Transcript of meeting of the Executive Directors of the Bank, held on Thursday, May 4, 1995

1 TCB INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Thursday, May 4, 1995 Washington, D.C. The meeting of the Executive Directors was convened at 10:08 a.m. in the Board Room, 700 Eighteenth Street, N.W., Washington, D.C., Mr. Gautam Kaji, Chairman, presiding. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  2 C O N T E N T S ITEM PAGE 2 Proposed Loan - Argentina (Second Provincial Development Project) (including country assistance strategy) 111 3 Proposed Loan - Argentina (Provincial Bank Privatization Loan) 111 Mr. Terrazas 115 Ms. Piercy 120 Mr. Chneiweiss 123 Mr. Al-Mofleh 129 Mr. Evans 131 Mr. Ascari 137 Mr. Fadare 144 Mr. de Paiva 163 Mr. Fischer 168 Mr. Kobayashi 172 Mr. Good 174 Mr. Katash 177 Mrs. Jonsdottir 180 Mr. Nogues 186 MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  112 MR. KAJI: May I turn to items two and three. These are proposed loans to the Argentine Republic. I suggest that they be presented together, but they can be discussed either together or separately as you wish. Item two is a proposed loan in the amount of $225 million for the Second Provincial Development Project. This project is accompanied by a country assistance strategy. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  113 Item three is a proposed loan in the amount of $500 million for a Provincial Bank Privatization. We are pleased to welcome Mr. Kreis, Advisor in the Western Hemisphere Department of the IMF, who is attending this meeting. Mr. Nankani of the LAC Region will introduce the assistance strategy and the loan proposals. And I am pleased to note that Mr. Suwan, Mr. Cosgrove, Mr. Nogues and I believe Mr. Gerber have circulated their statements. Mr. Nankani. MR. NANKANI: Thank you, Mr. Chairman. Since 1990, Argentina has been undergoing a rapid and deep process of economic adjustment. In the four years of the Convertibility Plan, hyperinflation has been reduced to annual inflation rate of under 4 percent, as economic growth has averaged 7.7 percent. Productivity growth has been significant, and over the last two years exports and investment have become the engines of economic growth. Nevertheless, the recent regional crisis has highlighted the vulnerability of the economy and particularly its financial system to volatile capital flows. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  114 Despite initial declines in bank deposits and international reserves, courageous government measures to address the crisis have recently restored some stability in the financial markets. As noted by some Directors, this crisis has signalled the need for decreased reliance on external savings and an increase in national savings necessary to sustain acceptable economic growth. In the country assistance strategy we are presenting to you today, we are considering two economic scenarios based on different assumptions about future capital inflows into Argentina: first, an early recovery scenario; and second, a prolonged regional crisis scenario. We consider the prolonged regional crisis scenario as the more likely one, and our proposed country strategy is based on that scenario. The Bank has been an active supporter of Argentina's considerable adjustment efforts, through economic and sector work and adjustment and investment operations, supporting, among others, trade liberalization, public sector reform, privatization, improved tax administration and financial sector reform. Our proposed assistance strategy focuses on three prongs: one, consolidation and deepening of structural MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  115 reforms with our strongest support during the crisis period of 1995; two, reduction of poverty and development of human resources; and three, rebuilding of the greatly deteriorated infrastructure base. Provincial reforms are a necessary condition for the success of each of these three prongs, since these highly autonomous entities have become increasingly responsible for the delivery of key services necessary for their economic development. The first loan being presented today, the Second Provincial Development Project, is an umbrella operation, covering all provinces and provides support for institutional strengthening aimed at improving their fiscal situations, as well as for small infrastructural investments. In order to deepen the reform process, this loan and most future sector operations will favor those provinces willing and able to implement major structural reforms. This selectivity would be fundamental for leveraging Bank resources to promote fiscal adjustment while ensuring the success of these operations with adequate provincial counterpart financing. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  116 The second loan being presented today, the Provincial Bank Privatization Loan, is in direct response to the current crisis, but it is also the product of the Bank's long-standing involvement in the financial sector, as well as in provincial reforms. The operation has been timed to seize the opportunity of a sharp turn in the provincial governments' will to abandon past opposition to privatize or to close their inefficient banks. The sharp deposit losses during recent months have irreversibly turned provincial banks from provincial financiers to provincial fiscal drains. Up to fifteen additional provincial banks out of twenty have indicated their commitment to proceed with privatization and already eight provinces have signed contracts to privatize their banks. The loan's availability to finance privatization costs is expected to accelerate further the provinces' determination to privatize. In conclusion, Argentina has taken measures to face the current challenge with fiscal tightening, including a new agreement with the IMF, and efforts to facilitate the consolidation of its banking sector. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  117 We are currently contemplating a complementary banking operation that would facilitate the restructuring of the private banking sector, as well as social safety net operations that will help protect the poor. Argentina merits the Bank's support. The government has shown clear commitment and is implementing a courageous strategy to help resolve the crisis. It has a proven track record. It has demonstrated an impressive implementation capacity, and the proposed level of Bank support falls within our exposure guidelines. Thank you. MR. KAJI: Thank you, Mr. Nankani. Mr. Terrazas. MR. TERRAZAS: Thank you, Mr. Chairman. We would like to commend the staff in the quick response in preparation of the papers under consideration. It seems to be efficient in dealing with the problem that Argentina faced after the crisis erupted by completing a clear diagnosis of the situation and presenting the best options to resolve the current economic endeavor. We would like also to commend the Argentine authorities for the management of the crisis. Their MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  118 credibility and access to international markets remain almost on track and it helped to restore confidence. Regarding the CAS, with reference to the fiscal accounts, the commitment and the speed with which the Congress approved the package are commendable. It was a clear sign that their economic policy was under control. This is an area in which I have one of my concerns, because extending economic reforms to the provinces presents a major challenge. It has been accomplished in part of the federal level but it seems not fully committed to the local governments. We have heard some comments by the staff about this, but we would like to hear something in this process that is ongoing. The government is designing reforms on labor legislation for additional flexibility in this sector, and we know that an economy with a weak financial system and a rigid labor market is vulnerable to these type of external shocks. We know that very recently there were some changes made in the Congress to improve the treatment of small and medium enterprises. Our concern is related to the long-term commitment. Are there any new proposals on this subject? MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  119 With regard to the projects, let me start with the Provincial Bank Privatization one. We support this project. There are several merits in this operation. The first one is the political significance of the reform. We can perceive the high sensitivities and costs of an adjustment in an operation in this sector. The provincial governments' commitment to privatization should be highlighted. The second one is the macroeconomic relevance of this process. It will contribute to increase the confidence in the system. It will help maintain macroeconomic stability for a reduction of the fiscal deficits in the provinces, and contribute to a more efficient process of resource mobilization and allocation of savings. A third one is the creative scheme of financial incentives for the provincial governments to privatize or close the provincial banks with their initiative and management with the help of a supervisory board without creating an additional group. This is a major commitment. A healthy banking system is the key for soundness of the financial system and for the viability of the economy as a whole. We strongly support the management's view of MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  120 this project. I think that the preventive approach is a correct one. The reform of the financial system is essential to keep up with the fast-changing modern economy. Some privatization mergers or closures of banking institutions must be undertaken in order to achieve a competitive and efficient financial system. Adjustment may be painful but necessary. This will ultimately achieve our goal of a solid economy that provides benefits for the real sector. Strengthening the banking system is a fundamental step in this direction. There is one issue that concerns us. In the current state, the provincial banks have been a major factor in provincial economic instability and poor resource mobilization. On the other hand, the provincial banks have played an important development role. They provide a number of valuable banking services. Sometimes they are not only banks in a hard to reach place but with the closure or privatization, some communities might find themselves without a basic banking service and the provinces without a tax collection agency. Which do you will be substituted in this transition? MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  121 With regard to the second provincial development project, there are several reasons for our support, including continuity of the work and improvements initiated with the first provincial development project. Second, it builds on the lessons and experience acquired from the first project with municipal projects in Argentina. And third, it emphasizes the development of institutional capacity as a key background for future reforms. The project presents a group of eligibility criteria to select the provinces that will benefit from the loan and to select the sub-projects. These are positive elements in order to make the government's commitment a reality. Thank you, Mr. Chairman. MR. KAJI: Thank you. Ms. Piercy. MS. PIERCY: Thank you. Since my office has had several very useful discussions with staff and with the benefit of the advanced statements from Messrs. Nogues, Suwan and Cosgrove, I can be brief. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  122 I do though want to echo Mr. Nogues' appreciation of the staff for the work they have done in recent months and the quick response to the critical developments here. I would add, like Mr. Suwan, that the government deserves applause also for taking these prompt and decisive steps to adjust to the new climate, to accelerate and intensify the reform program, and to begin to restore confidence. The project for provincial development and the provincial bank privatization target urgent remaining gaps in the country's reform program. While the projects have been prepared in a tight time frame, they build on, as was cited in the staff presentation, an ongoing policy dialogue and extensive analytic work. I concur with Mr. Cosgrove that the conditions for wise use of these resources have fully been met. We are hopeful that these projects will go a long way toward achieving decisive reforms in the provinces and facilitating a consolidation of the banking system that is currently under severe pressure. The need for transparency and close supervision in the privatization of the provincial banks cannot be understated. And we are gratified that this receives careful attention in the documents. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  123 It is important to understand that the banks that acquire these assets could be weakened and, therefore, no undue pressure should be placed on banks to participate. We also hope that as a result of this process, control will rest firmly in private hands. I would also underscore the need to anticipate the long-term access to credit by smaller enterprises and entities in rural areas. The financial system that will emerge from the current turmoil needs to be capable of addressing this need, as was just pointed out by Mr. Terrazas, and the Bank and government should take steps now to assure that this happens in the future. The country assistance strategy does a commendable job of specifying the Bank's role in an extremely fluid situation and in placing it in the context of several scenarios. I trust from a recent experience that Mr. Burki will keep the Board well informed of the Bank's progress and the situation as it evolves in Argentina, as has been done. We support the emphases in the CAS on consolidating structural reform and poverty reduction. These two issues go hand in hand. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  124 The restructuring and privatization of the economy need to be undertaken in the fashion that reduces income inequality, opens the door to broad-based ownership of assets, and promotes health expansion of employment opportunities. I hope this has been looked at as a part of the just completed poverty assessment. The close collaboration that has taken place with the IDB should also be commented on. I hope this can become a hallmark of the Bank's overall work in this region. I do understand that this is not always simple because of differences in standards and practices between the two institutions. So, I do particularly appreciate the efforts that are made in this regard. Similarly, I think strong ties with the IFC will serve the Bank's clients well in this sector and in this region. A final point on environment, while the IDB has the lead on the environmental action plan, I think it is imperative for the Bank's projects in ESW and infrastructure and mining to address environmental impacts. The work on water, transportation and energy should integrate demand MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  125 management, and in the area of energy it should explore the scope for supporting renewable sources of energy. We are also looking forward to the upcoming reports on forestry, pollution and financing infrastructure in the provinces. Thank you. MR. KAJI: Thank you, Ms. Piercy. Mr. Chneiweiss. MR. CHNEIWEISS: Thank you, Mr. Chairman. I believe that this discussion is very important. I see the proposed CAS as a credibility test both for Argentina and for our institution. First, we are very impressed by the strength and the speed of the response of the Argentine authorities to the negative external shock that took place following the Mexican crisis. The IMF's Board has already approved the stabilization program. So, I will not repeat the debate of our colleagues in the IMF. Let me just say that it is a very courageous program. The major risk is probably the political risk. Socially acceptable and politically sustainable are the macroeconomic programs the government has embarked upon. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  126 Second, I think that the proposed assistance strategy is also a test for our institution. It is an opportunity to check how relevant we are and how appropriate our answers can be when faced with such a volatile and evolving situation. On this ground, I think that the staff's answer is reassuring. You have been able to respond with a strategy focused on the main challenge, the weak banking system, which could jeopardize the whole adjustment strategy. Moreover, I think that the staff has been able in close cooperation with the IDB to design quickly banking sector projects addressing two related issues -- restructuring of the banking system and provincial public finance. At this stage, Mr. Chairman, I would like to draw two general conclusions. First, I recall that when we discussed the World Debate Tables, we were right to highlight the fact that capital inflows in developing countries are extremely volatile and concentrated. And it shows that our institution has a key role to play in the restructuring of financial sectors in order to help our borrowing members to MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  127 attract and retain capital flows and be prepared to be less dependent through increased internal savings. So, I am pleased to see that we have other similar operations under preparation in Mexico, in Morocco. And I believe that financial reform lending should reach higher levels in our portfolio. The size of the loans and the volume of lending proposed over the next two years in Argentina, $1.4 billion per annum, clearly demonstrates that our core business is to make loans. Our core business is to make loans, of course, loans facilitating the reform process. Second, we support country-specific and selective CASs, and I recall that the IDA Deputies, by the way, said the same ten days ago. And I believe that this document is indeed quite specific and transparent. However, I must say -- and maybe I will disagree a little bit with Ms. Piercy -- that I don't see the necessity of a lengthy section about environment since it is quite sure that we will not be active in this area. So there is a balance to find. Let me now turn to the loans proposed in the banking system. I believe that staff have rightly identified the main weakness of Argentina's economy, but I MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  128 still need to be reassured about the way we address the problems through the two $500 million loans, the Provincial Bank Privatization Loan for approval today, and the Bank reform loan under preparation which you mentioned. My essential question is: Will these operations prove to be adequate and sufficiently lessen the vulnerability of the financial sector? I understand that the provincial bank privatization loan is a very opportune operation. I know that there is a strong motivation of provinces to privatize. I thus praise the Government of Argentina through Mr. Nogues, and I praise the staff for having rightly seized this opportunity. But, I have still some doubts about the management of a residual entities. What will happen if the provinces fail to negotiate with creditors the liquidation of residual entities? And what kind of additional privatization action, as stated on page 26, paragraph 78, will then be undertaken? It is not clear to me. More broadly, I would like to share with my colleagues three concerns pertaining to the financial sector. First, it is in my view of utmost importance to strengthen prudential supervision simultaneously with the MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  129 restructuring of the banking system. For instance, regulation on loan classification and provisions prove to be inadequate or not well implemented in Argentina. I would like to stress in that respect the importance of not only having adequate regulations but also a strong implementation capacity. The enforcement of the Central Bank and the institutional development of the superintendency of financial entities appears for us a key issue. And I would be pleased if the staff could elaborate a little bit more on this matter. Second, a stronger competition between banks and other financial institutions should also be encouraged. Are there measures currently being envisaged to liberalize leasing, securitization by non-banks, commercial paper, private placement market? All this is not very clear. And third and finally, about the recent bond deposit guarantee scheme, I would like to get more information. Will the size of this insurance deposit fund be large enough? Are there possible ways to accelerate its capitalization? Mr. Chairman, I remember that last year we expressed reservations on Mediatic (Phonetic) capital market MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  130 development loan, another $500 million loan, which we approved. It is still not yet effective. I think we should take into account the lessons from the difficulties we faced, lessons of realism and of careful assessments of the need of the country. I understand that this loan will be reshaped over the next few weeks, and I hope that then we will see that it is an adequate project useful for the country. Thank you very much. MR. KAJI: Thank you, Mr. Chneiweiss. At this time, I have ten more speakers who have already expressed their interest in speaking. I suggest that we adjourn at this point in time and reconvene at 2:30. [Whereupon, at 1:04 p.m., the meeting was recessed, to reconvene at 2:30 p.m. the same day.] MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  131 AFTERNOON SESSION MR. FRANK: Good afternoon. We will be resuming the agenda from this morning. I did want to ask if I can meet with the Executive Directors following the regular session in an informal meeting. Thank you. The next speaker is Mr. Al-Mofleh. MR. AL-MOFLEH: Thank you, Mr. Chairman. The implementation of the convertibility plan and the economic reform agenda has been exemplary in Argentina in the 1990s. Those commendable efforts have put the economy on a growth path that promises significant economic development and alleviation of poverty. Volatility in the international capital markets more recently has presented the government with the challenge of deepening reforms in an effective and timely manner in order to preserve results already achieved. Under the convertibility plan, convergence of economic agents and the ability of the government to effectively address the changing external economic environment becomes increasingly important. To this effect, and as the present document indicates, the government has reacted swiftly to the crisis, leading to a stabilization in domestic financial markets. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  132 For this the authorities are to be commended, and the support from the international financial institutions is well deserved. The CAS rightly addresses the main issues facing the government. These pertain to provincial fiscal reform, banking reform, and competitiveness enhancement. As such, and notwithstanding the detailed analysis in the present CAS, I personally find the CAS we discussed in February 1993--which, incidentally, focused on the very issue of the fiscal adjustment and at the provincial level. Introduction of greater flexibility in the labor market and improving the institutional capacity to deliver better social services to the poor really may be better presented. Here I agree with the point raised by Mr. Suwan in his written statement regarding the apparent lack of emphasis on domestic saving in the CAS. While there is clear focus on fiscal adjustment, mobilization of additional private saving at a time when international capital flows are uncertain could be more emphasized. Regarding the graduation, page 32, I read with interest and agree with the staff conclusion. Concerning the proposed provincial bank privatization loan, implementing this project now could take MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  133 advantage of the recent decreases in the volume of deposits and would hopefully improve the chances of success. The project is well within the framework described in the CAS, and we can, therefore, support it. I note the cooperation between the Bank and IFC staff in preparing this and the bank reform loan, and I encourage more such cooperation. Finally, I would be interested in comments on measures to be taken in the process of banking sector reform that would curtail perverse incentives to take advantage of the intended deposit insurance mechanism in paragraph 61. Thank you, Mr. Chairman. MR. FRANK: Thank you. Mr. Evans? MR. EVANS: Thank you, Mr. Chairman. I want to commend staff for what I think is a good, well-written, and frank report, though I will have one area of criticism which relates to the lack, as I see it, of any spelling out adequately of alternative lending scenarios. I also appreciated the excellent statement by Mr. Nogues. Let me start by commending the prompt and courageous action by Argentina in response to the crisis. I MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  134 note that the crisis was not all of Mexico's making. Indeed, I think the CAS could have made this clearer. Clearly, Argentina has suffered in recent months, in part because there was more reform that needed doing. I think it's important to recognize that one reason for the present improvement in investor confidence is that more of the right policies are now being put in place. Jan Piercy noted before lunch, Mr. Chairman, the close relationships with the IADB and the IFC, how desirable that was. I think you would expect me to add to that list the IMF. And as you know, there was a good discussion there a few weeks ago when we approved the extended facility, and Directors warmly commended the prompt response of the authorities and highlighted concerns about the financial sector and the banking system, and this discussion and this loan fits in, of course, extremely well with that, and it does, indeed, with the point mentioned by staff in their introduction, the complementary private sector banking loan which is now being worked up. As I hinted a moment ago, I think this recent crisis has had some kind of silver lining because it's providing opportunity and the impetus for reform, especially in the provinces, which this Chair and a number of other MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  135 Chairs have been keen on in the past. We are glad to see the Bank giving its full support to Argentina in grasping this opportunity. I agree with the statement that the authorities' early recovery scenario looks a bit over-optimistic in the short term. That was the feeling at the IMF Board as well. I want to say a little bit about the scenarios. I was struck not so much by the short-term differences, but by the relatively modest nature of the medium-term growth projections. Here's an economy which has demonstrated its ability to grow at 7 percent plus for years, even while unemployment grew. And I'm wondering why we, indeed Argentina, should be content with not much more than 3 percent for the rest of this century. I would have thought that--and, of course, it's a big proviso, but provided that the reforms we're supporting, particularly provinces and labor market reforms, go ahead, then the potential in Argentina is greater than that. I just want to turn now to the question of alternative lending scenarios. After all, that is the key issue for the CAS and for this discussion, as Mr. Cosgrove pointed out in his statement. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  136 There obviously is a big element of uncertainty not only about the economic developments in the region but also about the responses in Argentina itself. And I was, therefore, a bit surprised to find a rather bald statement in paragraph 81 that the Bank lending could reach $5 billion over the next few years, although that is modified by another statement in paragraph 92 that there would be a minimum of $2.9 billion if the provinces were not up to the mark. It seemed to me that the amount of that Bank lending needs to be conditional on rather more than the willingness of provinces to reform. I would expect it also to depend on the willingness or ability to reform, deregulate labor markets. And I wonder whether there wouldn't have been a case for looking at not only the--in a bit more detail looking at a lower lending scenario, but also at a higher growth scenario. Now, that scenario in which reforms proceed and which have more results in terms of not short-term but medium-term growth could well be associated with somewhat lower Bank lending. I think there's no doubt that as Argentina gets richer, as it tackles it structural policies, it will, as the CAS says, be MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  137 able to return to the international capital markets, and there will be less need for Bank lending. We have to remember that Argentina is a relatively rich country, and the question of graduation should not be dismissed for too long. Turning, Mr. Chairman, to the question of the exchange rate and convertibility law, Argentina has in place a currency board system which has worked very well so far, and the view of the IMF, supported by the Board, was that the pegging to the dollar has been central to the successful performance of the economy. And I think this is basically an issue for the IMF much more than not for this Board. What I would say is that if Argentina is to be successful, as I hope it will be, in sticking to this parity, then it will need to maintain and, indeed, improve competitiveness by internal adjustment, which makes essential a more flexible labor market system. And I think here the Bank undoubtedly has a contribution to make, and like Mr. Cosgrove, I found what was said in the CAS a bit disappointing as relates to what the authorities are planning to do in terms of the implied rather slow progress. And I would be grateful for any comment staff could make on this and how the Bank could be doing more in this area. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  138 Mr. Chairman, despite Argentina's relatively high GDP per capita, I think the poverty issue is still very important, and I think this is discussed very honestly and frankly, both in the CAS and in Mr. Nogues' statement. And given the stagnation of poverty reduction in the last couple of years, despite rapid growth, like others I would like to encourage you to ensure the strong focus on poverty is maintained. On the projects, we support both these projects. We think they fit very well into the overall framework. The reforms will only work, of course, if they're fully supported by provincial authorities. And we have to say if the provinces were not prepared to go the distance, then the Bank would have to step back. But I was glad to see that the disbursement profile and mechanism in the provincial bank privatization loan reflected some strong conditionality. Just one or two questions on the privatization loan. One is, how confident are the staff that the 15 banks identified will be privatized or closed? And I wonder whether the staff have any plans for reporting back to this Board in the course of this operation, should things not go according to plan? MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  139 Thank you, Mr. Chairman. I'm sorry. I would just like to echo Mr. Nogues' interest in the capital markets loan that was approved last year but not, I understand, disbursed. It would be quite helpful to have some more background on that. Thank you. MR. FRANK: Thank you very much, Mr. Evans. Next I have Mr. Ascari. MR. ASCARI: Thank you, Mr. Chairman. Argentina is at a difficult juncture. The difficulties that lie ahead stem from external factors and the recent (?) international markets that are the basis of the financial crisis of Mexico of last December and threaten now to spread to other emerging economies, particularly in the Latin America Region. While these factors that started the course of events are beyond the control of national governments, the modalities and the extent of their impact depend on the strengths and weaknesses of the Argentinean economy. This particular external shock hits the Argentinean economy in the middle of a process of deep economic reforms, a process that has profoundly reshaped the structure of the economy but that is by no means completed. This makes the economy MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  140 more vulnerable since it still lacks in some of its parts the flexibility and efficiency to respond and adjust quickly to changes in the external environment. The macroeconomic management of Argentina is centered on the convertibility plan and the parity of the nominal exchange rate. The system has been instrumental to bring hyperinflation down to one digit and to stabilize the economy. It is also a model that gives more degrees of freedom to economic policymakers and that allows almost no slippage in the macroeconomic stance. In the most recent period, the pillars on which this model is based have become less solid. The short-term capital flows that finance an increasingly large current account deficit have changed the sense of direction, and the fiscal situation has weakened. It is also a model that might have implication for the long-term economic development of Argentina because of the limitation that it might impose on export growth. The Argentinean economic is still characterized by a small share of exports on the overall GDP below 7 percent, and the future growth will have to be export-led. In the presence of a fixed nominal exchange rate, the competitiveness of exports will depend on the ability of the authorities to keep inflation below the level of competitiveness and the MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  141 ability of firms to continuously increase productivity. In other words, this model provide a narrow head for exports to grow in the long term. While the real exchange rate has slightly depreciated since December 1993, this might be difficult to sustain over time. Productivity gains have occurred and will continue to, but they take place in a situation of increasingly high unemployment--12 percent, recent estimates--and of labor-saving growth. The substitution of capital for labor in the process of increasing productivity might soon face social constraint. So the main question that the country is facing in terms of its long-term development strategy--and here I underline long-term, which is the framework within which we, the Bank, operate--is how to sustain a fast GDP growth through an even much faster export growth in the presence of a fixed exchange rate system. And on this I would like to have the views of staff. Now, turning to the sectoral levels, the main challenges that the Argentinean economy faces are well described and analyzed in the document. One is the fiscal situation in the provinces that continue to be a source of instability and increasing public deficit. It is a MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  142 difficult issue to handle, both for the central government, whose control (?) on the provinces is less than direct and is limited by legal and administrative constraints, but also for the Bank, whose ability to use its leverage at fostering reforms at this level of administration is less strong. The second area of concern is the financial sector, and so far the country has succeeded in avoiding a major financial crisis. But the banking system is now burdened with non-performing