Document of The World Bank FOR OFFICIAL USE ONLY Report No. 22049-AR MEMORANDUM OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT AND THE INTERNATIONAL FINANCE CORPORATION TO THE EXECUTIVE DIRECTORS ON A COUNTRY ASSISTANCE STRATEGY PROGRESS REPORT OF THE WORLD BANK GROUP FOR THE ARGENTINE REPUBLIC June 25, 2001 Argentina, Chile, Paraguay and Uruguay Country Management Unit Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. The last Country Assistance Strate(y for Argentina was discussed by the Executive Directors on June 27, 2000 (Report No. 20354-AR, dated September 8, 2000). CURRENCY AND EQUIVALENTS Currency Unit: Argentina Peso (Arg.$) ARG$1= US$1 WEIGHTS AND MEASURES Metric System FISCAL YEAR January I - December 31 ABBREVIATIONS AND ACRONYMS AAA Non-Lending Services AFIP Federal Tax Authority AGN National Extemal Audit Agency ANSES National Social Security Agency APL Adaptable Program Loan CFAA Country Financial Accountability Assessment DNPOIC Directorate for Externally Financed Projects ESW Economic and Sector Work FOPAR Social Development Fund Project FSAP Financial Sector Assessment Program ICR Implementation Completion Report IDB Inter-American Development Bank IDF Institutional Development Fund IMF International Monetary Fund LIL Learning and Innovation Loan LUSIDA AIDS/STD Control Project MECOVI Regional Program to Improve Poverty Measurement MERCOSUR Southern Cone Common Market WB Managers and Staff Responsible for this CAS Vice President Mr. David de Ferranti Country Director Ms. Myrna Alexander Lead Economist Mr. Paul Levy Country Economist Mr. David Rosenblatt Task Manager/Country Officer Mr. Mark Hagerstrom IFC Managers and Staff Responsible for this CAS Vice President, Investment Operations Mr. Assaad Jabre LAC Director Mr. Karl Voltaire Task Manager/Chief Mr. Toshiya Masuoka FOR OFFICLIL USE ONLY NAFTA North American Free Trade Area NGO Non-Governmental Organization OECD Organization of Economic Cooperation and Development OED Operations Evaluation Department PAMI National Retired Persons Medical Insurance PDP Provincial Development Project PER Public Expenditure Review PHRD Program for Human Resource Development PRESSAL Provincial Health Sector Development Project PRL Provincial Reform Loan PRODYMES Secondary Education Project PROFAM Family Capacity Building Project PROMIN Maternal and Child Health and Nutrition Project PROSAP Provincial Agricultural Development Project PROINDER Small Farner Development Project PSAL Programmatic Structural Adjustment Loan SDR Special Drawing Rights SIEMPRO Poverty Monitoring and Analysis Unit SfNTyS National Tax and Social Identification Project SME Small and Medium Size Enterprises TRABAJAR Public W'orks Employment Scheme UNDP United Nations Development Program VAT Value Added Tax VIGIA Public Health Surveillance and Disease Control Project Y2K Year 2000 Project This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization. THE ARGENTINE REPUBLIC COUNTRY ASSISTANCE STRATEGY PROGRESS REPORT TABLE OF CONTENTS EXECUTIVE SUMMARY iii - vi A. INTRODUCTION I B. ECONOMIC AND SOCIAL PERFORMANCE 1 Background 1 Recent Economic Perforrnance 2 Social Concerns 5 C. RESPONDING TO THE CHALLENGE 6 The Reform Agenda 6 Renewing the Effort 6 Sources of Growth and Prospects 9 International Support 11 D. PROGRESS IN ACHIEVING CAS OBJECTIVES 12 Social Development 12 Provincial Reform and Development 15 Sustainable Growth 16 Overall Program Monitoring 18 Portfolio Performance 19 Lending/Investments/Guarantees/Non-Lending 22 E. FUTURE OUTLOOK AND RISKS 27 Solvency, Growth and Poverty Reduction 27 Alternative Scenarios 28 Risks and Risk Mitigation 28 i TABLES Table I Fiscal performance at Federal and Provincial Levels Table 2 Monitoring the Progress Table 3 Program Triggers FIGURES Figure I Inter-annual GDP Growth Rates - 1998-1 to 2000-1 ANNEXES Annex Al Key Economic & Program Indicators - Change from Last CAS Annex A2 Country At a Glance Annex B2 Selected Indicators of Bank Portfolio Performance and Management Annex B3 Bank Group Program Summary Annex B3 IFC and MIGA Program Annex B4 Summary of Non-Lending Services Annex B6 Key Economic Indicators Annex B7 Key Exposure Indicators/Supplementary Table Annex B8 IBRD Operations Portfolio Annex B8 Statement of IFC's Held and Disbursed Portfolio Annex B9 CAS Program Matrix MAP IBRD 29348 ii Argentine Republic Country Assistance Strategy Progress Report FYO1 Executive Summary 1. The Joint IBRD-IFC Country Assistance Strategy, covering FY 01-04, was considered by the Board in June 2000 when the new administration had recently taken office. The country was facing an economic dowvnturn which began in late 1998, resulting in increased unemployment, deteriorating social indicators andfiscal accounts. Initial expectations were that the economy would benefit from the vigor of the new administration and a more positive external environment. However, that was not to be the case: Argentina remains in the midst of a three year recession and is confronted with problems of competitiveness, fiscal vulnerability and uncertainty, along with the related social consequences. Development Chlallenges 2. Although there has been progress in meeting development objectives, the inability to return to a growth path that saw the economy expand by an average of 4.8 percent per year during the 1990s is undermining achievements in social development and exacerbating poverty. The economy shrank by 3.4 percent in 1999 followed by a drop of 0.5 percent in 2000. Only now are there some signs of recovery. Over the past three years, Argentina has been hit by a series of external shocks: the Asia crisis (1997), the Russian default (1998), the Brazilian devaluation (1999), the US dollar appreciation and low commodity prices. While the corporate sector in general has been weathering the recession with its traditionally conservative balance sheet, economic uncertainty, reflected in the lack of domestic credit expansion, has affected new investment. Small and medium size firms, the main source of employment and largely oriented to the domestic market, have been particularly negatively affected Since the path by which the economy reacts to shocks is constrained under the Convertibility Plan, there are few options: fiscal policy constitutes the main instrument at the Government's disposal, with the economy responding through changes in prices, wages and employment. The key to restoring growth rests with measures to increase productivity, reduce the fiscal drain on the economy and restore investor and consumer confidence. 3. In late 2000, in reaction to deteriorating access to international capital markets and continuing lack of growth, the Government initiated a new set of economic reforms to strengthen its fiscal position, including that of provincial governments. To provide a financing cushion and to bolster confidence, the Government negotiated a package of international financial support of $39.7 billion, with about halffrom the private sector. The package also included an augmented stand-by arrangement of $13. 7 billion with the Fund. In the case of the Bank, this includes already planned lending under the FYOJ-04 CAS, with up to $900 million in quick-disbursing programmatic lending comprised of $400 million shifted within the base case, plus $500 million subject to triggering of the high case as outlined in the CAS. The announcement of the international package provided immediate relief into 2001, as country risk and interest rates fell. However, this iii provides breathing room only. Once again, fiscal performance in the first three months of 2001 did not meet expectations. The Minister of Economy resigned in early March 2001 and a newt economic team was brought in. By mid-March, this economic team too was replaced. Country risk spreads jumped once again, and the urgency in addressing Argentina's economic difficulties mounted 4. The new team is headed by Minister of Economy, Domingo Cavallo, previously Minister during the 1991-1996 period and the architect of the Convertibility Plan. Minister Cavallo has put in place an economic recovery strategy based on three pillars: (a) strengthening political cohesion and support for reform; (b) securing financing to dispel risks of default; and (c) promoting economic policies that address fundamental fiscal and economic growth challenges. Congress granted the Executive Branch special powers to enact economic measures by decree. A debt swap was implemented to lower debt service obligations over the next five years, with much of the savings accruing during the next eighteen months. To stimulate growth, a number of sectoral agreements were reached to lower fiscal and regulatory impacts on external competitiveness. In addition, the Government has embarked on a concerted effort to strengthen tax administration, and improve key social services to address better the needs of the poor and to reinforce investment in human capital. At the same time, provincial governments will continue to accompany the Federal Government in reducing fiscal deficits. The main elements of this new program, supported by Congress, have been agreed with the International Monetary Fund and endorsed by the Fund's Board Recently, additional complementary measures were announced, aiming to: (a) increase competitiveness through a trade compensatory system offiscal incentives and disincentives; (b) stimulate consumption and growth through the reduction of income taxes to low and medium- income persons; and (c) improve the collection ofpast-due taxes and reduce evasion. 