Argentina - Country assistance strategy

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14278-AR MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE ARGENTINE REPUBLIC APRIL 10, 1995 Country Operations Division Country Department I Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  MOST RECENT CAS DISCUSSION March 1, 1994 (Report No. P-6161-AR) CURRENCY EQUIVALENTS Currency Unit: Peso (Arg$) Arg$1 = US$1 ACRONYMS AND ABBREVIATIONS DDSR - Debt and Debt Service Reduction EFF - Extended Fund Facility FSAL - Financial Sector Adjustment Loan GATT - General Agreement on Tariffs and Trade GEF - Global Environmental Facility IDB - Inter-American Development Bank IDF - Institutional Development Fund LIBOR - London Inter-Bank Offer Rate MERCOSUR - Southern Cone Common Market (Mercado del Cono Sur) NAFTA - North American Free Trade Association PRL - Provincial Reform Loan PERAL - Public Enterprise Reform Adjustment Loan PSRTAL - Public Sector Reform Technical Assistance Loan SAREP - Secretary for the Economic Reform of the Provinces (Secretaria de Asistencia para la Reforma Economica Provincial) SRNAH - Environmental Secretariat (Secretaria de Recursos Naturales y Asuntos Humanos) WDR - World Development Report YPF - Argentina's newly-privatized petroleum company  FOR OFFICIAL USE ONLY TABLE OF CONTENTS Page No. A. Economic and Social Perfornance.1 Overview ................................. 1 Recent Economic Performance ...................... 3 Social Performance ...................... s Impact of the Recent Mexican Crisis ...................... 7 Implications of the Crisis ...................... 9 Economic Prospects ........................................ 11 B. Bank Group's Country Assistance Strategy ........ ................. 17 Bank Support During the Regional Crisis: Consolidating Reform .... ........ 17 Poverty Alleviation and Human Resource Development .................... 23 Rebuilding Deteriorated Infrastructure ............................. 24 Bank Lending and ESW ................................ 27 Creditworthiness and Exposure ................................ 28 Portfolio Implementation ................................. 28 Cooperation with Other Multilateral Institutions ......... .............. 30 C. Agenda for Board Consideration ................................ 31 Lending Issues ........................................... 31 Graduation ................................ 32 ANNEXES I. Policy Objectives of Bank Assistance Program II. Bank Group Fact Sheet m. Poverty and Social Development Indicators IV. Key Economic Indicators V. Key Exposure Indicators VI. Status of Bank Group Operations in Argentina This document has a restricted distnbution and may be used by recipients only in the performance of their l official duties. Its contents may not otherwise be disclosed without World Bank authorization. l   MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY OF THE WORLD BANK GROUP FOR THE ARGENTINE REPUBLIC APRIL 10, 1995 A. Economic and Social Performance Overview 1. Four years have passed since Argentina, faced with the severe economic crisis of 1989-90, adopted the Convertibility Plan. This courageous and innovative plan restructured Argentina's economic landscape. From extreme hyperinflation, it moved relatively quickly to an annual inflation rate of 3.9 percent in 1994. Output and productivity increases have been remarkable for the last four years, with GDP growth averaging 7.7 percent. The initial consumption-led boom matured into a healthy pattern of investment and export-led growth. Privatization of state assets has been far reaching, and far more successful than expected. As a result of the economic recovery, poverty levels declined significantly, although economic restructuring with a rigid labor market has resulted in increased unemployment; about 12 percent of the labor force by late 1994. 2. Trade reforms and economic recovery resulted in imports growing from barely US$4 billion in 1990, to over US$21 billion in 1994. The import boom was financed by capital inflows, including large scale foreign direct investment and portfolio investments, that quickly responded to the signals of structural adjustment. The abundance of foreign exchange due to the capital inflows led to a real appreciation of the currency. This appreciation has been reversing itself since the latter half of 1993, due to decelerating inflation and currency realignments among its major trading partners. The impact of the currency's appreciation has been further mitigated by wide-ranging productivity increases. As a result, export growth, particularly of industrial exports over the last two years, has been accelerating. 3. There is growing evidence that Argentina has been undergoing an important adjustment in response to the radical restructuring and liberalization of its economy. Productivity (both of labor and capital) is increasing, and particularly in 1993 and 1994 the growth of investments and exports, which are the key determining variables for the ultimate success of the Convertibility Program, has accelerated. 4. As the Mexican economic crisis unfolded, however, it became clear that the Convertibility Plan remains particularly sensitive to foreign capital flows, with the crisis becoming the first serious test of the Plan. Higher international interest rates and the Mexican  - 2 - The Convertibility Plan The Convertibility Plan, one of Argentina's most successful economic programs, gets its name from the Convertibility Law, but it represents a much wider set of measures aimed at the complete and permanent adjustment of the economy. The main pillars of the Convertibility Plan are: (a) Monetary Reform, through the Convertibility Law, subsequently supplemented by the new Charter of the Central Bank; (b) Fiscal Reform, initially through a sharp improvement in the administration of the tax system and later through a redefinition of tax instruments and rates; (c) State Reform, through an ambitious and successful plan of privatization and deregulation of factor and product markets; (d) Social Security Reform, allowing for a new capitalization mechanism operated by the private sector; (e) Trade Reform, through the elimination of export taxes and most quantitative restrictions on imports, and the reduction of the level and range of import tariffs. While these are radical reforms, the recent history of hyperinflation, governmental confiscation of private financial assets, and extreme economic instability meant that only such a radical program would be credible to the Argentine public. The Convertibility Law The Convertibility Law of April 1991, fixed the rate of the Austral at 10,000:1 to the dollar. On January 1992, the Austral was replaced by the Peso at the fixed rate of 1:1 to the US dollar. The Law also established that the monetary base could not exceed the dollar value of international reserves, and prohibited all indexation in the goods and labor markets. The Convertibility Law, in practice, made the Central Bank into a Currency Board by mandating a 100 percent international reserve requirement for high-powaered money. This has lent strong credibility to economic management, with monetary policy becoming broadly endogenous. However, the Central Bank can exert some discretion through the use of variable bank reserve requirements, and excess international reserves. To ensure the full reserve backing, other conditions were set on the behavior of the monetary authorities through the new Charter of the Central Bank. This Charter, approved by Congress on September 1992, established the independence of the Board of Directors, all of whom are ratified by Congress and provides fixed terms of tenure for the appointees, including the president. This Plan also encourages prudent fiscal management, since there is no significant scope for monetizing fiscal deficits. The Central Bank Charter permits a maximum of 20 percent (in emergencies raised to 33 percent) of reserves backing the monetary base to be in dollar-denominated government bonds (e.g., BONEX). Issuing base money against BONEX allows the Central Bank to regulate short run fluctuations in market liquidity through swaps. Additionally, the Charter dictates that the Central Bank cannot take any new interest earning liabilities, and it cannot remunerate reserve requirements. These measures eliminate the possibility of generating a quasifiscal deficit through the servicing of Central Bank debt. Consistent with the restrictions for generating Central Bank liabilities other than those used to acquire international reserves, the Charter does not allow the Central Bank to significantly guarantee commercial bank deposits, i.e. deposit insurance. This substantially reduces the role of the Central Bank as a lender of last resort, both for the peso and for the domestic dollar deposits system. Nevertheless, in an emergency the Central Bank can provide, for a limited time, liquidity up to 100 percent of a bank's capital. Under the convertibility system, international reserves are backing the monetary base, and cannot be considered as precautionary reserves. Also, under this system, variations in international reserves have a direct impact on the economy through changes in the money supply and the real interest rate. An important feature of the Convertibility Plan is its bi-monetary nature, which permits the use of foreign exchange for market transactions, or the holding of foreign exchange denominated liquid assets in the domestic financial system. Dollarization has contributed to enhancing the credibility of exchange rate policy, since it reduces vulnerability under a fixed exchange rate, because portfolio shifts from domestic to foreign currency denominated deposits, or vice versa, would not necessarily involve a reduction in total domestic bank deposits. Under a dollarized system, where fractional reserve requirements are in effect, the concept of lender of last resort takes a different dimension, since part of the liabilities of the banking system are dollar denominated, and the Central Bank cannot print dollars to fulfill that function. In a crisis, high bank reserve requirements, excess international reserves, or a foreign lender of last resort are needed to fulfill that function.  - 3 - crisis are reducing capital inflows, with negative economic, financial, social and political implications. Since under crisis conditions a change of the Convertibility Law in an increasingly dollarized economy could add to economic instability, the only internal response to the current test of the credibility of the program, is fiscal tightening and the further strengthening of the adjustment process. The hard won gains of the Convertibility Plan have lent great credibility to the Government's economic policies following decades of economic mismanagement. Changing this crucial anchor would risk evoking images of past reversals in economic policy which greatly discredited Argentina's past economic programs. 5. In addition to the fundamental need to sustain at least a fiscal balance to compensate for lower external savings, it is imperative to add flexibility to the economy by deepening labor and financial market reforms, as well as to reform public administration, particularly at the provincial level. A strengthening of the banking system would also strengthen the economy's ability to withstand external shocks of the nature experienced early in 1995. While the plan is internally consistent and should be able to accommodate a slowdown or even a reversal in capital inflows, even with the political will to withstand the rigors of the needed adjustment, a financial crisis could jeopardize the Plan, since one of the weak points of an increasingly dollarized economy is the absence of a dollar-lender of last resort. 6. Overcoming the current crisis would strengthen the Convertibility Plan, proving it able to absorb severe external shocks. The Convertibility Plan may well be further strengthened since the crisis has provided further impetus for structural reforms, such as adjustment in the provinces, financial reforms and changes in labor legislation. Recent Economic Performance 7. With the dynamic evolution of the economy, shifting from a consumption- to an export- and investment-led growth, GDP in 1993 and 1994 grew by 6 and 7.1 percent, respectively. Gross fixed investment reached 20 percent in 1994, associated with increased national and foreign savings. Exports, which were affected by declining international prices in 1992-93, rose by 20 percent in 1994, with manufactured goods exports exhibiting particular buoyancy, growing at an average 27 percent in 1993-94. Better international prices for grains and improved economic conditions in Brazil contributed to the growth in exports. In 1994, imports grew at the fast pace of 26.7 percent. Imports of capital goods led the expansion, indicative of the acceleration in investment and the restructuring of the economy. Financing trade and current account deficits was not difficult, given Argentina's improved access to international financial markets during 1993 and 1994. During the first two months of 1995, exports rose by 35 percent, while imports remained approximately at the previous year's level. 8. In August 1994, Argentina reached an accord with Brazil, Uruguay and Paraguay, its MERCOSUR partners to: (i) eliminate most intra-group tariffs from January 1, 1995; and (ii) establish a common external tariff covering 85 percent of the positions of the import-tariff nomenclature in January 1995, to be subsequently increased to 97 percent in January 2001. To  - 4 - ease the transition, exemptions have been authorized; each government may exclude up to 60 positions from MERCOSUR trade and up to 300 positions from the common external tariff. Moreover, the automobile, sugar and telecommunications sectors will continue to benefit temporarily from their existing privileged regimes. These agreements went into effect on January 1, 1995. Since Argentina's trade in MERCOSUR is primarily with Brazil, its prospects are closely tied to the continued stabilization and resumption of sustainable economic growth of the Brazilian economy, which accounts for 22 percent of Argentina's total trade. 9. The fiscal performance of the Federal Government was broadly satisfactory in the first two years of the IMF's Extended Fund Facility (EFF), which expired in March 1995. EFF targets were exceeded in 1992, and performance remained broadly satisfactory in 1993 and early 1994: primary fiscal surpluses were well over 2 percent of GDP. In mid-1994, the Government, in agreement with the RAF, indicated that it would not draw down the final two EFF tranches, as Argentina's access to international financial markets had improved. Third- and fourth-quarter 1994 fiscal performance, however, deteriorated due to lower than expected revenues while expenditures continued to increase. The social security accounts, in particular, deteriorated with the transitional costs of introducing the new optional private pension system, a reduction in employer's wage taxes, and the absorption by the Federal Government of three financially- troubled provincial pension systems. During the fourth quarter, the Govermment did initiate a program of remedial measures to increase tax collections and further reduce spending, bringing the fiscal accounts close to equilibrium in 1994. 10. With the increased accumulation of intemational reserves, and the reduction in bank reserve requirements carlier in 1993, monetary aggregates expanded at a fast pace. Bank credit grew at an even faster rate, reflecting the sub-par, but fast improving, monetization of the economy. Interest rates on peso deposits declined from 25 percent in December 1992, to 9 percent by early December 1994, just before the Mexican crisis began. Interest rate spreads, although declining, remained high, reaching 13 percent, indicative of the continued segmentation and shallowness of the financial 'system. By end-1994, approximately half of Argentina's financial transactions were in US dollars, and these interest rates and spreads were much lower. Continued capital inflows sustained the growth in aggregate demand. Liquid international reserves at end-November 1994 stood at US$14.5 billion, a significant increase since the end of 1992. Nonetheless, the general instability in world financial markets, which started in early 1994, as well as the more recent crisis in Mexico, have had a negative impact on Argentine financial markets. Reserve accumulation and credit expansion decelerated substantially during 1994; by early 1995 they were falling as dollarization of the economy accelerated. 