Transcript of joint meeting of the Executive Directors of the IBRD and IDA, held on Thursday , December 19, 1985

STRICTLY ONFIDENTIAL NM : nrn INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNAT IONAL DEVELOPMENT ASSOCIATION Thursday , December 19 , 1985 Washington, D.C. The meeting of the Executive Directors was convened at 10 : 50 a .m. in the Board Room , 1818 H Street , N.W., Washington, D. C., Mr . A. W. Clausen, Chairman, presiding . MILLER REPORTING CO.. INC, 507 C Srrce,, N.E. W ashingcon. O.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 2 C O N T E N T S ITEM PAGE 5 Record of Previous Approval: 34 Education Benefits Review fo r 1985 6 Other Business 34 ;_J MILLER REPORTING tO .• INt. 507 C Su~t,, N .E. Washingwn, D.C. 20002 (202) 546-666(,  STRICTLY ONFIDENTIAL 34 MR. CLAUSEN: The next item is the minutes today will record your previous approval of the item listed in the agenda, under item number five, that is the Education Benefits Review for 1985. Before we close the meeting, I would like to take the opportunity to make a few observations about my recent trip to Uruguay, Argentina and Ecuador. As I mentioned on Tuesday, the topic in I could even say in the extreme -- almost the sole topic in each of the three countries that • we visited was Plan Baker. I must say that also, as I commented on Tuesday just very briefly, that there is, I must say, widespread misunderstanding about the Baker Plan, and I hope that we were able to correct some of the misconceptions The Baker Plan shifts the emphasis to accelerating MILLER REPORTING CO., INC. 507 C Street. N.E. Washington, D.C. 20002 (202) H6- 6666  35 STRICTLY ONFIDENTIAL economi c growth and to strengthening the debt- servicing capacity in the longer-term framework of economic development. And obviously there is a major role for the World Bank to play in mobilizing additional external financing that will be needed in support of government growth programs to achieve these ob j ectives . c.omo-W by G~t:nJe~ Figures -- there was great attentioh on the ? arithmetic or the figures ; you know , the $20~llion coming 1, from the commercial banks was not enough , and the $9 ;,{illion additional corning from the multilateral banks was also indicated not enough to do the trick . Rather than focusing on that these are not maximums but they are minimums and indicative of the direction, there has got to be increased credit exposure. The first country I visited was Uruguay, and, as you know , it is one of the most market-oriented country among the Latin American countries. It has got a freely floating exchange rate. It has got free capital markets and only minor restrictions on trade . As you know , the country is saddled with large 0 external debt and the burden of debt service is compounded by a severe deterioration in Uruguay ' s terms of trade and subsidized competition from the EEC. MILLER REPORTING CO .. INC. 507 C Street, N.B. Wa1hingron, D.C. 20002 (202) H6-6666  STRICTLY ONFIDENTIAL 36 The country has gone through four consecutive years of GNP decline, which exacerbates the problems and involves the social cost of the adjustment that Uruguay has undergone. In our view, the government's economic stabilization program is solid, and it is very much on track. And the recent promulgation of a law on the refinancing of industrial and agricultural debt should remove some of the uncertainties that have constrained private sector investment. However, there are no signs yet of a strong economic recovery. Because of the smallness of the domestic market in Uruguay, the reactivation of the economy is going to depend on an expansion of exports. And the country has undergone a recent bilateral trade agreements with Argentina and Brazil, and that should help Uruguay. You should know too that the Bank is supporting the government efforts to develop Uruguay ' s comparative advantage as a transport corridor for inter-regional trade and to make its agriculture more productive. And we visited the agricultural sector on field visits and also the port, port efficiency, and progress in both of those important areas for this country could be seen. The government has focused its attention on MILLER REPORTING CO .. INC. 507 C Street, N.E. W~shington, D.C. 20002 (202) .H6-666G  STRICTLY ONFIDENTIAL 37 stabilizing the economy and showing up the country ' s external finances. Agreement on a multi- year rescheduling of the p ublic commercial debt, combined with voluntary fresh financing , which as you know is supp orted by the Bank with the guarantee on the l ater maturities , is underway and is expected to be completed in the first part of next year . We would expect that now that the Congress of Uruguay has a p proved the 1986 budget, that the government would now concentrate increasingly on longer- term development issues . I must say that our visit there provided a very good opportunity to ascertain government priorities and to di scuss possibilities of Bank support for financial rescheduling of the industrial sector , as well as for rationalizing government services