5. These measures greatly improve the outlook for the remainder of 2001 and for 2002, with growth expected to recover in the later half of 2001. Nevertheless, the situation in Argentina remains fragile with country risk perceptions still above their pre- crisis levels. It is apparent that the international capital markets have reached the limit of their financing of Argentina 's fiscal deficits. Thus, the challenge remains to restore growth and establish afiscal equilibrium. Progress in CAS Implementation 6. Looking back at the past year, the long recession set back progress towards realizing Argentina's long-term development goals. This is particularly evident in poverty levels, which have most likely deteriorated, as the incidence of poverty is highly dependent on growth. Nevertheless, there has been progress on many fronts during the year, as discussed in this report, even if there is still a long way to go to complete the development agenda set out for the Bank's collaboration with Argentina. Despite the setbacks, the goals set out in the last CAS remain valid and the strategy appropriate, focusing on consolidating structural reforms, enhancing social development, strengthening social services and social safety nets, and improving public sector capacities, including sub-national governments. In fact, the recession and increasing social problems validate these priorities and reinforce the need to address underlying iv structural deficiencies. At the same time, persistently high tnemployment reinforces the need for the Government to continue its strategy of increasing competitiveness, wt ith IDB and Bank support, andfor the IFC to continue to focus on improving access to investment financing for companies that generate growith and emnployment, and activities that demonstrate tangible benefits of growth and reform. 7. During FY01, the mainstay of the Bank's lending program was support to the provinces for reform of social services and fiscal management, as the cornerstone for improvements to the quality, equity and efficiency of health and education services at the same time as reinforcing fiscal responsibility. The program also included pilot efforts in sustainable fisheries management, indigenous peoples andfamily capacity building, and support for secondary education at the provincial level. These programs conform to the priorities identified in the current CAS, albeit at lower levels than originally anticipated 8. Performance of the Bank 's portfolio, with 45 active loans, $4.5 billion in commitments and $2.5 billion undisbursed, has deteriorated but remains strong. The deterioration is largely due to the constraints on indebtedness and counterpart funding, offset by determined action by the current administration to manage actively the portfolio. Delays have also been associated with the change in administration, the establishment of new structures, and the time needed to reformulate project teams and determine new priorities. At present, 10 percent of the portfolio is considered as unsatisfactory and 12 percent at risk. At the same time, the track record on achieving project objectives shows that development effectiveness of the portfolio remains high. 9. Reflecting the prolonged recession and the fact that IFC investments in Argentina continue to be in 'frontier" sectors, the overall quality of IFC's portfolio has somewhat decreased but remained acceptable. As of March 31, 2001, 9.5 percent of the loan portfolio was in non-accrual status and interest rate collection was 89.8 percent (compared with 7.4 percent and 91.9 percent, respectively, at the time of the CAS). 10. Looking to the coming year, the main shift in the proposed Bank program, as anticipated in the informal Board briefings in late 2000, is the inclusion of a proposed programmatic loan to support the Government 's intensified effort to consolidate structural reforms and to enhance social policies. This follows the agenda laid out in the CAS for the high case lending scenario, and will likely consist of a combination of poverty focused reforms in the social sectors, pension system, health insurance, plus federal-provincialfiscal relations and modernization of the state. In addition, because of the need to continue to support poverty alleviation, the plan is to extend Bank support to the temporary public works program (TRABAJAR). The Bank will also consider ways to support Argentina's competitiveness, especially in the infrastructure. The proposed lending program has been adjusted to reflect progress in specific sectors and on-going implementation. With these adjustments, the total program for FY 02 stands at about $1.0-1.5 billion depending on project preparation and on whether triggers for the high case lending scenario are met. 11. With regard to IFC, in FYO, the focus has been in the area of domestic financial market development, SME financing through financial and other intermediaries, v education, provincial infrastructure, and housing finance. IFC will continue to focus on these and other priority sectors specified in the CAS, namely middle-sized companies that have impact on growvth and job creation but currently lacking access to long-term financing, and credit enhancement structuredfinance. 12. In terms of analytical/advisory work, the programi is on track and builds on wvork done for the CAS-- the FYOO Poverty Assessment and the Government's 1999 Public Social Expenditure Review. Additional work is planned on Argentina 's fiscal and debt sustainability, sources of economic growth and trade relations. Tracking of provincial finances remains an essential part of our analytical wvork. Studies of different dimensions of social development have been completed and work on transport-infrastructure, rural infrastructure, SMEs, and municipal finance and services is underway, building our knowledge for future operations and policy advice to remove bottlenecks to growth and improving services, especially for the poor. A joint Bank-Fund assessment of the financial sector is also underway. Fiduciary aspects are being addressed in updates of the Country Financial Accountability and Procurement Assessments. Prospects and Risks 13. Argentina continues to face a difficult economic and social situation with its options limited by the Convertibility plan and the country's willingness and ability to tolerate the costs of transition. The prevailing policy stance gives major wveight to stimulating economic activity which should have a positive impact on employment and poverty reduction. The reluctance of the capital markets to continue to finance the fiscal deficit, however, reinforces the imperative of closing the fiscal gap. The economic and social consequences of a failed economic program, on top of already high levels of poverty and unemployment, would be serious. The situation in Argentina is particularly critical as external and domestic shocks have implications for Argentina's long-term solvency. External indebtedness is only moderately high by international comparisons but, due to a small export base, the external debt service to export ratio is one of the highest among emerging markets. A series of simulation exercises for this progress report show that simultaneous long run solvency at the external sector and public federal and provincial administrations can be achieved at a real economic growth rate of about 2.9 percent. This should be attainable, but economic reforms to enhance competitiveness and productivity gains are required. Moreover, on the fiscal side, the measures to control nominal growth of primary expenditures at both levels of government are a necessary condition for debt ratios to stabilize, even if economic growth were higher. 14. The new measures currently being implemented create the conditions for a much needed economic turnaround There are signs that the economy is responding but the coming months are critical with close monitoring by the international financial institutions of the economic and social situation. A number of possible scenarios are outlined in the report. At this point, we are proposing no deviationsfrom the parameters for the program outlined in the CAS Should conditions warrant, as the situation in Argentina evolves, the CAS would be updated as appropriate. vi Argentine Republic Country Assistance Strategy Progress Report FY01 A. INTRODUCTION 1. The most recent Joint IBRD-IFC Country Assistance Strategy (CAS) was considered by the Board in June 2000. The development strategy for the FYO1-04 period, spanning the term of the new Administration of President De la Rua, focuses on: (i) enhancing social development; including poverty alleviation and human resource development; (ii) improving the performance of the state, particularly at the sub-national level; and (iii) consolidating structural reforms. Total lending was projected to be about $3 billion for the period, about half the level of earlier years, with the possibility of increasing total lending over the FY 01-04 period to $3.5 billion should the triggers be met. 2. The CAS was considered at the point when the new Administration was confronting the challenges of an economic downturn which began in late 1998, resulting in increased unemployment, deteriorating social indicators and fiscal accounts. Against this backdrop, the progress report reviews economic and social performance, achievement in meeting CAS objectives, and the support offered by the major partners, the IMF and the IDB. It highlights initiatives by the Government to respond to the current challenges and outlines the proposed support from the international community. Finally, it assesses the sustainability of the economic program and the risks. B. ECONOMIC AND SOCIAL PERFORMANCE Background 3. Since the launch of the Convertibility Plan in 1991, the economy has been transformed through a sweeping set of structural reforms that altered the monetary system (establishing a currency board arrangement with the Argentine peso pegged one-to-one to the US dollar), liberalized trade, and redefined the role of the state. The latter was achieved through privatization, decentralization to the provinces, and reform of the social security system. All of this was intended to reverse the long-term trends of slow growth, low labor productivity, state domination, low domestic savings, weak investment, high economic volatility, and chronic inflation which culminated in hyperinflation and the incidence of poverty reaching over 40 percent inl989. 