11. In spite of major national reforms--of the state and financial institutions, privatizations, liberalization of foreign and domestic credit--extending the economic reforms to the provinces presents a significant challenge. While fiscal adjustment has occurred at the federal level, provincial fiscal deficits persist (1994 deficit of 0.7 percent of GDP), mainly because of the continued inability of provincial governments to contain current expenditures and increase sufficiently their own-source revenues. The potential benefits from the decentralization  - 5 - of many federal functions should be significant, but many provinces are not fully prepared to effectively fulfil their increasingly important roles in health, education, water and sanitation services, and the strengthening of provincial governments is vital. Social Performance 12. Argentina's poor suffered disproportionately from the country's past disappointing economic perfornance. The proportion of Argentines living in poverty doubled from 1980 to 1989, as formal sector employment stagnated and bursts of hyperinflation eroded the real wages of the poor. Inflation also had a disproportionate effect on savings, as the poor were not able to shift out of pesos as rapidly as wealthier Argentines. At the same time, social services failed to cushion the fall of many Argentines into poverty; few programs reached the poor, while fiscal austerity and weak administration led to a severe deterioration of all such programs throughout the 1980s. 13. The Bank's Poverty Assessmen indicates that Argentina's urban poverty declined dramatically between 1990 and 1993 with economic growth and price stability (see Box). This declining trend was evident notwithstanding the fact that a slight upturn was noted during 1994 amnong the poorest districts of Metropolitan Buenos Aires. While absolute poverty is diminishing overall, income distribution has been rather stable. The income share of the lowest quintile was relatively unchanged between 1990 and 1993. This is partly explained by high unemployment and underemployment rates, the brunt of which was borne by this group, as well as the lagged recovery of their wage (relative to those at the top) over the period. 14. Data from 1993 revealed that the highest incidence of poverty in Buenos Aires is found among children, the unemployed, and the uneducated. More than 25 percent of the unemployed were below the poverty line in May 1993. Further disaggregation shows that the incidence of poverty is highest among children below 10 years old (29 percent in May 1993). The education level of household heads is also highly correlated with poverty incidence: households whose heads have no education have a poverty rate of about 30 percent, and those who completed primary school about 20 percent. Viewed in terms of percentage distribution, about 60 percent of the total poor in 1993 have finished only primary school and close to 30 percent had no schooling at all. Given the strong link between unemployment and poverty, Argentina's urban unemployment rate is worrisome. Since 1992 the unemployment rate has increased continuously, reaching 12 percent by late 1994. Part of this comes from an increased participation rate, particularly among women in the lowest two income quintiles. Poverty rates are also higher for females than males. More than a fourth of families classified as indigent have female household heads. 15. Improved economic prospects have apparently generated an increase in the labor force of about 3 percent in the last three years. Much of the increase in unemployment is likely to be transitory--linked to industrial restructuring, public sector downsizing and relative price changes--but Argentina's labor market remains rigid and non-competitive. Non-wage labor costs  - 6 - remain excessive, equal to over 50 percent of gross wages, while the relative price of capital compared to labor has recently declined with the opening of the trade regime. Poverty Profile Argentina's urban poverty declined between 1990 and 1993 together with the achievement of economic stability and growth. This is a dramatic reversal of the poverty trend during the latter part of the 1980s. In 1989 almost half of the population in Metropolitan Buenos Aires reported receiving incomes below the poverty line. This occurred as real GNP per capita in Argentina dropped by 25 percent and real wages by 50 percent between 1980 and 1989. In contrast, the poverty rate in Buenos Aires was about 17.6 percent in 1993. The Bank's recent Poverty Assessment presents a typology of the poor based on income: the indigent, the stagnant poor, and the cyclical poor. The indin-ent are those whose income is insufficient to purchase the minimum food basket. The stagnant poor are those whose income is insufficient to purchase the food basket and non-food consumption goods; this group is above the indigent line but below the lower end of a defined poverty band. Their status depends less on macroeconomic and employment circumstances and more on their lack of education and limited employability in the formal labor market. The vulnerable poor are those defined to have an income level oscillating within a band of 25 percent below and 25 percent above the poverty line, and whose poverty status is more variable depending on employment circumstances. In May 1993, it was estimated that the vulnerable poor were about 14 percent of the Buenos Aires population, the stagnant poor, 6.9 percent; and the indigent, 3.4 percent. This grouping, albeit somewhat arbitrary, helps distinguish the focus of poverty alleviation policies. The vulnerable group, with a good amount of human capital stock, would need a different type of policy and program assistance (e.g. employment focus, short-term social safety nets) compared to the longer-term, structural poverty circumstances of the indigent. The poverty status of the stagnant poor, somewhat in the middle-ground, depends less on macroeconomic circumstances and more on the lack of appropriate education to facilitate employability in the formal labor market. The location of the poor is also changing. In 1992, the Metropolitan Buenos Aires' poor only constituted one-quarter of the total poor, while Pampeana, Northwest and Northeast accounted for 65 percent of the poor. Between 1990 and 1992, moreover, the proportion of the poor located in the Northwest and Northeast rose from 24 percent to 29 percent. In other words, while the severity of the poverty problem is being reduced nationwide, poverty in the rural and some outlying urban areas is becoming relatively more acute. Data on rural poverty continues to be major weakness of poverty analysis in Argentina, however, and the picture is far from complete. 16. Economic stability and growth are necessary but not sufficient conditions to ensure continued and sustainable poverty reduction. Cognizant of this, the Government is placing equal importance on the development of a policy environment to create employment opportunities and to invest in human resources. Recently, the Government reduced payroll taxes in some specific  - 7 - sectors to encourage employment generation, and one of its proposed laws to make labor markets more flexible was recently passed by Congress. Impact of the Recent Mexican Crisis 17. Argentina has been vulnerable to the Mexican crisis due to its relatively heavy reliance on foreign capital inflows (financing in 1994 an estimated current account deficit of 3.6 percent of GDP), the inflexibility of its exchange rate regime, and the need for a strong financial system under the Convertibility Plan. Argentina, however, enjoyed several advantages compared to Mexico: (a) its current account deficit was less than half that of Mexico's; (b) it enjoyed a credible political and economic leadership; (c) its level of international reserves remained high; (d) public debt maturities were not concentrated in the short-term spectrum of the market; and (e) many of its structural reforms -- privatization, governmental reform, domestic market liberalization, foreign investment -- were deeper. 18. Argentina's financial sector is particularly vulnerable to negative external shocks, given the nature of the Convertibility Plan, under which Argentina's high-powered money needs to be fully backed by international reserves. Additionally, since bank reserve requirements are less than 100 percent, M2 is about 3.5 times the stock of international reserves. Therefore, under the Convertibility Plan, the Central Bank has more limited resources than other countries to confront a run against bank deposits. The Government could, however, contemplate moving to full dollarization of the financial system as a response to a currency run, as long as public confidence in the financial system were maintained. 19. One additional factor to be kept in mind is that the distinction between a run on currency and a run on banks is not clear cut, and factors pushing towards the complete dollarization of the financial system could likely affect confidence in the banks. Moreover, as became evident in the initial stages of the Mexico crisis, the weakest banks are more prone to experience losses in deposits to stronger banks, generating liquidity problems that endanger the stability of the entire financial system. For this reason, the Government has opted to move expeditiously both in the reform of provincial banks, as well as to encourage the merger or closure of many weaker private banks. 20. Argentina's banking system has indeed proven vulnerable to the recent external shock. Following a 30 percent decline in the stock market index, and declines in dollar- denominated Government bond prices, between the beginning of the crisis and mid-March, plus mounting non-performing loans, bank asset values deteriorated sharply. This portfolio deterioration, in conjunction with the initial tightening of credit in the banking system and the decline in bank deposits, led to the cessation of operations of three small wholesale banks (one of which subsequently resumed operations) and a brokerage firm, and a number of other institutions were left in a weakened financial condition. However, the financial system has so far survived the severe external shock, and by March, the private banking system was undergoing some consolidation through mergers and acquisitions.  - 8 - 21. The Government has reacted forcefully to the crisis. During late February and March, it took courageous measures to reestablish a fiscal surplus by cutting expenditures on, among others, export subsidies, public sector wages, and social security expenditures, while raising VAT rates and other taxes. Swift action by Congress in approving unpalatable emergency measures added to the credibility of the measures, which were supported by a conditional IMF program. As the Government was announcing these measures in mid-March, it also assembled an international financial package of approximately US$11 billion in support of the Convertibility Plan. About US$5.4 billion would come from the IMF, IDB, and the Bank; an additional US$0.8 billion may come from Japan's EXIM Bank; about US$2.3 billion is expected from 2 large bond issues; and US$2.4 billion from projected asset sales. The announcements effectively stopped the accelerating decline in bank deposits. As a result, by early April, financial markets showed signs of stabilization and recovery. 22. More specifically, at the beginning of January, the Government announced the reduction of expenditures (particularly to the social security system), decreed cost-cutting measures, and vetoed new programs, partly in anticipation of lower revenues due to the slowdown in economic activity and the funding needs of the social security system. It also announced a significant additional privatization program of US$2.4 billion, to reduce the level of public sector debt. Next, on February 27, 1995, and in view of the sharp decline in tax revenues during January and February, the authorities extended the wealth tax to financial assets, and eliminated several deductions for the income and value-added taxes. Simultaneously, they implemented further cuts in expenditures on investment, and goods and services, and reduced nominal public wages of high-level staff. Finally, in mid-March 1995, the Government announced the extension of the Fund's EFF to March 31, 1996, and further tax adjustments that would generate a fiscal surplus of 0.7 percent of GDP (excluding privatization proceeds), including a temporary increase in the VAT rate from 18 to 21 percent, an increase in the employer's wage taxes, and a reduction in export subsidies. The resulting increase in the VAT revenues will not be shared with the provinces, but a new federal fund of US$1.2 billion was created to help provinces privatize and reform their banks and public enterprises. Not only have the authorities reacted firmly to the crisis on the eve of presidential elections scheduled for May 14, by announcing measures estimated to yield some US$6.3 billion, equivalent to 2 percent of GDP in the remainder of 1995, but they have received strong political support in Congress, where the fiscal program was approved in record time. 23. On the financial side, immediately after the Mexican crisis erupted, the Central Bank tightened liquidity to prevent a currency run. It did not bail out two failed banks, but set up first a private facility, and subsequently a facility at Banco de la Naci6n financed through the imposition of a 2 percent bank reserve requirement, to assist small banks in crisis. To counter the risk of further bank failures, it also facilitated the use of interbank credit, and reduced temporarily reserve requirements in both dollar and peso deposits, and used rediscounts at a faster pace. On March 14, 1995, the authorities increased the liquidity in the financial market further by authorizing commercial banks to use 50 percent of their technical reserves to meet their legal reserve requirements. To stem capital outflows, the authorities induced the further  - 9 - dollarization of the banking system (dollar deposits by March 22, 1995, accounted for 54 percent of total deposits). Nevertheless, between the beginning of the crisis and March 22, total deposits in the financial system declined by about US$7 billion, most of them in peso deposits. Currently, the Central Bank is contemplating the establishment of a bank deposit guarantee scheme. During this crisis, the Central Bank had to perform a delicate balancing act between averting a run on the currency (by imposing tight liquidity), and avoiding a banking run (by subsequently injecting liquidity), two contradictory policies for two not unrelated risks. The Central Bank's action so far, has been markedly different from past crisis episodes which led to strong monetary emissions and subsequent bouts of high inflation. Implications of the Crisis 24. The Mexican crisis brought to light important lessons for Argentina: (a) it highlighted the extent of the economy's reliance on volatile capital flows; (b) revealed the need for a strong financial system, including the relevance of a dollar lender of last resort in an increasingly dollarized system; (c) reemphasized the need to sustain credibility of the economic program; and (d) made obvious the difficulties in changing the exchange rate during periods of crisis. 25. Vulnerability. The Convertibility Plan has so far served Argentina well. It has brought unprecedented stability and growth to a heretofore volatile economy, and given the Government great credibility to support its further reforms. It has been the key factor in drastically reducing inflation, and has provided strong support for prudent fiscal and monetary policies. Nevertheless, under the fixed exchange rate regime, the economy remains vulnerable to sharp swings in capital flows. During periods of decelerating or declining capital flows, lags in the adjustment in relative (domestic to foreign) prices can create a sharp slowdown in economic activity. 26. An economy with a weak financial system and rigid labor markets is even more vulnerable to shocks, particularly under a fixed exchange rate regime where changes in capital flows could be more pronounced. Financial vulnerability could cause great damage in a short period of time since it magnifies the deleterious effects of negative random shocks. As the recent experience in Argentina shows, capital movements usually affect the weakest financial institutions first, creating problems that could subsequently affect the entire financial system, thus reinforcing the effect of negative capital movements. 27. A further dimnension of this financial vulnerability under the Convertibility Plan is that the Central Bank, under a fractional reserve requirement system, is a weak "lender of last resort", since its dollar reserves are not enough to stem a serious banking run. To reduce the risks of a financial crisis in an increasingly dollarized system, there is a need, for example, to get explicit support from other central banks, possibly via swaps. However, while such a facility may be desirable, it is unlikely that a variation of the Mexican emergency support program would be replicable.  - 10 - 28. Leading indicators of financial vulnerability are not very reliable in predicting the timing of a crisis, particularly if crises are determined by developments external to the region (e.g., higher international interest rates). As past experience (the Tablita experiment) in Argentina shows, major financial disruptions usually start from the failure of a key financial institution. Thus, policymakers have to develop tools to detect or pinpoint the source of trouble. For that reason, effective banking supervision should be given the highest priority. More importantly, however, there is a need to deepen and strengthen the financial system, particularly through the privatization or closure of public sector (particularly provincial) banks that account for an inordinate amount of non-perfonning loans of the financial system and distort the allocation of credit. 