadly, including anyMercosur member nation as a domestic investment, restriction on investments in foreignmarkets reduces diversification and tends to increase volatility. It also limits the productchoices of potential investors and thereby weakens the industry. To address this problem,the government will submit to Congress a modified law which removes the geographicrestriction on mutual fund investments as a condition of second tranche.

82. Excessive reliance on rating agencies is another factor which is increasing the costof equity finance. All bonds and short-term commercial paper must be rated by twoagencies before being emitted. This creates a captive market for the rating agencies andsignificantly adds to the cost of accessing the capital markets. Securities must also berated if they are to be purchased directly by the pension funds. Since the rating

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requirement specifies that the rating agencies must operate in Argentina to be consideredvalid, this requirement forces firms which are listed in foreign exchanges and rated byinternational agencies to obtain additional ratings in Argentina. The government willundertake a review of these regulations, as a condition of second tranche, and prepare anaction plan to reform the rating industry, taking into account the conclusions of thatreview as a condition of third tranche. Satisfactory progress in implementing that plan isalso expected as a condition of third tranche, including if necessary passage of resolutionsby the relevant regulatory bodies such as CNV and the Central Bank.

83. Harmonizing Taxes in the Financial Sector. There are numerous inconsistenciesand contradictions in the tax structure which discriminates between financial serviceproviders and instruments in Argentina. Two examples are the leasing industry andinsurance. In the case of leasing, the differential impact of the value-added tax (IVA) onbanks and specialized leasing companies is reported to create an advantage of 200 basispoints for the former. The tax disincentive for leasing has discouraged foreigninvestment, including IFC participation. and has reduced the growth of dedicated firms.In the case of the insurance industry, taxes on premiums are very high, reducing thecompetitiveness of insurance products. Although the federal tax on premiums are beingreduced (see para. 80), there are still municipal taxes of 0.5-1.0 percent on premiums.

84. In general, the tax system should strive for neutrality, so that market forces aredriving the financial market and not tax rules. A comprehensive study, according toterms of reference which have already been agreed, will be undertaken by thegovernment as a condition of second tranche. By release of the third tranche, thegovernment will have submitted to Congress proposed amendments in order to introducegreater neutrality.

85. Regulatory Coordination. The coordination of regulations and supervision offinancial intermediaries also needs to be strengthened. Increasingly, financialintermediaries are involved in several lines of business supervised by separate regulatoryagencies: the Central Bank; the National Securities Commission (CNV); theSuperintendent of Insurance (SSN); the Superintendent of Pension Funds (SAFJP); andthe Superintendent of Worker's Compensation (SART). Most banks also have securitiesoperations and the largest financial conglomerates combine banking, insurance, pensionfunds and securities dealings. Such conglomerates complicate the task of supervisors byproviding opportunities for shifting risks between firms in the group. Holding companiesalso make it more difficult to detect violations of regulations, such as prohibitions oninsider trading and connected lending. In fact, local law does not define what constitutesa common economic group, although the Central Bank has established criteria designedto restrict connected lending. Conglomerates also facilitate regulatory arbitrage byconcentrating activities where regulation is weakest or supervision most relaxed.

86. The financial sector regulatory bodies need to begin to develop protocols formanaging financial conglomerates. A first step is to develop mechanisms to shareinformation and establish regular meetings to discuss general problems or issuesconcerning specific institutions. Another key step is to provide greater protection tofinancial regulators from legal action related to the good-faith discharge of their official

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duties. This has proven to be a major impediment in the timely resolution of bankingfailures, for example, and puts regulatory staff at personal risk. The government willtherefore present to Congress a draft law which provides such protection, as a conditionof third tranche.

D. ENHANCED REGULATORY ENVIRONMENT

87. In both developed and developing countries, there is overwhelming evidence ofsignificant potential gains from effective regulatory reform. Such reforms are designed toeliminate barriers to economic activity and reduce administrative procedures and costs,while regulate natural monopolies, and ensure effective competition in markets whileprotecting consumer rights from a health, safety and environment point of view.

88. Argentina has implemented one of the world's most ambitious and successfulstructural reform in these areas. As part of its overall reform program, it has introducedeffective competition in the domestic market by opening up its trade regime, removingbarriers to foreign investment, liberalizing domestic goods and capital markets andbroadly deregulating the economy. In addition, Argentina has also been one of theforerunners in introducing competition in infrastructure services through sector reformsand introduction of private participation through divestment and concession contracts.Since 1989, private participation has been invited in virtually all major infrastructuresectors - telecommunications, electricitv, gas, ports, railroads, toll roads, airports andwater. Within the overall objectives of competition, promotion of entry and efficiency,state monopolies have been unbundled and privatized, sectors restructured and regulatoryframework have been introduced in most sub-sectors.

89. Argentina's achievements have been impressive in electricity, gas, transport andtelecommunications. In electricity, the sector was divided between generation,transmission and distribution, and 25 new business units were created to introducecompetition. The competitive segments of generation and production were opened toentry without detailed regulatory scrutiny, while transmission and distribution areregulated under a price-cap regime. The restructured electricity and gas industries nowhave non-discriminatory access to their transmission networks. In telecommunications,the sector was privatized, and two regional monopolies were created with initialexclusivity for the provision of basic services; this arrangement is now set to expire in1999. Value added and cellular services were immediately opened to competitive entry.A decree has been issued to phase in full liberalization of the telecom sector, and a newlaw is being prepared to embody those measures.

90. In the transport sector, Argentina has entered into concessions in virtually allsub-sectors -- railways, ports, toll roads and airports. Port restructuring and privatizationfostered competition both between ports and within ports. In the port of Buenos Aires,for example, all terminals compete for cargo movement and handling. Key port activitieswere further liberalized. In the railroad sector, the freight network was partitioned into

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six sub-networks which were then concessioned. Both in passenger and freight services,the state remains the owner of the fixed facilities, including track, stations and the rollingstock. In the water sector, Argentina was a pioneer with the concessioning of the BuenosAires water services company and followed by several other municipal water services.

91. Rationalization of the Regulatory System. Given that virtually all infrastructureservices in Argentina are provided by private providers, the need for an effectiveregulatory framework is key to promoting efficiency. Although Argentina set upregulatory entities in all infrastructure sectors when private participation was introduced.the overall performance of these regulatory institutions has been mixed. The system hasevolved piecemeal and in a fragmented fashion; it lacks consistency in the agencystructures, administrative procedures and economic and technical criteria. Additionally,as most of the regulatory entities have been created by decree rather than law, the gas andelectricity regulatory agencies being the exception, the system lacks stability because theagency structure, the tenure of the regulators and their administrative procedures can bechanged by decree. Not unexpectedly, the gas and electricity agencies, which have beencreated by law, have shown better performance than some of the others.

92. A corollary issue is the lack of autonomy of the regulatory agencies from theexecutive branch. Under their legal framework, they are subject to oversight by theexecutive branch and to an automatic executive review of their decisions in case of anappeal. Regulators perceive this automatic review, combined with their own insecurity oftenure, as limiting their operation. As a further symbol of the lack of independence of theregulatory agencies, though their financing sources are often specified in the concessioncontracts, their actual operating budgets are often subject to decisions by the executivebranch. On the other side of the coin, the regulatory agencies are not accountable fortheir performance and there is a general perception that, in most sectors, they have notbeen adequately pro-active in monitoring compliance with contractual obligations andsector performance. Thus far, there has been little review of the effectiveness orappropriateness of regulatory procedures or the impact of their decisions.

93. The government is committed to rationalizing its regulatory entities. It willsubmit a draft law to Congress, as a condition of third tranche, to harmonizeadministrative procedures, economic and technical approaches followed by utilities,rights and process of non-binding consultation with consumers, process of appealingregulatory decisions and public disclosure of information, including requirements forannual review of operational procedures and impact of regulatory decisions to beundertaken by independent firms. The same draft law (or equivalent legal instrument)will include a provision allowing the executive branch to forego its right to hear appealsif such appeals are based on technical and analytical decisions. In addition, thegovernment will prepare an action plan , as a condition of third tranche, to address theissues of independence of regulators and financial resources.

94. Regulation of The Transport Sector. One of the most noticeable areas offragmented regulation is in transport. The different sub-sectors that move freight cargo,such as roads, ports, railroads, are under different regulators, whose approaches andpolicies differ and do not always work to promote efficient multi-modal transportation.

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The government, based on an agreement to be reached with the Bank on the overallstructure as a condition of second tranche, will determine the general structure andresponsibilities of a new regulatory agency or agencies, as a condition of third tranche.

E. QUALITY PUBLIC ADMINISTRATION AND FISCAL STRENGTHENING

95. The process of reforming the state is far from complete. Argentina is a federalcountry, with a complex set of fiscal relations and strongly entrenched provincial rightsand responsibilities over natural resources, among other things. Provincialresponsibilities, moreover, have increased, relative to the federal government, as theresult of decentralization, especially in health and education. Provinces now account foralmost half of public expenditures and face their own problems of public administration,fiscal equity and governance which are being addressed in parallel through a series ofprovincial development and reforms loans and monitoring through non-lending services.At the same time, the role of the federal government, particularly in infrastructure asnoted above, has dramatically been altered as a result of privatization and deregulation.This transition to an economy dominated by private, rather than public, decisions hasplaced higher demands on the quality of the public service. According to various cross-country indicators, levels of institutional performance and integrity, while they areimproving, are perceived to be low.

96. The issue of fiscal equity is the critical feature of Argentina's reform program.On the side of expenditures, the government remains firm in its efforts to control publicspending, especially at this time of uncertainty (see para. 18). On the other side of theequation, revenues, Argentina has successfully eliminated many distortionary taxes andreduced its reliance on tax handles. A major achievement was the reduction of exporttariffs and duties on imports, which for years had been a main source of public revenue.A value-added-tax (IVA) was implemented and efforts are underway to generalize thattax. Changes to tax administration, with the support of the Bank and IDB, have helped tobuild the tax authority's capacity. Still, there are serious problems: VAT charges, at 21percent, are high and tax evasion persists, with only about 50 percent of possible taxesactually collected; the courts are ill-equipped to handle tax fraud and evasion cases; andconsumption and asset taxes account for a disproportionately large share of total revenuesas compared to taxes on corporate profit and earned income. As noted earlier (see paras.57 and 83), there are specific problems in the area of non-wage labor taxes andharmonization taxes in the financial sector, among other areas. Reforms addressingreducing evasion, extending the value-added tax, and increasing profit and income taxesare underway or contemplated under the government's letter of intent with the Fund.

97. Reform of intergovernmental fiscal relations. Argentina's federalism is groundedin the sharing of fiscal revenues. Total transfers to the provinces were $18.2 billion in1997, just under 6 percent of GDP, and financing about 56 percent of total provincialgovernment expenditures. The current system of "coparticipation" is a complex mix ofone large revenue-sharing pool (generating $11.5 billion or 41 percent of provincialcurrent revenues in 1997) and a series of tax-sharing programs. The distribution of thegeneral revenue-sharing fund is according to percentages that were fixed in place by a

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1988 law while many of the specific programs, although distributed automatically, areearmarked legally for uses such as housing or home mortgages (FONAVI -- $900million) or providing electricity service to remote rural areas (FEDEI). There are anumber of discretionary transfers (ATNs -- $538 million) as well as some specific socialsector assistance programs and investment programs. Some of these programs followfairly reasonable need-based criteria while others do not.

98. The final result is a large diversity in the level of shared revenues per capita-afive-fold difference in revenues per capita for the highest and lowest provinces. Thisdispersion is difficult to justify in terms of needs and/or cost differentials. Changes to thesystem, however, have been hard to realize even though there is wide-spread awarenessof its inadequacy. The 1994 Constitutional Reform called on Congress to enact a newcoparticipation law by the end of 1996. Congress later extended this deadline by twoyears, and this deadline will probably have to be extended again.

99. A consensus view has emerged from a series of Bank analytical reports, academicpapers, and recent government proposals for reform. The three problems to be addressedby any reform of intergovernmental fiscal relations are: (1) simplify the complicated tax-sharing/revenue-sharing system, consolidating programs into one fund, to improvetransparency; (2) introduce a rational formula-almost any rational formula-fordistributing resources across provinces; and (3) increase the degree of correspondencebetween the provincial tax payer and the provincial services he/she receives. The latterwould involve some form of decentralization of tax powers, either through moreprovincially administered taxes or provincial surcharges on federally collected taxes.

100. The government has advanced in its technical proposal for reform based onprinciples agreed with the Bank. The proposal includes: (I) putting all federally collectedtaxes into a single revenue-sharing pool, including payroll contributions for the socialsecurity system (with the minor exceptions of trade taxes and a few specialized charges);(2) separating out sector programs and eliminate their automatic financing, making themdiscretionary line items in the federal budget, in order to give more flexibility to thefederal budget; and (3) distributing funds on the basis of a formula which includes a"derivation/devolution" component plus compensation for poor provinces, and smoothsthe application to the new system (for those provinces with smaller shares in the future).

101. The government expects to be ready in several months with the details of itsproposal, which will be reviewed with the Bank as a condition of second tranche, and toinitiate a serious round of discussions with the provincial governments. The success ofthese negotiations are predicated on guaranteeing that no province will lose in terms ofrevenues on the short run. As a first step, therefore, the government will have to agreewith each of the provinces on the baseline figure. Based on past experience-in 1988when the last revision to the system was made-negotiations will be difficult and there isno guarantee of successful buy-in by the provinces. As a condition of third tranche, thegovernment will have presented its proposal to all of the provinces and carried out ameeting of all provinces to adopt the proposal.

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102. Provincial Tax Reform. An additional, long-standing problem in Argentina hasbeen the search for a substitute for the distortionary provincial gross receipts (turnover)tax. This tax is multi-stage sales tax that accumulates across the stages of production,since, unlike the value-added tax, there is no crediting for tax paid on the purchase ofinputs. Several years ago, as part of the federal fiscal pact, the provinces agreed to beginto grant exemptions to primary stages of production on this tax, as part of a process ofeventually reaching a provincial retail sales tax. The final form of the retail sales taxnever emerged, and this area of tax reform has been stalled for the last two years.

