[--- Unable To Translate Box ---] INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Wednesday, November 22, 2000 Washington, D.C. The meeting of the Executive Directors was convened at 10:05 a.m. in the Board Room, 700 Eighteenth Street, N.W., Washington, D.C., Mr. Sven Sandstrom, Chairman, presiding. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] CONTENTS ITEM PAGE Proposed Loan to Argentina - Provincial Reform Loan 3 Opening Remarks by Ms. Alexander 3 Opening Remarks by Mr. Levy 4 Opening Remarks by Mr. Reichmann 6 Opening Remarks by Mr. Myers 8 Mr. Singh 10 Mr. Stek 17 Mr. Almofadhi 19 Ms. Geiser 21 Mr. Moulin 23 Ms. Stevenson 26 Mr. Alhaimus 28 Mr. Passacantando 29 Mr. Jonck 31 Mr. Zhu 33 Mr. Alfiler 34 Ms. O'Leary 36 Mr. Dedeoglu 37 Mr. Abdul Aziz 38 Mr. Meyer 65 Mr. Garcia-Lopez 73 MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] PROCEEDINGS MR. SANDSTROM: Good morning. Welcome back from the induction. Actually, one of you said it felt more like an injection. And you now have to absorb what you have learned. Well, let's start with the agenda. The first item there is the proposed Provincial Reform Loan of $303 million to the Argentine Republic to support the Province of Cordoba. And we have had some previous discussions on the situation in Argentina, and also with regard to this particular loan. So we will now give you to continue on those previous briefings a rather full introduction to this loan, both an update on the general situation, including the context for the loan, and then the specific rationale for the loan itself. And we will start with Myrna Alexander, followed by Paul Levy and then Thomas Reichmann from the IMF will give us an update from his perspective, and then Ron Myers will introduce the loan itself. So, Myrna, please. MS. ALEXANDER: Thank you. This is just a very brief introduction, for a more detailed presentation by Paul Levy and Thomas Reichmann from the IMF. Since Friday when we met the last time on Argentina, the major MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] development has been an agreement between the Federal Government and the provinces. We have assessed that agreement and we have looked at how that agreement will have an impact on the proposed Cordoba loan. So with that brief introduction, I will turn it over to Paul Levy to describe in more detail the substance of the provincial/federal agreement and how it affects this particular operation. MR. LEVY: As you know, one of the important components of the agreement between multilaterals and Argentina for the proposed financial support was an agreement between the federal government and the provincial governments. That agreement was reached on Monday, and, as a consequence of that agreement, we had a positive reaction in the markets. The bond prices have improved; the stock market improved to some extent. Interbank interest rates have declined, and yesterday's issues of bills and notes in Argentina have improved by about 150 basis points compared to the last issue about ten days ago. So that is an indication of the positive reception of the markets to this agreement, which is only part of a series of steps that the federal government has MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] committed towards the future signing of a support program with the multilaterals. Now going back to the agreement between the federal government and the provincial governments, the main elements of that agreement include freezing of primary expenditures for the duration of the agreement until 2005, and on the revenue side, the revenue sharing amounts between the federal government and the provinces will also freeze for the first two years with very marginal increases for the next three years of the agreement. Those measures on the revenue and expenditure side intend to bring a fiscal balance by the year 2005. However, the provinces have agreed to a clause that would allow them to increase spending in periods of social emergency without, however, undermining the overall target of reaching a balanced budget by 2005. Additionally, to increase their spending, they have to have the prior agreement of the federal government to do so. One other component of the increment includes the transfer of social funds to the province in the amount of $225 million on a yearly basis. Overall, the evaluation that we have made so far on this agreement, it MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] is a positive agreement. We have the participation of all provinces except one. Santa Cruz has not signed the agreement, but all the major provinces have agreed to it. So the market reaction has been positive to this development. The mission of the International Monetary Fund will be leaving over the weekend and a Bank parallel mission might be visiting Argentina this weekend as well. Now as far as the relation between this agreement with the Cordoba loan, we have used the assumptions of the agreement and we ran the fiscal numbers on Cordoba, and we broadly find them consistent with the agreement that was signed. In this sense, we feel that both from the fiscal projections that we have and with the commitments of the government that the fiscal targets of the Cordoba loan will be met in the context of the federal/provincial agreement. With that, I might turn the floor over to the IMF. MR. REICHMANN: Thank you. Though I have very little add on recent developments to what Paul just briefed you on, I think I can just restate where I think Argentina stands vis-a-vis the Fund. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] Argentina is at the end of its first year of a three-year standby arrangement. It has met the performance criteria by the last testing date in September. With that, Argentina has accumulated drawing rights on the Fund for 1.6 billion SDRs, about $2.1 billion, which are there since Argentina so far has treated the standby as a precautionary. A few words on key stylist facts on the macro situation. I think I can add at this moment that basically the macroeconomic situation is characterized by Argentina's inability to recover from the recession of last year. Our preliminary indicators are that there was no growth in the third quarter of this year and for the year as a whole growth now is expected to be between zero and 0.5 maximum. At the same time, exports are doing reasonably well, growing by 13 percent, and have resulted in a swing in the trade balance of over $2.3 billion so far this year and are heading towards narrowing of the external current account from 4.3 percent of GDP in 1999 to about 3.4 percent of GDP this year. The reverse of this is again the consequence of the recession. That has a negative impact on the fiscal accounts and we expect that the budget ceiling for the MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] end of the year will be exceeded by anywhere of $500 million, $600 million, about 0.2 percent of GDP. On the latest news, as Paul mentioned, they are quite encouraging. The pact was signed with the provinces and is very much in line with the authorities' original intentions. Beyond it, the negotiations were difficult but successful in the end, and the markets have reacted positively to that. We will be discussing the details now of the second year of our standby arrangement with the authorities beginning this Sunday in Buenos Aires. Thank you. MR. SANDSTROM: Thank you very much, Thomas. Ron Myers, please. He will introduce the loan itself. MR. MYERS: Thank you and good morning. The reform program supported by this operation is comprehensive and ambitious. It seeks to end cycles of boom and bust, to reverse a slow decline in economic fundamentals and to avoid a serious banking crisis. A mix of first and second generation reforms, short and long-term measures, it touches nearly all aspects of government operations. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] A sustainable fiscal position will be sought through tight controls on spending, aggressive tax administration reform, a cleanup of municipal government finances, as well as off-loading bankrupt and inefficient state enterprises such as the provincial bank, the electricity company, and the provincial lottery. Efficiency and effectiveness in public administration will be pursued through reforms in the civil service, government financial management and anti- corruption and open government policies. Finally, these measures will help create the fiscal space for the third major project component -- policy and institutional reforms in the social sectors designed to promote citizen involvement, increase competition, build new alternatives to traditional service delivery system, and nurture a culture that values more highly performance and results. The protection of the social assistance budget, in addition to reforms in its execution, in this project is new to Argentine provincial reform loans. We believe this is a solid reform operation -- technically sound, designed and owned by the borrower, aimed at the key problems confronting the province, MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] supportive of broader national goals, and under strong and committed leadership. Now we haven't received any written statements from Directors, but we would be happy to respond to any questions. Thank you. MR. SANDSTROM: Thank you very much, Ron. That's it? Okay. Do you have any comments, questions, advice? Mr. Singh was first. MR. SINGH: Thank you, Mr. Chairman. Let me say at the very outset that I have enjoyed reading this document and I would like to commend the authors for being both analytical and candid in their presentation. I have also heard the presentations made this morning with colleagues. I would like to mention, Mr. Chairman, that the document read with the presentation this morning presents a story of progress in Argentina and also holds considerable promise. What have worried me are a few points only, and I thought that I would raise that, because I do believe that the international community, particularly the multilateral development institutions, should send a strong signal of support to the national MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] and provincial authorities in Argentina to continue with their fiscal, structural, social and administrative reforms. Now my concerns are two-fold. First, I am quoting from paragraph 26 on page 12, and this says something which is again quite welcome. It says "Emerging lessons from the ongoing experience suggests that the loan design for a direct relation between the Bank and the participating province is important in enabling the Bank to bring to bear its international experience and in providing" -- this is very significant -- "and in providing a mediating