Argentina - Country strategy note

 ARGENTINA 68064 COUNTRY STRATEGY NOTE This Country Strategy Note updates the Country Strategy Paper for Argentina, issued on April 29, 1992. It reviews progress over the last twelve months in economic conditions and in the implementation of the Government's reform agenda as presented in the CSP, and the Bank's assistance strategy in light of these developments.! The 1992 CSP foresaw the Bank's role in Argentina as shifting from support for the completion of structural reforms at the central government level, to improving financial intermediation and restoring the supply of core public goods and social services. It proposed further adjustment lending to support reform of provincial finances, followed by provincial investments and a heavy emphasis on social sector lending. Bank lending and ESW activities would also seek to ensure adequate credit for private sector development, farmers and privatized infrastructure firms. The lending program would be conditioned on satisfactory macroeconomic performance, measured mainly by the Government's maintenance of an operational primary sUlplus sufficient to obviate the need for infiationary finance. OVERALL ASSESSMENT 1. In 1992, the authorities continued to adjust the economy, extending the period of sound economic performance initiated in March 1991. They reached agreement on a debt deal (completed in April 1993), accelerated the privatization process, and diverted some transfers from the provinces into social security. The fiscal deficit remained under control for the third year in a row, and infiation subsided to the 1 percent per month range after September. The Government complied with its three-year EFF (signed March 1992), as well as conditionality under the Bank's Public Enterprise Reform Loan (March 1991) and Public Sector Reform Loan (July 1991). The increased operational primary surplus for 1992 (2 percent of GDP) met the EFF target as did, by a wide margin, the increase in net international reserves. Interest obligations still exceeded the operational primary surplus slightly, despite the sharp fall in world interest rates. 2. The main risk to Argentina's program relates to the continued real appreciation of the ~, and current account deterioration. The current account deficit reached US$8.0 billion in 1992, up from a US$1. 7 billion surplus in 1990, and a US$2.8 billion deficit in 1991. The economy is, thus, extremely vulnerable to private sector expectations and potentially volatile short-term capital infiows, as well as to any change in world interest rates. Investor confidence is still high because of the income from privatizations; in the medium term confidence will be infiuenced by the economic team's ability to keep its program -- particularly with respect to 1. The Counlty Strategy Note also takes account of, and is consistent with, the Febnwy 16, 1993 Board discussion of the Argentins Counlty Assistance Strategy (CAS) document.  2 fiscal discipline -- on track during the run-up to the next Congressional elections (October 1993) and thereafter to the Presidential election (1995). President Menem is considering seeking an amendment of the Constitution to allow him to run for re-election, and this could preoccupy the new Congress and raise the stakes for concessions to traditional interest groups seeking preferential subsidies and the like. The risks related to the real appreciation of the ~ and the need for continued fiscal adjustment could be reduced, though not eliminated, by successful completion of the social security reform and more flexible labor laws, which are under consideration in the Congress, and by strong fiscal adjustment in the provinces. This is the strategy described in the 1992 CSP and this Note recommends basically that we adhere to that strategy. 3. While the 1992 strategy remains intact, three aspects merit further consideration. (i) Although we do not suggest any reduction in the FY93-97 lending program for Argentina of US$5 billion, proposed in last year's CSP, we do want to signal that the probability of delivering this volume of lending has decreased somewhat because of the increasingly political environment (para. 2) in which the economic team must operate. (ii) Second, we are intensifying our strategy of direct Bank involvement in the provinces, given the need to match the rapid decentralization of power and responsibilities from the center to the provincial governments. However, institutional weaknesses may constrain absOIptive capacity, and the difficulties of achieving politically sensitive fiscal reforms at this level reduce the prospects for delivery of the final proposed adjustment operation (for provincial fiscal reform) before the 1995 Presidential