Statement by Jannes Hutagalung at the Board meeting of March 17, 1998

International Bank for Reconstruction and Development 87338 International Development Association International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS98-104 March 16, 1998 Board Meeting of March 17, 1998 Statement by Jannes Hutagalung Argentina: Country Assistance Strategy - Progress Report We welcome the opportunity of discussing this progress report on Argentina's Country Assistance Strategy. We are glad to note there is progress in the implementation of the CAS and support its continuation to achieve further objectives set in the CAS. The Argentine Government is to be commended for its success in containing the effects of the Mexican Peso crisis. Last year, it achieved impressive economic performance leading to substantial rise in production, employment and investment. The economy grew by 8%, inflation was practically zero, and international reserves continued to accumulate reaching $22.8 billion. Progress was also made on the fiscal side by meeting the targets set under the Fund program. Confidence in the banking system seems to be on the rise shown by the recovery of the interest rate and increasing deposits. These achievements, however, were overshadowed by the Asian financial crisis threatening to slow the Argentine growth to 4% in 1998. The government also faces a number of problems, such as income disparities, high unemployment, fiscal and current account deficits. If not addressed properly, these problems could lead to unsustainable situation harming the economy's fundamentals and its access to capital markets. We agree that to solve the problems, the government need to take a number of steps recommended in the CAS. To increase revenue, tax reform should be adopted and tax evasion minimized. Modernization of labor regulations is critically important to make the labor market more flexible and reduce unemployment. Improving governance and judiciary are essential to produce transparency and increase confidence. Widening of income disparities is a problem that needs to be seriously addressed by the government. In this regard, measures such as improving quality of education, extending labor intensive projects and promoting exports could contribute significantly to improving income distribution. We also support measures to strengthen provinces in terms of decentralization, tax structure reform and improved fiscal performance.  2 It is encouraging to note that the Bank’s supported activities as well as the lending program remains appropriate and on track. Although these reform measures are inherently more difficult, we are confident that with the strong commitment of the government, they can be successfully implemented contributing toward social development and poverty reduction. Finally, on the National Highways Rehabilitation and Maintenance Project, we have no difficulty in supporting it as it is consistent with the CAS and built on the achievement of the ongoing Bank-assisted Road Maintenance program. We appreciate the incorporation of lessons learned in the design of this project and hope this can be done in other proposed projects.