103. Progress has been made, with Bank technical assistance, in exploring thepossibility of a provincial VAT surcharge as a substitute for the gross receipts tax. Thisprovincial VAT also could be used as an instrument for further tax decentralizationwhereby the federal government would make tax room by reducing its VAT rate andallowing the provinces to increase their rate (if they wish) in exchange for reduced sharesof coparticipation. The longer-term objective is to establish fiscally strong provinces -provinces with the capacity to raise a high share of their revenues on their own and settheir own tax rates. At the same time, the system of intergovernmental relations wouldassure that transfers compensate provinces with less innate capacity to raise revenues dueto poorer tax bases. Any new provincial tax instruments must be designed so as to avoiddistortions in the location of economic activity and avoid the possibility of a province'sresidents "exporting" their tax burden to residents of other jurisdictions. The governmentis committed to completing the preparation of the detailed proposals, to be reviewed withthe Bank as a condition of second tranche, on the elimination of the gross receipts tax andon tax decentralization and engaging the provincial governments on their adoption and tomake satisfactory progress in reaching agreement with the provinces, as a condition ofthird tranche.

104. Governance and Public Ethics. The first generation of reforms already taken inArgentina have drastically changed the role and responsibilities of the state. Among themost important achievements was the privatization of major part of the economy. Notonly did this open new opportunities for investment, productivity improvement and theinfusion of new technology and management, privatization has basically eliminated thepotential for unethical and corrupt dealings by public officials in these enterprises. Theother change has been the deregulation of the economy. With the elimination of controlsover imports, foreign currency and many other areas of economic activity, the scope forunethical behavior by government officials has been severely curtailed. In addition,internal control and external auditing agencies have been restructured, with the support ofthe Bank, and there is generally much more information on government programs madeavailable to the public, especially with the use of Internet.

105. Despite these reforms, more needs to be done to restore confidence in publicagencies and to promote integrity as a positive attribute of the public administration. In aseries of actions since the 1994 constitutional amendment, culminating in the creation ofthe National Office of Public Ethics, the government has declared its intention to fightcorruption. Integrity actions such as the establishment of an ethic office, however, can beineffective if they are not set in the context of broader public sector reform andimprovements to the judicial system. To that end, the government has asked the Bank's

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support to build the capacity of the National Public Ethics Office, with an InstitutionalDevelopment Grant, and to modernize the judicial system. A Model Court Developmentloan (LIL) has already been approved and further support for the judicial system is underpreparation. In addition, the Bank and government have agreed to undertake jointly astudy on governance and integrity in Argentina and develop a common strategy.

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4. THE PROPOSED LOANS

106. The proposed special assistance to Argentina will help to preserve theachievements of the reforms undertaken by President Menem's administration since1989. It complements the preventive measures already taken by the government over thepast year to ward off the contagion effects of the East Asian crisis. Most importantly. the.proposed support helps to carry the government's reform agenda forward to a next stageby supporting measures to improve social protection and the quality of social services,strengthen the financial sector, improve effectiveness of the regulatory framework andrestructure and refocus federal-provincial fiscal relations. Underlying all of thesemeasures is the need for Argentina to incorporate equity and poverty considerations intoa consistent set of public policies and programs.

A. RATIONALE AND OBJECTIVES

107. The Bank's special structural adjustment support aims to help Argentina to reduceits vulnerability to external financial shocks at the same time as increasing its capacity forsustainable and equitable growth. Specifically, the proposed operations are intended to:(i) facilitate the reentry of Argentina to the international capital markets and avoid thegreat social and economic costs, as experienced during the Tequila crisis, associated withthe alternative of drastically contracting expenditures and depleting reserves in order tomeet the country's financial commitments while countries, such as Argentina, are shutout from the international capital market; (ii) protect vulnerable groups during thispresent period of high uncertainty; (iii) add to the lines of defense of the banking systemin order to deter and, if need be, withstand liquidity shocks; and (iv) continue Argentina'ssuccessful reform program, particularl) with a focus on the long-term issues of savingsand capital market development, efficiency in the financial sector, and public policieswith respect to regulation, tax and fiscal equity, the efficiency of social spending andquality investment in human capital.

108. The proposed support for Argentina meets the criteria set out for special structuraladjustment lending (see R98-249, dated October 2, 1998). First, in terms of thestructural dimensions, Argentina still has a high dependence on external financing whichhas come into relief now that the international capital markets suddenly have closed toemerging markets. Argentina's reliance on external financing is historic and the result ofdecades of high inflation--and bouts of hyper-inflation-- which have eroded confidence infinancial institutions and demonetized the economy. With macro-stability achieved, thatconfidence is being restored; however, M2 still only accounts for 25 percent of GDP andcapital market development has lagged. In addition, for decades, the predominant modelof economic development was a closed and protected one based on import-substitution.The economy has since been liberalized and protection lowered. Discriminatory taxes on

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exports have been removed and exports have been growing rapidly, from 6.3 percent in1993 to 9 percent of GDP in 1997. Nevertheless, exports remain a small percentage ofthe total economy. In addition, the public sector has not yet been able to sustain a fiscalsurplus and continued efforts are needed to increase public savings. But, not only is itimportant to increase public savings, adjustments to public spending and the distributionof public resources must be done in such a way as to promote social equity, quality andefficiency. This is particularly true in the area of social services where much still needsto be done. Finally, reducing the country's vulnerability is critically dependent onimproving productivity and efficiency especially in the key infrastructure services thatcontribute to export expansion. Now that these services have been privatized, soundregulatory performance is critical.

109. To address structural challenges facing Argentina, these loans incorporate thefollowing: (a) measures to reduce poverty and unemployment, both by protecting keysocial safety net programs, and advancing reforms in health and education; (b) provincesare key actors in the provision of social services, and this loan promotes therationalization of intergovernmental fiscal relations, as well as provincial tax reform; (c)further reforms in the regulatory area are recommended, following massive privatizationof public enterprises in transportation, electricity, telecommunications, and in thefinancial sector; (d) strengthening the banking sector, improving access of small andmedium enterprises to credit, and deepening the capital markets are priorities, particularlyin view of the country's variable access to international credit, and the self imposeddiscipline of the convertibility law; and (e) support of the repo facility is a keyinstrument for reducing Argentina's vulnerability to external shocks.

110. Argentina also satisfies the second main criteria for special structural adjustmentsupport, a strong policy program, as demonstrated by its track record and its intendedreform measures. Argentina achieved macro-stability with the introduction of theconvertibility plan in 1991 and since then has maintained a sound macro-economicframework. Moreover, its current record in satisfying the conditions of Bank adjustmentloans has been excellent. The Bank has extended US$ 3.8 billion in nine such operationssince 1990.3 Completed adjustment operations-- Public Sector Reform Loan (PSRL, Ln.3394-AR), Public Enterprise Reform I and II (Loans 3291-AR and 6012-AR), theFinancial Sector Adjustment Loan (In. 3558-AR), the Provincial Pension Reform Loan(Ln. 4116-AR) and the Provincial Reform Loan I (Ln. 3836-AR)--met all majorobjectives in a timely manner. The Provincial Bank Privatization Loan (Ln. 3878-AR)and the Banking Sector Reform Loan (Ln. 3926-AR) are both fully disbursed(completion report pending). The Second Provincial Reform Loans (Loans 4218, 4219,4220, 4221-AR) and Health Insurance I Loans (Ln.4002/4003-AR) are still underimplementation and are being implemented satisfactorily. In addition, the proposedprogram, as set out in the government's letter of development policy, provides thecontent of the continuing reform program and specifies the measures that the governmentintends to take to address some of the remaining key structural issues.

3 Not including a free-standing FY93 Debt and Debt Service Reduction Loan, Ln. 3556-AR.

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111. The other criteria are met. The proposed program is part of a concertedinternational support package which includes the Inter-American Development Bank aswell as the International Monetary Fund. All three institutions have made availablesimilar amounts of financing. Additional financing may be forthcoming from bilateralsources. An important feature of the overall program is the support from the privatesector through the Central Bank's Repurchase Facility. This facility provides $ 6.7billion in private financing from the international banks to support Argentina's bankingsystem in the event of a liquidity crisis. In terms of the country 's external financing plan,that plan is sustainable over the medium term, as Argentina's external public debtamounts to only 30 percent of GDP, with short term debt alone to only I percent of GDPand debt service within acceptable limits. The proposed support from the Bank forArgentina, an IBRD eligible borrower, also falls within creditworthiness and exposurelimits. It is evident, however, that a worsening of the global financial crisis facingemerging markets and a further protraction in the reopening of capital markets - beyondwhat is presently anticipated-would call for a reassessment of Argentina's financingplan and the contribution of multilateral institutions, particularly the IMF.

112. At the end of FY98, IBRD debt outstanding and disbursed to Argentina amountedto $5.5 billion, equivalent to 5.1 percent of total IBRD debt outstanding and disbursed.In FY99, net disbursements are projected to total $2.4 billion, bringing IBRD's total debtoutstanding and disbursed to Argentina up to $7.9 billion or 6.5 percent of total IBRDdebt outstanding and disbursed. These aggregates reflect planned commitments of $3.4billion, including $3 billion of adjustment lending, and gross disbursements of $2.8billion, including $2.5 billion in adjustment lending. The net disbursements exceed theranges envisaged in the March 17, 1998 CAS Progress Report by roughly $2 billion forFY99 and $1.6 billion for FY00. Based on current projections, net disbursements toArgentina in FY99 will account for around 20 percent of total IBRD net disbursements,which are now projected at close to $13 billion. This high share of net disbursements toArgentina in total net disbursements reflects the large volume of planned adjustmentlending. Commitments to Argentina for FY99 are projected to account for around 10percent of total IBRD commitments, which are currently projected at $32 billion. Theseamounts are consistent with IBRD's aggregate financial capacity.4

B. TERMS AND CONDITIONS

113. Loan Amounts. The SSAL would be a three-tranche loan of US$2.52525 billion.The first tranche of $1.02525 billion (including the capitalized front-end charge) wouldbe made available upon effectiveness, anticipated for November 1998. The secondtranche for $1.0 billion would be anticipated for March 1999, and the third tranche of$500 million, no sooner than July 1999. The closing date of the loan would be December31, 1999.

114. To support the repo facility, a contingent loan of US$505.05 million would bemade to the borrower Argentine Republic, with the proceeds made available by the

4 Programmatic and Emergency Adjustment Lending: World Bank Guidelines, R98-249, October 2, 1998

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borrower to the Central Bank. It would be drawn only if and when the repurchase facilityis triggered, and would be deposited in a special account at the Central Bank to be usedonly by the Central Bank to meet margin calls or repurchases from repo buyers (or toinvest in highly liquid securities during periods when margin calls are not necessary, withproceeds to be redeposited in the special account). If the margins move favorably, thereflows would replenish the special account. If the repo facility is not used, the loanwould not be drawn and could be cancelled upon request by the Borrower. Given thecontingent nature of the loan, and the need to be able to provide the enhancement in avery short time frame once the margin calls are made, the disbursement of the RepoFacility Support loan would not depend on satisfactory progress in the program supportedby the SSAL, once the repo has been made effective. However, effectiveness conditionsinclude effectiveness of the SSAL, satisfactory progress in carrying out the adjustmentoperation, and a macroeconomic policy framework that is consistent with the objectivesof the adjustment operation. Thus, the Repo Facility Support Loan is structured as theequivalent of part of the first tranche of the SSAL, supported by the same programconditionality as the SSAL, and potentially disbursable at any time after June 30, 1999 aslong as the SSAL first tranche has been released. As an ingredient essential to theintended support of the repo facility, the availability of such disbursement of the RepoFacility Support Loan is virtually irrevocable once the Repo Facility Support Loanbecomes effective (except for the potential impact of standard Bank remedies set forth inthe Bank's General Conditions). The closing date of the loan would be September 15,2003.

115. Terms and Conditions. Consistent with the exceptional circumstances facing thecountry, the proposed SSAL and Repo Facility Support Loan would be priced accordingto the special terms agreed by the Board (see report R98.249, dated October 2, 1998,discussed October 22, 1998). Thus the two loans would have five-year maturity,including three years of grace, and interest rate of LIBOR plus 400 basis points.Commitment and other standards fees would apply without waivers. At the request of thegovernment, and consistent with the country's external debt management policy, theproposed loans would be LIBOR-based Single Currency Loans (SCL) in US dollars.

116. Disbursement and Procurement. Loan disbursements would be made undersimplified SAL/SECAL disbursements. For the SSAL, proceeds will be disbursedagainst satisfactory implementation of the adjustment program, including compliancewith stipulated tranche release conditions. In the case of the contingent loan to supportthe repo facility, proceeds would be disbursed only if the repo facility is activated and ifthe SSAL is effective. Disbursements will not be linked to specific purchases, andsupporting evidence for disbursements is therefore not required. If after deposit is madein the Deposit Account the proceeds of the loan and any part thereof is used for ineligiblepurposes as defined in the Loan Agreement, the Bank will require the borrower to either(a) return the amount to the Deposit Account for use for eligible purposes, or (b) refundthe amount directly to the Bank, in which case the Bank will cancel an equivalentundisbursed amount of the loan. Tranche release review and program supervision willensure that the program supported by the SSAL is carried out as agreed. Additionally,the status of the repo facility would be reviewed periodically.

34

117. Accounts and Audit. The Ministry of Economy, Public Works and Services(MEyOSP), on behalf of the Government, will maintain the accounts for the SpecialStructural Adjustment Loan, and the Central Bank of Argentina for the contingentSpecial Repurchase Facility Support Loan, in accordance with sound accountingpractices. The Bank reserves the option to audit the special deposit account establishedfor the Special Structural Adjustment Loan, consistent with normal structural adjustmentoperation rules. Upon the Bank's request, the Argentine Republic will audit the depositaccount established for the Special Repurchase Facility Support Loan, in accordance withappropriate auditing principles, by independent auditors acceptable to the Bank. TheBank has already undertaken a review of the auditing practices and standards of thegovernment's independent audit agency (AGN) and finds that these are acceptable to theBank and conform to international practices and norms for public auditing. In addition,the Bank is about to embark on a review of the government's internal financialmanagement systems, including the adequacy of internal controls. These systems werelast revised in 1992 with Bank assistance.

118. Monitoring Arrangement. The Ministry of Economy, Public Works and Services(MEyOSP) and the Chief of Cabinet's Office will be responsible for monitoring progress.

119. Environmental Assessment Requirements. In accordance with the Bank'sOperational Directive on Environmental Assessment (OD 4.00, Annex A), the proposedoperation has been placed in Category "U" and will not require an environmentalassessment.

