Argentina - Industrial Credit Project

FILE COPY Document of The World Bank FOR OFFICIAL USE ONLY X:Fr N T Report No. P-2029a-AR ONN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO. THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO NACIONAL.DE DESARROLLO WITH THE GUARANTEE OF THE ARGENTINE REPUBLIC FOR AN INDUSTRIAL CREDIT PROJECT June 3, 1977 r Ths-- 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.  CURRENCY EQUIVALENTS (as of May 12, 1977) Currency Unit = Argentine Peso ($a) US$1 $a363 $al,000 US$2.75 $al,000,000 US$2,754.80 ABBREVIATIONS AND ACRONYMS BANADE = Banco Nacional de Desarrollo (National Development Bank) BCRA = Banco Central de la Republica Argentina (Central Bank) ERR = Economic Rate of Return FIEL = Fundacion de Investigaciones Economicas Latinoamericanas (Latin American Economic Research Foundation) FRR = Financial Rate of Return GDP Gross Domestic Product GNP = Gross National Product IFC = International Finance Corporation LAFTA = Latin American Free Trade Association VNA X Valores Nacionales Ajustables (National Adjustable Bonds)  FOR OFFICIAL USE ONLY ARGENTINA - INDUSTRIAL CREDIT PROJECT Loan and Prolect Summary Borrower: Banco Nacional de Desarrollo (BANADE) Guarantor: The Argentine Republic Loan Amount: US$100.0 million equivalent Loan Terms: Interest on the loan would be at 8.2% per annum. Amor- tization would be on the basis of the aggregate of the following two amortization schedules: (a) for the US$99.75 million portion relent to industrial enterprises, repayments would be made over a maximum period of 15 years and would follow a flexible schedule based on the aggre- gate of the amortization schedules of BANADE's subloans; and (b) for the US$0.25 million for technical assistance, repayments would be made on the basis of equal semi-annual principal payments over 15 years, including three years of grace. Relending Terms: Subloans would be denominated in US dollars, with interest at not less than 11% per annum, and with maturities of up to 15 years, including grace periods of up to three years, subject to a final maturity of the Bank loan of 15 years. The Government would assume the risk of loss resulting from changes in the exchange rate between the US dollar and the currencies repayable to the Bank. Purpose: The proposed loan would help finance (i) the foreign exchange cost of fixed assets for investment subprojects in the manufacturing sector and (ii) technical assistance to BANADE. Debt Covenant: Maximum debt/equity ratio of 10:1. Free Limit: The first four subprojects to be financed from the loan proceeds would require Bank approval irrespective of sub- loan amounts; a free limit of US$2.0 million would apply thereafter. Thb docuwnwt bam a rtricted ditribuUon and may be uoe by fecipdaw 1* in the perfontaa of theif okhW dutL Is coatents my not obferwie be disc_ind wbhout Wou lek auborWa6m.  Technical Assistance: The technical assistance component would help BANADE to improve its lending to the industrial sector, including (a) US$200,000 to help finance about 65 man-months of consulting services (at about US$4,100 per man-months) for staff training and sectoral studies; and (b) US$50,000 to help finance the sending of staff abroad for training. Procurement: Through normal commercial channels, following standard DFC practice. Commitment and Disbursements: The loan is expected to be committed by December 31, 1979, and disbursed by December 31, 1981. Disbursements for expenditures financed by subloans would cover 100% of foreign expenditures for direct imports, 30% of expendi- tures for locally produced equipment, and 60% of expendi- tures for foreign equipment purchased off-the-shelf. No more than US$6.0 million would be withdrawn in respect of any subproject. Under the technical assistance component, the Bank would finance 75% of total expenditures for consulting services and 100% of foreign expenditures for training abroad. Staff Project Report: No. 1321b-AR, dated May 25, 1977  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANCO NACIONAL DE DESARROLLO WITH THE GUARANTEE OF THE ARGENTINE REPUBLIC FOR AN INDUSTRIAL CREDIT PROJECT 1. I submit the following report and recommendation on a proposed loan to Banco Nacional de Desarrollo (BANADE) with the guarantee of the Argentine Republic for the equivalent of US$100.0 million to help finance an Industrial Credit Project. Interest on the loan would be at 8.2% per annum. The pro- ceeds of the loan, except for US$0.25 million, would be relent in US dollars to industrial enterprises at not less than 11% per annum, with terms of up to 15 years including a maximum grace period of three years. The relent portion of the proposed loan would be repaid substantially in conformity with a schedule based on the aggregate of the amortization schedules of BANADE's subloans, subject to a maximum term of 15 years. The balance of US$0.25 million would finance technical assistance for BANADE and would be repaid over 15 years, including three years of grace. PART I - THE ECONOMY Introduction 2. A report entitled "Economic Memorandum on Argentina" (No. 1282-AR) was distributed to the Executive Directors on September 8, 1976. It was designed to assess current developments and provide a medium-term perspective of the Argentine economy. Country data sheets are attached as Annex I. Background 3. Argentina is endowed with a favorable human and natural resource base and among developing nations enjoys a relatively high GDP per capita, which is estimated at about US$1,590 in 1976. However, the country's income level masks deep-seated structural imbalances in the economy, manifested in its inability to attain stable growth. During several years preceding early 1976 there was a severe deterioration of key institutions, of productive capacity and of infrastructure. High levels of protection and domestic market limitations contributed to a generally high-cost industrial structure which did not reflect relative costs and factor scarcities within the domestic economy. Lacking adequate incentives, the agricultural sector produced and exported below its potential. Ensuing social and economic tensions made it difficult to pursue rational economic policies for any considerable period of time. The result was a "stop-go" pattern of growth which, in turn, led to frustrated expectations, rising social tensions and occasional political upheavals.  - 2 - 4. The economic and financial chaos inherited by the present Government which came to power in March 1976 was virtually without precedent in the country's history. The last few months of the previous administration saw a total breakdown of economic management which propelled the nation toward hyperinflation and placed its capacity to service external obligations in serious jeopardy. Upon taking office, the most urgent tasks before the authorities were to break inflationary expectations and to shore up the coun- try's precarious external financial position. Since inflationary expectations manifested themselves in a flight from the peso, and the consequent weakening of the free market exchange rate, the authorities moved expeditiously to strengthen the peso. To increase the public's willingness to hold financial assets and reduce the velocity of circulation of money, the authorities raised interest rates and introduced indexed government bonds. With a view to further strengthening the peso, an increased proportion of export transactions was shifted to the free foreign exchange market rate and a US$300 million short-term credit from U.S. and European banks was arranged. In addition, the authorities successfully rolled over about US$350 million of payments due on public sector obligations from the second to the last quarter of 1976. These measures resulted in a sharp drop in the free exchange rate from 380 pesos per dollar to 240 pesos within one month, indicating initial success in lowering inflationary expectations and halting flight from the peso. Recent Performance 5. During the past year the new Government in Argentina has made considerable progress in stabilizing the economy. Through a strong incomes policy, which reduced real wages appreciably while maintaining the previous high employment level, and through improved fiscal and monetary management, the Government reduced the rate of inflation from 740% during the twelve months ending March 1976 to about 160% during the most recent 12-month period ending March 1977. Rationalization of exchange rate and trade policies resulted in a sharp improvement in the balance of payments for 1976 and both the resource and current account balances registered a US$1.9 billion improve- ment over their 1975 levels. Improved confidence in the peso and the intro- duction of positive real rates of interest generated repatriation of external private capital estimated at about US$200 million. During 1976 the Government achieved a substantial improvement in the external debt structure by repaying the short-term loans due in the last quarter of 1976 and by contracting new loans with more favorable maturities. Despite large repayment of short-term debt, gross international reserves increased by almost US$1.2 billion in 1976. As of December 31, 1976, they amounted to US$1.6 billion, or the equivalent of five months of imports of goods and non-factor services. Nevertheless, net foreign exchange reserves still remain negative.  6. Currency issue continued to increase rapidly in 1976, but private sector claims rose at a rapid pace reflecting a return of confidence in the financial system and a more realistic interest rate policy. Thus, while money supply expanded sharply, there was a considerable increase in financial savings and commercial banks accumulated large deposits with the Central Bank. Limits were established on bank credit to the Treasury, to the major public sector enterprises, and to the private sector. A number of financial assets were indexed and interest rates on other instruments were freed and are now positive in real terms. The system of "swaps," whereby the Central Bank permitted repayment of short-term foreign loans at a subsidized forward exchange rate, was a major factor in monetary expansion during 1975 and early 1976. The new Government, however, has substantially reduced the level of foreign borrowings under this system by making them a prohibitively expensive source of credit. 7. During the two years prior to the change of Government in March 1976, public finances in Argentina deteriorated to an alarming extent and became a major factor contributing to the hyperinflation of early 1976. Declining tax collections in real terms, sharply increased expenditures due to massive wage settlements and expanded public sector employment, resulted in a doubling of the Treasury deficit as a share of GDP. Adjustments in tariffs of public enterprises lagged behind inflation and there was serious deterioration in the financial position of a number of important enterprises, which had to be covered by Central Government transfers. Upon taking office, the new Government introduced a number of special emergency taxes and drastically cut current expenditures by allowing real wages of public sector employees to decline sharply. On the expenditure side, the results were dramatic and the Treasury deficit declined from almost 13% of GDP in 1975 to about 8% in 1976. About 70% of this improvement in the Treasury deficit was attributable to the decline in expenditures. A major effort was made by the authorities to finance the deficit by mobilizing private domestic savings and this was achieved through the sale of high yielding Treasury bills and indexed bonds. Central Bank financing of the Treasury deficit declined sharply in real terms and fell as a share of total financing requirements from 70% in 1975 to 48% in 1976. 