Transcript of meeting of the Executive Directors of the IBRD and IDA, held on Thursday, August 9, 1990 : Argentina - Second Trade Policy Loan Project

nm STRICTLY CONFIDENTIAL 1 NM INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Thursday, August 9, 1990 Washington, D.C. The meeting of the Executive Directors was convened at 10:44 a.m. in the Board Room, 1818 H Street, N.W., Washington, D.C., Mr. Barber B. Conable, Chairman, presiding. MILLI.A 111.POIITING CO., INC. S07 C Street, N.E. Washington, D.C. · 20002 (202) )46-6666 nm STRICTLY CONFIDENTIAL 2 C O N T E NT S ·- ITEM PAGE 4 Argentina - Progress of the Second Trade Policy Loan 134 Mr. Benachenhou 138 ~ Mr. Shiratori 140 MILLIR IIIPOIITINQ CO., INC. ,01 C Street, N.E. Wuhingt0n, D.C. 20002 (202) ~46-6666 run STRICTLY CONFIDENTIAL 3 C ONT E NT S .- ITEM PAGE 4 Argentina - cont'd. Mr. Caranza 143 - Mr. Jarvis 145 Mr. Carling 162 Mr. Fernandez 164 Mr. Boehmer 166 Mr. Potter 168 Mr. Pinto 170 Mr. Avillez 172 Mr. Dujmovic 173 Mr. Al-Assaf 175 IIILLEII Rl!POflTING CO., INC. 507 C Succt, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 134 nm Item four on the agenda is the memorandum from the President entitled "Argentina - Progress of the·Second Trade Pol icy Loan" . We are happy here to welcome Mr. Ferran, the Deputy Director of the western Hemisphere Department of the IMF, who is attending this meeting. Mr. Gerken, a Task Manager in the LAC Region, is going to introduce the proposal for us. Mr. Gerken, you are recognized for that purpose, sir. MR. GERKEN: Mr. Chairman, Members of the Board: This loan was presented to you in October 1988 in a package with the banking sector loan and two investments loans. The reform targets of the banking loan and the first tranche of the trade loan had already been achieved when the macro- economic program on which it was predicated collapsed in MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 ( 202) 546-6666  STRICTLY CONFIDENTIAL run 135 March 1989. You remember we gave you a presentation at that time. The banking loan was subsequently dropped and the second tranche of this loan delayed. Since then, Argentina has gone through economic· turmoil with two periods of hyperinflation and a deep economic recession before regaining a measure of stability in March 1990 of this year. A new Government took office in the midst of hyperinflation in July 1989. It, unprepared as it was, responded with another heterodox stabilization program which then failed in December. However, from the start, the new Government began implementing a series of structural reforms, recognizing that this would be the only way to overcome Argentina's endemic instability problem for good. Let me just ·name a few. The Government implemented a major tax reform, extending the value added tax at a uniform rate to virtually all goods and to banking services. It strengthened tax administration through a very tough penal code and through the hiring of tax inspectors and auditors. It enacted a privatization program that has already MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 136 nm resulted in the sale of the telephone company, the national airline, and two TV stations, the auctioning off of central oilfields and the concessioning of 10,000 kilometers of roads to the private sector. It took first steps in the reform of public administration; it closed 80 branches of the National Housing Bank and the Industrial Development Bank, in effect re- stricting them to second-tier operations. In addition, the Government took drastic measures i to reduce the fiscal costs and the economic distortions of the incentive regimes for the industrial sector through two /measures: suspending the Buy National Law for procurement and suspending the industrial promotion regimes for new projects and eliminating or reducing tax exemptions for ongoing projects. I Now a key component of this overall structural reform has been the trade and industry program which is suppdrted through this loan. Progress is reflected in the following figures: the production coverage of quantitative import restrictions has come down from 30 percent to 7 percent, the average tariff rate has come down from 43 percent to 18 percent, and the tariff band from 0-115 percent to only 10-24 percent. MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL nm 137 The tax benefits for 1,370 out of 4,070 industrial projects have been suspended and others are coming under a strict auditing program. One condition of the loan, regarding the reduction of the coverage of industrial export taxes, has not been complied with because of overriding fiscal concerns. However, the Government has compensated for this through over-performance on the side of import liberalization. The momentum of the above reforms has been in- strumental in achieving a measure of macroeconomic stability since March 1990 with an orthodox program, i.e. not resorting to a fixed exchange rate or to incomes policy. To consolidate the stability already achieved and facilitate a recovery from the ongoing recession, it is essential that the structural reforms continue. The release of the second tranche of this loan has been delayed for about 16 months due to macro instability and the high transitory export taxation. We now feel that sufficient progress has been made to warrant the release. 1 Such action would provide visible support for the continuation of the reform process. Thank you, Mr. Chairman. MR. CONABLE: Thank you very much. Now, let's discuss this matter. MILLEA REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 ( 202) 546-6666  STRICTLY CONFIDENTIAL nm 138 Mr. Benachenhou is our lead-off again. You are a regular pioneer today, Mr. Benachenhou. MR. BENACHENHOU: Thank you, Mr. Chairman. This Chair has been following with great admiration the decisive actions taken by the Argentinean Government to put the economy of the richly endowed Argentina back on its feet, and this in spite of difficult political and social circumstances. The Argentinean Government has set an exemplary policy, designed to overcome the deadly scourge of inflation and to stabilize prices without bringing the economy to a full halt. We have attended recently a presentation by the Governor of the Central Bank of Argentina of the monetary elements of these adjustment policies. We must say that we have been impressed by the comprehensiveness and coherence of the measures taken. These measures have already given significant results on the inflation rate front, and on the stabilization of the exchange rate of the Austral, which indicates that the public at large has regained trust in the capacity of the Argentinean economy to regain health and is supportive of the new course of action of the Government. No reform in the monetary sector can succeed if the MILi.ER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL nm 139 perceptions of the public are not changed, and the real sector cannot return to a balanced growth without the return of the monetary sector to an orderly state. These two basic elements of sound economic management are being heeded by the Argentinean Government. However, such policies, so well thought out and so well implemented as they might be, are doomed to fail if they do not receive an unwavering support from the multilateral institutions, in particular the Bank and the Fund. We have today the opportunity to send a strong signal to the Argentinean Government and to the international financial community that we believe in the soundness of the adjustment program and that we are ready to support it. As stated by the memorandum before us, and I quote, "The structural