29. The Exchange Rate Regime. Under a fixed exchange rate regime, where capital flows could be volatile since changes in relative prices are more difficult to generate, crisis management in a fractional reserve requirement system requires either the Central Bank to hold large international reserves, or international support needs to be assured in order to provide a lender of last resort to the financial system. Flexible exchange rates, however, are less attractive in a highly dollarized economy, and, in any case may lead to undue volatility in the real exchange rate, as the Mexican experience made all too obvious. In the case of Argentina, approximately three-quarters of private sector liabilities, four-fifths of government debt, and over half of bank credit is in US dollars, and a devaluation would have a further destabilizing effect on the banking system, as well as on corporate and public finances. A devaluation under crisis conditions could prove to be highly counterproductive, deepening the crisis it is intended to correct. It could discredit hard won gains obtained under the Convertibility Plan, and would result in capital outflows, a banking crisis, higher inflation, and a possible economic depression. 30. Credibilt. With a vulnerable financial sector it is imperative to strengthen the credibility of the economic program. This is another lesson one can draw from the recent Mexican crisis. While the Argentine adjustment process remains robust, and reforms to make financial and labor markets more flexible were proposed, since mid-1993 there was a hiatus, with some important reforms deferred pending legislative or provincial approval and implementation. Additionally, during the second half of 1994, the national government's fiscal surplus was reversed, primarily on account of social security reform efforts and higher expenditures. National deficits compounded provincial deficits, reversing an improving trend in consolidated fiscal accounts. While longer term, inter-generational transfers may in one sense justify the higher transitory net costs of the refonning social security system, in retrospect, short-term considerations regarding the credibility of the adjustment program showed that a relaxation of fiscal policy was premature. Thus, when the Mexican crisis erupted, the Govemment had to address both the vulnerability of the financial system as well as the credibility of its economic program. 31. Upon the eruption of the crisis, the Government took strong measures to redress its fiscal balance (see paras. 21-23) and extended its IMF EFF in order to reassure domestic and intemnational investors. Further, it reinvigorated the adjustment process by passing through  - 11 - Congress legislation capping social security pensions, liberalizing labor laws to small and medium enterprises, and taking measures to restructure the financial system by accelerating the privatization of provincial banks and the consolidation of private banks. Economic Prospects 32. A more generalized result of the Mexican crisis, which in itself is linked to the increase in international interest rates, is the larger perceived risk of emerging economies by the international financial markets. While this higher perceived risk will inevitably reduce capital inflows to countries such as Argentina, the rate of such deceleration will be a function of policy responses to the crisis, both regionally and on a country-by-country basis. 33. For projection purposes, we are working with two country strategy scenarios. While the strong and rapid reaction of the Government to the crisis has reduced concerns about its future domestic actions, the external environment remains uncertain. Although the initially strong reaction of financial markets to the Mexican crisis has now ameliorated, it is clear there remains a strong reluctance to redirect significant flows towards emerging markets, particularly in Latin America. Moreover, there continues to be a general lack of discrimination between developing countries in this region by the markets. The speed with which these market phenomena will begin to reverse themselves is difficult to estimate. Our two scenarios, therefore, are: Early Recovery. Principal countries affected by the crisis adopt economic policy measures that reestablish credibility in the eyes of international investors in the next few months, and Argentina addresses effectively and promptly issues of financial vulnerability and the credibility of its adjustment effort. In this scenario, access to international financial markets is slowly regained beginning in 1995, but capital inflows remain below those observed in previous years."' * Prolonged Regional Crisis. This scenario is driven entirely by the quite likely possibility that, in light of the modest response of private flows to Mexico's reforms, international capital markets will remain tepid for a much longer period. Argentina, however, addresses effectively and promptly issues of financial vulnerability and credibility of its adjustment effort. Although capital inflows would remain severely curtailed, Argentina could be able to refinance its moderate levels of maturing debt, mainly through flows from multilateral organizations, privatizations, foreign direct investment and associated credits. Argentina's recovery from this crisis and medium term growth prospects depend 1. The Government's view is that the Early Recovery Scenario is more likely.  - 12 - on its capacity to overcome the sudden and severe limitations it confronts in accessing international capital markets. 34. Longer term, under both scenarios, Argentina would strongly pursue its reform agenda, improve its competitiveness, and thus benefit from an investment and export-led growth. Additionally, overcoming the crisis would strengthen the Convertibility Plan. Of course, a worst case economic scenario cannot be excluded; however, this would require a totally different strategy. Therefore, this document focuses on the two more likely scenarios: Early Recovery and Prolonged Regional Crisis. 35. Early Recovery. In this scenario, well-performing Latin American economies would regain limited access to the international financial markets by the second half of 1995. Argentina would be among them, taking strong measures to reduce the vulnerability of its financial system, while strengthening its economic program. 36. To reduce the vulnerability of the financial system, the Central Bank would strengthen its supervisory capacity of the financial system, and proceed with the privatization or closure of many state-owned banks. The private banking sector is already undergoing a strong consolidation, with the absorption of many marginal private banks harmed by the decline in asset values suffered over the last six months. Many provincial banks are being prepared for privatization. 37. To strengthen the credibility of the economic program, the Government would take decisive measures to generate a surplus in the national fiscal accounts. A target of achieving a primary surplus that exceeds interest obligations of the Federal Government is desirable in order to: (i) help strengthen national savings and private investment; (ii) moderate the financing requirements of the Federl Government with its debt amortization refinancing needs; (iii) help sustain the fixed exchange rate regime with the only effective macroeconomic policy instrument (fiscal policy) available to the Government; and (iv) keep public finances from relying on transitory revenues that the privatization process is generating. 38. The Government would take the opportunity of this crisis to promote structural reforms in the provinces, including the privatization or closure of inefficient and bankrupt provincial public enterprises. The Government would retake the initiative to deepen factor markets in order to make the economy more flexible and able to improve its response to external shocks, by facilitating the restructuring of the financial markets, and reforming labor market legislation, and the health insurance system. These measures would contribute to further productivity gains, which are imperative for the success of the Convertibility Plan. 39. Renewed access to the international financial markets later in the year could still reduce net capital inflows to Argentina by more than half in 1995. The projected decline in international reserves and demonetization, evident in early 1995, are expected to produce an automatic monetary tightening that would complement the fiscal tightening. Reduced fiscal  - 13 - expenditures will be necessary not only to close the previously existing fiscal gap, but also to cover revenue shortfalls resulting from lower economic activity as well as the increase in local and international interest rates (about US$300 million additional interest payments for each percentage point increase in interest rates). 40. Economic growth could decelerate in 1995, to between 2 and 3 percent, down from about 7 percent in 1994, as the slowdown in capital inflows would require an adjustment of the external balance. Following this adjustment, the Argentine economy, which despite regained access to international financial market, could expect much more moderate capital inflows than those observed in 1993/94, could grow at a medium-term rate of about 3-4 percent annually if domestic inflation continues at international levels and efforts to expand the country's export base are successful. Improvements in competitiveness and in terms-of-trade as well as slowing domestic consumption would help switch resources from non-tradeables to tradeables. Under this scenario, Brazil, as a major trading partner, would not be affected much by the crisis, and Argentina's overall exports in the medium term could continue to expand at a real rate of 7 to 8 percent annually. Deceleration in the growth of domestic consumption in Argentina, as well as of imports, would reflect the slowdown in exogenous capital inflows and domestic credit, restrictive fiscal policy, and the attainment of a new, higher and sustainable level of income resulting from structural adjustments. The private sector would be the leading expansionary force, while public investment would be concentrated on fewer activities as the result of privatizations. Slower growth of the domestic market would also shift more production towards exports, aided by deregulation, the regional trade agreement implemented in January 1995, and other measures to enhance productivity in the tradeable sector. 41. Macro consistency would require gross national savings to increase from about 16.4 percent of GDP in 1994 to 17.0 percent in the 1996-98 period. This increase would follow the positive trend observed since the beginning of 1993. In 1993 alone, national savings increased by almost 2 percent of GDP due to higher private sector savings, and further gains were made in 1994. Future contributions to the new, capitalized pension fund system are unlikely to be offset by reduced savings in other instruments, because of a likely reduction in evasion given the closer link between expected benefits and contributions. Furthermore, the deepening of the capital markets, including the growth of the new pension fund system, could contribute to the increase in private savings. Another reason suggesting a future increase in savings is that the low savings rates in the 1991-93 period reflected a one-time consumption adjustment to higher levels of income; consumption growth rates attenuated in 1993, and future consumption trends could moderate even more. Finally, public savings could recover in 1995- 98, as a result of the fiscal adjustment discussed below. 42. In 1995, the recently announced fiscal adjustment program is projected to yield an overall surplus (including privatizations) of 1.4 percent of GDP, to strengthen the credibility of the economic program. The consolidated public sector accounts over the 1996-98 period are projected to be basically balanced; this is consistent with macroeconomic objectives and projected net financing needs of the public sector. Since increasing transfers to the provinces  - 14 - and the elimination of several distortionary taxes as well as reduced tariffs within MECOSUR are expected to reduce Federal Government revenues, public expenditures would have to be tightened in 1995-96. As a result, the Federal authorities have recently announced measures to reduce public expenditures, increase tax revenues, and accelerate the privatization program in 1995. Provincial finances would improve over the 1995-98 period, as a result of the new revenue sharing agreement and much needed civil service reforms that would reduce or stabilize personnel expenditures. Table 1: Argentina - Key Macroeconomic Indicators Early recovery scenario (Percent of GDP) ' 1994 1995 Average Average (Cat.) (proj.) 1996-98 1999-2004 National Accounts GDP Average Annual Growth 7.1 2.5 3.5 5.0 Totnl Investment 20.0 18.9 19.1 21.3 National Savings 16.4 16.6 17.0 19.0 Foreign Savings 3.6 2.3 2.1 2.3 Pubrkc Sector Yk Primary Surplus 1.1 2.6 1.2 1.0 Intereatpayments 1.2 1.3 1.3 1.1 Domestic 0.1 0.1 0.2 0.2 Foreign 2' 1.1 1.3 1.2 0.9 Balance (- deficit) -0.0 1.4 0.0 0.0 Balance of Payments Trade Balance -2.0 -0.9 -0.4 0.3 Current Account Balance -3.6 -2.3 -2.1 -2.3 Capital Account 3.8 1.6 2.2 2.4 Public Secor 0.7 1.2 0.3 0.5 Private Sector 3.1 0.3 1.9 2.0 Memo: GDP (US$ billion) 279.5 295.1 331.7 455.8 a/ Unless otherwise stated, all figures for public finances and balance of payments are net. bl National Administration. c/ Includes quasi-fiscl balance of Central Bank. 43. Financing in the balance of payments will be mainly a function of the desired private savings-investment levels. In that respect, the projected slowdown in capital inflows in 1995 could be initially compensated by an increase in domestic savings and a moderate decline in investment. Thereafter, domestic investment growth could recover as the result of sustained structural adjustment efforts. Continuous access to bilateral and multilateral financing, new privatization proceeds, and foreign direct investment should moderate the expected slowdown in private short-term capital flows. Over the 1996-98 period, private capital inflows, including trade credits, privatization flows, and other foreign direct investment, would help finance the projected current account deficit of 2.1 percent of GDP. With consistent macroeconomic  - 15 - policies, a stable extemal environment, and the continuous financial assistance of multilateral organizations, Argentina's external financing requirements for sustainable growth could likely be met. 44. Prolonged Regional Crisis. In this scenario, the regional crisis is associated with a severe curtailment of capital inflows. Given the recent strong reduction of capital flows to the region, this scenario is not unlikely. As in the previous scenario, however, the Argentine authorities would be expected to take the appropriate measures to accelerate the adjustment process, while keeping the fiscal accounts in equilibrium. 45. In the prolonged regional crisis scenario, capital inflows might be sufficient for the amortization of maturing debt, albeit with the enhanced assistance of multilateral organizations. With the extended IMF EFF, multilateral organizations would, under the current scenario, enhance their disbursements in both 1995 and 1996. Nevertheless, net capital inflows in 1995 could be barely positive, down from US$10.5 billion in net capital inflows in 1994. 46. The reduction in capital inflows, and a decline in net international reserves of approximately US$3.2 billion (Gross Reserves will decline by only US$1.2 billion on account of DMF disbursements) would sustain a severely reduced current account deficit of US$3.5 billion, (or 1.2 percent of GDP) approximately a third of the deficit in 1994. To achieve this adjustment in the external accounts, economic activity would decelerate sharply, with real GDP growth possibly reaching zero percent or less in 1995, with some recovery in 1996 as capital inflows partially recover. Inflation would continue to decelerate, reducing further the past real appreciation of the peso. 47. The stagnation or decline in economic activity would be the result of declining international reserves, which, under the Convertibility Plan, would cause a contraction in the monetary base (actually, in view of the economy's increasing dollarization, a decline of broader monetary aggregates may be slower than the decline in international reserves). Permitting the automatic adjustment mechanism of the Convertibility Law to function as intended will be a crucial test of the credibility and survival of the Convertibility Plan. Another important corollary to this passive monetary policy is the absence of margin for a fiscal deficit. The reduced level of economic activity would facilitate the adjustment in relative prices (non- tradeables to tradeables), hastening an improved trade balance, and future economic recovery. 48. While the stagnation or decline in economic activity could contract imports and consumption significantly, in combination with restricted credit and higher interest rates it would also affect public and private investment. Public investment, in particular, would be affected by the severe fiscal adjustment. Thus, it may take a few more years beyond 1996 for overall investment in Argentina to exceed the 20 percent share of GDP achieved in 1994. The combination of higher financing costs and reduced economic activity would put significant strain on corporate finances, affecting in turn the performnance of the banking system.  - 16 - 49. On the financial side, higher perceived currency risks and the weakening of the banking system--with lower asset values and increased non-performing loans--would likely result in the further restructuring and dollarization of the financial system. As the system dollarizes further, the authorities would increasingly be faced with the need to provide the reassurance of a dollar lender of last resort. Table 2: Argentina - Key Macroeconomic Indicators Illustrative prolonged regional crisis scenario (Percent of GDP) a/ 1994 1995 Average Average (est.) (proj.) 1996-98 1999-2004 National Accounts GDP Average Annual Growth 7.1 0 2.8 4.8 Total Investment 20.0 17.2 17.8 21.3 National Savings 16.4 16.0 16.6 20.2 Foreign Savings 3.6 1.2 1.1 1.2 Public Sector b Primary Surplus 1.1 1.3 1.3 1.0 Interest payments 1.2 1.4 1.4 1.2 Domestic 0.1 0.1 0.2 0.2 Foreign !' 1.1 1.3 1.2 1.0 Balance (- deficit) -0.0 0.0 0.0 0.0 Balance of Payments Trade Balance -2.0 0.1 0.5 1.5 Current Account Balance -3.6 -1.2 -1.1 -1.2 Capital Account 3.8 0.1 1.3 1.3 Public Sector 0.7 1.2 0.3 0.5 Private Sector 3.1 -1.1 1.0 0.8 Memo: GDP (USS billion) 279.5 285.0 315.6 428.1 a/ Unless otherwise stated, all figures for public finances and balance of payments are net. b/ National Administration. c/ Includes quasi-fiscal balance of Central Bank. 50. The consolidated public sector accounts should be at least balanced during the 1995-98 period. This is consistent with macroeconomic objectives and projected net financing needs of the public sector. Under this scenario, keeping the fiscal accounts in equilibrium could become an increasingly daunting task, even though no surplus is expected unlike in the prior scenario. Fiscal revenues could decline with the reduction in overall economic activity and imports, minimum fiscal transfers pledged to the provinces (the emergency VAT increase has been excluded from coparticipation) could drop and more financing may be needed for the possibly higher costs of bank mergers and privatizations. Nevertheless, the Govemment has undertaken a commitment to raise more revenues or reduce outlays even further in late 1995 or 1996 if necessary. With provinces facing their own fiscal constraints, fiscal and political relations between the national govemment and provincial govemments could become tense. A  - 17 - prolonged regional crisis could also adversely affect Argentina's regional trading partners, particularly Brazil, and Argentine exports to that country. 51. Risks to this scenario include its high social costs. These would not be insignificant, particularly in provinces facing severe fiscal difficulties. Unemployment would rise from levels that were already elevated due to the ongoing restructuring process. While measures should be taken to mitigate its impact, the social cost could be justified only on the expectation that the economic program emerges from this crisis more credible and strengthened in its ability to improve longer-term social welfare. Under conditions of higher unemployment and banking distress, it would be even more imperative to implement structural adjustments to facilitate the more efficient clearing of labor and capital markets. Another risk could be the temptation to reverse trade liberalization measures, particularly in view of the need to produce a significant reduction in imports (this scenario includes a real 11.4 percent decline in 1995) and reduced fiscal revenues. 52. Longer term, this scenario continues to assume reduced access to international financial markets, compared to buoyant net capital inflows observed in 1992-94. The capital account balance, as a share to GDP, is expected to remain less than one third of the 1992-94 period. Under this scenario, in the context of the Convertibility Plan economic growth would be markedly lower in the 1995-97 period, but could resume a 4-5 percent real growth pattem thereafter, albeit starting from a lower base. B. Bank Group's Country Assistance Strategy 53. We propose the World Bank to remain a strong supporter of Argentina's ambitious reform program. Our assistance strategy focuses on supporting the country's efforts to: (i) consolidate and deepen structural reforms, with our strongest support during the crisis period of 1995; (ii) reduce poverty and develop human resources; and (iii) rebuild the greatly deteriorated infrastructure base. Bank Support During the Regional Crisis: Consolidating Reform 54. The regional financial crisis represents the first severe test of the Convertibility Plan. Therefore, our country assistance strategy during the next 12-18 months will emphasize supporting Government efforts to deepen the adjustment process, particularly in provincial reforms, banking reforms, and reforms to improve the competitiveness and institutional base of the Argentine economy. Investment in poverty reduction and the delivery of social services would be pursued as scheduled to reinforce the safety net, but some infrastructure projects would be deferred due to the likely scarcity of counterpart funds. 55. Our immediate emphasis is on provincial reform (Provincial Reform Loan (PRL), Provincial Development Project II, Municipal Development Project II), bank restructuring  - 18 - (Provincial Bank Pnivatization Loan, Bank Refonn Loan), and the strengthening of the safety net. As explained below, provincial reforns remain vital for both the credibility and consistency of the economic program. The two banking loans would help rapidly reform the banking sector. A social safety net loan could help insulate some cost-effective social programs from the Government's cost-cutting needs. 56. Extending fiscal and economic reform to the provinces is now vital. While fiscal adjustment has occurred at the federal level, the operational primary deficit (overall fiscal balance less interest payments and capital revenues) of the provinces was reduced from 1.6 percent of GDP in 1990 to 0.3 percent in 1992, due largely to windfall transfers from improved tax collection by the Federal Government. However, the provincial deficit is estimated to have risen again to 0.7 percent of GDP in 1993 and 1994, or about US$2 billion, mainly because of the continued inability of provincial governments to contain current expenditures and to increase sufficiently their own-source revenues. 57. The fiscal improvement of provincial and municipal governments is even more important now because their role has grown. In 1993, these governments accounted for 60 percent of public investment and are expected to reach 70 percent by 1996. They are now the major providers of health, education, security, water and sanitation services. Yet, most of them are ill prepared to fulfill their increasingly important role, with potential negative implications for economic growth and poverty reduction. The present Argentine federal system still has a mismatch between responsibilities and financing. Unconditioned federal transfers provide little incentive for efficient spending and provincial taxes are poorly collected and generally distortive. Budgeting mechanisms are weak, and inadequate administrative controls have contributed to substantial over-staffing. Provincial public enterprises are largely inefficient and rely on high tariffs, transfers from provincial treasuries or soft loans from provincial public banks, which themselves have become insolvent. 58. Bank strategy for the reform of provincial and municipal governments seeks to: (i) stabilize public finances and begin reforming provincial administrations, while providing for urgent investments which improve the fiscal balance and are linked to sectoral reforms; and (ii) improve the efficiency of delivering public goods and services through a series of proposed sector operations in secondary education, public health, provincial roads, water supply, agricultural services and infrastructure, and municipal development. The PRL and most future sector operations will be targeted to support those provinces willing and able to implement major structural reforms. This selectivity would be fundamental for leveraging Bank resources to promote fiscal adjustment and for ensuring the success of these operations with adequate provincial counterpart financing. Under this strategy, we would expect to be fully engaged in assisting five to seven of the provinces. At the same time, other provinces would have access to Bank assistance through Provinces I and II, which are umbrella operations covering all provinces and providing, at a minimum, support for institutional strengthening and small investments aimed at improving their fiscal situation. Lending for poverty reduction and human  - 19 - resource development would cover a broad range of provinces, but greater financial support by the federal government would be required to ensure adequate counterpart. 59. Those provinces privatizing provincial banks but not included in the PRL would be assisted by the Provincial Bank Privatization Loan. This proposed loan of US$500 million would support the privatization of up to fifteen Argentine provincial banks, comprising about 10 percent of total banking assets. Privatization will address the long-standing poor performance of provincial banks which undermined financial sector efficiency and made fiscal balance more difficult. Inadequate governance has been at the core of poor provincial bank performance. Through privatization it is expected that the newly emerging private banks will focus on profit maximization and financial soundness and that the Central Bank supervision and enforcement of liquidity, capital adequacy, and provisioning requirements for these banks will be more effective. Stronger management and supervision of provincial banks will reduce the risk that these banks generate systemic runs on bank deposits. Furthermore, privatization will improve provincial finances by eliminating the continuing losses that provincial banks generate. Orderly privatization or closure of the provincial banks is rendered particularly urgent and opportune now in the wake of current deposit losses. 60. A proposed Bank Reform Loan for US$500 million is also under preparation to accelerate the consolidation of the Argentine banking system, through the recapitalization and then merger of viable private banks. Consolidation had already begun before the current crisis and was initially triggered by declining deposit growth and lower intermediation spreads. It is now being accelerated by liquidity and solvency problems of the smaller banks caused by investor reallocation of deposits to the larger and better banks. In the context of this loan, the Government has already set up a Capitalization Trust Fund to implement an orderly down-sizing and capitalization of the banking sector without creating further crises of confidence. The fund will support mergers and acquisitions that result in stronger banks, and the Central Bank will close remaining banks that do not meet required liquidity and solvency ratios. 61. The Bank's efforts in preparing these two loans were facilitated by both our prior experience and studies of Argentine capital markets, and the field support of IFC staff. Both loans are technically adjustment loans, but far more similar to "hybrid" loans; after first tranche disbursements for policy actions, later disbursements would be linked to very specific transactions and funding needs of the project. At time of circulation of this CAS, some key points affecting the design of these loans -- and thus the Government's reform of the banking sector -- were still being analyzed. Particularly important will be better estimates of the size of banking losses, and their impact on public finances and the overall economy; the type and coverage of deposit insurance to be put in place, along with its financing; and the market for private bank mergers. The fluidity of the current situation may warrant the incorporation in the design of these loans contingency reforms to address downside risks. 62. The Government continues its efforts to enhance the competitiveness of the Argentine economy through, inter alia, reforms of labor and financial markets to reduce  - 20 - production costs and improve incentives for new productive investment. Since the previous CAS discussion, the Government has implemented a major reform of the national social security system beginning in July 1994 (see Box). The Capital Market Development Technical Assistance Project is assisting in detailing regulations and establishing an effective superintendency for the pension fund management institutions. Social Security Reform Argentina's mandatory public pension insurance became financially unviable during the 1980s, resulting in severe underpayment of pensions. In 1991, the Government concluded that adequate benefits and financial viability could only be restored with a systemic reform that would reverse the steeply increasing trend of the dependency ratio (pensioners/contributors), which was primarily the result of an increasing evasion of contributions. As an initial step leading up to the actual operation of the system in July 1994, the Government took measures enabling the National Pension System, which covers close to 90 percent of all workers, to gradually raise benefits to their mandated level. These included the earmarking of co-participated tax revenues, a reform of the collection function, and an increase in the minimum years of contributions from 15 to 22, which slowed the increase in the number of pensioners. In addition, the Gov-rnment issued consolidation bonds in recognition of pension arrears estimated at about US$10 billion. Central to the reform is the combination of public schemes on a pay-as-you go (PAYG) basis with private or public pension funds in an integrated system of mandatory pension insurance. Employers and independent workers will contribute 16 percent of, respectively, gross salary and income to the PAYG system. The scheme provides a basic, uniform pension of about 28 percent of average salary, which may be increased only by additional years of contribution beyond the 30 year minimum. All workers contribute 11 percent of salary or income to either the PAYG scheme or a pension fund with the right to change affiliation twice a year. Expected benefits will be strictly proportional to contributions and-in the case of pension funds--the fund's investment performance. These rules are expected to lower evasion by linking expected benefits to contributions. Further measures to reduce the dependency ratio include a gradual increase in the retirement age by 5 years, a further increase in the minimum years of contributions to 30, and stricter rules for disability claims. While the social security reform implies transitional fiscal costs, averaging about 0.5 percent of GDP over the 1995-98 period, there will be a longer-term reduction in public sector debt with the pensioners. The ongoing reform will also stimulate gross domestic savings as the future contributions of the new capitalized pension fund system are unlikely to be offset one-to-one by reduced savings. Equally important is the shift from public to private savings, equivalent to about 0.6 percent of GDP in the first years of the reform, which may improve the allocation of savings and deepen the financial markets. 63. With regard to labor market issues, Argentine law accords industry-specific collective bargaining at the national level the dominant role in determining wages and work conditions. Such industry-wide agreements in Argentina have severely limited aggregate and relative wage flexibility, mobility, labor demand and productivity. The Government is attempting reform of labor legislation, which would enhance relative wage flexibility by allowing  - 21 - firm-level agreements, improve the flexibility of work organization through less restrictive work-time rules and clear expiration dates for all collective agreements, and reduce turnover costs. The difference between labor costs and take-home pay is also being reduced by reductions in payroll taxes. After a year of consideration, Argentina's legislature recently passed a new labor law liberalizing labor treatment by small and medium-sized firms. The Govemment may propose further reforms for larger firms in a few more months. 