loans, bank assets are deteriorating, and bank deposits are declining. So if this is the situation, the response of the Argentinean Government so far to the external crisis has been very strong and rapid. It has tried to anticipate rather than follow events. It has focused on the right priorities and problems. And it has been fully endorsed by the Congress and it's probably well understood by the population. Measures have been taken to bring the fiscal deficit back into surplus. A financial package has been put together with the assistance of international organizations, and this is important to reassure the markets and bring back confidence in the Argentinean economy. And the government has also used all the monetary levers to the maximum MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  143 possible extent in order to offset the effects of the capital flight on the real economy and the banking system. Furthermore, immediate actions are being planned or taken in order to accelerate the process of structural reforms in the financial and banking sector and in the fiscal situation at the provisional level. So the response of the government has been strong and has been timely. The response of the Bank has also been very fast, and this deserves to be acknowledged. In these circumstances, rapidity of action is not less important than the nature of the actions themselves, and this CAS is a special document that tries to cope and respond to a very contingent situation. It proposes a major increase in lending, and we acknowledge it. But it also proposes a different focus of lending. While it presents a rather long series of policy approaches to complete the lending program- -and this can be useful to leave open different lending options--we believe that in the near future it will have to continue to remain strongly focused on a few priority areas. The document also illustrates two possible macroeconomic scenarios, but the lending program is not differentiated. We have only one lending scenario. We believe that in this particular situation this is acceptable MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  144 because we are responding to a contingent situation, because we need to assure our maximum and most timely supports of the measures taken by the Argentine Government, because we have to give a strong message to the markets that we believe in these reforms. There is an element that has allowed us to respond timely and with this significant level of resources to emergency of this situation in Argentina, and this is our low exposure. This has not happened on other occasions. This time we have the elbow room to step up our intervention and provide our assistance when it is most needed and in the form that is most appropriate. So we can strongly endorse this CAS and the lending program that is proposed. Like Ms. Piercy this morning, we hope to have a chance to review it in one year's time or so, so that we can see which one of the two economic scenarios is materializing and to decide at that stage whether this CAS is still an appropriate response or needs to be refined. Let me now briefly come to the two loans before us today on which we share very much the comments made by Mr. Gerber in his circulated statement. They are part of an integrated approach and well reflect the priorities of the country at this juncture. The second provincial development MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  145 loan, as important as it is, leverages reforms at the provincial level indirectly by discriminating eligible provinces on the basis of their financial performance. The framework for reforms and for enlarging the number of well- performing provinces is thus left within the purview of another loan, the provincial reform loan. We feel it is important, and we would like to have reassurance from staff that these operations are moving fast and are moving together because they need to reinforce each other. The provincial bank privatization loan is a well- structured and well-focused operation. It has some positive features that we have rarely seen in other operations, and I would like to take just a couple of minutes because I think it's worth underlining them. First, the total cost of the operation, privatization, and closure are clearly assessed and the financing needed is clearly identified, although here one has to note that the requirement is very large and it is almost entirely borne by the FEIs (?), the World Bank and the Inter-American Development Bank. The tranching of the operation is sensible, three equal tranches, and their disbursement is distinctly linked to the implementation of the agreed measures, measures that MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  146 will have to lead to either the privatization or the closure of the banks and within an overall time framework which is close-ended. In this context, we see the operation that we are approving today and those that we have approved in the past as being a well-connected strategy, well-connected within a strategic design, and the boundaries of this strategy are the need for reforms in the financial sector and in the provincial sector. It is important, however, that all these projects now move at the same speed and in a sequential fashion for which is necessary a strong supervision effort by the Bank. Thank you. MR. FRANK: Thank you very much, Mr. Ascari. I have next Mr. Carvalho, after which I will ask management and staff to respond to the questions that have been raised up to this point. Mr. Carvalho--oh, Mr. Fadare, our apologies. MR. FADARE: Thank you, Mr. Chairman. We wish at the outset to commend the Argentine authorities for the remarkable achievements on the convertibility plan. Mr. Chairman, we endorse the Bank Group's country assistance strategy for Argentina, focused MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  147 on supporting the country's efforts to consolidate and deepen structural reforms. We have a few specific comments on the CAS. First, though we agree that much has been done by the Argentine Government to reform the country's economy and mitigate the impact of the Mexican financial crisis, the outstanding use(?) on the development agenda are quite formidable and should occupy the center stage in the Bank Group assistance strategy for Argentina. To the extent that the convertibility plan under which Argentina's monetary requirements are to be fully backed by international (?) constitute the bedrock of the reform agenda. The government should maintain strong fiscal measures to back up the plan. This has also become more important in view of the strong evidence that a plan is highly vulnerable to external volatility. The CAS recommends the establishment of a dollar lender of last resort in an increasingly dollarized system. We would ask the staff to deepen the analysis here and provide concrete steps by which this mechanism could be established. Second, we broadly endorse the policy objectives of the Bank Group country assistance program outlined in MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  148 Annex 1 of the CAS paper. We particularly feel that urgent actions are required in the areas of adjustment in the provinces, liberal legislation, equitable share of the gains of economic growth, and raising the level of service. Third, we also have no problem in supporting the proposed lending program and economic and sector work highlights in paragraphs 80 to 83 of the CAS paper and the associated conditions. Though the program would seem ambitious considering the unpredictability of the current financial crisis, the envisaged targets could be achieved under the first scenario of early recovery from the crisis. Under the second scenario of prolonged regional crisis, the Bank may have at some future date to review the lending program. Strengthening of the Bank's economic and sector work in assessing the adequacy of the convertibility plan to lead Argentina on a path of sustainable economic growth through the ongoing country economic report receives our full support. The other areas of economic and sector work focus, highlight in paragraph 65 of the CAS paper, including inter alia capital markets, technology development, infrastructure, and opportunities provided by MERCOSUR are MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  149 equally important. We are interested in the findings of the country economic report. Fourth, the analysis in paragraph 77 of the CAS paper reflects the high degree of environmental degradation, including, among other things, water pollution and soil loss. To this end, focusing attention on environmental use is most timely, as well as the forest sector review, and the sector strategy on new use and options in environmental pollution, and the proposed national environmental action plan. Fifth, portfolio improvement, a marked departure from the past, seems to be the outcome of massive restructuring and consolidation which took place in FY93. This is imperative to ensure better design and quality at entry for new projects into the portfolio. Considering particular the heavy exposure envisaged under the proposed lending program FY95 to FY97. We do not believe that it is advisable at this juncture to slow down on the Bank's economic and sector work, the foundation upon which most of the lending program is supposed to rest. We think a reasonable balance should continue to be maintained between levels of new commitments and portfolio management on the one hand, and the economy and sector work on the other. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  150 Finally, inter-institutional cooperation with the Fund and IDB have been most beneficial, as well as cooperation within the Bank Group. IFC's strong lending program in general and support for private sector development in particular should be sustained, as well as MIGA's increasing guarantee operations. Mr. Chairman, let me now turn to the projects. We support the second provincial development project in Argentina, which, like the first provincial development project, can provide financial support and incentives for the provinces to undertake their own public sector reform programs consistent with the national program. The access(?) of this complementary reform at the provincial level remains one of the most urgent outstanding policy measures and a serious fiscal drag on the economy. The increasing decentralization and devolution of responsibility to the provinces make the necessary fiscal, financial, and administrative reforms there imperative. In fact, the Bank's proposed high lending scenario is predicated on provincial reforms. The Bank's intervention is, therefore, most welcome. We also support the provincial bank privatization loan. