Transcript of meeting of the Executive Directors of the IBRD and IDA, held on Thursday, June 23, 1988 : Argentina - Second Agricultural Credit Project

· runl 1 STRICTLY CONFIDENTIAL INTERNATIONAL BAN~ FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION ... Thursday, June 23, 1988 Washington, D.C. The meeting of the Executive Directors was convened at 10:10 a.m. in the Board Room, 1818 H Street, N.W., Washington, D.C., Mr. Barber B. Conable, Chairman, presiding. MILLER REPORTING CO., INC. )07 C S-t, N.E. Washington, D.C. 20002 (202) )-46-6666 run2 2 STRICTLY CONFIDENTIAL C O N T E N T S ITEM PAGE ·s Proposed Loan - Argentina (Second Agricultural Credit Project) 91 Mr. Sherwin 93 Mr. Faint 95 Mr. Keating 110 Mr. Malan 111 Mr. Luschin 112 Mr. Ameil 114 MILLEA REPORTING CO., INC. )07 C Succt, N.E. Washington, D.C. 20002 (202) )46-6666  STRICTLY nm90 CONFIDENTIAL 90 MILLER REPORTING CO., INC. )07 C Succt, N.E. Wa.shington, D.C. 20002 (202) 546-6666 nm91 STRICTLY CONFIDENTIAL 91 Item five is a memorandum and recommendation on a proposed loan in the amount of $106.5 million U.S. equivalent to the Banco de la Nacion Argentina, with the guarantee of the Argentine Republic for a Second Agricultural Credit Project. Mr. Nickel, who is an Agricultural Economist in the LAC Region, is going to introduce the proposal for us. Mr. Nickel, you are recognized for that purpose. MR. NICKEL: Thank you. In the early part of this century, Argentina was one of the most highly developed countries in the world. The foundation of its prosperity was agriculture, especially the exploitation of the fertile crescent around Buenos Aires. Argentina's ex9eptional natural resources permitted production of a wide variety of agricultural commodities, enabling it to be self-sufficient in most agricultural products, as well as to generate large exportable surpluses. Agriculture has consistently provided over three-quarters of the country's foreign exchange earnings maktng it a driving force within the economy. MILLER REPORTING CO., INC. l07 C Street, N .E. Washington. D .C. 20002 (202} '46-6666  STRICTLY CONFIDENTIAL 92 run92 After the second world war, rapid industrialization, based on import substitution, became the centerpiece of goverrunent policy, and the agricultural sector was dis- criminated against through fiscal and trade policies. The agricultural sector has demonstrated a noteworthy resilience to economic turbulence and has functioned as an important break to general economic decline during the past decade or more. In response to economic uncertainty, however, farmers have opted for low-risk, low input technology, which has meant that the sector has performed well below potential. Sustained economic recovery in Argentina, and improvement of its balance of payments and external debt position depend critically on a rapid expansion of exports. The government, the World Bank and the Inter-American Development Bank, which would cofinance the project, recognize that agriculture affords Argentina its best hope for growth in the short and medium terms, and for a sustained boost in export earnings. The project before you would provide an infusion of capital for on-farm investment to stimulate higher productivity and export growth. It would encourage higher participation and efficiency in agricultural lending through the rediscounting operation proposed. Thank you. MILLER REPORTING CO., INC. ,01 C Street, N.E. Washington, D .C. 20002 (202) ,46-6666  STRICTLY nm93 CONFIDENTIAL 93 MR. CONABLE: Thank you very much, Mr. Nickel. What questions do we have? Mr. Sherwin. MR. SHERWIN: Thank you, Mr. Chairman. r found this somewhat bothersome. The loan sets out with a perfectly reasonable objective of easing the constraints posed by an inadequate supply of long-term credit to the agricultural sector in Argentina. However, in doing so, it seems to be addressing symptoms rather than causes. Very briefly, the agricultural sector in Argentina has difficulty raising finance, firstly, because the macro policy setting in Argentina is, not to be polite, sub- optimal, I guess, and has been for some time. And, secondly, the banking system is similarly and I guess consequentially in somewhat of a mess. The doubt I have is whether a proposal from the Bank, which lends directly to the farmers, does much to encourage the necessary changes in that broader picture. A couple of weeks ago or maybe several weeks ago we discussed and approved a substantial financial sector adjustment loan for Argentina and that was supposed to make a fundamental difference to the way the ban~ing system operates and in particular to stimulate its capacity to provide efficient MILLER REPORTING CO. , INC. )07 C Succt, N.E. Washington, D.C. 20002 (202) )46-6666 run94 STRICTLY CONFIDENTIAL 94 intermediation services, while maintaining more robust prudential standards and mobilizing domestic savings gene- rally. It would seem to me that lending directly to the agricultural sector in this way, if anything, lessens the incentives that may exist for the Argentinean authorities to follow through on that. A specific concern in this project is the financial risk which may be borne by, in particular, the participating first tier