elections. (iii) Argentina has just completed a six-year exercise, with U.N. technical assistance, to. revise its national accounts. A number of methodological issues have still to be reviewed, but early indications are that Argentina's per capita GNP will pass the Bank's trigger point for initiating graduation discussions with Borrowers, within the five-year time frame of this CSN. ARGENTINA'S ECONOMIC PROGRAM 4. The Government's program attacks the root cause of Argentina's economic decline: an overextended public sector, contributing to inflationary fiscal deficits and interventions in trade and financial markets, culminating in past bouts of hyperinflation and recession. The program, which has gained momentum and coherence since its launching in 1989, has two components: (i) structural reform to eliminate the public sector's deficit, divest its non-core functions, and terminate its inefficient intervention in markets; and (ii) the March 1991 Convertibility law, guaranteeing a one-to-one convertibility of the ~ to the US dollar, thereby limiting Central Bank financing to the Government and linking monetary policy to international reserves. The Government accords priority to price stability as the essential precondition for reviving private investment and encouraging productivity growth. 5. By April 1992, as discussed in the CSP, the Government had already made impressive progress in structural reforms. It improved the tax structure by broadening the value added tax (VAT) base and eliminating or reducing taxes on trade and financial intermediation; reduced tax evasion sharply through modernizing tax administration and lowering inflation; reorganized the Government and cut federal employment by 18 percent; privatized the telecommunications  3 company, the national airlines and concessioned major parts of the petroleum reserves, the railways, and the interutban highways. It progressed in the regularization of provincial finances through the closure of the provinces' overdraft window at the Central Bank, and the discontinuance of routine rediscounts to provincial banks. In addition, the Government has substantially liberalized trade, carrying on the process begun in 1987. It also maintained the elimination of price, wage and interest rate controls, and investment licensing. It has deregulated professional and transport services, enacted some legislation to increase labor fiexibility and improve collective bargaining, and is expected to complete shortly the reform of social security. Finally, it had signed an offer sheet for a debt reduction deal and set the stage for completing most of the privatizations by end-1992. Despite this progress, the structural reforms were not complete, and needed to be consolidated. In particular, the Government needed to further extend adjustment to the provinces, and further reform labor legislation to fiexibilize the adjustment of wages and prices, a crucial component for the success of the stabilization plan based on the Convertibility Law. MACROECONOMIC PERFORMANCE 6. Overview. The March 1991 Convertibility Law inherited the best initial conditions of any recent stabilization program. The fiscal accounts were then in near balance, the Government could collect taxes and control subsidies to public enterprises better, and liquid international reserves were five times greater than the average for programs begun in the 1980s. Abetted by these advar.ltages, the macroeconomic situation improved dramatically. The Argentine program stimulated substantial capital infiows, amounting to some US$6 billion in 1991. These infiows financed increased imports and additions to reserves. Import competition, remonetization, and expectations of exchange rate stability lowered monthly infiation to I-I. 5 percent in 1991, compared with 4 to 6 percent a month in the last quarter of 1990. Nominal interest rates on deposits fell to less than 10 percent annually, from nearly 9 percent monthly in 1990. These events, together with cuts in interest rates on consumer loans, produced a consumption-led boom in 1991. 7. During 1992, GDP growth was 8.7 percent and industrial production grew in the 12 percent range for the second year in a row.z Employment rose by about 10 percent. Investment expanded briskly in 1992, rising from 12.5 percent to 14.5 percent of GDP. The increased investment was financed mainly by external savings, with gross national savings declining moderately, to 9.3 percent of GDP. Public savings rose by about 2 percentage point of GDP, while private savings fell. Infiation (consumer prices) decelerated to an annualized rate of about 9 percent in the last quarter of 1992 and the first quarter of 1993, compared to over 20 percent a year earlier. Nonetheless, 9 percent infiation still exceeds international rates. From the beginning of the Convertibility Plan to December 1992, the real effective exchange rate calculated using the Argentine consumer price index appreciated by 24.7 percent. Wages in dollars have risen over 14 percent since January 1992, on top of 4 percent during 1991. 