and revenues . And I would expect , as we indicated there , that the Bank would be able to increase its l ending to Uruguay i n the f uture . Next we went to Argent i na, and there besides the Baker Plan the princ i pal subject was the Austral Plan , which is a bold program instituted by Argenti n a in mid 1985 and a program designed to break inflationary expectations , which the progress has been rather remarkable . The results in just a matter of months were monthly price increases which were running 30 , 40 percent in the middle of 1985: now , MILLER REPORTING CO •• INC. 507 C Street. N .E. W ashins<on . D.C. 20002 1202\ 546-6666  38 STRICTLY ONFIDENTIAL say, October, November are down at the 2 percent level or a bit below the 2 percent level; remarkable in the rapidity with which the inflationary expectations and psychology has been broken. But there aren ' t yet clear signs of an economic recovery in Argentina . President Alfonsin and his economic team are committed t o stay with the plan, which addresses the short term areas in the economy, but to also -- they appear to be giving every evidence to addressing the structural issues, the longer-term issues in their economy. I must say that their ideas are clear on their objectives and on the main problem areas to be tackled that is agriculture, industry, public enterprises, inefficiencies in both the private sector but principally in the public enterprise sector to look at the trade regime, but there remains much to be done to translate, may I say , the rhetoric and the awareness of where the problems are into effective programs, operational programs of action . One of their priority issues that needs to be addressed, and that is to how to phase out wage and price controls, which were instituted as part of the Austral Plan . And the government is going to have to act very forcefully in order to contain the fiscal deficit at a level consistent MILLER REPORTING CO .. INC . .507 C Street. N .E. Wa, hingcon. D.C. 20002 (202) 546-6666  39 STRICTLY ONFIDENTIAL with the price stability. There is progress in government plans to reform the financial sector, as I indicated, and the trade regime. There is much talk about privatization of some public enterprises and ideas, but no action as yet. There is need to improve the incentives for the private sector and to obtain efficienc y in the public sector. All this is in the awareness of the government and what we need to see now are some actions that will put the awareness into some operational -- to make operational the steps that will reduce the problems in these areas. We traveled a bit in Argentina. We went to Mendoza. We went to Cordoba. I will comment on that just in a s econd. We visited with the private sector, with the banking corrununity . I must say that the private sector is highly critical of the public administration ' s lack of efficiency. It's a little bit of calling the pot who is calling the pot black because the private sector also has a lot of inefficiencies. But in our discussions with the industrialists ;_J in the country and the bankers , we didn 't always find that they had a clear understanding of the problems nor, more importantly, that they were ready to change their course. MILLER REPORTING CO .. INC . 507 C Smcr, N.E. W2shingron . O.C. 20001 (202) 546-6666  STRICTLY ONFIDENTIAL 40 It is going to be difficult . There still seems to be a widespread belief that a reactivation and a remonetarization of the economy will solve the problems , and that is all that needs to be done . But our message was that both the public and the private sector are going to have to make changes in order to increase the productivity . And external financing, of course, can help ease the process of change in an envi r onment of economic g r owth and there is some growth in Argentina . It is i n, say , the 3- 1/2 percent level and the plan is for the g r owth in 1986 calendar year to b e in the 4 percen t area . But external resources and e x ternal finance only make sense if the country strengthens its capacity to service its external debt . In our discussions , we emphasized that the Bank stands ready to support the economic reform in Argentina through a substantial expansion of our lending . To refresh your memo r ies , in our fiscal year 1984 we had no commitments that we brought to the Board in that fisca l year. Our commitmen t s increased to $180 million in our fiscal year 1985 , and they may reach somewhere between $400 mi ll ion and to $500 mi l lion in our curr ent fiscal year ending June 30, 1 986 . MILLER REPORTI NG CO.. INC. 507 C Street, N.E. Wasbingron . D.C. 20002 (202) 546-6666  STRICTLY ONFIDENTIAL 41 And we are shooting for around $700, $800 million or thereabouts, perhaps even a bit more, depending on progress of discussions, in our fiscal year 1987 based upon our expectations that the government is going to continue pressing ahead with its plans for increasing economic efficiency. And the country has chosen to tackle sectors. We have an agricultural sector loan, which we would propose to bring