Summary of discussion at the meeting of the Executive Directors of the Bank and IDA, followed by a meeting of the Board of Directors of IFC. August 1. 1996

 International Bank for Reconstruction and Development 74326 International Development Association International Finance Corporation FOR OFFICIAL USE ONLY SD96-5 1 IFC/SD96-2 1 FROM: Vice President and Secretary August 26, 1996 Summary of Discussion at the Meeting of the Executive Directors of the Bank and IDA, followed by a meeting of the Board of Directors of IFC. August 1. 1996* Contents**" Credit to Zambia for Economic and Social Adjustment Bulgaria: Rehabilitation Loan 4 Report of the Audit Committee to the Executive Directors 5 Report of the Audit Committee to the Board of Directors 5 * This summary consists of staff notes of the discussion and is not an approved record. ** The summary of discussion of the remaining item on the agenda of the Board Meeting of August 1, 1996 will be distributed separately. Distributin: Executive Directors and Alternates President's Executive Committee Senior Management. Bank, IFC and MIGA This document has a restricted distribution and may be used by recipients only in the performance of their officialduties. Its contents may not otherwise be disclosed without World Bank authorization.  SD96-5 1/IFC/SD96-2 1 - I - Board Meeting of August 1. 1996 BANK/IDA MEETING CREDIT TO ZAMBIA FOR ECONOMIC AND SOCIAL ADJUSTMENT I. The Executive Directors approved a credit in the amount of SDR 62.4 million (US$90 million equivalent) to Zambia for the Second Economic and Social Adjustment Credit (IDA/R96-131, June 26, 1996). 2. Six speakers abstained, and one speaker was opposed. 3. Staff Introduction. The staff said that the credit was part of the Bank's support for Zambia's program of rapid liberalization and extensive privatization to stimulate private sector led growth coupled with increased attention to social services and other direct poverty alleviation measures. In view of the uncertain macroeconomic environment, effectiveness and disbursement would take place when evidence of strong macroeconomic policy implementation was available. This would be accomplished by sending Bank staff with the August IMF mission to examine end-June performance against Fund targets, progress in structural reform, and prospects for continued strong performance. As explained in an updating note distributed the previous week, determination on the effectiveness condition would be based on the findings of the mission. The Bank would also increase efforts to renew the dialogue between the Government and bilaterals with the hope of a resumption of bilateral financing and allowing a sustainable reform program to be maintained. 4. With respect to the credit itself, the staff said that it focused on some new areas of emphasis, namely procurement reform and informal urban settlements, and followed up on some continuing issues such as the privatization of the national copper company (ZCCM). The Government had already taken strong action in these and other areas, including increasing the administrative efficiency of the sale and transfer of leaseholds, tariff reductions, and spending in the social sectors. 5. Differing Views on the Credit. A number of speakers expressed their support for the credit. Among the reasons they cited for their support were successful efforts at economic reform, generally satisfactory implementation of IMF program, the need for the Bank to exercise leadership within the donor partnership, helpinigto overcome problems (such as worsening copper prices) that were beyond the country's control, and the fact that to deny the credit could further erode progress. Some speakers said that they could go along with the credit but indicated that they were somewhat uneasy about it. One speaker was opposed, and several speakers asked to be recorded as abstaining. The speaker who was opposed said that there did not yet appear to be a viable economic program and the Fund's ESAF review had not been completed; for these and other reasons it was premature to ask the Board to approve the credit. He said that if it was not possible for management to submit a recommendation to the Board prior to credit effectiveness, he wanted to be recorded as opposed. Another speaker said that he would abstain for the same reason. Most of those abstaining felt that consideration of the credit should have been delayed until after the August Fund/Bank mission; without the information to be provided it would be difficult to take a decision. One of those abstaining said that he was doing so because the operation was not fully financed and it was known that in such cases the likelihood of failure was high. 6. A few speakers were uneasy with the manner in which the issue had been handled procedurally and otherwise. One of them, noting the difference of opinion among donors as to why they withdrew balance of payments assistance, said that it was not the Bank's business to be involved in issues of non-economic governance. Another added that there could be implications going beyond Zambia, including the potential for undermining the cooperative nature of the Board, and thus consideration should be given to how to avoid such situations in the future. One speaker called for judging operations on their quality and on the country's commitment, and not onielements outside the project or unrelated to the economic reality of the country. 7. The Chairman agreed that the different perspectives on economic and political governance and the links between the two made this a difficult case for the Bank and its management. It was also difficult from the  SD96-5 I /IFC/SD96-2 1 -2- Board Meeting of August 1, 1996 perspective of funding prospects, where the IDA credit was clearly the linchpin as the Bank's decision would affect to some extent the flow of other resource to Zambia. 8. Some speakers pointed out that there were significant risks involved but felt that the Bank should support the operation despite the risks. 9. The staff, acknowledging the risks, said that management's intention had been to be transparent and share them openly with the Board. 