banks. As it is described here, the participating banks will have liabilities indexed to the official U.S. dollar Austral exchange rate, while the corresponding assets could be indexed to a range of quite unrelated wholesale price indices. No prudential supervisor worth a salt would permit that to occur, and for that matter I wouldn't have thought any banker acting in a responsible way would be prepared to accept that. And I really wonder about the efficacy of the Bank being seen to be sanctioning or even encouraging that practice. And it seems to be quite contrary to the objectives of the financial sector adjustment loan, which we addressed a while ago, which was to try a~d clean up prudential issues. Finally, and back to the broader scale, I have a MIU.ER REPORTING CO., INC. )07 C Succt, N .E. Washington. D .C. 20002 ( 202) )46-6666  run95 STRICTLY CONFIDENTIAL 95 little difficulty in determining what it is that determines the scale and the character of our Argentinean lending program. One gets the impression sometimes that we have got a gross financing gap which has been identified. A proportion of that seems to have been allocated to the World Bank to fill, and then we go then to find projects or programs to hang our lending on. If that is the case, it seems to be putting the cart well ahead of the horse. I think we need to concern ourselves very thoroughly obviously about the viability and sustainability of our programs and projects in any country. So the specific question is: Is management satisfied with the macro policy setting in Argentina? And in that regard, I refer back to some exchanges I had with management earlier this year about this issue, and where it was stated that management shared the concern about the viability of the macroeconomic frame- work. I guess the specific question is: What has changed since then to justify this program? Thank you. ······. ..... ~ MR. CONABLE: Thank you, Mr. Sherwin . Mr. Faint. MR. FAINT: Thank you, Mr. Chairman. MILLER REPORTING CO., INC. )07 C Suett, N .E. Washington, D .C. 20002 (202) )46-6666  STRICTLY run96 CONFIDENTIAL 96 Well, I think our reaction to this operation was very similar to Mr. Sherwin's. The loan seems to face us with a considerable dilemma. On the one hand, nobody could argue about the desirability of its objectives, but, on the other, we have serious doubts about its viability and effectiveness. And our first concern, which was also alluded to by Mr. Sherwin, relates to the overall macroeconomic framework in Argentina. And I think the absence of reference to this macroeconomic setting in the papers before us is rather noteworthy . .:-:·,'~ It is true that conditions of acceptable macro- economic management are normally attached to adjustment rather than project operations, but obviously when we are dealing with the financial sector, we are in something of a gray area. There are obviously very direct links between the macroeconomic envirorunents and the prospects of success for financial sector operations, particularly as far as the progress of inflation is concerned. And I think an assessment of the risks to this operation in terms of macroeconomic stability should have been included. The linkages run both ways. The goverrunent bears the ultimate responsibility for currency risk under this MILLER REPORTING CO., INC. 507 C Succt, N.E. Wa.shington, D.C. 20002 (202) 546-6666  STRICTLY nm97 CONFIDENTIAL 97 operation, since if the credit risk is insufficient to cover the Banco de la Nacion's liabilities, the government will compensate BNA. This has implications for the public sector borrowing requirement and for Argentina's ability to comply with Fund targets. Then again I believe that the analysis of this project should have included its potential impact on the PSBR and on performance against Fund targets. Now the second set of worries relate to the state of the financial sector in Argentina. The extremely high real interest rates and the absence of availability of any but the shortest-term credit, together with the acute problems faced by a variety of financial institutions have been graphically described to this Board both when we took the banking sector loan in March of this year and on previous occasions. Now this Chair supported the banking sector loan and regarded it as a heroic attempt to tackle problems of daunting proportions. The question that arises now is whether in the presence of these enormous distortions, it makes sense to proceed with a project which addres ses only a segment of this sector, or to await some initial results from the sector loan in terms of the refo r ms that see m so v e ry urge ntly needed . I think it must be open to doubt whethe r this MILLER REPORTING CO., INC. )07 C Sueet, N.E. Washington, D .C. 20002 (202) )46-6666  nrn98 STRICTLY CONFIDENTIAL 98 operation can stand a loan in the absence of these reforms. Will the intermediary banks be in a position to lend at the real rates envisaged which, though still substan- tial, are far below the real rates generally obtained in Argentina for private sector lending? And will the ad- ' ministrative costs associated with the banking system's inefficiency, coupled with inflationary expectations, continue to inhibit the provision of credit at acceptable rates to borrowers? Or, on the other hand, will the uptake of the credit fall short because of its high cost? On the information presented, it is hard to feel confident of this operation's viability. In addition to these major concerns, I have one or two subsidiary questions on which I should like some clarifi- cation from the staff. And the first one relates to one of the points Mr. Sherwin made about the exposure of partici- pating banks in relation to this potential mismatch between .