8. In order to stem financial deterioration of the state enterprises, the Government implemented a program of periodic rate adjustments which, since the,muiddle of the year, resulted in a substantial real tariff increase for SEGBA, Agua y Energia, and Gas del Estado. Further progress in reduction of Central Government transfers to state enterprises is assumed in the 1977 Budget and the authorities are continuing periodic tariff adjustments this year. 9. During 1975 and early 1976, there was a steady and increasingly sharp contraction in the level of economic activity. As the economic situ- ation became more and more chaotic, private investment declined precipitously throughout the economy. The sharpest decline in investment was registered in  - 4 - the first quarter in 1976 as inflation accelerated and default on the country's external debt appeared imminent. The momentum of the recession continued into the second quarter of 1976 as measures required to slow infla- tion further reduced aggregate demand and growth. Stocks of industrial products, which had been accumulated for speculative reasons during 1975 and early 1976, were brought to market as the private sector shifted out of real goods into financial assets, reflecting a return of confidence in economic management and a response to the sharp increase in real interest rates. This drawdown of stocks accentuated the decline in industrial production. 10. Since June 1976, the situation has improved significantly due to a turnaround in private investment, increased output in the mining sector (coal, natural gas and crude petroleum) and growth in agriculture by an estimated 4.4% for the year as a whole and an annual rate of 6% in the first quarter of 1977. While demand for manufactured goods accelerated, in large part because of increased investment in agriculture, the decline in real wages during 1976 produced a drop in consumer spending. Despite declining economic activity, unemployment has not shown any substantial increase. Unemployment is currently estimated at 4.2% in Greater Buenos Aires and 4.5% for the entire country. Private firms have generally complied with Government efforts to prevent large-scale layoffs and many have shortened working hours instead of reducing their work force. Declining real wages have made it possible for enterprises to maintain staffs at prerecession levels despite falling production. Development Strategy and Prospects 11. The immediate objectives of the Government's economic program -- strengthening of the country's external position, reducing the rate of in- flation, reversing the sharp deterioration in public finances which had taken place up to March 1976, correcting the most serious distortions in relative prices and reactivating the economy through stimulation of agricultural and mining output--were achieved with a large measure of success in 1976 and the Government has now turned its attention to achieving its longer-term develop- mental objectives. In contrast to the protectionist import substituting industrial development strategies which have prevailed in Argentina during most of the post World War II period, the present authorities are pursuing an export oriented growth strategy with primary emphasis on agriculture and other areas where the country has a strong comparative advantage. Through a combination of trade and internal pricing policies, the authorities have shifted the internal terms of trade in favor of agriculture, and the real effective exchange rate for agricultural exports has been substantially improved. In late 1976, a tariff reform of major proportions was carried out and import duties on industrial products were reduced so as to increase indus- trial efficiency. To return to a more market-oriented economy with the internal price structure more in line with international prices, the Govern- ment has simplified the trade and exchange system by eliminating most import prohibitions and the multiple exchange rate system and by reducing the wide effective exchange rate differentials for exports. A foreign investment  - 5 - law, judged to be one of the most liberal in Latin America, was promulgated early this year. This law aims at enhancing the contribution of external capital and technology to Argentine natural resource development. 12. In order to strengthen domestic resource mobilization, the Government is currently implementing far-reaching structural reforms of the financial and fiscal systems aimed at accelerating development of Argentina's capital markets and rationalizing public sector finances. Details about the measures being taken to revive the financial system are given in paragraphs 37-42 below. Argentina's postwar experience indicates that strengthening of the country's fiscal system is required for strong growth of public investment and mainte- nance of price stability. Basic structural reform of the fiscal system is now in progress which aims at restoring the financial viability of provin- cial governments and state enterprises which have in recent years accounted for most of the fiscal deficit. Twenty-six private enterprises which had been acquired by previous administrations to prevent them from bankruptcy are, during the course of 1977, to be returned to private ownership or liquidated. Ambitious targets for 1977 have been established for the Argentine Railways which, if implemented will make a major contribution to reducing its large deficit. Additional taxes have been introduced at the national level and important improvements in tax administration have been carried out. Major restructuring of the tax system is being planned for later in the year and reform of the civil service, intended to create the type of highly qualified permanent public administration similar to that which exists in the Central Bank, is moving ahead at a pace which makes it likely that this will be completed by the end of the year. A new group has been created in the Ministry of Economy to rationalize public sector investment planning and to develop a long-term public investment program. Taken in their entirety, the measures adopted by the new Government are impressive and represent a major shift in Argentine development strategy which, when fully implemented, will lay the foundation for strong self-sustained growth in the future. 13. The major factor determining continued success of the stabilization program is the fiscal situation. This in turn is closely linked to incomes policy, since excessive wage adjustments have in the past and especially during 1975 and early 1976 not only fueled inflationary expectations but aggravated the fiscal problem, since wage and salary payments constitute about 60% of current expenditures of the Central Government. Despite the adverse impact on the Budget, the Government is permitting some recuperation of real wages in 1977, not only for social reasons but also because this will foster economic recovery. Consumer spending declined during 1976 and the recovery of invest- ment, which has taken place since the middle of last year cannot be expected to continue in the face of prolonged depressed consumer demand. Export demand should continue to be strong and this, together with an increase in consumer spending and continued recovery of investment, should make it possi- ble for the Government to achieve its growth target of 4.5% in 1977. In the fiscal field, the Government's objective is to reduce the Treasury deficit from 8% of GDP in 1976 to 3.5% in 1977 which, together with the monetary and balance-of-payments programs adopted by the Government, is expected to result  - 6 - in a continued reduction of inflation. The Government's program has been examined by the IMF and renewal of the 1976 Standby Agreement was approved by the IMF Board on April 20, 1977. 14. Argentina's balance of payments is expected to continue to improve in 1977, making it possible for the country to further accumulate foreign exchange reserves and resume growth of imports. Export growth is expected to be strong despite declines in world grain prices and only modest increases in beef prices. Argentina's 1976-77 grain crop is estimated to be the highest in its history and production of oilseeds and beef are also expected to increase sharply in response to the Government's new stimulative price policy for agriculture. The Government's policy of maintaining positive real interest rates should induce further repatriation of savings held by citizens outside the country. Despite resumption of large external debt service payments in late 1977, both gross and net international reserves are expected to increase by about US$300 million during the course of the year. 15. Over the longer term, the prospects for strong growth in the Argentine economy are favorable. During the next two to three years, growth rates are likely to increase as the balance of payments continues to improve and investor confidence is reestablished. Price and trade policies aimed at opening up the economy are beginning to bring about a shift in the structure of industry and agriculture, which is needed to increase economic efficiency and stimulate growth. The levels of international trade, which have been low for an economy of Argentina's resource endowment and economic size, are expected to expand significantly as the economy adjusts to a new price structure and set of investment incentives. It will take a number of years and continuing large capital inflows to carry out these tasks, partly because of their inherent complexity and partly because public support needed to maintain the effort can be sustained only if social costs of the adjustment process are held within tolerable limits. The inflows of medium- and long-term capital from both private and official sources will, in addition to their support of moderni- zation of infrastructure and productive capacity, play essential roles in this process. 16. Export prospects for the longer term appear to be excellent and assuming continued recovery of beef exports, substantial increases in the volume of grain exports coupled with expected improvements in world grain prices, export earnings should increase by an average of 16% annually in current terms through 1980. Roughly two-thirds of that increase would be generated by agriculture and about one-third by the industrial sector. Maintenance of a 5% to 6% growth of GDP during the late 1970s and beyond will require that imports increase at a rapid pace (15% annually through 1980). This pattern of growth of imports and exports would permit the country to generate a trade surplus averaging almost US$1 billion annually between 1977 and 1980. This surplus would be adequate to cover factor services and still yield a modest current account surplus. Given Argentina's heavy debt service  payments, and the need to restructure its external debt and to rebuild its international reserves, however, considerable gross inflows of medium- and long-term capital will be required, averaging US$1.3 billion annually for the next four years. The bulk of these capital requirements should be available from bilateral arrangements, suppliers' credits, world capital markets, direct private investments and foreign commercial banks. Multilateral sources, however, are expected to play an important role both by providing capital and by stimulating capital flows from other sources. Debt Service and Creditworthiness 17. At the time the new Government came to power in March 1976, Argentina was faced with external debt payments falling due before the end of 1976 estimated at US$3.7 billion, equivalent to two-fifths of Argentina's total outstanding external debt. Overall indebtedness included short-, medium- and long-term obligations of the public sector in the amount of US$5.3 billion, "swaps" of approximately US$1.3 billion, exchange rate guaranteed imports of roughly US$600 million and miscellaneous other private debt estimated at US$1.9 billion. In mid-March 1976, disposable foreign exchange reserves amounted to only US$23 million, and the new administration had to arrange short-term loans with commercial banks. It obtained a standby credit from the IMF of about US$300 million of which the first credit tranche of about US$180 million was used in 1976. The Government secured a four-year loan of approximately US$970 million from commercial banks in the U.S., Canada, Europe and Japan. These loans and credits, although needed to make payments on the previously short- term bank borrowing and rollovers, strengthened Argentina's foreign exchange position and improved confidence in the peso. Moreover, since the loans and credits from the banks are of a medium-term character, they contributed to an improvement in the external debt structure. As a consequence of these transac- tions and of the favorable performance of the current account of the balance of payments, Argentina was able to reduce outstanding foreign exchange guaran- tees by US$1.5 billion and simultaneously increase disposable foreign exchange reserves by about US$1.2 billion, more than double the increase of about US$590 million in total outstanding external debt. 18. Argentina's medium- and long-term external public debt outstanding and disbursed was US$4.3 billion at the end of 1976. Private external debt amounted to roughly US$1.3 billion. External public and total debt service ratios during 1976 were 18% and 32%, respectively. Despite the large gross borrowings envisaged over the next several years, and continued use of finan- cial and suppliers' credits, these debt service ratios are expected to decline to about 15% and 23%, respectively, in 1980 because of the improvement in the term structure of debt and the expected increase in exports. Provided the authorities successfully implement their stabilization and development policies and manage the external indebtedness along the above indicated lines, debt service should not prove unduly burdensome. Under these circumstances, Argentina should find it manageable to service the aforementioned external borrowing required for economic reconstruction and sustained economic growth.  - 8 - PART II - BANK GROUP OPERATIONS IN ARGENTINA Bank Operations 19. Past Bank lending to Argentina has been sporadic because of periodic macroeconomic difficulties and unsatisfactory sector policies, along with delays and problems in complying with specific project conditions. Since 1961, Argentina has received eleven loans from the Bank amounting to US$701.6 million, net of cancellations; five loans were for the power sector, five loans for the transportation sector and one loan for livestock development. Six loans have not yet been fully disbursed. The loans for an electric trans- mission and distribution project and for a fourth highway project, approved by the Executive Directors since September 1976, marked the resumption of lending to Argentina after a hiatus of over five years. Annex II contains a summary statement of Bank loans as of April 30, 1977, and notes on the execution of ongoing projects. 20. In its lending to Argentina, the Bank is supporting several impor- tant interdependent and complementary development objectives. The first objective is to contribute to the Government's efforts to diversify and increase Argentina's export capacity and overall economic efficiency in line with the country's economic resources and development base. While recent policy changes will provide much of the initial stimulus to increase exports, sustained growth will require an expansion of productive facilities both in the agricultural and industrial sectors. The recently approved fourth highway project will help upgrade the highway infrastructure necessary to support the planned resumption of economic growth and the expansion of agricultural export traffic. The proposed Industrial Credit Project would support the moderniza- tion and expansion of efficient industry in general and potential export industries in particular. We plan to submit to the Executive Directors in the near future other loans with a direct export orientation, including grain storage, agricultural credit, ports and, possibly, railways. 21. The second lending objective is institutional development and policy reform to ensure that investments are made and used efficiently. Under the proposed Industrial Credit Project, reforms would be implemented which will enable BANADE to fulfill effectively the role of major provider of medium- and long-term funds to the industrial sector. Similarly, under the recent highway loan, the Bank has supported efforts to improve the management, planning capabilities, and operation of the National Highways Authority. Institution building has also been important in the power sector where the Bank has supported reforms in the tariff structure which will furnish adequate rates of return on invested capital, and where the Bank has assisted in the preparation of a long-overdue national power expansion program and a national power sector organization study. In lending for livestock development, the Bank loan has served to introduce modern methods of ranch management within the framework of a supervised agricultural credit program.  - 9 - 22. Thirdly, Bank lending to Argentina is helping to provide essential long-term external capital when it can be absorbed effectively within the framework of sound overall financial planning and when capital requirements substantially exceed availabilities from other external sources. Private foreign sources are not yet prepared to offer Argentina financing in sufficient amounts and on appropriate terms. It will take Argentina some years of suc- cessful economic management to regain its position as a substantial borrower of long-term capital in private markets. In the meantime, very large amounts of relatively short-term external loans and credits will have to be repaid. During this period the Bank would serve as a catalyst to stimulate lending from other sources as well as to directly provide a part of the needed capital inflow. In connection with the proposed Bank loan, BANADE would obtain additional foreign funds through a co-financing arrangement which has reached an advanced stage of negotiation (paragraphs 60-61 below). 23. Finally, the Bank is maintaining a dialogue with the Government regarding possible Bank assistance in projects that would foster physical in- tegration between Argentina and its neighboring countries, especially with the lower income countries of Bolivia and Paraguay. Such projects should serve as a major impetus to the economic growth of these two landlocked countries and enable them to raise their living standards. The Bank project for a gas pipeline between Bolivia and Argentina has been a milestone in integrating the two economies in the energy field to the benefit of both countries. We are also discussing with the Government other integration projects, espe- cially in the energy field. IFC Operations 24. As of April 30, 1977, IFC had made twelve loans to borrowers in Argentina totalling US$58.2 million and one equity investment of US$2.0 million, of which US$34.5 million has been repaid, cancelled or sold. A summary of IFC's investments up to April 30, 1977, is given in Annex II. PART III - THE INDUSTRIAL AND FINANCIAL SECTORS The Industrial Sector - Background 25. Industry has long been an important sector of the Argentine economy. At the turn of the century, the share of manufacturing in total output had already reached about 15%. From this base, industrial growth surged ahead during the Great Depression and again during World War II, propelled each time by the substitution of locally manufactured goods for imported products. After World War II, the Argentine Government began to promote actively its industrial sector through a combination of foreign exchange and import con- trols, high tariffs and special tax incentives. Growth in manufacturing value added averaged 4.1% in the fifties, rose to 5.6% in the sixties and accelerated  - 10 - to 7.2% between 1970 and 1974, before falling to 3.2% in 1975. The average industrial growth rates in the past, however, conceal wide fluctuations in the annual rates of expansion which have ranged from 10% to -5% in the last twenty years. The bottom of the latest recession was reached in mid-1976, and many industrial subsectors have since experienced increasing sales. This was particularly noticeable in food processing and agricultural supply industries, such as agricultural machinery, tractors and trucks. 26. Government efforts to promote industry in the postwar period were based on the concept of industrialization through import substitution. Laws and decrees were issued offering both protection and incentives which encour- aged a shift from the traditional industries to the "dynamic" modern sub- sectors, mainly chemicals, rubber, metals, and machinery and equipment. The share of total output of metal products, machinery, and transport vehicles and equipment rose from 16% to 33% between 1950 and 1975, while the share of the traditional industries declined from 50% to less than 30% during the same period. Argentina became one of the few countries in Latin America in which the value added of these three "dynamic" branches of industry surpassed the value added of the "traditionals." 27. In spite of a fairly rapid growth rate and continuous diversification, the Argentine manufacturing sector continues to be confronted with three major interrelated problems: (1) a substantial degree of instability with rapid swings from strong expansion to sharp contraction; (2) a high-cost structure, as reflected in relatively high prices and underutilization of capital; and (3) a low labor absorption rate, which has left the manufacturing sector's share of total employment at the 23% that existed in the early postwar period. These problems and the measures being taken by the Government to cope with them are discussed below. Instability and Import Dependence 28. Import substitution policies have changed the composition of imports, but not the volume and value of imports which have continuously grown. Total imports doubled in value between 1960 and 1974, growing rapidly each time a foreign exchange crisis had been overcome. During the same period, imports of intermediate goods increased from 50% of total imports to 70%. The dependence on imports is strongest in the "dynamic" branches of the industrial sector. Consequently, industry remained highly dependent upon the foreign exchange earnings of the agricultural sector. Whenever agricultural exports grew at too slow a pace, usually due (separately or in combination) to inappropriate macroeconomic policies, poor growing conditions and marketing difficulties, industrial growth was severely hampered by acute shortages of foreign exchange. 29. In the fifteen years following World War II, import substitution industries were promoted. In the early 1960s, however, policymakers realized that higher and more stable growth rates could only be achieved through a program of export diversification. In 1962, several fiscal and monetary incentives to stimulate industrial exports were introduced, but had little influence in the first years because of erratic exchange rate policies.  - 11 - Later, when these incentives were supplemented by global reimbursements of income taxes, an export insurance scheme and more realistic exchange rate adjustments, industrial exports accelerated, reaching 23% of total exports between 1972 and 1975. As was the case with overall industrial gtowth, the rapid increase in manufactured exports at an average of 20% per year in real terms between 1968 and 1975 was led by the "dynamic" industries, which reached 40% of total manufactured exports in 1973/75. 30. The Government is aware that the most important prerequisite for stable and continuous availability of foreign exchange is adequate incen- tives for the Argentine exporter. It has placed emphasis on realistic management of the exchange rate, which now offers both traditional and non- traditional exporters a predictable price for their sales abroad. In the specific case of nontraditional exports, the Government has negotiated trade agreements with Brazil, Bolivia, Chile, Paraguay and Venezuela which contain provisions for the exports of relatively sophisticated manufactured products from Argentina in exchange for mostly raw materials and intermediate goods. Efficiency in Argentine Industry 31. The level of efficiency and competitiveness of Argentine industry varies greatly among sectors. Although generalizations are difficult to make, it is apparent that prices of many Argentine industrial products are substantially above those in the industrialized countries and that the level of capital utilization has been low during the major phases of the import substitution cycle. In addition, there are specific problems of efficiency in the various industrial subsectors. The "dynamic" industries tend to be tech- nically efficient but relatively high-cost producers mainly because many firms have remained too small to enjoy economies of scale. Most of the "tradi- tional" industries, on the other hand, work with rather outdated equipment and management methods which have made it difficult to sell beyond the domestic market. This dualistic character is also evident in intra-industry analysis which shows that a great number of subsectors are composed of a few enterprises that are relatively large by Argentine standards, alongside numerous small and rather inefficient firms. 