Announcement of World Bank Approves Four Loans to Argentina Totaling 1.25 Billion Dollars on October 27, 1988

FOR IMMEDIATE RELEASE 'World Bank 1818 H Street, N.W., Washington, D.C. 20433, U.S.A. BANK NEWS RELEASE NO. 89/12 Contact: Ciro Gamarra (202) 473-8721 WORLD BANK APPROVES FOUR LOANS TO ARGENTINA TOTALING $1.25 BILLION WASHINGTON, October 27, 1988 -- The World Bank today acted on four loans for Argentina, amounting to $1.25 billion, which will directly support key parts of the government's economic program. Three new loans were approved and a fourth loan, approved earlier this year, was modified. A total of $700 million of quick-disbursing policy reform loans ($300 million for trade and $400 million for the banking sector) are included in the package. These funds are expected to be disbursed in tranches over the next year, in line with reform measures undertaken by the government. The package also includes $252 million for power sector investments and $300 million for a housing sector project. The power sector loan is scheduled to be disbursed over the next two years and the housing sector loan over the next five years. Trade Policy The $300 million loan for trade policy reform is the second World Bank lending operation in support of the government's program to further integrate Argentina into the world economy. The first phase of program reforms strengthened the competi- tiveness of Argentine exporters and removed a substantial number of quantitative import restrictions. The Bank supported that phase with a $500 million loan approved in May 1987. The second phase initially included a gradual elimination of non-tariff barriers over three years. But the momentum created by the successful implementation of the first phase encouraged the government to-expand the content of the reform program, and to accelerate its implementation. The new loan addresses import protection, the deregulation of exports and improved industrial investment incentives. In less than two years--between the approval of the first loan and the completion of the second--the government will have undertaken the following: * Quantitative import restrictions, which previously protected 62 percent of industrial production, will cover only 15 percent; * Reference prices and specific tariffs, which protected 100 percent of industrial production, will now cover only 7 percent; NOTE: Money figures are expressed in U.S. dollar equivalents. -2- * The average tariff rate will have come down from 43 percent to 30 percent; * The maximum tariff rate will have been reduced from 115 percent to 50 percent; * A comprehensive regime for the duty-free import of materials used for the production of export goods will have been introduced; * A scheme consistent with the General Agreement on Tariffs and Trade (GATT) will have been implemented to automatically reimburse indirect taxes to exporters, replacing discretionary export subsidies which promoted countervailing duties by importing countries; * Most industrial export taxes will have been removed; and * Industrial export licenses, except those for quality control, will have been eliminated. Most of these targets have already been achieved. The reform program frees industrial trade from regulatory constraints and reduces the burden and dispersion of trade taxation to allow the industrial sector to compete in the world market. Non-traditional exports have already performed vigorously, growing more than 50 percent in current dollars between the first half of 1987 and 1988, and strong growth is expected to be sustained over the medium term. The program is expected to reduce Argentina's dependence on volatile commodityl export earnings which tend to destabilize the economy. Further, over the medium term, the program is expected to increase industrial labor demand and raise the productivity of investment. The $300 million loan will be disbursed in two tranches. The first tranche of $150 million will be disbursed upon fulfillment of conditions of effectiveness, which include a reduction of quantitative restrictions from 37 percent to 18 percent and of the average tariff rate from 43 percent to 30 percent of domestic production in each case. The second tranche of $147.65 million is expected to be released by early 1989 upon a review of progress of the government's macroeconomic program and the fulfillment of specific conditions, including the further reduction of the production coverage of quantitative restrictions to 15 percent, and of export taxes to 7.5 percent, the removal of industrial export licenses and progress in improving industrial investment incentives. The remainder of the loan ($2.35 million) will finance consultant services, training and equipment purchases and will be disbursed by June 1990. The loan, excluding the technical assistance component, will be applied to 100 percent of the c.i.f. costs of imports, except those normally excluded under World Bank policy-based lending, such as alcohol, tobacco and armaments, and goods otherwise financed. -3- Banking Sector Reform The World Bank today also modified a $400 million loan, originally approved in March 1988, to help increase deposits and raise confidence in Argentina's banking system, restore the system's capacity to channel and allocate credit, and reduce spreads and cost of credit. An efficient banking system is an important condition for the success of the government's efforts to modernize the economy. The government has been introducing key policy reforms, supported by the World Bank loan, to deregulate the banking sector, enhance financial intermediation by the private banks, and strengthen their supervision. But, because of an unanticipated increase in inflation, the Central Bank has not been able to achieve its target for rediscounts or to keep reserve requirements below