2. All estimates in this CSN are based on !be old nstional accounts series (see paras. 4 and 27 regarding !be new series).  4 Capital inflows, jointly with the economic expansion, contributed to an 83 percent increase in imports in 1992; exports increased by 1 percent. As a result, the current account deficit for 1992 reached 5.2 percent of GDP, up from 2.1 percent a year ago. Capital inflows ofUS$12.0 billion, mostly private, more than offset the current account deficit, allowing a US$4 billion accumulation of net reserves. 8. Fiscal Policy. The operational primary balance of the nonfinancial public sector increased to 2 percent of GDP (up from 1.1 percent in 1991). Revenue from privatizations raised the primary balance to 3.2 percent of GDP. This more than covered interest obligations (2.1 percent of GDP), and the Central Bank's quasi-fiscal deficit (0.2 percent of GDP). Thus, overall public sector operations produced a sUIplus of 0.9 percent of GDP. 9. Increased taxes were the major factor in tightening fiscal policy. Tax collections rose by 2.2 percent of GDP (from 15.0 percent of GDP to 17.2 percent). A strong improvement in tax administration and a booming economy were the main causes of this rise. Transfers rose by as much as taxes, i.e. 2.1 percent of GDP. This increase reflected increased transfers, mainly to social security (l percent of GDP, of which 60 percent represented an offsetting increase in the social security sUIplus, that will disappear after the reform) and the provinces (0.8 percent of GDP). Current spending increased slightly, by 0.6 percent of GDP. Capital spending and non-privatization receipts both declined slightly. The fiscal deficit also was reduced by the drop in dollar interest rates, which cut (accrued) interest obligations by 1.3 percent of GDP. 10. Over the last twelve months, authorities continued adjusting the public sector and improved relations with domestic and foreign creditors. They have increased revenues by improving efficiency of tax and customs administration, eliminating distortionary taxes (e.g. stamp tax and the tax on diesel fuel), raising the cotpOrate income tax rate from 20 to 30 percent, and reducing tax subsidies for industrial promotion. A new revenue sharing agreement with the provinces was approved in June 1992, partly reallocating coparticipated revenues from the provinces to the social security system, generating a (temporary) sUIplus in the system of 2.6 percent of GDP in 1992-93. Following an apparent slowdown in tax revenues in the first quarter of 1993 and in light of the costs of social security reform, Minister Cavallo agreed with the IMP to cut budgeted spending by 10 percent. For the second quarter of 1993, the IMP reports a continued revenue shortfall of US$528 million from program projections. 11. In May 1993, the Govermnent also made several announcements regarding new commercial, tax and industrial policies. Tariffs and the statistical tax on imports of capital goods produced domestically were eliminated, and a 15 percent subsidy for the domestic production of capital goods was introduced. Additionally, the Govermnent proposed to limit the cascading nature of the provincial turnover tax by reducing tax rates on agricultural and industrial products and to eliminate the highly distortionary provincial stamp tax. However, the federal proposal for provincial tax reform faces strong political resistance from the provinces as the turnover and stamp taxes provide over 70 percent of the local tax revenue. The capital goods subsidy (which could amount to some 3.5 percent of total public revenues, if fully  5 implemented) would be discontinued should provinces fail to agree on the elimination of the provincial turnover and stamp taxes. 