10. A speaker referred to the partnership between the Bank and the donors and felt that the Bank should act as the senior partner by taking the lead in supporting the country at this critical time. Some other speakers, both those who supported and abstained, regretted that there was not better coordination between the Bank and the donors. IH. The staff said that it should not been seen that the Bank was detaching itself from the partnership, rather it was attempting to exercise influence within the partnership by bringing the Government and the donors together. 12. Preferable to Delay Credit. A number of speakers including some who abstained and some who supported the credit said that they would have preferred delaying consideration until after the IMF/Bank mission in August returned. One of the speakers said that he would abstain if there were not another discussion after the mission's return. Another speaker said that he could not support the credit at this time which he regarded as based on a mistaken recommendation of management. 13. One of those who supported the credit said that he understood the reasons for going ahead now but was still somewhat unconvinced. He also went on to state that he did not like the political flavor of a request for a postponement that would be driven by a timetable of resumption of bilateral assistance which was also contingent upon political developments in Zambia. While he respected donors' concerns, he said that they should not interfere in the Bank's deliberations. 14. A speaker said that he thought the timing was right to ensure that the reform momentum was maintained. 15. Donor Support. The importance of donors' continued support was underscored by several speakers, most of whom, however, were doubtful of a quick resumption of donor support. Some speakers expressed appreciation for management's attempts to bring the Government and donors together; a speaker thought it was unrealistic to expect this before the Zambian elections. 16. One speaker questioned the wisdom of the Bank's providing balance of payments support without a resumption of bilateral assistance. Another speaker said that he would prefer more coordination with bilateral donors. He said that he had the sense that the Bank was working at odds with them, for example, as they were withdrawing balance of payments support the Bank was about to supply it. 17. A speaker commented that donor support was failing because of doubts about economic performance and political commitment towards core objectives of the program. 18. The staff said that it was essential that the bilaterals came back if the program was to be fully funded. Two sets of issues concerned the bilaterals. The first was economic including the strength and performance of the program; the Bank was working with the Fund to address the shortfalls. The other issue encompassed political governance issues, which were outside the Bank's mandate, and thus were not covered by the condition of effectiveness. Nevertheless, the Bank was trying to get the Government and bilaterals together to discuss issues. 19. Bridging Operation. Several speakers noted that the credit was intended as a bridge to give Zambia time to secure renewed bilateral balance of payments assistance, but they feared that there was a real danger of the Bank's contributing to a "bridge to nowhere". They acknowledged that substantial donor support was  SD96-51/IFC/SD96-21 -3 - Board Meeting of August 1, 1996 needed but were unsure that it would be available in the near future, and they feared that IDA resources could be wasted if donor support was not forthcoming soon. A speaker asked what the requirements were. 20. The program could not be financed in the medium term without the bilaterals, the staff said. The total figure for the year was about $263 million, to which must be added $20-30 million for copper and cobalt price fluctuations; available assistance without additional assistance from bilaterals would be about $215 million. Without it, there might be some compression of the program. For the third quarter, the preliminary figure for debt service due was $62 million; plans could become unstuck without the sufficient assistance. 21. Contradictorv Assessments. It was noted by some speakers that contradictory assessments of conditions in Zambia were being made by the Bank and bilateral agencies, and a few of these speakers indicated that the assessments of the Bank and IMF tended to be overly optimistic. 22. One speaker said he believed that the Bank had good quality information based onireality. 23. The staff said that the Bank's position was sound but there might be different perceptions on the part of the Bank and bilaterals. On the basis of the Bank and IMF's information and analysis, there had been progress in recent months, and prospects were good if financing remained available. 24. Concerns about Setting a Precedent. Commenting on a request (in a memorandum to the President circulated prior to the meeting) that approval of the credit should be on the basis that, once the outcome of the mission was known, management would submit a recommendation to the Board on whether the credit should become effective, several speakers expressed concern that this might set an inappropriate precedent by involving the Board in judging if effectiveness conditions were met. They said that management was responsible for assessing fulfillment of conditions of effectiveness, taking into account guidance from the Board. 25. The Deputy General Counsel explained that the established practice of the Bank and IDA, based on the Articles of Agreement, was that the Executive Directors approved the conditions of loans and credits and management determined whether the conditions were met. If management was satisfied that the conditions were fulfilled, it then released the tranche and immediately informed the Board. In fact management would have complied with a contractual obligation to release the relevant tranche once the conditions were met. If the conditions were not met, management did not disburse and could decide to suspend or cancel, or, if it found reasons to waive or amend the conditions, it would bring the matter to the attention of the Board which would then decide. This policy had been approved by the Board in June 1990. 26. A speaker said that a change in basic policy was not being proposed, and stated that the conditions for disbursement set out in the updating note were not sufficient because they did not include a reference to a fully financed program. 