Statement by Eugene Miagkov at the meeting of June 27, 2000

87567 International Bank for Reconstruction and Development International Development Association International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS2000-219 June 27, 2000 09:31:17 AM Statement by Eugene Miagkov Date of Meeting: June 27, 2000 Argentina: Country Assistance Strategy 1. We would like to commend the Staff on preparing a high quality WBG Country Assistance Strategy for Argentina. The document contains in-depth analysis of major development challenges faced by country and presents a coherent strategy aimed at consolidating achievements in the areas of macrostabilization and structural reforms as well as enhancing the social benefits of economic growth. We are pleased to see that the CAS has been prepared in a highly participatory mode and adequately reflects the priorities of the Government and aspirations of the civil society. 2. Continuos support by the IMF, World Bank Group and IDB during the 1990s had played a critical role in successful transformation of the Argentine economy, laying a new foundation for a country’s socio-economic development. Unfortunately, due to different factors the country remains vulnerable to external shocks. In particular, it strongly depends on the terms of access to the international capital market that are very volatile and can negatively influence domestic financial and economic situation. These risk factors can be alleviated only in the medium to long run by continued fiscal consolidation efforts and strengthening the competitiveness of the Argentine economy. Existing monetary arrangement such as currency board has proved to be an effective tool to maintain macroeconomic discipline. On the other hand, it immediately translates external shocks into domestic recession. In view of these factors maintaining a sufficiently large active Bank Group lending and non-lending program in Argentina during next 5 years would be the best way to help country in sustaining strong macroeconomic performance and moving to a more sustainable growth path. In this respect we are not fully convinced that the lending volumes as represented in Base Case scenario do fully take into account the potential financing requirements. The triggers leading to High Case such as no major problems with counterpart funds at the provincial level and changing revenue sharing arrangements between federal center and provinces are in our view too restrictive. That’s why we believe that the Bank should be more flexible in providing financial support to Argentina if the situation in financial markets deteriorates. 3. We support the main priorities of the Bank Group program for Argentina: consolidating macroeconomic reforms, managing social risks, improving health and education, removing infrastructure bottlenecks, enhancing framework for a more broad-based private sector development, continuing provincial reforms. We especially appreciate a strong emphasis set on addressing the social downside of Argentine economic transformation: growing income disparities, persistent poverty, and high structural unemployment. Of course, a major precondition for an effective poverty reduction strategy will be a sound macroeconomic framework, continued structural reforms and continuation of economic growth. On the other hand, it is extremely important to control social risks by enhancing counter-cyclical components of social expenditures along with increasing a targeted character of assistance. It is also important to maintain a sufficient volume of human capital investments in order to preserve and enhance the quality of labor force as an important factor of Argentina’s competitiveness. Given the overall context in which social expenditures are done, especially their dependence on fiscal relationships between federal center, provinces and municipalities, we would like to ask the Staff if the intense efforts to reduce expenditures and reach a positive fiscal position by 2003 as required by the Law of fiscal responsibility will not create additional tensions and detrimentally affect important social programs. For example, the commendable efforts to improve financial performance on provincial level that include introducing the system of sanctions against those provinces who fail to achieve their targets can contribute to freezing the existing unfavorable picture of regional disparities in social development. 4. Another important area that needs to be addressed in order to broaden the basis for economic growth is infrastructure development, including investments into essential elements of urban infrastructure such as water supply and sanitation, solid waste removal etc. As we can see, a sustainable approach to financing future investments is urgently required in view of fiscal considerations constraining public investment program and a lower attractiveness for the private sector of greenfield operations. A possible mix of Bank lending and guarantees is mentioned in CAS but the lending program contains only 2 rather modest size operations in the area of infrastructure. Staff clarifications in this respect will be appreciated. 5. We welcome the inclusion into CAS the discussion of private sector development strategy. As we know, The Bank Group strategy in this area in the past has been especially innovative and has brought substantial results in terms of increased efficiency of Argentine economy and inflow of foreign direct investments. On the other hand, there are still important impediments to private sector development in Argentina. The most important impediment is in our view lack of access to the term financing for the majority of Argentine companies. We believe that this situation can be explained not only by “crowding-out” of private credit by public debt but represents a major structural constraint of Argentine economy that needs to be addressed in a systematic way. 6. Finally, let us support the general thrust of proposed CAS for Argentina. We also would like to wish the Government and people of Argentina every success in the implementation of ambitious economic and social programs.