~ their borrowings, which would essentially be dollar denomi- nated and their !endings, which could be linked to a variety of domestic inflation indices. And, as Mr. Sherwin said, I think that prudential considerations would really be rather strongly against banks undert?king unpredictable exposure of this type. MILLER REPORTING CO., INC. ,01 C Sueet, N.E. Washington, D.C. 20002 (202) '46-6666 run99 STRICTLY CONFIDENTIAL 99 Secondly, I couldn't find in the paper very clear specification of which banks are likely to be involved, but r 1.-...., we understand this may include some provincial banks, most o f. these in a very precarious financial position. And I wonder what mechanisms will be put in place to ensure that par- ticipant banks are suitably sound. And thirdly, a good deal of information about the financial status of the principal intermediary for the project, BNA, is provided in Annex 1, but Table 9 only covers its private sector loan portfolio. Can staff comment on the state of BNA's public s~ctor portfolio? .......... ·In line with my earlier comments, I should also like staff's views on, first of all, status of implementation of the conditions of the banking sector loan and, secondly, the implications of the present operation for Argentina's PSBR. Thank you. MR. CONABLE: Thank you, Mr. Faint. The first two interventions indicate an underlying malaise that I think we better deal with promptly. Mr. Bottelier, would ,you lead off for the staff? MR. BOTTELIER: I will try to address the major questions, Mr. Chairman, and ask my colleagues to chip in. MILLER REPORTING CO., INC. ,01 C Sacct, N.E. Wuhingroo, D.C. 20002 (202) S46-6666  STRICTLY nrnlOO CONFIDENTIAL 100 Concern was expressed on the macroeconomic situation in Argentina which continues to be very distressed. Is it ~-. j wise for the Bank to proceed with a loan of this kind before l the macro situation has cleared up or at least before we have I l i, seen some initial results of the banking sector loan? r: It is no secret that the macroeconomic situation in Argentina continues to be fairly unstable and turbulent, as it has been for some time. It is no more unstable or turbulent, I would say, than Mexico's was, say, up to about a year ago or several other major countries in Latin America are at this present time. ·we have not specifically reported on the macro situation in the documentation for this loan because all the documentation is prepared in accordance with standard procedures for such purposes, and we have recently submitted an economic section or an economic information report to the Board on that. The macro situation may be unstable, but let me i. draw your attention, as we have tried to do at the Board meeting two weeks ago, that there is also evidence of some I I considerable movement in improvement on the structural I adjustment side in Argentina. _ I The main problem is the fiscal deficit of the I MLLER REPORTING CO., INC. ,01 C Stittt, N.E. Wub.ingion, D .C. 20002 (202) ) 4 ~  STRICTLY nmlOl CONFIDENTIAL 101 government, which was over 7 percent last year. The target, as submitted by the government in the current budget for this .r.. • .•· . year, is 3.9 percent. This is a 3 percent improvement and does not take into account the very considerable improvement in the quasi-fiscal deficit that is now taking place as a result of the measures taken under the banking sector loan. There is also other evidence I think, mounting evidence of results of the structural adjustment program. Allow me to quote you some key elements here. There is a great likelihood that the March perfor- mance criteria that an IMF mission is currently looking at in Argentina in the field have been met or have been very substantially met, which would be considerable improvement over past performance. Inflation has been high in the first five months of this year, higher than expected, which is generally indicated as a sign of deterioration. But the other side of that coin is that the reason for this is the very considerable fiscal effort that the government has been making through public utility price adjustments. There has been an 18 percent real increase in electricity rates and other major utility prices as part of the -- MR. CONABLE: How much is that, 18 or -- MILLEA REPORTING CO., INC. ,01 C Succt, N.E. Wa.,hington, D .C. 20002 (202) )46-6666  STRICTLY nm102 CONFIDENTIAL 102 MR. BOTTELIER: Eighteen percent real improvement of the utility prices, gasoline prices, and inevitably this has a short-term impulse on the level of inflation. We fully expect the inflation rate this month to be lower than the last five months because the adjustments are clearly of a