32. The main causes of the present low efficiency levels would seem to be the lack of competition due to high and uneven protection of import substi- tution industries, lack of control and inefficient management in many state enterprises supplying basic inputs to industry, and mismanagement of public finances, which frequently deprived the private sector of necessary funds. The authorities have reversed past policies and called for: (1) a gradual opening up of the economy to international competition by a reduction of import bar- riers and further promotion of exports; (2) a restructuring of major industries by merging or eliminating marginal firms in branches which are plagued by excess capacity; and (3) an improvement in the performance of state enter- prises, both in the directly productive and in the infrastructure industries. Broad tariff reductions averaging 25% were implemented in November 1976. Since  - 12 - tariff reductions for imported inputs were smaller than for final products, the effective protection of a great number of products decreased even more than the nominal tariff reduction. Effects of these tariff reductions are now being analyzed by the Government to consider further action. The restructuring of the automobile industry and its suppliers represents a major specific task of the Government. A commission has been formed to analyze possibilities of decreasing the number of firms and increasing economies of scale. Finally, recent legislation has changed rules and regulations in the state enterprises, increasing the regular workweek, providing necessary incentives for different skills and responsibilities, and gradually decreasing the number of excess employees. fmployment in Industry 33. Argentina's most active phase of import substitution did not provide a significant number of new employment opportunities. Total employment in the manufacturing sector, which had reached 1.4 million in 1950, expanded by an annual rate of 1.4% in the following eight years. Between 1958 and 1968 em- loyment in manufacturing was stagnant. It was only in recent years that labor absorption in industry grew markedly, averaging 3% p.a. between 1968 and 1975, due to a gradual expansion of manufactured exports and a substantial increase in employment by state enterprises. Due to these factors, the level of un- employment in the economy has remained at a low level of 4.5%. As part of its strategy to improve the efficiency of state enterprises, and to improve its fiscal situation, the Government's goal is to encourage the private sector to absorb manpower that is now in surplus in the state enterprises. This would be accomplished by decreasing numerous fringe benefits in state enterprises and by limiting increases in real wages to those who have contributed to improving productivity. In the medium term, this shift should be possible as the recovery under way gains momentum, stimulated by Government policies to expand manufacturing production, especially of export-oriented industries with high skilled labor inputs. The proposed project would help create new job opportu- nities in the industrial sector. Investment Prospects 34. Current Government policies have been designed to lay the ground- work for a more efficient industrial sector and provide the internal and external monetary stability essential for new investments, higher output, and increasing exports. Potential industrial expansion has been estimated on a macroeconomic basis and checked against an independent survey of 100 industrial firms undertaken in November 1976 by the Argentine research foundation FIEL. The planned growth rate of about 5% per annum in GDP, the expected minimum growth rate in the medium term, would require annual investments by all sectors in machinery and equipment of about US$6.0 billion in 1977/78, assuming that the 13% share of total investments of machinery and equipment in GDP that existed during the early 1970s were to continue. On this basis, imports of capital goods are estimated to reach US$610 million in 1977 and US$710 million in 1978. The manufacturing sector accounts for about 28% of total investment  - 13 - but absorbs 55% of investment in imported machinery and equipment. Con- sequently, investment demand for machinery and equipment by the industrial sector should be US$1.7 billion per year, while industry's demand for imported machinery and equipment would average US$360 million annually for 1977 and 1978. The results of the FIEL survey, which covered about 7% of total sales and about 11% of total investments in the manufacturing sector, are consistent with the projected investment figures based on macroeconomic analysis. The demand for medium- and long-term credit is also reflected in the project pipeline of BANADE which included 143 subprojects at an advanced stage of consideration at the end of 1976. These projects require US$420 million for investment financing. In addition, there were another 200 subprojects at a less advanced stage. These figures indicate that the industrial sector is on the verge of embarking on a sizable modernization and expansion program. The Financial Sector - Background 35. Argentina's relatively well-developed financial system consists of the Central Bank, more than a hundred commercial banks, two state-owned development banks, two investment banks, a mortgage and a savings bank, as well as several credit houses and consumer credit unions. It also has four stock exchanges. This extensive network has been built over a long period of time--Argentina already had a relatively mature financial system in the 1940s. During the late forties, however, a long period of deterioration set in stemming from inappropriate Government policies. On several occasions, positive measures were taken to reverse this deterioration, but with limited success. In recent years, financial intermediation has been particularly affected by Government policies and the general instability which came to a head in the explosive inflation of 1975 and early 1976. 36. Private financial assets and credit to the private sector declined substantially in 1974 and 1975 because of huge fiscal deficits, low nominal interest rates, and "nationalization" of deposits (paragraph 38). The market for long-term corporate securities declined with new share issues in 1974-76 representing a mere 5% of the annual volume reached in the early sixties. Term credit virtually disappeared. Together with the decline in credit came the expansion of extra-banking markets and capital flight. By June of 1976, total domestic credit to the private sector had declined in real terms to only 44% of the December 1974 level. Credit to the industrial sector followed the same pattern. In fact, by end of December 1975, the real value of commercial bank credit to the industrial sector had dropped to 73% of the year-end 1974 amount. To compensate for the sharp reduction and further encouraged by subsidized forward exchange rate guarantees, companies increasingly turned to borrowing short-term overseas. This was not sufficient, however, to compen- sate fully for the decline in local credit since total private sector foreign borrowings only increased from US$3.4 billion at the end of 1974 to US$3.9 billion by June of 1976.  - 14 - Measures to Revive the Financial System 37. After the change in Government in March 1976, the monetary authori- ties began to introduce important measures to revitalize the financial system, including the institution of positive real interest rates. Short-term rates for certificates of deposit have been completely freed and indexed instruments have been introduced into the market. The Government is also considering measures to facilitate the gradual lengthening of the assets and liabilities of the financial system. In the future, after some confidence in the economy has been restored, it should be possible to develop a market for term debt based on floating rates or indexed instruments, such as the Government's indexed bonds (VNAs). At the request of the Government, a recent IFC mission assisted in studying these matters. Its recommendations are being discussed with the Government. BANADE, in cooperation with private financial institu- tions, is also studying ways of developing the domestic capital market. 38. The Government has recently transformed the system of "nationalized deposits"--whereby banks were required to accept deposits on behalf of the Central Bank which then relent funds to financial institutions through rediscounts and advances--into a fractional reserve requirement system. It has also freed the resources raised through certificates of deposits and indexed deposits and abolished special lines of rediscount. 39. A new law on financial institutions was recently enacted which reduces the Central Bank's role in matters unrelated to normal central bank- ing functions while increasing its powers to supervise the orderly operations of financial intermediaries and to control the money supply. A major innova- tion of the new law is the ending of specialization of financial institutions. Commercial banks may now provide a wider spectrum of financial services, including those hitherto reserved to specialized entities. Since commercial banks control the bulk of financial assets, this could eventually result in an overall increase in term financing as some progressive banks move into longer- term intermediation. Taking into account these developments, BANADE is con- sidering the formation of consortia with private financial institutions to help channel additional funds to its projects. 40. The domestic private credit market is being revived by the policies the Government is introducing in the financial system. The policy of main- taining positive real interest rates has already resulted in a major shift from non-financial to financial savings and could help draw back into the system funds previously diverted overseas and to the extra-banking market. In addition, Government measures to reduce the fiscal deficit and to improve the efficiency and profitability of state enterprises are expected to result in a gradual reduction of public sector competition for funds. 41. While the gradual normalization of the economic environment can be expected to restore savers' confidence and to result in a further expansion of the credit market, it will probably take some time for a term market to be established. Whereas short-term funds would be available from private local and foreign commercial banks and input suppliers, the term credit  - 15 - needs of industry will not be fully satisfied by the financial system for some time. Reliance on foreign capital markets to fill this gap completely is not feasible since only the largest firms have access to foreign borrowing and since it will take Argentina several years to reestablish its position as a substantial borrower of long-term capital in international markets. 42. The proposed Bank loan to BANADE would thus help fill an important gap in the financing of the Argentine industrial sector directly, and indirectly through complementary funds mobilized through co-financing arrangements. It would be oriented towards the sector's most pressing need--term financing of productive investments. PART IV - THE PROJECT Background and Objectives 43. In recent years, most industrial firms not only postponed plans for expansion but also neglected necessary investments for reequipment, because of the prevailing economic and political instability. As a result, a large portion of the present equipment and machinery in the industrial sector is economically obsolete. The new Government has now taken energetic steps to stimulate priority investments. The industrial sector has responded positively and has stepped up investment plans for modernization and expan- sion. The proposed Bank loan to BANADE, as a complement to the Government policy measures already taken, would help provide scarce resources to finance the foreign exchange component of fixed asset purchases associated with specific industrial subprojects. 