4. The economic results of the Government's program during the 1990s were dramatic. Argentina had average economic growth of 4.8 percent over 1991-1999, despite the Tequila crisis in 1995 and the external shocks and ensuing recession since 1998. In contrast to previous bouts of hyperinflation, during the past decade Argentina had one of the world's lowest rates of inflation, with price deflation in the past two years. The Federal Government's fiscal deficit receded from an average of about 6 to 8 percent of GDP for most of the 1980s to 1.4 percent in 1998 and 2.6 percent in 1999. Total foreign debt--about $147 billion-- is moderate as a share of GDP (equivalent to 52 1 percent) but large when compared to the country's export base. As a result, external debt represents more than four times the annual base of exports of goods and services, and debt service has represented 60 to 90 percent of total exports in recent years. 5. Nonetheless, Argentina's external indebtedness and dependence on external capital to finance public sector deficits and private investments reflect the currency regime, under which both the dollar and the peso has equal legal status, and the relatively underdeveloped state of the capital markets. This leaves the economy vulnerable to external shocks and changing perceptions of the international capital markets. This happened during 1994-95 with the Tequila crisis, and again with the Asia crisis of 1997, the Russia crisis of 1998 followed by the Brazil devaluation in 1999. All of these shocks have had negative impacts on the economy's ability to create employment and reduce poverty, particularly as much of the adjustment depends on productivity improvements and flexible labor markets. Poverty has risen to about 29 percent after falling in the early 1990s and unemployment has remained stubbornly high at 14-15 percent. Moreover, the pace and intensity of economic reform waned in the latter part of the 1990s, and the end of the decade saw a noticeable deterioration of the fiscal accounts at both levels of government in 1999, an election year. The deterioration of public accounts created additional pressures on the level of country risk and the cost of borrowing for the country as a whole, aggravating the length and depth of the economic recession. Recent Economic Performance 6. Argentina has been facing an external environment characterized by high international interest rates, low commodity prices, adverse realignment of other currencies, declining confidence and limited access to international financial markets. Economic performance in 1999, with a decline of 3.4 percent of GDP, was the worst since the hyper-inflationary period of 1989. At the start of 2000, when the CAS was prepared, the economy appeared to be recovering but these incipient signs of growth were short-lived and the pace of economic recovery remained slow through 2000 (Figure 1). Consumers and investors were wary and investment has dropped from 20 percent in 1998 to 16 percent of GDP in 2000. Figure 1 Interannual GDP Growth Rates, 1998-1 to 2001-1 80% 60% 4. 0% _ / _ 2.0% _- 0.0% I N f X -weE11 -20.% i -4.0% -6.0% 2 7. The year 2000 ended with a decline of 0.5 percent of GDP even though exports in aggregate grew by 13 percent, and manufactured exports in particular by 18 percent. The current account deficit improved significantly from 4.4 percent of GDP in 1999 to 3.3 percent in 2000, with strong export growth and slack import demand offsetting the rise in foreign interest payments. Unemployment registered 14.7 percent in October 2000 and poverty levels may have worsened. Despite the recession, there was improvement on the fiscal front: the aggregate provincial deficit was 1.2 percent of GDP (down from 1.6 % in 1999)' which together with the federal deficit of 2.4 percent of GDP (roughly the same in 1999 but with a $3 billion cut in primary expenditures accommnodating the increase in interest obligations), represented an improvement over 1999 (Table 1). In total, the consolidated primary public deficit was reduced by 0.6 percent of GDP in 2000. Table 1: Fiscal Performance at Federal and Provincial Levels Est. 1995 1996 1997 1998 1999 2000 Millions ofpesos Federal Government -2,545 -5,889 -4,341 -4,170 -7,348 -6,974 Provincial -3,530 -1,840 -1,377 -2,488 -4,633 -3,517* Administrations o/w Buenos Aires -270 -581 -808 -1,355 -2,150 -1,868 Province Total -6,075 -7,729 -5,718 -6,529 -11,981 -10,491 Shares of GDP (%Y) Federal Government -1.0 -2.2 -1.5 -1.4 -2.6 -2.4 Provincial -1.4 -0.7 -0.5 -0.8 -1.6 -1.2 Administrations Total -2.4 -2.8 -2.0 -2.2 -4.2 -3.6 Note: Deficits exclude privatization proceeds as revenues Sources: Ministry of Economy, IMF *Bank Staff Estimate 8. International capital markets became increasingly wary of the capacity and willingness of Argentina to meet its obligations as the year 2000 unfolded which led to a sharp rise in country risk. In October-November 2000, external debt markets closed for Argentine public borrowing, and domestic interest rates rose sharply, although not comparable to the worst of the Tequila crisis. The markets were calmed by the swift action by the Government and the IMF to mobilize international financing, called the blindaje, (see para. 33). With these new reforms and the support package, financial variables improved substantially at the start of 2001. The Government returned to the international bond market with a $4.2 billion debt swap and new issues were launched. IThese estimates are still to be confirmed. The government estimates that the fiscal effort by the provinces was somewhat greater-about 0.55 percent of GDP. 3 9. But these developments were short lived and the initial positive reactions by the international capital markets to the blindaje could not be sustained when early results for January and February 2001 showed that fiscal deficit was larger than the indicative targets agreed with the Fund. In March 2001, the economy was hit by the resignations of two Ministers of Economy in succession. After the first Minister's resignation. the new economic team proposed a program to cut $2 billion from the federal budoet. The program, while focused on inefficiencies in federal spending, failed to received adequate political backing. This Minister was replaced with an economic team headed by Minister Domingo Cavallo who has been Minister of Economy from 1991 to 1996. 10. Continuous access to international capital markets is critical for Argentina to finance its deficit and the roll-over of its external debt. Thus, when these events occurred, it was just at the point that the Federal Government had hoped to access the capital markets to fill its financing plan for the second quarter of 2001. With the markets effectively closed again as of March 2001-with country risk spreads remaining over 1000 basis points-the Government had no recourse but to tap the domestic market with a $3.5 billion placement. Included was the issue of a one-year bond for $2 billion that local banks can compute towards their liquidity requirements which were lowered from 20 to 18 percent of deposits. The recent voluntary swap of about $30 billion in public debt reduced the Federal Government's liquidity requirements in the coming years--by $16 billion over the next five years and $7.8 billion over the next 18 months.2 11. Throughout most of 2000, confidence in the domestic banking system remained strong, as the monetary authorities had implemented prudent banking policies, strengthening the system since the Tequila crisis. Overall, the banking system continues to be highly dollarized with dollar accounts at 63 percent of total deposits far outweighing peso accounts and the majority of domestic credit is nominated in dollars. The system has maintained its deposit base in both pesos and dollars, exhibiting growth of 7 percent growth in the first half of 2000. However, deposits declined by about 5 percent in the face of the political uncertainty in October and November 2000 and then recovered only to decline once again by about 6 percent or $5.5 billion through to May 2001, before stabilizing and showing signs of recovery in the second half of May and early June.3 International reserves fell by about $7 billion between the end of 2000 and May 2001, but remain strong, totaling $25.4 billion, and fully back the money supply, a requirement to maintain convertibility and the integrity of the currency board system. 12. The recession and the mounting fiscal pressures have had an impact on interest rates and on credit demand. As the markets began to increase country risks, inter-bank rates spiked in October 2000 and again in March 2001. With low investment and consumer confidence, the banks, reflecting a lack of demand for credit at the prevailing 2 The net cost of this operation is estimated to be 35 basis points in incremental yields on the stock of debt swapped and the extension of maturities of such debt by 2.8 years, plus the increase in indebtedness by $2.2 billion. On a net-present-value-basis, this swap is considered very successful. 3In contrast, during the Tequila crisis, 18 percent of deposits were withdrawn from the system and a significant number of banks were forced to close, restructure and/or merge. 4 high interest rates, have been increasingly shifting their asset composition towards public sector debt. Credit to the private sector declined during 2000, to reach about $62 billion, or roughly 22 percent of GDP. In the first four months of 2001, credit declined further to $60 billion with prime rates jumping from 8 percent to 24 percent during March 2001. The Government's switch from external to domestic sources of financing further complicates this panorama further by crowding out private borrowing. In addition, the continuing stagnation of the economy has led to an inevitable deterioration in the quality of bank portfolios albeit this deterioration remains modest, and private banks are generally heavily provisioned. Social Concerns 13. While many social indicators have improved in the past ten years--including a drop in infant mortality from 25 deaths per 1,000 births in 1991 to about 18 deaths in 2000--poverty levels have stubbornly stayed high after having fallen in the immediate recovery period of the early 1990s. The Bank's estimates for 1998 put poverty at about 29 percent of the urban population, down from the peak of 41 percent in 1990 but up from the pre-Tequila crisis level of 22 percent in 1994.4 (Poverty is likely much higher in the rural areas and not likely to have improved in the past two years.) This situation is compounded by rising income inequality, underemployment and unemployment, especially for the unskilled, indicating that the benefits of growth have not been widely shared. Income for the unskilled has been stagnate for the past 10 years as productivity increases benefited workers with higher human capital, and much of the burden of reacting to external shocks has come through reductions in unit labor costs. Moreover, as a coping strategy, many firms and employees are opting out of the formal social security system, with about 45 percent of the labor force currently not contributing to pension or health insurance programs adding to social vulnerability. 