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  151 In conclusion, we commend the staff for the excellent CAS and project documents, and the Bank, the Fund, as well as IADB, for according high priority and speed to assisting Argentina at a particularly difficult time. Thank you. MR. FRANK: Thank you, Mr. Fadare. Now I will ask Mr. Burki to start. MR. BURKI: Thank you, Mr. Chairman. I just want to address one question which has been raised by a few Executive Directors. This is with respect to our lending strategy and why is it that we have only one scenario presented in the CAS. I do want to emphasize that Argentina is passing through a period of transition. As several of you have commented, this transition has been the result of exogenous factors. It doesn't have much to do with the internal decisions taken within Argentina. It is, therefore, proper for us to maintain flexibility in both our lending program and also in our economic and sector work program. This CAS that you have seen was prepared very quickly in order to inform the Board of the way the Mexican crisis had impacted on Argentina and what kind of response we were coming up with in terms of both lending as well as MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  152 ESW. Although we have identified a number of operations on which we are working--and these are mentioned in paragraphs 69 to 79--I hope the Board would agree with me that it is important for us to retain flexibility in order to have the capacity to respond quickly and meaningfully as the situation develops. MR. FRANK: Thank you, Mr. Burki. Mr. Nankani? MR. NANKANI: Thank you, Mr. Chairman. I will address a few of the questions and then turn to Mr. Levy and Mr. Alber on others. With respect to the challenges that face the provinces in terms of reforms, an issue that has been raised by many Executive Directors, we think that, in fact, much progress has been made in the last few years by some provinces, and others, seeing, that, are beginning to also make reforms. If one looks at the distribution of reforms currently, of provinces currently, one finds a number of star performers, a number of middle performers, and others that are lagging but are beginning to undertake reforms. Certainly our own strategy in the provinces has been to assist every province that is interested in institutional development to assist its capacity, as, for MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  153 example, the provincial development project two today does, and, in addition, to provide resources for those provinces that are interested in undertaking reforms at a faster clip. With respect to the provincial banks' developmental role and some of the difficulties that some of the provinces might face with the privatization of some of the banks under consideration, I think it's important to recognize that, in fact, under the reforms of the financial sector in Argentina over the last few years, some of the established banks have, indeed, set up units to provide credit to small- and medium-scale enterprises. And for this to happen on a sustainable basis, the financial sector reforms, in fact, have to be deepened. We should also add that both the Argentine Government and ourselves in some of the operations we are contemplating currently, particularly the rural poverty project, are thinking of establishing some pilot schemes for testing new methods of credit provision to rural farmers and some small-scale enterprises. With respect to the question of competition in the capital markets as a result of some of the measures that are being taken currently by the government, supported by this operation, we should mention that, in fact, in spite of an MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  154 expected reduction in the number of banks in Argentina over the next year as the financial system streamlines itself, we would still see a larger number of banks in Argentina compared to neighboring countries like Chile; and, indeed, as one looks at the activity on the part of private banks to take over some of the smaller banks today, one finds that the middle banks are interested in taking over some of the smaller banks and not so much the larger banks. So in the future, the current larger banks are likely to have other larger banks competing with them. On the issue of the bank deposit insurance scheme and its size and whether its setting up might be accelerated, the ultimate aim is to have 5 percent of deposits in this fund, but it is true that the rate at which the contributions are to be made is a very slow one. Here it's important to recognize that, indeed, the deposit insurance fund is the last claim for depositors who have problems with any banks. In the first place, the bank's own reserves would have to be tapped into, and other assets, before the deposit insurance fund comes into play. The government on its part has been particularly keen to make sure that the fund is entirely funded by the banking system and not through the treasury. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  155 There were a number of questions on the capital market development loan. The capital market development loan is about to get effective. There is a minor issue that we expect to be resolved in the very near term, hopefully in the next week or so. In terms of the demand for the loan facilities, indeed, there is a great deal of demand, and the authorities have requested a slight amendment that would allow old three-year bonds that are already in the market to be eligible for this loan and not just new three-year bonds, new bonds of minimum maturity of three years. And we are looking into that, and Directors will get a proposal for that amendment in the near future. There was a question about savings. Indeed, savings have improved in the last few years. Domestic savings have gone up from 13 percent to 16 percent. However, as we stated earlier, the present crisis in terms of the volatility of capital inflows has shown up the need for greater advances in domestic savings, and our projections are rather modest on this score, it is true. However, we have tended to be conservative. Indeed, if one asks what are some of the most important measures that the government might take to improve domestic savings, it's clear a lot of those are being undertaken. The most MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  156 important is the fact that confidence in the financial system and in the credibility of the convertibility program be maintained. And certainly the government is active in that area. The financial sector deepening that we are seeing will help in that area as well. We have also seen a recent reform of the pension system in Argentina, and we expect that, as in Chile, this is possibly going to increase savings as well. It certainly is going to transfer some savings from the public to the private sector. So we would agree that there is a great deal that domestic savings can do in Argentina, and we think these policies are in the right direction. I would like Mr. Levy to take up the two questions on export growth and labor markets and Mr. Alber the questions on the provincial privatization loan, please. MR. LEVY: We'll start with the issue of export growth. Clearly, for the convertibility plan to produce the desired effect, there is a need for a significant increase in exports and investment. This economy has to be an export- and investment-led growth. In the first two years of the program, consumption was driving the growth of that economy, but improvements, significant improvements in productivity in the last two MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  157 years have had a very significant effect on exports. Last year, exports in Argentina grew by 20 percent, and for the first three months of this year exports have been growing at 45 percent. I'm not suggesting that this rate is sustainable, but I would suggest that it is indicative of the response of the economy to the challenges that it faces within the context of the convertibility program. So the economy has been undergoing significant structural adjustments, and we are seeing the initial results, beneficial results of that adjustment. On the labor markets, as you're aware, it is a very complex situation. We have unemployment growing to 12 percent as of October of last year, and there are a number of causes that contribute to that outcome. In the context, again, of the convertibility program, there have been tremendous pressures to increase productivity, which led, of course, to the increase in exports and other beneficial effects on the economy, but also the shedding of labor in the industrial sector and other sectors of the economy. In the case of industry, we have had increases in production of over 40 percent, with no increase in employment whatsoever. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  158 Another factor that contributed to increase in unemployment has been a shift in relative prices where we have the capital/labor ratio declining by 40 percent. This is due to the opening of the trade regime that made the cost of capital much more accessible. Another factor has been a significant increase in labor force participation with significant participation of women, in particular. We have also observed an increase in migration which in the last few years has added an 18 percent increase in the labor supply. Finally, we have structural problems in terms of the excessive non-wage labor costs that characterize the labor markets in Argentina. There is a need to liberalize the entry and exit of the labor force in the market. There is a need to liberalize the restrictions on temporary or fixed-term contracts that are prevalent in the market. The market would also benefit from a significant reduction in employer severance payments which duplicate an unemployment insurance program that is in effect. There is a need to decentralize collective bargaining, particularly in the service sector, that is preventing the movements in human capital where demand is greatly needed. There is a need to reduce non- wage labor costs which account for 53 percent of gross work MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  159 remunerations. There is a need possibly also to alter the workers' accident compensation framework. A number of measures have been taken by the government. Recently we have seen some measures in labor markets, liberalizing labor markets in small and medium enterprises, but we do expect those measures to be extended, to some extent, in the next few months. The government has made efforts in the past, and we expect that they will continue to make such efforts in liberalizing the labor markets. And the Bank, in the context of its ESW, is stressing those issues, and we hope that in the future we'll have the appropriate results. MR. FRANK: Thank you, Mr. Levy. Mr. Alber? MR. ALBER: Mr. Chairman, one question was: How confident are we that we will be able to privatize 15 banks? Well, our expectations have already been exceeded. We believed at the beginning that the project would start off with three privatizations. In fact, already now there are eight trust fund agreements signed with nine privatizations. We believe that after the elections we may get two or three of major additional banks. While we cannot be totally MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  160 confident about the 15, we think we have made already tremendous progress towards achieving that large number. A second question was about the quality of the superintendency of banks. There is a strong commitment by the Argentine authorities to have a strong superintendency of banks. Over the last several years, regulations have been vastly improved. The organization has been vastly strengthened. And it is astounding how well this admittedly young superintendency of banks has been holding up under the current crisis. At the present time, about 70 banks are being checked out daily. We recognize that further assistance will be needed, and we will be exploring additional technical assistance. Technical assistance is also being provided by some U.S. authorities. A third question related to the residual assets and how these would be managed. Argentina has had a vast privatization program, and the Argentines themselves are very sensitive to the issue of properly disposing of residual assets and liabilities. In our project, we have taken care of this in emphasizing the planning of this process, in emphasizing the organization of this process, in emphasizing that the finance--namely, the loans of the World MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  161 Bank and the loans of the IDB--will be a major source to finance the liabilities of the residual entity. Should there be overhang, should costs be above what we have estimated, then the provincial governments will have the responsibility to look for additional financing. Their first step will be, of course, to negotiate with creditors, but in addition, they may then have to adopt additional fiscal measures and perhaps accelerate other privatizations in their respective provinces. In most provinces, the public utilities--power and water--are still owned by the provincial governments, so there is room for additional privatization revenues. Thank you. MR. FRANK: Thank you, Mr. Alber. I have a follow-up by Mr. Evans. MR. EVANS: Thank you, Mr. Chairman. Those were helpful responses, and I think the staff has illustrated the importance of labor market reform, but not very much was said about the Bank's contribution to this, other than this would be a part of the economic and sector work. And I wonder whether anything further could be said on that. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  162 But I would like to just come back to Mr. Burki's comments on the Bank strategy. He said that the causes of the problems in Argentina were not much to do with internal Argentinean matters. We had, I think, something of this discussion a while back on Mexico. Let me offer two reasons why I think that has been a contributory cause. One is I think there is some evidence in interest rate spreads in the financial markets that there were concerns before the Mexican crisis. I think secondly, and more important, I think the scope and size of the measures which the Argentinean authorities have taken and which have rightly come in for a good deal of praise carries the implication that the crisis was not simply a matter of exogenous shocks. On the question of the lack of alternative lending scenarios in the paper, I agree with Mr. Burki that the Bank needs to attain a good deal of flexibility, uncertainties that I mentioned earlier. But I would have thought it was precisely because of those uncertainties and the need for flexibility that it would be helpful to have more than one lending scenario spelled out. Thank you. MR. FRANK: Thank you very much, Mr. Evans. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  163 On the first point, Mr. Nankani? MR. NANKANI: Yes, on labor market support, in addition to the economic and sector work, we are in the context of the safety net operations looking at the possibility of supporting some of the programs there relating to unemployment insurance and strengthening those. And if we succeed, then that would be some support in that direction. But, in general, it's an issue that is very central in our policy dialogue, and there is not much difference of opinion on the need to do something about it and what needs to be done. And it's a question of the government phasing the implementation through its channels within the country. MR. FRANK: All right. On the point about to what extent were the difficulties there exogenous or internal, can you shed more light on that, either Mr. Burki or Mr. Nankani? MR. BURKI: Some of the problems that we are dealing with now were clearly determined by exogenous factors. But as we pointed out in the last CAS, the CAS that was presented to the Board about 12 months ago, I guess, 10 months, we went into considerable detail about the MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  164 problems that were internal to Argentina. We talked about the problem of relatively low savings rate. We talked about the problem of reforms having not been extended to the provinces. We talked about labor mobility as a problem. We talked about the need for the creation of contractual savings institutions, and there was a very thorough discussion of those aspects of the Argentinean situation. The point I am making, Mr. Evans, is that we thought we needed to bring to you a CAS in which we focused a great deal on exogenous factors and how those factors had affected the situation in Argentina and how the government has responded, and responded very bravely, very timely, to the situation that was created which was not of their own making, and also to indicate to you the suggested steps that we were taking both in the lending area as well as in the economic and sector work program area in order to respond to the situation that exists today. I did say that we have 11 paragraphs on various kinds of operations that are under preparation, but in my view, it would not be very helpful to be very precise at this point in determining how the lending could be shaded in a very fine way in order to respond to one of the two scenarios that we have indicated, because there are so many MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  165 uncertainties as to the external situation as it is likely to develop in the coming months. MR. FRANK: If I could just add to that last point, I think the presence of just one scenario certainly will not inhibit our willingness to be flexible and to respond. I think, in fact, this is a program that is a response to change circumstances. You will see next month in the case of Mexico, again, a response that was showing a lot of flexibility. So I think that there is a question of what is meaningful to put forward as a scenario, which I regard as something we need to be as careful as we can, but also be prepared to abandon whatever scenarios we put forward and try to respond to meet the circumstances. Could I then proceed? I have next Mr. De Paiva. MR. DE PAIVA: Thank you, Mr. Chairman. I am in broad agreement with the CAS, which, by the way, is a very good CAS, and so I just want to make five comments of a general nature. My first comment is a tribute to the Government of Argentina. We all recognize that Argentina's response to the hardships derived from the peso crisis was outstanding, not only because the government reacted promptly and very energetically, but also because, as Julio Nogues mentions in MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  166 his statement, it acted in the context of a democratic environment, in a productive dialogue with Congress. I appreciated very much Julio's description of the forces that motivated the Argentinean Government in the measures taken and in its dialogue with Congress, and I also noted that he makes reference to the fact that the memories of the period of hyperinflation in Argentina are still very fresh, and they have an impact on the reaction of society and of government about the proposals that are put before both of them. I think that there are already positive signs, signals in the market, the syndicated loan, the possibility of access to private capitals, and I do think that the Argentinean Government has reasons to believe that the early recovery scenario, that of Argentina recovering access to international financial markets still in 1995, is more--is likely to materialize. My second observation regards the reaction of the World Bank, a point that was dealt with by Mr. Ascari before: a reaction that was swift, unruffled, and effective, with the design of a program tailor-made to the Argentinean needs addressing the core issues requiring strong action by the government and by the Bank. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  167 I was glad that the Bank was able to give this response and that so much emphasis was put on the reform at the level of the provinces, of privatization of provincial banks, and financial sector reform. The financial sector is a crucial sector for any economy, is a crucial segment in any economy, but in view of the liquidity constraints imposed by the currency board system, the peso crisis had a direct impact on the financial system. And I was impressed with the fact that the Argentinean Government approached the Bank precisely to work in this area very strongly and the Bank reacted, as I said, swiftly and effectively. My third comment relates to paragraph 53 when the CAS says that the World Bank should remain a strong supporter of the Argentinean ambitious reform program. I agree with that, but here I have a question. The beauty of the recent cooperation between the Bank and Argentina is that it's very much concentrated in structural adjustment lending, with loans that do not require counterpart funds and that do not penalize the government's fiscal efforts. The CAS, however, indicates that in the long run, in the year 1996 and 1990, some emphasis will be put in long-term investment lending. The question is: Is a huge portfolio, long-term investment portfolio, compatible with a strict MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  168 fiscal policy? Shouldn't the Bank be more flexible in its requirements concerning counterpart funds? Should the Bank be more innovative in approaches dealing with private sector development, for example? My fourth observation regards trade, and I do welcome the indication that the Bank is starting a wide review of MERCOSUR: Mr. Burki had already anticipated that to the Board when he made his presentation some months ago to the Board about the work of the office in the region as a whole. And during our retreat a few weeks ago, Minister Ananat (phonetic) from Chile suggested that the Bank should make an effort to provide some intellectual input to the regional trade agreements. Then I saw with a certain dismay the "Global Economic Prospects in Developing Countries" and a certain lack of enthusiasm about regional trade agreements. I do hope that I'm wrong, that the regional office will be able to put emphasis on this issue, and that not much attention would be paid to (?) index, the one described in one of the boxes in the "Global Economic Prospects in Developing Countries" document, a little bit skeptical about the future of regional trade arrangements. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  169 My fifth observation, of course, Mr. Chairman, deals with graduation. I thought we had all agreed last year that it is too early to think about graduation in the case of Argentina, and I am glad to see that the Bank does not intend to start discussions on graduation with the government. Actually, these discussions at this stage would be very much inconsistent with everything that is said in the CAS about the need for Bank support to the Argentinean efforts. Argentina has still a lot to benefit from the assistance of the Bank, but I think that the Bank also has to benefit from its cooperation with Argentina, in terms of substance, in terms of innovation, in areas where the Bank is expected to innovated, and above all, benefit of being associated with the making of success of an economic program that has given us time and again indications that is going to succeed. After my five observations, I have two comments on issues that were raised during the debate. One is a comment made by Mr. Chneiweiss that I thought was extremely interesting when he said that this CAS demonstrates that lending is what our business should be, and that this is the priority area for the Bank and where our efforts should be MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  170 concentrated. And the second point is about how frequently we should come back to revise the Argentinean scenario and to follow up on the projects and on the CAS itself. Of course, we have rules about bringing CASs to the attention of the Board, and we should follow these rules. But time and again, when we discussed the previous CAS on Argentina and in a number of other discussions about Argentina, time and again reference was made to the fact that this is a test; this is a period which we should follow with enormous attention. And time and again, the Argentinean Government has demonstrated that it has been able to succeed and to present even more positive results than the one that could be anticipated by these discussions. So I think we should look at this issue on the basis of the level of exposure of the Bank in the country, look at Argentina, as we should look at any other country which the Bank has a substantive problem of cooperation. Thank you. MR. FRANK: Thank you very much, Mr. De Paiva. Next I have Mr. Fischer. MR. FISCHER: Thank you, Mr. Chairman. Let me at the outset say