12. The privatization program was amplified in September 1992 when Congress approved the privatization of the state petroleum company (YPP). On June 28, 1993, the Government announced that 160 million shares will be sold in cash at US$19 per share. Up to 46.5 million shares will be sold against debt instruments (BOCON) held by pensioners and private investors (the stock of BOCON held by pensioners amounts to about US$lO.4 billion). Total receipts, by the Federal Government and Provinces, could reach US$3.9 billion, about US$3.0 billion in cash, and US$O.9 billion through swap operations. Federal receipts will be exchanged for BOCON held by pensioners. To mitigate the expansionary impact of the YPF operation, the Government committed to the IMP to sterilize its foreign proceeds from its YPF sale. 13. The Government also passed legislation in June 1992, that allowed the privatization of Gas del Estado, resulting in the complete restructuring of that sector, and sale of a major share of that operation in December 1992. Other major privatizations included Obras Sanitarias de la Nacion (OSN); Servicios Electricos de Gran Buenos Aires (SEGBA); Empresa Distribuidora de Electricidad La Plata (EDELAP); port tenninal elevators in Buenos Aires, Quequen and Puerto Diamante; the steelworks Altos Homos Zapla and Somisa; a concession for the Argentine racetrack; shares in Telecom; and railway concessions. Except for the mails, and minority share holdings, the Government has now substantially completed its privatization program. 14. The Government has proposed to Congress a major change in the public pension insurance system, which accounts for one-third of federal public expenditures. The refonn would maintain mandatory pension insurance but limit the state's role to supplying a unifonn basic and supplementary pension on pay-as-you-go principles. In addition, the private sector would supply a fully funded pension system, similar to the Chilean system. The Lower House of Congress approved the refonn with major modifications, including higher public pension promises, an opt-out from the private pension fund, and a pension fund supplied by Banco de la Nacion that would be subsidized and offer state guarantees for pension fund savings in pesos and dollars. The Government is urging the Senate to act on the refonn law, and expects to be able to implement an improved version in early 1994. 15. An external debt agreement was concluded on April 7, 1993, that reduced US$28 billion in commercial bank debt by approximately 37 percent, and eliminated interest arrears. This debt deal is expected to improve further Argentina's creditworthiness. The agreement fonnalized arrears in a 12-year uncollateralized bond at LIBOR with a 3-year grace period, after a US$700 million downpayment; existing debt was exchanged for a collateralized par bond with a fixed interest rate, or a collateralized discount bond at 65 percent of face value paying LIBOR; the new collateralized bonds will have a 12 month rolling interest guarantee. 16. Structural refonns of the Federal Government and the Central Bank have been supported by the Bank's Public Sector Refonn Loan (pSRL, US$325 million, July 1991, with the second tranche disbursed in February 1993) cofinanced by the Inter-American Development Bank, the Tax Administration Technical Assistance Loans I (US$6.5 million, January 1989) and II (US$20  6 million, April 1992), the Public Sector Refonn Technical Assistance Loan (US$23 million, June 1991) the two Public Enterprises Adjustment Loans (PERAL I and II, US$300 million each, February 1991 and January 1993), and the Public Enterprise Refonn Execution Loan (PEREL, US$23 million, February 1992). The Bank supported the debt agreement with a Debt and Debt Service Reduction Loan in January 1993 (US$450 million), and with US$300 million in set- asides from the PERAL II and the Financial Sector Adjustment (US$400 million, February 1993) Loans. 17. Monetary and Financild Policies. In September 1992, a new law strengthened the Central Bank's autonomy, and further restricted its ability to extend credit to the Government and the banking system. This measure reinforces the Convertibility Law, and paves the way for an independent, disciplined monetary authority. 18. In response to a short-lived run on the ~ in mid-November 1992, the authorities strengthened their commitment to the fixed exchange rate regime by pennitting reserve requirements to be met either in foreign or domestic currency,equalizing reserve requirements on foreign and domestic currency deposits, and allowing the use of foreign currency denominated checking accounts in domestic transactions. In February 1993, these measures were complemented by a lowering of reserve requirements and further deregulation of commercial bank transactions in order to reduce spreads and increase bank lending to the private sector. Tenn deposits under 30 days were also eliminated to increase the average maturity of deposits in the domestic financial system, and reduce the risks of a run on the banks. Finally, since April 1993, banks' compliance with reserve requirements is based on a four week moving average, which should reduce the volatility of short-tenn interest rates. Over the last six months, the authorities have taken measures to reduce interest rates and stimulate investment. In October 1992 they imposed a 2 percent per month ceiling on loans made