influence between the federal and provincial stakeholders". Now if you read the sentence along with the annexure, which says, Mr. Chairman, in paragraph 61, "While Argentina has a history of bailing out smaller provinces, Cordoba is an unlikely candidate under the current regime". What we are suggesting is that the political complexion of the federal government, with the political complexion of the federating unit would suggest that there is no degree of impartiality. And if you read "with our desire to provide a mediating influence between the federal and provincial stakeholders", I do not know. Are we getting too close MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] to meddling? Are we getting too involved with the internal political situation of a country? I just thought if you read these two paragraphs together, that gives you a message. Yet, at the same time, I do believe, Mr. Chairman, that the Bank's engagement in the country over the last decade, especially in times of crisis, has stood us in good stead, and that we have a fund of knowledge and experience and, if I may use that word, goodwill in that country, that I would advise be accepted without much of partisanship. My fears are: Are we throwing that away with the considered position we are taking in this paper of mediating between the federal government and the federating unit, which I thought read with these two statements do not seem to be acceptable to me? I would need clarification on this point because it is a sensitive political point. The second point that I wished to make is to compliment those who have designed this particular loan proposal. The letter of the government of the province makes very good reading. It has correctly assessed the strengths and weaknesses of the economy and of the social structure of the province in very frank terms. The need MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] to control and even reduce the state expenditure has to be balanced with an even more pressing need of providing quality public service to the poor. In the fields of education, health and social safety, efficiencies in the present system would no doubt lead to resources that can be deployed to serve the unmet needs of the poor. But this will not be enough and allocation of additional funds has to be done in order to better equip the poor to take advantage of different economic opportunities. And it is in this background that I support the loan proposal. Mr. Chairman, the third point that I wished to make is in respect of civil service reforms. And I will confine myself large to pension reforms. Now a point has been made that the civil service's structure at the federal level and in the states vary greatly, and this point has been made, because it is a product of a certain evolutionary process, and I do accept that. But what has been said -- and this is not only true of Argentina but in respect of a large number of developing countries, and this is with regard to pension reforms. Now what are our experiences? Do we have any other country in view where the pension reforms that we have talked about have succeeded? And what kind of MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] reforms we are suggesting, because this is something which would be of value to the other national governments, because over the years this responsibility is going to increase, not only to pay the salaries but also to pay the pensions. Now is there a system of establishment of a pay commission in this country? I would like to know. And if there is a system of appointment of a pay commission, what are its recommendations in respect of pension reforms? What are the obligations of the federal government under the constitution? And are these obligations being met? What is the ratio of service composition between the officers of the federal government serving in Cordoba and the officers belonging and being appointed by the federating unit, that is the Cordoba Government? Now these are the issues which would need to be gone into with some care. Do we contemplate to advise the provincial government on these lines? Now it was mentioned, Mr. Chairman, in the report itself that compared to the forecast we made in respect of the country assistance strategy document of May 2000, slippages have taken place in respect of GDP growth. And these slippages are important and need to be MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] kept in view while we are planning this kind of assistance to a federating unit. But have we really gone into the whole thing, economic parameters in respect of this federating unit, the Cordoba Government itself? Because my reading of the document shows that compared to the national scene, this particular provincial government has not done too badly. And if that presumption which comes out from the reading of the document is correct, then this kind of loan that we are giving, which covers education, health and other administrative reforms, what do we expect in a period of two to three years in terms of the overall growth of the economy and also of improving the capability of the administration to deal effectively with poverty removal? I get a figure, not from this document but from another document, that the number of persons below the poverty line is about 36 percent of the population in Argentina. I have not got the figures with respect of this state, but what will be its impact on the poverty reduction over a period of time, two to three years? My last point, Mr. Chairman, is with regard to tax and also with regard to convertibility of the currency. Now it is not clear to me what is the share of the devolution of funds from the national government to MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] the federal government and who is responsible for income tax? What is the role of the state administration? I do understand the state has a pivotal role with respect to sales tax. But what is the role of the state administration on income tax? What is the share of the state administration in respect of devolution of funds from the center to the states? Are these being done in terms of the constitutional or national law position? Or has there been violation of that? This is something which I thought I would like to understand. With regard to the convertibility, we have nine years' experience and we do feel that this has helped in a big way the economy of the country in controlling inflation, in dealing with the situation. It would be interesting to know from our colleagues who are dealing with this country, what have they lost if they had not gone for this? Because when we are looking at the policy prescriptions, the convertibility also must not have been integral in respect of disadvantages. There must have been some disadvantages. And maybe that is interesting to know that some policy correctives could be met. In conclusion, Mr. Chairman, this chair supports the present provincial reform loan, proposal for the MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] Province of Cordoba and agree with the detailed policy. And I do look forward to the responses. Thank you very much. MR. SANDSTROM: Thank you very much. And staff will come back later with responses to the five specific questions you had. There were many hands raised very quickly. Let me read the list I have to make sure we have it right -- Stek, Almofadhi, Geiser, Moulin, Stevenson. So we have Pieter Stek next. MR. STEK: I didn't know I was as quick as all of that, but Mario probably now thinks that it is a custom in this Board for the two neighbors to start talking. Let him think that for a while. I won't destroy his illusions that neighbors tend to be friendly. First of all, you get some constructive questions and then next you get somebody who has been to the induction. There is a cost/benefit to induction obviously. You don't go quite as much in depth as you would like to otherwise. But my impression is that this is a very good loan and, coupled with what the IMF is doing, I think we are meeting those requirements that Richard Stern, Nick Stern, I mean -- well, I almost said Ernie Stern for a MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] moment -- that Nick Stern described for us in the restricted Executive Session that together we are trying to cope with slow growth and with the decline of investor confidence due to a number of circumstances, which we must still hope though are temporary, because my only concern is if these issues that we discussed in the restricted session are not temporary, then this is going to be a very long, drawn-out process. So I would welcome some comments on that, because there is this huge debt burden of the economy as a whole in dollars, and there is the question of whether growth will be reanimated sufficiently by what the two institutions, plus the IDB -- and I don't know whether there are others participating -- plus the IDB are undertaking to help the country. I will be, as I said, very brief. I wish Argentina well. Mario and Roberto, they are in that curious state of tension where you are not allowed to speak for your own country until perhaps the very end if you want to. It is a strange sensation but you hope to be able to report home at the end that the Board was very supportive, and then at home they probably think that it is doing through the extraordinary input that comes from the ED. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] But I know you will be able to deal with that in the right way. Thank you very much and I think a lot of thanks is due to the induction. MR. SANDSTROM: Thank you, Pieter. You are in good spirits. Mr. Almofadhi, please. MR. ALMOFADHI: Thank you, Mr. Chairman. First, let me say that we appreciate the recent briefings on the evolving situation in Argentina, including staff's remarks this morning. These helped to put the operation before us in context. I have just a few selective comments. On the overall situation, I would like to welcome progress in the discuss between the federal and provincial authorities. As I mentioned when we discussed the CAS for Argentina back in June, it is to be hoped that there indeed will be a growing number of provinces that realize that getting their fiscal in order will have benefits to themselves as well as to the nation. We have also noted the problems with the increasing trend in debt service ratios. The document before us gives a good description of progress made so far in the complex process of provincial reform and I agree that there have been encouraging signs. I also MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] agree that the current CAS did indeed beg support of individual provincial reforms programs, one of the main pillars of Bank's assistance, and the document makes a good case for applying this principle in the case of Cordoba. However, it is also fair to say that there are some uncertainties regarding the future of the program in Cordoba. And in this regard, we read with care the analysis presented in Annex C of the document on fiscal reform. And if we understand paragraphs 48 and 50 of that annex correctly, such uncertainties extend not only to the very large negative net worth of the Bank of the Cordoba but also to the proposed disposition of the large possible net worth of the power company and the state gambling monopoly. The document is right to point out in paragraph 50, and I quote, "There are large uncertainties associated with this plan." It will be important to get more accurate price estimates that it seems consultants are now working on. Maybe some additional comments on this point from staff will be appreciated. Of course, this also will have an impact on the overall cash flow and debt stock analysis. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] On balance, however, I can go along with this good operation and support it. Thank you very much. MR. SANDSTROM: Thank you very much. Barbara Lee Geiser. MS. GEISER: Thank you, Mr. Chairman. We can strongly support this loan, particularly in the context of Cordoba's commitment to an impressive fiscal and structural reform agenda, as well as the many actions already taken. We very much the incorporation of lessons learned from previous provincial operations, both successful and unsuccessful, in this case including the upfront actions already taken to strengthen the provincial finances as well as the broad consensus that seems to have been built to own the reform agenda. As Mr. Singh mentioned, we considered Mr. De La Soto's letter of provincial reform policy to be one of the most persuasive letters we had seen. The considered the steps taken to build the consensus very encouraging and think they bode well for the whole program's implementation, consultations with civil society, the extensive press coverage and the debate and approval by the provincial legislature of the legal framework of the reform, which we note was also supported by the opposition parties. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] We continue to believe that setting Argentina on a sustainable fiscal path is among its highest priorities and thus we very much welcome the fiscal pact that has just been signed. As Treasury Larry Summers already said, this will put Argentina in a very good position to strengthen the fiscal relations and the overall balance in Argentina. At the time of the CAS review, this chair had stressed the importance of enhanced revenue collection efforts and thus we were very happy to hear President de la Rua's recent announcement of measures along this front, and we urge their thorough implementation. Regarding two other points on the program, we very much support this program's commitment and the State of Cordoba's commitment to more efficient and effective social sector spending. Thus, we have been somewhat concerned about the implications of the pact about social spending and this loan. And we welcome staff's confirmation -- at least if I interpret it right -- that the implication of the pact for the loan, there are no negative implications. I would be interested to know if there are any negative implications for the overall social sector spending plan of the state itself. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] And finally, we welcome the program's attention to increase transparency in the province, particularly regarding financial management and to its efforts to fight corruption. Thank you. MR. SANDSTROM: Thank you very much. Emmanuel Moulin, please. MR. MOULIN: Thank you very much. We have been strong supporters of the previous provincial reform loan for the Province of Catamarca. And we believe, like its predecessors, this loan is expertly designed and well suited to the needs and capability of the beneficiary province. It is also unquestionably timely, though maybe more for Argentina as a whole than for Cordoba itself. So we want first to commend the staff for this well- designed loan. Although the recent developments in Argentina do not in any way challenge the relevance of this loan, they do nevertheless have an important bearing on the way it is going to be implemented. We have sufficient trust in management and in the country team to be confident at the implications that the most recent development will be MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] fully taken into account in the implementation of this loan. Therefore, we support it strongly. Nevertheless, I think it is only fair to ask that the Board be fully briefed, ideally if it is legally possible in the form of an amended loan presentation report or in a more informal way, as to the implications for this loan of the spending freeze recently agreed between provinces and the federal government until 2005, which seems to contradict some assumption underlying the loan. For example, if I look at the report on page 36, I wonder if the sentence on this page, stating the reforms will have a short-run impact on the level of expenditures and calling for additional resources to ease the transition process. I am wondering if this is fully consistent with the agreement between the federal government and the provinces. And also when we look closely at Table 6 on page 17 of Annex C, which is a table on the projection of revenue and expenditure, we see that the total expenditures are said to increase at about 6 percent between 1999 and 2005. And if I understood well, the freeze is on primary expenditures. And when we look at the interest payments line, this line is said to decrease MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] quite substantially. So I would like for staff to elaborate maybe on these figures and on the consistency with the agreement reached. I Think it will also be very interesting to learn, as Mr. Singh has already pointed out, how the reforms of the pension and social security systems, which are to be enacted at the federal level, will impact the reform's plan and supported by this loan in the same area in the Province of Cordoba. This being said, I reiterate that we strongly support this loan and we commend staff for its design. Thank you. MR. SANDSTROM: Thank you very much. Rosemary Stevenson, please. MS. STEVENSON: Thank you. Like others, we support the loan and, like others, we have been impressed by the very purposeful letter of provincial reform and the clear intent expressed there to tackle the fiscal deficit while seeking to improve services to the poor. As we discussed in the context of the middle- income countries review, growth is a very powerful factor in poverty elimination, and structural questions have to MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] be addressed. And the Bank clearly has a role in fostering pro-poor participation in the growth process. I have two questions about the poor really. First is about data, the data available on urban and rural poor, am I right in saying that Argentina still doesn't have a national household expenditure survey with representative samples of urban and rural areas? And is it also the case that the data for the NBI index cited in the paper is based on a survey that is ten years old. If so, how robust is the baseline data for the program? And how are we going to be able to measure its impact on the poorest? Second is a request for some clarification on a similar sort of theme. Cordoba seems to score quite well nationally in terms of its education results and it says as well in the paper that people come from neighboring provinces to take advantage of its more advanced health facilities. So the issue isn't so much one of resources as of coverage. You Bank's report on poor people in a rich country concluded that if cross-subsidies to middle and upper-income groups were eliminated in Argentina, there would be significantly more resources to improve coverage and quality of service for the poorest without increasing MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] the fiscal burden. Now, I mean, that is not an easy task in any circumstances, and it is certainly not easy when we are looking at a deficit reduction program. But could you clarify a bit more how the proposals for a new computation based health delivery system and the pilot health scheme will tackle the subsidy question and make sure that we reach people who are currently outside the safety net? As I say, clarification on these two poverty-oriented questions, but otherwise let me just reiterate that we firmly support the loan. Thank you. MR. SANDSTROM: Thank you very much. Tariq Alhaimus, please. MR. ALHAIMUS: Thank you, Mr. Chairman. Mr. Chairman, like other speakers, I also support the proposed loan. The provinces quite clearly play a key role in both the macroeconomic and social performance of the country, and the Bank's involvement in the provinces in the past decade has also been quite successful. The loan is also quite well designed and the commitment of the province seems to be quite strong. I only have one related question, not on the loan but on the Bank's future support for other MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] provinces. As we are told in the document, Cordoba is a relatively affluent province with $7,900 per capita income, and in one respect enjoys a health service, as the document says, comparable to developed consensus. And the document also says that the province is the third largest in the country with lagging social indicators, poor performance and pockets of severe poverty. So, all in all, there is a very good reason for going for a loan in Cordoba. But I also wonder if more attention could be given to the much poorer provinces of the north where poverty is nearly 50 percent, and, as also indicated in the report, it reaches about 70 percent in the rural areas. Unless I am missing something, Mr. Chairman, I don't see much of individual provincial reform programs in these northern provinces. And I want to ask if there is anything significant being planned or in the pipeline for the northern poorer provinces? Thank you, Mr. Chairman. MR. SANDSTROM: Thank you very much. Franco Passacantando. MR. PASSACANTANDO: Thank you. We also support this loan and found this document very good and very informative. Just one suggestion for future operations in provinces. If we can MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] have some synoptic table for the economic situation of the province, as we have for the country as a whole, it would be helpful for us to have a snapshot of the economic situation of the