44. While providing scarce long-term funds, the proposed Bank loan would help accomplish the following objectives: (i) to increase the overall effi- ciency of the industrial sector by helping to finance projects with the greatest potential for exports and import substitution; (ii) to support the design and implementation of reforms instituted by BANADE's new management aimed at rationalizing resource allocation in the industrial sector; (iii) to provide BANADE with technical assistance to improve its lending to the indus- trial sector; and (iv) to serve as a catalyst for the mobilization of comple- mentary external funds from the international capital markets through co- financing arrangements. The Institution 45. BANADE was created in 1970, as successor to Banco Industrial de la Republica Argentina. Battered by uncontrolled inflation, highly negative interest rates, and frequent management changes, BANADE became primarily a channel for Government subsidies to state-owned enterprises and autonomous agencies; its role as a provider of credit to private industry was largely limited to short-term loans and guarantees of short-term foreign suppliers' credit. Mobilization of medium- and long-term resources in domestic and external capital markets was insignificant due to the prevailing economic  - 16 - situation in Argentina. By early 1976, lending at highly negative interest rates had almost completely eroded BANADE's equity base, and its lending operations had come to a virtual standstill. 46. Between 1973 and 1975, industrial project financing declined sub- stantially. Short and term loans by BANADE to the manufacturing sector declined from 64% of total loan approvals in 1973 to 41% in 1975, while the financing of public sector service entities increased from 11% to 37% of the total. Medium- and long-term fixed asset financing for private industry declined from 32% in 1973 to 17% of total loan approvals in 1975, while the financing of working capital and foreign trade, essentially commercial banking activities, represented about one-third of total operations during this period. BANADE used its guarantee authority extensively, mostly for state enterprises, to cover foreign supplier and financial credits. On the other hand, through its nationwide branch system, BANADE made a strong effort to attend to the needs of industry outside of the capital area. In 1975, approvals of loans to private borrowers located in the interior accounted for about one-half of the amount and three-fourths of the number of loans approved for private enterprises. Organization and Management 47. The new Government has taken drastic measures to put BANADE on a sound foundation. The institution was recapitalized and an experienced and highly qualified management team brought in. During the preparation of this project, Bank staff have worked closely with the new BANADE management in its efforts to reform the institution and restore its ability to function as an effective industrial development bank. Substantial progress has already been made. BANADE's objectives have been clearly defined and sound operating policies have been introduced. A new Charter of Incorporation has been approved by the Ministry of Economy and will be enacted by Decree-Law prior to the signing of the proposed loan. In addition, a new Policy Statement has been approved by BANADE's board of directors. The Charter stresses the institution's primary role as a term lending development institution, within the overall industrial promotion policy framework set by the Government. At the same time, it provides safeguards for operational autonomy, sound evalua- tion standards, and financial viability. 48. BANADE's board of directors, composed of distinguished professionals who come from successful careers in private banking, industry and the Govern- ment, has moved swiftly to create an organizational structure which emphasizes project lending. The reorganization has been smoothly implemented and key positions filled with highly capable staff. Operating departments have been clearly separated from support departments and have been set up according to functional lines into industrial, mining, and commercial lending. Capable professionals have been assigned to project evaluation work and additional staff with potential for this task have been identified. BANADE is well staffed to undertake its role as the country's leading industrial development  - 17 - bank, though some additional training is required to support increasing operations in the future. The proposed loan would consequently support a comprehensive training program to strengthen and enlarge the core of qualified project staff. 49. In anticipation of being called upon to support projects which require concessionary funds, such as for social purposes, BANADE's Charter of Incorporation authorizes the establishment of special trust funds. Special fund operations must be kept completely separate from ordinary operations and BANADE may not be charged with any losses, expenses, or other liabilities pertaining to those operations, nor may any of BANADE's resources be trans- ferred to special funds. 50. Concerted efforts are being made to upgrade BANADE's capability to advise the Government in pursuing rational industrial policies. For this purpose, a new unit, the Division of Economic Studies, has been created to conduct industrial sector studies, to assist management in its dialogue with the Government and to help focus BANADE's project promotion efforts. BANADE is uniquely qualified to provide, at the project level, advice and feedback to the Government on the impact of overall industrial policies. Through its participation in the financing of large Government-supported industrial projects, BANADE will help ensure that adequate measures to improve overall operational efficiency will be taken. The proposed loan would include a technical assistance component to help finance consultants for industrial sector work in view of its importance for both BANADE's operations and Government policies (paragraph 63). 51. As in other public institutions, inflation has diminished salaries in real terms of BANADE's professional staff to a greater extent than in the private sector. Salary ceilings at the higher levels have recently been increased significantly. To enable BANADE to retain key staff members and recruit new qualified staff, the Government plans to require BANADE to make periodic adjustments as needed. Project Appraisal and Supervision 52. While BANADE's technical staff has adequate project evaluation expe- rience, past appraisals consisted principally of technical, market and finan- cial analyses, including financial projections. The evaluations did not always focus on the major project issues nor did they contain financial (FRR) or economic (ERR) rate of return calculations. Efforts have now been made to upgrade project evaluation procedures. BANADE's Policy Statement requires that all projects financed be technically, economically and financially viable, that they be adequately managed, and that they have reasonable market pros- pects. Steps are being taken to utilize financial and economic rates of return in the selection and evaluation of projects. BANADE has agreed to include FRR and ERR calculations for all subprojects utilizing US$500,000 and more of Bank funds. The evaluation of subprojects will also include estimates of direct employment generation and balance-of-payments impact, particularly export potential (Section 3.02 of the draft Loan Agreement).  - 18 - 53. Management is taking steps to improve project supervision. In following the execution of the project, Bank staff would focus on progress in this field over the commitment period of the proposed loan. Financial Situation and Policies 54. BANADE's equity capital, which had been eroded from US$87 million equivalent in 1970 to a mere US$7 million in 1975, was increased in June 1976 by $a52 billion (approximately US$208 million as of mid-1976) in part by a Government contribution to BANADE's equity of $a20 billion, and in part by capitalizing $a25 billion of BANADE's liabilities due to the Central Bank arising from special rediscounts of loans to state enterprises. The Govern- ment has agreed to increase further the equity base of BANADE by capitalizing additional liabilities to the Central Bank of $a20 billion on account of general rediscounts. Furthermore, at least another $alS billion of BANADE's debt to the Central Bank arising from special rediscounts of loans made to state enterprises will be consolidated in the form of a ten-year bond. These measures, reinforced by BANADE's new policy of lending at positive real rates of interest, will ensure a firm and substantial base for BANADE's operations. 55. BANADE's Policy Statement sets forth operational limitations which will protect the institution from unreasonable financial risks in the future. These policies cover concentration of assets, equity investments, liquidity and liability management, financial ratios and management of special funds. The maximum debt/equity ratio, including contingent liabilities, has been set at 10 to 1 (Section 4.06 of draft Loan Agreement). This ceiling is reasonable since BANADE would operate as a mixed commercial and development bank. With the 1976 increase in capital, BANADE's debt/equity ratio, excluding con- tingent liabilities, decreased from 36.6:1 to 1.7:1 and is not expected to surpass 4:1 by year-end 1979. Short-term, medium- and long-term, and guaran- tee operations would each account for about one-third of liabilities. Since external auditing has not been fully comprehensive in the past, BANADE has agreed to arrange for auditing satisfactory to the Bank (Section 4.02 of the draft Loan Agreement). 56. The principal of peso-denominated medium- and long-term loans are now being indexed in accordance with the same index applied to Government readjustable bonds, and bear interest at 3.5% to 7.5% depending on their pur- pose. Most fixed asset financing for private industry will carry a rate of 7.5%, while loans for certain agroindustrial activities, regional promotion and basic industries will be made at lower rates. Medium- and long-term loans granted prior to mid-1975 do not contain an indexing clause; however, BANADE attempts to convert these to indexed loans whenever possible. Projected Operations 57. The trend of the past four years toward increased financing of public utilities and public sector services would be reversed in favor of financing of the manufacturing sector in line with BANADE's redefined objectives. In the  - 19 - future, BANADE will, as required by its Charter, give priority to the medium- and long-term financial needs of private industry. BANADE's projections for the years 1977-79 show that lending to the manufacturing sector would increase from 41% to 64% of total lending, with a corresponding decrease in the financ- ing of public sector enterprises. Average total annual loan approvals would increase threefold over the 1976 amount to a level of.about $a200 billion or US$720 million equivalent (all figures for projections are measured in constant 1976 prices, at an exchange rate of $a277 per US dollar). 