forward to the Board in the first part of next year, and that will be, say , $300, $350 million, and it will be the principal piece for strengthening the agricultural sector, which it needs to impose efficiencies in that. We visited the two largest projects that the Bank is financing in Argentina. And I am pleased to report that both projects are proceeding well. One is the refinery conversion project for YPF . It is near Mendoza. And that project is already at an advanced stage of execution. And then we visited the Jasarita (Phonetic) Hydro Power Project, which project after considerable delays in getting underway, that loan of $210 million was approved by our Board in 1979, and there have been lengthy delays in starting that project. And it is still in its early inception, but it's a tremendous project and it is going to have an impact, a very positive impact when implemented and underway on the entire Argentinean NILLER REPORTING CO. . INC. 507 C Strcec. N.E. W><hingron. D.C. 20001 (202) 546-6666  STRICTLY ONFIDENTIAL 42 economy . We are considering possibilities for supplementary Bank loans in view of changes in the original financing plans of both of these pro j ects . And we are considering that and it depends upon how fast implementation goes and also on the overall flows that can be p rovided for these projects from other sources . I think that our visit was helpful in that it put the Bank more squarely on the map in Argentina and i t has not been there . It is hard to get on the map when you don ' t have any commitments in FY84 and , given the size of the country , only a modest amount in our fiscal year 1985 . And in this conte x t , we clearly encouraged the government not to coast on the success of the Austral Plan, which, as I once again say, the results from that plan have been -- I can ' t think of a better word than truly remarkable to bring the inflation rate down as rapidly as it has to break that psychology in only a period of four or five months . And the projection for calendar year 1986 is that their rate of inflation would hopefully even get down not to si ngle digit but , say , 15 percent which is very good . Then we encouraged the country really to tackle MILLER REPORTING CO .. INC. 507 C Street, N.E. W ashington, O.C. 20002 (202) 546-~  STRICTLY ONFIDENTIAL 43 its structural weaknesses with the same vigor as they tackled the stabilization challenge . ~] In Ecuador, one of the three countries on this trip , I thought that Ecuador had gone farther in defining not only its stabilization program or adjustment program, but also with coming to grips with the growth program . And I must say too that I am much impressed by the courage, the c a ndor, the professionalism which mark the economic team of President Febres-Cordero, and those that are participating in t h e economic management of the Ecuadorian economy . I thought our meeting with the President was very good . It was clearly very candid, whatever that means, and we were able to point out how much we recognized the progress made by the government in turning around the economic policies from a very paternalistic style into one that the transition into an economy that is more market-oriented and to be determined by the marketplace . The paternalistic interventionalist style o f the government was a result of the oil boom and very easy access to borrowings by conunercial banks. They were queued up, just knocking on the door and "won ' t you take our monies", which provided an easy way for the government to subsidize con- sumption and not to take the dif f icult policies that the MILLER REPORTING CO. . INC . .507 C Smee. N .E. W ,shing,on, D.C. 20002 (202) 146-6666  44 STRICTLY ONFIDENTIAL government now finds it necessary to catch up because their foreign exchange revenues are diminished as a result of lower petro leum prices and they are also diminished by virtue of the fact that the commercial banks are not knocking at the door to lend Ecuador the easy money. But they are now addressing these problems head on . And I must say really I am very impressed with Ecuador. The policy reforms that they have instituted have already shown significant results in promoting g rowth . It will be, say, 2-1/2 to 3 percent this year , modest but , relative to what it has been, that is p rogress in the right direction. They have reduced their inflation . It is now about 20 percent , and they have eliminated the balance of payments deficit, which I don't know how many countries in Latin America can make that claim . And the government ' s program really has been the basis for the success in restructuring its external debt. You may not know or be aware that Ecuador is the o nly country, I believe, that has negotiated a multi-year rescheduling at the Paris Club, and I applaud that. I hope they are not the l ast . Maybe it 1 s the example of those countries that can get multi-year re scheduli ng at the Paris Club on official debt is based upon performance and economic policies that are MILLER REPORTING CO.. INC. 507 C Stret t, N .E. W~shington. D.C. 