temporary nature. Tax receipts in the first quarter were substantially higher than the first quarter of last year. On the balance of payments side we find that there is beginning to be observed considerable response to the trade liberalization efforts. In the first quarter of this year, non-traditional exports were up by 42 percent in real terms. Of those, industrial exports grew by no less than 55 percent and may reach $2 billion this year, which will be the highest ever in Argentina's history. There is also evidence, as I reported to you last time, in an introductory statement that on the public enterprise fron~, a lot of movement in the right direction is being made. Yes, therefore, the macroeconomic situation is far from satisfactory at this stage, but we do not find that a sufficient reason to hold up a critically needed supply side loan, which this is, to suppl~ment and complement the efforts t hat have been made on the structural side. MILLER REPORTING CO., INC. ,01 C Smet, N .E. Wuhingtan, D.C. 20002 (202) 546-6666 nml03 STRICTLY CONFIDENTIAL 103 This loan for your attention today is not aimed at achieving major new policy achievements. Those have been made in the financial sector. Those have been made in the agricultural sector. This is a conventional credit supply loan with no bells and whistles. It is a very tough loan because all the risks are passed on to the ultimate borrower. There is not a hint of subsidy in the loan. It is badly needed because there is no long-term money in Argentina at this moment, which is hardly surprising in a country which has been ravaged by high inflation for such a long time. One of the reasons that made it possible for the government to remove the quantitative import restrictions on the tractors and the agricultural implements, on which we reported in the context of the agricultural sector loan last time, was the prospect that the IDB and the World Bank would come forward with this loan fairly shortly thereafter, because the local industry would have no chance of survival without the availability of local long-term finance. I might add that we have delayed the presentation of this loan by as much as three months simply because the loan was in fact ready for presentation in late March. We have delayed it because the gqvernment had at that point not removed the quantitative import restrictions on the tractors MILLER REPORTING CO., INC. )07 C Sueet, N.E. Washington, 0 .C. 20002 (202) )46-6666  STRICTLY run104 CONFIDENTIAL 104 and the agricultural implements. \ As far as Mr. Sherwin's request concerning the ·' overall approach that the Bank is taking in Argentina, I would like to emphasize that we are not in the gap-filling business, that there is a program for Argentina which is clearly linked to progress on the structural adjustment side. ' We have a lending program which will move as fast as Argentina is able to move on the major structural adjustment efforts, and those are pretty comprehensive. They range all the way from industrial policy, agricultural policy, banking sector policy, social sector policy, public enterprise reform. ,. ~ ~ The lending program is large, potentially large, i J perhaps up to $1 billion a year, but there is absolutely no guarantee or assurance that we will proceed with major loans unless Argentina is able to move on the program of structural adjustment. I would be happy on some occasion to provide greater detail on what we are doing to Mr. Sherwin or other members of the Board if there is interest in this, but I would like to assure you that we are not in the gap-filling business and that our lending program is not formulated on that basis. MR. CONABLE: Mr. Nickel, did you want to add MILLER REPORTING CO., INC. 507 C Smet, N.E. Wuhiagtoa, D.C. 20002 (202) ,-46-6666  STRICTLY nmlOS CONFIDENTIAL 105 anything? MR. NICKEL: I would like to address the question of financial risk to first-tier banks. MR. CONABLE: Well, Mr. Faint, on the points that have been brought up, yes. MR. FAINT: Well, I would only like to say one thing about Mr. Bottelier's remarks. I mean I wish that his optimism about the macroeconomic situation in Argentina would be borne out in practice. That is a very deeply held wish. I don't think it is accompanied by quite the degree of confidence that he feels. . ·~ ·But the comment is this: I think I understood him to say that there is nothing about the macroeconomic situation in this project, because it is a project and the procedures say that you can't put macroeconomics into these documents. Well, all I would like to say is this: If there are clear macroeconomic risks in a project, they must be analyzed in the project, whatever the procedures say, just as any other risk would be analyzed. And, secondly, if there are macroeconomic effects of the project, I think that those too should be analyzed in a project. · Thank you. MILLER REPORTING CO., INC. )07 C Smet, N.E. Washingcon, D.C. 20002 (202} )46.6666  STRICTLY runl06 CONFIDENTIAL 106 MR. CONABLE: Yes, Mr. Bottelier. MR. BOTTELIER: There is an amplification of the inherent risks in this loan related to the macroeconomic situation in the staff appraisal report on page 14 in paragraph 3.17 and following, which