58. As mentioned before, BANADE's past operations with state and state- related enterprises contained a large subsidy element due to lending at highly negative interest rates in real terms and to lenient lending practices. BANADE's Charter and Policy Statement now contain sound policies for future operations with these enterprises. BANADE's Charter requires that new opera- tions be conducted in a way which preserves the real value of its capital base. All projects financed by BANADE, including specifically state enter- prise projects, must meet sound economic, technical and financial criteria, as determined by BANADE, and operations must be conducted in a way which preserves the real value of BANADE's equity. Furthermore, the financing of infrastructure and public works will be an exception, limited by the Policy Statement to those which are linked to industrial or mining development projects. Commercial banking operations will be continued, but will be oriented to the extent possible toward support of BANADE's industrial develop- ment objectives. Special emphasis will be given to the credit needs of small- and medium-size firms in the interior, and also to complementary working capital financing of large-scale industrial projects supported by BANADE. Management estimates that during the next two to three years, approximately one-third of BANADE's loan portfolio will be of a commercial banking nature. Future Resources 59. BANADE's future short-term operations will be funded with deposits of the public, which are expected to increase to $a50 billion by year-end 1979. This goal appears to be well within BANADE's capabilities, given its nation- wide system of branches. To finance the projected volume of medium- and long-term lending operations, BANADE will have to raise $a35 billion (US$126 million) in the local capital market by year-end 1979, which appears feasible given the Government's efforts to revitalize the financial system. Foreign currency liabilities are projected to increase to $a140 billion equivalent (US$505 million) by year-end 1979. In addition to the proposed Bank loan of US$100 million, BANADE is negotiating loans of US$30 million from IDB and US$25 million from the US Eximbank. Short-term foreign exchange liabilities would amount to about US$145 million. Forecasts indicate the need for an additional US$205 million of foreign term financing. BANADE's management has already taken steps to fill this gap. BANADE's standing in international capital markets has improved substantially following its reorganization and policy changes which have been accomplished with Bank support. As a result, a London bank has been able to arrange a US$100 million five-year Eurodollar loan to BANADE at an interest rate which will fluctuate with a margin of 1-3/4% p.a. above the London Inter-Bank Offer Rate (LIBOR) which would be earmarked  - 20 - for the financing of six large industrial projects supported by the Government. These projects are already under implementation and would, consequently, utilize the loan by July 1977. Co-financing Operation 60. In connection with this loan, the Bank has urged BANADE to take the opportunity to seek co-financing from private banks to help fill its financing gap. BANADE has accepted firm offers from two major banks (one European and one U.S.) to participate in such co-financing in the amount of US$50 million each. The co-financing operation would enable BANADE to obtain a longer maturity, a longer period of grace and a lower interest rate than BANADE and prime Argentine borrowers have been able to negotiate so far. However, the shorter term of the private loan compared to the Bank loan and the differential in the interest rate structure of subloans made from the private loan and those made from the Bank loan, make it advisable for BANADE in its financing of subprojects to mix private funds and Bank funds as may be required. In order to assist BANADE in matching the amortization of subloans to the amorti- zation of its external borrowings as closely as possible, it is proposed that the Bank agree to permit BANADE to use most of the Bank funds to finance the later maturities of its loans to subborrowers, while using funds drawn from the co-financing commercial banks to cover most of the short-term maturities on its sub-loans. 61. When the co-financing operation is finalized, amendments to the Loan Agreement between the Bank and BANADE will be presented to you (i) to include a cross-default clause referring to the private co-financing loan in the form normally employed by the Bank in relation to co-lenders; and (ii) to allow BANADE to adjust principal payments on Bank subloans for subborrowers utilizing funds from both the Bank loan and the private banks' loan in the manner mentioned in paragraph 60. The Bank would also enter into a Memorandum of Understanding with the agent for the private banks providing for the Bank, if requested, to act as channel for the service payments on the private banks' loan and for the Bank and the private banks to exchange information and consult each other on any matters which might seriously affect the service or accomplishment of the purposes of their respective loans. Terms and Conditions of the Proposed Bank Loan and Subloans 62. The proposed loan of US$100 million to BANADE, with the guarantee of the Argentine Republic, would be utilized to finance the foreign exchange component of industrial projects and would include a technical assistance component of US$250,000. Bank funds would finance the cost of imported equip- ment and the foreign exchange component of locally manufactured equipment. BANADE will relend the proceeds of the proposed Bank loan in dollars. The exchange risk between the dollar and the currencies repayable to the Bank would be carried by the Argentine Government. The proposed loan is expected to be committed by December 31, 1979 and disbursed by December 31, 1981.  - 21 - Following standard DFC practice, the amortization of the relent portion of the proposed loan would conform to the aggregate of the amortization schedules of individual subloans. 63. The technical assistance component would include: (a) US$200,000 to help finance about 65 man-months of consultancy services (at about US$4,100 per man-month) for staff training and sectoral studies, and (b) US$50,000 to help finance the sending of professionals overseas for fellowships and training programs. The qualifications, experience and terms and conditions of employ- ment of the consultants required under the project would have to be satis- factory to the Bank (Section 3.05 of the draft Loan Agreement). This technical assistance component would be repaid over 15 years, including 3 years of grace. 64. Subloans would be for up to 15 years (subject to a maximum term for the Bank loan of 15 years), including a reasonable grace period not to exceed 3 years. The amortization schedule for subborrowers utilizing funds from the proposed co-financing operation would be adjusted as indicated in paragraph 60 above. Unless the Bank otherwise agreed, the maximum amount of Bank funds that might be utilized for any subproject would not exceed US$6 million (Section 2.02(a) of the draft Loan Agreement). Subloans would be denominated in dollars and would carry an interest rate of not less than 11%, with a commitment fee on the undisbursed balance. The spread of 2.8% p.a. between BANADE's relending rate of 11% p.a. and the Bank's lending rate of 8.2% p.a. would be adequate to cover subloan administration and supervision expenses. By September 30, 1978, at the latest, BANADE and the Bank would exchange views on the appropriateness of the terms and conditions of subloans (Section 4.08 of the draft Loan Agreement). The first four subprojects would require Bank approval irrespective of subloan amount; a free limit of US$2 million would apply thereafter (Section 2.02(b) of the draft Loan Agreement). This arrangement would result in Bank review of a representative sample of subprojects covering approximately 60% of the loan amount. Procurement and Disbursement 65. While BANADE's procurement procedures were not adequate in the past, BANADE would now satisfy itself that goods and services purchased are suitable to the projects and are reasonably priced (Section 3.04(a)of the draft Loan Agreement). It is BANADE's intention to require subborrowers to obtain three quotations for purchases of most goods and services. Procurement for subproj- ects would thus be in accordance with standard practice for the Bank's loans to DFC's. Disbursements for expenditures financed by subloans would cover 100% of foreign expenditures for direct imports, 30% of those for locally produced equipment, and 60% of those for foreign equipment purchased off-the- shelf. These percentages represent the estimated foreign exchange component of these items. Under the technical assistance component, the Bank would finance 75% of total expenditures for consulting services, and 100% of foreign expen- ditures for fellowships and training abroad.  - 22 - Project Risks and Benefits 66. Assuming that the present high quality of management is continued in the Argentine economy and in BANADE itself, the project does not present any special risks. The existence of a substantial demand for long-term financing has been established during the preparation of the proposed project. Argentina's industry needs a major overhaul in view of the large proportion of economically obsolete equipment and machinery. The proposed Bank loan would play a decisive role in channelling long-term funds into the industrial sector, which has been disinvesting in the past few years but is now planning rather heavy investments to modernize and expand capacity. While we expect the proposed loan to be committed and disbursed according to schedule, the actual timing will, to a large extent, depend on the continuation of the present pace of economic recovery. Proceeds of the Bank loan would be used principally to finance high priority medium-size subprojects averaging about US$8 million. It is expected that many would be located in outlying provinces, thus contributing to the Government's industrial decentralization efforts. PART V - LEGAL INSTRUMENTS AND AUTHORITY 67. The draft Guarantee Agreement between the Argentine Republic and the Bank; the draft Loan Agreement between the Bank and Banco Nacional de Desarrollo; and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement and the text of a draft resolu- tion approving the proposed loan are being distributed to the Executive Directors separately. The Decree-Law enacting the new Charter of BANADE would be issued before the signing of the loan documents for the proposed loan. Special conditions of the project are listed in Section III of Annex III. 68. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 69. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President by J. Burke Knapp Attachments June 3, 1977  AK14 I TM.ALE 3A Page 1 of 4 pages GtMTDNA - SOCIAL INDICATORS DATA SET LAND AREA ITHOU AWZ) - - (tTttl Xtt21 ---- NAftSTINA REFERENCE COtMTRIES 19701 TOTAL ZT?e6.9 MOST RECENT AGRIC. 1M .2 1960 1970 EST1MATE VENEZUELA SPAIN AUSTRALIA" GNP PER CAPITA (US$) 770.0 1060.0 1590.0 L440.0 1560.0 3620.0 POPULATION AND VITAL STATISTICS POPULATION (MID-YR. MILLION) 19.9 23.2 25.0 10.3 33.6 12.5 POPULATION DENSITY PER SQUARE KM. 7.0 8.0 9.0 11.0 67.0 2.0 PER SO. KM. AGRtICULTURAL LAND .. 13.0 31.0 19.o 105.0 2.0 VITAL STATISTICS CRUDE BIRTH RATE t/THOU, AVI 24.9 22.5 21.8 42.1 21.0 20.9 CRUDE DEATH RATE I/THOU4AV) 9.0 8.6 8.8 8.7 8.8 8.8 INFANT MORTALITY RATE I/THOU) 59.4 58.9 49.3/a 27.9 17.9 LIFE EXPECTANCY AT BIRTH IYRS) 66.0 67.4 68.2 63.0 70.5 72.0 GROSS REPRODUCTION RATE 1.5 1.5 1.5 2.9 L.4 1.4 POPULATION GROWTH RATE tIl TOTAL 1.5 1.5 1.5 3.4 1.1 Z.2tL! URt AN 2.6 2.4 2.3 4.7 2.0 2.9 URBAN POPULATION tS OF TOTAL) 71.2 77.4 80.0 75.7 59. 1 88.5 AGE STRUCTURE (PERCENTI 0 TO 14 YEARS 30.7 29.3 29.0 47.1 a 27.8 28.8 15 TO 64 YEARS 63.7 63.7 63.0 50.5iS 62.5 62.8 65 YEARS AND OVER 5.6 7.0 8.0 2.4/ll 9.7 8.3 AGE DEPENDENCY RATIO 0.6 0.6 0.6 1.0/A 0.6 0.6 ECONOMIC DEPENDENCY RATIO 1.0 1.0 .. 1.6I/ 1.1 0.9 /b.c FAMILY PLANNING ACCEPTORS tCUMULATIVE, THCU) .. .. 67.0o USERS IS OF MARRIED WOMEN) .. .. EMPLOYMENT TOTAL LABOR FORCE (THOUSAND) 7500.0./A 9000.0 *- 3100.0 11900.0 4900.0 tb c LABOR FORCE IN AGRICULTUPE tI) la 0/b 15.0 .. 22.0 25.0 9.0/b.c UNEMPLOYED (t OF LABOR FORCF) 9.0 5.0 4.5/A 6.0 1.1 1.0 INCOME DISTRIBUTION I OF PRIVATE INCOME REC O BY- HIGHEST 5 OF HOUSEHOLDS Z7.5 21.4/ a .. .. 14.1 Id HIGHEST 201 OF HOUSEHOLDS 50.9 47107j * *- 38.9 LOWEST 20S OF HOUSEHOLDS 6.9 5.6 .. . .. 7.1 id LOWEST 402 OF HOUSEHOLDS 16.6 16.2/7 .. .. .. 20.0/d DISTRIBUTION OF LAND OWNERSHIP _____________________________ I OWNED BY TOP 102 OF OWNERS .. .. .. S OWNED 8Y SMALLEST IOS OWNERS .. .. .. HEALTH AND NUTRITION POPULATION PER PHYSICIAN 650.0 /cd 500.0 480.0/b 1080.0 740.0/b 840.0 /b POPULATION PER NURSING PERSON .. 980.0/b .. 