Transcript of joint meeting of the Executive Directors of the IBRD and IDA, held on Tuesday, September 16, 1986 : Argentina - Power Engineering Project

STRICTLY CONFIDENTIAL NM:nm INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Tuesday, September 16, 1986 Washington, D.C. The meeting of the Executive Directors was convened at 10:34 a.m. in the Board Room, 1818 H Street, N.W., Washington, D.C., Mr. Barber B. Conable, Chairman, presiding. MILLER REPORTING CO,, INC. 507 C Street, N .E. Washington , D.C. 20002 (202) 5 46- 6666  STRICTLY CONFIDENTIAL 2 C O N T E N T S ITEM PAGE MILLER REPORTING CO .. INC. 507 C Srreer, N.E. Washington , D.C . 20002 IJ/)7\ )41\.6666  STRICTLY CONFIDENTIAL 3 NM:nm P R O C E E D I N G S MR. CONABLE: Item two is a proposed loan to Argentina. It is the report and recommendation on a loan of $14 million equivalent to the Argentine Republic for a Power Engineering Project. Mr. Sokol is coming forward. He is from the LAC Region and he will introduce the proposal. You are recognized Mr. Sokol. MR. SOKOL: Thank you. Mr. Chairman, Members of the Board: Before introducing the project, we would like to report briefly to you this morning on recent developments in Argentina. After the initial success of the Austral Plan in bringing down inflation, inflationary pressures have been rekindled. Monthly consumer prices rose by 6.8 percent and 8.8 percent in July and August of this year respectively. This upsurge in inflation was caused by an increase in the money supply, MILLER REPORTING CO., INC. 507 C Street, N.E. Washington , D.C. 20002 (202) 5 46- 6666  STRICTLY CONFIDENTIAL 4 originating from a policy of increasing central bank redis- counts and rising foreign exchange reserves, large private sec tor wage increases and from sharp seasonal increases in domestic beef prices which count heavily in the index. These developments occurred during a period of tight fiscal management, as reflected by the government's succesful reduction of the overall public sector cash deficit from 4.6 percent of GDP in the first quarter of the year to 1.9 percent of GDP in the second quarter, the lowest since the introduction of the Austral Plan 15 months ago. The latte r has been a major achievement in Argentina and compares favorably with a deficit of over 10 percent of GDP a year-and- a-half ago. To bring the program back on track, the governme nt has tightened monetary policy and adopted a more active incomes policy through ceilings on monthly increases for wages, prices and public sector tariffs. These measures are temporary and should last three to four months. Moreover, the government has indicated its dete rmination to follow an exchange rate policy which would maintain the competitiveness o f exports. It also proposes to f ree prices and establish collective wage bargaining next year. The governme nt has a lso adop t e d a fl e xible i mp orts p olicy i n its efforts to MILLER REPORTING CO .. INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546- 6666  5 STRICTLY CONFIDENTIAL contain inflation. While these measures should help bring down inflation, they are likely to slow down the reactiva- tion of the economy. The government is keenly aware that vigorous export expansion is the main non-inflationary approach to enable the country to resume sustainable economic growth. To this effect, the government has recently announced a package of trade policy reforms, which include the elimination of export taxes on all manufacturing and agro-industrial exports, the elimination of certain and significant reduction of other export taxes on agricultural products, tax rebates on the indirect tax content of manufactured exports, the introduction of an insurance scheme to protect exporters from exchange rate fluctuations, the establishment of two temporary admissions regimes for the automatic duty-free importation of inputs required for exports, and the simplification of trade procedures. These trade policies are part of a program of policy reform which the government intends to implement, which reflects an export-oriented development strategy. Such ' _ _J . a strategy will lead to progressively closer commercial links with the world economy, providing the impetus to achieve sustainable growth over the medium term. MILLER REPORTING CO .. INC. 507 C Street, N .E. Washington, D .C. 20002 l ? /1?\ ~-,;.,;,;,;1,  6 STRICTLY CONFIDENTIAL In recognition that renewed private investment must be a leading force in Argentina's long-term economic develop- ment, a draft tax amnesty law has been submitted to Congress to facilitate the repatriation of capital and also provide for the conversion into equity of claims on Argentina's external debt held by residents. The government is also about to submit legislation for authority to proceed with a public sector privatization program while at the same time strengthening and restructuring public sector enterprises. In addition to this, the government is seeking to increase the efficiency and resource mobilization aspects of the public sector. The proposed loan fits squarely within the government's strategy. It supports Argentina's efforts to improve the efficiency of the power sector and more particularly of its regional power distribution system. Thank you. MR. CONABLE: Thank you, Mr. Sokol. Mrs. Domingue z has a question. MRS. DOMINGUEZ: Mr. Chairman, we are pleased to r e ad in the Pre side nt's Re port that the Bank stands ready to p rovi d e t e chnical assi s tance in o r d er to h e l p Arge n ti n a imp l e me nt measures need e d to be tter the c ond ition o f MILLER REPORTING CO .. INC . 507 C Street, N .E. Was hington, D .C. 20002 1202) 546- 6666  7 STRICTLY CONFIDENTIAL electricity distribution in the country by improving the apportionment, planning and design capability. Under this project, the government's new policy emphasis could provide a useful framework for dealing with long-term problems since the project is based on a number of major aspects to improve the utilities' efficiency and planning procedures in charge of service distribution. We are quite satisfied, Mr. Chairman, that in this project management has streamlined the processing of these loans since from the stages of appraisal to approval only eight months have elapsed. ' l l_J Thank you, Mr. Chairman. MR. CONABLE: Thank you, Mrs. Dominguez. Are there other comments? Mr. Lankester. MR. LANKESTER: Mr. Chairman, thank you. We have no difficulty. Indeed, we welcome -- we have no difficulty with this project; indeed, we welcome it. I found Mr. Sokol's statement very interesting. I wonder if he could circulate a copy of it. Thank you. MR. CONABLE: Thank you. Mr. Sokol, it was quite a comprehensive statement MILLER REPORTING CO .. INC. 507 C Street, N.E. W ashington , D.C. 20002 (202\ 546-6666  8 STRICTLY CONFIDENTIAL for a comparatively modest loan here and I think it was quite useful. Any further comments or questions? Mr. Mizoguchi. MR. MIZOGUCHI: Yes, thank you, Mr. Chairman. I have no difficulty in supporting the proposed loan. The proposed project consists of four studies and the metering program and training program, which improved the managerial capacity of the power sector in Argentina. In other words, the project is an investment in the software of Argentina's power sector. In this sense, I think that the project is quite interesting. Many problems in a certain sector in a certain country are caused not only by severe economic situation in that country but also b y the weakness of the managerial capacity in the sector. So, in this sense, I think tha t this kind o f project can be impleme nted in other sectors and in other countries . This is my g eneral comme nt. Thank you. MR. CONABLE: Thank y ou, Mr. Mizoguchi. Any further comme nt? (No r e sponse .) MILL ER REPORTING CO .. INC. 507 C Street, N .E. W ashington , D .C. 20002 (202) 546- 6666  STRICTLY CONFIDENTIAL MR. CONABLE: If not, the minutes will show the Executive Directors approve the loan on the terms proposed. MILLER REPORTING CO .. INC. 507 C Street. N.E. W~shingron , D.C. 20002 /202) 546-6666