64. Even with the return of financial stability, the high cost of capital, particularly for medium and small size firms without access to international markets could remain an impediment to the restructuring of the economy and enhancing competitiveness. A recent Capital Markets Study indicated that high peso interest rates and considerable spreads reflected the high risks of the system, market segmentation, the distortive nature of a large (over half of the total system) and inefficient public banking sector, and the need for improved competition. The two proposed banking loans would significantly reduce the segmentation and size of the public banking sector while helping create a sounder private banking system. But banking reform is only the first step. The Congress recently passed a new mutual fund law, and the Government has drastically reduced the tax biases against financial assets. The National Stock Commission has published a series of new operating standards, and encouraged the market for securitized instruments. It is now working with the Stock Exchange to provide a greater transparency in its operations. Meanwhile, the new pension system could soon be providing about US$2 billion yearly looking for longer term investments. The authorities' proposed sale of minority shares in earlier privatized state enterprises, along with the need for bond and stock placements by expanding companies will be providing the supply of such instruments. These actions, which will provide a stronger supply of funds and the system to intermnediate them more efficiently, should begin to accommodate the deepening of the capital market that was abruptly halted last December. The State, however, will need to strengthen its supervisory framework. These reform efforts will be assisted through the recent Capital Market Development Loan and companion Capital Market Development Technical Assistance Loan, as well as a proposed technical component accompanying the Private Bank Reform Loan. The first loan, approved last year, is not yet effective since the authorities were not able to readily find a merchant bank interested in backstopping support that was also prepared to forgo significant financial operations in Argentina. We now believe that experts in backstopping can be separated from other merchant banking activities and retained to run the facility; some changes to make the loan more useful in today's shorter-term markets will soon be proposed to the Board. The latter two loans will support pension reform and regulation, continued bank supervisory training and development, as well as some specific bank staff training. 65. Competitiveness will depend on reforms in labor markets and health financing, continuing measures to deepen financial markets, and investments to exploit the opportunities presented by MERCOSUR. The Bank would continue to support these efforts through extensive economic and sector work (ESW) and country dialogue, as well as lending operations. The ongoing Country Economic Report would assess the Convertibility Plan and its ability to lead Argentina on a path of sustainable economic growth and review the impediments to higher  - 22 - growth, including capital and labor markets reforms. ESW is also focused on capital markets, technology development, regulatory issues, infrastructure and MERCOSUR. Under ongoing technical assistance projects, the Bank also provides support for the implementation of social security reform and the development of capital markets. Besides lending to sub-national governments, our lending will support export promotion, as well as the development of modem institutions to foster agricultural, forestry and mining development. We would also give particular emphasis to improving governance with studies and lending for legislative and judicial modernization. Assistance to Argentina by the IDB would complement our activities in these areas. 66. In the long-run, Argentina's development will depend on an expanding and dynamic private sector to lead the country's economic recovery. This, in turn, will require stronger public institutions oriented toward providing the private sector with essential services. The agriculture sector, in view of its comparative advantage, has an important role to play in the needed expansion of Argentine exports. A process of sector restructuring is underway which is vital to raise productivity and reduce resource degradation, basic elements in the sustainable development of the sector. This process requires on-farm investments in improved technology, and off-farm investments by government and the private sector in research, extension, physical infrastructure and human capital development. The on-going Agricultural Services and Institutional Development Project supports agricultural exports growth through provision of supporting phytosanitary, research and market information systems while improving the operational efficiency and cost recovery of government agencies providing these services. The sector has an important number of smallholders who either lack the technical skills or face special agro-ecological problems in remote areas, and therefore face serious difficulties in adjusting to the new economic environment. A proposed Provincial Agricultural Development Project would support the strengthening of provincial institutions to provide basic services, with particular attention to the commercial smallholder clientele. Argentina also lags far behind its neighbors in the development of natural resource-based industries, and Bank support would focus on promoting environmentally sound investments through a proposed Forestry Development Project, and a Mining Project to improve national and provincial mining legislation. 67. The Technology Development Report is reviewing issues related to Tedirecting the supply of research, technology transfer, and quality control, particularly for small and medium-sized firms to respond to market demand. A proposed Export Support Loan would promote continued trade liberalization and provide small and medium sized firms with technical assistance and training to enable them to access foreign markets. Bank support for private sector development would also be provided through the strengthening of institutions providing assistance in agriculture, forestry and mining development, as well as in reducing limitations imposed by a weak and cumbersome judicial system. Operations by the IDB would complement these efforts by co-financing the proposed agricultural sector project, as well as providing technical assistance and training for the restructuring of firms and improving the development and dissemination of technology.  23 68. A key factor in limiting private sector development are delays in the judicial process that pose enormous transaction costs; an IDF Judicial Sector Review has examined four main areas for reform: operations of the courts, procedural codes, alternative dispute resolution methods, and legal education. The study provides an upstream diagnostic review of the judicial sector as the basis for a future Judicial Reformn project. The IDB would provide support for similar reforms in the provinces. Poverty Reduction and Human Resource Development 69. Sustained economic growth will provide the basis for future improvements in income levels and distribution, as well as reduce drastically the numbers of cyclically poor. Measures to further reduce market distortions, particularly labor market rigidities, will accelerate this process. Nevertheless, further efforts will be required to assist both Argentina's "stagnant" and "indigent" poor. Coordination among the various levels of government is key, given that provincial governments execute more than 80 percent of social expenditure (excluding social security). These governments, however, are hampered by costly and inefficient delivery of services, a lack of targeting for priority beneficiaries, deficiencies in monitoring the impact of social progress, and a weak history of coordination with the federal government. 70. To reduce poverty and assist families adversely affected by economic adjustment, the Bank is developing with the Government a Social Safety Net project, which would be supported by a loan of US$150 million. This project, which is being quickly prepared, would provide assistance to improve social expenditure management and targeting of services to the poor while financing poverty-reduction activities to communities in extreme poverty. By supporting sound social programs, we hope to help insulate them from the 1995-96 cuts. A Health Insurance Reform Loan would support the reform of the inefficiently run social health insurance system (obras sociales) in order to provide minimum health benefits to its members, ultimately opening it to competition. A proposed Rural Poverty Alleviation Project would address the needs of low-income small farmers in depressed areas to improve productivity and incomes. 71. These targeted efforts would be complemented by broader efforts to improve the quality of human resource investments. Service delivery capacity in the health sector, in particular, has been seriously eroded. Per capita outlays on health are well above those of other middle income countries in the region, yet matemal and infant mortality rates and malnutrition remain unacceptably high, and many chronic diseases are still prevalent. The provinces, which now bear the major responsibility for health service delivers, require assistance in the organization and management of services--particularly of public hospitals. The proposed Healtlh Sector Development Project will address wider sector efficiency issues by assisting the establishment of public hospitals as independent trusts, developing hospital accreditation systems, and pilot testing new hospital reimbursement systems. with a possible follow-up project.  - 24 - 72. Similarly, the recent record in education has been dismal for a country at Argentina's income level. This has undermined its productivity and international competitiveness, and efforts to improve income distribution. Barely half of the students entering primary (54 percent) and secondary education (50 percent) complete their schooling; in the universities, the graduate enrollment ratio is below 5 percent and the country produces one- fourth fewer graduate students per capita than Korea. Deterioration in public education results both from a decline in real public spending and weak sector management. The Federal Government has devolved the administrative responsibility for delivering secondary educational services to the provinces, which were already responsible for pre-school and primary education. The recently approved Decentralized Secondary Education Improvement Project will support effective decentralization of the system by strengthening the central ministry in its new role and supporting seven provinces to strengthen their capacity for delivering quality, cost-effective education. Follow-on loans would assist an additional sets of provinces. At the level of higher education, state funding of the national universities has declined in real terms while enrollments have mushroomed, leading to very low efficiency. The authorities have proposed a major higher education reform, including increased financial autonomy of universities, an accreditation and evaluation system for private and public institutions, and a more transparent financial mechanism for allocating resources to universities. The Bank would support this initiative with a proposed Higher Education Reform Project, which will help strengthen institutional capacity at the national level and establish a more competitive environment for the improvement of higher education and provide incentives for efficiency gains and quality enhancement in universities; negotiation of this project was completed in March 1995. In education, the IDB is supporting reforms in primary education and is working with the Government on issues and activities related to education/training of the work force. Rebuilding Deteriorated Infrastructure 73. For decades, fiscal crises have led to under-funding and deterioration of Argentina's infrastructure. According to the 1994 World Development Report (WDR), in terms of quality and quantity, Argentina was one of the worst performers among upper-middle income countries in 1990. Investment in water and transportation has been too low, so that assets and the quality of services have eroded. According to the WDR, within its income category, Argentina has the lowest share of population with access to safe water and the lowest share of paved roads in good condition. If Argentina is to improve the welfare of its people and provide the basis for future growth, a massive effort is needed to recondition and expand infrastructure, together with rebuilding institutional capacity, particularly at the provincial level. 74. To begin this process, institutional responsibilities for many sectors have been completely reorganized through privatization--railways, airlines, Buenos Aires' water and sewerage, ports, and selected road concessions--and by decentralization of most remaining public sector responsibilities. Provinces have important responsibilities in road transport, port operations, and water supply and sewerage, but the entities concerned generally lack financial and administrative autonomy, have weak accounting and auditing systems, are over-staffed, and  - 25 - have deficient management and technical staff. In contrast, in the energy sector, with Bank support Argentina has undertaken major changes in its sector institutions, and has become one of the most advanced of developing countries in privatizing energy suppliers. As part of this support, the ongoing Yacyreta Hydroelectric Project, co-financed with the IDB, is achieving its implementation timetable and complying with important resettlement and environmental mitigation activities. Discussions are underway on the possible participation of private capital in the utility. Additional support for implementation is being provided through the recently restructured SEGBA V Loan, which would also support privatizing provincial power distribution systems. 75. Our strategy would support badly needed infrastructure rehabilitation and development. Ongoing ESW is focusing on Infrastructure Options for the Provinces and the Bank has completed a Water Supply Sector Study with a focus on institutional and financial issues. Institutional capacity and policy objectives would be pursued largely using a two-track approach through the proposed Second Provincial and Municipal Development Loans. Consolidation of the role of new regulatory agencies would also be pursued under a proposed Regulatory T.A. Project. A proposed technical assistance loan would support improvements in investment planning and evaluation, at both the federal and provincial levels, as well as support the development of possible intra-regional investments to enhance the benefits of the MERCOSUR. Future Bank infrastructure operations will give priority to investments in rehabilitation and maintenance over investment in new capacity. They would help the Government improve the sustainability of infrastructure investment and increase its efficiency through privatization/concessions. Where government participation is appropriate, institutional, managerial and financial capacity would be strengthened. This would enhance the access of public entities to the financial markets and improve coordination between the federal and provincial levels for investment and regulatory oversight. An ongoing Road Maintenance Project and Water Supply Project II would be followed by new projects in both sectors. IDB lending would complement our activities in the water sector and provincial infrastructure, as well as support for port modernization and the development of export corridors. 76. As regards financing of private infrastructure, the Government's privatization strategy has been to require purchasing firms to commit themselves to undertake future investments. As the new owners have either direct access to international financial markets or are in partnership with international firms, the Government has shown little interest in using Bank guarantees or ECO-operations in energy and telecommunications. The Government has indicated, however, that there might be a role for Bank guarantees to induce private investment in urban transport, ports, roads and the water and sewage sectors. This interest may become even broader if the Government itself continues to encounter difficulties in accessing international markets for its general borrowing needs. Argentina has also indicated interest in some Bank operations to support important public sector obligations for privatization-related investment, such as a proposed Buenos Aires Mass Transit Project would both help improve Buenos Aires' transport congestion as well as encourage key transport investments.  - 26 - 77. Environmental Issues. In recent years, awareness of Argentina's environmental degradation has grown and there is a broad consensus that water pollution issues need to be addressed and sector institutions strengthened. Contamination of water resources by industrial and hazardous wastes, and the inadequacy of water supply and treatment systems are most severe in Greater Buenos Aires, certain provincial cities, and specific industrial locations. Soil loss due to water and wind erosion, salinization, pollution and fertility pose serious problems to agriculture. Argentina's ratification of the Biodiversity and CLimate Change Conventions reflects increased concem for global environmental issues such as biodiversity conservation and global warming. 