C. BENEFITS AND RiSKS

120. Benefits. Long-run benefits of the structural reforms supported by the operationare anticipated economy-wide. Reforms in the federal-provincial fiscal relations, inparticular, are expected to engender greater regional equity and efficiency in theallocation of fiscal resources and ultimately stimulate improved revenue mobilizationthorough devolution to the provinces. A stronger financial sector, with appropriateprudential and regulatory frameworks, is expected; this would, along with developmentof the capital markets, serve to stimulate private savings and provide greater access bysmall and medium scale enterprises to credit and alternative financial instruments. Thisshould be a stimulus to employment creation and exports. The specific regulatoryreforms to be undertaken under the program are aimed at promoting efficiency in theprovision of infrastructure services and to address equity considerations amongconsumers and providers/owners. Finally, the reforms included in the program in thearea of social protection, education and health are expected to advance the ability ofpolicy makers to design and implement poverty focused programs, stimulate greaterequity in the access to social programs, and improve the quality and efficiency of thoseprograms as part of a broadly focused agenda to reduce poverty and invest in humancapital.

121. On the short run, the program is expected to facilitate Argentina's reentry to theinternational capital markets and help avoid a sharp economic downturn, which in thecase of the last financial crisis in 1995 resulted in a decline in GDP of 4 percent and a

35

sharp increase in unemployment to 18.4 percent. With unemployment still over 13percent, many Argentines, especially those with less marketable skills, have not yetrecovered from that crisis. In particular, the proposed operation will benefit vulnerablegroups whose access to the social programs would be safeguarded under the program.

122. Adding to the lines of defense in the banking system is of paramount importance.The lessons of the Tequila crisis in 1995 and the present situation in East Asiademonstrate that actions need to be taken to reduce stress in the banking system.Preventive actions are especially advisable in the case of Argentina due to the currencyboard arrangement, and its implication that foreign reserve losses translate directly into aliquidity shortage in the banking system. Thus, the specific benefits of the contingentloan to support the Central Bank's repo facility are two fold. In the first instance, theenhancement to the facility is expected to reduce in the probability of default, thusmaking the facility more attractive to international banks. This would , in turn, increasethe probability of maintaining the size of the facility in relation to the deposit base. In thesecond instance, that of a liquidity shock and the activation of the repurchase facility bythe Central Bank, the benefit would be mitigating the impact of a severe liquidityshortage. Liquidity is critical to preserve reforms in banking sector and assure access tocredit of SMEs and other borrowers in time of a systemic credit crunch. SMEs, as majorgenerators of employment, are usually disproportionately affected by credit restrictions.As a contingent loan with the goal of preventing a crisis, it would only be disbursed if theCentral Bank exercises its option with the private banks. The Central Bank does notexpect that this will be the case as the total coverage that the system has through othermeans which would precede the activation of the repo facility are equivalent to 30percent of deposits.

123. Risks. If access to international capital markets is not restored by mid-1999, thefinancial package currently assembled might not be sufficient to meet external needs,resulting in a severe economic adjustment. This could put pressure on resourcesavailable for social safety nets and cause the poor and disadvantaged to suffer even more.Moreover, this could result in countries such as Argentina having to take additionalmeasure to alleviate their respective debt servicing burdens. An additional risk is that thereform process could be delayed by the upcoming national elections. While this risk hasto be acknowledged, experience during the 1994-1995 financial crisis, which alsocoincided with presidential elections, was to the contrary and the reform process actuallyaccelerated. A third risk is that access to international financial markets is regained soon,the impetus for reform wanes. Given the advanced state of many of the reforms, and theoutstanding commitment by the government in several areas, mostly notably changing tofederal-provincial revenue sharing, the prospects for continuing the program remain high.A fourth risk is that the current international and Argentine economic scenariodeteriorates faster than anticipated, resulting in capital outflows that weaken the bankingsystem. The support for the repo facility is intended to alleviate such pressures.Nevertheless, the risks of the crisis worsening and the impact on the Argentina economybeing much more severe than anticipated are significant. That makes the preventivemeasures supported under the two operations even more critical.

36

5. BANK GROUP STRATEGY

124. The last progress report on the FY97-00 CAS was discussed by the Board onMarch 17, 1998. At that time, Argentina was weathering the initial effects of the Asiacrisis, but there was a clear need to continue to monitor the situation. In particular, wenoted the increased risk associated with Argentina's ability to access internationalfinancial markets to roll over its debt and to finance the fiscal deficit. We indicated thatwe would work with the Government in identifying measure to help mitigate the spillovereffects were the crisis to persist and deepen.

125. The proposed package of emergency support is consistent with that strategy andreflects the nature of the crisis facing Argentina. An update on the country assistancestrategy, which accompanies this report, provides additional detail on the impact thatsuch emergency assistance has on the Bank's program and IFC's activities in the country.

126. Collaboration with the IDB. In recognition of the critical situation facing manycountries in the Latin America and Caribbean Region, the IDB and the Bank have beencollaborating in order to a joint response to borrower requests for special support. In thecase of Argentina, the two proposed loans have been closely coordinated with the IDBduring identification and preparation. Both institutions conducted joint identificationmissions, and a continuous dialogue was established during their preparation andnegotiations.

127. Collaboration with the IMF. The IMF has an Extended Fund Facility withArgentina for $2.8 billion. This facility is part of a continuing effort by the Fund tomitigate the impact of external crises. In entering into this program in February 1998, theGovernment's intention-and message to the markets-was that the program wasprecautionary and it would be drawn down only if the country was in crisis. This facility,therefore, is regarded as an integral part of the current special multilateral support toArgentina. As of this point, the program is on track. The Fund's next review isscheduled for early December, at which point the country's situation and financingrequirements for 1999 will be reassessed. Close coordination between the IMF and theBank took place in the development and review of that program and has continued in thepreparation of the proposed loans. This has been the case throughout the series of Fundand Bank adjustment programs with Argentina in recent years. Frequent consultations oneconomic conditions and prospects took place during the preparation of these loans.

37

6. RECOMMENDATION

128. I am satisfied that the proposed loans comply with the Articles of Agreement ofthe Bank, and I recommend that the Executive Directors approve them.

James D. WolfensohnPresident

Washington, D.C.November 3, 1998

38

ARGENTINA: Special Structural Adjustment Loan Annex A: Social Indicatorsand Special Repurchase Support Loan of Development

Argentina Social IndicatorsLatest single year Same regiontincome group

Latin America & Upper-middle-1970-75 1980-85 1990-96 Caribbean income

POPULATIONTotal population, mid-year (millions) 26.0 30.3 35.2 485.8 473.2

Growth rate (% annual average) 1.7 1.5 1.3 1.7 1.5Urban population (% of population) 80.7 84.8 88.4 73.7 73.0Total fertility rate (births per woman) 3.2 3.1 2.7 2.7 2.6

POVERTY(% of population)National headcount index .. 25.5

Urban headcount indexRural headcount index

INCOMEGNP per capita (US$) 2,680 2,660 8,380 3,710 4,600Consumer price index (1987=100) 0 23 1,376,469 631 506Food price index (1987=100) .. 22 1,201,924

INCOMEICONSUMPTION DISTRIBUTION(% of income or consumption)Lowest quintile 4.4 ..

Highest quintile 50.3 ..

SOCIAL INDICATORSPublic expenditure

Health (% of GDP) .. 4.3 3.0 3.4Education (% of GNP) 1.5 3.8 3.9 5.0Social security and welfare (% of GDP) 5.8 4.8

Net primary school enrollment rate(% of age group)

Total 96 .. 91 91MaleFemale

Access to safe water(% of population)

Total 66 55 64 73 76Urban 76 63 73 84 87Rural 26 17 17 43 42

Immunization rate(% under 12 months)

Measles 67 76 84 84DPT 63 82 86 88

Child malnutrtion (% under 5 years) .. 2Life expectancy at birth(years)

Total 67 68 73 70 70Male 64 65 69 66 66Female 71 72 77 73 73

MortalityInfant (per thousand live births) 48 29 22 33 30Under 5 (per thousand live births) 71 38 25 41 36Adult (15-59)

Male (per 1,000 population) 212 205 176 182 181Female (per 1,000 population) 116 102 84 114 107

Matemal (per 100,000 live births) .. 85 100

World Development Indicators 1998 CD-ROM, World Bank

Annex B: Key Economic IndicatorsPage 1 of 3

Argentina - Key Economic Indicators

Actual Estimate ProjectedIndicator 1993 1994 1995 1996 1997 1998 1999 2000 2001

National accounts(as % GDP at currentmarket prices)

Gross domestic product 100.0 10(.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0

Agriculture' 6.7 6.4 7.0 6.9 7.0 7.7 7.6 7.6 7.5

Industry' 32.6 32.3 32.1 32.1 32.1 35.5 35.2 35.0 34.7

Services' 51.2 51.6 51.3 51.4 51.4 47.1 47.5 47.6 48.0

Total Consumption 83.6 82.4 81.6 81.9 81.6 80.9 81.2 79.7 78.7Gross domestic fixed 18.2 19.9 18.3 18.5 20.1 21.6 21.1 22.5 23.3investment

Government investment 1.5 1.4 1.1 1.2 1.2 0.8 0.9 1.1 1.2Private investment 16.8 18.5 17.2 17.3 18.9 20.8 20.2 21.4 22.1(includes increase instocks)

Exports (GNFS)b 6.3 0.8 8.5 8.9 9.0 8.7 8.8 9.2 9.7

Imports (GNFS) 8.1 (.1 8.5 9.2 10.7 11,2 11.1 11.5 11.7

Gross domestic savings 16.4 17.6 18.4 18.1 18.4 19.1 18.8 20.3 21.3

Gross national savings' .. 16.4 16.9 16.5 16.6 17.1 16.8 18.2 19.0

Alemorandum itemsGross domestic product 257.841 281.925 281,060 298.734 325,012 345.016 356,492 378,122 402,983(US$ million at currentprices)Gross national product per 7,260 8.140 8.050 8.370 8,770 9,520 9,680 10,110 10,630capita (US$, Atlas method)

Real annual growth rates(%, calculated from 1986prices)

Gross domestic product at 5.7% 8.0% -4.0% 4.8% 8.6% 5.0% 2.0% 4.5% 5.0%market pricesGross Domestic Income 6.3% 8.4% -3.8% 5.8% 9.0% 4.4% 2.1% 4.7% 5.1%

Real annual per capitagrowth rates (%. calculatedfrom 1986 prices)

Gross domestic product at 4.4% 6.7% -5.1% 3.8% 6.3% 3.8% 0.8% 3.3% 3.8%market pricesTotal consumption .. 8.5% -9.9% 6.1% 10.2% 3.2% 1.1% 1.6% 2.4%Private consumption .. 8.8% -10.2% 6.4% 10.5% 3.2% 1.2% 1.5% 2.4%

(Continued)

Annex B: Key Economic IndicatorsPage 2 of 3

Argentina - Key Economic Indicators(Continued)

Actual Estimate ProjectedIndicator 1993 1994 1995 1996 1997 1998 1999 2000 2001

Balance of Payments(US$m)

Exports(GNFS)b 15.572 18.437 23,824 27,037 29.318 29,968 31,337 34,963 39,002Merchandise FOB 13.269 16.023 21.162 24.043 26,217 26.489 27,649 30,827 34,202

Imports (GNFS)b 20.728 25.616 23,808 27.910 34.899 38.541 39,607 43,322 47,193Merchandise FOB 15.632 20.162 18.804 22,282 28,489 31.583 32,436 35,633 38,933

Resource balance (5,156) (7.179) 16 (873) (5.581) (8,573) (8.271) (8,359) (8,192)Netcurrenttransfers 411 320 432 334 517 350 350 350 360(including official currenttransfers)Current account balance (7.672) (10.117) (2.768) (3.787) (11,459) (15,290) (15.251) (16,181) (17,205)(after official capital grants)

Net private foreign direct 2.515 3.117 4.783 5,090 5,895 5,644 4,000 6,184 6,200investmentLong-term loans (net) 16,971 12.803 19.156 18.960 13.236 11,145 7,669 11,643 12,896Official 2.667 1.497 2.466 1.449 758 2,214 4,026 2,629 2,497Private 14.304 11.306 16.690 17.511 12,478 8,931 3,643 9,014 10,398

Other capital (net, including (7.334) (5,242) (21.234) (16.487) (4,610) (134) 1,662 2,326 2,146errors and omissions)

Change in reservesd (4.480) (561) 63 (3.776) (3,062) (1,364) 1,920 (3,972) (4,037)

Memorandum itemsResource balance (% of -2.0% -2.5% 0.0% -0.3% -1.7% -2.5% -2.3% -2.2% -2.0%GDP at current marketprices)Real annual growth rates(1986 prices)

Merchandise exports 7.9% 15.7% 27.1% 7.2% 7.0% 6.6% 2.0% 8.0% 8.6%(FOB)Primary -1.2%o 7.4% 27.1% 7.2% 7.0% 12.0% 3.0% 9.0% 13.0%Manufactures 12.7% 16.7% 27.1% 7.2% 7.0% 2.0% 1.0% 7.1% 4.2%

Merchandise imports 12.3% 25.0% -11.6% 6.1% 37.0% 12.0% 1.0% 6.8% 6.4%(CIF)

Public finance(as % of GDP at current

market prices)'Current revenues 17.4 16.9 17.5 15.4 16.6 17.0 17.1 17.3 17.5Current expenditures 15.6 16.2 17.3 16.2 16.9 17.5 17.7 17.6 17.6

(Continued)

Annex B: Key Economic IndicatorsPage 3 of 3

Argentina - Key Economic Indicators(Continued)

Actual Estimate ProjectedIndicator 1993 1994 1995 1996 1997 1998 1999 2000 2001

Current account surplus (+) 1.8 0.7 0.2 -0.8 -0.4 -0.5 -0.6 -0.3 -0.1or deficit (-)Capital expenditure 1.0 1.0 1.1 1.2 1.2 0.8 0.9 1.1 1.2Foreign financing 0.2 0.5 0.8 2.4 3.4 2.2 2.2 1.2 0.9

Monetary indicatorsM2/GDP (at current market 17.6 19.0 18.5 20.7 24.6 25.0 25.0 25.0 25.0prices)Growth ofM2 (%) 46.5 17.6 -2.8 18.8 29.3 8.1 3.3 6.1 6.6Private sector credit growth! 127.4 71.2 268.8 13.8 88.8 66.4 99.5 99.5 99.5total credit growth (%)

Price indices( 1986 =100)Merchandise export price 113.2 118.2 123.1 128.6 127.8 127.1 130.1 134.3 137.2indexMerchandise import price 112.0 115.3 121.5 126.3 126.3 125.0 127.0 130.7 134.2indexMerchandise terms of trade 101.0 102.5 101.3 101.8 101.2 101.7 102.4 102.8 102.2indexReal exchange rate 48.9 49.1 48.2 48.2 48.2 48.2 48.2 48.7 49.3

(US$/LCU)lReal interest ratesConsumer price index 10.6% 4.2% 3.4% 0.2% 0.5% 1.5% 1.2% 1.5% 1.5%(% growth rate)GDP deflator 7.5% 1.2% 3.9% 1.5% 0.2% 1.1% 1.3% 1.5% 1.5%(% growth rate)

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 of IMF resources.e. Should indicate the level of the government to which the data refer.f "LCU" denotes "local currenc) units." An increase in US$/LCU denotes appreciation.