reforms and commitment of the Government to the program present the best opportunity in the last five years to achieve lasting stability", end quote. Mr. Chairman, as to this Chair, we fully support your conclusions and recommendations set forth in the memorandum before us for the waiver of one condition of tranche release of the second trade policy loan to Argentina. In conclusion, Mr. Chairman, I should like to pay particular tribute to the Latin American Vice Presidency and MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 140 run its staff for the undaunted efforts it has displayed to assist the Argentinean Goverrunent in the present action and to congratulate the Goverrunent for the quality of the team gathered to implement the adjustment policy and to wish too the Argentinean people success in this difficult task of· restructuring of its economy. Thank you, Mr. Chairman. MR. CONABLE: Thank you, Mr. Benachenhou. Mr. Shiratori. MR. SHIRATORI: Thank you, Mr. Chairman. I support the proposed recommendation to waive the condition of reducing the production coverage of export taxes on industrial goods below 7.5 percent, because all other conditionalities are met and the macroeconomic policy framework is consistent with the objective of the loan. However, I am not quite optimistic on the success of the stabilization program in view of the country's poor track record. The new stabilization program announced last March, together with the Central Bank's intervention in the foreign exchange market, has certainly reduced inflation sharply. But the economy is now in deep recession. The new stabilization program is built around various structural reforms in the public sector like major MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL nm 141 tax reform, revenue sharing, large wage cut, privatization of ·1 state enterprises, industrial promotion and so forth. Since all these measures have just been implemented and are going to be introduced in the near future, and they are unpopular among the people, particularly the labor unions, there is a big danger of repeating the past failures. We need a strong assurance that the new stabilization program will be implemented without any slippages. I want to have the staff's view on this point. I have several specific questions. First, on tax reform, how successful was the value added tax reform which was implemented last February, as well as the revenue-sharing arrangement with provincial governments? What kind of measures have been taken to improve the tax administration which has been extremely weak in Argentina? I want to know more about this. And in this connection, how these measures reduced the underground economy? Second, on the expenditure side, there seems to be a significant slippage in the administrative reform, in particular the programs to reduce the wage bill. How does the staff evaluate the developments since it was announced last March? Third, on privatization, I want to know who has MILLER REPORTING CO., INC. 507 C Sueet, N.E. Washington, D.C. 20002 ( 202) 546-6666  STRICTLY CONFIDENTIAL 142 run acquired the privatized telephone companies, airlines and other state enterprises, and what other companies are going to be privatized, under what schedule? And what state enterprises will remain unprivatized? Fourth, I want to know the progress with respect to the commercial debts, in particular the results of the Bank Advisory Committee held in New York a few days ago. Fifth, on the debt/equity swap program, this was put into effect in January 1988 but has been suspended since March 1989. I hope it will be resumed quickly because it will not only reduce Argentina's debt burden but will also accelerate the inflow of much needed foreign capital and technology, as well as managerial skills, to Argentina. However, I would like to know the inflationary impact of this program. Finally, what is the staff's outlook on the medium- term balance of payments, particularly in view of the long- standing bias against exports? And in this connection, I wonder if there is any sign of return of flight capital. Thank you very much. MR. CONABLE: Thank you, Mr. Shiratori. There were a number of very specific questions there. Mr. Caranza. MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL nm 143 MR. CARANZA: Thank you, Mr. Chairman. I support the recommendation of the document for a waiver of the condition on export taxes which has not been met so far, and the release of the second tranche of the trade policy loan, thereby reopening the Bank's contribution to the stabilization of the Argentinean economy. I trust that the authorities of Argentina will soon be able to make good of their commitment to reduce distortions that still characterize their external trade. I think in 1 i general that the policy efforts made in the recent past by Argentina deserve a positive assessment, and that we can say already that some good results have started to arise from the firm fiscal and monetary stance maintained by the Argentinean policymakers since last March. A consistent fiscal and monetary policy is allowing Argentina to solve the problem of reestablishing a positive balance in its public finances while at the same time I starting to put a check on inflation. I On the monetary policy side, the strong commitment of the authorities to avoid monetization of the public debt and to guarantee an increasing autonomy of the Central Bank is to be commended. On this latter aspect, I trust that the Argentinean authorities will follow a consistent path and MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 ( 202) 546-6666  STRICTLY CONFIDENTIAL nm 144 promote a formal institutional change in the status of the Central Bank that enhances its independence and allows it to fully exert its functions of monetary policymaking. On the fiscal and trade policy side, as I said, more has to be done, but the results so far are already rather impressive in terms of budget balancing effort and the reduction of a vast array of protectionist measures there to distort trade. On exchange rate policy, the Government has maintained a sort of duty float with a partially flexible exchange rate associated to a conunitment to link domestic monetary expansion to the movements of external reserves. So far so good. Even so, it seems to me that the stabilization effort would probably be more successful, consistent and less fraught to uncertainties if the authorities could use the exchange rate as anti-inflationary nominal anchor and at the same time negotiate a consistent path for nominal industrial wages. In conclusion, Mr. Chairman, progress has been made in terms of structural reforms, including a strong effort at privatization of inefficient state-owned enterprises and the establishing of a new value added tax. For all these reasons, I think that we should MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL run 145 support the courageous effort of Argentina to resume a path of stable growth, balance the budget and reduce the distor- tions that hamper the competitiveness of this economy. In reaffirming my support to the present loan, I want to commend the authorities of Argentina and wish them the best of success. Thank you. MR. CONABLE: Thank you, Mr. Caranza. Mr. Jarvis. And after Mr. Jarvis, I will ask the staff to be prepared to start responding to some of the very specific questions that have been raised. Mr. Jarvis. MR. JARVIS: Thank you, Mr. Chairman. Argentina has gone through a very difficult time since the second trade policy loan was approved in October 1988. The country has experienced two bouts of hyperinflation, output has