78. Environmental activities are shared between a wide range of institutions, including govemment ministries and agencies at the federal, provincial and municipal levels, and a variety of non-governmental agencies. Within the three levels of government there is a significant degree of overlapping, and little coordination and institutional capacity. This complexity as well as the weakness of the legal framework have hampered the implementation of solutions to these environmental problems. With support from the IDB, a national Environment Secretariat (SRNAH) is beginning to improve sector organizational arrangements and to develop an environmental action plan. It recently won approval for an Environmental Pact, a framework agreement to improve the collaboration between the Federal and provincial levels for policy making and enforcement. The IDB project will strengthen the legal framework and monitoring systems, and should ultimately enable the SRNAH to exercise greater oversight of national policy and activities. In addition, the IDB would finance several discrete efforts to clean up water courses. Bank assistance, to date, has focused on sectoral improvements. Ongoing agricultural and water and sewerage projects include provisions to promote environmental protection. Past energy loans first helped better regulate hydroelectric facilities' compliance with intemational norms; the Government later extended these regulations to thermal plants and, more recently, to oil and gas operations. Environmental problems in Government industrial plants are being addressed under public enterprise reform operations. The Yacyreta II Project included a comprehensive resettlement and environmental management related to the hydroplant's construction, in collaboration with IDB. 79. To provide a sound underpinning for future lending, the Bank has completed a Forest Sector Review, which highlighted institutional weaknesses, and has initiated a major sector study on Issues and Options in Environmental Pollution. Both would provide input for the national environmental action plan. Future Bank assistance is likely to include a Forestry Development Project to address issues of soil conservation and erosion control, improve the management and conservation of native forests and mitigate desert encroachment in Patagonia; an Industrial Pollution Control and Solid Waste Management Project to help the Government strengthen environmental institutions and bring industrial pollution under control; and a Flood Protection Project for enhanced flood control measures in the Parana River Basin following the ongoing rehabilitation effort. In addition, the Bank will be appraising a project for the Reduction of Ozone-Depleting Substances, funded by the Montreal Protocol, and pursuing the Government's interest in the preparation of projects to be submitted to the Global Environmental  - 27 - Facility (GEF) for funding to improve biodiversity conservation in terrestrial as well as marine and coastal environments and to mitigate global warming through the reduction of greenhouse gas emissions and carbon sequestration. Bank Lending and ESW 80. The Bank's FY95-99 lending program will build upon a solid, but fairly recent, base of lending and ESW. Following years of low-level activity, since 1991 the Bank has stepped up lending to Argentina, with a FY93-97 program of US$5 billion. The first three years of the program have been implemented in a timely manner, focusing largely on successful adjustment support for public sector reform, public enterprise privatization and financial sector reform, as well as debt and debt service reduction and related technical assistance operations. 81. Under the proposed strategy, Bank lending to Argentina for FY95-99 could reach about US$5.1 billion. The proposed program is based on the expectation of a gradual normalization of the regional crisis following reform loans and a major increase in lending during FY95-96, strong policy performance, commitment by the provinces, and continued improvements in project implementation. Following on the reform lending, the annual programs will be reduced by about half and increasingly focused on investment operations in infrastructure and human resources development, as well as institutional strengthening to consolidate the ongoing structural reforms. Annex I provides a matrix of the policy issues addressed in the Bank's country assistance program, and Annex II provides the likely sectoral distribution of the proposed IBRD lending program. In view of the current crisis, reform loans would account for 60 percent of new Bank lending in FY96, followed in subsequent years exclusively by investment lending. Over the FY96-99 period, our lending will be allocated to human resource development and poverty alleviation (30 percent), environmental protection and infrastructure (45 percent), private sector development (10 percent) and economic reform loans (14 percent). 82. Lending would be supported by a program of ESW underpinning our macroeconomic dialogue and the design and policy content of our investment operations. The strategic focus and sectoral of our ESW will include decentralization, economic efficiency, human capital and welfare, and infrastructure. Substantial effort will be directed at the issues of sub-national government in the aforementioned areas. Work has recently been or is nearing completion in the areas of capital markets, poverty alleviation, technology, mining, water supply and sewerage, and forestry. We have also recently initiated a Country Economic Report and a Department-wide review of MERCOSUR, as well as studies to support health sector reform, higher education, infrastructure, and environmental pollution. The timeliness and relevance of future Bank ESW would be enhanced by giving more emphasis to producing shorter, more focused reports with a quicker turnaround. Analytical work is also being performed under ongoing operations to support social security reform (Capital Markets TAL) and in connection with project preparation for judicial reform and rural poverty. In the future, the proposed Public Investment TAL would provide for studies in a broad range of sectors. These will help to  - 28 - compensate for formal Bank ESW, which is expected to begin declining over the next several years as the share of resources for lending and supervision is increased. 83. In the context of the regional crisis, the ESW program is being reconfigured to deal to a larger extent with more immediate issues, particularly related to macroeconomic management, the design of temporary safety net programs and employment dislocations, and increased adjustment in the provinces. Given overall budgetary constraints, much of the ESW program would have to provide to implicit support for reform loans and quick policy notes. Longer gestation products would have to be deferred. On a quasi-emergency basis, we would need to draw in CVP staff experienced in public expenditure reviews, in unemployment relief programs, and in financial sector support operations. With current resource constraints, the required shifts in ESW would come largely at the expense of proposed sector work in infrastructure. Creditworthiness and Exposure 84. Fiscal adjustments and the completion of the debt and debt service reduction deal, supported by the Bani, have significantly improved the creditworthiness of Argentina and the new interest bill falls within the range of projected fiscal sustainability. The debt agreement also limits increases in the future interest bill if international interest rates rise sharply. In addition, the country's approximate energy balance shields the current account against oil price variation. However, external debt service is relatively high at 49 percent of exports in CY94 and is projected to decline only gradually, remaining above 40 percent into the next century. While Argentina meets all of the Bank's creditworthiness criteria, the recent debt reduction operation has added to the relative inflexibility of Argentina's external debt. 85. The Bank's exposure to Argentina is US$4.1 billion at end-CY94, or 3.6 percent of the IBRD portfolio. This comparatively low level for a large and active client reflects a history of low lending before 1986 and a 1989-90 hiatus in new lending. Our exposure is projected to rise to a peak of 5.0 percent of the Bank portfolio by 1996, with full implementation of the proposed FY95-99 lending program. There would be some risk to increasing our exposure, but this risk is manageable, and would mainly be associated with financial sector reform which could have a large pay-off. Moreover, after FY96, our lending volume would be drastically dropped. Export-based risk indicators are projected to remain reasonable and are not likely to worsen drastically because export commodity prices are not expected to fall much below their recent historically depressed levels. Portfolio Implementation 86. The successes achieved on the macro front have been the main determinants of the performance of the ongoing portfolio, but improvements are also evident in implementing irvestment operations, following another year of managerial stability and a slowdown in the previously high turnover rate of project implementing staff. Although there were several  - 29 - high-level changes in various ministries, most core staff were not affected. Portfolio performance has benefitted from four Country Portfolio Performance/Programming missions held since 1990, and the Government has also worked hard with the Bank to cancel and restructure several loans over the past few years. As a result, the share of unsatisfactory projects has been greatly reduced from 30 percent in 1991 to 5 percent in FY94. Only one project, Water Supply II, is rated as a problem, mainly due to institutional issues emerging from the decentralization process. This project was restructured during FY94 based on intensive supervision and a study Table 3: Argentina Selected Indicators of Bank Portfolio Performance and Management FY92 FY93 FY94 FY95 Portfolio Performance No. of Projects under implementation 21 26 20 20 Avg. Implementation Period (years) 3.2 3.3 3.3 3.1 Percent of Projects Rated Unsatisfactory Development Objectives 14% 15% 5 % 5% Overall Status 24% 15% 5% 5% CanceUed during FY (UIS MiUlion) 39.5 357.9 3.0 Disbursement Ratio (%) 10% 24% 16% Disbursement Lag 26% 24% 27% Memorandum Item: No completed projects rated unsatisfactory in FY95 Portfolio Management Supervision Resources (USS Thousand) 1,825 1,895 1,735 1,988 Average Supervision (USS Thousand) 86.9 72.9 86.7 90.4 Supervision Resources at Headquarters (in %) 100.0 100.0 100.0 100.0 Supervision Resources by Rating Category (USS Thousand/project) Projects rated Satisfactory 92.3 78.0 87.7 91.2 Projects rated Unsatisfactory 70.6 43.8 64.6 " 72.0 Memorandum item: next CPPR: October 1995 1/ Does not include supporting ESW for Water Supply 11 of US$215,000. of water sector issues and is expected to improve soon. While in FY93 supervision represented a decline of almost one-fifth from the FY92 effort, due largely to the successful cancellations and restructuring of problem projects, supervision coefficients rose in FY94 and will likely need to continue at that level thereafter, as new operations are launched with the provinces requiring a greater level of supervision. 87. The implementation of investment and technical assistance loans approved prior to 1989 suffered from macroeconomic instability, counterpart funding constraints, poor  - 30 - management and frequent changes in personnel. As the economy stabilized, these difficulties have abated, although the Government still lacks an investment process on par with those of other hemispheric leaders in adjustment; the new Public Investment Law should begin to improve the situation and we are preparing a Public Investment Strengthening Loan to support this effort and extend it to the provinces. On the positive side, savings mobilization has improved, relieving the constraints on counterpart funding. Furthermore, the Government has steadily improved its investment programming through preparation of an investment program tightly linked to the budget. Also, through the civil service reform and associated salary increases, management in the national public sector has been gradually improved and heavy reliance on Bank technical assistance projects to finance and help retain qualified staff has eased. Still, much remains to be done and these issues have yet to be seriously addressed at the provincial level. Although the quality and pace of implementation has quickened, many tasks still lie ahead. Through the Public Sector Reform Technical Assistance Loan, the Bank is providing support at the federal level for improving procurement, budgeting, and monitoring. At the provincial level, efforts to strengthen public sector management are being pursued by the Provincial and Municipal Development Projects, as well as through sector specific operations. Cooperation with Other Multilateral Institutions 88. IMF and IDB. The Bank has worked closely with the IMF in the design and supervision of adjustment operations, in formulating country strategy, and in ESW. In the context of the current crisis, this need for close relations increased, as a Fund program was a virtual prerequisite for increasing our response to Argentina's crisis. IDB and the Bank continue co-financing and operating closely in a variety of fields (e.g., provincial development, social sectors, completion of the Yacyreta hydroelectric plant) with good results. The current situation has also led us to step up our collaboration with the IDB, which plans to co-finance the Provincial Bank Privatization Loan. Indeed, in an effort to shorten preparation time and reduce the cost of loan preparation on the Government, the IDB proposes to use Bank documents for its Board's consideration. Areas of future co-financing include provincial agricultural development, and we have begun to experiment with joint ESW with the ongoing Health Sector Study. Much of the EDB program complements proposed Bank assistance; the IDB emphasizes primary and vocational education while we concentrate on secondary and higher education. The Bank will support national judiciary reform; the IDB, for provincial judicial reform. The Bank's proposed mining project will benefit from IDB-financed reform of the mining regulations. While the IDB has emphasized development of general environmental institutions and specific clean-up of actually polluted areas, the Bank is concentrating on general water policies and solid wastes. To increase collaboration between the Bank and the IDB, the two similar country departments recently held a joint management retreat. 89. IFC and MIGA Activities. Our collaboration with IFC has been enhanced under the ongoing process of market liberalization and privatization, particularly with the regional crisis and efforts to strengthen the banking sector. The current regional crisis has greatly diminished alternative foreign financing sources, while local Argentine financing has become  - 31 - increasingly scarce and expensive. Consequently, the demand for IFC financing in the near future is expected to increase. Given the achievements in recent years in Argentina, and the impact the current financial crisis could have on the country, IFC's position is to maintain an active presence in the country as a positive signal both domestically and internationally. 90. The IFC Board reviewed a paper, "IFC's Operations in Argentina", on February 6, 1995. While the paper reviewed IFC's past and ongoing operations in more depth, it did indicate IFC's future focus. IFC's objective in Argentina is to support the private sector in its efforts to adapt and develop under the new open market policies. To achieve this, IFC will continue to implement a broad strategy which calls for: (i) improving the competitiveness of the private sector through implementation of industrial reconversion programs, development of high value-added exports, upgrading of local infrastructure and corporate restructuring; (ii) better access of Argentine companies to international financial markets, through the use of both traditional financial investments (such as syndications and straightforward securities issues) and non-traditional financial instruments (such as convertible loans, warrants and financial derivatives); (iii) developing domestic capital markets through establishment of new products and financial institutions (underwriting, leasing, factoring and venture capital); (iv) regional and cross-border investments and strategic alliances that permit economies of scale and risk diversification; and (v) investing in companies which improve the efficiency of the domestic distribution and service sector. On a sectoral basis, IFC's investments will be focused on general manufacturing, infrastructure, oil and gas, and capital markets development. As of December 31, 1994, IFC's portfolio (loans and equity) in Argentina was US$748 million, with investments in 84 companies (including two agency lines with 43 subprojects). Argentina has been a member of MIGA since 1992. Six contracts of guarantee for six projects have been issued to date and MIGA's contingent liability in Argentina is US$129 million, as of December 31, 1994. Projects have been in the areas of residential mortgages, banking and privatization. MIGA is currently reviewing a number of new projects for which coverage is sought. C. Agenda for Board Consideration Lending Issues 91. During FY95 and FY96, the Bank could average lending of US$1,380 million; well above that expected in our last CAS. We believe the courageous effort of the Government in addressing the external shock it has received, the major and rapid collaborative effort undertaken jointly with the IMF and IDB, as well as the Bank's considerable headroom in Argentine exposure support such a response. 