Statement by Eugene Miagkov at the meeting of July 19, 2001

87582 CONFIDENTIAL EDS200 1-03 72 July 19,2001 09:56:15 AM Statement by Eugene Miagkov -Date ofMeeting: July 19,2001 ARGENTINA: Country Assistance Strategy This discussion of Argentina CAS Progress Report is taking place at a time of dramatic deterioration of the country's financial situation as a result of an unfavorable combination of domestic and external factors. The Govemment of Argentina is making strong efforts aimed at achieving fiscal consolidation, preserving macroeconomic stability and dispelling risk of default. Under these circumstances the Bank Group's continued support to Argentina is crucial for stmctural reforms, restoration of economic growth and protecting the poor. We are pleased to see that the Bank proposes a good program of assistance. At the same time we are somewhat discouraged by the fact that despite long and reach history of the Bretton-Woods institutions' involvement in Argentina and their substantial country knowledge they have not been able to timely detect fundamental disequilibria that have led to the current negative developments. Argentina is facing formidable challenges of enhancing competitiveness, achieving fiscal sustainability and restarting an investment-led growth in the environment of fixed exchange rate and open capital account. This environment makes the country particularly vulnerable to changing perceptions by the international capital markets. The heavy debt service burden relative to narrow export base also contributes to the country's vulnerability to shocks. Under these constraints continuation of structural reforms and fiscal consolidation are essential for realization of the existing rich growth potential. This potential for a strong economic performance is evidenced by the rapid private-sector led growth of the 1990s as well as recent increase in exports based on fundamental improvements in productivity. Addressing the social dimension of development is also of crucial importance in order to preserve and augment the quality of human capital. In this respect we believe that the Bank's strategy in Argentina with its focus on social development, improvement in performance of the state and consolidation of stmctural reforms remains valid. We also believe that despite the present difficulties there is a good opportunity for moving ahead in areas that have been lagging behind. These include strengthening financial discipline at all levels of fiscal system, reducing structural deficits, integration of the informal sector into mainstream economic institutions, reduction of tax evasion, modernization of the labor market and improving efficiency of social safety nets. The continuation of reforms at provincial level is also a necessary condition for reaching sustainable growth. The proposed Bank lending program for FY02 seems to be quite right in tenus of addressing  ;I 2 these systemic issues. The anticipated up to $900 million PSAL would be an appropriate vehicle to support the structural refonns and alleviate social consequences of fiscal austerity. While we -agree that an additional $500 million envisaged by the high-case scenario should be conditioned on maintaining adequate macroeconomic framework, progress in federal-provincial fiscal arrangements and advancing some crucial social refom1s, we. do not believe that the proposed striGt conditionality with regard tocounterpartfunding is fully warranted. The current financial situation requires an exceptional fiscal austerity t!lat may cause curtailing of the counterpart financing. The same factors can also cause some problems with the disbursement of existing loans. These problems could be resolved after the normalization of financial situation (similar arguments are used to justify so called heteropox tem-porary measures as described in the c!ocuments). Of course, reducing public expenditures at all levels is a key to prevent looming financial collapse. At the same time advancing structural reforms supported by the PSAL is necessary to assure needed systemic transformation in the medium and long term. However, we doubt that at this juncture simultaneous pursuit of these different objectives would be productive. Staff comments on that would be appreciated. We support the continuation of the Provincial Reform Loans, including the proposed loan for the Province of Santa Fe that will complement the PSAL well. Finally, we wish Government and people of Argentina success in overcoming current difficulties. 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 the consent of the Executive Director concerned.