province. We think that the highest priority, of course, is the fiscal adjustment and fiscal consolidation that is taking place in Argentina. And in this respect, we would like to have some clarification about the contribution that the province is giving to the overall situation of improvement of collection, revenue collection. I have seen that important steps have been taken as described in paragraph 37 on page 18, important steps not only in reforming the system in collection but also in actually implementation of tax collection measures. Still, on the overall results, I would like to have some indication of the overall results. I see some indication in one of the appendices, but if you can give us some indication on the overall results of these improved tax collection efforts. I think we made some comments on the overall approach that is being followed by the Bank on the adjustment loan to the provinces when we discussed the Catamarca loan. So I will not repeat those comments that indicated especially the need for a clear signal of an MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] indication of how we select the province for participation in our program, and the impact that the particular approval of a loan might have on the perception of our overall approval of the way these provinces conduct their own reform agenda. As we said when we discussed the Catamarca loan and even more now, given the recent events, is that there is an inevitable tension between the fiscal consolidation and the need to improve the social conditions. And in this sense, I will look forward to the answer provided to the question that the U.S. chair raised about what you mean about inefficiency in the social provision of services and how that can help solving this tension. I also look to the answer to the question of B.P. Singh on the mediation between the government and the provinces. I think it is an important question. I interpret that mediation as a support of the Bank to the coordination of the central government. And if that is the interpretation, if you confirm this interpretation, I think I would support that. Of course, if you get into a mediation effort within all the provinces, I would share some of the concerns of Mr. Singh. But to conclude, thank you for this good document and I support this operation. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] MR. SANDSTROM: Thank you very much, Franco. Finn Jonck, please. MR. JONCK: Thank you, Mr. Chairman. Just four very, very brief comments. First, this is the kind of loan that we under the present circumstances cannot but approve. The reforms are needed and there is also a clear need, of course, for a sign of support from the IFIs. So there is no choice, so to speak, but approving it. And let me say clearly that I support this loan. Secondly, the fiscal reforms have been highlighted in a number of interventions and they have been described as being very comprehensive and important. I fully agree to that. But I would like to ask the question whether or not the tax reform part of it is the weak part of the reform. The taxation reform was described as being aggressive now in the future, but when you read the paper, you can see the tax reform consists of lowering tax rates and just increase or improve strengthened collection, but nothing else as far as I can see for the time being. And that seemed to me to be a pretty weak part in reaching the fiscal balance in 2005, but I would appreciate comments on that. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] Thirdly, just to associate myself with the comments made by Rosemary on the poverty aspects of the loan. And fourthly, we were told that an IMF mission would be leaving for Argentina over the weekend and probably a Bank mission in the same week. Why don't we have a joint mission here? I think if it is merited in some cases, this could be the place to have a joint mission. MR. SANDSTROM: Thank you very much. Zhu Xian, please. MR. ZHU: Thank you, Mr. Chairman. I will be brief. First, this chair also supports this operation for Argentina. And we understand at this moment this is a very important signal the Bank can send to Argentina, particularly its strong support at the provincial level. Having said that, I have two questions. First, I understand that the time frame for the implementation of the reform program is less than three years. I just wonder if the staff can give me some sort of assessment in terms of the comprehensiveness of the reform program and whether it is realistic to implement that over this period of time and if there will be any change beyond MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] what we can see now, and whether there will be some sort of flexibility. Second, I read with interest in the documents some ways of providing the employment opportunities for the civil servants which might be laid off through the reform program. I think this is interesting but not an easy job. I just want to know from the staff whether there will be a more specific and detailed program to address this issue. Thank you. MR. SANDSTROM: Thank you very much. Felix Alfiler, please. MR. ALFILER: Thank you very much, Mr. Chairman. I will be very brief. Just to say that we strongly support this operation, and we also commend the staff for a very informative paper. We are particularly appreciative and attracted to the discussions on the lessons learned in the Bank's long involvement with Argentina and also the lessons learned in the involvement with subnationals. And we think there are very important points there that we should emphasize. As you know, our chair has always consistently been asking the staff to be sensitive to timing, both the political timing, the political cycle and in the budget MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] cycle. And we know this has been a problem in the case of Argentina. We also take note of the difficulty in getting both the legislative and the executive to agree on a lot of reforms. And we are again thankful that the staff has pointed this out. This is a very important thing. And we know if there is always that kind of agreement, 50 percent of all these project problems would have been solved. We also note, however, that some of the prescriptions to overcome the problems identified were a bit ambitious. But it is good to know that the staff is conscience of this, as pointed out again and again in these types of papers. Like I said, we strongly support this operation. Just a bit of an administrative questions. Some people in our constituency who are more familiar with the Argentine relationship with the World Bank would like me to ask about the problems that have been encountered in the compatibility between the old system of financial management that the World Bank has assisted Argentina with in developing and also I understand there has been a new financial management procurement and disbursement system being applied to this project. We want to know to MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] what extent the staff has been successful in coping with inconsistencies in the system and also to hope that these inconsistencies do not result in delays in disbursement. Thank you very much, Mr. Chairman. MR. SANDSTROM: Thank you very much. Are there any other comments? Terrie O'Leary and then Mr. Dedeoglu. MS. O'LEARY: Just a very short intervention to say that we are fully supportive of the loan. I think this has been a very good conversation. It actually raises two issues in my mind that I think might be beneficial to us. First of all, there were a number of concerns that people raised about in a time when you are actually trying to facilitate some deep expenditure cuts to achieve a fiscal budgetary balance and you have to offset that against the social spending. I mean, the two are subsequently at odds. Some people have been able to broker it a little bit better than others. So following up on the implementation of the loan, it wouldn't be a bad idea to have a couple of informal sessions about how it is going, and then picking up on Mr. Singh's point, coming from a country where we know full well the tensions in federal/provincial MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] relations, that might also be something that we might want to have a discussion about further down the road in terms of the Bank's views and experiences in different countries with strong provinces and a central government. It might be a nice idea just to have a very informal discussion about that a little bit later on. But just to reiterate, we are very, very supportive of the loan and thank staff very much for putting it together. MR. SANDSTROM: Thank you very much. Mr. Dedeoglu. MR. DEDEOGLU: Thank you, Mr. Chairman. We, first, should say that we strongly support this loan. I think it has to be thought within the general picture of this package to support the country. However, we would appreciate a little bit indication as to the following steps that the Bank would take within this framework. In the informal meeting, in Executive Session, there were indications that there was a some kind of frontloading of the program. So we would appreciate a little bit information as to the following steps in that direction. And we also would like to hear the answer to Franco's question as to the clear indication of the MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] selection process to enhance the signalling effect of such loans. Thank you very much. MR. SANDSTROM: Thank you very much. Are there any other comments at this stage? Please, Mr. Abdul Aziz. MR. ABDUL AZIZ: Mr. Chairman, we support this loan. I just want to raise a point on the context of the loan itself. While this is a loan for the reform of the public sector at the provincial level, the context will be within the overall national reform strategy, because the revenues going to the province, I note that 60 percent come from the federal level and the reform is at the federal level itself, and to address what are the twin deficits there, both in the current account and fiscal deficits, we may get into problems of sustainability down the road. So I would like that this study address the overall context of this. Thank you. MR. SANDSTROM: Thank you very much. Anyone else? [No response.] MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] All right. Myrna, back to you to start with. It is quite an agenda you have, going all the way back to B.P. Singh's very good questions, mediation or meddling. MS. ALEXANDER: Yes. Thank you very much. It has been a very long and interesting list of questions. And I think Mr. Passacantando has answered Mr. Singh's question. [Laughter.] So that was a good start. He provided me with a very good entry point there. No, indeed, I think mediating perhaps has a connotation which would be stronger than what we actually do in practice. And I think the word "coordination" is more apt. I think the relationship we have developed in Argentina with the provinces is a non-partisan relationship. We have been working with all of the provinces, with all of the parties for many, many years, and I think it is a sign of confidence on the part of the federal government and of the provinces that they are willingly entering into agreements with us under the guidance of the federal government in terms of the process of selection and the content of the reform program. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] Indeed, we have a very good collaboration with the Ministry of Economy at the federal level in these programs. We also have very good collaboration with the federal Ministries of Health and Education. So what we do at the provincial level is within the context of national strategies and that our role is working with all parties in trying to achieve a common goal. On the second question raised by Mr. Singh on some of the pension reforms and successes, I will provide a very brief comment on that, and then we ask subsequently for more elaboration on some of the successes and other examples, and perhaps Claudia would like to address that one. Just to clarify in the case of Argentina, the federal government handles the national pension scheme which covers federal public sector employees as well as private sector employees in the formal sector. There is no pension coverage for people who are outside of the system, either at the federal level or at the provincial level. The provincial government is only responsible for pension for provincial public civil servants. So you have a clear division of labor among the parties on pensions and so that the national strategy is to MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] harmonize the provincial civil service pension schemes with the federal scheme which applies both to federal civil servants and to formal sector employees. That was reformed in approximately 1993. And so we supported in 1995 a first merger, if you want, of transfer of responsibility of some provinces to the federal government. This is an ongoing process, based upon the collaboration between the federal government and the individual provinces to harmonize their systems and, secondly, the financial capacity of the federal government to absorb some of the additional costs of the reformed pension system. And so the process of merger, of transfer from the provincial governments to the federal system has been taking time. And so there are ongoing negotiations and discussions in the case of Cordoba between the federal government and provincial government on the harmonization and the merger. I will ask Ron to elaborate a little bit more about the questions of the pay commission and so forth. I would also like to reiterate that in terms of the question on the obligations of the federal government, in the federal system, the federal government is current on its payments to the pension scheme, that there are no MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] outstanding deficits in terms of the current payments. This is in sharp contrast to the situation in the late 1980s, early 1990s when there was an arrears in payment of the federal pension system. Part of the proceeds of the sale of the petroleum company in 1993 was used to pay off those liabilities. But currently, as I said, there are no arrears. There are disputes and there are legal cases between individuals and the federal pension system over what is due to people. But beyond that, they are current in their payments. Continuing on with Mr. Singh's questions on the impact on poverty -- and this was also raised, I believe, by the British chair and several other chairs -- so I will address that one in terms of what are we expecting, what is the baseline. That was a question raised by the U.K. chair. We have recently completed a poverty assessment for Argentina which is publicly available. It is a document which has analyzed transient poverty throughout the 1980s and 1990s and indeed to clarify there is a household survey in Argentina which covers urban centers with more than 5,000 population. So there is a segment MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] of the population which is not covered by the national survey. In terms of percentages, it is relatively small since Argentina is approximately 87 percent or so urban. So we do know that in the statistics we provide that there is no coverage of those in the smaller centers in the rural areas. We have done two surveys in provinces to look at rural poverty, and that is where the number of the 70 percent comes from. And we are presently working with the federal government, which is responsible for the household surveys, to incorporate the rural areas in the household survey. This is being supported by a technical assistance loan that we have with the federal government, and they are entering into the phase of doing the piloting of the questionnaire, but we don't anticipate that we will have national, fully comprehensive data for another couple of years, since they need to pilot the questionnaire and do that. So it is in the works, but what you have currently does not cover the rural areas other than the discrete surveys that we have done and some other work that the Ministry of Economy has done on further small samples. So we are having a feeling for it. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] Now what do we expect this operation to do in terms of reducing poverty? I think there was a fairly broad analysis of the evolution of poverty in Argentina in the country assistance strategy. That provided some ranges of poverty reduction, possibilities of poverty reduction in Argentina, depending upon several parameters. The first obviously is growth. And so much of what we anticipate to happen in terms of poverty reduction in the future in Argentina is based upon how fast can Argentina grow. Modest growth of I believe 3.3 percent is what we used in the CAS; it would reduce poverty somewhat. More aggressive growth levels of over 5 percent would reduce it more. But we are talking about a relatively long process of poverty reduction. This is mainly because of the current high levels, and the continued disparity in income levels between those with higher skills and the unskilled. And so closing the gap on skills is a very long- term proposition. And even if unemployment were to drop, so that the unskilled had more steady incomes, it is not likely that that alone would be significant in reducing poverty levels since the wage market is clearly at a level for unskilled workers, which is typically below the MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] poverty line if it would be a single wage earner for a family of four. So that is the reality in Argentina. It is not that much different in the case of Cordoba. Cordoba, as noted by the speakers, is relatively affluent in comparison, but we do not anticipate that in Cordoba either you will see a dramatic turnaround in poverty. So what you see in the operation itself is an emphasis on the quality of social services being brought to the general population, specifically the poor, which would help to close the quality gap on education. It is a long-term measure for poverty reduction, meanwhile addressing questions of vulnerability, quality of health care coverage which help the well-being for all the population but specifically for the poor, as is part of the social safety net. So that is a general perspective, if you want, on poverty reduction and the contribution of this operation. If I look at the question of taxes, the division of labor in Argentina on tax collections is laid out in work that we have done in the past. I don't have the exact dates of the report, but we have done a gray cover piece of economic work on the fiscal situation and the MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] way taxes are shared in Argentina. But basically, you have taxes that are solely for the federal government and taxes that are solely for the provinces, and then taxes that are shared. The taxes that are shared are collected by the federal government and then devolved to the provinces according to the formula which we call co-participation. That share -- and Paul may correct me -- but slightly more than 50 percent of these shared taxes go to the provinces in aggregate and commensurately a slightly less than 50 percent are retained by the federal government. The provinces do not collect income taxes. That is the responsibility of the federal government. And as far as I know all of this is in conformity with the constitution and local laws. I will ask the Fund to respond to the question of the costs of convertibility. Would you like to do that now, Thomas, or to hold back a little bit? MR. SANDSTROM: Why don't we keep going? MS. ALEXANDER: I will keep going, okay. I will ask Ron Myers later to provide some more details on the uncertainties of the cash flow and negative net worth of the banks and how that is proceeding on the MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] privatization. This was the question raised by the Saudi Arabia chair. I will now address the question raised by the U.S. chair on the social sector spending, and how that fits in, and I will ask Paul Levy to provide a bit more details on how that workout looks like. Cordoba is a province where social sector spending levels are relatively high, meaning that we are fairly comfortable with the present levels. It is more the distribution, the allocation and the efficiency of those to change the composition of spending and how it is directed rather than increasing the level per se. So in the case of Cordoba, as in the case of some other provinces, the level of social spending is not particularly the issue. So when you have the spending freeze and you have the fiscal constraints, you do not necessarily generate a direct conflict with social sector spending. Nevertheless, there is a large reform agenda on the quality of that spending which is being addressed. If I go back to the Cordoba operation, one of the cases there in education was that Cordoba was spending vastly larger sums on education than the norm and what would be likely justified. So you have a mix of MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] provinces in Argentina, some that are spending too little on social programs, some that may be spending, in fact, too much, and others where the spending level is more or less okay, and it is the quality of the spending. In the case of Cordoba, it is