5200 150.0 7O b POPULATION PER HOSPITAL BED 160.0 /c 170.0 170.O;L 310.0 220.0 80.0 /b PER CAPITA SUPPLY OF - CALORIES t7 OF REQUIREMENTS) 115.0 119.0 133.0 100.0 107.0 115.0 PROTEIN IGRAMS PER DAY) 98.0 99.0 118.0 62.0 81.0 101.0 -OF WHICH ANIMAL AND PULSE 54.0 64.0 32.0 40.0 71.0 DEATH RATE I/THOU) AGES 1-4 4.4 3.2 .. 5.4 0.9 0.9 EDUCATION ADJUSTED ENROLLMENT RATIO PRIMARY SCHOOL 97.0 104.0 104 .0/ 100.0 131.0 106.0 SECONDARY SCHOOL 31.0 37.0 47.0/b 41.0 57.0 83.0 YEARS OF SCHOOLING PROVIDED (FIRST AND SECOND LEVEL) 12.0 12.0 12.0 11.0 11.0 13.0 VOCATIONAL ENROLLMENT t1 OF SECONDARY) 50.0 59.0 62.0 .. 20.0 16.0 ADULT LITERACY RATE (Sl 91.0 93.0 .. 77.0 94.0 99.0 HOUSING PERSONS PER ROOM (URBAN) 1.3 1.4 .. .. ..0/b OCCUPIED DWELLINGS WITHOUT PIPED WATER (2S 53.0 .. .. ACCESS TO ELECTRICITY (X OF ALL DWELLINGS) 69.0 76.0/d 79.0/d .. .. 98.0/bc RURAL DWELLINGS CONNECTED TO ELECTRICITY (S) 19.0 .. .. .. .. 93.0/b.c CONSUMPTION RADIO RECEIVERS (PER THOU POP) 176.0 388.0 425.0 /c 165.0 212.0 212.0 PASSENGER CARS (PER THOU POP) 24.0 62.0 88.0 55.0 71.0 312.0 ELECTRICITY (KWH/YR PER CAP) 524.0 936.0 1135.0 1229.0 1634.0 4495.0 NEWSPRINT (KG/YR PER CAP) 8.6 12.0 7.8 8.2 5.8 35.9 SEE NOTES AND DEFINITIONS CN REVERSE  ,.4 4 pagw" NOTES Unlees otherwise noted, data for 1960 refer to any year between 1959 and 1961, for 1970 between 1968 aas 1970, and for Meet Recent gstimate between 1973 ad 1975. ** Selection of Australia as en objective country is based on comparable resource endowenefts and economic structure. ARGENTIHA 1960 /a.8 Persons 14 years of ane and over; lb Persons 15 years of age and over; /j 1962; .Ld Registered, not all practicing in the country. 1970 /a. Income recipients, Buenos Aires - urban; .Lb Hospital personnel only; /c Households, total, urban and rural; /d Percentage of population. MOST RECENT ESTIMATE: /a. Septomber 1976; /b 1972; /c 1971; L.d Percentage of population. VENEZUELA 1970 Ia Excluding Indian jungle population; /b Ratio of population under 15 and 65 and over to total labor force. SPAIN 1970 EmFployment office estimate; Ab Registered, not all practicing in the country. AUSTRALIA 1970 1. Due to iomeigration, population growth rate is higher than rate of natural increase; /b 19b66 Ic Excluding full- blooded Aborigines; /d 1967-68. R4, January 25, 1977 DKNMPfliS9 OF SOCIAL IN9DICATORS Land Area (thou he2 Population per nursing person - Population divided by nu-ber of practicing Total- Total surface ares comprising land ares and inland waters, male sand fonale graduate nurses, "traind" or 'certified" nurses, and ASi.-Moat recent estimate of agricultural area used temporarily or parma- auxiliary personnel with training or experience. neatly for crops, pastures, market & kitchen gardens or to lie fallm. Population par hospital bed - Population divided by m,zber of hospital beds available Sm public and private geaeral and specialized hospital sad GNP pear capita (US$) - GNP per capita estimates at current market prices, rehabilitatiom ceatare; excludes auring hom.es nd est.bliahmests far calculated by eame canvrsion method as World Beank Atlas (1973-75 basis); cuatodial and preventive care. 196,0; 1970 sad 1975 data. Par capita supply of calories (I of requiremets) - Computed frm emargy aquivalsat of net food supplies available in country per capita per day; PoP.Lation and vital ataftftic!. available supplies comprise doesatic production, imports less exports, and Population (mid-yea nillion) A. of July first: if mat available, average changes, in stuck; net supplies eclude sanmal feed, %ands, quantities uoed of two end-year eatimates 11)60, 1970 and 1975 data. In food processing sad losses Sm di.tribution; requiromsota mere estiated by FAG kesed on physiological veeds f-o noraml activity and health camaid- Population density - per square he - Mid-year population per square kilometer aring smvronmtal toaperature, body weights, age and sex distributions of (100 hectares) of total area, population, antd allowing 10% for ,aate at household level. Population density - Per sousre he of saric. lead - Computed as above for Per capita supply of protein (gra pear day) - Protein conttent of per capita agricultural loand only. net supply of food per day; mat supply of food is defined es abae; require- mento faor all countcries established by UJSDA Ec-onoic Reasaaach Services vital statistica provide f or a minixwo allwance of 60 gross of total protein per day, and Crude birth rate per thousand. average - Annual live births per thousand of 20 grams of animal and pulse protein, of which 10 gris should he amimal mid-year population; ten-year arithmetic eaerages -nding in 1960 and 1970, protein; these standards s-e lower than those of 75 gri of total protein and five-year average ending in 1975 for most ecant estimate, snd 23 grana, of animal protein as an average for the world, proposed by 1A0 Crude death rate per thousand, averase - Annual deathe per thouand of aid-yea in the Third World Food Survy. population; ten-year arithmetic averages ending in 1960 snd 1970 and five- Per capita protei. supply from animal sad pulse - Protein supply of food year average ending in 1975 for most recant estimate, derived from aninala and pulaws Sm grams pot day. Infant mortality rate f/thou) - Annual deaths of infants under one year of age Death rate f/thou) ages 1-4 - Annual1 deaths per thousand Sm age group 1-4 per thousand lIve births. years, to children in this age group; suggested as an indicator of Life expectancy at birth (yrs) - Average number of years of life renainig at mlalutrition. birth; usually five-year averages ending in 1960, 1970 and 1975 for develop- inkg countries. Education Gross reproduction rate - Average number of live daughters a woman w.ill bear Adjusted enrolimant ratio - primary school - Enrollment of all ages as per- In her normal reproductive period if she experiences present age-specific cantage of prim,ary schkool-ege population; includes children aged 6-11 years fertility rates; usually five-year eavrages ending in 1960, 1970 and 1975 but adjusted for different length. of primary education; for counatries with for developing conotries. universal education, enrollment may exceed 100% stnce ose pupils are below Population arout rats (7.) - total - Compoud annual gr-sth rates of mid-year or above the offici.l school age. population f or 1950-60, 1960-70 and 1970-75. Adlua ted enrollment ratio - secondary school - Computed as above; saconmdary Population arowth rate (7.) - urban - Conputed like growth rate of total education requires at lesat four years of approved primary imatraction; population; different definitions of urban arews may effect comparability of provides general, vocational or teacher training instructions for pupils data among counotries. of 12 to 17 years of age; correspondence courses are generally exc luded. Urban population (7. of total) - Ratio of urban to total population; different Years of schoolsv prvded (frtCscodlvl)- Total years of definitions of urban araea may affect comparability of data among countries colig tseodr level, votomal instruction may be pertially or cV1eisy exclu.ed. NAR structure (percent) - Children (0-14 years) , workinS-ge (15-64 years), Voeiaa nr.lInrt C7 of secondary) - Vocationl inatitutiama Include and retired (65 years and over) as percentages of mid-year population. technica1, industria1 or other Program whith operate imiepondWkcly or a Ace dependency ratio - Ratio of population under 15 and 65 and vovr to those depart-ent of secondary insti tutions. of ages 15 through 64. Adult literacy rate (7. - Literate adults (able to read and writs) as per- Economic dependency ratio - Ratio of population ooder 15 and 6) and ove,~ to tentage of total adult population aged 15 years and over. the labor force In age group of 15-64 years.. Fomily planning - acceptors itmoulative, thou) - Cu,1,ltive number of acceptors Hous Ing of birth-control devices under auspices of national fanily Planning program Persona per room (urban) - Average nuber of prarsos per roo is accupied since inception,' conventional dwellings in urban areas; dwellings exclude son-permanent Famiy pannig -users (7. of married -omen) - Percentages of neried women of structures end -noccupied parts. child-bearing age (15-44 yerar) who use birth-control devie.s to all married Occupied dwellings withot ped water (7.) - Occupied conventiona1 deeliegs women in san age group. iuraadrrlareas withot inside or outside piped water facilities as percentage of all occupied dwellings. ftployment Access to electricity (7. of all duellinga) - Conventional dwellings with Total labor force (thousand) - Economically active persona , including armed electricity in living quarters aso portent oR total dwellinps in urban and forces and unmplayed but excluding housewives, students, etc. ; definition rural areas. in various countries are not comparable. Rural dwellings conncted to electricity (7.) - Computed as above for araml Labor force in agriculture (7.) - Agricultural loabr force (in fanning, forestry, dwlinsoly. hunting and fishing) as percentage of total labor forc.. Unomployed (7. of labor force) Unmnploysd are usnelly defined as persons who Cousumptio are able end willing to takea job, out of a Job on a given day, renained out Radio receivers (pear thou pop) - All types of receivers for radio broadcasts of a Job, and aesking work fsr a specified minimum period nor exceeding one to general public per thousand of population.; excludes unlicensed receivers week; may not be comparable betwee countries, due to different definitions in countries ead in years when registration of radio sets was in effect; of unomployed and source of dota, e.g. , employment office statistics, esiple data for recant years mey nut be comparable since most coutries abolished surveys, compulsory unemployment insurance, licensing. Passenger arsfer thou popl - Passenger crar comprise motor care searing Incoa distribution - PercentaHe of private Income (both in cash and kind) les tasight person; excludes asbulances, hearses and military received by richest 57., richest 207., poorest 207., and poorst 407. of house- vehicles. holds. Eloctricity (kwh/yr pear cap) Annuaml consumsption of industrial, cowemeria, public and private electricity in kilowatt hours per capita, generally Distribution of lend ownership - Percentages 01 land Owned by wealthiest 107. based on production data, without allowance for Iseae in RXida but allo- and poorest 107. of lend owners. Lug far Imports and exports of electricity. Newsprint Mk/yr percap) - Per capita annual consumption is kilogrin Health end Nutrition estimatedfo d sti production plus mat imports of asprint. Population par physician - Population divided by numer of practicing physiciama qualified from a medical school at omiversity level.  Actual PrfJecte 1970.. 1973 - 1916 - 1980- 1970 197 129.0 NATIONAL ~~~~~~~~ 1970 197 1969105fl 1973 1976 1960 19l5 Miins of US $at 1974 Prices sd EcanQ eRts4Sae fD Gross ibmetic Pout 45.874 516.027 513663 54,222 63,2768,7 . o. 4. .8 2.3 1a1 k 0. Gais ro :Trm uo Trde(+ z1,03L 0 .....jj ..zllfllfl - TM - -23 1. -1. Gross Dometic Incom 44,838 56,0-27 52,797 53,95 6245 8631 5.3 0.3 4.2 6. a 100.0 100.0 100. Import (joel. mIS) 3,927 4,218 2,812 3,512 4,304 7,513 -2.7 .8.9 11.2 11.8s 8.8 3.3 6.9 xot import capacity) -4 1_76 -_4.762 -_3.661 - 5,0- 4 -_7.889 _*j9. -_12.7 81.3 9-.4 -9.3 .6.9 -8.1 Reore Gp-249 -544 -849 -52 -730 -7 05 16 -. Consumptioni Expenidtures 34,319 43,042 41,038 40,724 47,062 65,020 4.1 1.9 3.5 6.7 76.5 ?777 75.6 investment (mncl, stocks) 10,270 12,441 10,910 11,997 14,453 20,905 5.3 -3.1 7.3 7.7 22.9 20.7 23.2 Domestic Savings 10,519 12,985 11,759 12,569 15,184 21,281 8.9 -4.9 6.6 7.0 23.5 22.3 24.4 NaLtional Savings 10,012 12,569 11,375 12,142 14,828 21,024 9.0 -4.4 6.9 7.2 22.3 21.5 23.8 NM HCANDISE TRADE Annual Data at Current Prices As Prcent of Total laports Capital goods 365 432 Sao 609 924 2,398 1.4 13.1 13.9 21.1 21.6 *b.o 15.5 Intermediate goo&o 1,168 2,543 1.9S 2,591 4,063 10,680 11.4 5.7 20.7 21.5 68.9 62.5 sa.0 Fuels and related materials 79 526 so 538 779 1.,31 28.6 46.0 10D.4 14.3 4.7 17.2 11.1 PrSim&a pro*sscts 1,485 3,020 2.807 4,344 4,655 8,923 20.7 2.4. 