clearly point to the risks that the demands may be lower than projected on account of the fact that the macroeconomic situation will not improve at a rate that we hope. ' MR. FAINT: That is a very good analysis of the macroeconomic risks facing this project. MR. CONABLE: Mr. Nickel, would you please take up ··, the other questions? MR. NICKEL: Yes. I would like to address the question of the financial risks to the first-tier banks. The use of the index, the eventual index to be chosen, would not be unilaterally chosen by the sub-borrower but would rather be a topic of negotiation between the first-tier bank and their client. And we fully expect that both the choice of index and the eventual interest rate would be a matter of negotia- tion and mutually determined. So the exposure, we feel, is limited by that factor. MR. CONABLE: Mr. Qureshi would like to add MLLER REPORTING CO., INC. ,01 C Saect, N.E. Wuhingtoo, D.C. 20002  STRICTLY CONFIDENTIAL nm107 107 something also. MR. QURESHI: Well, Mr. Chairman, I almost thought twice of intervening at this particular stage, but I do feel . that we must avoid the temptation to set much higher standards ·'· for this loan than we would for other loans. We have just almost less than a month ago put before you a banking sector loan, and that did include fairly considerable discussion of the macroeconomic . setting in which financial operations by financial institutions could indeed be gauged and assessed. And it does seem to me that when we come to you so soon after having discussed various types of adjusted-related operations that it is really not appropriate for us to keep on repeating a discussion, particularly when that macro- economic situation changes quite rapidly. We thought it would be quite appropriate and adequate in this particular case to tell you how the risks of this particular loan were related to changes in the macro- economic situation. But since this is not a quick-disbursing loan, it is not basically a loan that has much to do, if r may say so, with broad macroeconomic indicators as such, we did not wish to delve into thgt area. We will have, I might say, opportunity to do that MILLER REPORTING CO., INC. 507 C St=t, N.E.  STRICTLY nmlOB CONFIDENTIAL 108 before too long. I fully expect that the Argentinean authorities will be coming forward in the very near future with their plans in the macro policy field, which will clearly influence and guide our actions on some of the major adjustment loans that we have in view for the future, which will not go forward unless and until we feel and the Fund feels that these programs and actions that the Argentinean authorities contemplate are adequate and appropriate under the circumstances. There is one particular point that I just wanted to underline once again, and that has something to do with the credibility of our dialogue and our intervention and our role in Argentina. And I think Mr. Bottelier referred to it already. But I do want you to know that we have pressed the Argentinean authorities extremely hard, I might say to some extent against their feeling as to the political advisability o f some of the actions that related to liberalization of i mport controls and in particular the import of agricultural e quipment. This has been a pretty thorny issue between us and t he Argentine authorities for quite some time. We have pushed them on this score despite their very serious concern t hat this would have a devastating effect on the domestic 1111.LER REPORTING CO., INC. ,01 C s-. N.E . • . Washingtoa, D .C. 20002 ( 202) ,-66-6666  STRICTLY nm109 CONFIDENTIAL 109 Argentinean agricultural equipment producing industry, and that that would be in fact overwhelmed by the foreign competition. This particular loan provides them what is available to almost all other industrial enterprises, that is no;ffial availability of credit, and it seems to us that not to go forward with this kind of an operation after we have agreed on the agricultural sector program, after we have agreed on the banking sector program is, in fact, to leave the Argen- tinean industry entirely open to what I would consider very vulnerable to outside competition at a time when the Argen- tineans are prepared to take the liberalization measures that we think are important. MR. CONABLE: Mr. Keating. Mr. Sherwin, did you want to follow up on that point? MR. SHERWIN: Sorry. I wanted to follow up on an earlier response by Mr. Nickel, if I can do that. MR. CONABLE: Fine. MR. SHERWIN: On the issue of risk, Mr. Nickel's response was that in fact this would be negotiated between borrowers and banks and, therefore, there is no problem. I think that is missing the poi~t. What we appear to be doing i s at least sanctioning, if not encouraging, the banks to MILLER REPORTING CO., INC. ,01 C Sttttt, N.E. Wub.ington, D.C. 20002 {202) )46-6666  STRICTLY runllO CONFIDENTIAL 110 assume a set of risks which is in conflict with what we are intending to do under the financial sector loan. I think that risks damaging our credibility. MR. NICKEL: We have set out in the credit regula- tions a list of five indices, one of which is the Austral/dol- lar index. And we expect that these five indices will be those which