Annex C:Argentina: Emergency

Structural Adjustment Loan

Annex C:

External Financing Requirement and Projected Sources of Financing(in mnillions of U.S. dollars)

Category 1 9 9 8-4 "' Quarter 1999 1998-V + 1999

Financing requirements:

1. Current Account Deficit 3,250 15,251 18,501

2. Long term external debt amortizationsa 3.600 13,553 17,153

a. Public and Publicly guaranteed 2,100 7,580 9,680

b. Private 1,500 5,973 7,473

3. Change in gross reserves (- decline) -1,000 67 -930

4. Gross Financing Requirements 5,850 28,871 34,724(I +2+3)

Sources of Financing

5. Private investment flows (net) 500 5,000 5,500

6. Multilateral and Bilateral Gross 4,000 8,500 12,500Disbursementsbo/w World Bank 1,250 2,685 3,935

7. Additional private debt flows 1,350 15,371 16,724

8. Total Sources of Financing 5,850 28,871 34,724(5 + 6 + 7)

a. In addition, there is an estimated US$17,988 million (DECDG) to 31,000 million (B.l.S) in short-termexternal debt, which must be rolled over in 1998 and 1999. Of this amount, an estimated 10,000 million isin the form of trade credits.

b. Includes IMF.

MOP Schedule DGenerated: 1 1/02/98

Status of Bank Group Operations in ArgentinaOperations Portfolio

DifferericeBetween expected

Original Amount in USS Millions and actualFiscal disbursements a/

Project ID Year Borrower PurposeIBRD IDA Cancellations Undisbursed Orig Frm Rev'd

Number of Closed Projects: 55

Active ProjectsAR-PE-6058 1999 REPUBLIC OF ARGENTINA SOC.PROTECT 4 90.75 0.00 0.00 90.75 0.00 0.00AR-PE-49269 1998 ARGENTINE REPUBLIC SOC PROTEC 3 284.00 0.00 0.00 284.00 0.00 0.00AR-PE-50713 1998 MINISTRY OF ECONOMY MODEL COURT DEV. 5.00 0.00 0.00 5.00 .60 0.00AR-PE-50714 1998 REPUBLIC OF ARGENTINA SECOND.ED 3 119.00 0.00 0.00 119.00 77.85 0.00AR-PE-51693 1998 GOVERNMENT P.RFM(SALTA) 75.00 0.00 0.00 30.00 0.00 0.00AR-PE-51694 1998 GOVERNMENT P.RFM(S.JUAN) 50.00 0.00 0.00 40.00 25.00 0.00AR-PE-51695 1998 GOVERNMENT P.RFM(R.NEGRO) 75.00 0.00 0.00 50.00 25.00 0.00AR-PE-52590 1998 REPUBLIC OF ARGENTINA NAT HWY REHAB6MAINT 450.00 0.00 0.00 450.00 198.66 0.00AR-PE-55477 1998 GOVT OF ARGENTINA MINING TA 39.50 0.00 0.00 39.50 11.10 0.00AR-PE-55935 1998 GOVERNMENT EL NINO EMERGENCY 42.00 0.00 0.00 42.00 12.00 0.00AR-PE-6006 1998 MIN. OF ECONOMY P.RFM(TUCUMAN) 100.00 0.00 0.00 45.00 0.00 0.00AR-PE-6041 1998 GOVERNMENT SMALL FARMER DV. 75.00 0.00 0.00 75 .00 14.12 9.00AR-PE-6050 1998 REP OF ARGENTINA POLLUTION MGT. 18.00 0.00 0.00 18.00 .86 0.00AR-PE-39584 1997 GOVT OF ARGENTINA B.A.URB.TSP 200.00 0.00 0.00 177.66 17. 67 0.00AR-PE-40808 1997 GOA N.FOREST/PROTC 19.50 0.00 0.00 18.13 -. 77 0.00AR-PE-43418 1997 REPUBLIC OF ARG AIDS PREV.6STD CTRL 15.00 0.00 0.00 10.94 -. 32 0.00AR-PE-46821 1997 GOVT.OF ARG PENSION TA 20.00 0.00 0.00 15.37 2.74 0.00AR-PE-49268 1997 ARGENTINE REPUBLIC SOC.PROTECT.2 200.00 0.00 0.00 22.89 -52.11 0.00AR-PE-5980 1997 GOVT OF ARGENTINA PROV ROADS 300.00 0.00 0.00 296.94 51.93 0.00AR-PE-6010 1997 GOA PROV AG DEVT I 125.00 0.00 0.00 122.15 6.85 0.00AR-PE-6052 1997 GOVT OF ARGENTINA FLOOD PROTECTION 200.00 0.00 0.00 196.26 14.28 0.00AR-PE-6059 1997 ARGENTINE REPUBLIC MTL.CHD.HTH.2 100.00 0.00 0.00 93.51 3.50 0.00AR-PE-34091 1996 REP OF ARGENTINA HIGHER ED REFORM 165.00 0.00 0.00 127.57 85.58 61.58AR-PE-37049 1996 GOVT OF ARGENTINA PUB.INV.STRENGTHG 16.00 0.00 0.00 15.32 10.32 0.00AR-PE-38883 1996 REPUBLIC OF ARGENTINA ENT.EXPORT DV. 38.50 0.00 0.00 18.90 18.89 -. 33AR-PE-40904 1996 REPUBLIC OF ARGENTINA BANK REFORM 500.00 0.00 0.00 166.00 166.00 0.00AR-PE-40909 1996 REP. OF ARGENTINA N. INSURANCE REFORM 350.00 0.00 0.00 100.00 125.00 0.00AR-PE-45687 1996 REP. OF ARGRNTINA H.INSURANCE TA 25.00 0.00 0.00 5.52 -. 58 0.00AR-PE-6030 1996 REPUB OF ARGENTINA PROVCL HLTH SCTR 101.40 0.00 0.00 85.33 49.62 0.00

DEVAR-PE-6040 1996 GOVERNMENT FORESTRY/DV 16.00 0.00 0.00 12.43 .74 0.00AR-PE-6055 1996 GOVT. OF ARGENTINA MINING SCTR DEVT 30.00 0.00 0.00 7.48 -1.42 0.00AR-PE-6057 1996 GOV'T OF ARGENTINA SECNDARY ED 2 115.50 0.00 0.00 100.55 46.90 -14.95AR-PE-5992 1995 GOVT OF ARGENTINA INA SECONDARY ED I 190.00 0.00 0.00 136.29 112.00 0.00AR-PE-6018 1995 ARGENTINE REPUBLIC PROV DEVT II 225.00 0.00 0.00 192.56 21.57 0.00AR-PE-6060 1995 GOVT OF ARGENTINA MUNIC DEVT II 210.00 0.00 0.00 162.42 -- 18.31 0.00AR-PE-6025 1994 GOVT OF ARGENTINA INA MTNAL CHILD HLTH 6 100.00 0.00 0.00 12.56 6.26 0.00

NAR-PE-6062 1994 MIN OF ECONOMY CAPITAL MKT TA 8.50 0.00 0.00 2.45 2.43 0.00AR-PE-6003 1993 GOVT OF ARGENTINA INA RD MAINT & REHAB 340.00 0.00 0. 00 38.90 28.37 0.00

SCTAR-PE-6036 1993 GOVERNMENT YACYRETA II 300.00 0.00 0.00 1.01 1.00 0.00AR-PE-5977 1991 ARGENTINE REPUBLIC WTR SUPPLY II 100.00 0.00 36.00 19.90 55.91 19.91AR-PE-6005 1991 REPUBLIC OF ARGENTINA PROVINC DEV PROJ 200.00 0.00 0.00 12.89 11.87 0.00AR-PE-5968 1987 SEGBA SEGBA V 276.00 0.00 0.00 55.62 55.61 0.00

Generated by the Operations Information System (OIS) Page I

MOP Schedule DGenerated: 11/02/98

DiffererceBetween expected

Original Amount in US5 Millions and actual

Fiscal disbursemernts a/

Project ID Year Borrower PurposeIBRD IDA Cancellations Urndisbursed Oria Frm Rev'd

Total 5,909.65 0.00 36.00 3,514.80 1,186. 75.21'72

Active Proiects Closed Projects TotalTotal Disbursed (IBRD and IDA): 2,358.82 7,143.55 9,502.37

of which has been repaid: 228.38 3,237.76 3,466.14

Total now held by IBRD and IDA: 5,645.25 3,909.31 9,554.56Amount sold . 0.00 12.79 12.79

Of which repaid : 0.00 12.79 12.79

Total Undisbursed : 3,514.80 3.49 3,518.29

a. Intended disbursements to date minus actual disbursements to date as projected at appraisal.

Note:Disbursement data is updated at the end of the first week of the month.

Generated by the Operations Information System (OIS) Page 2

MOP Schedule D

ArgentinaSTATEMENT OF IFC's

Committed and Disbursed PortfolioAs of 30-Sep-98

(In US Dollar Millions)

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1960/95/97 Acindar 35.00 16.43 10.00 61.11 10.00 16.43 10.00 11.111977/84/86/88/94/96 Alpargatas 24.23 6.05 6.37 89.29 19.23 6.05 6.37 48.791978/81/86/87/91/93/96 Minetti 10.00 0.00 10.00 27.27 10.00 0.00 10.00 27.271986/89/91/97 Banco Roberts-AL 10.00 0.00 0.00 0.00 10.00 0.00 0.00 0.001987 BGN-TBR .11 0.00 0.00 0.00 .11 0.00 0.00 0.001987/89 BGN-Bolland .13 0.00 0.00 0.00 .13 0.00 0.00 0.001987/89/90/96/97 Terminal 6 18.53 0.00 0.00 17.87 17.23 0.00 0.00 16.171987/92 BRLP 7.53 0.00 0.00 0.00 0.00 0.00 0.00 0.001988/93 Bunge y Born 2.66 0.00 0.00 20.05 2.66 0.00 0.00 20.051989 BGN-Algodonera .16 0.00 0.00 0.00 .16 0.00 0.00 0.001989 BGN-Ferrum .50 0.00 0.00 0.00 .50 0.00 0.00 0.001989 BGN-FRIGOTOBA .08 0.00 0.00 0.00 .08 0.00 0.00 0.001989 BGN-Interpack .15 0.00 0.00 0.00 .15 0.00 0.00 0.001989 BGN-Parafina .38 0.00 0.00 0.00 .38 0.00 0.00 0.001989 BGN-Willmor .41 0.00 0.00 0.00 .41 0.00 0.00 0.001989 ROB-COMESI .09 0.00 0.00 0.00 .09 0.00 0.00 0.001989 ROB-INTA .09 0.00 0.00 0.00 .09 0.00 0.00 0.001989/96 Banco Frances 4.82 0.00 0.00 .13 4.82 0.00 0.00 .131990 CIP 0.00 .08 0.00 0.00 0.00 .08 0.00 0.001990/94 Petroken 19.39 0.00 5.00 3.65 19.39 0.00 5.00 3.651991 BCA .39 0.00 0.00 .50 .39 0.00 0.00 .501991 ROB-Longvie .11 0.00 0.00 0.00 .11 0.00 0.00 0.001992 FEPSA 6.95 0.00 0.00 5.87 6.95 0.00 0.00 5.871992 Oleaginosa Oeste 4.58 0.00 5.00 5.60 4.58 0.00 5.00 5.601992 Rioplatense 5.33 1.00 0.00 1.67 5.33 1.00 0.00 1.671992 San Jorge 0.00 27.00 0.00 0.00 0.00 0.00 0.00 0.001992/93/96 Malteria Pampa 11.49 0.00 1.00 9.20 11.49 0.00 1.00 9.201992/95 Bridas 32.26 0.00 0.00 51.38 32.26 0.00 0.00 51.381993 Argentina Equity 0.00 4.00 0.00 0.00 0.00 4.00 0.00 0.001993 Nuevo Central 5.63 3.00 0.00 8.75 5.63 3.00 0.00 8.751993 Yacylec 7.15 5.04 0.00 18.96 7.15 5.04 0.00 18.961993/94 Molinos 0.00 5.55 0.00 0.00 0.00 5.55 0.00 0.001994 AceiteraChabas 0.00 3.10 0.00 0.00 0.00 3.10 0.00 0.001994 Aceitera General 12.50 6.90 0.00 0.00 12.50 6.90 0.00 0.001994 BGN 12.00 0.00 3.00 0.00 12.00 0.00 3.00 0.001994 LBAR 0.00 1.17 0.00 0.00 0.00 1.06 0.00 0.001994 LBAV 0.00 3.62 0.00 0.00 0.00 3.62 0.00 0.001994 Quilmes 10.28 0.00 0.00 7.50 10.28 0.00 0.00 7.501994/95 EDENOR 14.63 0.00 15.00 23.50 14.63 0.00 15.00 23.501994/95/96 Aguas 66.85 7.00 0.00 198.61 66.85 7.00 0.00 198.611994/95/97 La Maxima 0.00 16.49 1.90 0.00 0.00 14.22 1.86 0.001995 Banco Roberts 0.00 0.00 20.00 0.00 0.00 0.00 20.00 0.001995 CEPA 10.33 0.00 0.00 1.80 10.33 0.00 0.00 1.801995 Mastellone 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.001995 Nahuelsat 25.00 5.00 0.00 0.00 25.00 5.00 0.00 0.001995 SanCor 17.50 0.00 20.00 21.00 17.50 0.00 20.00 21.001995 Socma 18.75 0.00 0.00 45.00 18.75 0.00 0.00 45.00