14. The poor have been affected the most during the current economic downturn and the greatest gain in terms of poverty reduction will likely be attained by rapidly restoring sustainable, investment-led growth. As shown in the FYOO Poverty Assessment, Argentina needs sustained growth, combined with no further deterioration in income inequality, to reduce poverty levels significantly over the next ten years: for example, per capita income growth of 1.8 percent per year for the next ten years (or annual growth of about 3.3 percent of GDP) could reduce poverty to the 21-24 percent levels. Similarly, reviving employment creation and reducing unemployment helps: full employment could reduce poverty by some 6-8 percentage points. 15. While this analysis shows that a significant drop in poverty is attainable with sustained growth and employment creation, reduction of poverty in Argentina is also very dependent on improving human capital. Previous studies show that improving educational levels may be the single most powerful way to reduce poverty levels as incomes for the unskilled have stagnated during the 1990s, while those with superior levels of education continue to do relatively better. Thus, human capital formation 4See the Bank's most recent Poverty Assessment for Argentina, Report No. 19992-AR; March 23, 2000. 5 remains at the center of social policies. Given that social services are shared between the federal and provincial administrations, the provinces are key players in maintaining social services, especially the delivery of primary and secondary education, public hospitals and clinics, housing, and a variety of social protection programs and social expenditures. These services comprise about 53 percent of provincial spending. C. RESPONDING TO THE CHALLENGE 16. Since it took over in December 1999, the Administration of President De la Rua has faced the challenge of overcoming three main drags in the economy: (i) the latest competitiveness shocks caused by the January 1999 devaluation of Brazil, and the on- going appreciation of the US dollar; (ii) fiscal vulnerability given fiscal slippage in 1999 and high volume and cost of the roll-over of debt which has been mostly financed externally because of low levels of domestic savings and intermediation; and (iii) low consumer and investor confidence. The Reform Agenda 17. At the outset, the new Administration put forward a program of economic and social reforms designed to restore growth and promote greater social equity while being fiscally responsible and retaining the Convertibility Plan. These principles still hold but the results of the Government's efforts have yet to bear fruit. In late 2000, in response to the deteriorating economic situation described earlier, the Government initiated new measures to strengthen its fiscal position, including that of provincial governments; promote financial access, particularly for small and medium size firms, deepen public sector reform, accelerate reform of health care financing, alter the pension system, and strengthen the social safety net. Importantly, the Federal Government secured the agreement of the provinces to advance on reforms at that level, including steps on revising the existing system of federal-provincial revenue sharing, co-participaci6n. This new Federal-Provincial Agreement, which has the status of a law and was signed by all but one province, includes a number of commitments on improved fiscal management by the provinces, in line with federal policies and programs, and a freeze primary expenditures in those provinces with fiscal deficits until 2005. In addition, the Government negotiated an international package, the blindaje, to address external financing needs for 2001 and to restore market confidence. Renewing the Effort 18. Taking over the economic portfolio in mid-March, 2001, Minister Cavallo, the architect of the Convertibility Plan, launched a series of measures based on three fundamental pillars: (a) strengthening political cohesion and support for reform; (b) securing financing to dispel risks of default; and (c) promoting economic policies that address the fundamental fiscal and economic growth challenges. The new Minister secured in short order legislative endorsement of the new Law of Competitiveness and the Law on Delegation of Powers. The latter provided the executive branch with powers to modify the Law of Defense of Competition, improve regulation of the capital markets, eliminate exemptions to income and profit taxes, generalize the VAT, and for those 6 activities covered by new competitiveness plans eliminate the minimum presumed income tax on businesses, the tax on interest and employer labor charges. In practice, these competitiveness plans are intended to rationalize and reduce gradually the tax. burden with the goal of eventually converging the tax system to a core of the VAT and income tax, thus eliminating differential tax treatment among sectors and provinces within a two year period. Accompanying these measures was an increase in import tariffs to 35 percent on goods outside the MERCOSUR area, a reduction of duty on capital goods imports to zero, and a halving of VAT rates for selected sectors. Increased tariff dispersion is expected to be reversed within a two year period. 19. Under the Law of Competitiveness, the new Tax on Financial Transactions provides a rapid injection of revenue and sets the stage for Argentina to meet its fiscal target which allows for a deficit of $6.5 billion in 2001. The new tax is expected to generate revenues of about $2.7 billion for the remainder of 2001. As all transactions over $1,000 now must be processed through the banking system, this tax and the banking system have become important pieces for a medium term program to control tax evasion. Along with increasing revenues via the new tax and elimination of exemptions on VAT, the new team also has enacted expenditure cuts in the order of $860 million. Together, these measures are expected to contribute in meeting the year end fiscal targets. 20. The Government also indicated its intention to continue with the Convertibility Plan but has also announced that it would alter the currency mix to include the EURO in equal amount to the US dollar. Legislation authorizing this shift to take place when the US dollar and the EURO reach parity was recently approved by Congress. The rationale for this is to reduce the fluctuations in the real value of the peso and its vulnerability to international monetary shocks and to reflect better the destination of Argentina's exports-currently about 17 percent to the European community and 15 percent for NAFTA countries. The new system would retain the core features of the Convertibility Plan, namely, full backing of the monetary base with reserves and strict limits on monetary policy. 21. In June, the Government successfully concluded a debt exchange with the private sector that delayed debt service on approximately $30 billion worth of public debt. With this innovation, the debt service burden will be reduced over the next five years by $16 billion, with much of the reduced financing needs accruing over the next 18 months. The financial relief allows the Government to regain its focus on economic reforms. In mid- June, new measures were announced, to complete the "Competitiveness Plan." These measures include: tax relief to middle-income families, as a stimulus to consumption; a new export subsidy (import tax) to improve competitiveness; and measures to improve tax collection. 22. The intent of these policies is to enhance competitiveness. The Government has clearly targeted the elimination of distortionary taxes and the excessive tax burden on those who pay taxes, thus, working towards a more efficient and equitable tax system. In addition, past studies also indicate that there remains considerable potential, particularly in the area of transport and logistics to reduce production costs. A recent measure was aimed to reduce and even out toll charges for road traffic. There is also much to do to 7 lower the transaction costs imposed on business by the state which will be addressed through the modernization of the state program. On the fiscal side, structural changes are being pursued by reducing fraud and better management of the social security system. There are also reforms to be put in place to improve public procurement, reduce cost§, and streamline bureaucracy. 23. Turning to social policies, first and foremost on the agenda is restoring economic growth which should go a long way in reducing poverty over the medium term. But this strategy needs to be coupled with policies for effective social protection for the poor. First, there is the issue of income even for the working poor, especially those with dependent children (with some 45 percent of all children in Argentina in poor families) as well as income maintenance for those less able to participate in the work force-such as single mothers--or the aged who do not receive pensions. As highlighted in the Poverty Assessment and recent ESW, these groups are the most vulnerable to economic shocks. Thus, one of the main policy reforms will be to revamp social assistance programs. Second, on social protection, an additional dimension is risk management by those least able to insure against the risk of future income loss and health and/or unanticipated expenditures. The lack of insurance coverage has been exacerbated by the fact that the share of workers in the informal sector has increased substantially since the late 1980s, now accounting for some 45 percent of the labor force. This leaves workers without health insurance, pension coverage, severance benefits or unemployment insurance and adds considerably to the burden faced by public services to provide these services. The present situation creates a serious inter-generational problem. Thus, the second main thrust will be on revamping basic social security systems. 