by public banks, a measure also aimed at stimulating restructuring of these banks. In March 1993 they began auctioning subsidies to banks, with the winner of the subsidy being the banks that offer to charge the lowest rates to final borrowers. (It is unclear how the effective lending rate, including lending fees, can be enforced.) In April and May 1993, they announced programs to reduce borrowing costs for finns that hire workers laid-off by provincial governments, as well as additional directed credit schemes for small and medium entrepreneurs and rural investors. Although the fiscal impact is likely to be slight, there is concern lest such measures signal a return to increased government interventionism in Argentina's financial markets. We are paying particular attention to these issues in our dialogue with the economic team. As a result of this dialogue, the Government has already agreed that targeted interest rate subsidies would be eliminated when the existing facility has been utilized by mid-1994. 19. Trade Policy. In November 1992, faced with an' increasing trade imbalance, the Government increased export tax rebates from an average of 8 to 13 percent, and eliminated the remaining duties on some agriCUltural products. On the import side, the tariff band was narrowed from 0-35 percent to 0-20 percent, lowering both the average tariff and dispersion. However, the Government also increased a flat tariff surcharge, called a statistical tax, from 3 percent to 10 percent on a temporary basis. Thus, overall tariffs increased from an average of 14 to 19.3 percent, which jointly with the increase in export tax rebates depreciated the real  7 effective exchange rate by about 5 percent. In July 1993, the Government reintroduced for one year certain quantitative restrictions for paper and wool clothing imports. We will pay particular attention to this issue in our policy dialogue, with the objective of preventing a broader reversal of the trade liberalization process. MEDIUM-TERM PROSPECTS 20. The Government's main macroeconomic objective is to achieve a robust long-term annual growth rate of 5 percent, with expanding employment and in1Iation held to international levels. It aims to maintain the operational primary surplus sufficient to service interest payments and to obviate the need for a future inflation tax. It plans no change in its monetary and exchange rate policies, which will continue to be disciplined by the Convertibility Law and the new Central Bank Charter. It expects that a tight fiscal stance, continuing import competition, product and factor market deregulation, and new entrants in heretofore oligopolistic markets would drive domestic in1Iation to international rates and bring about any correction that is needed in the real exchange rate. 21. As the last CSP pointed out, the above scenario is attainable if the Government continues to improve its fiscal position, and if private markets generate a smooth transition to a sustainable balance of payments and growth path. However, even with adequate ex ante fiscal adjustment, near-term growth rates could be lower than projected. Slower growth or even a recession could come about through two related mechanisms. Capital inflows may taper off once investors complete their portfolio adjustment in favor of Argentina and privatizations are completed. Rising international interest rates could also slow capital inflows sharply. The first response to a slowdown in capital inflow would be a loss of reserves and higher domestic interest rates, which would dampen growth. But, even then, domestic prices are likely to be slow to converge to competitive international levels; price setters, long used to markup pricing in oligopolistic environments, might take several months of slow sales before starting to cut prices to the degree necessary to adjust the price level and thus the real exchange rate. Slower growth eventually would produce the price convergence necessary to sustain the exchange rate regime and rekindle export-led growth, although it would also undoubtedly create added fiscal pressure. As revenues fall and the interest bill rises, it might become more difficult to achieve the projected partial rollover of domestic debt with bondholders. Further reduction of expenditures, despite the recession, might be needed to reduce the Government's net borrowing requirement, and defend the exchange rate. A short recession would probably pose no major threat to the program, and is unlikely to derail structural reforms, but a larger one might cause problems. 