more that the level is okay, and within that you are addressing it. So the tensions in this case are not as pronounced as one may have thought typically might be the case. Nevertheless, I think the point raised by Mr. Passacantando, as well as by Ms. O'Leary from the Canadian chair, that these tensions can exist and we will be quite delighted in an informal conversation on how we can do that. MS. GEISER: Just a quick clarification. It wasn't so much as to whether or not there should be an increase in social sector spending, but whether or not there would be any pressure for that total to be reduced based on this fiscal pact. MS. ALEXANDER: No. And, in fact, it is not. In the case of social protection, which is a little bit different, the issue on social protection spending -- so there is health, education and social protection spending -- was more the fact that the social protection spending in Cordoba comes from the lottery and, therefore, the MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] administrators of social programs did not have the predictive levels and, therefore, were not able to provide programs in anticipation. So that one again is not changing levels, but it is changing the budget methodology so that there is a more reliable and predictable flow of funds in the social protection. So just to reinforce that we don't anticipate that. When we look at the fiscal numbers again where you do see the lower flows to the provinces, they do increase the deficit over the period. But there is margin on the capital budget side. When you look at the historical levels of capital investment in Cordoba, the level that they are projecting in the budget going out the five years have a relatively robust room for some cuts. So we do feel that on the fiscal side there are opportunities. On the capital budget side, there is also a new opportunity on the pension side to be able to accommodate the changes that were agreed and see how they translate through. We have confirmed with the provincial government, we have confirmation from the Minister of Finance of the province that he shares our view, our analysis that what we have in the program is compatible and consistent with the federal agreement and that they MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] intend to abide by the agreements reached with us in this operation. Again I think this addresses mainly the questions raised by the French chair too. Whether it would be wise to send a revised Table 6, we can do that since we do have the updates of that particular table, as you highlighted. The second part of the question raised by the French chair on the pensions and social security and how the federal new pension reforms have an impact on the provinces, as I explained, they are distinct systems. The goal is to harmonize and have one national system of pension services in Argentina and so that progressively the provinces would be transferring responsibility for pensions to the federal government, paced by the agreement as well as of the financial capital by the federal government to absorb. The pension reforms that have been announced and are being considered by the legislature in Argentina do not bear on the provincial situation, is my reading, and perhaps Thomas might be able to clarify that as well. Continuing on the question from the U.K. on data, I have addressed the question of the baseline. And indeed, the NBI, which is the indicator of unsatisfied MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] basic needs, is a construct which combines indicators of poverty with other measures of the lack of physical infrastructure. It has a very heavy weighting on housing, as an example. And we have looked at the NBI in Argentina and it is a useful indicator of poverty. It is accurate in terms of poverty as measured by income in the range of about 70, 80 percent. So if you use that, you would be capturing about 70 or 80 percent of the poor population. So we continue to use it for targeting mechanisms, as I said, because it does have some value to it. We don't use it for measuring poverty though. And indeed, when you look at some of the elements in that index, they are based upon the previous census. So they are approximately ten years old. Argentina does a census every ten years. They are currently underway in doing the latest one. But, nevertheless, when you look at things like housing and some of the other physical infrastructure, it is not a bad instrument, but, as I said, it is not the instrument we use for measuring poverty. Indeed, these household surveys are done once a year and, therefore, we were able to track the poverty on the basis of incomes. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] I would like to emphasize though that the poverty statistics we use in Argentina are based upon incomes, not on consumption. And they do not value transfers in kind under social programs. And so in that respect, they are still not the kind of quality indicators of poverty that we would like to have. I would like now to address the question raised by the Kuwait chair on the attention to the poorer provinces in the north and whether we have specific plans to do a provincial reform loan in the north. The northern provinces, indeed the northeast and northwest, are the poorest. They also are the ones that have most likely the highest concentration of rural populations and the rural poor. We have been working in two of the provinces in the northwest, the Province of Salta and the Province of Tucuman. Those two provinces were included in the first round of provincial reform operations that we approved in 1997. We have completed both of those. The case of Salta, the implementation completion report is available, and that program was satisfactory and some elements of it very highly satisfactory. In the case of Tucuman, we are just in the process of finishing the completion report for that. And MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] unfortunately, that turns out to be unsatisfactory overall, but with some positive elements to it. The lessons that we have included in the report here demonstrate some of the reasons why we have not been completely successful in these operations and some of the reasons why we are selective in which provinces we work in. As emphasized in the report, the selection of which provinces to work in has to be very clearly based upon the capacity of the province and its willingness to undertake reforms as demonstrated by previous reforms and/or the quality of the reform packages being presented. And so we are selective. The quality of commitment is a major factor; past track record is a second factor, among other things. In the case of the northern provinces, unfortunately, there is not a lot of political will in some of the provinces to reform. So in the case of Salta, where there is a very high political willingness and a very high capacity to deliver on reforms, it was included in the earlier rounds. Now for the future, we are considering one of the provinces in the northeast, the Province of Misiones, which is a poor province that abuts Paraguay and Brazil MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] as a possible candidate. So that is primarily the response there. I would like to emphasize, as I did before, that the case of the poorer provinces, they still benefit from technical assistance. We have support programs in every province, trying to help them through technical assistance, develop their capacity for financial management and general administration of the province so that they can progress and eventually qualify for reform programs or have the capacity on their own with additional technical assistance to adopt the reforms that have proven successful in other provinces. So the demonstration effect, the possibility of a demonstration effect in selecting particular provinces is very high. I take note of the request by the Italian chair to provide a synopsis of the provincial situation. I will ask Ron Myers to respond to the question on the results so far in tax collections. The question of how do we select was raised again there. The criteria, although obviously applied with some qualitative assessment, looks at willingness to reform, past experiences on reforms, the quality of the reform package that is being offered, the potential for demonstration MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] effect, as well as obviously the needs of the province per se. Again, I will ask Ron in the context of his response on tax collections to indicate what specific measures the province is going to take. Ron will also answer the question raised by the chair for China on the employment programs, if there are details provided on what civil service might do in the future. On the case of the question raised by the Belgian chair on the following steps, how we are going to proceed, as we indicated before, we are discussing with the Argentine authorities the composition and general areas where the Bank's attention would focus over the next year or two. The tentative agreement that we have is that we will continue the program of provincial reforms with additional provinces, that we will continue the operation that we had already started preparing in the areas of social sector reforms, principally on health insurance and on the consolidation and streamlining of existing social programs; that we would work collaboratively with IDB and the Fund on the areas of co- participation, revenue sharing and fiscal relations between the provincial government and the federal MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] government, and that we would add a program on public employment and temporary support for the unemployed, and continue on with other dimensions of a program including the possibility in the future of a fund for financing infrastructure, which under the current circumstances is not likely to be able to generate much results now. So that is the broad parameter. We have missions going out on these operations. One is already under preparation. Ron Myers will be responsible for looking at state modernization, which I forgot to mention, but that is another area. And we will be working on the co-participation alongside with our colleagues. So work is underway and that will be the next steps. We are still looking at how to present these operations, what kind of programmatic approach we would like to take. So that is a discussion that we will be having inside the Bank and with the Argentine authorities over the form and the way these operations would be prepared. So we anticipate coming back to the Board as fast as we can with these operations, but it won't be within the next month or two. It will probably take us that long to get the things in shape. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] Finally, I am at my end. Thank you. MR. SANDSTROM: Thank you, Myrna. You asked many goods and you get many good answers. Now at the end, Myrna, you will come back. There are a couple of other questions including joint Bank-Fund missions and so on. But let's take Ron, Claudia and then Thomas. MR. MYERS: Thank you. Very briefly, with regard to the privatization, the short answer is that uncertainties still remain. However, the government is making every effort to reduce those uncertainties. That includes the fact that they have intervened with a small group in the provincial bank in order to prevent further deterioration in the situation. They are working closely with public sector unions within the bank to explain the situation and lay out the options as far as retraining or passing over to different parts of the province or staying with the privatized bank if they wish. This also applies for the electricity company. They are working closely with the Bank using Bank procurement rules. Even though we are not financing the hiring of management consulting firms or international bankers, it is a point of great importance MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] of the government that this be seen as a very clean and transparent process. And so they are following Bank procurement rules. We are reviewing the bid documents, reviewing the terms of reference in order to give them support in that regard. As far as the actual sales, they expect this to take place in the first half of the next calendar year. We will see what the market is like at that time. Hopefully, it will have settled down a bit and this will be a successful operation. But again, there is a degree of uncertainty. We tried to develop the most solid figures possible, but unfortunately we have to wait and see. With regard to the issue of tax collection, there is a major effort in place in Cordoba with results beginning to show. As you know, the government has taken a line of reducing tax rates. This is not done. They have made clear to us not to have a strong supply side response in the short-term but rather to send signals to domestic and international investors and to signal a new social contract with the citizens of the province and with investors. Linked to that is a very strong program of improved tax administration, to wide the tax base, MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] reducing the burden on those who actually will pay in order to promote investment and growth, but sharing the burden with those who have heretofore been avoiding payment of taxes. We have worked very closely with the IMF on this, and actions taken so far include a much more aggressive pursuit of tax evaders, closure of businesses, expansion of new modern information management systems to capture information on property, satellite imagery and a number of other actions that are showing results. Despite the reductions in tax rates, tax collections are holding steady and despite the overall economic problems affecting Argentina. So it is a very interesting process to watch, but they have made clear to us that the reduction in taxes, which is a gradual process, will be interrupted if tax collection or overall economic activity are not maintained. But their primary goal is to establish fiscal balance. So this is very much of a pragmatic approach that they are following. With regard to civil service, I would strongly support the idea of a pay commission looking carefully at salary levels. We have discussed that with the authorities. However, they argue, and I think we would agree, that what is being attempted here is quite substantial and there are limits in going into fiscal and MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] political areas and getting into salaries at this point. With the potential transfer of staff between agencies, this is certainly something they have on the agenda but it won't be in the next year. The steps that they are taking are to increase new management information systems to eliminate ghost workers, to create an establishment register, to do a job in classification throughout the government and to emphasize training and retraining of staff. Basically again, a social contract that staff would not be let off would be given options in order to permit legislative approval of the privatizations. At this point, I should indicate that as far as realism of this reform effective that Mr. Zhu raised, there is a technical assistance loan going to the Board of the IDB within two weeks. We have been working very closely with the IDB and with the government, and their funding will provide much of the support for a lot of the reforms here. And I should also, of course, point out that this program has been initiated and a lot of steps have already been taken. So we are quite confident that this program will be achieved based on everything that we have seen so far. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] I think I covered it. MR. SANDSTROM: Thank you. Claudia. MS. COSTIN: Thank you. I was asked to talk a little bit about previous Bank experience on pension fund reforms, if we were successful or not. Yes, the Bank has had previous experience on bank reforms, and up to now they are successful, especially in another federation which is Brazil, where the Bank worked on two fronts -- one, the overall pension reform for all workers and the pension reform for civil servants. In both cases, what the Bank was willing to do is to help build an actuarial on financial consistency and also the issue of harmonization was very important here because in the case of civil servants especially, the states had pension funds that were broken and the constitution changed. And the law that regulates pensions for civil servants has changed with Bank help. And we had to help them restructure, the states to restructure their pension funds. And this process is ongoing and it is till now very successful, and a new project is starting to be designed to help now municipalities where the same issue is concerning the government and the Bank. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] MR. SANDSTROM: Thank you very much, Claudia. Thomas, would you like to come back on convertibility and, if you wish, on tax reform? I think the question was focused on the costs of convertibility. MR. REICHMANN: Yes. That, of course, is not an easy question to answer in a few minutes. It is more a topic of a multi-day seminar. So briefly what we are talking about here is the currency board arrangement, the pros and cons of it. The advantages in the case of Argentina have been obvious. The convertibility regime did usher in a decade of stability which permitted the fast growth of Argentina registered in the 1990s, increased, first of all, the elimination of inflation, produced a positive effect on income distribution, eliminated negative effects of creeping inflation on income distribution. It increased efficiency in the economy, increased transparency. It provided extra incentives and push for reforms, and the results are clear. The costs are those of any system with a fixed exchange rate and an immovable exchange rate. Therefore, the adjustment to external events has to take place through movement of other relative prices which may take initially longer but in the end may be more lasting. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] The same goes with the system related to this, which is the absence or the shedding of monetary policy, which puts more of the burden of adjustment for the economy on the fiscal and relative price movements. So it puts the burden of adjustment more on the fundamentals which again may initially be more difficult, may take longer, but are more lasting. So, on balance, at least if the Argentinean people have to vote on this, they are voting seemingly unanimously for maintaining the system and bearing the costs. But it is obviously a debatable issue which deserves a longer treatment than we can give it here. On the other question that Myrna threw my way was on whether the pension reform that is being intended at the national level has any bearing on the provinces. Indeed, it has no direct bearing, although, of course, to the extent that the provinces transfer their own systems back to the federal level, they will be affected at that point. And there is a more general level in which the new pension reform will have a bearing overall nationally inasmuch as the new reform contemplates providing a minimum general non-contributory pension to everyone, to the whole population, even those that are outside the existing systems, be it federal or provincial. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] So from that point of view, with this preoccupation on the informal sector of the economy and the large uncovered segments of the population which has potential liability for the future, this reform intends to very modestly -- but at least it is a first step -- to address that one. Other than that, there is no direct bearing on that. Thank you. MR. SANDSTROM: Thank you very much, Thomas. And then, there were a couple of remaining questions for Myrna to respond to. Matthias, before Myrna. MR. MEYER: I wanted just to ask an additional question on the foreign exchange regime. Sorry. Maybe I didn't listen well, but I am wondering to what extent it is possible to maintain a regime like that when in very important countries like Brazil or others you have regimes which are flexible. And in the case of Brazil, you have the relatively strong devaluation which obviously affects the relative positions in trade. So the question is not how quickly can you adapt but how quickly can you adapt in front of very strong MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] changes in some of your main trading partners? And is that a consideration which could lead to policy changes? MR. REICHMANN: Well, first of all, I think to put the issue in context, let's remind ourselves that Argentina is an extremely closed economy. Basically, even though exports have been growing fast and have doubled over the last eight years, they are still less than 10 percent of GDP. Therefore, Argentina's growth prospects over the long-run indeed have to be export-led growth, competitiveness and so on. In the short-run, growth in Argentina and economic activity in Argentina do not depend on export performance, putting again the whole issue of adjustment in a more longer-term perspective. Second, adjustment vis-a-vis Brazil and so on does take place. There is the inflation differential. There has been some pass-through, by now significant, since January 1999 to inflation in Brazil, at