20002 (202) H6-6666  45 STRICTLY ONFIDENTIAL put into place . Our own support for Ecuadorian growth has also shown significant increase. Here again in FY84 , our fiscal year , we had zero. It jumped at a rate of infi nity to $8 million in our fiscal year 1985 , and in our current fiscal year we are shooting, we think , to about $230 million . You will recall in October we approved an agricultural sector loan, qu ick-disbursing , $100 million . That will be signed here in Washington in the second week of January. President Cordero has been extended , I guess , an off i cial visit to the United States and he will be here . Unfortunately, I will not be here at the time of that signing . But we are also involved in two operations to support policy changes in the industrial sector. These two loans have not yet been brought to the Board , but will in the coming weeks . The government has requested that we continue at about this level. You have got to look at FY85 $230 million or thereabouts as maybe catching up with a shortfall of only $8 million last year. We had a very thin pipeline underway ;_J in the previous government , but I would say that , if the efforts of Ecuador continues , that our lending level in Ecuador could probably range, say , clearly $150 to $200 MILLER REPORTING CO .. INC, 507 C Smet, N.E. \V35hingcon, D.C. 20002 (202) 546-6666  46 STRICTLY ONFIDENTIAL million at a cruise for the coming year . And we are looking at the financial and energy sectors at the request of the government to help them to clean up the inefficiencies in both of those sectors . And I must say that our large support and that of the Fund and the IDB too certainly could be useful in mobilizing additional externa l capital. We met with the group of bankers there, the foreign bankers, a group of maybe about 20, 15 to 20 at a breakfast to talk about guess what, and also what they could do in order to enlarge their credit exposure to Ecuador. I must say all of them are waiting for directions from back home . We all understand that. And I won't say the silence was deafening , but it was a bit disappointing. I was told by the Minister of Finance, who is in I guess he is on his way to New York now because I think he is doing some signing on the restructuring with the commercial banks on Saturday , which is a big effort. And they should be much congratulated . The Minister of Finance -- this is Francisco Swett, who is a member of the Development Committee -- I must say I was very impressed with this young man and a lso in combination with the Preside nt, the vigor and the candor MILLER REPORTING CO .. I NC. 507 C Street . N .E. W as hington. D.C. 20002 (202) 546-6666  47 STRICTLY ONFIDENTIAL and the courage in addre s s i n g the economic problems. Coun- tries like that I think deserve our support . All in all, I thought it was a very good meeting , f rustrating from the fact that in Argentina the press conference -- you say, you take the zero percent to $180 million, $400 plus the $500 million in the current year, it would be around $450 million if everything holds and if the Board approves our agricultural sector loan , let' s say $350 million , that we will be bring ing to you in January or February, and then indicating in the following year that if the country continues to address its structural problems with the energy that it has indicated , that our lending level will be up , say, even more than the $1/2 billi on, and in the u p per range of the next $1/2 billion . Somebody raises their hand and say, "Well, gee , if we instituted the Baker Plan , how much more would that mean for the World Bank?" And there is a lot o f mis- understanding on that . And I hope that there is less misunderstanding as a result of our visit . But I am glad that I don ' t have ;_J to face a press conference on that issue for a short time because I don't have any scheduled the remainde r of this year . MILLER REPORTING CO •• INC . 507 C Succr, N.E. W~shingion. D.C. 20001 (202) 546-6666  STRICTLY ONFIDENTIAL 48 I must say I was also imp ressed with our team . Latin America has got a lot of problems , but I think that hopefully the Board will gain some comfort and knowledge . We have got a first- class group of officers dealing with the very difficult issues and challenges in Latin America and as well as other areas too . I think we can all take a lot of comfort i n the fact that there is high quality in this organization , thanks to the direction o f the Board . I would remind you that there is a seminar startin g in one minute on Food Security , which Shah i d will chair . If there is no further business, l e t me wish you a l l a Merry Chri stmas and a Happy New Year . There is a seminar tomorrow as well on the IBRD/IDA and IFC Annual Reports , and our nex t Board meeting wi l l be on Januar y the 7th , where we have Bank loan s and IDA credits to bring forward to you . We are adjourned . Thank you . {Whereupon , at 12 : 10 p . m., the meeting was adjourned . ) MI LLER REPORTING CO .. INC , 507 C Sum, N.E. W ashington, D.C. 2000 2 (202) 546- 6666