92. After 1995, progress toward attaining country assistance objectives would be judged in several areas: (i) macroeconomic management, as measured by the maintenance of a primary fiscal equilibrium and low inflation, and improvement in the competitiveness of the Argentine economy, as measured by successful implementation of the new social security reform  - 32 - and required financial, labor market and health financing reforms; (ii) provincial adjustment, as measured by improvement in provincial fiscal balances; and (iii) project performance, as measured by maintaining currently good ratings for development objectives and implementation. These criteria would govern the Bank's willingness to proceed with the proposed lending of US$5.1 billion for FY95-99. The ability to reach this upper-level of financing, however, will depend largely on the fiscal performance and preparation and implementation capacity of the provinces. If the provinces are not up to the task, however, lending for FY95-99 would be significantly reduced to a minimum of US$2.9 billion, consisting after FY95 entirely of operations with the Federal Government. Graduation 93. Argentina was re-classified as a Category V Borrower last year and, based on Bank Atlas methodology, the country's per capita GNP for 1993 has been calculated at US$7,290. This is above the trigger level (US$4,865) for initiating discussions for future graduation from Bank lending. This issue was discussed at the previous CAS presentation in FY94. The general conclusion was that, although Argentina has begun efforts to recover its relative ranking among the world's more affluent developing countries, the adjustment process is still relatively young and fragile. Staff were encouraged to monitor the situation with a view for possibly initiating such discussions if Argentina continued to enjoy success on the macro front and improved access to international capital markets. Given recent events and prospects for a prolonged regional crisis, we do not intend to begin such discussions during the next CPPR. Sven Sandstrom Acting President  Annex I Page I of 2 ARGENTINA: Policy Objectives of Bank Assistance Program Area/Instruments Objectives Consolidating Structural Reform Responding to the Regional Crisis: Provincial * Restructuring of the banking system Bank Privatization Loan - Banking Sector Reform and 0 Mitigating the social costs of adjustment and improving labor Social Safety Net Loan market Provincial Adjustment: Lending - Provincial 0 Reforming provincial finances Reform Loan, Second Provincial Development and 0 Downsizing of provincial governments Second Municipal Development, as well as sector * Transferring public service responsibilities to provinces operations; ESW - Provincial Service Delvery Study Enhancing Competitiveness (Factor Markets): * Improving term intermediation performance Lending - Capital Markets Development and T.A. * Developing secondary market Loan; ESW - Country Economic Memorandum; * Improving regulatory management and enforcement Competition Study * Implementing of social security reform 0 Supporting labor market reforms Enhancing Competitiveness (Institutional * Improving returns to public investment Strengthening): Lending - Public Investment * Further divesting of public sector responsibilities Planning T.A., Judicial Reform, Export Promotion 0 Strengthening regulatory framework for privatized systems Loan, Airport Privatization Loan, Provincial 0 Enhancing legal framework and reducing court costs Agricultural Development Loan, Forestry and Mining * Reforming applied research, extension, and quality control Development Loans, and BA Mass Transit Project; * Restructuring of agricultural services with private sector ESW - Infrastructure Options, Technology and and user fee financing MERCOSUR Studies 0 Improving legislation and institutions for resource-based industries * Facilitating response to trade opportunities (MERCOSUR) Poveniy Reduction and Strengthening Social Services Poverty Reduction: Lending - Social Safety Net 0 Targeting of federal transfers and poverty programs Project (health insurance reform). Maternal and Child * Monitoring of poverty interventions Health and Nutrition I & 11, as well as Rural Poverry * Financing community development projects Project; ESW - Poverty Assessment and Rural * Reducing maternal and infant mortality and malnutrition Poverty Study * Improving incomes of rural poor Health Reform: Lending - Health Sector * Facilitating transfer of federal hospitals to provinces Development Loan I & 11; ESW - Health Sector * Retocusing on basic health care Studies * Refornting national health insurance program Education Reform: Secondary Ed I & 11, and * Facilita:ing transfer of secondary education to provinces Higher Education Loan; ESW - Education and Labor 0 Retorming financial and administrative systems Market Access Study * Improving quality of secondary and higher education  Annex I Page 2 of 2 Area/Sector Objectives Rebuilding Infrastructure Energy and Power: Lending - Yacyreta 11 * Privatizing electricity transmission and distribution Project, the restructured SEGBA V Loan, and a Restructuring National Nuclear Commission and privatizing nuclear Second Provincial Development; ESW - power facilities Infrastructure Options Study * Completing Yacyreta and introducing private participation * Establishing regulatory frameworks and agencies Transport: Lending - Provincial Transport I & 11, * Decentralizing and consolidating infrastructure management and BA Mass Transit Project; ESW -Infrastructure capacity Options Study * Rehabilitating national and provincial road networks * Promoting private investment and consolidating concessions * Modernizing urban mass transport Water and Sewerage: Lending - Provincial 0 Improving rural infrastructure (irrigation, drainage and flood Agriculture Development, Flood Protection Project control) and Water Supply 111; ESW -Water Sector Report * Supporting regulatory reform for decentralization and privatization and Infrastructure Options Study * Strengthening provincial and municipal institutions * Promoting private investmnent Environmental Management and Protection: 0 Promoting soil conservation Lending - Forestry and Mining Development * Enhancing regulatory framework in forestry Projects, and Industrial Pollution and Solid Waste * Improving management of native forests Project, as well as GEF/MOP projects; ESW - 0 Improving industrial waste treatment and disposal Environmental Pollution Study * Expanding sewage collection and treatment * Improving solid waste collection and disposal * Ozone reduction and industrial pollution control * Reducing greenhouse gas emissions * Protecting marine and coastal biodiversity  Annex II Page 1 ot 2 Argentina - Bank Group Fact Sheet, FY91-99 IBRD Lending Program, FY91-99 Past Past Past Past Current Planned Planned Planned Planned Category FY91 FY92 FY93 FY94 FY95 FY96 FY97 FY98 FY99 Commlttments (US*m) 679.5 373.0 1960.0 608.5 1443.0 1317.0 900.0 710.0 700.0 Sector 1%) Agriculture 4.9 0.0 0,0 0.0 0.0 15.5 0.0 0.0 0.0 Industry & Finance 0.0 0.0 20.4 83.6 0.0 31.0 0.0 0.0 0.0 Energy 0.0 0.0 15.3 0.0 0.0 0.0 0.0 0.0 0.0 Power 0.0 7.5 0.0 0.0 0.0 0.0 0.0 0.0 48.1 Public Sector Management 80.4 92.5 38.3 0.0 32.7 2.2 5.9 0.0 9.6 Infrastructure & Urban Development 14.7 0.0 26.0 0.0 46.6 0.0 82.6 46.7 38.5 Human Resources 0.0 0.0 0.0 16.4 20.7 48.2 3.8 40.0 3.8 Environment 0.0 0.0 0.0 0.0 0.0 0.0 4.7 13.3 0.0 Mining & Other Extractive 0.0 0.0 0.0 0.0 0.0 3.1 0.0 0.0 0.0 Muttisector 0.0 0.0 0.0 0.0 0.0 0.0 3.0 0.0 0.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Lending Instrument 1%) Reform Loans 80.4 92.5 58.7 0.0 20.7 60.7 0.0 0.0 0.0 Specific Investment Loans & Others 19.6 7.5 41.3 100.0 79.3 39.3 100.0 100.0 100.0 Total 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Disbursements (US$m) 456.9 285.9 1427.3 391.8 695.0 1591.7 478.9 360.0 360.0 Reform Loans 295.0 169.1 1166.1 94.8 300.0 1200.0 75.0 0.0 0.0 Specific Investment Loans & Others 161.9 116.8 261.2 297.8 395.0 391.7 403.9 360.0 360.0 Repayment IUSSm) 294.4 384.7 337.2 440.7 317.4 324.9 385.2 499.7 652.8 Interest (US$m) 198.0 215.7 204.0 272.1 294.2 320.8 342.6 384.2 390.9  Annex 11 Page 2 of 2 Argentina - IFC and MIGA Program, FY92-94 Past Category FY92 FY93 FY94 IFC Approvals (US$) 174.2 155.6 300.0 Sector (%) Agri-business 26.0 0.0 10.0 Capital Markets 12.0 3.0 2.0 Chemical Fertilizer 0.0 0.0 3.0 Infrastructure 7.0 67.0 50.0 Manufacturing 0.0 17.0 22.0 Oil-Mining 55.0 13.0 13.0 Total 100.0 100.0 100.0 Investment Instrument (%\ Loans 69.0 53.0 75.0 Equity 18.0 9.0 10.0 Quasi-Equity 13.0 35.0 15.0 Other 0.0 3.0 0.0 Total 100.0 100.0 100.0 MIGA Outstanding Guarantees (USSm) 50.0 55.0 24.0  Annex III Argentina Page 1 of 2 Laissingie yea recm LUUM (ipper- J1g140 URNi of esMe AmrV NdUdlu- blo Indicator 0111111NISUre 1970-75 195945 157.92 Ca,bbemn Inc.. E M1WP Resourmes and Expenditures HUMAN RFSOURCE.S Population gmre-1992) thousands 26,052 30,331 33,101 453.294 477,960 123.21 Age dependency ratio ratio 0.53 0.6.4 0.63 0.67 0.64 0.50 Urban- % of pop. 30.7 84.6 86.7 .72.9 71.7 78.1 Population growth rate anntual % 1.7 1.4 1.2 1.7 1.6 0.7 Urban *2.3 1.3 1.5 2.6 2.S 0.9 Labor rorce (15-64) thousands 9,391 10.334 11,910 166.091 181,414 390.033 Agricultume % oflabor force I15 1 3 Industry 34 34 . Femaic 26 27 23 27 29 33 Females per 100 males Urban number ..104 . Rural so80. NATURAL RIESOURCES Area thou. sq. kin 2,766.39 2,766.39 2,766.39 20,507.43 21.336.02 31,709.00 Density pop. per sq. kmn 9.4 11.0 1 1.3 21.7 21.5 24.5 Agriculturai land % of land aren 62.3 62.1 61.9 40.2 41.7 42.7 Change in agnculturaJ land annujal % 0.0 -0.1I -0.1I 0.5 0.3 -0.2 Agricultural land under irrgation . 0.3 1.0 1.0 3.2 9.3 16.1 Fomests and woodland thou. sq.kmu 603 597 591 Deforestation (net) annual % . .. INCOME Household income Sham of top 20%of households % of income 50 47 5 1 Share of bouom 40%ofhousciolds -1 4 16 14 Share of bottom 20% of households *4 5 5 EXPENDITURE Food % of GDP .. 23.1 . Staples ..2.6 . MeaL, fish, milk. cheese, egps ...4 . Cereal imports thou. metric tonnes 01 20 25.032 49,174 70,626 Food aid in cereals ... . 1,779 212 2 Food production per capita 1937- 100 90 100 97 104 109 101 Fertilizer consumption kg/ba 0.4 1.0 1.0 I15.5 63.3 162.1 Share of agriculture inGDP % of GDP 6.4 7.6 6.0 3.9 3.1 2.4 Housing % of GDP ..6.5 . Average household size peasorts per household 3.38.. Urban Fixcd investment: housing % of GDP ..6.2. Fuel and power % of GDP ..1.6 . Energy consumption per capita kg of oil cquiv. 1,304 1.291 1.351 912 1,649 5,101 Households with elecmctcty Urban % of households.. . Rural Transport and communication % of GDP 8. .6. Fixed investment: transport equipment ..2.3 . Total road length thou. kin 207 212 211 rNVESTMEINT IN HfUMAAN CAPITAL Health Population per physician person 535 370 . Population per nursec 960 930 . Populatuon per hospital bed *179 ..216 503 385 144 Oral rehydvranon therapy (under-S) % of casem.. 70 62 54 Education Gross enrollment ratio Secondary % of school-ag POP. 54 7 1 7 1 47 53 92 Female 57 75 74 . 94 Pupil-teacherrmtio: primary pupilaperteAclir I 8 20 138 25 25 13 Plupil-teacher ratio: secondary * ' 3 7 Pupils reaching gradce4 %of cohort 73 76 ...7 1 Repeser ratc: pnmary % of iotal enrl 9 ...1 4 1 1 lilliteacy % of pop. (ap Is+) 7 5 5 1 5 14 Female % of km (age lS+) ..6 5 1 7 1 7 Newspaperceirculatioti perthou.pop. 106 112 124 99 117 World Bank intcrnational Economics DepartmentL Apr i 994  Annex III Argentina Page 2 Of 2 Moet Sme regioninconw group Nra Laut singleyer rFt La-n Upper- higher Unit of ehcme America dlme- incouw Indietor IIWWW 1970-75 191085 1987-92 CarLbhw inconv group Priority Poverty Indicators POVERTY Upper poverty line local cwu.. .. . Headcount index % of pop. Lower poverty line local cuwr. Headcount index % of pop. .. .. GNPpercapit USS 2,470 3,150 6,050 2,690 3,370 21,960 SHORT TERM INCOME INDICATORS Unskilled urban wages local curr. .. .. .. Unskilled rural wages Rural terms of trade Consumerprice index 1987-100 0 23 1,153,714 Lower income FoodA 22 1,045,28S1 Urban Rural SOCIAL INDICATORS Public expenditure on basic social services % of GDP 15.6 16.3 Grss enrollment ratios Primary %school agepop. 106 107 107 106 107 103 Maie 106 107 107 .. .. 103 Female 106 108 114 .. .. 103 Mortality Infant mortaity per thou. live births 49.0 36.0 29.0 44.0 40.0 7.0 Under 5 mortality .. .. 35.8 56.0 51.0 10.0 Immunization Meisles % age group .. 90.0 99.0 78.9 82.0 82.4 DPT .. 66.0 84.0 73.3 73.3 90.1 Child malnutrtion (under-5) .. .. .. 10.5 Life expectancy Total yems 67 70 71 68 69 77 Female advanpae 6.6 6.7 6.7 5.6 6.3 6.4 Total ferility ram births per woman 3.2 3.2 2.3 3.0 2.9 1.7 Maon.nal mortality rate per 100,000 live births ..85 140 Supplementary Poverty Indicators Expenditures on social security % of total gov't exp. .. 35.6 35.0 Social security coverage % econ. active pop. .. 79.1 Access to safe water: total % of pop. 66.0 . 80.3 85.6 Urban 76.0 .. 91.0 94.3 Rural 26.0 .. 64.3 73.0 Access to health care Population growth rate GNP per capita growth rate Development diamond (annual aerage, percent) (annual average. percent) 10 - Life expectancy 4 2 4- O I *\ ^GNP Gross 2 0 ~~~~~~~~~~~~~~~~~perprmy If 1 .l I 7 c pitu enrollment .21 -10I 1970-75 1980-5 1987-92 1970-75 1980t5 1987-92 Accesstosafewaer Argentina Argentina - Upper-middle-income Upper-middle-income  Argentina - Early recovery scenario Annex IV Key Economic Indicators Page 1 of 6 _________________________________________--_________________________________________ actual "emate projoction 1990 1991 1992 1993 1994 1995 1996 NATIONAL ACCOUNTS (as % GDP at Current Market Prices) Gross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture /a 8.1 6.7 6.0 6.0 6.0 6.0 6.0 Industry /a 36.0 32.7 30.7 30.7 30.7 30.7 30.7 Services /a 55.9 60.6 63.3 63.3 63.3 63.3 63.3 Consumption 805 838 84.9 83.5 82.4 82.2 81.9 Gross Investment 14.0 14.6 16.7 18.4 20.0 18.9 19.0 Private investment Govemment investment Exports (GNFS) lb 10.4 7.8 6.6 6.3 6.8 7.8 8.0 Imports (GNFS) /b 4.9 6.2 8.2 8.2 9.2 8.9 8.9 Gross domestic savings /c 19.5 16.2 15.1 16.5 17.6 17.8 18.1 Gross national savings 15.2 13.1 13.2 14.9 16.4 16.6 16.8 Memorandum Items Gross domestic product (million USS atcurrent prices) 141,234.2 189,620.5 228,695.8 255,326.2 279,500.4 295,082.6 311,533.4 Gross national product per capit (USS, Atlas method) 3,282.7 3,947.1 6.070.3 7,016.2 7,976.4 8,442.2 8,806.5 Real annual growth rates (%. calculated from 1987 prices) Gross domestc product at maket prices 0.1 8.9 8.7 6.0 7.1 2.5 3.0 Gross Domestic Income -1.1 9.7 9.0 5.9 7.5 2.6 2.9 Real annual per capita growth rates (%. calculated from 1987 prices) Gross domestic product at market prices -1.1 7.6 7.4 4.8 5.9 1.4 2.1 Total consumpton -1.6 11.3 9.5 3.6 4.3 0.6 1.4 Private consumpton (Continued)  Argentina - Eary recovery sconario Annex IV Key Economic Indicator. Page 2 of 6 actual etimate projection 1990 1991 1992 1993 1994 1995 1996 Balme of Payments (US$m) Exports (GNFS) /b 14,727 14,843 15,048 16,075 19,076 23,050 24,843 Merchwndbef.o.b. 12,252 12,107 12,235 13,090 15,818 19,115 20,797 Imports (GNFS) /b 6,954 11.843 18,803 21,016 25,631 26,285 27,592 Mrchndulseto.b. 4,100 8,100 14,872 16,786 21,275 21,775 22,864 Resource balance 7,773 3,000 (3,755) (4,941) (6,555) (3,234) (2,749) Not current transfers 71 0 (32) 0 359 302 404 (including officiad current transfr) Current account balance 1,641 (2,862) (8,361) (6,557) (9,975) (6,770) (6,712) (aftr otficial capiti grant.) Net privat foreign dirct Inveetment 2,036 2,481 4,179 6,239 1,282 2,600 1,700 MLT loans (net) (4,114) (615) (819) 7,871 4,791 1,487 2,550 Official (4,135) (80) (1,984) 4,566 1,115 2,006 379 PrIht 21 265 1,165 3,305 3,677 (520) 2,171 Othe capit (net, mi. *&o) 3,430 3,790 8,993 (3.533) 4.401 543 3,017 Chang In eerve. /d 2,993 2,794 3,992 4.019 500 (2,140) 555 Memorandum iems Resourc-balancl(as%ofGDP) 5.5 1.6 -1.6 -1.9 -2.3 -1.1 -0.9 Real annual growth rats (1967 prices) Merchandibs exorts (f.o.b.) 26.1 -2.0 -0.0 7.5 12.8 19.0 8.4 Primary 55.4 1.7 3.3 5.8 12.3 19.0 8.4 Manufacturs 14.8 -12.9 -3.5 9.2 13.4 19.0 8.4 Merchandise Imports (c.l.f.) -8.3 100.4 82.6 12.3 22.9 0.9 3.1 (Continued) =______________ __- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -  Argontina - Early recovery scenario Annox IV Key Economic Indicators Page S of 6 actual etimat. projection 1990 1991 1992 1993 1994 1995 1996 Public finance (as % of GDP) /o Current revenues 14.4 16.2 17.1 17.3 17.3 18.6 18.5 Current expenditures 15.9 16.8 16.5 15.6 16,6 16.5 17.3 Current account surplus (+) or deficit(-) -1.5 -0.6 0.6 1.7 0.7 2.1 1.2 Cepital expenditure 1.4 1.0 0.8 1.0 1.0 1.3 1.4 Foreign financing (net) 0.4 1.5 -0.3 0.2 0.3 1.3 0.0 Monetary Indicators M 2GDP (at current market prices) 11.5 10.6 13.7 17.8 19.4 18.8 19.2 GrowthofM2(%) 1113.3 141.3 62.5 46.5 19.5 2.3 7.7 Private sector cred.growth/total cred. growth (%) Price Indices (1989=100) Merchandise export price index 112.9 113.8 115.0 114.5 122.6 124.5 124.9 Merchandise import price index 112.5 110.9 111.6 112.2 115.7 117.4 119.5 Merchandise terms of trade index 100.3 102.6 103.1 102.0 106.0 106.1 104.5 Rea exchange rate (US$/LCU /0 48.7 66.3 75.3 82.5.. UBOR 5.9 7.3 3.9 3.4 4.9 6.3 6.1 Consumer prkce index (% growth rate) 2314.0 171.7 24.9 10.6 3.9 4.0 3.0 GDP deflator (% growth rate) 2023.2 141.0 15.3 6.3 2.2 3.0 2.5 /a If GDP components are stimated at market prices. /b *GNFS- = 'goods and nonfactor services. /c Includes net unrequited transfers excluding official capital grante. /d Includes use of IMF resources. /e Should indicate the level of the government to which the data refer. /f *LCU- denotes 'ocal currency units.1 An increas In US$/LCU denotes approclation.  