a particular participating bank could use in indexing principal. We do not mean to suggest that a particular bank cannot rule out the use of one of these indices if they feel that it is unduly risky. However, we fully expect that the bank will ·intermediate risk, will ascertain whether a particular index deserves a certain amount of margin, interest premium to cover what it perceives. We are basically .." I• turning the banks loose to do what they do best, and that is ,, intermediation. . " .... . MR. CONABLE: Mr. Keating . I' ~s MR, KEATING: Thank you, Mr, Chairman. i Mr. Chairman, we will support this loan, but I am iii to ask after the environmental impact statement. I think it I ·,· is an adequate statement but it is our understanding that the I !!,ii problems of erosion and the b;eakdown of soil texture and the loss of organic matter and fertility are very serious, and t I ..,;._.:.- 507 C Slftet, NJ!. il it, Wuhiogton, D.C. 20002 .,. ( 202) 546-6666 I..·  STRICTLY runlll CONFIDENTIAL 111 .. l I that our concern therefore with this statement does -- is . 1- what is being proposed enough? There is poor communication and coordination with j the farmers. And I want an amplification of this statement l· made. Thank you, Mr. Chairman. MR. CONABLE: Thank you. Mr. Malan. MR. MALAN: Thank you, Mr. Chairman. The fact that the Argentinean macroeconomic situation is relatively unstable was, in our view, recognized when discussed in a balanced way by the Bank staff on previous occasions in this Board. It is again in the appraisal report before us and most forcefully in Mr. Bottelier's intervention. I think the basic point is the following: Yes, the macro situation is unstable, but it is not the reason why the Bank should hold up an operation which, if implemented well, I .. as we hope, would contribute to reduce this instability and i.. I increase the supply response of the Argentinean economy. So we do support the operation, Mr. Chairman. ~ I. - I • We have one questio~ though, a highly intriguing one that we spent a lot of time trying to figure out what was MILLER REPORTING CO., INC. 507 C Su=. N.E. Wuhinetoo, D.C. 20002 (202) 546-6666  STRICTLY nm112 CONFIDENTIAL 112 the intention and the implications of the Bank staff. On page 7 of your memorandum to the Executive Directors, Mr. Chairman, it lists the statement of Bank loans and credits to Algeria, at least in my copy, and I was unable to understand the reasons why we have been provided this information in the context of the Argentinean loan. If there is any clarification, I would like to receive it . • Thank you. l r • MR. CONABLE: Are you trying to imply there is not a substantial identity between Algeria and Argentina? I · (Laughter. ) MR, CONABLE: I suspect that may be a print shop error. Are the figures referable to Argentina or are they referable to Algeria? MR. NICKEL: Algeria. MR. CONABLE: Algeria. Well, you have our permis- sion to tear that page out under the circumstances. Mr. Luschin, did you have something? MR. LUSCHIN: On this point? MR. CONABLE: No, on any point. I am creating a i • diversion, Mr. Luschin. I wo~ld like to have you cooperate. MR. LUSCHIN: Yes. I wasn't sure if I should ask MILLER REPORTING CO., ..C. 507 C Street, N.E. Wuhington, D.C. 20002 (202) '46-6666  STRICTLY CONFIDENTIAL nm113 113 for the floor, but since you . ask me, Mr. Chairman, I have two points actually. First of all, we support the loan and we are grateful for all the conunents we have heard by the staff, It is good to hear that there are positive trends developing in the overall context of the Argentine economy. The two points I wanted to make are the following: I have the feeling that if the Bank has decided to make policy-based lending to one country, then I would very much encourage the Bank to underpin these policy-based loans with I-· traditional investment loans. This was one of the basic findings in the past of the Operations Evaluations Department of the mutually reinforcing nature of these two different types of loans. That is the first general remark. Then I wanted to welcome very much the cofinancing of this operation with the Inter-American Development Bank. I make specifically this remark since I have the feeling tnat such a cofinancing doesn't take place too often. At least, this is my view, which I have got since I am sitting here in this Board, and this is rather unusual since both institutions are based in Washington and should cooperate to the extent possible. Thank you very much. ~ ~ MILLER REPORTING CO., INC. · • ,01 C Suect, N.E. 11 Wuhingtao, D.C. 20002 ~. (202) '46-6666 5  STRICTLY nm114 CONFIDENTIAL 114 MR. CONABLE: Thank you. Mr. Malan . MR. MALAN: Unless I have read wrongly the project, although there is policy content, this is a project operation. I refer to Schedule Bon page -- it is not numbered -- it should be 6. It says that disbursements would take place from 1989 to 1996. This is clearly a project-~ MR. CONABLE: It is a slow-disbursing loan, yes. MR. MALAN: And it is important to know that it has relevant policy content. Thank you. MR. CONABLE: Thank you. I.