fallen, and investment is stagnant. The authorities continue to face very serious problems and their ability to solve them remains doubtful. Nevertheless, there are some hopeful signs. The authorities have undertaken a wide-ranging and impressive program of structural reforms. They have agreed on a stabili- zation program supported by the IMF, and for the moment MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL run 146 anyway they are managing to avoid the worst problems of inflation. One of the most important areas of structural reform is trade policy and we very much welcome the fulfill- ment by the authorities of most of the conditions of this· trade policy loan. One detailed condition that has not been fulfilled relates to export taxes. The authors of the paper argue that expected achievements on the import side of trade reform, as evidenced by movements in the coefficient of protection, have compensated for the weak performance on the export side. I do not find this argument particularly convincing. It would, after all, be possible to have the same coefficient of protection under a regime that involved no tariffs or subsidies and under one that involves substantial taxes and subsidies. The coefficient is a partial indicator of progress at best. Moreover, it was not clear to me from the paper whether progress in implementing the reforms on the export side have merely been delayed, or whether the authorities have abandoned their efforts in this direction. I would hope that the authorities can commit themselves to taking further measures to eliminate export taxes soon. MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 147 run I can appreciate the difficult fiscal position faced by the authorities restricts their room for maneuver, but I would hope that they can implement alternative revenue- raising measures soon. In the long-run, an open economy and successful· export industries are essential for Argentina's prospects. I am sure that the authorities recognize this. Like Mr. Shiratori, we would be interested to hear more about Argentina's relations with its various creditors. But on another point relating to trade and payments, this Chair has expressed concern in some previous discussions about Argentina's poor payments record with respect to imports of natural gas from Bolivia. I understand from the staff that Argentina's payments performance has improved significantly in recent months. We warmly welcome this 1 improvement. It should make an important contribution to Bolivia's adjustment efforts. In view of Argentina's substantial compliance with the detailed conditions of the loan, we can support the proposal that the condition on export taxes be waved. However, I note, Mr. Chairman, that your memorandum concludes by saying that with the release of the second tranche of the trade loan, the Bank would recommence substantial support for MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 ( 202) 546-6666  STRICTLY CONFIDENTIAL run 148 Argentina. We believe that a certain amount of caution is necessary here. It is entirely appropriate that the Bank should support Argentina's adjustment efforts. However, if the Bank's adjustment lending is to be successful, the macroeconomic conditions must be right. It is essential that management continue to monitor the situation carefully and that they continue to collaborate closely with the IMF on this in the spirit of the memorandum that the Board discussed earlier today. Thank you, Mr. Chairman. MR. CONABLE: Thank you, Mr. Jarvis. Now, may I call on Mr. Husain first to lead off for the staff. MR. HUSAIN: Thank you, Mr. Chairman. I will address the first question that was raised by Mr. Shiratori and alluded to by Mr. Jarvis in conclusion, and ptobably which is the most important question that should be asked and can be asked about Argentina and its relationship with the World Bank today. In view of the repeated attempts in the past in Argentina to stabilize their economy, what confidence do we have that this series of actions that the Goverrunent has MILLER REPORTING CO., INC. 507 C Street, N .E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL run 149 taken recently would lead to get progress and, therefore, a more enduring progress than in the past? Let me start by saying that in Argentina, more than any country in Latin America, we are dealing with the accumulated mismanagement of a long, long time, probably half a century, in terms of what has happened to the Goverrunent, its operations, its finances, its relationship with its various constituents. Therefore, the issue in Argentina is not simply that the fiscal deficit has been large or that the trade regime was highly distorted. But in the operations of Goverrunent, wherever you looked, there was a malaise in terms of the efficiency of operations, in terms of the viability of the process, in terms of the sheer rent that the machinery of state creates or permits and, therefore, the low or negative productivity of various operations. And we and the Argentineans I think, the people who are in charge of economic policy today, are convinced that if the Argentinean effort is to succeed, that it has to go substantially beyond the immediate stabilization of the economy, and therefore deep structural surgical measures have to accompany stabilization measures. And I think this is what we are beginning to see in MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 150 run Argentina, which means that not only has the Goverrunent recognized that there are no shortcuts and that, therefore, there are no heterodox programs that would succeed, but that the Goverrunent has got to face the issues quietly and deal with them in the most orthodox manner possible; namely, that if the central issue is the diseconomy of the Goverrunent operations, which are reflected in the Government accounts, then there is no way you can control inflation or resume !growth, i first of all, by bringing the fiscal accounts into I balance and generating some sort of a surplus. And this is at the center of the current program of the Goverrunent. For the first time in many, many years, Argentina is generating a primary surplus, which is extremely important, primary surplus of the magnitude that Mexico had been generating about a year or two ago after a continuous stabilization program of many years. So this is one issue. But we would be very pessimistic about the future prospects of Argentina if the Government's efforts were limited to this. But behind this fiscal discipline is a major program of structural reform that is being undertaken. And at the center of it are two issues. One is the reform of the taxation system, about which I will ask my colleagues to speak at some greater MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL run 151 length as to how the tax reform is working and how the tax machinery is responding to the needs of the situation. And second, a surgical reform in the state enterprise sector which has been the most important single contributor to the mismanagement of Goverrunent and to the fiscal problems. You have read from the newspapers about the privatization of two very large enterprises leading to the conversion of about $7 billion of Argentina's debt into equity. It is the largest conversion of debt into equity. But, more important that the Goverrunent is divesting two enterprises and, therefore, cutting out the future claims of these enterprises from the Treasury, from the management I 1 structure, and therefore leaving it to the broad regulatory system and the private enterprise. But beyond that, the Goverrunent is working on the reform