Announcement of World Bank Supports Argentina's Public Sector Reform with a Three Hundred Twenty-Five Million US Dollars Loan on July 30, 1991

FOR IMMEDIATE RELEASE World Bank 1818 H Street, N.W., Washington, D.C. 20433, U.S.A.* Telephone: (202) 477-1234 BANK NEWS RELEASE NO. 92/8LAC Contact: Antonio Pimenta-Neves Tel: (202) 473-8722 WORLD BANK SUPPORTS ARGENTINA'S PUBLIC SECTOR REFORM WITH A $325 MILLION LOAN WASHINGTON, July 30, 1991 -- The World Bank today approved a $325 million quick-disbursing loan to Argentina to help the government mobilize revenues, rationalize expenditures and make the Central Bank more independent and efficient. The loan will provide new support for the government's program to restructure, modernize and reduce the country's public sector. Large and persistent public sector deficits are the main cause of the macroeconomic instability that plagued Argentina over the past ten years. This instability plunged the economy into stagnation and hyperinflation, thwarted private sector growth and increased absolute poverty in the country. The World Bank loan will support measures already underway to increase public sector revenues, improve tax and customs administration and reduce distortions in the tax system. Among other things, the government will reduce or eliminate tax loopholes for industrial promotion, including the tax subsidies to the electronics industry in Tierra del Fuego. By 1994, these subsidies will have been reduced by 70 percent. The government will also continue to curtail bxpenditures. To better control them, the government will adopt a new legal framework to ensure consistent and comprehen@ive accounting and adequate internal controls and auditing. An administrative reform has already reduced the number of ministerial departments from 272 to 184 and will further eliminate superfluous public functions. The government has cut 10 percent, or 60,000 members, of its work force, and plans to double that number by mid-1992. To reduce procurement expenditures, the government will revise its procurement procedures, including its "Compre Argentino" ("Buy Argentina") program, which subsidizes domestic suppliers against foreign competition. Altogether, the revenue and expenditures measures under implementation by the government will reduce the overall public sector deficit by 2.5 percent of GDP next year and more in the years to come. NOTE: Money figures are expressed in U.S. dollar equivalents. - 2- Equally important, the Bank loan will support the -government's efforts to create a modern monetary allthority. The.Central Bank has already been stripped of functions considered inappropriate to a monetary authority, such as financing of trade transactions and social security payments. The Argentinian Congress is now examining a new charter for the Central Bank prohibiting direct lending to the government, forbidding rediscounts to public banks (except for emergency liquidity needs and then only against collateral), and limiting the rate of accumulation of Treasury bonds in the Central Bank's portfolio backing the money base. The new charter will also increase the political independence of the monetary authority. These measures are indispensable if Argentina is to reverse in a sustainable manner the economic decline of the past decade. During the 80's, inflation, tax subsidies and poor tax collection sharply reduced the federal government's revenues. At the same time, expenditures increased significantly, with federal employment growing by more than 20 percent. Austerity programs adopted after 1985 were ineffectual. They compressed civil service wages by 75 percent, but depleted middle management of talent and continuity. Still on the expenditure side, various interest groups managed to ensure access to public funds, forcing a disproportionate expenditure compression onto parts of the budget under discretionary control of the Treasury. The austerity programs drove investment to historically low levels and left the federal wage bill to account for 70 .percent of non-interest expenditures. Even so, the deficit"could not be closed. As the willingness of the public to hold government paper declined, the Central Bank became the only source of finance for the deficit. In 1990, Argentina's attempt at stabilization and structural reform program finally produced some results. The government achieved a primary surplus of 2.2 percent of GDP on a cash basis, an improvement equivalent to more than 3 percent of GDP compared to the average for 1987-89. Progress on structural reforms also'helped to restore some degree of market confidence. The government sold assets or concessions in telecommunications, roads, airlines, hydrocarbon deposits, and railways for a total of $600 million. It also managed to reduce its foreign commercial bank debt by $7 billion. Simultaneously, the government extended the VAT (value added tax) to practically all goods and services, reduced special transfers to the provinces and public enterprises, deregulated the hydrocarbon sector, and announced decrees to reduce the size and scope of the federal government. In trade, it reduced quotas and slashed the maximum tariff to 24 percent, save for some specific duties. In the financial sector, the government closed the retail activities of the Housing and Development Banks. In late 1990, the stabilization program unravelled but the new economic team which took over in early 1991 soon announced the government's renewed effort to stabilize the economy and open it to competition. The maximum tariff was further reduced to 22 percent. In March, the government announced a law guaranteeing the convertibility of the austral at A$10,000 to the US dollar. The new law also proscribed further money creation except to purchase foreign exchange. -3 This meant that any increase in net domestic assets would have to be offset by a primary surplus in the nonfinancial public sector. The new program reduced inflation to 9.7 percent,in March and about 2 percent in July. Since the beginning of 1991, interest rates have fallen spectacularly from 100 percent to about 20 percent a year. The sudden availability of reasonably priced credit fueled consumer spending and, consequently, a modest economic recovery. Argentina's near term macroeconomic situation remains fragile. In the short run, economic activity is likely to fluctuate as markets wait for further signs of sustained stabilization. A strong performance in public sector accounts, therefore, is essential to the government's strategy to promote a recovery through a strong turnaround in private investment and demand. The World Bank loan will be disbursed in two tranches of $162.5 million each against import receipts. As many measures envisioned by the program are already under implementation, $65 million of the total will be made available for retroactive financing of expenditures incurred after January 1991. The World Bank loan is for 17 years, including five years of grace, with a variable interest rate, currently 7.73 percent, linked to the co-st of the Bank's borrowings. It also carries an annual commitment charge of 0.25 percent on the undisbursed balance. Argentina: Evolutlao of Federal Eamployment Thouands 80 Admialatrat Fleform Program 550 -Projeted- 540 460 Decm ber 1983 July 1989 May 191 May 1992 May 2993 a/ al Redwoion in 1093 asoolated with trafefr of secondary eduostion to the pnnos - 4.. ARGENTINA NONPINANCIAL PUBLIC SECTOR DEFICIT OF COMBINED PUBLIC SECTOR Percet of GOP Percent O GDP b 12 S- ntorest Paymont* I' Overall cIt De0 2 0 2 2Primary salanc 1987 1988 1989 1990 1991 Prag. -3 Nøntinancial C*ntrad Sank 1987 1988 189 1990 1991 a/ Prag. C/ at aat tamet et et and program yeqr (7/91-4/921 ere prelected LEVEL OF EXTERNAL PROTECTION REVENU£ FROM ASET SAL£S AND PRIVATIZATIONS Percent US$ BILLION 0uAntitative Reatrictiona a/ 2.0 60- Average Tarifis b/ 40 - 3o- 20M 0.5 1 7 1188 1989 1990 -11 18 198 18 190 1991 1988 1989 1990 1991 a/ al Produ.II.a eserag. b/ W.Igand by 4o-..eI gredueef at * i..t... se Ie ~l tctd