agreed ceilings. In early August 1988, the government launched an economic stabilization program, the "Plan Primavera," which addresses the imbalances that have slowed progress in the implementation of banking sector reform. The agreed changes in certain loan conditions align them with the stabilization plan, which in turn provides a framework for achieving the loan objectives. The $400 million loan is expected to be disbursed in two tranches. The first tranche ($199.5 million) will be disbursed in early 1989 upon a satisfactory assessment of progress towards agreed macro economic and sectoral adjustment programs, and fulfillment of specific loan conditions. The second tranche ($200 million) would be available around the middle of 1989 upon completion of another macro assessment and fulfillment of specific conditions. About $500,000 of the loan will be used to buy computer equipment for the Central Bank and for technical assistance. Housing Sector The $300 million housing loan supports government efforts to reform sector policies. The main purpose of the reforms is to increase the productivity of the housing programs financed by the National Housing Fund (FONAVI), improve FONAVI's financial performance, and reduce subsidies while ensuring that they reach their intended beneficiaries. The loan will finance the construction of almost 60,000 houses and the rehabili- tation of about 40,000 existing houses. On the basis of improved design and bidding procedures, housing construction periods will be reduced from three years to less than a year and costs will be lowered to less than half the current amount. The project is expected to reduce the housing sector's fiscal deficit through lower subsidies and higher savings and recovery of mortgages. Socioeconomic benefits include the sharper targeting of subsidies to the poorest segments of the population and the creation of about 180,000 man-years of employment. This is the first housing sector project financed by the World Bank in Argentina. It has an estimated total cost of $608 million, with the balance to be provided by FONAVI ($280.4 million) and the beneficiaries ($27.6 million). The Bank loan is expected to be disbursed over five years. Electric Power The $252 million loan will support an electric power policy program which aims to expand the sector by using least-cost measures and programs, rehabilitate the finances of the national power utilities, and promote more rational use of electricity through a tariff system based on economic costs. -4- The program also aims at improving the efficiency of the utilities, strengthening the institutional structure of the sector, and establishing stricter environmental safeguards. Considerable progress has been achieved in the power sector during the preparation of the loan in the areas of investment planning and tariff adjustments. The use of a higher discount rate (12 percent instead of 8 percent) more in line with the opportunity cost of capital and the assumption of realistic demand projections for the planning of generation expansion have resulted in assigning high priority to gas-fired thermal plants in conjunction with completing hydro projects. This investment strategy represents the least-cost solution for Argentina; makes appropriate use of its natural resources, including natural gas; and its inherent flexibility and low-risk allow adjustment to different market growth scenarios. The government has consistently adjusted tariffs during 1988, thus helping avert financial deterioration of the utilities and starting a process of financial rehabilitation to be supported and monitored by the present operation. About $250 million of the loan will help fund the 1988-89 period of the sector investment program to be used to speed up construction of the Yacyretl binational (Argentina-Paraguay) hydroelectric project, the most pressing need of the sector. The remaining $2 million will be used to strengthen the Energy Secretariat. The YacyretA project, for which the World Bank approved a first loan of $210 million in October 1979, has suffered an eight-year delay in the completion schedule. After appointing a new management team, the Argentine government carefully considered the options regarding the implementation of the project, and decided to complete it. The move resulted in changes in project design, renegotiation of contracts with construction and engineering firms, and a rescheduling of project execution to adapt to updated demand projections. Progress in construction has been satisfactory during the last three years and it is expected that the first units of YacyretA will be under production tests by the second semester of 1992. Analysis shows that completion of the project is still the least-cost option for expanding national power generation facilities. While thermal plants, to be economic, require a considerably lower investment than hydro plants to offset their fuel costs during lifetime operation, in the Yacyretl case the investment that would be required to replace it with thermal plants is greater than that needed to complete it. The project requires total financing estimated at $2.4 billion. The balance will be provided by the consumers ($991.6 million), the government ($52.2 million), a proposed Inter-American Development Bank loan ($250 million) and other borrowings ($806.9 million). The World Bank loan is expected to be disbursed over two years. The World Bank loans for trade policy and the housing sector are for 15 years including a five-year grace period. The loan for the electric power sector is for 13 years, including six years of grace. All four loans have a variable interest rate, currently 7.59 percent, linked to the cost of the Bank's borrowings. They also carry an annual commitment charge of 0.75 percent on the undisbursed balances. - 0 -