24. The appropriate response to these concerns has to be reconciled with the need to close the fiscal gap, a prerequisite for restoring growth. Thus, the way ahead for Argentina requires judicious management on the fiscal side, including reducing tax evasion, so as not to exacerbate the pro-cyclical nature of social spending. As highlighted in the FYOO Poverty Assessment and the Government's 1999 review of Public Social Expenditures, there exist a wide array of social programs at both the federal and provincial levels. At the federal level, the Federal Government budgeted some $1.2 billion in targeted social program in 2000 and has been able to maintain service levels albeit at low levels of coverage. Programs include efforts to assist vulnerable groups with programs such as the public works program, TRABAJAR, school scholarships for poor children, food supplements, community development, and job training for the unemployed. Next steps are to consolidate these programs and to ensure better coverage with a universal system for identifying eligible beneficiaries. 8 Sources of Growth and Prospects 25. A credible economic program founded on the measures now being introduced could return Argentina to economic growth by the second semester of 2001. Under sucn a scenario, renewed access to foreign capital would be critical, lowering domestic interest rates. External private capital flows are expected to recover slowly, reflecting the still fragile confidence of the international financial market. Inflation would continue to remain low. An accelerating recovery during the course of the year could result in real GDP growth in the range of I percent. The Government, itself, is more optimistic and aims at growth closer to 2.5 percent for the year, based on a strong reactivation of consumer demand. 26. Looking beyond 2001, growth rates of about 3 percent for 2002 and about 4 percent growth per annum over the medium term are likely. These rates are below Argentina's average for the 1990s-at 4.8 percent per annum-- and reflect an assessment that a quick rebound is not likely because concerns about Argentina's solvency will persist until there is demonstrated fiscal credibility. In such a medium term scenario, including a primary expenditure freeze, Argentina can achieve fiscal and external sustainability. Furthermore, unemployment could be declining at an annual rate of 0.5 percentage points6 and poverty by 1.5 percentage points annually7. Further declines in unemployment could be obtained from a reduction in labor costs (with likely reductions in labor taxation). Without more rapid growth, job creation is not expected to rebound over the short tern, and the unemployment rate may remain at relatively high levels. 27. The above projected growth rates are above the minimum level estimated as the lower bound on Argentina's medium term growth rate needed for debt solvency. Analysis shows that a real GDP growth rate of 2.9 percent per year combined with compliance with the fiscal objectives of the Law of Fiscal Responsibility and the November 2000 Federal-Provincial Pact which establishes balances at both levels of government by 2005 are the minimum needed to sustain Argentina's debt. In other words, the agreed freeze in expenditures must be adhered to; otherwise, on its own growth will be insufficient to ensure long-run clebt solvency. 28. One can question what the likely sources of growth will be and whether the underlying conditions conducive for growth exist. This concern principally stems from doubts about Argentina's ability to compete internationally, due to any real exchange rate misalignment. Estimating the extent of misalignment for any currency is rather controversial and inexact. In the case of Argentina, two main variables have been 5 The economy was essentially flat in the fourth qiuarter of 2000, and preliminary figures for the first quarter of 2001 reveal a decline of GDP of 0.2 percent (both periods as measured quarter-to- quarter, on a seasonally adjusted basis). Consumption showed similar trends. 6 Employment elasticity to growth estimates range between 0.3 to 0.5%. Employment elasticity to labor costs is estimated at -0.6% to -1.0%. 7 This assumes estimated employment and poverty reduction elasticities at 4 percent economic growth and no deterioration in income inequality: the economy requires 1.4% per capita income growth to obtain a 1% decline in the poverty rate. 9 analyzed. First is productivity. On this count, the evidence would tend to support the contention that Argentina has been able--albeit not in all tradable sectors--to maintain competitiveness. This is best reflected in the substantial decreases seen in unit labor costs throughout the 1990s: past studies show that productivity increases and other cost reductions through 1998 should have been sufficient to offset real exchange rate appreciation, thus maintaining Argentina's competitiveness.8 Available evidence demonstrates that past privatization and deregulation have substantially improved Argentina's cost structure and that there have been significant gains in lowering of the cost of capital cost during the 1990 through trade liberalization and financial sector reforms. Nevertheless, it is apparent that the Brazilian devaluation of 1999 was a serious shock to which the economy may still be adjusting. More recent studies show that unit labor costs in 2000 are lower for all sectors of the economy than in 1992 thanks to technology, capital investments, and labor market flexibility induced by the de facto liberalization of the market via increased informality. Depending on the measure used, consumer prices or unit labor costs, data for 2000 do not provide clear evidence of whether or not there is any significant real exchange rate misalignment: in fact, based on unit labor costs, the data reveal a 17 percent depreciation in the period 1993-2000. 29. Export performance is another measure of the economy's ability to compete internationally. Here the story is mixed but with some positive trends. Exports have been one of the better performing sectors during the recession9 and there has been a trend of increased specialization in areas of Argentina's comparative advantage. Data for the period 1991 to 2000 show consistent growth in export values (with the exception of 1999 which was followed by recovery in 2000). In the early part of 2001, exports--including manufactured goods and products destined for Brazil--continued to grow. Nevertheless, it is clear that the Brazilian devaluation affected exports to MERCOSUR in that year, mitigated by constant exports to the rest of the world. Moreover, it is important to point out that export performance does not only depend on exchange rates but also factors such as tax policy, labor flexibility, logistics, and business practices which are currently being addressed by the Government. Nevertheless, current export perforrnance would still mean that Argentina may not be maintaining its share of the global market from an already low base. 30. Argentina has no short-cut for maintaining its competitiveness. In an economy with a fixed exchange rate and no dollarization of the financial system, the policy recommendation might be to devalue and/or move to a floating exchange rate system. However, analysis by the Bank shows that a devaluation could have devastating effects on the Argentine economy, due to the high degree of dollarization. The banking system, itself, is relatively well matched in terms of the currency composition of its assets and liabilities but insolvency among borrowers, either private or public sector, would be a threat. In addition, for those still holding deposits in pesos (about one-third of deposits), devaluation would be equivalent of confiscation of part of the real value of their assets. 8 This conclusion is based on analysis undertaken by Bank staff. 9 Real GDP declined by 3.5 percent in 1999, and growth in 2000 is estimated to have minus 0.5 percent. Exports of goods grew by 13 percent during 2000. 10 Because of this potentially severe impact and the country's past experience with devaluation and inflation, such a shift is not considered as a viable policy option. 31. Prospects for economic recovery are highly linked to improvement in country risK perceptions. Since Argentina has an open capital account and its financial markets are well integrated with international markets, a reduction in country spreads does not only affect prospects of external financing and investment but also domestic interest rates with impact on local consumption and investment. Thus, the extent of economic recovery and the pace of that recovery depend on: (i) country risk perceptions by the international capital markets which will determine the cost of capital and interest rates in the country; (ii) the Government's ability to show that it can meet its debt obligations and manage the future growth of public debt-success in this area will positively affect market perceptions; and (iii) a series of micro-decisions made by Argentine consumers and foreign and local investors in response to market conditions and opportunities in the real sector, many of which will be affected by the present measures to realign the tax base and to promote competitiveness. 