of other major areas, that is the railways. As you know, the deficit of the railways which had been close to $1 billion, about 3 percent of GNP, has been again a major issue for twenty years. Ever since I have been working on Latin America, this has been a major issue, and again the Goverrunent is in the process of privatizing part of the operations of the railways, reforming and closing down the other part. Similar actions are contemplated in areas such as MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 152 run petroleum, such as steel and other industries, chemical industries that are managed by Goverrunent. So behind this facade of some of the fiscal achievement that we have seen in the last few months is a major reform of the structure of state and the economic structure of state that is going on in Argentina. Now, I think we would be very naive if we said that we expect this effort to go without reverses, without incidents, because the process of economic change, economic reform is ultimately an intimately political process. And there is no doubt in my mind that even with the best of efforts, it is entirely possible that there would be some back-tracking, there would be some reverses. But the key issue is whether the Goverrunent has the programs, the plans and the will to move ahead in the desired direction and whether it is generating a sufficient consensus to do this. And our view is, yes, the Goverrunent is doing all three, which means that the Goverrunent is united in the purpose of reform. It is showing a determination and will which we have not seen in the Argentinean Goverrunent in decades, and it is creating a consensus among its political constituents for the reform and the change of the entire process of Goverrunent. MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 153 run So, in short, to answer the basic question that Mr. Shiratori has raised, we are working very closely with the Argentinean Government over a wide spectrum but particularly in the reform of the state, reform of public enterprise, reform of the taxation system. And what you are seeing here is merely a small part of where we are engaged. Now, we could have brought this amendment to you and this second tranche release to you earlier. We did not because we wanted to see some track record on the current stabilization of the Goverrunent. I think now we can say with some confidence that, yes, the Government not only has achieved remarkable success in stabilization but it has the machinery in place for a significant structural improvement and continued stabilization measures. In the months to come, we hope that we would come to you with significant programs for the reform of the public enterprise sector, which is absolutely crucial in the future reform in Argentina. But let me ask my colleagues to answer some of these specific questions that have been raised. MR. CONABLE: Who would like to lead off? Mr. Bottelier. MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 154 run MR. BOTTELIER: Maybe I could answer the first two specific questions Mr. Shiratori put to us on the revenue sharing with provinces and on the success of the value added tax. The first issue is a crucial one in the Argentine context. Up till December 1987, January 1989, the sharing of revenues with the provinces was the subject of a great deal of negotiations and uncertainty. It was one of the factors that contributed to fiscal irresponsibility on the side of provincial goverrunents who, when not getting enough revenues from the Goverrunent, knew that they would have fairly automatic access to the rediscount windows of the Central Bank. In order to close that major fiscal loophole, the Goverrunent had to seize access to the Central Bank rediscount window but, as a quid pro quo, it had to guarantee to the provinces that they would have a certain fixed proportion of centrally collected revenues. That proportion was set at 58 percent for all provinces. That was the formula agreed upon after lengthy negotiations in January 1988. That formula has been in effect ever since that time, has worked relatively well. There has been no further access by the provincial banks to the Central MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL run 155 Bank rediscount window since January 1988. So that is a major breakthrough. The concern now is that perhaps the Federal Government may have been a little too generous in its formula with the provinces, and that is a major task in the months and perhaps years ahead. With regard to the value added tax, which is one of the main taxes that is co-participated with the provinces, there have been a number of major breakthroughs in recent years. You yourself referred to what was mentioned in the text, the reforms of December last year, which extended the tax to all goods. Previously, it was only manufactured goods. For example, all agriculture and most trading was excluded from it. 1 All goods are now included and most services, including banking. There is a group of services not yet covered by the value added tax, and there is presently legislation pending in Congress that would extend the value- added tax to other services as well. There is also a proposal that the standard rate, which is currently 13 percent, should be raised to 15 or 15- 1/2 percent. I think altogether the VAT reform has been I ! • encouraging. The process of reform is .not yet complete, but MILLEA REPORTING CO., INC. S07 C Street, N .E. Washington. D.C. 20002 ( 202) 546-6666  STRICTLY CONFIDENTIAL 156 run I think on balance we feel the progress has been quite significant on the value-added tax. MR. CONABLE: What about the issue of who is buying the privatized property? Perhaps Mr. Gerken will take that. MR. GERKEN: I should answer that. There are three big sales which have been going on. The telephone company in the northern region has been bought by a group which has been led by Bell Atlantic. The southern network has been bought by a group led by Telefonica de Espagna. The national airline has been bought by a group which is led by Iberia, the Spanish airline. The next big items which are coming is the conces- sioning of the railways, the major lines of the railways. The bids are out on that, on the three major networks of the railways. Then in terms of firms, what is coming is all what is owned by the Ministry of Defense, and that is basically steel and petrochemical factories. So, that is the basic major program on the line. Now what about the debt/equity program? You are quite right saying that on the debt/equity program, there are concerns about the inflationary impact, a concern which with the sale of public assets we don't have. So, indeed, we are MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL run 157 supporting the Goverrunent in putting the emphasis not on the debt/equity program but on the sale of public enterprises. For the near future, we don't see a resumption of debt/equity program coming. MR. HUSAIN: But the conversion to equity would· essentially take place through the sale of public enterprises 1 which -- MR. GERKEN: Right. MR. HUSAIN: -- is much larger than it would have been otherwise. MR. GERKEN: Right. Now, this has already a tremendous impact on the stock of debt. I mean, the stock of public debt is about $35 billion to $40 billion and the sales which have been taking place have already reduced this stock by $7 billion, a substantial amount. So, further sales will also bring that down further. So, in that sense, the commercial debt with the public sector is already in the process of being reduced quite heavily on the stock. With respect to interest