13.5 13.9 83.8 74,6 69.7 44 1poop .2EL 911 ..46 3i3 J9 31.4 10.5 3f5t 25 3~ 16.2 haL 30.3 W OWa1Nrehworts (fob) 1,773 3,931 3,763 4,344 665 1,8 22.6 5.3 15.4 17.9 100.0 100.0 100.0 M4erchandise Trade Indices Average 1974 - 100 Export Price Index 41.9 100.0 103.1 106.5 134.7 186.2 Itmort Price Index 52.3 100.0 127.5 130.7 162.3 228.0 Terms of Trade Index 80.1 100.0 80.7 81.5 83.0 81.6 Exports Volume Index 115.4 100.0 92.8 108.4 131.4 214.8 1970- 1973- 1970 1975 1976 1973 1976 ____- VAlIE ADDEDI BY SECTOR Annual Data at 19 74 Prices and Exchanige RaLtes Average Annual GrmrF Rates As Percent of Total. Agriculture 6,104.4 6,620.3 6,669.7 7,216.7 8,543 11,705 0.7 2.2 14.8 12.8 13.8 Induistry and Mining 15,927.3 20,488.3 21,627.4 23,131.3 24,755 38,089 6.3 4.2 38.5 4G.o 44.7 Service 19.275,3 2323714 20.055,4 204f160.3 23465 29,482 4.5 -3.1 46.7 47.2 AW Total. 41,307.0 50,460.0 48,352.5 50,528.3 56,956 79,276 4.7- 0.7 100,0 i3rff 100.0 PBSLIC FINANCE 1970-73 1973-76 As Percent of GDP (Central Government -Treasury,) Averag A-ial Growth Sates 1973 1975 1976 Current Receipts 3,345 3,345 3,749 -13.6e 9.1 - 7.3 4.6 7.0 Cusrren E enditures 2,316 3,440 3,1 0431 50 6.7 6.4 tdtet Savings 1,029 -95 333 -- 2.3 -. . Other Public SectorTransfers 1,110 3,181 4,363 21.7 20,0 2.4 10.1 8.1 Public Sector Investment 314 435 652 3.8 23,0 0.7 1.0 1.2 SECTED INDICATORS 1965- 1970- 1975- 1980- (Calculated from 5-Year avera-ged data) 19175 I 19 Average WCON e.g -9 Import Elasticity ~~~1.1 09 1.4 1.7 ?brgimal Domsestic Savin~gs Sate() 26.7 10.6 63.7 24.5 Msrginal National Savinigs Rate (7, 23.2 16.2 44.5 24,9 LABOR FONCE ANID Total labor Force Value Added Per Worker (174- Prices & Eac. Rates) OuTpuT PER WORKERN In Millions $ of Total 1965 - 73 In U.S.Eoflars Percent ofAvert~e 1PD -7 1965 193 1A 173 Got Rate 1965 1973 L%93 7197 Growth Rate Agriculture 1.4 1,3 17.9 14.4 -0.7 4,122,8 4,799.8 95,9 91.2 1.7 Industry 2.4 2.8 30.8 31,1 1,9 4,926.6 6,829.4 114.7 129.7 3.7 Service 4.0 4,9 51.3 54.4 2.6 3.980,0 4,492.7 92.6 85.3 1.3 Total7. 9,0 100,0 flo-% *78 4,296,9 5,264.0 1C00. 100.0 2,3  ANNEX I Page 4 of 4 pages BALAICE OF PAYISTS . EXTERNL ASSISTANCE AND DEBT (asuntsain millions of U.S. dollars at current price.) Acthal Estimated Projected 1971 1972 1973 1974 1975 1976 1977 1980 1985 SUMMARY BALANCE OF PAYMHNTS Exports (incl. NFS) 2,188 2,389 3,799 4,762 3,669 4,688 5,120 8,171 17,990 Imports (ncl. NFS) 2.240 2.222 2.633 4.218 4.518 3,585 4,411 6.986 17.132 Resource Balance -52 167 1,166 544 -849 1,083 709 1,185 858 Net Factor Service Income -333 -386 -455 -416 -440 -490 -513 -580 -585 Net Interest Payments (-210) (-273) (-317) (-297) (-414) (-440) (-440) (-480) (-455) Direct Investment Income (-46) (-60) (-77) (-35) (-16) (-27) (-30) (-100) (-130) Other Factor Service Income (-77) (-53) (-61) (-84) (-10) (-23) (-43) ( - ) ( - ) Current Transfers (net) -3 -4 10 - 5 18 - -4 -6 Balance on Current Account -388 -223 721 128 -1.284 611 196 601 267 Private Direct Investment 11 10 10 10 - - - 40 60 Official Capital Grants - - - - - - - - - Public M6LT Loans Disbursement 529 522 832 776 448 1,908 1,005 1,034 933 -Amortization -297 -317 -468 -548 -516 -589 -906 -919 -1,044 Net Disbursements 232 205 364 228 -68 1,319 99 115 -51 Other ML6T Loans Disbursement 163 101 71 244 405 268 292 256 505 -Amortization -44 -50 -100 -216 -408 -427 -287 -312 -455 Net Disbursements 119 51 -29 28 -3 -159 5 -56 50 Short-Term Capital and Transactions n.e.i. -441 205 -444 -344 248 -1,806 Change in Net Reserves ( - = increase) 467 162 -622 -50 1,107 35 Change in Gross Reserves (- - increase) 400 -195 -864 44 856 -1,157 GRANT AND LOAN COMIT3(ENTS Official Grants & Grant-Like - - - - - Public M&LT Loans IBRD 151 - - - - 115 Other Multilateral 15 92 57 1 177 165 Governments 65 82 42 519 42 146 Suppliers 119 118 116 535 307 196 Financial Institutions 178 390 156 488 126 970 Bonds 185 120 65 290 200 207 Public Loans n.e.i. - Total Public M6LT Loans 713 802 436 1,833 852 1,803 Actual Est. DEBT AND DEBT SERVICE 1972 1973 1974 1975 197-6 Public Debt Outstanding & Disbursed 2,368 2,792 3,046 2,902 4,251 Interest on Public Debt 156 199 233 250 258 Repayments on Public Debt 317 468 548 516 589 Actual Debt Outstanding on Dec. 31. 1976 Total Public Debt Service 473 667 781 766 847 EXTERNAL DEBT (Disbursed only) Disbursed Only Percent Other Debt Service 179 354 410 604 639 IBRD 342 8.1 ~~~~~~~~~~~~~~~Total Debt Service 652 1,021 1,191 1,370 1,486 IBRD 342 8.1 Other Multilateral 294 6.9 BURDEN ON EXPORT EARNINGS (7) Governments 567 13.3 Suppliers 686 16.1 Public Debt Service 19.8 17.6 16.4 20.9 18.1 Financial Institutions 1,566 36.8 Bonds 743 17.5 Total Debt Service 27.3 26.9 25.0 37.3 31.8 Public Debts n.e.i. 53 1.3 TDS + Dir. Inv. Income 29.8 28.9 25.7 37.8 32.4 Total Public M6LT Debt 4,251 100.0 AVERAGE TERMS OF PUBLIC DEBT Int. as % Prior Year DO&D 8.3 8.4 8.3 8.2 8.9 Amort. as X Prior Year DO&D 16.9 19.8 19.6 16.9 20.3 IB8D Debt Out. & Disbursed 256 302 340 341 '342 IBRD as X of Pub. Debt 06D 10.8 10.8 11.2 11.8 8.0 IBRD Debt Serv. as 7; of Pub. Debt Serv. 5.1 4.6 4.5 5.6 5.1  ANNEX II Page lot 4 THE STATUS OF BANK GROUP OPERATIONS IN ARGENTINA A. STATEMENT OF BANK LOANS (As of April 30, 1977) Amount less Undis- Loan # Year Borrower Purpose Cancellations bursed (US$ million) Fully disbursed loans 317.3 505 1968 Argentina Livestock 15.3 3.6 619 1969 Argentina Roads 25.0 2.1 733 1971 Ferrocarriles Argentinos S.A. Railways 56.5 6.8 734 1971 Argentina Roads 67.5 24.6 1330 1977 SEGBA, S.A. Power 115.0 115.0 Total 596.6-/ 152.1 Of which has been repaid 107.0 Total now outstanding 489.6 Amount sold 7.0 Of which has been repaid 7.0 - 0 - Total now held by Bank 489.6 Total Undisbursed 152.1 No IDA credits have been made to Argentina. 1/ A loan of US$105.0 million for the Fourth Highway Project was approved by the Executive Directors on March 22, 1977 and signed on May 16, 1977.  ANNEX II Page 2 of 4 B. STATEMENT OF IFC INVESTMENTS (as of April 30, 1977) Fiscal Amount in US$ million Year Obligor Type of Business Loans Equity Total 1960 Acindar Industria Steel Products 3.7 - 3.7 Argentina de Aceros, S.A. 1960 Papelera Rio Parana, S.A. Pulp and Paper 3.0 - 3.0 1961 Fabrica Argentina de Automotive 1.5 - 1.5 Engranajes, S.A.I.C. Transmission 1962 PASA, Petroquimica Petrochemicals 3.0 - 3.0 Argentina, S.A.I.C. 1965/1972 Celulosa Argentina, S.A. Pulp and Paper 12.5 - 12.5 1969/1975 Dalmine Siderca, S.A. Steel Products 17.0 - 17.0 1969 Editorial Codex, S.A. Printing and 5.0 2.0 7.0 Publishing 1971/1973 Calera Avellaneda, S.A. Cement 5.5 - 5.5 1977 Alpargatas S.A.I.C. Textiles & Fibers 7.0 - 7.0 Total Gross Commitments 58.2 2.0 60.2 Less Cancellations, Terminations Repayments and Sales 32.5 2.0 34.5 Total Commitments Now Held by IFC 25.7 - 25.7 Total Undisbursed 3.5 _ 3.5  ANNEX II Page 3 of 4 C. PROJECTS IN EXECUTION (As of April 30, 1977) Loan No. 505 - Balcarce Livestock Project, US$15.3 million loan of July 31, 1967; Effective Date: August 31, 1967; Closing Date: July 31, 1977. Lending to ranchers progressed very slowly from loan effective- ness until 1970, then accelerated as cattle prices increased and technical services improved. From 1970 to 1973, project performance was satisfactory 'and a substantial amount of the loan was disbursed. However, the closing of the European Economic Community (EEC) to Argentine beef imports in 1974 limited external demand for beef and slowed down ranchers' demand for invest- ment credits. Current prospects for beef cattle development in Argentina are improving significantly since producers' prices are increasing in real terms under new Government pricing policies and since beef exports are expand- ing rapidly due in part to the reopening of the EEC market. At present, about 25% of the Bank loan still remains to be disbursed. Loan No. 619 - Second Highway Project, US$25 million loan of June 24, 1969; Effective Date: October 1, 1969; Closing Date: June 30, 1978. All components of the project as originally defined have been completed at a cost substantially below the appraisal estimate. The overall quality of construction and supervision is satisfactory. The undisbursed loan amount of US$5.2 million has been reallocated to the construction of the Rio Colorado-Cotita and Pradere-Rufino roads, after being appraised by the Bank and approved by the Executive Directors on January 10, 1974. The work on these two roads was delayed in 1975 mainly because of problems in the supply of equipment. The National Highways Authority has taken measures to improve this situation and work is now progressing satisfactorily. Loan No. 733 - Railway Project, US$84 million loan of April 28, 1971; Effective Date: July 30, 1971; Closing Date: December 31, 1977. Due to the socio-economic situation of the country, it became clear in 1973-1974 that the original Project could not be implemented. On July 2, 1974, US$27.5 million (or about one-third of the US$84.0 million loan) was cancelled. The remaining US$56.5 million was to finance procurement com- mitted by the original Closing Date, April 30, 1974. After having come to a standstill in 1975, procurement has regained momentum. The last of 59 con- .tracts for Bank-financed goods was finally signed in May 1976. Goods have been delivered for 40 contracts, and the revised loan is now 88% disbursed.  ANNEX II Page 4 of 4 Loan No. 734 - Third Highway Project, US$67.5 million loan of May 5, 1971; Effective Date: July 30, 1971; Closing Date: June 30, 1977. The overall quality of construction and supervision for the 28 road sections included in the project is satisfactory. Fifteen of the road sections have now been completed, but construction of the remaining thirteen sections ran into severe problems caused by the difficult economic situation prevailing in 1975 and early 1976. Since March 1976, the Government has taken measures to improve the situation and work has now resumed at a normal pace. The bulk of the remaining work is expected to be carried out during 1977, with the completion of several other contracts extending into the first quarter of 1978. Loan No. 1330 - Electric Transmission and Distribution Program, US$115.0 million loan of November 1, 1976; Effective Date: January 10, 1977; Closing Date: December 31, 1981. The project is proceeding as scheduled. Loan No. 1384 - Fourth Highway Project; US$105.0 million loan of March 22, 1977; Effective Date: Closing Date: June 30, 1981. The Loan Agreement was signed on May 16, 1977 and is expected to become effective by September 22, 1977.  ANNEX III Page 1 of 2 ARGENTINA - INDUSTRIAL CREDIT PROJECT Supplementary Project Data Sheet Section I - Timetable of Key Events (a) Time taken to prepare project: Five months (July/November 1976). (b) Agency which prepared project: Banco Nacional de Desarrollo. (c) First presentation to Bank: July 1976. (d) First mission to review project: September 1976. (e) Departure of appraisal mission: November 29, 1976. (f) Completion of negotiations: May 17, 1977. (g) Planned Date of Effectiveness: September 16, 1977. Section II - Special Bank Implementation Actions None Section III - Special Conditions 1. The Government would assume the risk of loss resulting from changes in the rate of exchange between the US dollar and the currencies repayable to the Bank (paragraph 62). 2. BANADE would estimate, in accordance with methods satisfactory to the Bank, (i) financial and economic rates of return for subprojects using $500,000 or more of Bank funds, and (ii) the direct employment and balance-of-payments impact, including export potential, of all subprojects (paragraph 52). 3. The debt/equity ratio of BANADE and its financial subsidiaries would not exceed 10:1 (paragraph 55). 4. The first four subprojects to be financed from the loan proceeds would require Bank approval; a free-limit of US$2.0 million would apply thereafter (paragraph 64). 5. The amount of Bank funds to be utilized in any subproject would not exceed US$6.0 million (paragraph 64).  ANNEX III Page 2 of 2 6. The Borrower would employ consultants to provide technical assis- tance, whose qualifications, experience, and terms and conditions of employment would be satisfactory to the Bank (paragraph 63).  IBRD 12432 AUGUST 1976 A ME R ICA -,^.Co,on~Thl lics1% .-n L ARA .I . s 0 U ~ ~ ~ 4 ~ Sn ~~ ~~/X iuj RoAnNoole ~SIE Argentino OSA .~~~~~ero,d. de 1,,goye. 88t VIngo n deAPLSi rs' j \ ) _telro / | z orronqursn.s. IORRENTES Z > ,