27. Some speakers asked that in assessing fulfillment of the conditions the concerns of the Board be taken into account and that both performance and future prospects be considered. A speaker said that the conditions should be concrete in order to make it obvious whether they were met and, further, the funds should not be disbursed if there was no prospect that the Fund would resume disbursements under the ESAF program; another speaker urged management to take a prudent, conservative approach in determining fulfillment of the conditions. 28. The staff said the funds would not be released unless management was satisfied that prospects for Zambia remained viable. 29. The Chairman assured the speakers that management would take guidance from the present discussion when the situation was re-examined in August and fulfillment of the conditions of effectiveness was assessed. It would then provide a full report to the Board. If management was fully satisfied that conditions had met with the guidance received from the Board, it would release the tranche. If there were doubts about following the guidance received from the Board, management would come back to the Board.  SD96-5 1/IFC/SD96-2 1 -4 - Board Meeting ofAugust 1. 1996 30. Privatization of ZCCM. A speaker said that the government should have acted earlier on the privatization of ZCCM, adding that the company was still being run badly. On the other hand, a different speaker said that the Zambian authorities should not be faulted for the problems of ZCCM which had been complicated by the reduction in bilateral support. BULGARIA: REHABILITATION LOAN 3 1. The Executive Directors approved a Rehabilitation Loan to Bulgaria in the amount of US$30 million equivalent (R96-159, dated July 15, 1996). 32. Staff Introduction. The staff first discussed recent financial developments in Bulgaria since the President's Report had been distributed to the Board, noting that there had been some signs of a slow down in the deterioration of the financial situation, although overall economic conditions still remained very fragile. Staff also said that there had been some progress in the implementation of Bulgaria's reform program and, consequently, the Bank had continued with the preparation of a broad financial and enterprise sector adjustment loan (FESAL) of approximately US$200 million. The FESAL would only be presented to the Board after significant upfront measures had been taken by the government. This rehabilitation loan was seen as an important element of the Bank's strategy to assist the government with the implementation of the initial phase of the structural reforms. 33. Impetus for Reform. Several speakers spoke in support of the Rehabilitation Loan. One of them favorably noted the Bank's support of the reform program in Bulgaria, commenting that IBRD was providing more than financial support by helping to create an enabling environment conducive to reform. 34. Some speakers expressed the view that the amount of the loan seemed small in light of Bulgaria's considerable needs. 35. Government's Commitment. A speaker expressed concern about Bulgaria's economic situation and the performance of the country portfolio. She asked staff to assess the Government's commitment to the reform program as well as the desirability of the Bank's moving forward with its FESAL under present conditions. 36. The staff discussed the Bank's proposed assistance program to Bulgaria and the relevant conditionality. It said that there was an increasing commitment on part of the authorities to address the important and difficult issues before the country. 37. Severance Payments. Some speakers commented on the severance payments that would be financed with the proceeds of the loan. One of them noted that payments would be made to employees with little tenure and asked if this was too generous treatment given the country's current economic situation. A different speaker said that consideration should be given to broadening the policy of financing severance payments where that would help reduce the size of government and assist fiscal control. 38. The staff responded that the loan would help finance the fiscal costs associated with the reform program, which would include severance payments. The severance policy was established by the Government. 39. Enterprise Reforms. Some speakers stressed the importance of enterprise reforms. A speaker emphasized the need to close the largest loss making enterprises, and asked if the Government's program to close all of these entities by September was still on track. He stressed the importance of getting the FESAL in place as soon as possible. 40. The staff said that the program was on track and would accelerate. 41. First Structural Adjustment Loan. A speaker noted that an assessment of the Bank's 1991 structural adjustment loan concluded that its outcome was satisfactory. She said that, given present circumstances, this conclusion seemed too optimistic.  SD96-51/IFC/SD96-21 -5 - Board Meeting of August 1, 1996 42. The staff said that the impact of the first structural adjustment loan was positive. Very significant progress had been made and, until the current crisis, Bulgaria was on a trajectory towards accelerating growth and greater financial discipline. 43. Bulgaria's Debt. A speaker commented on Bulgaria's debt and asked if the Bank's Debt and Debt Service Reduction Loan had left Bulgaria with an inflexible debt service profile that would persist over the medium term. REPORT OF THE AUDIT COMMITTEE TO THE EXECUTIVE DIRECTORS 44. The Executive Directors considered the Report of the Audit Committee on the Audited Financial Statements of the Bank and the Association as of June 30, 1996, and approved the financial statements attached to the Report, and adopted the draft resolution appended to the Report (R96-166/1; IDA/R96-146/1, dated July 3 1, 1996). IFC MEETING REPORT OF THE AUDIT COMMITTEE TO THE BOARD OF DIRECTORS 45. The Board of Directors considered the Report of the Audit Committee on the Audited Financial Statements of the Corporation as of June 30, 1996, and approved the financial statements attached to the Report and adopted the draft resolution appended to the Report (IFC/R96- 175/1, dated July 31, 1996).