Generated by the Operations Information System (OIS) on 11/02/98

MOP Schedule D

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1995 SIDECO 0.00 15.00 0.00 0.00 0.00 15.00 0.00 0.001995 Terminales Port. 8.50 2.00 0.00 0.00 8.50 2.00 0.00 0.001995 Tower Fund 0.00 15.73 0.00 0.00 0.00 10.15 0.00 0.001995 Tower Fund Mgr 0.00 .14 0.00 0.00 0.00 .06 0.00 0.001995/97 Kleppe/Caldero 10.93 0.00 0.00 0.00 8.93 0.00 0.00 0.001996 Banco Galicia 30.00 0.00 0.00 200.00 30.00 0.00 0.00 200.001996 Bansud 25.00 0.00 0.00 0.00 4.90 0,00 0.00 0.001996 Brahma - ARG 17.79 0.00 0.00 29.70 17.79 0.00 0.00 29.701996 CAPSA 12.00 0.00 5.00 33.00 12.00 0.00 5.00 33.001996 Grunbaum 7.00 0.00 2.00 5.00 7.00 0.00 2.00 5.001996 MBA 0.00 .16 0.00 0.00 0.00 .16 0.00 0.001996 Neuquen Basin 0.00 26.40 0.00 0.00 0.00 21.89 0.00 0.001996 Refisan 20.00 0.00 0.00 27.00 20.00 0.00 0.00 27.001996 Transconor 24.95 0.00 20.00 207.88 24.95 0.00 20.00 207.881996 Zanon 12.83 0.00 6.00 0.00 12.83 0.00 6.00 0.001997 FRIAR 10.00 0.00 2.50 7.00 10.00 0.00 2.50 7.001997 Guipeba 15.00 0.00 5.00 0.00 15.00 0.00 5.00 0.001997 Milkaut 9.38 0.00 10.00 4.50 9.38 0.00 10.00 4.501997 Suquia 0.00 0.00 10.00 0.00 0.00 0.00 10.00 0.001997 T61 10.00 0.00 5.00 30.00 10.00 0.00 5.00 30.001997 Vicentin 25.00 0.00 0.00 10.00 25.00 0.00 0.00 10.001998 FAID 0.00 5.00 0.00 0.00 0.00 2.75 0.00 0.001998 Hospital Privado 9.60 0.00 0.00 0.00 0.00 0.00 0.00 0.001998 Patagonia 5.00 0.00 1.00 0.00 2.00 0.00 1.00 0.001998 Patagonia Fund 0.00 30.00 0.00 0.00 0.00 0.00 0.00 0.00

Total Portfolio: 648.97 205.86 163.77 1,172. 575.44 134.06 163.73 1,080.79 59

Approvals Pending Commitment

Loan Eqity Quasi Partic

1996 AGUAS III - INC 15.00 0.00 0.00 75.001997 ARGIE MAE 0.00 .40 0.00 65.001998 AUTCL 12.00 0.00 0.00 0.001998 F.V. S.A. 12.00 0.00 4.00 0.001993 FEPSA (11) 0.00 0.00 0.00 4.001998 HOSPITAL PRIVADO 1.00 0.00 0.00 0.001998 MERCANTIL ARG. 20.00 0.00 15.00 0.001999 MINETTI-ANDINO 30.00 0.00 14.00 70.001998 SUQUIA CL 30.00 0.00 0.00 50.001999 SUQUIA CL 11 5.00 0.00 0.00 0.001997 TGN 11 BLINC 0.00 0.00 0.00 10.001998 U.BELGRANO 22.00 0.00 0.00 0.00

Total Pending Commitment: 147.00 .40 33.00 274.00

Generated by the Operations Information System (OIS) on 11/02/98

ANNEX E: Matrix of Policy Actions / PageI

ARGENTINA

Policy Matrix for Actions to be Taken under a SSAL

Special Structural Adjustment Loan

November 1998

ANNEX E: Matrix of Policy Actions / Page 2

A. REFORM OF INTERGOVERNMENTAL FISCAL RELATIONS

Objectives Issues Main reforms to date Second Tranche Third TrancheI) Simplification of the a)Eliminate special Fiscal "Pacts" I and 11: Prepare proposal (ante- -Satisfactory progress on an agreement

system of intergovernmental funds - Completed proyecto) for the between the federal government and the

transfers: "primary decentralization to the simplification of primary provinces.distribution". This system is b)Eliminate differential provinces of health services distribution.

established via the main incentives for federal and primary and secondary -Formal presentation of Government's

coparticipation Law 23.548 tax administration by education -In proposal, at least 70 proposal to all provincial Governors.

and Laws 24.699, 23.906, establishing that all percent of federal-24.621, 24.065 and federal taxes enter the -Implemented a variety of provincial automatic

modifications. general revenue-haring measures to deregulate transfers would bepool transport, retail and distributed according to one

professional service sectors "fund" and one distributionat the provincial level rule

II) New formula for a) Increase -Began to incorporate Prepare proposal (ante- - Satisfactory progress on an agreement

allocating transfers across Correspondence, provincial public employee proyecto) for the creation of between the federal government and the

provinces: "secondary promoting Constitutional pension systems into the a new secondary provinces.distribution" - as established concept of "solidarity" in reformed national pension distribution formula.

in Law 23.548, and Laws the sense that more system. -Formal presentation of Government's

24.699, 23.906, 24.62 1, resources remain with the -In the proposal: proposal to all provincial Governors (as

24.065 and modifications. population -Federal leadership in One component of formnula above).variety of provincial is a proxy for

b) Improve Equity, as structural reforms, via "derivation/devolution" -Improve measurement of provincialpromoted in the provincial reform projects (which means allocating own tax bases by the Ministry ofConstitution and provincial development resources to a jurisdiction Economy.

projects. in proportion to thec) Introduce revenues collected in that"Equalization" - transfers jurisdiction) and anotherthat compensate compoenet is a newprovinces with lower per formula which compensatescapita revenue-raising provinces that have lowercapacity per capita tax bases.

ANNEX E: Matrix of Policy Actions / Page 3

Objectives Issues Main reforms Second Tranche Third Trancheto date

III) Eliminate a) Introduce -Through Prepare a proposal incorporating the following features. - Satisfactory progress onGross Receipts residence-based second fiscal an agreement between thetax and create taxation to the extent pact, began to -A clear definition of tax base and clear administrative guidelines federal government and theadequate possible eliminate -New proposed tax should tax consumption or income on a residence provinces.substitute distortionary basis, and it should avoid taxing production and the earning of income

b) Maintain fiscal impact of the (i.e. origin of income) -Formal presentation ofautonomy gross receipts -Any substitute tax on consumption should not have a "cascading" Government's proposal to

("turnover") effect - that is, its incidence should not be cumulative across stages of all provincial Governors (asc) Establish general, tax, by production. above).broad-based exempting -Any substitute tax on consumption should involve lowerconsumption tax primary stages administrative costs than the current parallel taxation of sales (e.g. VAT

of production. along with Gross Receipts)-Any substitute tax on consumption should induce incentives for

-Second Fiscal automatic compliance by creating an opposition of interests betweenPact the vendor and purchaser with respect to reporting sales.eliminated -New tax proposed should allow provinces to set their own ratesprovincialpayroll taxes. Feasibility study completed to show that new tax could raise at least as

much revenues as current Gross Receipts tax.IV) Tax a) Maintain -Improved Develop a proposal for the eventual decentralization of at least one - Satisfactory progress on

Decentralization residence-based provincial tax major federal tax (decentralization could mean provincial surcharge) an agreement between thetaxation to the extent administration and a time-bound plan for its enactment. federal government and thepossible through provinces.

federal -Proposed decentralized tax should be residence based, and it shouldb) Improve fiscal technical avoid taxing production and the earning of income (i.e. origin of -Formal presentation ofautonomy via power assistance income) Government's proposal toto set rates and programs, e.g. -Proposed decentralized tax should allow provinces to set their own all provincial Governors (asgreater own-source Provincial rates above).revenues Development

Project, andothers.

ANNEX E: Matrix of Policy Actions / Page 4

B. FINANCIAL SECTOR

Objectives Issues Main reforms to date Second Tranche Third Tranche

I) Harmonization of Differential tax treatments Various taxes on transactions Completion of a Tax reform project submitted to CongressFinancial Sector Tax distort financial markets. (eg. Checks) have been study by the resulting in approximate tax neutrality in theTreatment. reduced or eliminated. borrower on tax treatment of financial instruments.

treatment ofTaxes on dividends and financialcapital gains have been intermediationreduced and discriminatory in Argentina.treatment of foreign investorseliminated.

Agreement on terms ofreference for acomprehensive review offinancial sector taxes.

II) Empower financial sector Supervisory and regulatory Submit draft law to Congress which providesregulatory and supervisory authorities lack adequate protection from personal liability for financialauthorities. protection from legal actions sector supervisors and regulators for good-

related to the good-faith faith actions taken in the performance of theirdischarge of official duties. official duties.

III) Coordination of Financial Lack of coordinated sectoral Establish Committee fully operational in accordance toSector Regulation and policies result in arbitrage pernanent inter- its terms of reference. Progress inSupervision. opportunities across financial agency implementing the report's recommendations.

instruments. Supervision of Committee offinancial markets fragmented, financialnot able to address regulatoryconglomerates and agencies underconnnected lending. agreed terms of

reference. Willreview andreport on theconsistency ofcurrentregulatorypractices.

ANNEX E: Matrix of Policy Actions / Page 5

1. Banking Sector Reform

Objectives Issues Main reforms to date Second Tranche Third TrancheI) Reduce the size of public Public sector banks BANADE closed. Bringing Banco Hipotecario to Issuance of a public documentsector involvement in the are injecting an the point of sale by formal detailing all the explicit and implicitbanking system unwarranted degree 15 out of 24 provincial solicitation of bids from the guarantees the Borrower maintains in

of inefficiency in the banks privatized or closed. private sector for at least support of BNA.banking system controlling share (subject to

Law for the privatization of normalization of internationalBanco Hipotecario passed. market conditions, defined as the

ability of a Latin AmericanFirst ever audit of the Banco company to undertake an Initialde la Nacion underway by Public Offering.)the Central Bank. Present plan of action on the basis of

Review homogeneity of that supervisory review.supervisory rigor of public andprivate banks by the Governmentand the Central Bank.

11) Increase resilience of Difficulties in Substantial consolidation, Form an interagency committee Review with the Bank committee'sbanking system to external exiting the banking privatization, increased entry to review: (a) bank failure recommendations, and present anshocks, and facilitate the exit system have the of foreign banks, and resolution processes, including implementation plan of action on bothof weak banks from the potential to increase tightening of regulation and the relations between issues.system its systemic risks supervision. Superintendency of Banks, the

Central Bank and SEDESA, andNeed to strengthen Reduction of the number of (b) regulatory guidelines forearly intervention banks by one-third to about proper bank governance, affectinginfrastructure. 110 entities. owners, management, and outside

directors. The committee shouldNeed to strengthen Adopted and implemented include at least two internationalinteragency supervisory strategy experts in the field andcoordination and including the institutional representatives from thesupervision to development of the Argentine private banking sector.address issues of Superintendency ofbank governance, Financial Institutions.connected lendingand financial Limited private depositconglomerates. insurance scheme

introduced.

Banking regulation has beenenhanced through:

ANNEX E: Matrix of Policy Actions / Page 6

Banking Sector Reform (cont')

Objectives Issues Main reforms to date Second Tranche Third Tranche--Increased minilnum capitalratio to 11.5% of riskweighted assets--Liquidity requirementincreased to 20% of mostbank liabilities--Enhanced disclosure onborrowers, establishingCentral de Deudores--Introduced a subordinateddebt requirement to banks

Central Bank signed acontingent repo facility withinternational banks equal to10 percent of deposits.

Enhance the Privatization of the Amendment of the provisionsmarketability of administration of residual governing operations of federalresidual bank portfolios of newly public banks to allow the sale ofportfolios to privatized provincial banks loan portfolios of liquidatedstimulate future incorporated in most recent federal banks in the possession ofprivatizations. privatizations. federal public banks.

ANNEX E: Matrix of Policy Actions / Page 7

2. Improving SME Access to Credit

Objectives Issues Main reforms to date Second Tranche Third TrancheI) Develop a competitive The current law for Submit theleasing industry. leasing, No. 24.441, revised leasing

discourages the growth of law prepared bylease finance. the Under

Secretary ofBanks andInsurance toCongress.

II) Establish a strong legal Existing laws in the Civil Submit a newframework for the use of and Commercial Code securedmovable collateral (secured discourage the use of transactions lawtransactions) in credit contracts. movable collateral as the to Congress,

primary guarantee in credit following Banktransactions. review.

3. Capital Markets

Objectives Issuess Main reforms to date Second Tranche Third TrancheI) Deepen capital markets, Mutual funds are restricted Laws passed introducing private Submit anDiversity financial instruments to investments in Argentina pension funds, expanding and amendment to theand Improve portfolio and Mercosur assets, which encouraging mutual funds and Fund Lawdiversification for mutual prevents adequate liberalizing the insurance sector. (24.083) tofunds diversification due to high Congress to

correlation of returns (Law Law passed to facilitate issuance of remove24.083) corporate bonds, commercial paper geographic

and convertible debentures. restrictions onmutual fundinvestments

II) Improve the quality and Ratings now required but Present plan (concerning ratingscompetitiveness of the rating rating firms are of mixed firms-as in tranche 2) andindustry quality and current incentive Contract a review satisfactory progress in the

structure discourages of laws and implementation of such plan, includingobjective ratings regulations passage of resolutions by agencies as

concerning necessary-SAFJP, CNV, SSN,ratings firms Central Bank.

ANNEX E: Matrix of Policy Actions / Page 8

4. Insurance Sector

Objectives Issues Main reforms to date Second Tranche Third TrancheRevise legal framework to Laws 17418 and 20091 State reinsurance company Present revised laws to Congress.allow greater competition and dealing with the insurance (INDER) closed. Laws should include the following:to introduce modem contract and prudential - adoption of solvency monitoringsupervision and regulation. regulations respectively are Caja de Ahorros y Seguros (the and free-market approach;

outdated. largest insurance company) - separation of life and non-lifeprivatized business;

- early-warning tests andPremium and product controls empowerment of SSN to takesubstituted with solvency remedial actions;monitoring. - strengthen resolution process;

-establish mechanism to ensureProhibition to entry expired. proper consumer protection.