22. Also, a shift in confidence, a worsening macroeconomic panorama, and/or short-term political compromises in the course of the Administration's attempts to introduce constitutional reforms could trigger a speculative attack on the~. The ease of capital mobility between currencies and across borders, superimposed on a small monetary base, makes the economy unusually vulnerable to swift changes in private expectations and portfolio shifts. Sudden demonetization, and very high interest rates could produce cracks in the financial system. The Government might then be forced to choose between: (i) providing emergency liquidity to prevent the collapse of the financial system, thereby putting further pressure on the exchange  8 rate; and (li) letting financial institutions collapse with some depositors suffering losses, while sharp increases in interest rates drive the economy into recession. In these circumstances, there would be great pressure to alter the exchange rate regime. 23. The probability of these adverse events declines as the Government progresses on reforms that improve the fundamentals of public finance. The Cavallo team has exhibited two solid years of successful management, concluded the Brady deal and completed substantial privatizations, enhancing its reputation. The downsizing and privatization of much of the public sector are unlikely to be reversed. Also, international reserves are the highest in a decade and cover the monetary base (although not the deposit base), which tends to deter a speculative attack on the ~. Even if the events outlined in para 22 were to materialize, in all likelihood any policy reorientation would still, of necessity, focus on maintaining fiscal balance and policies conducive to private investment. Over the last few years, the country has enacted difficult strnctural reforms with considerable public support. The lack of alternatives to fiscal discipline and price stability, and memories of the hyperinflation of 1989-90 have made stability politically popular. These comprise powerful ballast that is likely to keep the ship of structural adjustment headed in the same direction, even in a financial storm. BANK ASSISTANCE PROGRAM 24. Based on last year's record, this Note recommends adhering to the latest CSP strategy, to help Argentina consolidate the macroeconomic reforms and deepen their impact, by strengthening the greatly weakened institutional and infrastructure base, both at the federal and provincial levels, and by fostering the development of the private sector. Three aspects of the proposed strategy merit further comment. 25. First, the FY93-97 lending program for Argentina in last year's CSP called for a total commitment of about US$5 billion. While no change is recommended at this time, we do wish to signal that the economic team will be operating in a heightened political environment during the run-up to the October 1993 Congressional elections, and thereafter to the 1995 Presidential elections. The pressures to moderate basic economic and financial policies which underpin the Government's medium-term macroeconomic program, to accommodate short-term political pressures, will increase. At the same time, the Bank's leverage to influence such developments will be reduced due to the phasing out of adjustment lending, in favor of smaller investment operations, mainly at the provincial level. In our dialogue with the Government we will continue to emphasize that the US$5 billion program is an upper limit, which would be attainable only provided that: (i) there is continued progress on the fiscal fundamentals, as measured by the Government's ability to maintain an adequate operational primary surplus; continued satisfactory compliance with an IMP program; and continued compliance with conditionality under previous adjustment loans, including the two trade policy loans of 1987 and 1988; (li) the dialogue on sector policy issues relevant to individual operations remains constructive and fruitful; and (iii) the central and provincial governments demonstrate an improving project execution capacity.  9 26. Second, the increased transfer of resources and responsibilities from the Federal Govermnent to the Provinces during 1992 means that the need to strengthen our analytical work and dialogue with the Provinces is now even stronger than before. At the same time, we must be cognizant of the fact that the institutional weaknesses of the provincial govermnents, and the need to deal with a rapidly increasing number of actors at that level, may constrain the volume of lending that can be effectively transferred. Also, although we continue to carry a final adjustment loan for provincial fiscal reform in the lending program, the difficulties of achieving politically sensitive fiscal reforms at the provincial level make delivery before the 1995 Presidential election particularly uncertain. 