rate payments, the Government is now paying $40 million per month as a token for resumed discussions which are taking place. MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL run 158 MR. CONABLE: This is to the conunercial banks. MR. GERKEN: That is to the conunercial banks, yes. Now, a question was raised on the medium-term balance of payments outlook and the bias in the trade regime, the under export bias in the trade regime. As you know, the balance of payments has been very strong over the last two years, partly a reflection of the recession but also partly a reflection of the success we have had with the first trade loan, providing free trade status 1 for exporters. And this is basically reflected in the strongly increasing share of non-agro-based exports in the total. Non-agro-based exports have had a share of below 20 percent for decades, and they are now raised to about 35 percent. Now, this I think is a sign of success. The concerns, of course, on the balance of payments are the heavy export taxation on the agricultural sector and the agro-based industries. There, the Goverrunent has just announced in the last week a major reduction of these taxes for the next season so as not to forestall new sowing for the new season. So, this will take place starting in December. Still, I mean, there is a concern on that, and we are working with the Goverrunent on the further reduction of MILLER REPORTING CO., INC. 507 C Street, N .E. Washington, D.C. 20002 (202} 546-6666  STRICTLY CONFIDENTIAL 159 run the anti-export bias. You have already mentioned that there is a concern of the fiscal implications in the very short term. This concern is very serious. Let me give you one figure. The export tax revenue accounts for about 30 percent of the revenue of the Federal Goverrunent. This has to do with this co-participation Mr. Bottelier has been talking about, because export taxes are 100 percent going to the Federal Goverrunent, the others only 42 percent. So, it is not an easy matter to replace an export tax with, say, an extension of the value-added tax because you need much more of additional value-added tax to have the same effect for the Federal Goverrunent. So, what you really need is a change in the quota, and that is a very structural issue which is not easily answered. Now, what further measures to reduce anti-export bias is the Goverrunent committed to? The Goverrunent has announced that it will soon resume the reimbursement of the value-added tax to export. That is quite a substantial amount. We would have liked them to rather reduce the export tax proper, but they are going this way. But still, I mean, this is a substantial measures. MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 160 run All other measures, yes, the Goverrunent agrees with us that the medium-term target should be zero export taxes. That is clear. We don't have any qualms on that point. But we do have to recognize that in the short-term the fiscal issue is overriding, and only in the sense, in· the way that the stability is consolidating can we get a firm commitment from the Goverrunent on specific dates, which we don't have at this time. Then there was this one technical question on the coefficient of protection. You are right. The same coefficient can, of course, be reached by domestic measures, meaning taxes, discrimination in taxation between these programs. What I did not mention is that relatively this discrimination has not changed over time. So that the change which is observed is indeed reflecting the trade policy measures. MR. CONABLE: Is there anything else, friends? Yes, Mr. Jarvis. MR. JARVIS: I'm sorry. Could you just go over that last point again? I wasn't sure I quite understood what you are saying. MR. GERKEN: Yes. Your intervention has been that the positive result on the coefficient on protection could MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL nm 161 have been achieved by other measures, which have nothing to do with the trade side. That is my understanding of your intervention. MR. CONABLE: Is that right, Mr. Jarvis? That is the way I understood it too. MR. GERKEN: And I am saying there haven't been other changes. So, it does indeed reflect the trade policy. Maybe you have another concern on that, which has to do with the aggregation bias in this one. I mean, we have only two aggregates -- importables, exportables -- and within those aggregates there can be lots of distortions, of course. This is not reflected. This is only reflected in the lowering of the dispersion of the measures which you have seen in the tariff rates which comes down from 100-215 down 10 to 24, which is really reducing this type of distortion. MR. CONABLE: Mr. Jarvis. MR. JARVIS: Yes, thank you. That is helpful. What I was really trying to get at was that the coefficient of protection on its own isn't necessarily a very useful indicator. It can conceal what is going on underneath. I certainly accept there being improvements in the trade position in this case, but I am not sure that it is MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 162 run entirely true that improvements on the import side can compensate for no progress on the export side. MR. CONABLE: You agree with what he says obviously. MR. GERKEN: No. (Laughter. ) MR. GERKEN: No, but I didn't want to go into trade theory on this one. Indeed, it can be shown that measures on the export side are equivalent to measures on the import side if you take them in the aggregate, not if you take them commodity by commodity. Then you have differences, but in the aggregate it can be shown. MR. BOTTELIER: It is a standard concept used in a lot of theoretical literature. MR. CONABLE: Yes, all right. Confront him individually, will you? Let's move on. Mr. Carling is next. MR. CARLING: Thank you, Mr. Chairman. There has been a fundamental change of direction in macroeconomic management in the last six months and meaningful progress has been made in reducing inflation and the fiscal deficit. Although this progress needs to be followed up and MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D. C. 2000 2 (202) 546-6666  STRICTLY CONFIDENTIAL 163 run there remains a long way to go towards stabilization, it can be accepted that macroeconomic policy need not be an obstacle to release of the second tranche at this time. But I believe that it should be some time before any new adjustment lending is proposed and I was, therefore, like Mr. Jarvis, surprised to read the final sentence of the memorandum, that with this release the Bank would recommence substantial support if that means an early resumption of new adjustment lending. Regarding the export taxes, we are always reluctant to agree to waivers of important conditions attached to tranche releases, and this was an important condition. And it is disappointing that the waiver request is not accompanied by a revised timetable for compliance. We are pleased to hear that the Goverrunent remains committed to removal of the taxes. Argentina certainly has the scope to substitute broad-based taxes for the export tax revenue. Now, I had a comment on the coefficient of protec- tion also, I am afraid, Mr. Chairman. I think that Mr. Jarvis is right because the coefficient is used to support the argument that anti-export bias has diminished by a certain amount. But I think that it assumes that each percentage point of export tax is equivalent to each per- MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL run 164 centage point of import duty and its effect on anti-export bias. And generally-speaking, that would not be the case. And I would refer the staff to