32. Comparative studies by the Bank and others of growth potential based on a country's policy and institutional capacity put Argentina near the top among developing countries reinforcing the likelihood that Argentina will be able to sustain 4 percent growth per year. It still has a strong human resource base, relative to many other developing countries. It possesses efficient and modem basic services, such as banking, telecommunications, water, electricity and transport, reflecting the privatization and substantial investments and restructuring since the early 1990s. It also has untapped potential in natural resources, such as mining, forestry, and agriculture, in which Argentina continues to have comparative advantage and is demonstrating rapid adoption of new information technologies-areas in which Argentina could be a regional leader. Moreover, as the economy has been adjusting it is showing increased specialization and expansion of exports through the 1990s. Export of goods and services has averaged 9.2 percent annual growth fromrl991 to 2000, grew by13 percent in 2000 and continues at that rate into 2001. Yet, the situation remains fragile and the present efforts, with the support of the international financial institutions, must continue. Not only will domestic conditions be important, so will a positive external environment especially in terms of interest rates and the general regional and global economic setting. A number of these potential risks and possible altemative scenarios are elaborated in the final section. International Support 33. The international community helped to mobilize support for Argentina as conditions deteriorated in late 2000. The Fund's support was reflected in the agreement with the IMF approved in January 2001 and subsequently modified in May 2001. Expanding the then in place, three-year $7.4 billion Stand-By Arrangement, the Fund program now totals $13.7 billion (SDR 10.6 billion), with one-fifth of this amount provided by the IMF's Supplemental Reserve Facility (SRF). From December 2000 to March 2001, the Fund disbursed $5.0 billion, followed by $1.3 billion in May 2001. Commitments by the private sector comprise about half of the total package, and were designed to rollover debts maturing in 2001 and 2002, with $10 billion committed by 11 private banks (which includes $5 billion of Treasury Bills) and $3 billion by private pension funds. In addition, the package included swap operations for $7 billion, in which short term maturing bonds were exchanged for long maturing bonds. Finally, the package also includes a commitment of $1 billion from the Government of Spain, and World Bank and the Inter-American Development Bank (IDB) pledges of about $2.5 billion each, largely comprising already programmed support. The center piece of the Bank's efforts will be structural reform measures under a proposed Programmatic Structural Adjustment Loan (PSAL) which will address social equity and vulnerability. In parallel, the IDB will be supporting additional reforms in the areas of public pensions, banking and capital markets and competitiveness of the economy which are also key ingredients to Argentina's sustained recovery. So far the IDB has approved and disbursed the first of its expected series of loans, one for $400 million aimed at pension reforms which have not yet been enacted. (The division of labor between the two institutions is broadly as laid out above but there is open collaboration across the areas.) D. PROGRESS IN ACHIEVING CAS OBJECTIVES 34. The strategy formulated for the Bank's collaboration in Argentina during the FY0I-04 period focuses on: (i) enhancing social development; including poverty alleviation and human resource development; (ii) improving the performance of the state, particularly at the sub-national level; and (iii) consolidating structural reforms. Despite a difficult year, the CAS remains relevant and on track as assessed by country performance indicators, operational experiences and results. This section provides a brief overview of the key strategic actions in the CAS and the progress made in realizing objectives according to a synthesis of country and self-evaluation indicators (see Annex B9). Social Development 35. Social development forms the core of the ongoing Bank program and specific objectives include strengthening of social policy formulation and coordination, and social protection programs, especially during this economic downturn, and rebuilding the institutional basis for improvements in human resource development to improve social welfare and the productivity of the work force over the medium term. 36. Social Assistance. Although the level of social spending, mainly for public pensions, is high in Argentina relative to other countries, some social indicators still lag and the economic downturn has exposed weaknesses in social protection policies. The strategic actions include: * Improving poverty analysis, monitoring and targeting of social assistance. Progress has been substantial under SIEMPRO and the regional MECOVI program on the analytical side and on development of new tools but more needs to be done to systematize application and to correct deficiencies in data. Similarly, the PER and Poverty Assessment both demonstrate that targeting of some-but not all-social programs is quite good, albeit with low coverage of intended beneficiary groups. 12 * Ensuring funding of safety net programs and improving efficiency in spending. Budget levels for social programs at the federal level remain stable for 2000, at $1.2 billion for targeted programs, despite the fiscal crisis; however, these programs tend to have low coverage and may still be vulnerable to cuts. Demonstration of sound program design and implementation continues in selected areas (for example, PROINDER, FOPAR) but overall progress has been sporadic and interrupted by financial crisis. Moreover, there may now be too many pilot programs which need to be consolidated and scaled up. * Targeting of basic maternal and child health services to the poorest families. Progress in reducing infant mortality rates in general and special targeted assistance under PROMIN continue to be considerable as evidenced by national indicators and the ICR for the completed first project. The new government has renewed and revitalized the program with encouraging results. * Ensuring that poorest households are covered by health insurance and other parts of the social security system. Policy differences and concerns about financial feasibility have delayed implementation of the LIL Health Insurance for the Uninsured, although pilot programs in selected provinces under PRLs, evaluated in recent ICRs, demonstrate the power of this approach. Provinces continue to demonstrate high demand for this program. Pension reforms are being pursued at the national level although the system is still far from being universal. * Increasing focus on rural poverty, indigenous groups and basic services for the poor. So far there has been limited progress in terms of physical investments under PROSAP, Water Sector and PDPII projects but important steps have been taken on understanding the issues via ESW (Voices of the Poor, Water Resource Management, Municipal Services, Rural Reproductive Health, and Rural Infrastructure). This should lay the basis for future interventions. An important step has been the approved of the Indigenous Peoples LIL. 37. In order to enhance understanding of the challenge of alleviate poverty, considerable analytical work is underway and/or recently completed. This includes studies on how poor families cope with economic crisis, reproductive health in rural areas, a baseline study of social capital in Argentina, and an assessment of institutional capacities at the federal and provincial level to provide key social services. These studies build on the ongoing effort to continue to disseminate the FY00 Poverty Assessment. 38. Gender. The Bank has continued to look for opportunities to highlight gender dimensions both in operations and analytical work. Recent examples include several of the studies noted above which have strongly integrated gender dimensions. External 13 funding (Japan's PHRD) has also been mobilized to support incorporation of gender in the program and funding from Italy is being used to assess the compatibility of the local legal framework to support reproductive health rights. As discussed further, gender dimensions are increasingly addressed in the provincial reform loans and gender roles are explicitly part of the proposed Family Capacity-Building Project (PROFAM). 39. Education. Education reform has been underway since the early 1990s. While still high relative to many other countries, the quality and relevance of Argentina's education system have deteriorated, threatening the basis for improved competitiveness and income equality. Strategic actions include: * Assisting the provinces to improve the learning outcomes of secondary school students through enhanced resource allocation, particularly to poor students. Emerging evidence from selected provinces shows strong improvement in educational attainment, under the PRODYMES I, II and III projects, as well as complementary system-wide reforms under Provincial Reform Loans (PRLs) and introduction of pilot programs of full day school at high risk schools. * Redirect public spending in higher education to reach the poor. Higher education remains a challenge which the new Federal Minister of Education intends to address. A high level commission has been recently appointed to provide specific policy recommendations. So far, efforts to introduce greater efficiency and equity in public spending have had limited success. The IFC is supporting investment in privately-provided higher education. 