Transcript of meeting of the Executive Directors of the IBRD and IDA, held on Tuesday, December 1, 1981 : Argentina - Second Industrial Credit Project

STRICTLY CONFIDENTIAL 1 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Tuesday, December 1, 1981 Washington, D. c. The meeting of the Board of Directors was convened at 10:20 a.m. in the Board Room, 1818 H Street, N.W., Washington, D. c., Mr. A. W. Clausen, Chairman, presiding. MILLER REPORTING CO., INC. 320 Massachusem Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 2 C O N T E N T S ITEM PAGE MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  44 STRICTLY CONFIDENTIAL  STRICTLY CONFIDENTIAL 45 Item number four on the agenda is a proposed loan in the amount of $100 million equivalent to BANADE with a guarantee of the Argentine Republic for a second industrial credit project. And Mr. Kanchuger of the Latin American Caribbean Region will introduce the proposal. MR. KANCHUGER: Thank you, sir. Mr. Chairman, Members of the Board: The proposed $100 million loan to BANADE, the national development bank of Argentina, would support the Government's objectives of making the industrial sector more efficient and international y competitive. It would be the Bank's second industrial credit loan to BANADE. The previous loan was made four years ago and helped to restore to operations an institution whose policies of low interest rates during a period of high inflation and subsidized lending to inefficient state enterprises had so eroded its capital base that further lending became virtually impossible. BANADE's emphasis since 1977 on positive real interest rates, sound project and credit analysis and loans for industrial modernization has allowed it to play a key role in support of the Government's trade liberalization MILLER REPORTING CO., INC, policies. 320 Massachusetrs Avenue, N .E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 46 The first Bank loan helped attract additional cofinancing and assisted in making important institutional changes within BANADE. The proposed new loan will continue to assist the modernization and expansion of industry by providing fixed interest term credits to finance the foreign exchange component of sub-projects. The loan will also finance sub-projects in the mining sector and will introduce a credit line for industrial energy conservation. some of the loan funds will be onlent through banks controlled by provincial governments, which will help stimulate regional development and mobilize provincial bank resources for industrial development. The project includes technical assistance for BANADE's further institu- tional development and for the development of an industrial energy conservation program. The proposed study of effective protection included in the project is expected to strengthen the dialogue between the Government and the Bank on the formulation of industrial sector policy. It is anticipated that complementary external medium-term funds from private financial institutions would be raised by BANADE through cofinancing arrangements. Argentina's policies of moving to a more open economy have made it necessary for the industrial and mining MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. \Vashingron, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 47 enterprises to become more efficient and internationally competitive in order to survive. The proposed loan would help these enterprises during the initial difficult transitio period of the liberalization process. MR. CLAUSEN: Thank you, Mr. Ka.nchuger. Mr. Derrick Smith. MR. D. SMITH: Thank you, Mr. Chairman. RA.NADE seems to be now sort of well established institution with its reorganization having been successfully accomplished with the help of the Bank loan. It seems to have a good deal of access to commercial funds. In fact, mos of the future expenditure will have to be met from those sources. I just wondered, given that and given that Argentin 's debt service ratio appears to be on its way down, exactly what the case is for injecting large amounts of Bank funds into this particular project, given that we have always regarded Bank finance as the finance of last resort? Thank you, Mr. Chairman. MR. KANCHUGER: Yes, sir. There are two principal reasons for continuing with Bank financing in the case of -- in view of the ability of Argentina to attract external financing. The first is the MILLER REPORTING CO .. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 48 terms of the loans. The commercial Bank loans and the external financing they have been able to obtain have been on terms of eight years or less. Often the external lines of credit are tied lines of credit as well. Secondly, the Bank is in the -- the proposed new loan as in the first loan would be able to attract additional cofinancing and cofinancing with other external financing matched with Bank terms and a provision for using -- having the Bank loans be the later maturities for sub-projects would allow projects to be financed that would require terms that would be longer than those that would be available from solely commercial bank financing. MR. CLAUSEN: Thank you, Mr. Kanchuger. Mr. William Smith. MR. W. SMITH: Thank you, Mr. Chairman. We want to express our strong support for this loan. To us DFC loans go a long way in assisting our countries, that is to say borrowing countries, by way of technical assistance. DFC loans ensure that the projects that are financed by our local banks are verified by the World Bank when it comes to the economic soundness, social objectives and so on and so forth. We hope that during this period when it is to be said that the private sectors ought MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 49 to be encouraged in our countries, more and more attention should be paid to DFC lending by the Bank Group. Thank you, Mr. Chairman. MR. CLAUSEN: Thank you, Mr. Smith. Those comments will be duly noted. Are there any other comments on this proposed loan for $100 million? Mr. Kivanc, excuse me. MR. KIVANC: Thank you, Mr. Chairman. We would like to commend the staff for the prepara- tion of this project which has our full support. We welcome particularly the just replicably widespread distribution of the loan. We are glad to observe that the line of credits provided by this project will also be channelled through the provincial banks to enterprises located far away from the financial centers. This may encourage regional development and it may stimulate industrial development in Argentina by mobilizing the provincial bank resources. Mr. Chairman, we are also gratified to note that, as mentioned in paragraph 68, the arrangement would encourage additional cofinancing. Mr. Chairman, the point that I would like to make is the document shows the minimum lending rates for dollar MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 50 denominated loans such as 16.5 percent with five percent spread and the pool of currency loans such as 14.1 percent with a spread of 2.5 percent for the project, as well as the practice of the rest linked to the tasa testigo. I would be grateful for further details about how the relending terms of the project fit into Argentina's interest situation? This question also relates to the risks mentioned in paragraph 76, that changes in the exchange rate and interest rate policies would make the line of credit unattractive. To what extent is the onlending interest rate flexible in the case of lowered amount for subloans? Thank you, Mr. Chairman. MR. CLAUSEN: Thank you, Mr. Kivanc. Mr. Kanchuger, can you talk to the rate demand? MR. KANCHUGER: With regard to the flexibility of the onlending rate, there is provision for the Bank and Argentina to agree to changes in the interest rate based on future developments. The Argentine Government has been pursuing the policy of positive interest rates. The interest rate has been fluctuating as the inflation in Argentina has been fluctuating from month to month. At the present time, the proposed interest rate is probably -- is relatively attractive compared to what the IIIILLER REPORTING CO .. INC. 320 Massachusetts Avenue, N ,E, Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 51 rate is in Argentina. MR. CLAUSEN: Are there other comments, gentlemen, vis-a-vis this proposed credit to Argentina? (No response. ) Seeing none, then we shall declare this loan to be approved. MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666