the 1987 WDR in support of my proposition. And the WDR in fact has empirical estimates for Argentina, showing that only about half of import protection translates into implicit taxes on exports. Be that as it may, we accept that the economy has become more export-oriented through a substantial reduction in import protection and some reduction in export taxes. There has been some shift in the composition of tax revenue away from export taxes. In view of the overriding short-term need for revenue, we can reluctantly go along with the waiver request. Thank you. MR. CONABLE: Thank you, Mr. Carling. Monsieur Fernandez. MR. FERNANDEZ: (Interpreted from French.) Thank you, Mr. Chairman. We approve the President's recommendation to remove the conditionality linked to the limitation of taxation on manufactured goods which are exported. It is understandable that such a conditionality was not reached and met, in view MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL run 165 of the importance of the receipts generated by this taxation. The reduction of such tax should take place within the more wider framework of the tax reform, which is at the center of the adjustment process in Argentina. In view of the ambitious objectives which the authorities have set for themselves in this field, the reduction of this export tax should only take place alongside the putting in place of an efficient value-added tax, especially through the widening of the value-added tax, and we encourage the authorities to do so. But risks and uncertainties remain, since the monetary and tax measures have been implemented to break this spiral of hyperinflation. The other points I wanted to make have already been made by other speakers. But I would like to underscore a few ! 'of these risks, even if some answers have already been given by the staff. First of all, the conversion of the domestic debt led to a change in the efficiency and effectiveness of the monetary policy instruments, and the authorities have lost for a certain time their borrowing capacity on the domestic market, and possibilities of refinancing, non-inflationary refinancing. This will only stress again the essential role MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL run 166 of the tax policy. Another concern has to do on the privatization policy, but the staff has given their answers. Finally, there is the acute problem of the external debt of Argentina. We welcome the resumption of Argentina·of regular payments of its commercial debt. In view of the constraints weighing on the Argentinean economy, we can only accept a partial resumption of payments, and the increase of arrears during the period of negotiations with the banks. This, of course, creates a time constraint, an additional time constraint, and we hope that these negotia- - tions will soon be completed. Can we be told at what stage these negotiations are? And what are the means that will be allocated to such an operation? In conclusion and in spite of these uncertainties, we approve, Mr. Chairman, your recommendations and we wish full success to the authorities. In fact, they deserve it because of their commitment and their efforts. Thank you. MR. CONABLE: Thank you, Monsieur Fernandez. Mr. Boehmer. MR. BOEHMER: Thank you, Mr. Chairman. I am also prepared to approve the proposed waiver MILLER REPORTING CO., INC. 507 C Street, N .E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 167 run of the loan condition concerning export taxes and consequently the release of the second tranche of the trade policy loan. In this particular case, a pragmatic approach seems to be justified because of the paramount importance of fiscal adjustment. We have to accept that extending the basis for tax revenues cannot be achieved very quickly under prevailing circumstances and perhaps the condition of the loan in this respect was unrealistic already in the first place. I would like to add three brief observations. First, whereas the measures taken to reform the tax system and to restructure the public sector are encouraging, it is less clear what the Goverrunent intends to do to further reduce and in the end eliminate the anti-export bias in the trade regime and in the tax regime. But I do appreciate the additional explanation that has just been given by staff. Second, the report could have been slightly more candid on the development of economic policy over the last two years. One could be tempted to comment on this develop- ment extensively. However, in light of the recent progress in stabilization and adjustment, I think it is appropriate to concentrate on the present and future economic reform efforts of the Argentine Goverrunent. Provided that there are no major setbacks in the MILLER REPORTING CO., INC. 507 C Street. N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 168 nm short-run, I think the Bank should go ahead with the loans envisaged for FY91. Third and finally, the progress with regard to privatization of public enterprises is quite impressive. I hope, however, that the rapid privatization will not be made at the expense of the creditors and suppliers of these 1 entities that are being privatized. And I am glad that the Bank is aware of these problems and has discussed them with the Government. Thank you very much. MR. CONABLE: Thank you, Mr. Boeluner. Mr. Potter. MR. POTTER: Thank you, sir. Well, like the others, I think it is altogether appropriate to say that one has to be impressed with the wide-ranging reform which one sees in Argentina in recent months. And though obviously there is still more to be done, it is probably not unfair to say that for the first time in a long while, Jµ"gentina may be indeed looking at an opportunity to work towatds stability and economic growth. Having agreed with the Fund to resume its standby, and if I am right I think there is a Fund mission in Argentina at the moment -- and just en passant I might offer the MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL run 169 observation that it seems to me that they are due back imminently and I wonder whether it might not have been better to have heard what they might have to say. It might have been helpful to us, but I think at the end of the day the document is sufficiently persuasive in itself so that we can go ahead without that information. But what I would like to say most is that we are ·impressed that the Goverrunent has done so much, indeed that they have done quite a lot more than was required of them in many respects and, although we share the concern which you do and many of our colleagues do considering the lingering longevity of export taxes, it seems to me that we have assurances from an administration that has developed a reputation for delivering on its assurances, and that we should base our judgment on the accomplishments of this Goverrunent, and we should accept at face value the fact that they intend to deal with export taxes and, as a consequence, we should support the tranche release. I was interested in what Mr. Jarvis and Mr. Carling had to say with respect to that final sentence of the document, which looking at it again I found a little am- biguous. I think it says something along the lines that with this release, the Bank will recommence substantial support MILLER REPORTING CO., INC. 507 C Street. N.E. Washington, D.C. 20002 (202) 546·6666  STRICTLY CONFIDENTIAL run 170 for Argentina. I don't know whether that means that this release constitutes that substantial support or whether, indeed, there is a large program lying behind which will follow in the wake of this release. Either way, I would be inclined to think that, as