40. Health Services. Argentina spends at OECD levels but receives relatively poor quality health services for that price. This situation stems from monopolies in health insurance financing, too little spending on health prevention, particularly for diseases affecting the poor, responsible parenthood and traffic safety, and public hospitals that lack accountability, subsidize the non-poor and are overburdened by patients seeking primary attention. Strategic actions include: * Increasing competition in the health insurance market and reforns of the federal program for the elderly (PAMI) and provincial programs for public employees. Progress in the initial round, supported by earlier Bank loans, was substantial in establishing the basis for a more effective system of health insurance. However, the second stage of reforms at the federal level are presently stalled and a renewed effort is needed. Nevertheless, there has been considerable evolution in the design of the reformns and their instrumentation. In selected provinces, this has been via PRLs. * Allocating greater spending for health promotion programs, including HIV/AIDS. 14 While spending may not have increased so far, efforts at increasing awareness and developing institutional capacities are now underway via LUSIDA and VIGIA. In the case of AIDS, much more needs to be done as the epidemic has now reached similar proportions as in Brazil. Improving efficiency and targeting of public hospital services in the provinces. Progress under some aspects of PRESSAL has been disappointing, although decentralized hospital management has been adopted nationally and there has been progress in transforming provincial health policies via PRESSAL and the PRLs. 41. Water and Sanitation. Privatization and investment supported by the Bank Group has helped to spur an important increase in access to safe water (with coverage increasing from 72 percent since the early 1990s to about 83 percent). But access by the poor remains a problem. The strategic action is to: * Increasing investment through private participation and coverage for the poor. There has been important progress and even more is expected over the coming years as the attention has shifted from operational improvements to expansion to unserved, mainly poor communities. Most major centers have now privatized services, with important gains in coverage, while progress in smaller cities and cooperatives under the Water Sector APL is taking off. The private concession serving Greater Buenos Aires, supported by the IFC, has initiated investments to increase coverage with mechanisms to make hook-up affordable to the poor. Provincial Reform and Development 42. The provinces account for about half of total public sector expenditures and almost all public spending in health and education, as well as being responsible for providing basic infrastructure services. As such they are an important focal point for achieving development objectives in social development and fiscal management. 43. Fiscal reform and social sector spending. Public expenditures in most provinces should be sufficient to provide basic health and education, but spending has been inefficient and service of poor quality. Pro-cyclical transfers and poor management foment financial crisis and add to the social costs. Strategic actions are designed to: * Deepen first generation reforms, supported by the Bank during the 1990s, with a focus on social programs, increased local resource mobilization and improved incentives under revenue sharing. The provinces were able to reduce their aggregate deficit from 1.6 percent of GDP in 1999 to 1.2 percent in 2000. Importantly, compliance with fiscal targets among smaller, highly indebted provinces, supported through the Federal Government's 15 debt-restructuring program, has been good. The PRLs are proving to be an effective instrument to pursue reforms in the social sectors while reinforcing fiscal discipline. 44. Infrastructure. Argentina's lags behind higher-income developing countries in the quantity and quality of infrastructure to lower business and logistic costs. After successful transformation of much of the transport system and public infrastructure at the federal level, these deficits remain pronounced at the provincial level. At the federal level, problems are now of adjusting the strategy to satisfy unmet demand for transport, iron out regulatory interfaces, and fill gaps in the integrated/multi-modal systems. Furthermnore, periodic flooding causes important economic losses and many poor live in flood-prone areas. Strategic actions include: Rebuilding and upgrading infrastructure, mainly roads Efforts at the federal level have had enormous payoff under the National Road Maintenance Project (as evidenced in the recent ICR). Using the same system, provincial governments are realizing a 30 percent reduction in unit costs for maintenance under the Provincial Roads Project. * Enhancing local level public infrastructure and promoting private sector investment. Almost all major public utilities have been privatized with on-going efforts being supported in the Province of Cordoba and as proposed for the Province of Santa Fe under the PRLs. In the case of water and sewerage, progress in the smaller urban centers under the Water Sector APL is encouraging. IFC is focusing on extending its support for private infrastructure in the provinces. * Creating provincial capacity to deal with recurrent flooding, protect most important assets, and develop a disaster insurance mechanism. Structural and non-structural measures are taking hold with considerable advances on flood awareness and capacity building under the Flood Prevention and El Nino Emergency Projects. Payoffs are already evident in terms of losses avoided. Sustainable Growth 45. The economy remains vulnerable to external shocks and a return to a sustainable and strong pattern of growth requires continuity of reforms in factor markets and fiscal prudence. Sustainable growth also requires attention to pollution problems and effective natural resource management. 46. Economic Policy and Governance. Continuing fiscal deficits increase country risks and add to Argentina's vulnerability to external shocks. Confidence is also weakened by poor public sector efficiency, lack of transparency and a weak judiciary. Strategic actions include: 16 * Reducing the structural deficit by reform of the state at national and provincial levels. In aggregate for 2000, the primary public sector deficit fell by about 1 percent Qf GDP. As noted above, there has been improvement at the provincial level, despite the adverse economic environment, and there was a small improvement in the federal fiscal deficit in 2000: current expenditures were reduced by 0.4 percent of GDP and capital expenditures by another 0.1 percent of GDP, but interest payments were 0.5 percent of GDP higher than in 1999. * Inclusion of the informal sector into mainstream economic institutions. Progress has been slow but a renewed effort is underway. The issue has high priority for future policy reforms and the Bank expects to contribute via ESW on SMEs as well as the proposed PSAL and State Modernization TA Project. * Reducing tax evasion and continuing with trade reforms. The deepening of the state modernization program to be supported by the proposed PSAL and State Modernization TA Project would further strengthen governance in areas such as tax administration and procurement. Efforts under SINTyS to detect fraud have identified $135 million of savings. There have also been gains in the area of judicial administration, under the Model Court Development LIL, where judges are becoming actively involved in the reform effort, transparency and corruption as evidenced by the strong actions taken by the new Anti-Corruption Office, being supported by an IDF Grant. On trade, the fiscal measures recently introduced are expected to be reversed at the end of 2003, and the Government remains committed to free trade zones and open global markets. - Promote the liberalization of labor markets and reduce labor taxes A major advance was made to eliminate out dated labor contracts and to decentralize labor relations in early 2000. These measures are now coming into effect. At the same time, the Government is continuing to reduce labor taxes as part of the Competitiveness Law. We are contributing via ESW and the proposed PSAL. 47. Financial/Private Sector Development. Due to earlier restructuring and increased supervision, Argentina's financial system has reduced its vulnerability to external shocks and has remained sound through the recent turbulence. Still, the few remaining, large public banks continue to show weak performance compounded by the overall low levels of intermediation. SMEs lack access to capital, technology and markets and lag behind larger firrns in taking advantage of trade and economic liberalization. Furthermore, increased reliance by the public sector on domestic financing is threatening the crowding out of the corporate sector. A Financial Sector Assessment (FSAP) is being conducted jointly by the Bank and Fund and its early conclusions and observations reaffirm the improvements in banking supervision, compliance and 17 regulation, as well as point to weaknesses in insurance and capital markets, and issues of efficiency and competition in pension funds. 48. Meanwhile, IBRD and IFC are pursuing further collaboration in the area of provincial development, social sectors, and SMEs, with the IFC strategy to focus on: (i) the domestic financial markets (including housing finance); (ii) private provision of social services; (iii) private infrastructure in "frontier" areas and in poorer provinces; (iv) companies that currently lack access to long-term financing; (v) innovative "credit enhancement" structured finance; and (vi) potential "growth leader" areas. In FY01, IFC approved a credit line, through a commercial bank, for SMEs in the Province of Santa Fe, two projects in tertiary education (USAL, ITBA), and innovative (or frontier) transactions in SME-financing through supply chains and lower-income discount retailing. IFC is currently looking at provincial infrastructure in power and gas distribution, SME financing, and social sectors. Collaborating with the IBRD and IFC, MIGA has been active in the domestic financial markets (notably mortgage and SME finance), power, services and manufacturing. During FY01, MIGA insured three projects: two in the financial sector providing medium to long-term financing for both mortgages and SMEs, and a logistical services project. 