the time when there has been cost deflation in Argentina. There is considerable adjustment in terms of unit labor costs. Both productivity as well as real wages in Argentina have moved in a way to contribute to adjustment. So, yes, indeed, there are problems of speed here. There are problems of short-run versus long-run MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] costs, but the issue essentially is an open issue and there is not an immediate need at this moment foreseen for changing the regime. MS. ALEXANDER: There are several more questions. And let me start with the question raised by the chair for Denmark on a joint Bank-Fund mission and why are there two missions going out in parallel. This is the practice that we have had between the Bank and the Fund for many, many years. There is a pattern of working together but nominally on two separate missions. People are happy with it. So changing the name to a joint mission, I must say, I am not sure of the impact of that, but the idea that they work together, they are there together, the programs are shared, if you want, and that there is ample coordination I think is the main point to emphasize; that this has happened in Argentina for many, many years and continues to be the practice today. There was a question raised by the chair for Mexico about the new and old financial management systems. I think this is a question that we can return to in a bit more detail, but my first reaction on this one is that this is an adjustment operation and therefore there have been no changes in the way the Bank disburses MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] and, therefore, we don't anticipate that there will be any impact on implementation, of incompatibility of financial management systems. There was a final question raised by the chair for Malaysia, which is a very broad question, a very good question, and it touches on the same issue raised by Mr. Stek, the question that this is a long-term process; this is a process of reforms that will take a number of years, that require the federal level to reform as well. And indeed, this is what is happening presently, that you have the Fund and the Bank and the IDB working on a set of reforms at the federal level which are in some respects mirrored at the provincial level or complemented at the provincial level, depending upon the area of jurisdiction. So you have an ongoing process of reform selectively and generally at the provincial level, complemented and mirrored at the federal level with national level reforms. I think it is important, however, as we mentioned during one of the earlier briefings that the restoration of growth, the restoration of confidence and investments in Argentina is not something that we can take for granted and that there indeed are some risks to the program. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] MR. SANDSTROM: Thank you very much, Myrna. Finn. MR. JONCK: Well, Sven, if you will allow me just two comments. First, on the question of a joint mission, I think it is a question of principle, of course. And the answer that we have been doing that in the past is why we are doing it in the future is not really satisfactory. But that is an issue of principle that I think we should come back to in another context. Secondly, in light of the responses we have gotten on the many questions raised about the poverty effect, I am a little concerned, so to speak, that we are not told that this loan is not envisaging any short-term poverty reduction effect. What we are aiming at is closing the long-term gap, or more or less that is the wording. If you combine that with what I also referred to in my first intervention some of the tax reforms, which are aiming at tax cuts, which may be construed as benefiting, first of all, the better-off parts of the population, I am a little concerned about the message and the profiles, so to speak, of this. And I would recommend that staff in negotiating the future lending MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] take a little more into account also the short-term poverty effect of the lending program. MR. SANDSTROM: Thank you very much, Finn. Myrna, do you have any comment on Finn's last question on the short-term impact? On the question of joint missions, I think in practice it works like joint missions. We have staff assigned to work with the Fund mission and Paul Levy, for instance, will be working with Thomas' mission. He is a de facto member of the mission. It is just that it is easier for us to see them as two parallel missions because there are other members who work more specifically at issues that are specific for the Bank or specific for the Fund. So in practice, it works extremely well and jointly. Myrna, on the short-term versus long-term. MS. ALEXANDER: Well, I think it is wise counsel from the point of view of how to design and implement programs. My response was more trying to be realistic I think, and that to portray that in Argentina with the level of poverty of over 30 percent, with growth of 0.5 percent or less, with a serious problem of investor reluctance, that quick turnarounds I don't think is anything that we can promise. And I would not want to be MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] seen to be projecting these kinds of operations as a quick fix. Instead, they do address many of the long-term problems. Hopefully, and we are all wishing for a quick turnaround in Argentina. Unfortunately, that has not been happening. And, therefore, I think it would not be particularly good for us to sell these kinds of operations to the provinces as quick fixes. Nevertheless, we do know from our experience in a province like Salta and what we were able to do in other provinces that indeed you can have in a two or three-year time frame some very significant changes in quality of social services and see some rapid changes, for example, in educational attainment, outreach of social programs and so forth. So you can have an impact on the poor. I didn't mean to say that you won't have an impact on the poor, but it would be probably over- optimistic to think that we will have a short-term impact on the level of poverty. Indeed, another part of the program which is operating at the federal level is some mitigating for the unemployed through an expansion of the ongoing program that we have called Trabahar [phonetic] which is a temporary work program, which has been very successful in MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] mitigating some of the short-term impacts of high unemployment. MR. SANDSTROM: Thank you very much. I think Myrna's response is quite fair. It is very clear that these operations have a medium to long- term impact in terms of fiscal management, capacity building, the strengthening of the institutions, but with the focus on the social sectors, social protection, and also the program as a whole has a focus on regenerating growth, to generate employment. But having said that, I think one thing we need to do better is to articulate the linkages between these medium to long-term objectives and the poverty issue in the country. That is something we have been discussing in recent operations of this type. There are others coming shortly in Brazil and elsewhere and we are going to do a better job in articulating these linkages. Are there any other comments at this stage? Roberto Garcia-Lopez, he will help me to wrap it up. MR. GARCIA-LOPEZ: Thank you, Mr. Chairman. Before I read my statement of my government, going back to your first comments of this morning about last injection program that we finished yesterday -- MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] MR. SANDSTROM: Roberto was the one who introduced the word "injection". I thought it was a very good comment. MR. GARCIA-LOPEZ: The good news, looking around the table, is that most of us survived the injection program. You need to prepare a stronger one for the next time. Mr. Chairman, on behalf of my Argentine authorities, I would like to thank management and staff for the preparation of this program and for providing an excellent update of the main macroeconomic developments to which the country has committed. The international community has reacted with a surge of confidence and positive signals after the announcement made by our President. As many of you are aware, one of the most important events to consolidate the Argentine fiscal program was agreement reached two days ago between the federal provinces, including the Province of Cordoba. As outlined in the Letter of Provincial Reforms, signed by its governors, the Province of Cordoba persists in undertaking the necessary reforms to achieve sustained growth and to fight against poverty. The provincial program is strongly complemented by an IDB investment MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] loan that will be directly to state reform and implementation of a new public administration model. The Bank has supported provincial reform program under Provincial Reform Loan I and a second group of loans for the provinces of Salta, Tucuman and Rio Negro and recently Catamarca too. The proposed loan before us follows the line and we expect the Bank will continue supporting our provinces to ensure responsive delivery of public social services within fiscally sound policies. Last but not least, I would like to express my appreciation to my Board colleagues for their comments and their support and I am personally committed to transmit their thoughtful contribution to my authorities. Thank you. MR. SANDSTROM: Thank you very much. And with that, the loan is approved on the terms proposed, and we will circulate an updated Table 6. We will try to provide you with, as Franco called it, a synoptic table on the Cordoba economy. But in particular, we will try to include tables in future provincial operations that give you the picture of the economy. I think B.P. Singh also raised that earlier. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666 [--- Unable To Translate Box ---] And we will keep you informed both in terms of the lessons learned on the impact of the freeze on the social sectors and how these tradeoffs work in practice, and also take up Terrie's proposal of maybe a more general discussion of the federal/provincial relationships and what we learn in these operations, not only in Latin America but also elsewhere, like in South Asia. So with that, thank you very much. MILLER REPORTING COMPANY, INC. 735 8th Street, S.E. Washington, D.C. 20003-2802 (202) 546-6666
Группа Всемирного банка · Transcript
Transcript of Meeting of the Executive Directors of the IBRD and IDA, held on Wednesday, November 22, 2000
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