Argentina - Financial Sector Adjustment Loan Project

 Financial sector adjustment project Report No: ; Type: Report/Evaluation Memorandum ; Country: Argentina; Region: Latin America And Caribbean; Sector: Financial Adjustment; Major Sector: Finance; ProjectID: P006047 Argentina: Financial Sector Adjustment Loan (Loan 3558-AR) The Implementation Completion Report (ICR) for the Argentina Financial Sector Adjustment Loan (Loan 3558- AR, in the amount of US$400 million equivalent, approved in FY93 and closed ahead of time in FY95) was prepared by the Latin America and the Caribbean Regional Office. The loan was cofinanced by the Export-Import Bank of Japan in the amount of US$ 200 million equivalent. Borrower's and Cofinancier's comments are included. The main objectives of the loan were to: (i) reduce the public sector's role in the financial system; (ii) strengthen the solvency and the supervisory framework of the banking system; and (iii) provide resources for Argentina's debt and debt service restructuring with commercial banks. In addition, the FSAL was to support Argentina's debt and debt service reduction (DDSR) arrangements (the "Brady Deal"). An amount of US$200 million was set aside for the DDSR package. The project achieved most of its objectives. Some key reforms were initiated before Board presentation: liberalization of interest rates, elimination of directed credit, implementation of the new Charter of the Central Bank, and issuance of new banking regulations. The other institutional reforms were implemented after Board presentation as planned. One national public bank was closed, another privatized, and the activities of the remaining ones streamlined. Provincial banks complied with tighter regulations on public sector lending and reserve requirements. Moreover, all eligible debt of commercial banks in foreign currency was restructured, as part of the "Brady Deal". Of the FSAL funds, eventually, only US$85 million were needed to support the DDSR package. The ICR rates the project outcome as satisfactory, institutional development as substantial, and sustainability as likely. The Operations Evaluation Department (OED) agrees with these ratings. The principal lesson is that an early policy dialogue on financial sector reforms and a progressive build-up of consensus on program objectives are factors of success in the preparation of financial sector adjustment operations. A second lesson is that reforms of such magnitude require a continued and long- standing relationship between the Bank and the national authorities. The ICR is of satisfactory quality and gives a good description of overall achievements. As the Cofinancier noted, however, the ICR provides little statistical evidence of improvements in the performance of the banking system, and it remains unclear how banks are emerging from the 1994-95 liquidity crisis. An audit is planned