Statement by Todd Crawford at the meeting of June 27, 2000

87545 International Bank for Reconstruction and Development International Development Association International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY CONFIDENTIAL EDS2000-216 June 26, 2000 07:44:10 PM Statement by Todd Crawford Date of Meeting: June 27, 2000 Argentina -- Country Assistance Strategy 1. We welcome the opportunity to discuss the World Bank Group's proposed Country Assistance Strategy (CAS) for Argentina. OED's report on the Argentina Country Assistance Evaluation, which the informal CODE Subcommittee discussed on June 12, provides good background for today's discussion. Both staff and the Government of Argentina are to be commended for the fully satisfactory performance of the portfolio and the substantial institutional development impact of the Bank's program, despite the adverse external shocks the economy confronted during the CAS period. 2. Argentina clearly continues to face developmental challenges, including the incidence of poverty and the economy's vulnerability to adverse external shocks. However, Argentina's per capita income is relatively high, its resource endowment is rich, and its institutional capacities and access to international capital markets are growing. Greater domestic resource mobilization, more effective governance and use of resources, and continued structural reforms are all needed to help position Argentina to graduate from World Bank lending. 3. Given Argentina's stage of development, we concur that it is appropriate to begin a gradual reduction in the level of lending from the previous CAS period and, therefore, we support the proposed $3 billion base lending scenario. We also concur broadly with the three themes proposed for the Bank's assistance in the CAS period ahead: enhancing social development; improving the performance of the state; and consolidating structural reforms. The specific objectives of the Bank's assistance should include stronger public finances, reduced vulnerability of the economy to adverse external shocks, higher investment by a more competitive private sector, and job creation, which the CAS notes is the highest priority for the poor. Success of the strategy should be judged by higher levels of sustainable economic growth and indicators of declining poverty, such as are described in Table 6. 4. We could envision a high-case scenario entailing additional lending under certain circumstances. In the event of intensified economic and financial pressures in Argentina and a strong Government policy response, it would be appropriate for the Bank to step up its support within a framework for coordinating assistance from other international financial institutions. 5. A high-case lending scenario could also be appropriate if the Government were to intensify the reform of public finances. Further structural reforms in areas such as governance and provincial-level privatization are important, as will be progress in implementing recently enacted labor market reforms. However, the federal Government's persistent fiscal deficits are at the heart of the country's problems. These deficits have impelled the Government to undertake considerable domestic and external borrowing just to sustain necessary expenditures. They are an important factor behind high domestic interest rates and the private sector's inability to tap domestic credit markets for the funds they need for investment and job creation. The federal Government's accumulated foreign debt underlies the country's vulnerability to shocks in external capital markets as well. The Fiscal Responsibility Law is a tangible recognition of the importance of reducing the fiscal deficits. 6. We see improved revenue collection at the federal level as an essential part of an effective strategy to lower Argentina's fiscal deficits, reduce its vulnerability in international capital markets, and increase affordable credit to the private sector for investment and job creation. The burden of adjustment cannot fall entirely on expenditures, nor need it. There are estimates that revenues lost to tax evasion are equal to about 40 percent of revenues collected. According to staff, if the Government were to collect 70 percent of the revenues potentially available under the current tax regime, it would have incremental annual revenues equal to several multiples of the annual deficits it has run in recent years. Therefore, we believe that improvements in the Government's tax administration and collection should be one of the triggers for a high lending scenario. 7. We also see merit in staff's proposal that a new federal-provincial revenue sharing arrangement should be a trigger for high case lending. Reform and strengthening of this arrangement is important, given that the provinces are responsible for almost half of public sector expenditures, including 90 percent of spending on health and education. A new revenue sharing agreement that would rationalize both the aggregate federal revenue sharing with the provinces and the distribution among the provinces themselves, while creating incentives for the provinces to improve their own revenue collection, would constitute a significant advance. 8. We appreciate the thorough Annex on the Bank Group's Private Sector Strategy. Notwithstanding the LAC Portfolio Rebalancing Transaction that the Board approved on June 22, the IFC's exposure in Argentina will require careful management. The IFC will need to exercise the greatest selectivity in new transactions and we appreciate the information that the IFC has provided about the sectors in which it expects to be less active. Among the priorities that the IFC has outlined, we believe that transactions to deepen domestic financial markets and investments with high potential for job creation could produce significant developmental returns. We underscore the importance of timely public disclosure of social and environmental studies for investments likely to have a significant impact on the human environment, as early public consultations with affected parties can improve the quality of projects. We also appreciate the extensive information about MIGA's activities and exposure. While we concur that diversification of MIGA's portfolio is important, we hope that this will not preclude support for investments to develop non-bank financial institutions, should such opportunities arise. 9. We welcome the analytical work that preceded preparation of this CAS, including the comprehensive Poverty Assessment, the study of labor markets and unemployment, the review of the gender dimensions of the portfolio, review, and the publication of the findings of that review. We appreciate the information in Box 10 about the consultative process that the Bank used in preparing the CAS and would be interested in examples of how the CAS evolved in response to this consultative process. We also support the Bank's commitment to continue the consultative process as the CAS is implemented. Publishing the CAS will be critical to the quality of the dialogue in those consultations. We would appreciate confirmation that the Government has requested such publication. 10. We are pleased that a Country Financial Accountability Assessment (CFAA) was done in FY 99. Could staff clarify how the findings of the CFAA are reflected in the Bank's proposed program? Also, we understand that a new Country Procurement Assessment Report (CPAR) is to be done in FY 01, but do not find this in the summary of non-lending services budgeted in Annex B4. Could staff clarify? 11. Finally, we want to wish the Bank and the Government every success in achieving the goals of this CAS. The benefits of rising prosperity in Argentina will reach far beyond her own borders.