- Mr. Ameil. ~ MR. AJ.fd:IL: Thank you, Mr. Chairman. In principle, we also could support whole-heartedly this project, given the benefit of the doubt to the authori- ties on the question of macroeconomic policies. · After all, although this has also been disputed now, this is not the mainstream of the World Bank activities. I would like to ask two questions, address~'\hem to the staff. We have some indication that there might have been some problems under the Paris Club agreement. Could you update us on this? IIIU£R REPORTING CO., INC. 507 C Sa=, N.E. Wuhingioo, D .C. 20002 (202) S46-6666  STRICTLY nmllS CONFIDENTIAL 115 And the second, more specific question regards the disbursements procedures under this loan. Basically, among .,...., the objectives of the loan we found that it will serve ~ lik, financing; various types of activity in agriculture,Apurchase of modern agriculture machinery, storage facilities, agro- processing facilities and so on, on top of it also providing working capital and rediscounting the existing loans. Most of it surely seems for domestic needs and domestically supplied procurement. In part, among the benefits the document lists high efficiency, and this brings me to ask the question with regard to international competi- rroc.u.Y«"'c ... ls tive bidding. I understand it is noted there that :k,ils iii11.:i.t 'o" ost& .;. a.o.&.\ $3 million" -- will be open and supervised by the Central Bank of Argentina. Is $3 million a standard limit? Thank you. MR. CONABLE: Are there further staff comments? Mr. Faint wishes to ask further. MR. FAINT: Well, I think in view of some comments that have been made, I should like to make a couple of things clear. First of all, in my initial statement I recognized that this is a project operation and not a policy-based one. I, however, pointed out that ~hen you have a project which is set in the financial sector, there is a particularly close MILLER REPORTING CO., INC. )07 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL nmll6 116 linkage between that project and certain macroeconomic development. MR. CONABLE: Yes. MR. FAINT: I pointed out that if a project is rendered problematic or unviable by the macroeconomic framework, that should be recognized. I fully accept that policy-based operations should be accompanied and . supported by project operations, but not of course by unviable ones. Now I asked for two things, which I think are quite important for the Board to take cognizance of at this point, and maybe my attention wandered for a moment, but I don't ,., think I heard the answers. One was what is the actual position with regard to the implementation of the conditions that were laid down by the banking sector loan as of now? And the other was what are the staff's views about the implications of this operation for the PSBR? Thank you. MR. CONABLE: Can we have an answer to that? Mr. Bottelier. MR. BOTTELIER: Mr. Chairman, the banking sector loan objectives have been sub~tantially achieved with the economic reforms and financial sector reforms that were MILLER REPORTING CO., INC. )07 C Sattt, N .E. Wuhiogton, D .C. 20002 <! i;- (202) >'6-6666 ;,  STRICTLY CONFIDENTIAL nm117 117 introduced in October last year. However, the banking sector ioan has not yet become effective mainly pending two factors. One is the approval by us and the submission to the Argen- tinean Congress of a budget for Central Bank rediscounts, which is held up because there is an IMF negotiating team in the country at the moment, which I think has caused the government to delay the submission of the 1988 budget to ..... Congress for that reason, and consequently the rediscount budget is held up with that also. The second reason is that as a condition of effectiveness, we required a reduction in the marginal reserve requirements for banks. What has happened because of the higher than expected inflation, marginal reserve require- ments, instead of having been lowered, have been raised. This is legally strictly in opposition to the intention of the loans. We will have a discussion with the authorities on that particular issue within the next few days, and hope to resolve it. But the bulk of the sector loan objectives have been achieved. With regard to the public sector borrowing re- . quirements, we see no links between this loan and the budget . The proceeds of this loan are . channeled entirely outside the budget. No budget allocations are envisaged at · all under MILLER REPORTING CO., INC. 507 C Smet, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY nmll8 CONFIDENTIAL 118 this loan. No subsidies are envisaged. I am not quite sure that I have understood your question correctly, Mr. Faint, but there is no link with the budget at all. MR. CONABLE: Mr. Faint. MR. FAINT: It's the currency risk which the government assumes under this project. And perhaps I could ask a different question. Has this aspect been discussed with the IMF? And have their views been obtained on it? MR. BOTTELIER: Excuse me, Mr. Faint. There may be a misunderstanding. The documents clearly explain that the currency risk is entirely borne by the ultimate borrower. Both the cross-currency risk and the dollar exchange risk are ,. calculated into the final price, and the Government of Argentina has refused to carry the risk. A special fund to protect