Tax on insurance premiums beingreduced progressively.

Standards for managers and owners,and new regulations on reservemanagement to limit riskinvestment adopted.

Adoption of an early warning detectionDraft laws modify existing codes system in the Superintendency of17418 and 20091 discussed with the Insurance (SSN). Passage of necessaryinsurance industry. resolutions to establish this system,

compliance by firms and integration ofStrengthen preventive Need to improve collection early warning system in coresupervision and analysis of information supervision activity.

on insurance firms, so as todetect potential problems in Satisfactory enforcement of newa timely manner capital requirements.

Secure adequate capitalization Inadequate minimum capital Res. No. 25.804 passed to increase Adoption of anrequirement (see SSN capital requirement form $550,000 action plan by theResolution No. 21.523) to $3 million for existing firms and SSN to enforce

to $5 million for new life firms and new capitalup to $10 million for new property requirements& casualty firms

ANNEX E: Matrix of Policy Actions / Page 9C. Human Development

1. Poverty, Social Protection and Labor

Objectives Issues Main reforms to date Second Tranche Third TrancheImprove the targeting and Social programs are Participating in the regional IBRD-IDB Propose a new poverty line andefficiency of various targeted using the program to improve the collection of basic methodology for a new NBI index.social programs designed NBI index, which is social statistical information, using LSMS Establish specific objectives for targetedto reduce poverty. an inexact measure of techniques. social programs

poverty; there is nonational poverty line. Completed first ever survey of consumption

expenditures (Encuesta de Gastos) in 1996and 1997 and the survey of social indicatorsand use of social programs (Encuesta Social)in 1997.

The SISFAM is Implemented an information system,currently being used, SIEMPRO, to track social programs andunder the norms of undertook a program of training provincialSINTyS, to identify authorities in the use of the system.beneficiaries andinsure proper Convened a working group of experts totargeting in four review and revise the methodology toprograms. measure poverty (Index of Unsatisfied Basic

Needs and Poverty Line).Introduce SISFAM as agreed to improve

Agreed to a plan and budget to extend targeting in six additional programs in theSISFAM to additional poverty targeted Secretariat of Social Development, as perprograms. plan.

Improve evaluation of Social programs are Completed first budgetary review of social Merge all Consolidate existing food/nutritionprograms by often overlapping and public spending and complied inventory of nutrition/food programs (PRANI, ASOMA, PRO-institutionalizing public need improved social programs. programs under HUERTA, RAF) into a Integrated Foodexpenditure reviews. targeting on the poor. the Secretariat of Program which will target its services

Completed impact evaluations of Social according to:TRABAJAR, ASOMA, PROMIN, and Development * income level,FOPAR. under a single * health or nutrition indicators

management unit,TORs agreed for a review of the efficiency sharing alland internal management of programs run by administrativethe Secretariat of Social Development support services

ANNEX E: Matrix of Policy Actions / Page 10

Objectives Issues Main reforms to date Second Tranche Third TrancheEnsure minimum safety Benefits of non- Pension administration improved, payments Review the Propose a new criteria for eligibilitynet for the elderly poor contributory pensions made in a timely fashion and minimum level distribution of non- for non-contributory pensions that

need better targeting increased to $... per month. contributory pensions improves targeting to the poor.(including pensionesgraciables)

Maintain spending levels Budget support for Social spending, particularly for social Maintain spending Maintain spending levels for keyin key social programs targeted programs security benefits, increased by 20 percent per levels for key programs (Table 1) in 1999 Budgetimportant to the poor needs to be capita in real terms since mid-I 980s. programs (Table I) in at the level of the total 1998 Budget

maintained against 1999 Budget at the of $680 million for those programs.further cuts. Introduced new targeted social protection level of the total 1998

programs, such as TRABAJAR and FOPAR, Budget of $ 680to cope with increased unemployment and million for thosesocial needs of the poor. programs.

Implemented a targeted program of maternaland child health care, PROMIN, in 15provinces.

Agreed to a list of key programs forprotection, including those in basic health,education and employment that focus on thepoor and vulnerable groups ( Annex A)

Improve system of Present system of Employer and employee contributions Complete a study by Propose legal instrument for theunemployment insurance severance payments (aportes), which add to non-wage labor an international replacement of severance paymentsand lower non-wage labor and unemployment costs, reduced in 1996. Proposal in Congress consulting firm of and introduction of a fully fundedcosts. insurance leads to to reduce these contributions further. various options for a capitalized unemployment insurance

excessive labor costs, fully capitalized scheme.lacks portability, and New labor law adopted which, among other unemploymentincreases uncertainty. things, lowers severance payments for insurance scheme,

workers with little tenure; however, which will eliminateseverance payments remain high for workers severance paymentswith more years of service. and reduce labor costs,

and could be based onindividual accounts.Prior review of termsof reference.

ANNEX E: Matrix of Policy Actions / Page 11

2. Education

Objectives Issues Main reforms to date Second Tranche Third TrancheImprove the equity and Higher education's Secondary schools decentralized to the Formulate a policyefficiency of the public share of provinces and strategy planeducation investment expenditures is high on higher education

in relation to that of Compulsory education increased from 7 to financing.primary and 10 yearssecondary education Issue a Secretarialand there is little Curricula for primary and secondary resolution directingcost recovery at that education are being modernized discretional fundslevel. allocated to the

Increased federal funding allocated to MCyE, to theupgrade rural schools and to provide texts introduction ofand pedagogical materials ($ 300 million incentives for thebetween 1995 and 1998) establishment of:

* cost recoveryIncreased federal funding to accommodate for post-expansion of years of mandatory schooling graduate and($ 400 million between 1995 and 1998). undergraduate

educationStandardized testing, on a sample basis, programsintroduced along with a network of * scholarshipcontinuous teacher training. programs based

on merit forIntroduced compensatory program of students fromscholarships for poor families to retain low incomedisadvantaged students families.

ThePassed Federal law on higher education presentation ofrequiring accreditation and allowing a consolidateduniversities to recover costs for post-graduate budget of eachprograms. university,

including allsources ofrevenues.

ANNEX E: Matrix of Policy Actions / Page 12Education (cont')

Improve the quality of There is no universal Universal evaluation of fifth year secondary Universal Universal evaluation of all third yearhigher education merit system to enter education students introduced in 1997. evaluation of all 1998/1999 polimodal students, and

the university. 1998 fifth year incorporation of the respective grade inQuality of freshman secondary their secondary education certificate invery low, forcing education students the second semester of 1999.universities toorganize a remedialeducation cycle

ANNEX E: Matrix of Policy Actions / Page 133. Health

Objectives Issues Main reforms to date Second Tranche Third TrancheStrengthen the There are insufficient Initiated implementation of market The Superintendency of Health The SHS:regulatory framework prudential and liberalization reforms of the union System (SHS) has: * is applying the prudential andfor Health Insurance consumer protection run health plans, Obras Sociales. * Implemented prudential and consumer protection norms in a

norms, and consumer protection norms satisfactory manner, andinsufficient Mandated a minimum package of related to: * has issued norms for crisis resolutioninformation on Obras health care which must be provided --beneficiaries' services; related to the Obras Socialesavailable to by the union-run health plans. --regulation of medical (liquidations, mergers, etc)consumers programs; . publish consumer satisfaction poll.

Extended the period of time when --regulation of marketing;employees could change union-run andhealth plans from two months to --regulation of sanctionsany time during the year. and penalties;

* Has issued a public reportSponsored the restructuring of ... on the basic characteristicsunion-run health plans, covering and performance of the

workers and their families. Obras Sociales (to becomean annual publication)

Introduced autonomy in the * Conducted consumerfinancial and management areas for satisfaction pollspublic hospitals.

Approval by the Superintendency ofHealth Services (the Ministry ofHealth, or other Ministries whereappropriate) of a specific regulatoryframework incorporating the rightsaccorded by the Constitution (art.42), and those prescribed by theConsumer Protection Act No.24.240 and Antitrust Law.

Develop a Pensioners had Improved cost effectiveness of INSSJP will engage consultants Contracts with the out-sourced healthcompetitive managed limited choice of INSSJP (the government's health specializing in procurement to providers to administer servicescare market for providers and INSSJP program for the retired) by reducing undertake technical and (entidades administradoras) have beenproviding health care had to manage a costs by almost $ 1 billion. financial evaluation of bids for signed and are effective.to pensioners multitude of the out-sourcing of services to

individual health care major health providers and toprovider contracts provide its recommendations to

INSSJP's board.

ANNEX E: Matrix of Policy Actions / Page 14

Table 1: ARGENTINA SALPROTECTED PROGRAMS - 1998 Budget Levels (mil. $)

Food and Nutrition:PRANI (Prog. Alimentario Nac. Infantil)ASOMA(Apoyo Solidario a los Mayores)MATERNO INFANTILPROMINPROHUERTADisease Control:CONTROL DE ENFERMEDADES CRONICASVIGILANCIA Y CONTROL DEL COLERAPAI (vaccinations)PROG. DE CHAGASLUSIDA (AIDS Control)EMERGENCIAS SANITARIASEmergency Employment:TRABAJAR IIEducation:PSE (Plan Social Educativo)BECASPRISE (primary education -IDB)PRODYMES IISocial Fund:FOPARPrograms for Vulnerable Groups:PROG. CONSEJO MENOR Y LA FAMILIAMENORES EN CIRCUN. DIFICILESPROG. APOYO A GRUPOS VULNERABLESPROYECTO JOVEN (capacitacion-IDB))PROINDERINAIMEJORMIENTO DE BARRIOS (IDB)TOTAL 680

ANNEX E: Matrix of Policy Actions / Page 15

D. REGULATORY REFORMS

Objective Issue Main reforms to date Second tranche Third trancheImproving Rationalization Deregulation, opening up the trade Submit legislation to Congress to harmonize regulatory standardsefficiency of and regime, removing barriers to of federal electricity, telecommunications, gas, water andthe harmonization foreign investment, liberalizing transport agencies in order to ensure consistency of (a)infrastructure of the domestic good and capital markets. administrative procedures for approval of tariffs, sanctions andservices regulatory State monopolies have been fines, collection and use of fees, treatment of non-payment; (b)

entities for unbundled and privatized, sectors economic and technical standards for the analysis of tariff, cost ofgreater restructured and a regulatory capital, quality of regulated service and access; (c) consultationconsistency and framework has been introduced in with provinces and consumer groups regarding regulatoryimproved most sectors. decisions; (d) processes for hearing appeals; (e) promptperformance publication of annual audited financial accounts; (f) routineand efficiency. In electricity, the sector was public disclosure of information (including information on which

vertically disintegrated and 25 regulatory decisions are made); and (g) hearing and resolvingbusiness units created. consumer complaints.

In telecommunications, the sector Prepare a time-bound action plan, consistent with point I above,was privatized, two monopolies to increase the autonomy and independence of these federalcreated with an initial exclusivityarrangement for basic services; this regulatory agencies by: (a) establishing rules for the selection ofexclusivity arrangement expires in regulators, terms and protection of their tenure, and processes for1999. Value added and cellular removing them for cause; and (b) defining their financing sourcesservices were immediately opened Issuance by the and budgeting procedures and measures to ensure their financialto competition. A Decree has been Procurador del Tesoro de independence.issued to phase in full la Naci6n of an opinionliberalization and a new on the appropriate legal Subject to the legal opinion, submit draft legislation allowing theTelecommunications Law is being instrument allowing the executive branch no longer to hear appeals of decisions of anyprepared. executive to forego the regulatory agencies, if such appeals relate to technical and

In the water sector, concessioning requirement to hear analytical decisions.of the Buenos Aires water services appeals (as per the thirdcompany, and it was followed by tranche conditions).the concessioning of several othermunicipalities and provinces.

Enhance Absence of an In the transport sector, Argentina Assessment of options Present the design and implementation plan of a federaltransport integrated provided concessions in virtually and technical proposal for regulatory agency for freight transport services, which entityregulation approach to all sub-sectors - railways, ports, structure and would regulate port, airport, rail and trucking sectors under an

regulation in toll roads and airports. responsibilities of an integrated framework aimed at encouraging multi-modality in thetransport integrated federal agency use of transport services.services. for freight transport

services.

Annex FPage I of 12

ARGENTINASPECIAL STRUCTURAL ADJUSTMENT LOAN

LEITTER OF DEVELOPMENT POLICY

DEEPENING OF SOCIAL AND ECONOMIC REFORMS

Mr. James D. WolfensohnPresidentThe World BankWashington D. C.

Dear Mr. Wolfensohn:

1. This Letter of Development Policy describes the economic reform program ofArgentiaa as well as spccific steps to deepen the second-generation reforms that tbcGovemment is ia the process or implemcnting during a period of unsettledintemational financial conditions. To implement these reforms under the currentconditions, the Government requests financial assistance from the World Bank andthe Inter-American Development Bank. We would like to takc this opportunity toalso present thc macrocconomic framework that complements the reform program.

I. Macroeconomic Framework

2. Seven years have passed since Argentina adopted the Convertibility Plan.This has been Argentina's most successful economic program in decades, anid itsachievements, durability, and contiinued public support are a testimony to its success.Inflation, the scourge of Argentina for decades has been defeated, and economicgrowth during these past seven years, despite the sharp 1995 setback, averaged anannual 6.2 percent. Productivity has been increasing very fast thanks to the broadliberalization of the economy, aad the initial consLunption-lcd boom matured in recentyears into a healthy pattem of investment-led and export-led growth. Whilc povcityhas declined since the inception of this plan, unemployment remains an issue ofconcern, highlighting the need, and the Government's commitment towards continuedreforms.

3. By laying the basis for price stability, the Govemment has charted En agendafor the future with the fbllowing objectives:

4.