that I read this particular CAS also with the eyes of someone who MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  171 participated in a very interesting EDs trip to this country some years ago, and it was at the height of the privatization effort. In fact, one got the impression--and I say this without any value judgment--that there was a certain belief at the time that privatization was sort of a panacea for solving most of the problems. To use a German term, "Privatization (?) Uber Alles (?)" was a bit at the time, and I think only now the view is a bit broader also with the assistance of the Bank that there are a lot of other problems in the area, and the provinces are one. I also read the paper in light of the recent experience with Mexico, and the report does mention it. Let me add a few remarks. The first one is that we also welcome the approach of the Bank with a focus on structural reform, decentralization, institution building, and human resource development, and we think that the two scenarios are adequate and are well elaborated. My people did have the question that Mr. Burki answers, what are sort of the benchmarks for the different scenarios, and we were told that one needs flexibility. One has a bit the impression that right now the (?) just limits itself to simply listing the different areas of MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  172 activity, but I see the point that there is a lot of uncertainty. Now, as to the economic situation, as Mr. Evans mentioned, the IMF discussed this a month ago where a number of EDs also emphasized the lack of financial discipline of the provincial governments. And in the regions of Argentina, it seems that neither the Bank or chambers of commerce nor any other organizations or administrations, nor the administration itself, have so far managed to fully realize the importance of smaller and medium-size enterprises and to support them appropriately--one of the areas that is being addressed also by the Bank. After all, against this background, Mr. Chairman, we feel, and so does the Bank, I think, that the increasing integration of the Argentine economy into the regional markets--something that Mr. De Paiva just alluded to--and the anticipated stronger integration into the world market do, in fact, require efficiency and productivity increases in this sector. Therefore, the focus on the development of small- and medium-size industries and the supporting efforts by the administration are, we feel, crucial. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  173 The paper does speak of a prolonged regional crisis, and in paragraph 64 the small- and medium-size enterprises are particularly mentioned, as I indicated. Mr. Chairman, like Mr. De Paiva, I can only urge the Bank first to take trade issues more seriously, which the Bank, after quite some time, I think, by and large, has begun to address. And against also the background of the recent reorganization of LAC more along trade issues, I can only support what Mr. De Paiva--that being a pronounced believer in the merits and the potential of regional trade, notwithstanding the difficulties that there are. With respect to graduation, Mr. Chairman, I do appreciate very much that there is a final paragraph 93 in the CAS on this issue, and a bit perhaps contrary to Mr. De Paiva, although I recognize, given the uncertainty and the prolonged regional crisis, it is too early to begin such discussions, I would personally welcome that once the regional crisis has been settled, that the Bank does aggressively start to discuss this issue, not only with Argentina but hopefully with other countries in the area as we have, fortunately, some potential candidates for graduation. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  174 I think it is also important for our public opinion to be in the position to demonstrate that countries are graduating and that it's not limited to, let's say, Korea and then for a long time nothing more happens. So I personally would like to have this club of graduated countries become bigger in the not too distant future. With respect to projects, Mr. Chairman, on the second provincial development project, it is meant to build an environment for private sector-led growth while addressing a number of issues which I have already mentioned, particularly the challenge of institution building and, therefore, we support it. The provincial bank privatization loan, which, by the way, I understand IDB will deal with as a cofinancier next week in that board, is, regarding its size, a rather impressive one. We just heard that it has started on a promising footing, and we had some question how long this process is likely to take and what are the safeguards for the risk involved and what is the efficiency of the superintendency. We heard the explanations by staff, so I don't have to deal with at some length. Thank you. MR. FRANK: Thank you, Mr. Fischer. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  175 Next I have Mr. Kobayashi. MR. KOBAYASHI: Thank you, Mr. Chairman. First of all, we welcome the fact that, although the Mexican crisis has continued (?) effects on the economy of Argentina, as reflected in the rapid drop in the foreign reserve and (?) stock and bond markets, the government of Argentina responded quickly to the disturbance in the financial market by taking further strong adjustment measures, resulting in a gradual recovery of financial stability. In addition, we are also very pleased that the strong fiscal measures announced by the government of Argentina in early March have already been implemented just before presidential and congressional elections. However, we have a comment regarding the country assistance strategy, the following four points: First, strengthening of tax administration. We would like to point out that revenue performance is unsustainable, partly due to tax evasion. In order to avoid the occurrence of tax evasion, since 1994 the government of Argentina has taken a number of revenue enhancement measures. However, increased participation is unlikely to be immediate, and in the transitional period there could be significant loss of revenue from this source. In this MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  176 context, we think that it is of urgent necessity to strengthen tax administration. Second, capital flight. As mentioned in paragraph 7, in order to finance trade and current account deficits, Argentina's improved access to the international financial market during 1993 and 1994, we wonder whether inflow of foreign investment has included the repatriation of capital flight to Argentina's economy. It is said that from 1992 to 1994 the amount of repatriation of capital flight was estimated over US$18 billion by one institution. In contrast to repatriation of capital markets, we are interested to know if capital flight occurred in other countries at the level of (?) of the Mexican crisis, and we would appreciate it if staff could provide an estimate of this capital flight. Third, unemployment rate. We (?) Mr. Cosgrove's written comments and have described to staff in order to achieve economic growth, we think it is very important to accelerate labor market reforms. Fourth, finally, we would like to emphasize the government of Argentina's strong and timely response to the financial crisis helps to minimize the depth of the crisis. In addition to appropriate action taken by the government of MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  177 Argentina, which maintained a close relationship with international organizations, especially we welcome that the agreement was reached between the IMF and the government of Argentina to extend and augment EFF. Thank you, Mr. Chairman. MR. FRANK: Thank you very much, Mr. Kobayashi. Next, Mr. Good. MR. GOOD: Thank you, Mr. Chairman. A lot has been said on this issue. I'd like to make, just briefly, if I could, two comments. Let me preface those by simply saying that, yes, I think the documentation has been excellent on this. I think clearly, as others have said, the response of the government in the situation has been expeditious and hopefully effective, and I think the Bank has a sound strategy. I particularly, like others, want to commend what appears to be increasing interaction with other institutions like the IMF, the IDB, and others in the World Bank Group. I think the response is well done and appropriate, and we support both of the loans that are being proposed. Two comments, if I could. One has to do with, I guess, this whole question of the certainty that attaches to our views about what the current situation really is and how MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  178 long it will last. I was not here for the CAS that was discussed in March of '94, which was only 14 months ago, but my sense from talking to others is that it was a very upbeat kind of document, positive about the reform that was underway, to the point where, as a couple of other people have mentioned, there was talk, at least among some, about graduating Argentina from Bank lending, which gives you some sense, at least, of the aura that surrounded, I presume, the discussions at that point in time. How quickly the world can change in 14 months. In that situation, what's the appropriate response? We have one. Where that will take us seems to be clearly uncertain as well. As I read the documentation, the government of Argentina is saying they expect that things will turn around fairly quickly and that capital inflows will resume, maybe not at historical levels but will resume at significant levels in the not too distant future. The Bank, for whatever reason, has a view that it will be a longer period of time before that occurs. Who knows? If one knew what private sector capital flows were going to be doing, I think we could probably make some money out of it somehow or other. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  179 I guess the conclusion that I draw is really the need to be flexible, and others have made this point. I guess the only limited conclusion that I can draw at this point is that perhaps not in 1997, as is suggested, but before that, perhaps in 1996, we return and look at another CAS for Argentina. It seems to me that 1997 at the end is, whatever, 27 months from now, something like that. That is perhaps a bit too long. So, again, all the discussion about flexibility and the need to revisit, I support that. The second and final point, quickly--and I recognize this is not a critical point in the context of what's going on now. But I notice in the documentation with respect to fiscal changes that are expected from the Federal Government in 1995, there is a discussion of the impact of that on the poor in Argentina, and there is a discussion of various kinds of offsetting programs--a social safety net program, there's a reference to a targeted health program. I think that's important, and one gets a sense of qualitatively we are recognizing a point that has been made- -and I hear it made an awful lot--about the impact of the Bank and the Fund, ignoring the impacts of structural reforms and fiscal reforms on the poor. We hear that an awful lot, to see these kinds of things as qualitatively to MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  180 move us in the right direction. Where I feel a bit vulnerable--and I'm not necessarily asking for it in the context of this case, but in future cases, what would be nice would be to get some sense of the quantitative offset that is implicit or explicit--implicit, I guess, in those qualitative responses, but I have no idea whether in some sense it's a drop in the bucket in terms of the impact of these kinds of programs may have on the poor. So I'd just like to file that for future consideration. Thank you very much. MR. FRANK: Thank you, Mr. Good. Next, Mr. Katash. MR. KATASH: Thank you, Mr. Chairman. We endorse the Bank's assistance strategy for Argentina and commend the staff for fast and constructive work. We also fully support the timely projects proposed in response to the urgent necessity of fiscal, economic, and financial sector reforms in the provinces. The CAS, in our opinion, is tailor-made and considers all the most relevant issues for the country. It highlights those features of the Argentine economy which made it particularly vulnerable to the recent negative external shock. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  181 We agree with the assessment of the country's priorities in its present difficult situation and share the view that in the near term the main objectives of the Bank's assistance strategy should be restructuring of the banking system, reforming of provincial finances, enhancing competitiveness, and improving the institutional base of the economy. The overall level, composition, and flexibility of assistance to be provided seems quite appropriate. Our understanding is that there are no differences between the Bank's agenda for Argentina and that of the country's authorities. We would like just to know if this is correct. A key factor for the successful adjustment process in general is effective cooperation with the provincial governments. We would appreciate some comments by the staff on the role of provincial governments in the design and implementation of adjustment programs at the subnational level. Making use of this opportunity, we would underscore that for a number of reasons the experience of Argentina is of great practical interest to us. For example, in the Russian Federation, there are very similar problems of inability of many provincial governments to MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  182 improve their fiscal performance and effectively fulfill their increased roles in providing public services. Therefore, lessons drawn from the Bank's intensive involvement at the subnational level in Argentina would be very useful for Russia. Finally, we would like to stress that the government of Argentina has, indeed, reacted promptly and decisively to the recent shock and, as we see it, remains fully committed to further strengthening of the adjustment process. Let us, in conclusion, express our wish of witnessing speedy revival of the Argentine miracle. Thank you. MR. FRANK: Thank you very much, Mr. Katash. Finally, I have Mrs. Jonsdottir. MRS. JONSDOTTIR: Thank you, Mr. Chairman. Let me start by saying that I fully support the two projects that we are considering today. I can refer to Mr. Gerber's circulated statement as a basis for that position. As regards the CAS, there seems little left to say, so let me just touch very briefly on three points. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  183 First, like Mr. Chneiweiss, I think that this CAS is a certain test for the Bank as to whether it can respond to a changed situation in a timely manner. That seems certainly to be the case, and staff deserves compliments for that as well as for the documents that they have presented to us. Second, it seems evident that the issue of provincial reform is crucial, and the risks in that connection seem to me to be well described in Mr. Cosgrove's circulated statement. Third, I very much welcome the cooperation within the World Bank Group and between the different donor agencies described in the document. A real partnership and division of labor seems to be in place in relation to IDB, and coordination with IMF seems also to be working well. In conclusion, Mr. Chairman, as pointed out by Mr. Burki, Argentina now faces a transition based on external factors. I fully agree with him that the Bank must retain flexibility in order to respond meaningfully to the needs in Argentina. Like many others, I would, however, emphasize that the Board be kept well informed about developments in Argentina. Thank you very much, Mr. Chairman. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  184 MR. FRANK: Thank you very much. That's the last speaker I have. I will then ask-- I know we have a few questions or comments that we'll have a response on. Mr. Burki? MR. BURKI: Thank you, Mr. Chairman. I will just pick up on two comments, two questions, two suggestions, and then I'll turn to my colleagues for the rest. One is the issue raised by both Mr. De Paiva and Mr. Fischer about the importance that needs to be given to trade. Mr. De Paiva did refer to the statement that I gave to the Board, I think it was on the 11th of January, when I said that trade is going to be a major preoccupation of the economic and sector work to be undertaken by the Latin America Region, and some serious work is already underway. Our view is that greater integration of the economies of Latin America in the global economic and trading system will take place via subregional arrangements, and, therefore, I fully agree with Mr. De Paiva that it is extremely important to study these arrangements and their impact. In fact, when you look at the facts, the facts seem to support what Mr. De Paiva is saying. Export elasticity, that is to say, growth in interregional trade MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  185 compared to GDP growth, is two to three times when you look at these numbers in the context of subregional arrangement than in the context of total trade. We have launched intensive analytical work. We are studying the MERCOSUR arrangement, and we will also be working on the Andean (?) arrangement and the impact of NAFTA, and we hope to hold a major conference on trade issues sometime in the middle of 1996 when this work will be shared with the people outside the region. I just want to say one word about the growth scenarios. The two scenarios that we have presented have more to do with Argentina's external environment than with internal change. You will notice that the major difference in these two scenarios is in terms of growth rates over the medium term, 1996 to 1998, and there is very little difference in terms of growth rates over the long term, 1990 to the year 2004. And, obviously, the determining factors, the variables, are domestic savings, external savings, and productivity growth. Now, it would be entirely possible to make optimistic assumptions about these three interacting and mutually supportive variables, and if you were to do that, one could come up with a fairly high rate of growth for MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  186 Argentina over the long term. I think it was Mr. Evans who was suggesting that it should be possible for the Argentineans to return to a 6 to 7 percent rate of growth they experienced before this crisis hit them, and it is conceivable that that might happen if the three variables that I was referring to were to move in the right direction and would be mutually supportive. MR. FRANK: Thank you, Mr. Burki. Mr. Nankani? MR. NANKANI: A few of the questions I'll address, and then I would like Mr. Vetter to talk about the provincial reforms, the cooperation of provincial governments in the reform process. On the small and medium enterprises, in addition to the comments we made earlier, I would also note that we are discussing an experimental operation with the Argentine authorities on export support development loan which will assist small and medium enterprises in breaking out into export markets, which we would agree would be a very important element in the productivity growth that we would like to see in such enterprises. With respect to tax administration, indeed, Argentina has been one of the finer examples of successful MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  187 improvements in tax administration. Revenue collections improved significantly over the last three years, primarily through tax administration changes, and tax evasion has been on the decline. With respect to capital flight, it is true Argentina is one of the countries that is most sensitive in terms of confidence elements to capital inflows and outflows. The numbers we have in the statistics on capital inflows over the last few years do include repatriation of capital by Argentineans, although the breakdown is not easy to make. Finally, with respect to the quantitative impact of adjustment on the social sectors and how some of these complementary measures would help, data on poverty outside of the major urban areas is difficult to get. It doesn't exist. However, it is important to note that a lot of the reforms that we would hope to assist the government with in the social sector operations will involve the restructuring of current levels of expenditures in favor of the better functioning programs and in favor of the poorest groups. Therefore, we do expect, while this is a qualitative statement, that the quantitative impact will not be insignificant. MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  188 If I may, I call on Mr. Vetter, please. MR. VETTER: In these provincial reform loans in Provinces I and also in Provinces II, each of the provinces prepares a financial action and investment plan. In that plan, they identify the principal problems, the reforms necessary, and specific sub-projects that will address those problems. After that, they then execute the sub-projects, and we monitor the fiscal performance. In Provinces II, we already have 35 sub-projects with a total cost of $95 million that have been submitted and reviewed by us, and many more are being prepared. Many of this $95 million we already have the bidding documents, so there's a very high degree of cooperation in the reform process. MR. FRANK: Thank you very much, Mr. Vetter. Are there questions or comments? Yes, Mr. Nogues. MR. NOGUES: Thank you, Mr. Chairman. A couple of comments. First, this loan has been discussed on short notice, and I want to appreciate my colleagues for their support. We are aiming to sign the loan today or tomorrow. I would also like to appreciate the work of staff. They have done an excellent job. They have worked day and night MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  189 and even on the weekends, so I think this should go on record. Thank you. MR. FRANK: Thank you very much, Mr. Nogues. There have been a number of bouquets extended in various directions here, to the government and to the management. One that is missing--and I hope I am not violating a protocol of the Board, but that is one, I think both on behalf of the management and staff, that we would like to extend to Julio Nogues. He has worked very, very well with us in bringing about this extraordinary achievement of a new CAS, two new operations, and it has been our pleasure to work with you that closely and that effectively. We have had, I think, a very good discussion on the major items, both on the CAS and on the operations, and I think my colleagues have responded well to the comments. There has been a suggestion from time to time about the timing and when we look in on the Argentine situation again, particularly the next CAS. I think Mr. De Paiva reminds us very well that we do have procedures that set out the timeliness of these reviews. I think that we need not make a hard and fast decision on this particular MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  190 situation. I think as shown by the fact that the region came back within 14 months because of changed circumstances means that there is judgment being exercised in the situation, and my own view would be that we would be wise to plan on our normal cycle, but if circumstances warrant that, we would leave that to the management of the region to bring it back in due course, or as circumstances warrant. If there are no further questions, the two loans are approved on the terms proposed, and the pertinent comments will be circulated. Thank you very much. XX MILLER REPORTING COMPANY, INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666