Statement by Bassary Toure at the meeting of July 19, 2001

i I 87579 CONFIDENTIAL EDS2001-0367 July 18, 2001 12:57:55 PM Statement by Bassary Toure Date of Meeting: July 19, 2001 ARGENTINA: Country Assistance Strate&y Pro&ress Report We welcome the presentation of the Argentina's CAS Progress Report which provides a review of the economic and social performance, the achievement in meeting CAS objectives, the support offered by majors partners, and the initiatives by the Government to respond to challenges. We also commend the staff for the quality of the report provided to us. Argentina has been considerably affected over the past three years by a series of external shocks and faces today a major challenge to sustain and strengthen the achievement of the last decade. In 1999 economy shrank by 3.4 percent followed by a drop of 0.5 percent in 2000. The federal government finances deteriorated significantly in the first quarter of 2001. The set of economic reforms to strengthen the country fiscal position put in place in late 2000 did not meet expectations, as a consequence this led to the introduction of an economic recovery strategy by the new Minister of Finances who took office in early March 2001. The new package contains measures to improve the tax system, the international competitiveness in the economy as a whole, as well as isolating it from new adverse external shocks and to give a boost to domestic demand through measures aimed at encouraging consumption. The report does point out that these measures improve the outlook for the remaining of 2001 and 2002 but recognizes the situation in Argentina remains fragile and that challenge remains to restore growth and fiscal equili bri urn. It is in this context that growing worries emerged recently that Argentina will be forced to default on its massive debt foreign debt, raising the specter of another round of crises similar to the one that affected Asia, Russia and Latin America in the late 1990s. Consequently, Latin America markets have been severely hit in the recent past, and if a fallout from Argentina's economy occurs, this will constitute a danger from contagion. Although, Argentina's economy is smaller than those of such previous crisis as Korea, Russia, and Mexico, the bonds that have been issued by the Government account for roughly one - fifth of the bonds in emerging market portfolios held by overseas investors. So markets have become deeply unsettled by signs that Argentina may loose its struggle to pay interest and principal on those bonds. The crisis may have serious consequences on regional unemployment rate and regional growth. While we praise the new economic plan expected to assure fiscal solvency, we believe  2 that some policy measures would be distortional if maintained for a long time. We therefore welcome the Government commitment that the financial transaction tax and the trade tariff increase will be temporary. We also commend Argentine authorities for their efforts to enact reforms in view of managing public finance on sustainable basis. We commend the authorities strong commitment toward rapid and sustained progress in the areas of reversing the deterioration in tax compliance, reform of public administration, solvency of the social security system and liberalization of the trade regime. We believe that Argentina deserves strong support from the International community in order to overcome the difficult situation the country is facing. In this respect, the Bank and the Fund should work closely to assist the country. We would like however to voice our concern on the negative impact the measures taken by the Government may have on poverty The poverty assessment carried out in 2000 outlines that since 1995 poverty has grown slightly as percentage of the population and income distribution has deteriorated, the poor being the most affected by several crises. The shift of focus from growth to fiscal balance may involves important cuts that will ultimately affect wages and pension payment. Zero deficit means that the government will simply adjust its monthly spending to match tax revenues. Although, we are pleased to note the Government's strong commitment to honor first debt service payment, the authorities should not embark on spending cuts through reductions in salaries and pensions, and non-payment of suppliers as this may have negative consequences on the poor. Finally, we reiterate our support in including in the proposed Bank program, a programmatic loan to support the Government's intensified effort to consolidate structural reforms and to enhance social policies. We endorse the combination of poverty reduction reforms in the social sectors, pension system, health insurance, federal-provincial relations, and modernization of state as ootlined in the CAS for high case lending scenario. However, in case crisis occurs, staff may shed some light on the Bank assistance for 2001 and 2002. We are satisfied with the IFC focus on SMEs, education, and provincial infrastructures. In the past, Argentina has met challenges and was able to sustain and strengthen the achievements of the last decade, so we are confident that it will again do so in these difficult moments. We wish the Government of Argentina all the best in the implementation of the CAS. 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