Annex FPage 2 of 12

the consolidation of stability through strict compliance with Law 23928 ofMNarch 27, 1991 (the Convertibility Law), the prescrvation of fscal restraint,the operation of a competi6tic market economy, and regulation by the state ofnon-competitive markets;

* the strengthening of economic growth trough increased levels of savings,investment, productivity, privatization of public enterprises, private sectordevelopment and exports as well as intensirication of trade, financial andtechnological integration of the Argentine economy with world markcts and,

$ the achievement of higher levels of employment and a more equitabledistribution of income, both at a personal and regional basis, throughconsolidation of economic stability and growth, increased public investmentin human resource developnient aLnd social serviccs, and measures to promote

regional development.

4. To ensure that the private sector remains the leading expansionary force in theeconomy, the Government is committed to maintain flexible and open markets free ofdomcstic regulations and of major external trade barriers, and with a strong financialsector to improve intermediatiorL The Government's program of market reforrnscovers the following areas:

* Competitivc Market Economy: The Government has eliminated controls onprices, wages, interest rates, and capital flows as well as a complex nctwork ofsubsidies and implicit taxes. The Govcmment is committed to maintain suchpolicics. Thirough its privatization program, the Governmient has successfullywithdrawni from direct involvcment in economic production that had reducedthe country's growth potential. Leaving this role to the private sector, thegovenment can now focus on a more clearly defined role, in terms ofenhancing the regulatory environment for private sector development,providing thc basic requirements of the social safety net, assuring improvedquality of human capital development, and providing assistance to provincialand municipal govemmclts in the reform of the sub-national public sector.

* Trade Liberalization: The Government has made rapid strides towardsopening thc economy to trade, capital and technology. The import taxiffstructure has been simplified and the average tariffrate was lowered toapproximately 8 percent. Export taxes have been nearly climinated, and mostquantitative restrictions and othcr procedures that slowed the entry of imporLs,capital and technology have been removed. The Goverunent will keep theeconomy open to international competition and its antidumping provisions

Annex FPage 3 of 12

wiU be administered in line with the WTO/GATT code. Moreover, theMERCOSUR treaty came into full effect in January 1995. As specified in theTreaty of Asunci6n. the Government eliminated most intra-MERCOSURtariffs, and established a common external tariff covering 85 percent of thcpositions in January 1995.

Financial Sector Reform: Financial sector reforns have been aimed atincreasing financial deepening and the efficiency of fimancial intermediation.Following interest rate liberalization and the elimination of directed credit bythe Central Bank, the Government's strategy has been to increase depositorand investor confidence under the Convertibility Law. Pricc stabilization,liberalized interest rates and tighter regulation and enforcement of liquidity,capital adequacy and provisioning requirements were the chief refonns thatpermitted financial deepening. Similarly, capital nmarket reforms including theelimination of transaction taxes on securities trading and improvenments in theregulation of public offerings, encouraged the developmcnt of a majoremerging market. In recent years, the authorities took sign"ficant mcasures tofacilitate, tbrough the establishment of two Fiduciary Funds, the restructuringof provincial and private banks affected by the 1995 crisis. nITc result hasbeen the privatization of over a dozen public banks and a significantconsolidation and strcngthening of the banking system. The Government iscommitted to maintain liberalized interest rates and to refrain from directingcredit allocation of financial institutions. It is also committed to continuestrengthening ban}king supervision, and deepeniing capital markets.

5. Since the financial crisis of 1994/95, the Governmnent's objective has been tosustain past achievements by deepening refoTns in the public and financial sectors.These measures arc aimed at reducing country risk by strengthcning Convertibility.The following sections discuss these reforms as well as upconing steps of theeconomic program.

II. The Reform Agenda

6. Thc Government's program for 1999 is to maintain and deepen structuralreforms. The Argentine experience so far contains mostly the so-called '"firstgeneration reforms". The reform strategy in Argentina has centered in changingmacroeconomic rules, reducing the size and drastically narrowing the scope of thestate by dismantling institutions that promoted protectionism and statism.Privatization of state assets has been far-reaching, and far more successfull thanexpected. However, the task of enhancing the institutional capacity of the state and

Annex FPage 4 of 12

limiting its scope of intervention is not finished as we are still faced with the difficulttask of creating or rehabilitating indispensable public sector institutions.

7. This new stage of reforms shifts priorities to the consolidation ofmacroeconomic stability, sustaining high rates of growlh, and the challenge ofpoverty reduction. Following a dramatic decline in poverty in the first years of theConvertibility Plan, it started rising agan in 1994 mainly for two reasons: the lack offlexibility in the labor markets to absorb the reallocation of resources set off byreforms, and the recession following the "tequila crisis". Both factors contributed to agrowth in unemployment, which peaked at 18.4 percent in May 1995 (reduced to 16.1percent in May 1997, with the onset of economic recovery, and currently at 13.2percent).

8. The challenge of poverty reduction in the context of a stable and growingeconomy is the priority that drives the reform agenda for the next several years. Thisagenda, comprises the following four broad policy areas:

(a) Quality Investment in Human Capital(b) Efficienr Financial Markets(c) Enhanced Regulatory Environment(d) Quality Public Administration, and Fiscal Strengthening

9. Clearly, the above areas are closely interconnected. Both the reduction inpoverty, which is the first priority of the Argentine Government and economic growthwould benefit from, or more likely critically depend on, reforms in the above areas.Furthermore, it is essenttial to maintain the gains achieved under what we called firstgeneration reforms. Ultimately, the above categories of refomi can be secn asinstruments for achieving the primary goal of higher sustainable growth and povertyreduction.

10. The goverment is committed to pursuing this agenda of second-generationreforms. Below, more details are provided for each of the general categories ofreform.

(A) QUALITY INVESTMENT IN HUMAN CAPITAL

11. The success of the govemment's economic program led to a sharp reduction inpoverty levels during thc early 1990s. Infant mortality rates and adult iUiteracy are

Annex FPage 5 of 12

well below the average for upper-middle-income countries, while life expectancy andschool enrollment rates (at all levels of education) are above average for upper-middle-income countries. Despite these achievcments, thc fight against poverty andthe challcnge of improving the distribution of income continue to be importantdevelopment goals. Argentina has an extensive system of social programs includinghealth care, housing, nuLrition and education that are available without charge. In thiscontext, this loan will support Govemment actions to improve the targeting of socialprograms for the poor, and increase the efficiency of existing programs in education,health and nutrition including the following specific steps:

) The Govemment will develop a national poverty line standard of measurementand a poverty map;

>r The Government will review and revise its social sector spending, and undertaketo improve the efficiency of overlapping and poorly targeted programs;

> The Government will identify key programs in health, education and socialdevelopment that particularly impact on the poor and vulnerable groups includingbasic education, maternal and child health care, vaccination programs, andemergency employnent programs. These programs will be protected from budgetcutbacks relative to the amounts allocated in the CY98 budget.

)' The Government will continue to work with provincial authorities to provideassistance in improving the qualily and efficiency of primary and secondaryeducation programs (a provincial area of responsibility);

> The Govemrnment will address the problem of cost-recovery in public tertiaryeducation, and incentives will be put in place that will encourage the collection offees from students who can pay, and establish scholarships for those who camnot;

> The Government will continue to provide temporary employment to workers whohave not yct found a place in the newly re-structured economy, through theTRABAJAR program, which provides funds for local projects of public works inhigh poverty areas throughout the country;

) The Governmcnt will continue in its reform of the health care financing system.To date, the health insurance market has bcen partially liberalized, and acomprehensive regulatory framework has been introduced; a redistribution fundhas been established to compensate existing health plans for the costs of insuringworkers with lower incomes, and the Governient's health progranm for the retircd,the INNSJP, has been restruclured and refinanced to increase its internal

Annex FPage 6 of 12

efficiency, improve equity, and put the system on a sound financial footing. Underthe present operation, the Govemment will undertake a number of "secondgeneration" reforms in thc health sector, designed to deepen and extend the pastreforms. Ini addition, the Government will continue to provide support to thcprovinces in their efforts to improve provincial health services.

(B) EFFICIENT FINANCIAL MARKETS

12. Priority Issues for Reom _ in the Financial Sector. The government's policyof opening up financial markets to competition, along with prudent regu latorypractices has resulted in significant progress in financial sector dcvelcpment since thebeginning of thc Convertibility Plan. Financial institutions have adapted theirpolicies and products to a low-inflation environment, and the sector is an activeparticipant in global financial markets. The banking sector was strengthened,especially in thc aftlermath of the Tequila Crisis in 1994/95. The Goven,mcntrecognizes, however, that capital market development has becn less profound. Interms of institutional investors, the Govemment is committed to resolving importantissues regarding insurance, pension and mutual fund companies. Additional reformsare also needed to improve access to crodit for small borrowcrs, especially for smallbusinesses. Thcre arc also important institutional issucs to address for the sector as awhole, including thc need for coordination aniong financial market regulators and atax policy that does not discriminate against certain financial instrumcnits.

13. The Government views the Special Structural Adjustment Loan as anopportunity to address sonme of the mnost pressing institutional and legal ihpediiimentsto the developm1ent of a sound and robust financial system. The actions to be taken arefocused in the following areas: banking reform; strengthening institutional investors(insurance, pension funds, mutual funds); SME access to credit (lease finance andsecured transactions); and improved regulatory and tax policy coordination.

> In an international comparison of regulation of various banking systems in LatinAmerica and East Asia, Singapore, Argentina, and Hong Kong stand out ashaving thc strongest banking regulations. Across virtually all categorics,Argentina dominates the East Asian countries that have been beset by financialcrises. Thus, whereas no banking system is evcr immune to sufficiently largeshocks, the Argentinc regulatory system appears to be among the most robust, asit needs to comply with the constraints imposed by Convertibility Law. Tofurthcr strengthen the supervisory process, the Government is committed to: (a)improve failure resolution mcchanisms; (b) pass legislation protecting officials inthe exercise of thcir public duties, to facilitate the restructuring of the banking

Annex FPage 7 of 12

system; (c) subject publicly owned banks to the same supervisory rigor andregulatory cnforcement as private banks and, (d) strengthen guidelines for properbank govemance, affecting owners, management, and outside directors.

> Institutional investors. The Government initiated a modemization program for theinsurance industry in thc first half of the 1990s, which resulted in thie closure ofthe state reinsurance company (INDER), the privatizatioii of thc Caja de Ahorrosy Seguros (the largest insurance company), and the substitution of premium andproduct controls with solvency monitoring. Despite these advances, the industryhas not reached its full potential. The supervision of insuranice finns will bestrengthencd to ensure that regulators have access to timcly and accurateinformation as well as the capability to enforce prudential regullations. The mutualfund industry has grown rapidly in Argentina since the Tequila crisis; however, anumber of issues will be addressed, so as to improve the efficiency of this marketsegment. The current compulsory rating requirement creates captive marker forthe rating agencies and significantly adds to the cost of accessing the capitalmarkets. This system will be dropped, so that these services arc contracted basedon their merit and the value-added they provide to potential investors inevaluating new securities. In addition, geographic restrictions on mutual fundoverseas investments will be removcd, allowing thosc companies to furtherdiversify their investments.

> Another weakness in the financial sector which the Government is committed toaddress, is SME access to credit. The medium and small businesses have yet tofully benefit from liberalization of the financial sector. Factors responsible forconsistently high interest rates and lirnited availability of credit for SMEs includea weak credit culture and legal and institutional constraints. The GovernmenL willadvancc in legislation to provide for better means of secured transactions forSMEs, as well as removing legal and tax impediments to the development of theleasing industry.

> The Government is cornmitted to moving towards neutrality in the impact of taxpolicies on financial instrumeints, so that market forces arc driving the financialmarketplace and not arbitrary tax rules. A comprehensive study will bc conductedto review the tax treatment of financial intermediaries and instruments, andrecommend changcs to the tax law to introduce greater neutrality. The taxtreatment of leasing is also slowing development of the indusiry. The main taxissue concems the differential inmpact of value-added tax (IVA) on leasing whenperformcd by leasing companies vs. commercial banks. This tax disincentive willbe addressed in the reform program.

Annex FPage 8 of 12

14. The Contingent'!Repo" Fgilitv. Although the Tequila Crisis had its short-term costs, the Government used the crisis as an opportunity to accelerate rcforms inthe fimancial sector, contributing to the emergence of a system that is more resilien loextemal shocks. As a result, despite unease in the early stages of the more recentAsian crisis, the resolve and measures introduced by the nmonetay authorities sincethe Tequila Crisis (e.g. in staying with the Convertibility Plan, and allowing banks tofail), contributed to an early recovery of confidence in the banking system.

15. Banking regulation and supervision help linit the possibility of extensive losson bank deposits. Importantly, the authoritics have made their capital and reservercquirements risk-sensilive- Argentina's banking system still remains somewhatexposed to the negative influence of external shocks, as occurred in 1995, duLe to thelimitations inherent in a currency-board monetary system. As a result, the CentralBaink nioved ahead in implementing an iniovative contingent financing arrangementwith private commercial banks, described below.

16. To guard against a repeat of the 1995 tequila crisis where credit to SMEs wasseverely curtailed generating an important effect on economic activity and adisproportionate negative effect on employment and poverty levels, the Central Bainkhas adopted a liquidity policy for the financial system. This policy consists of twomain instruments: liquidity requirements for commercial banks, and the ConitingentLiquidity Facility (the repo facility). This facility gives the Central Bauk (BCRAb),the option to sell dollar-denominated govemment bonds to international baliks subjectio a buy-back clause (with an embedded implicit interest rate). In June 1998, the repowas written on bonds ($6.2 bn., 13 banks) and mortgages (S500 m., I bank) with arepo on loans to provinces under negotiation (letter of intent signed). The target is tomaintain a repo facility approximately equivalent to 10 percent of the deposit base ofthe banking system.

17. The Central Bank intends to transfer the state-contingent profits fromexercising the facility to the commercial banks facing the liquidity crisis, whiclh inturn would presumably use the funds to pay deposit witbdrawals. Banks wouldtransfer the underlying securities involved in the repo to the BCRA as collateral forthe loans offcred, and the funds lent by the BCRA would be those received from theexercise of its options. Thus, the facility pemits the BCRA to engage in discountlending effectively, without "creating money" - the facility permits the BCRA to actas a lender of last resort without violating its current implicit comrnitnient to maintaina 100 percent reserves against its liabilities.

Annex FPage 9 of 12

18. Part of the idea of the facility, of course, is that having it in place reduces thelikelihood that it will be necessary. That is, the probability that depositors will runbanks is reduced by the presence of the facility.