the policy debate moves along and as the agenda unfolds, and as the Bank's confidence grows, it would be altogether appropriate indeed that we should have a substantial program. If we have a member country that is really dealing with its problems and wrestling successfully and making progress, that is the very time when the Bank should be attempting to put its shoulder to the wheel and find the resources and the support to give them the wherewithal to try to find success. Thank you. MR. CONABLE: Thank you, Mr. Potter. Mr. Pinto. MR. PINTO: Thank you, Mr. Chairman. Afte~ listening to Mr. Potter, I have very little to say. But anyway, I agree very much with what Mr. Potter has mentioned. I think that the paper before us makes an enormous MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 {202) 546-6666  STRICTLY CONFIDENTIAL 171 run service to put together and present to the Board the very impressive set of far-reaching policies and measures adopted by the Argentinean Goverrunent. And we have to remember that these measures were negotiated by a Goverrunent that was the first democratic· goverrunent after many, many years. And in a way this new goverrunent is pursuing these policies in a difficult environ- ment, as Mr. Husain mentioned. We feel that the Bank support could make these measures durable, and not only because of the effects that the badly needed resources have in the economy, but the psychological impact that there is the fact that an institu- tion such as the World Bank being behind an economic program, I think this is very important to take into account. I agree here totally with Mr. Potter that to build up a pipeline takes time, and it is very difficult to sit back and wait. I frankly think that the decision to go ahead and recommend substantial support or continue to have substantial support for Argentina is a wise one. It is well- deserved and it makes sense. I think that Mr. Shiratori's question regarding capital flight, I think that the fact that investors realize that the World Bank is ready, preparing programs and dis- MILLER REPORTING CO., INC. 507 C Street, N .E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 172 nm cussing a wide range of topics regarding economic policies and is ready to put its own resources to the program makes a difference if we really want to help in terms of capital flight return. Thank you, Mr. Chairman. MR. CONABLE: Thank you, Mr. Pinto. Mr. Avillez. MR. AVILLEZ: Thank you, Mr. Chairman. It is really for us a great pleasure that we lend our strong support to this impressive package of reforms in I !Argentina. It needs political courage and determination, and it is really quite understandable the reasons why Argentina has not been able to comply with this export tax criteria. I hope that in the near future Argentina can, in fact, remove every anti-export bias because the coherence and the consistency of this package of administrative reforms and fiscal policy, monetary policy, competitive policy which is really important in this context, foreign exchange policy really should put the economy for the first time in many years in good shape. I really want to mention the exceptional performance of the second quarter in terms of the fiscal targets for the non-interest balance of the non-financial public sector. MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 173 run I would like, Mr. Chairman, to mention that it is really a sad story which is in paragraph 14 that it is the third year in a row of deep recession in Argentina. That is a price that has to be paid, and I think that in the medium- term when the economic regime becomes more convinced of the seriousness and determination of the Goverrunent in adjusting the fiscal sector, public sector -- eventually some experience that we have been experiencing in Brazil, happened in Brazil as well -- they would be convinced that they have to adjust their strategy. Otherwise, they would be losing economic opportunities. A final point, Mr. Chairman, is that I think it is much more than a token, the reduction of the levels of investment and consumption that the Argentine Goverrunent has experienced. There is a price to pay to restart negotiations with the commercial banks. I think we should expect full support from the international financial community, as was mentioned by Mr. Benachenhou, for a program like this. In the long-term that would be to the benefit of everybody. Thank you very much, Mr. Chairman. MR. CONABLE: Thank you, Mr. Avillez. Mr. Dujmovic. MR. DUJMOVIC: Thank you, Mr. Chairman. MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 174 run Mr. Chairman, I had the opportunity to exchange views on Argentina's stabilization and reform program with Mr. Bottelier early this week. The progress is evident on many macroeconomic issues, although I agree with some views expressed here there is still a long way to go to see the Goverrunent stabilized on a more sustainable basis. Taking into account what I have heard in my meeting with Mr. Bottelier and today and the fact that all but one condition for the second tranche of the this trade policy loan release are met, I would support the proposal before us. What I was missing in the paper and in today's discussion is the fact that there is no reference to the debt of Argentina and which kind of solution we can expect. In this context, I would like to hear some comments at least on two points. First, it seems to me that in many heavily-indebted middle-income countries, the current fiscal difficulties are, among other things, generated by so-called statization (Phonetic) of the private debt at an early stage of resche- duling and refinancing, to which extent it is the case in Argentina. And I think that from the fiscal standpoint, as well as from the foreign exchange cash flows' standpoint, the MILLER REPORTING CO., INC. 507 C Street, N.E, Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 175 run workout of the debt problem for Argentina is extremely important to see the more appropriate envirorunent for new investment and to see the economy grow. Thank you. MR. CONABLE: Thank you, Mr. Dujmovic. Are there further questions before I ask staff to wind this up? Yes, Mr. Al-Assaf. MR. AL-ASSAF: Mr. Chairman, I too can go along with the waiver. I think in weighing the trade versus the fiscal reforms, both are very important but I agree with the staff that the overriding priority to achieve the fiscal balance has the priority. Therefore, I believe that the waiver is warranted. But I would like to take this opportunity also to commend the authorities for their reform efforts, especially in the structural and also the exchange rate and controlling inflation. But I have a question with regard to inflation. Obviously, it has been decreasing over the last few months, but I wonder if we have any figures for July. It is also declining? MR. CONABLE: Thank you. MILLER REPORTING CO., INC. 507 C Sueet, N .E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 176 run Is there anything else? The staff has some questions to answer here. (No response.) MR. CONABLE: Mr. Husain, MR. HUSAIN: Two questions I think that need to·be answered, Mr. Chairman. One is what did we mean by the last sentence on page 14 about the beginning of substantial support for Argentina. Let me remind the Board that it is merely one year and a half since we made any loan to Argentina and of the last bunch of loans we made, $400 million which was for a banking sector adjustment never materialized, which means it was not signed and never became effective, and the second tranche on this has only been released now. MR. CONABLE: As I