27. Third, the Bank will want to evaluate the implications of the newly released national accounts. A preliminary application of the Bank's moving three-year average calculation of per capita GNP on the new national accounts suggests that Argentina's 1991 per capita GNP reached US$3,841. Data for 1992, which are subject to revision, indicate that Bank-adjusted per capita GNP could reach US$6,039. Although the ~ appreciation, based on a purchasing power parity estimation, has been significant since its 1991 fixity to the US dollar, the revised national accounts strongly suggest that within the five year horiwn contemplated in this CSN, Argentina's per capita GNP level could warrant initiating discussions on eventual graduation from the Bank. 28. Continued improvement in the performance of the Bank's ongoing portfolio of projects during FY93 was determined largely by the speed of the adjustment process, economic stability, improvements in public management and remedial actions taken by the Govermnent in response to the three Country Portfolio Performance Reviews held since 1990. The most notable achievements were in our adjustment operations, including Debt and Debt Service Reduction (DDSR) support, which were implemented largely on schedule. With regard to investment projects, improved performance was seen in agricultural operations, in technical assistance for power engineering, public enteIprise, and tax administration, as well as in the municipal and provincial development projects. In addition, we continued to clean up the portfolio of poorly performing projects designed prior to the macroeconomic reform process. For these reasons, the quality of the portfolio has improved, and the pace of loan implementation quickened. However, many tasks lie ahead, such as increasing the speed of loan activation and the monitoring by federal authorities of large projects. As noted above, continued improvement in the executing capacity of the central and provincial govermnent is fundamental for achieving the approved levels of lending during the period FY93-97. 29. A revised proposed five-year lending program is attached; while some of the specifics have changed, the thrust is basically the same as that of the latest CSP, and exposure would remain within Bank gnidelines. Roughly 20 percent of the FY93-97 program would be devoted to consolidating macroeconomic reforms with only one remaining adjustment lending operation on the key area of provincial reform, 55 percent to improving the public capacity to provide social and productive services (of which one-third would directly alleviate poverty, with a heavy emphasis on social sector lending), and the remainder to fostering private sector growth. Annex I provides a table of key economic indicators. Annex IT provides an update of the operations  10 proposed, and Annex ill lists the policy issues that would be addressed through the FY93-97 lending program. 30. Another Country Strategy Note will be prepared in early FY95 to review progress, particularly in macroeconomic performance.  ANNEX 1 Argentina: Key Economic Indicators, 1991-2001 aJ 1991 1992 1993 A_. 1994-97 Average 1998-2001 Output GOP (CUrrent uSS billion) 135.4 153.2 170.6 203.0 275.6 GDPGrowth 8." 8.7 5.0 3.4 4.5 Private Consumption per Capita 9.6 13.6 2.5 0.9 1.7 Investment (percent of GOP) Gross Investment 12.5 14.5 15.5 16.3 18.3 Public Fixed Investment 1.4 1.2 2.0 1.5 1.5 Private Fixed Irwetrtment 11.1 13.3 13.5 14.7 16.8 Savings (percent of GOP) Public National Savinl1S .{J." 1.0 2.5 1.0 1.7 PrIvate National Savings 11.3 8.2 8.0 10.5 12,3 FOreign Savings 2.1 5.2 4.9 4.7 4.1 Money and Prices Domestic Inflation (end of year) bI 69.9 10.7 8.9 3.8 3.8 Real Exchange Rate Index (1987=100) rJ 61.8 53.2 47.3 46.9 46.8 Ml (peroent ofGDP) 4.1 6.4 6.6 6.8 7.1 Public Sector Budget (percent of GOP) dJ Operational Primary Surplus 1.1 2.0 2.6 2.0 2.2 Primary Surplus 2.5 3.2 3.7 2.4 2.2 Quasifiscal Surplus of Central Bank 0.0 .{J.2 0.1 0.3 0.3 Overall Balance .{J.8 0.9 1.9 0.4 0.9 Balance of Payments (percent of GOP) Resource Balance 2.2 -2.4 -2.4 -1.3 .{J.3 ExporWGNFS 11.0 9.8 9.0 9.6 10.6 Imports GNFS 8.7 12.2 11.5 10.9 10.9 Current Account Balance -2.1 -5.2 -4.9 -4.7 -4.1 capital Account Balance (Net) 4.4 7.7 6.8 4.8 4.3 to Public Sector (Net) 2.9 -1.3 2.1 .{J.2 .{J.6 to Private Sector (Net) 1.6 ".0 4.7 5.0 4." Net Direct Investment e/ 1.8 3.1 1.5 1.2 0.8 01her U .