(C) ENHANCED REGULATORY ENVIRONMENT

19. Argentina's profound structural adjustment program implied significantreforms aimed at introducing efrective conmpetition in the domestic market such asopening up its trade regime, removing barriers to foreign investment, liberalizingdomestic goods and capital markets, and broadly deregulating its economy. In itsquest for greater efficiency and restructuring the role of the statc, Argentina has alsobecn one of the forerunners in introducing competition and private participation ininfrastructure services through outright privatization and concession contracts in allinfastructure subsectors. Since 1989, virtually all major infrastructure sectors suchas telecommunications, electricity, gas, ports, railroads, toll roads, airports arnd waterhave been affected. State monopolies have been unbundled and dismantled andprivatized, sectors have been restructured. A regulatory framework has beenintroduced in most of the subsectors, all with the objective to promote entry,competition and efficiency in delivery of services. In eiectricity for example, thesector was unbundled between generation, transmission and distibution and twentyfive business units created to introduce competition in the market. lntelecommunlications, the sector was completely privatized with an initial exclusivityarrangcment now set to expire in 1999, after which the market will be opened to newoperators. A new Telecommunications Law to establish the framcwork for this isnow being prepared. Argentina also provided sweeping concessions in virtually alltransport sectors in railways, ports, toll roads and airports. In the watcr sector, again,Argentina was one of the pioncers with the concessioning of the Buenos Aires waterservices company and it was followed by the concessioning of several municipalitiesin the provinces.

20. In the eight years since Argentina began these reforms, much has beenachieved, but equally, some issues have now emerged that must be addressed for thecontinued improvement in the growth and efficiency in the provision of infrastructureservices. These include the improvement of the regulatory framework (establishingautonomy of regulatory agencies from the cxecutive branch), introduction of aCompetition Law and an institutional framework to implement it, and the need of asystemn for speedy and efficient resolution of disputes among concessionaires anid theGovemment and/or the rcgulatory agency. The Govenmment is committed to developlegislation to address these issues, in particular, establisbing a specialized tribunal for

Annex FPage 10 of 12

the resolution of conflicts amongst concessionaires and the Government and/orregulatory agencies.

(D) QUALITY PUBuIC ADMINUSTRATION, AND FISCALSTRENGTHENING

21. The Goverwnent will build upon the progress made in earlier programs toreform the state sector, rationalizing its administrative structure and improving theefficiency of the civil scrvice. The Govcmment is committed to advancing further inthese reforms and in continuing to improve transparency.

> Public Exoenditure Review and Medium-Term Expenditure Framework. Toimprove the predictability of resource-availability, the strategic allocation ofrcsources amorng priorities, and the efficiency of resource use, the government iscommitted to conducting a public expenditurc review and to move fuirthcr towardsapplying concepts of a medium-term expenditure framework (MTEF) andperformance-oriented management. The public expendirure review would focuson strategic issues in re-aligning the public administration to the changing role ofthe government in Arge-ntina. An MTEF involves top-down, multi-year budgetplanning, and bottom-up policy planning.

tansparency, In recent years, the Government has advanced in improving thequality of fiscal and economic data, as well as its dissemination, via publicationsand in the intemet. An additional measure included in the plan of work is anaccounting of "tax expenditures" - the tax exeniptions granted to privatecompanies on a sectoral or regional basis.

> Law of FiscalRaenonsibilitv. The Government is also developing a new law forassuring fiscal discipline by the federal govemnncnt, setting limits on publicindebtedness. Thc Government has shown its commitment to meeting IMF fiscaltargcts during 1998, and the proposed budget for 1999 includcs CUts ofapproximately US$ I billion, compared to 1998. In addition, to help achievethese goals, the Government is ncgotiating a new collectivc bargaining agreementwith public employees to provide more flexibility to labor relations in the publicsector. Other measures to improve the efficiency of public expenditures werementioned in the human development section above.

? Provincial govemen Provincial governments, through their now-dominant rolein the provision of educational, health, and welfare services, account for alrnost

Annex FPage 11 of 12

haLf of total public expenditure in Argentina. They have gencrally lagged behindcentral government in fiscal performance and adjustment of their public sectors.But thcre is now a strong wave of reform, if at different speeds in differentprovinces. This has been demonstrated through recent reforms in the fiscal,privatiz.tion, deregulation, and pcnsion areas. Since 1996 the ccntral govertunmenthas promoted this process by cencouraging civil service refomi, fiscal and debt-management reform, aad greater efficiency and equity in public spending.

* Federal tax reform. Congress is considering legislation that would: (1) loweremployer payroll contributions; (2) broaden the value-added tax to includemagazines, cable television, and private health care services; (3) chiange thecorporate income tax, so that its base includcs distnbuted profits, worldwide rentsand export tax refunds; limit deductibility of interest costs; and introduce a tax onfirms' assets - to function as a minimum tax.

Reform of intergoveenmental fiscal relations. The current system of"coparticipation", as it is known in Argentina, is a complex mix of one largerevenue-sharing pool and R series of tax-sharing programs. Total budgetarytransfers to the provinces were SI 8.2 billion in 1997, just under 6 percent of GDP,and financing about 56 percent of total provincial government expenditures. Thedistribution of the general revenue-sharing fund is according to percentages thatwere fixed in place by a 1988 law. Some of the sectoral programs follow fairlyreasonablc need-based criteria, while others do not. The final result is a largediversity in revenucs per capita -- a five-fold difference in reveinues per capita forthe highest and lowest provinces. This dispersion is difficult to justify in temis ofneeds and/or cost differentials. Three problems that necd to be addressed in thereform of intergovernmental fiscal relations arc: (1) simplificationi of thecomplicated multiple tax-sharing/revenue-sharing system and consolidation of theprograms into one fund, to improve transparency; (2) introduction of a morerational formula for distributing thcse resources across provinces; and (3) increasethe degree of correspondence between the provincial tax payer and the provincialservices he/she receives. The latter would involve some form of decentralizationof tax powcrs, either through more provincially administered taxes, or provincialsurcharges on federally collected taxes.

> Provincial TaxReforM. An additional long-standing problem in provincialfinance in Argentina has been the search for a substitute for the distortionazyprovincial "gross receipts" (tumover) tax. This tax is multi-stage sales tax thataccumulates ("cascades') across the stages of production, since unlike the value-added tax, there is no crediting for tax paid on the purchase of inputs. The

Annex FPage 12 of 12

Government has been exploring the possibility of a provincial VAT surcharge as asubstitute for thc gross receipts tax. Later, it also could be used as an instrumeintfor furEher tax decentralization (where the federal govenmuent would make taxroom by reducing its VAT rate, the provinces would increase their rate (if theywish) in exchange for reduced points of coparticipation).

V. World Bank and Inter-American Bank Support

22. The above presentation demonstrates the depth of the Goverranent's ovcralleconomic rcform program. Financial assistance from the World Bank and the Inter-Amcrican Development Bank is essential to allow thc Government to remainfocussed on its reform agenda, and to continue to strcngthen the quality of coregovermnmert functions in the social, financial and regulatory sectors.

Sincerely yours,

BUENOS AIPES, rloverib-er, 02 1990.

Dr. ROXUJ##41 N EZM- JS * S PUI..dCO

IWIA;S Y SLAV iPUL;

Annex G

Argentina at a glance Pag9/6198of 2

Latin Upper-POVERTY and SOCIAL America middle-

Argentina & Carib. Income Developmwnt dlamond1997Population, mid-year (mRlsons) 35.2 494 571 Life expectancyGNP per capita (Atlas method, US$) 8,570 3,880 4,520GNP (Atlas method, US$ billions) 302.0 1,917 2,584

Average annual growth, 1991-97

Population (%) 1.1 1.7 1.5 GNP GrossLabor force (%) 1.9 2.3 1.9 p Gro

per primaryMost recent estimate (latest year available, 1991-97) capita enrollment

Poverty (% of population below nationel poverty fine) 26Urban population (% of total population) 88 74 73Life expectancy at birth (years) 73 70 70Infant mortality (per 1,000 live births) 22 32 30Child malnutrition (% of children under 5) 2 Access to safe waterAccess to safe water (% of population) 64 73 79Illiteracy (% of population age 15+) 4 13 15Gross primary enrollment (% of schoor-age population) 107 111 107 -Argenina

Male Upper-middle-inc groupFemale

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1978 1986 1996 1997Economic ratUoa

GOP (USS bilions) 51.2 110.9 298.7 322.7Gross domestc investment/GOP 30.7 17.5 18.5 18.9 TradeExports of goods and services/GDP 9.2 8.2 8.9 8.7Gross domestic savings/GDP 34.0 19.3 18.1 18.2Gross national savings/GDP 34.1 14.8 16.5 16.4

Current account balance/GDP 1.3 -2.6 -1.3 -2.9 Domestic - _Interest payments/GDP 0.9 3.3 1.9 2.0 Savings InvestmentTotal debt/GDP 18.1 47.3 32.4 32.4 \vnTotal debt service/exports 34.4 82.8 47.2 49.3 /Present value of debt/GDP 29.5Present value of debt/exports 277.7

Indebtedness19764t6 1987-97 1996 1997 1998-02

(average annual growth)GDP 0.6 3.8 4.8 8.6 4.0 -A rgenlinaGNP per capita -1.9 2.9 3.7 7.1 3.1 Upper-middle-income groupExports of goods and services 2.8 8.5 6.7 9.1 6.5

STRUCTURE of the ECONOMYW1976 1986 1996 1997 Growthratoaofoutputandlnvewtment(%)

(% of GDP)Agriculture 8.2 7.8 7.7 7.3Industry 50.9 37.4 35.5 36.4 20 .

Manufacturing 39.1 27.4 24.7 24.8Services 41.0 54.8 56.8 56.3 0

I92 93 94f 98r 97Private consumption 56.6 20 -. 9.. .29

General government consumption 9.4 i GDl GDPImports of goods and services 5.9 6.3 9.2 9.4

1976486 1987-97 1996 1997 Growth rates of exports and Imports %)(average annusl growmth)Agriculture 1.2 2.8 3.0 3.3 100Industry -1.5 3.5 5.0 11.2 so

Manufacturing -1.3 3.0 5.3 9.2 soServices 2.1 4.1 4.9 7.7 40

Private consumption 20 ..General govemment consumption o 9 9Gross domestic investment -4.8 7.5 8.8 26.5 -20 - 2 93 94 93 97

Imports of goods and services 1.1 19.5 18.2 27.1 Exports --. ImportsGross national product -0.4 4.2 4.6 8.1

Note: 1997 data are preliminary estimates.

The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond willbe incomplete.

Annex GPage 2 of 2

Argentina

PRICES and GOVERNMENT FINANCE176 1916 166 1197 InftIon (%)

Donmsdcpdc 20

(% change) 200Consumer prices .. .. 0.2 0.S ts

Implicit GOP deflator 433.3 75.7 1.5 -05 10.

Govenmnt finance 50

(% of GDP, includes currewt grants) o Current revenue .. .. 15.4 16.7 -- 92 93 94 95 g 97Current budget balance .. .. -0.8 -0.4 -GDP deœao eOverall surplus/deficit .. .. -1.8 -1.3 _

TRADE

(US$ millions) 1976 11" 1916f 1167 Export and Import levels (US$ millions)

Total exports (fob) .. .. 23,493 24,970 30.000

Food .. .. 2,203 2,148 25,000

Meat I'M.1,5 2,158 2.0

Manufactures 12,004 13,139 20000

Total imports (cif) 22,179 24,619 r000Food 10.000 Ai lFuel and energy .. .. 1,009 1022 5.000Capital goods .. .. 5,249 5,996 0

el 92 93 94 95 90 97Export price index (1995=100) .. .. 104 104Import price index (1995=100) .. .. 104 106 aExports SImporsTerms of trade (1995=100) .. .. 101 S8

BALANCEofPAYMENTS1976 19s 1996 1997 Cumrent account balance to GDP rtio (%)

(US$ milblons)

Exports of goods and servies 4,609 8.433 27,037 29,318 0Imports of goods and services 3,468 6,486 27,910 34,899Resource balance 1,141 1,947 - 873 -5,581 .

Net income -508 -4,808 -3,248 -4,005Net current transfers .. 2 334 346 .2Current account balance 657 -2.859 -3,787 -9,240 43

Financing items (net) 261 1,976 7,563 12,302Changes in net reserves -918 883 -3,776 -3,062 -4.

Memo:

Reserves inciuding gold (US$ mElons) .. 4,427 19,745 22,807Conversion rate (DEC, lbcat4SS) 2.00E-9 9.00E-5 1.0 1.0

EXTERNAL DEBT and RESOURCE FLOWS

fUSS millions) 16 1 N7 Composition of total debt, 1997 (USS millions)Total debt outstanding and disbursed 9,278 52,450 96,677 104,539

IBRD 343 1,140 5.372 5,494 A: 5,494 c: 6,619IDA 0 ° ° ° G: 20 0

Total debtservice 1,616 7,323 14,965 17,264 /_ 4.767

IBRD 44 210 608 635IDA 0 0 0 0 E: 11.215

Composton of net resource flowsOfficial grants 0 3Official creditors 42 268 1,449 758Private creditos 1,078 375 4,709 6,690Foreign direct invesbrtnt 0 574 1.936 3.000Portfol equity 0 0 F: 50.194

WoUld Bank programCommitments 115 724 948 1,221 A-iBFtD E-BilateralDisbursements 20 408 1,077 797 B - IDA D -Other muldiateral F - PrivatePrincipal repayments 19 134 282 299 C - IMF G - Short-term

Net flows 1 273 795 498Interest payments 25 75 326 335Net transfers -24 198 469 162

Development Economics 9/16/98

MAP SECTION

IBRD 29348

710 , r 60' 50-20' BOLIVIA ! 20

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fSanta Rosa®

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ARGENTINAC,

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. PROVINCE CAPITALS

® @ NATIONAL CAPITAL

( PROVINCE BOUNDARIES

- --- INTERNATIONAL BOUNDARIES

I

-50' 50-Rio Gallegos 0 100 200 300 400 500 600 KILOMETERS

I 0 100 200 300 400 Miles

. iJThis mop was produced by the Mop Design Unit of The World Bank..Ushualo The boundaries, colors,denominations and anyother information shown

TIERRA on this mop do not imply, on the port of The World Bank Group, anyDEL FUEGO judgment on the legaolstatus of any territory, or any endorsement or

acceptance of such boundaries.70' 60' 50°

APRIL 199i