recall, we disbursed only $150 million. MR, HUSAIN: That is correct, at that time. And after that, we just approved one housing loan. So, that was the last time we approved loans for Argentina about a year- and-a-half ago. But we have continued substantial work in Argentina, and, in fact, I would like to say that the Bank has had a major contribution to both the stabilization and the adjust- MILLER REPORTING CO., INC. 507 C Street. N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 177 run ment program in Argentina. So, when we say that substantial support would start, all we are saying is that the normal flow of projects and loans subject to their normal conditions would begin now because we feel that Argentina has established some track record of a stabilization program and has an adjustment program going and, therefore, has established a basis for the normal flow of projects and programs. And this would consist both of projects, particu- 1 jlarly one in a very advanced stage about a health program, jwhich would bring about a basic restructuring of the health program in Argentina, again restructuring the targeting and the covering of the health program in view of the changed situation and the fiscal situation. That is fairly advanced, Pieter, isn't it now? And we hope to bring it to the Board soon. But probably the most significant that we shall bring to the Board would be one on the public enterprise reform, which, as I said, is central to the viability of the whole fiscal and reform effort. We have done major work on that, and much of the work that the Goverrunent is doing now in privatization, in restructuring has already been undertaken as a part of our mutual discussions and as a part of the program that we have initiated. So, that is all this means, MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 178 nm Mr. Chairman. Now, on the second issue of what is happening between Argentina and the commercial banks, there have been a few discussions between Argentina and the commercial banks and Argentina is paying part of the interest due. Again, this has been in consultation with both the IMF and ourselves and at our behest. But we do feel that further progress in the discussions and negotiations between Argentina and the commercial banks is intimately linked to the progress of the stabilization and adjustment effort, because it is only that effort and the success of that effort that can produce the sort of credibility and the backing of Argentina's own performance and resources that is needed for any meaningful solution of the debt problem. But in the meantime, I think we should note that at least partially the debt problem is being resolved through a very large conversion of debt into equity as a part of the I privatization program that Argentina is undertaking. And we hope that there will be more of this in the months to come. MR. CONABLE: All right. Mr. Carling wants to follow up on something you said, Mr. Husain. MILLER REPORTING CO., INC. 507 C Street, N .E. Washington, D, C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 179 nm MR. CARLING: Mr. Husain mentioned public enterprise reform loan, how far advanced is the preparation of that? MR. HUSAIN: We are in the process of appraising it, Mr. Carling. MR. CONABLE: You are appraising it at this point? MR. HUSAIN: Yes. MR. CARLING: Will it come to us before the end of this year? MR. HUSAIN: Pieter. MR. BOTTELIER: Barring further major disturbances on the macroeconomic side and successful negotiations, we should be able to present it in November. MR. CONABLE: Mr. Bottelier, do you have anything to add or, Mr. Gerken? Mr. Gerken does yes. Mr. Gerken, go ahead. MR. GERKEN: Okay. There are two points. Have we been too ambitious on the export tax reduction? It didn't seem at the time. You see, at the time the share of export tax revenue and Federal Government revenue was only 3 percent, and it is now about 30 percent. What it reflects is this change in the tax structure which was corning through the co-participation. And I think we have not been foreseeing this implication. MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546,6666  STRICTLY CONFIDENTIAL 180 run I want to make one short remark on the coefficient of protection. Of course, I am aware what is in the World Development Report, but what is in the World Development Report is the relative price between the exportables and non- tradables, whereas what I have been giving you is the relative price between the exportables and the importables. And it is completely consistent. What it says is that a one percent change in the relative price of exportables to importables goes 40 percent in export non-tradables ratio and 60 percent in the importables tradable ratio. There is a clear identified relation between those. MR. CARLING: Perhaps we could have a seminar. MR. GER.KEN: Yes. MR. CONABLE: Mr. Gerken, do you feel very deter- mined about this? (Laughter.) MR. GER.KEN: Yes, I do. MR. CONABLE: Anything else, sir? MR. GERKEN: On inflation. MR. CONABLE: This past month was the question. MR. GER.KEN: Right. Inflation has come down further. The wholesale price index in July has increased by 3.9 percent and the MILLER REPORTING CO., INC. 507 C Street, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 181 run consumer price index by 10.8 percent. That makes an average of 7.3 percent. MR. CONABLE: However, the lower wholesale price index indicates that it is coming down, does it not, in all probability? MR. GERKEN: Yes. MR, CONABLE: It still is that much a month. MR. GERKEN: Yes. MR. HUSAIN: But a major part of what you call !inflation in Argentina is corrective inflation. MR, CONABLE: Is what? I MR, HUSAIN: Correct inflation. It means that the difference between 10 and 3 is largely the adjustment of publicly administered prices like electricity, transportation and so on, which need to be adjusted in order to improve the finances of these organizations. MR. CONABLE: Yes. We may have some correct 1 inflation in oil and other places also before too long. Mr, Dujmovic. MR. DUJMOVIC: I was about to make a question on was there any relevance of the so-called statization (Phone- tic) of the debt on the fiscal situation of the country? MR, CONABLE: Mr, Bottelier. MILLER REPORTING CO., INC. 507 C Srreet, N.E. Washington, D.C. 20002 (202) 546-6666  STRICTLY CONFIDENTIAL 182 run MR. BOTTELIER: If I understand Mr. Dujmovic's question, to refer to the assumption by the public sector of the private sector external debt at the time of the crisis in the early 1980s, that is a major factor which is now almost forgotten by many, by the creditors perhaps. It is true that at that time Argentina's private I external debt was at least as large as the public external !debt, probably slightly larger. Had Argentina not assumed responsibility for the private external debt, I think the /situation would have been totally different. !1 That is not a unique phenomena for Argentina. I I mean, all countries -- Mexico, Chile -- all countries with jencouragement from official sectors did assume quite a lot of debt. And that created massive fiscal problem, because what did not happen, of course, was the increase in fiscal capacity of the public sector to service their debt. And the debt crisis is to a large extent an internal fiscal crisis as a consequence in many of these countries. MR. CONABLE: Is there anything else? (No response.) MR. CONABLE: I see nothing else. The minutes will show the Executive Directors approve the recommendation in paragraph 36 of the memorandum. MILLER REPORTING CO., INC. S07 C Street, N.E, Washington, D.C. 20002 (202) 546-6666