Statement by Godfrey Gaoseb at the Board meeting of May 15, 1997

CONFIDENTIAL International Bank for Reconstruction and Development International Development Association 87145 International Finance Corporation Multilateral Investment Guarantee Agency FOR OFFICIAL USE ONLY EDS97-151 May 14,1997 Board Meeting of Thursday, May 15, 1997 Statement by Mr. Godfrey Gaoseb ARGENTINA: COUNTRY ASSISTANCE STRATEGY 1. We endorse the proposed CAS for Argentina which focuses on tackling second generation reforms and underpinning the Convertibility Plan. Argentina deserves to be commended for keeping the Convertibility Plan intact and persevering with the reforms that started in 1989/90, despite the crisis experienced by the region in 1995. In particular, we are impressed by the zero level of inflation registered in 1996, as well as the marked drop in interest rates and the achievements made in infrastructure privatization. However, much remains to be done to protect the economy from possible future shocks and to address the human resource development issues. 2. The high level of unemployment is a major source of concern and needs to be tackled through well-coordinated and multi-faceted reform programs that combine economic growth that rests on labor-intensive activities, liberalization of labor markets and promoting private sector investment, particularly SM scale type of business. In this connection, we are pleased to note in paragraph 44 the Bank's intentions to support through a number of employment creating lending and non-lending operations. We believe that such operations will enable Argentina to consolidate its efforts to regain the losses experienced during the recession. 3. Another area of concern is the external vulnerability, particularly the high level of debt, high dependence on one major export market and the expected decline in the region's terms of trade. While the proposed CAS mentions these problems, it has not been made clear how the Bank is going to assist Argentina in addressing them. We would appreciate some clarification from staff. 4. A number of provinces still suffer from weak public finances, thus slowing the process of decentralization. The emphasis put by the CAS on this area and the division of labor between the Bank and IDB are welcome. The criteria set for the provinces to enable them to become eligible for Bank assistance is, in our view, also appropriate. 5. The deteriorating state of portfolio performance, especially in the provinces, needs quick attention. While we fully support the remedial measures proposal by the Joint Argentina- Bank Portfolio Commission in Annex D, we believe that special emphasis should be put on quality at entry and adequacy of counterpart funding. Additionally, in view of the size of the Bank's portfolio and the need for continued intensive dialogue, we would support the This document has a restricted distribution and may be used by recipients only in the perfonnance oftheir official duties. It should not be distributed without the consent of the Executive Director concerned.  2 upgrading of the Resident Mission into a full field based unit as noted in paragraph 64. Thus the devolution of authority to the Mission would allow for such critical functions as supervision and some non-lending activities to be undertaken in-country. 6. We believe that the proposed lending level during FY98-00 and the associated triggers are appropriate. Regarding the issue of graduation, we think that in view of the fragility of the economic situation, and as many of the reform agenda remain to be addressed, the time is not ripe for Argentina's graduation from Bank lending. Revisiting this issue should come after bringing poverty incidence to a tolerable level and putting in place the appropriate mechanisms for insulating the country from severe external shocks. 7. We are pleased to note the active role played by IFC and MIGA, particularly in the areas of privatization and private sector development, as well as in strengthening the banking sector and developing the non-banking financial markets. 8. Finally, we commend the staff for this candid and well-articulated CAS. ~--~-