{J.3 5.9 3.2 3.8 4.1 Debt (peroent of GDp) Total Debt: {Extemal ancllnternal} 54.7 59.2 55.2 54.2 52.9 Total Debt SefVice oJ 8.7 6.3 6.3 9.3 10.9 _ Creditor Debt SefVice hi 1.8 1.4 0.9 D." 1.0 Public Debt 48.4 49.0 42.4 34.4 22.9 Public Debt Service 7.0 4.8 3.7 4.2 3.9 IBRo Exposure Ratios: IBRD OSfMLT Publicly Guaranteed Foreign OS 9.0 10.0 8.6 8.5 9.8 IBRD DS/Export$ GNFS 3.8 4.1 3.1 3.3 3.2 Preferred Creditor OSfMLT Pub. Guar. Foreign OS 35.9 34.6 27.2 25.0 27.5 Key Extemal Variables UBDR 6.1 3.8 4.5 6.6 7.0 Tenna otTrade (1987=100) 101.3 99.1 98.6 99.2 99.6 MW index (% growth) 2.1 4.3 3.8 2.9 3.6 Memo: World Bank Dlsburaements (USS Million) 480 171 1478 747 S04 Net DIsbursements (USS Million) 109 -212 1171 435 13 Net Transfers (USS Million) -108 -440 993 98 -342 aJ See footnote 2, Page 3. bI Meuured by Combined Price Index (50% CPI, 50% WPI). cI Argentine CPI VS. Combined Price Index of trading partners. dJ Federal Government and Central Bank. eJ Includes privatIZation. 'fl Includes trade credits and other bilaterals, private non-guaranteed and short term. gI Includes total foreign and domestic debt, long term and short term. hi Preferred creditors are IMF, IBRo and lOB.  ANNEXll ARGENTINA: Proposed Bank Lending Program, FY93-97 (US$ million) Assistance Objective/ 1993 - 1997 Lending Operation 1993 1994 1995 1996 1997 T<YI'AL % I. Consolidating Macroeconomic Reforms - Public Enterprise Reform 300 -DDSR 450 - Provincial Fiscal Reform 300 Sub-total 1,050 20% IT. Institutional Strengthening - Yacyreta IT 300 - Flood Rehabilitation 170 - Road Maintenance 340 - Oi1lndustry Environment 150 - Maternal Child Health 100 - Second Education Decentralization 200 - Social Sector Reforms TAL 30 - Provincial Agricultural Development 125 - Provincial Development IT 200 - Provincial Roads 200 - Buenos Aires Health 200 - Maternal Child Health IT 100 - Forestry Sector 30 - Provincial Agricultural Development IT 200 - Provincial Water & Sanitation 200 - Education Development 150 Sub-total 2,745 55% ill. Private Sector Development - Financial Sector Reform 400 - Capital Market Development 500 - Regulatory Development 25 - Productive Services 50 - Mining 30 - On Farm Development 200 Sub-total 1,205 25% Total Programmed Lending 1,960 750 680 780 830 5,000 100% Number of Loans 6 3 5 6 5 24  Annex ill Page 1 of2 ARGENTINA: Policy Issues In Proposed FY93-97 Lending Objective/Instrument Issues Consolidating Macroeconomic Refonn Public enterprise refonn • Divestiture of all PEs owned by Ministry of Defense • Improved anti-trust regulation • Improved Flexibility of labor contracts Re-establishment of external • Support for debt agreement between Argentina and creditworthiness commercial creditors Provincial adjustment • Refonn of provincial finances • Downsizing of provincial governments • Transfer of public service responsibilities to provinces • Privatization of provincial enterprises and banks Institutional Strengthening Energy and Power • Privatization/concessioning of electricity transmission and distribution • Restructuring of National Nuclear Commission/privatization of unfinished nuclear power project • Completion and privatization of Yacyreta • Establishment of regulatory frameworks and agencies Transport • Road concessioning/transfer to provinces • Privatization of ports • Removal of bottlenecks in export corridors Provincial and municipal development • Developing capacity to plan, build and maintain infrastructure Rural infrastructure water supply, and • Improved water management sewerage • Improved living conditions and sanitation in urban poverty areas • Strengthen regulatory framework for privatized systems Agricultural, industrial services • Restoration and refonn of applied research, extension, vocational training and quality control • Restructuring of national institutes including partial user fee financing • Liberalization of trade in consultant services  Annexm Page 2 of2 Objective/Instrument Issues Maternal and child health and nutrition • Targeting of social assistance on vulnerable groups • Reduction of maternal and infimt mortality and malnutrition • Improved delivery of social assistance Health • Transfer of public services to provinces • Refocusing on basic health care • Reforming national health insurance program Education • Transfer of secondary education to provinces • Introduction of university tuition Rural environment • Sustainable use of natural resources • Pricing and regulatory framework in forestry • Management of native forests • Soil conservation and chemical use • Property issues Urban environment • Market-based solution to water pollution problem • Industrial pollution control Fostering Private Sector Development Financial sector adjustment • Liquidation, privatization or downsizing of federal and provincial commercial banks • Enforcement of minimum capital and provisioning requirements • Improved disclosure of bank financial statements • Implementation of Central Bank reform Capital markets development • Improvement in term intermediation performance • Secondary market development • Improved regulatory management and enforcement