Argentina - Prolonged regional crisic scenarlo Annex IV Key Economic Indicators Page 4 of 6 Sctul edmate projection 1990 1901 1992 1993 1994 1995 1996 NATIONAL ACCOUNTS (as % GDP at Curr nt Mrket Prices) Gross domstic product 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Agriculture /a 8.1 6.7 6.0 6.0 6.0 6.0 6.0 IndusBty la 3.0 32.7 30.7 30.7 30.7. 30.7 30.7 Srvices /a 5S.9 60.6 63.3 63.3 63.3 63.3 63.3 Consumption 80.5 83.8 84.9 83.5 82.4 82.8 82.6 Gross Investment 14.0 14.6 16.7 18.4 20.0 17.2 17.3 Privae investment Gove rnment bnent Exports (GNFS) lb 10.4 7.8 6.6 6.3 6.8 8.0 8.3 Imports (GNFS) /b 4.9 6.2 8.2 8.2 9.2 8.0 8.2 Gross domestic savings /c 19.5 16.2 15.1 16.5 17.6 17.2 17.4 Gross national savings 15.2 13.1 13.2 14.9 16.4 16.0 16.1 Memorandum ihems Gross domeslc product (million USS at currnt prices) 141.234.2 189,620.5 228,895.8 255,326.2 279.500.4 285,006.6 297,974.4 Gross nabional product per capita (USS, Atlas metod) 3,282.7 3,947.1 6,070.3 7,006.8 7.976.6 8,15o.e. 8,419.3 Real annual growth rates (I6, calculated dom 1967 prIc") Gross domestc product at market price 0.1 8.9 5.7 6.0 7.1 0.0 2.0 Cillustrabve) Gross Domestic Income -1.1 9.7 9.0 5.9 7.5 .. 1.9 Real annual per capita growth rates (%, calculated from 1967 prices) Grossdomwdc productatmarketprlce -1.1 7.6 7.4 4.8 5.9 .. 1.1 Total consumption -1.6 11.3 9.5 3.6 4.3 .. 0.6 Private consumption (Continued) _ _ _ - - - - - - - - - -_ _ - - - - - - - - _ _ _ _ _ _ _-__ _-__ _ _ _-_ _-_-_ _-_ _-_ - -_ _ - -_ - -_ _ - -_ _ -  Argentina - Prolonged regional crisis scenario Annex IV Key Economic indicators Pago 5 of 6 actual estmate projection 1990 1991 1992 1993 1994 1995 1996 Balance of Payments (UJS$m) Exports (GNFS) /b 14,727 14.843 15.048 16,075 19.076 22,904 24,649 Merchandief.o.b. 125252 12.107 12,235 13,090 15.818 19,035 20,672 Imports (GNFS) /b 6,964 11.845 18.803 21,016 25,631 22,910 24,506 Merchandisef.o.b. 4,100 8,100 14.872 16,786 21,275 18,617 19,930 Resource balance 7,773 3,000 (3.755) (4.941) (6.555) (7) 144 Not current transfers 71 0 (32) 0 318 359 392 (including official curnent transdfrs) Current account balance 1,641 (2.862) (8,361) (6,557) (10,009) (3,463) (3,774) (aftr official capital grants) Net private foroign dirset Investment 2,036 2,481 4,179 6,239 1,282 2,600 1,700 MLT loans (net) (4,114) (615) (819) 7.871 4,361 529 (349) Officiad (4,135) (80) (1,984) 4,566 1,115 1,956 247 Privabe 21 265 1,165 3,305 3,246 (1,427) (595) Other capital (nt. Incl. *&o) 3,430 3,790 8,993 (3.533) 4,867 (2,837) 2,954 Change in roserve /d 2,993 2.794 3,992 4,019 500 (3,172) 531 Memorandum Items Resource balance (as % of GDP) 5.5 1.6 -1.6 -1.9 -2.3 -0.0 0.0 Real annuad growth rates (1987 prices) Merchandise xports (f.o.b.) 26.1 -2.0 -0.0 7.5 12.8 18.5 8.2 Primary 55.4 1.7 3.3 5.8 12.3 18.5 8.2 Manufactures 14.8 -12.9 -3.5 9.2 13.4 18.5 8.2 Merchandise imports (c.i.f.) -8.9 100.4 82.6 12.8 22.9 -13.1 5.1 (Contfnued)  Argentina - Prolonged regional crisis scenario Annex IV Key Economic Indicators Page 6 of 6 actual estimate projection 1990 1991 1992 1993 1994 1995 1996 Public finance (as % of GDP) /9 Current revenues 14.4 16.2 17.1 17.3 17.3 16.9 17.3 Current expenditures 15.9 16.8 16.5 15.6 16.6 16.8 16.8 Currnt account surplus (+) ordeicit (-) -1.5 -0.6 0.6 1.7 0.7 0.1 0.5 Capita] expenditure 1.4 1.0 0.8 1.0 1.0 0.7 0.7 Foreign financing (net) 0.4 1.5 -0.3 0.2 0.3 1.3 0.0 Monetary Indicators M2/GDP (at curren market prices) 11.5 10.6 13.7 17.8 19.4 18.6 18.9 GrowthofM2(%) 1113.3 141.3 62.5 46.5 19.5 -2.6 6.6 Private sector cred.growth/total cred. growth (%) Price Indices (1989=100) Merchandise export prce index 112.9 113.8 115.0 114.5 122.6 124.5 124.9 Merchandise import price index 112.5 110.9 111.6 112.2 115.7 116.5 118.6 Merchandise terms of trade index 100.3 102.6 103.1 102.0 106.0 106.9 105.3 Real exchange rate (US$/LCU If) 48.7 66.3 75.3 82.5.. LIBOR 8.9 7.3 3.9 3.4 4.9 6.3 6.1 Consumer price index (% growth rate) 2023.2 141.0 15.3 6.3 2.2 3.0 2.5 GDP deflator (% growth rate) 2314.0 171.7 24.9 10.6 3.9 3.5 1.6 /a It GDP components are esmated at market prices. /b *GNFS' = 'goods and nonfactor services.' /c Includes net unrequited transfer, axcluding official capitl grants. /d Includes use of iMF resourc. /e Should indicate the lIel of the government to which the data rehFr. nf 'LCU' denotes 'local currency units.. An Increa In US$/LCU denotes appreciation.  Argentina - Early recovery se-nario Annex V Key Exposure Indicators Page 1 of 2 _____________________--__________________________________________________________ actual estimate projection 1990 1991 1992 1993 1994 1995 1996 Total debt outstanding and disbursed (TDO) (US$ m) /a 62,233.4 65,396.5 67,770.3 74,472.9 86,359.5 90,359.7 95,943.8 Not disbursements (US$ m) /a (1,856.8) 2,263.8 9,385.9 13,953.7 9,237.4 3,999.7 5,583.3 Total debt service (TDS) (US$ m) la 6,160.9 5,544.6 5,003.1 7,946.B 9,082.3 12,186.8 12,796.1 Debt and debt service indicators (%) TDO/XGS /b 414.7 429.6 437.6 446.2 407.5 353.1 350.4 TOO/GDP 44.1 34.5 29.6 29.2 30.9 30.6 30.8 TMSIXGS lb 41.1 36.4 32.3 47.6 42.9 47.5 48.7 Concessional/TDO 1.0 0.9 0.9 0.8 0.7 0.7 0.6 IBRD exposure indicators (%) IBRD DS/Public DS 8.6 14.6 18.4 8.7 10.9 7.3 8.5 Preferred croditor/Public DS 28.9 46.3 50.8 17.7 22.8 19.3 20.3 IBRD DS/XGS 2.8 3.7 3.9 3.4 3.3 2.2 2.6 IBRD portfolio share 2.7 2.8 2.6 3.6 3.6 4.5 5.0 IFC (US$ m) Loans and quasi-equity 364.8 323.9 326.5 487.0 570.0 475.0 475.0 Equity 29.4 33.2 56.9 100.7 30.0 25.0 25.0 MIGA (USS m) MIGA outstanding guarantes 50.0 55.0 24.0 /a Includes public and publicly guaranteed debt,private non guaranteed.use of IMF crdits and net short term capital. /b 'XGS denotes exports of goods and servie s. Including workers' remittanes.  Argentina - Prolonged regional crisis scenario Annex V Key Exposure Indicators Page 2 of 2 actual estimate projection 1990 1991 1992 1993 1994 1995 1996 Total debt outstanding and disbursed (TMO) (USS m) /a 62.233.4 65,396.5 67,770.3 74,472.9 86,297.8 88,797.7 91,520.0 Net disbursements (USS m) /a (1.856.8) 2,263.8 9,385.9 14,638.2 9,272.2 2,499.4 2,721.8 Total debt service (TMS) (USS m) /a 6,160.9 5,544.6 5,003.1 7,948.8 9,507.0 12,474.2 12,766.1 Debt and debt service indicators (%) TDO/XGS lb 414.7 429.6 437.6 446.2 407.2 349.5 337.5 TDO/GDP 44.1 34.5 29.6 29.2 30.9 31.2 30.7 TDS/XGS /b 41.1 36.4 32.3 47.6 44.9 49.1 47.1 ConcessionalfrDO 1.0 0.9 0.9 0.8 0.7 0.7 0.7 IBRD exposure indicators (%) IBRD DS/Public DS 6.6 14.6 18.4 8.7 10.9 7.3 8.6 Preferred creditor/Public DS 28.9 46.3 50.8 17.7 22.8 19.3 20.3 IBRD DS/XGS 2.8 3.7 3.9 3.4 3.3 2.2 2.6 IBPD portfolio share 2.7 2.8 2.6 3.6 3.6 4.5 5.0 IFC (USS m) Loans and quasi-equity 364.8 323.9 326.5 467.0 570.0 475.0 475.0 Equity 29.4 33.2 56.9 100.7 30.0 25.0 25.0 MIGA (USS m) MIGA outstnding guarantees 50.0 55.0 24.0 /a Includes public and publicly guaranteed debt.private non guaranteed,use of IMF credits and net short term capital. /b XGS' denotes exports of goods and services, Including workrs' remittances.  Annex VI Page 1 of 4 The Status of Bank Group Operations in Argentina (as of December 31, 1994) 01ff. between Last ARPP Project Fiscal Actual and SupervIsIon ID Year Borrower Purpose IDRD Cancelielons Undsbursed Expected Dev. Overall _ _______ _______ eDsbursemente Objectives Status Fully disbursed loans (42) 5,033.3 of which SALISECAUDebt Reduction loans: 2675 1986 Argentina Agriculture Sector 350.0 2815 1987 Argentina Trade Policy 496.0 2996 1989 Argentina Trade Policy ll 300.0 3291 1991 Argentina Public Enterprise Reform 300.0 3394 1992 Argentina Public Sector Reform 325.0 3555 1993 Argentna DDSR Support 450.0 3558 1993 Argentina Financial Sector Adjustment 400.0 2641 1986 Argentina Water Supply 44.8 15.2 8.8 24.0 8 S 2854 1987 Argentina PowerDistribution 276.0 123.4 123.3 S S 2920 1988 Argentina Municipal Development 120.0 148 13.3 HS HS 2984 1989 Argentina Social Sector 28.0 0.1 0.07 HS HS 3280 1991 Argentina Provincial Development 200.0 144 4 114.3 HS S 3281 1991 Argentina Water Supply 100 0 962 3Z9 U U 3292 1991 Argentina PEREL 23.0 1.3 .2.8 S S 3297 1991 Argentna Agricultural Services 33.5 16.5 1.9 S S 3362 1991 Argentina Public Sector Reform TA. 230 79 6.8 HS S 3460 1992 Argentina Tax Administration 11 20 0 59 1.0 S S 3520 1993 Argentina Yacyreta II 300.0 49.1 40.2 HS HS 3521 1993 Argentina Flood Rehabilitation 170.0 80 1 73.1 HS S 3556 1993 Argentina Public Enterprise Reform ll 300.0 0.03 0.0 HS S 3611 1993 Argentina Road Maintenance 340.0 267.1 16.0 HS S 3643 1994 Argentina Matemal & Child Health 100.0 90.6 11.2 HS HS 3709 1994 Argentina Capital Markets *^ 5000 5000 0.0 3710 1994 Argentina CapitalMarketsTA. 85 85 00 3794 1994 Argentina SecondaryEducation 1900 190.0 0.0 Total 7,810 0 15.2 1.604.7 455.2 Of which has been repaid 2,433 4 Total Now Outstanding 5,376.6 I Arnount Sold 12.8 Of which repaid 12.8 Total undisbursed 1.604 7 * SECAL. SAL or Debt Reduotion Loan Not yet Effeotiv  Annex VI ARGENTIILA Page 2 of 4 STATEMENT OF IFC INVESTMENTS As of D.cumber 31, 1994 (In Miltions US Dotllrs) - Original Gross Comitments - Held HeLd Undisb Fiscal Yeors IFC IFC by by inct. Committed Obtigor Type of Business Loan Equity Partic Total$ IFC Partic Partic 1960 a/ AeirdJr industria Iron ond steel 2.94 - .73 3.67 - . - 1960 a/ Papelere Rie Porsne S.A. Ti1er putp nd paper 3.00 - - 3.00 - - 1961 *f Fabrics Argentine de Automotive ad accessorie 1.23 .28 1.51 - 1962 a/ Pass, Petroqulice Chemicals and petrochmic 3.05 - 3.05 195/72 a/ Cetulosa Argentina, S.A. Tisoer, putp and paper 8.25 - 4.25 12.50 1969 s/ Editorial Codex Soieded GraL namfacturing 5.00 1.60 .40 7.00 1o9975 a/ Dalmine Sideresa S.A.I.C. Iron and steet 14.75 - 2.25 17.00 1973 a/ Catera Avuttaneda, S.A. Cemnt and construction n 5.50 5.50 1977/84/16/88/94 Atpargatas S.A.I.C. Textiles 62.93 5.00 36.50 104.43 35.92 29.00 1977/35 a/ Soyax 5.A. Food no agribusiness Z1.00 - 21.00 - - - 1978/31/86/37/93/94 Juan Ninwtti S.A. Cmnt ard construction 44. 00 - 67.50 111.50 9.52 9.29 1973/$5j36/B/91 a/ MasruA S.A. Timber, pulp nd par 25.o5 4.25 3.00 32.90 1979tW07/92 of Ipeko Industries Chmicets a petrochmic 21.00 1.15 9.00 31.15 - 1979/83/SI a/ Alpesco. S.A. Food nd agribisinwss 5.20 1.61 - 6.81 . - 19a4 Petroqufifca Cuyo Chmifeals ad petrochmic 21.00 4.00 21.09 46.09 5.28 5.53 '196 a/ Atanor S.A.M. Chmicals and petrochmic 7.00 1.00 8.00 19U6 Cattorini Hnos. S.A. General manufacturing - - 0.00 .18 1986 Corimlca Pitxr S.A.C.I. Generat mwfacturing - - - 0.00 .19 1986 Coelia Sudmsrican ITS IndustriaL equipment snd - - 0.00 .21 1986 Diario La Nueve Provincis Timber, pulp ad paper - - - 0.00 .13 1966 Pledra Grwnd Mining -0.00 .06 1966 Roberts Particip efones Financial services 05 - .05 .05 196 S.A. de inversimres de Capital markets - 2.00 2.00 .43 1986/89/91 aneo Roberts S.A. Capitalt markets 28.00 - 21.00 197 a/ S.A. Gorevotllo y Chemicals nd patrochamic 13.00 - 13.00 . 1967/90 lidra Oil Deveotent Energy 80.00 - 27.60 107.60 .77 1987/90/91 Terminal 6 S.A. Industriat services 12.50 - . 12.50 5.00 1968 a/ Astra C.A.P.S.A. Energy 12.38 - 12.38 1968 a/ 1rides S.A.P.I.C. Energy 20.63 . 20.63 1988 Arcor S.A.I.C. Genral mnufacturing 12.00 - 12.00 2.00 1968 Cotortex S.A. Textiles - - - 0.00 .33 - 196 Corporacidn Genrat de Food and agribuinerss - - 0.00 .17 1968 Cia Irdlatriat Laro Textiles - - - 0.00 .07 1988 Productoe Pulpa Ioldeoda, Timber, pulp and paper - 0.00 .33 1968 San SebastiAn Food and agribusiness - - 0.00 .33 1988 Tevycom Fapeo S.A. Industriat equipment V.4 W - 0.00 .10 1988 Valley Evaporating Food and agribusiness o - 0.00 .17 1988 Vandanfil, S.A.I.C.I.F. y Textiles - 0.00 C17 - 19w/89 Fines FLich'n, S.A. GwnraL manufacturing - - 0.00 .43 1'9j8994 Banco General de legoes CapitaL mrkets 35.00 - - 35.00 15.00 1983/92 a/ Chirete/Morillo/OlLero4 Ernrgy 6.62 6.62 - 1968/92 Banco Rfo de La Pints, Cpitalt mrkets 50.00 - 50.00 35.00 - 7.53 1988/93 lunge y orm S.A. Genral manufacturing 63.00 - 57.50 120.50 19.00 57.50 1983/93 Longvie ParrA, S.A. Geraxl mnufacturing - - - 0.00 1.03 1989 a/ Argentirn Investmnt Financiat services 2.00 2.00 1989 o/ Chibuidoe Petrolt Energy 4.98 - 4.98 - 1989 anceo Frances de Rifo de Development financing 15.00 - 15.00 10.91 1989 Carboclor Industriao Chemicats and petrochmic - - 0.00 .21 1989 Cneosuid S.A. Industrial services - - 0.00 .33  Annex VI ARGENTINA Page 3 of 4 STATEMENT OF IFC INVESTMENTSPae3 f4 As of Decefber 31, 1994 (in Mlii ons US Dol Iars) - Originl Gross Coamitments - Held HeLd Undisb Fiscal Years IFC IFC by by fnct. Comnitted ObLigor Type of Business Loan Equity Partic TotaLs IFC Psrtic Partic 1989 ConasI S.A.I.C. Genral anufacturing - 0.00 .75 1989 Cotrperia Genrat de Finacial services .10 .10 .01 1989 Frecchia Hnos. S.A. IndustriaL servico - - 0.00 .49 199 Iridustrias Qumficas Chemicals and petrochmic - - 0.00 .28 1989 Ints S.A. Textiles 0.00 .75 1989 N.A. Soprano S.A. Tfmber, puLp and paper - 0.00 .10 - 1989 Perafina del Plate, S.A. Chamicals and petrochmic - 0.00 1.25 1989 Pastoril Santiagusn S.A. Food and agribusinrss - - - 0.00 .36 1989 S.A. GCrwro Garcia Food and agribusiness - - 0.00 1.36 1989/92 Astra - CoqnAif Ernrgy 50.00 43.00 93.00 27.71 32.25 1989/93 BoLland 9 Ca, S.A. Tourism 0.00 .40 - 1990 Atgodinra Santa Fe S.A. Taxtites - 0.00 .54 - 1990 Corporscl6n de Ffrinacial services .08 .08 .0 1990 Frigorffico Tobs, S.A. Food and agribusiness * 0.00 .25 1990 Wilimor S.A. Food and agribusirnss - * - 0.00 1.36 1990/95 Petroken Petroquisica Chamicas and petroch_ic 40.00 - 11.00 51.00 36.67 7.33 10.00 1991 Benco de Cr6dito Capital markets 10.00 - . 10.00 7.66 1991 Gullford Argentirn S.A. Textiles - - 0.00 .47 1991 Jugos del Sur, S.A. Food and agribusiness - - - 0.00 .33 1991 T8R, S.A. Industrial quipment and - - - 0.00 .36 1992 Frigorffico RiopLatens Food end agribusiness 12.00 1.00 6.00 19.0P 11.33 5.33 2.00 1992 KRA Sociedad de Ralsa Capital markets - .18 - .18 .16 1992 OLeaginoss Oeste, S.A. Food and agribusiress 20.00 - 15.00 35.00 20.00 13.75 1992 Polisur, S.M. Chemicals nd petroch_mlc - 7.00 - 7.00 7.00 1992/93 Petrolaes Argentina Son Energy 15.00 27.00 35.00 77.00 42.00 35.00 20.37 1993 ALto Paran S.A. Timber, pulp and peper - - - 0.00 19.47 1993 gridas S.A.P.I.C. Energy 35.00 15.00 60.00 110.00 50.00 55.00 - 1993 Cadipsa S.A. Energy 15.00 5.00 20.00 40.00 20.00 13.00 9.20 1993 Capri S.A.I.C.I Food and agribusirwss - - - 0.00 1.00 1993 EaprIgas S.A. Industrial services - 0.00 1.13 1993 Ferroexpreso Pmeano, Industrial equipment and 13.00 20.00 33.00 13.00 18.53 4.60 1993 Interpeck, S.A. Tller, pulp and paper - - - 0.00 1.50 1993 La IndustriaL Alimanticls Food and agribusirnss - - 0.00 .83 1993 MaLterfa Pap S.A. Food and agribusIrnss 12.00 - 12.00 24.00 12.00 12.00 1993 Mendoza Refrescos, S.A. Gsneral mnufacturing - - - 0.00 1.13 1993 Nuevo Central Argentino Industrial quiprent and 10.00 3.00 15.00 28.00 13.00 1993 Surfactan S.A. Chmicals and petrochmic - - - 0.00 .21 1993/94 MoLfnos Rio de to Plats Food and agribusiness - 3.00 * 3.00 7.83 194 Cervecertl y Naiter%a Food and agribusiress 15.00 . 15.00 30.00 15.00 15.00 1994 Coafaia Genwral de Energy 25.00 15.00 40.00 80.00 40.00 40.00 1994 Eapresa Distribuldora IndustriaL services 45.00 * 128.00 173.00 45.00 128.00 1994 Ferrum S.A. Cemnt and construction m - 0.00 1.50 1994 Maisa-Argentina, S.A. Tlxber, puLp and peper 11.00 - - 11.00 11.00 1994 The Argentinr Equity Financial services - 4.00 4.00 4.00 1994 Yacylec S.A. Industrial services 20.00 . 45.00 65.00 20.00 45.00 1995 Aceitera GeCreL Dehezs Food and agribusirnes 15.00 10.00 15.00 40.00 25.00 * 6.90 1995 Aguas Argentines IndustriaL services 38.00 7.00 134.50 179.50 45.00 - 45.00 1995 Companis Elaboredors de Food and agribusinens 15.00 - 6.00 21.00 15.00 6.00 1995 Kloppe S.A. and El Food and agribusiness 6.00 * - 6.00 6.00 . -  Annex VI ARGENTINA Page 4 of 4 STATEMENT OF IFC INVESTMENTS As of December 31, 1994 (In MilLions US Dollars) - Original Gross Comnitments - Held Haid Undisb FiscaL Years IFC IFC by by incL. Camitted ObLigor Type of Business Loan Equity Partic Totals IFC Partlc Partic 1995 La Buno Aires S.A. Capitat mrkets 1.17 - 1.17 1.17 - .53 1995 La Bue Afires S.A. Vida CapittaL mrkets - 2.89 - 2.89 2.89 1.42 1995 MasteLtone Herawnos S.A. Food and gribusiness 40.00 - 35.00 75.00 40.00 1995 Maxim S.A. AFJP Financist services 10.19 - 10.19 10.19 1995 Roberts Argentina FinanciaL services - 20.00 - 20.00 20.00 - 17.73 1995 Roberts Argentine FinnciaL services - .15 - .15 .15 - .13 Total gross commitments b/ 1055.01 166.02 885.60 2106.63 Less csnceltations, trminations, repsyent & saLes 466.65 6.19 358.09 830.93 Total comitments rno heLd c/ 588.36 159.83 527.51 1275.70 748.19 527.51 125.41 Pending cocl tomnts Acindar Industris Iron and steel 15.00 10.00 20.00 45.00 Empress Distribuidors Industrial services - - 8.00 8.00 GASINVEST . 20.00 - 20.00 MAHUELSAT 30.00 5.00 . 35.00 SODCA 25.00 15.00 60.00 100.00 TRANSCONIOR 25.00 8 0.00 105.00 TUCUPAL . .30 .30 Total pending comnitments 95.00 50.30 168.00 313.30 Totat comitments held nd pending comitmn ts 683.36 210.13 695.51 1589.00 Totat undisbursed commitments 61.73 54.08 9.60 125.41 A/ Invetments which have been fulLy cancelted, terminated, written-off, sold, redeemed, or reoaid. b/ Gross commitments consist of approved and signed projects. c Held commitments consist of disbursed and udisbursed investxmnts.