the financial intermediaries against this will be created as part of this loan and a special fee initially of 2 percent for the cross currency risk will be charged .to participating banks, and that may be adjusted because nobody knows how to evaluate that risk. MR. CONABLE: Yes, Mr. Faint. MR. FAINT: And who is the lender of last resort to the Fund? MR. BOTTELIER: Ultimately, government is the MILLER REPORTING CO., INC. >07 C Sattt, N.E. Wuhingtoo, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL nmll9 119 sovereign risk, yes. But that applies to all World Bank loans. MR. CONABLE: Mr. Ameil. MR. AMEIL: I think I have asked, Mr. Chairman, for an update on implementation of the Paris Club agreement. MR. CONABLE: Mr. Bottelier, can you tell us about that? MR. BOTTELIER: I am not sure I am fully up-to- date, Mr. Chairman, on that. There was a new agreement with the Paris Club concluded last year as part of the big rescheduling effort with the commercial banks. . ,·•:.- It is my understanding that quite a few of the bilateral agreements that result from the frame agreement with the Paris Club have yet to be signed and ratified by the participating governments. Other than that, I am afraid I cannot report to you on that subject. MR. CONABLE: Mr. Ameil. MR. AMEIL: Yes, Mr. Chairman. We have some indication that since November -- MR. CONABLE: I can't hear you, sir. I am sorry. MR. AMEIL: We have.some indication that since November last year there were no payments. MILLER REPORTING CO., INC. 507 C Strttt. N.E. Washington, D.C. 20002 (202) ).46-6666  STRICTLY CONFIDENTIAL . run120 120 MR. CONABLE: I don't believe that is correct. Since November of last year no payments, you mean, to 'f official MR. AMEIL: I do not want to make an issue of this. Maybe we could get on a bilateral basis an update on the subject. MR. BOTTELIER: We do not as a matter of course follow the arrears' situation between a member country and all of its creditors. I believe some arrears have accumulated for lack of cashflow with some bilaterals, but we don't have a complete picture. MR. CONABLE: However, there have been several arrangements with the IMF since that period, as I understand, and therefore there have been significant payments made on at least some of the debts owed. That is my understanding. tL I 1s " M~ Isn't that correct, Mr. Qureshi? MR. QURESHI: Yes, sir. It is correct that since ~·! ~ that time, the IMF has disbursed funds. But I do not believe tr! ' that this is an issue that we ought to take up in the context ~ .. of this particular loan, although we would be delighted to provide whatever information we have to Mr. Arneil on this. MR. CONABLE: Are toere further comments or questions? MILLEA REPORTING CO., INC. 507 C Saect, N.E. Wuhiagu,o, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL run121 121 (No response.) MR. CONABLE: I don't see any. The minutes will show the Executive Directors approve the loan on the terms proposed. Mr. Keating. MR. KEATING: Mr. Chairman, I am being overlooked. MR. CONABLE: I am sorry. Nothing deliberate, Mr. Keating. MR. KEATING: I know that, sir. Thank you. MR. CONABLE: You will remain monumental at that end of the table. · (Laughter.) MR. KEATING: I am enjoined to ask if the measures being considered to arrest what we understand are very severe soil erosion and other problems, if they are in fact adequate or not under the envirorunental impact statement. I had asked for an amplification. MR. CONABLE: All right. Mr. Nickel is now prepared to terminate this overlookment. MR. NICKEL: First of all, I would like to make a general statement that we have in our FY89 work program, economic and sector work prog~am an envirorunental assessment in Argentina. MLLER REPORTING CO., INC. ,01 C Street, N.E. Wuhington, D.C. 20002 (202) )46.6666  STRICTLY nm122 CONFIDENTIAL 122 And specifically with regard to this project, the World Bank and government as well are very keen on implement- ing this project because it means a new generation of equipment and technology being introduced into this sector. And we fully anticipate that this is going to be complemented with very good technical assistance to borrowers. MR. KEATING: Just to make sure I get this back to the people who are concerned, then you are satisfied that the measures which will be taken will in fact stop this severe soil erosion. Is that what you are saying? MR. NICKEL: we feel that it will ·go to a large degree to ·arrest the problem. MR. KEATING: Well then, I think it would be helpful to us if we could avoid this kind of question in further studies of this kind if there were to be a statement made what the Bank staff considers in this respect, that the measures to be taken are going to do the job or more effort is needed. Thank you, Mr. Chairman. MR. CONABLE: Thank you, Mr. Keating. Further comments? (No response.) MR. CONABLE: I regret that we have gone over MLLER REPORTING CO., INC. )07 C Sttttt, N.E. Washington, D.C. 20002 (202) '46-6666  STRICTLY CONFIDENTIAL nrn123 123 somewhat. We will -- excuse me. The minutes will show the Executive Directors approve the loan on the terms proposed. ,. MILLER REPORTING CO., INC. ,01 C Succt, NJ!. Wuhingu,n, D.C. 20002 (202) ,46-6666