49. Reduce Pollution and Conserve Natural Resources. Increased growth and urbanization have not been matched by establishment of a framework with clear jurisdictional responsibilities and enforcement, nor effective tools to promote responsible behavior. Strategic actions include coordination at the national and sub-national levels, and strengthening regulatory analysis and participation combined with pilot programs in "hot spots". Progress has been hampered, however, because responsibilities at the federal level remain in flux and require Government attention. Nevertheless, some success is being achieved in implementing the Yacreta project (although a decision on its future is still pending), living up to Montreal Protocol commitments, institutionalizing the Clear Air Initiative, piloting environment solid waste management at the municipal level, and protecting natural resources via programs for bio-diversity and natural resource management, especially forestry, mining and water. In addition, the Government has renewed its interest in the proposed Mining Decontamination Project which would clean- up uranium tailings and is continuing explore various opportunities for GEF to complement Bank operations, including the proposed Regional Guarani Aquifier Project, as well as new operations in resource management. Overall Program Monitoring 50. The period covered by the CAS-FY 01-04--coincides with Argentina's electoral cycle and provides the next administration an opportunity to assess progress and to redefine priorities and the role of the Bank. Selected indicators of Argentina's continuing development challenges were set out in the CAS (repeated here in Table 2) as a guide Argentina's long term development effort and to lay out where the country hopes to be by about 2010. The current values for economic and financial indicators reflect the ongoing economic downturn as well as the fact that it is still too soon to detect any material change in some areas. More recent measurements of poverty and income 18 distribution are not available, but given the increase in unemployment rates, the poverty rate is likely to have increased. Table 2: Monitoring the Progress (I) Economic and Financial Variables Initial Values Current Values Predicted/Target Values (a) GDP growth -3.5 percent (1999) -0.5 percent (2000) Average 4.0 percent (b) Credit Ratings BB for S&P (1999) C for S&P (May Government Paper-Investment 2000) grade (11) Social Indicators (a) Unemployment Rate 13.9 % (Oct 1999) 14.7 % (Oct 2000) < 10 percent (b) Poverty Rate 29 %(urban 1998) N/A <22 percent (c) Gini Coefficient 0.49 (1998) N/A 0.46 (d) Secondary Education Graduation Rate 52% (1998) N/A 70 percent (e) Infant Mortality Rate 18.8/1,000 (1998) 18.3/1,000 (2000) 12 per 1,000 (D Access to safe water 72 percent (1991) 83 percent (1999) 87 percent Portfolio Performance 51. With 45 active IBRD-financed projects and commitments totaling $4.5 billion (not including $250 million in outstanding policy based guarantees) and $2.5 billion undisbursed, including the Repurchase Facility of $505 million approved in FY99, the portfolio in Argentina remains one of the Bank's largest, accounting for about 7 percent of total loans outstanding. Bank exposure expected to continue to decline, although it could peak slightly in FY02 under a high case lending scenario (Annex B7). Portfolio performance remains relatively strong, despite the ongoing economic stagnation, fiscal tightening and the transition at the end of 1999. The latter was further complicated by shifting of project responsibilities among ministries and cabinet changes during 2000 and into 2001. Nevertheless, the share of problem/at risk projects remains in the 10-12 percent range. A portfolio review was held in March 2001 to reassess operations in light of Government renewed priorities and the continuing need for fiscal restraint. This resulted in agreement in principle to partial cancellations in several projects and restructuring of others. It is the intention of the current economic team to complete this exercise for preparation of the 2002 budget. In the meantime, a cross-the-board cut of about 15 percent was made in all project 2001 budget allocations. Despite this, disbursement has been at a normal rate. This strong portfolio performance reflects the upgrading of the Federal Governnent's National Directorate for Externally Financed Projects (DNPOIC) in the Ministry of Economy. 52. Reflecting the prolonged recession and the fact that IFC investments in Argentina continue to be in "frontier" sectors, the overall quality of the IFC portfolio has somewhat decreased but remained acceptable. As of March 31, 2001, 9.5 percent of the portfolio was in non-accrual status and the interest collection was 89.8 percent (as compared to 7.4 percent and 91.9 percent, respectively, at the time of the May 2000 CAS). IFC is maintaining close monitoring and management of single country exposure. IFC's current internal policy guidelines for single-country exposure are 12 percent of net portfolio (held or disbursed) and 25 percent of net worth (disbursed). As at the end of March 2001, net 19 disbursed portfolio in Argentina amounted to US$1,042 million, accounting for 11 percent of the total IFC portfolio and 15.8 percent of IFC's net worth, both indicators improving since the CAS (11.4 % and 17.9 %, respectively). With a share of 11.2 percent. Argentina remains the country with the second highest gross exposure in MIGA's portfolio, slightly higher than a year ago. In terms of net exposure, Argentina's share is at 8. i percent, compared with 8.3 percent last year. With respect to the country's sectoral portfolio, there has been some diversification away from the financial sector into services. Currently, MIGA's gross exposure in Argentina is in the following sectors: finance (73%), infrastructure (2.2%), mining (2.7%), oil and gas (17.4%), services (4.6%). Given MIGA's current pipeline, further diversification is expected, and the country's share in the total portfolio is not projected to increase. 53. Financial Management. The first Country Financial Accountability Assessment (CFAA), completed in May 1999, concluded that the Federal Governrnent followed generally accepted accounting principles and had in place the regulatory framework and systems to minimize fiduciary risk and to ensure that funds were being used for their intended purposes. This reflects the modernization effort of the financial management system in the early 1990s with Bank assistance. The CFAA, nevertheless, found that consolidating data from provinces to national accounts and several other areas needed improvement. Work is now underway by the Bank and IDB to address these concerns and to update the CFAA. The early conclusions and observations of this update continue to affirm that the Federal Government's financial management system is able to account for the use of funds, and confirms that the automated accounting system for project executing agencies is satisfactory. The update is also looking at payment delays and the linkages with the national government's system. Every project approved after July 1, 1998, has been subject of a financial management assessment. These assessments have found adequate systems in place or included recommendations for remedial actions under the respective projects. To date, however, no project in Argentina is using the PMR based disbursement process. 54. All financial transactions are subject to both internal and external audit. External audit is provided by the Auditor General of the Nation (AGN) which reports directly to Congress. AGN follows recognized international auditing standards and its audit of Bank-financed projects is acceptable in terms of technical quality albeit there is a significant problem of overdue audit reports. With IDB support, remedial efforts are underway, including a doubling of staff to deal with Bank loans and an increase in the number of audits performed by private firms. AGN has also agreed to modify its audit processes, so that pre-audit work with the project units would start before the end of the year. However, improvements in timeliness of audit reports is not expected until 2002. 55. Procurement. An assessment of the public procurement system at the Federal level was carried out in December 2000. The assessment confirmed what had been learned from past procurement evaluations, namely, that the public system is fragmented, inefficient and needs to be modernized. A regulatory decree issued in 2000 addressed some of the existing shortcomings but additional legislation is necessary for topics outside the scope of these statutes, such as institutional strengthening and electronic 20 procurement, and to place the procurement of works under the same legal umbrella with the procurement of goods and services. A law of principles has been drafted and is being discussed within the Government and with the private sector. Aside from a weak regulatory framework, public procurement is affected by cumbersome procedures and lengthy evaluation and decision-making processes that could last one year or more. Delays are, to a large extent, due to lack of standard documents, inadequate evaluation criteria, excessive adherence to formal, time consuming bureaucratic procedures and high turnover and insufficient training of staff endemic of the public sector. The proposed PSAL would support the policy initiatives and the State Modernization Project would include assistance to complete the law and for the drafting of necessary regulation as well as strengthening institutional capacity. 56. Procurement under Bank-financed projects, which is exempted from local legislation and in general does not follow local procedures, is comparatively more efficient and expeditious. Five capacity assessments carried out during the last year concluded that the procurement risk under Bank-financed projects is average. The assessments also confirmed that UNDP is frequently used to help with the contracting and payment processes and that actual procurement work is usually carried out by project executing agencies staffed with individual consultants with relatively good experience. However, turn over of staff, particularly with the last change of administration, has affected continuity and quality of late. 57. Complaints regarding procurement are generally related to restrictive specifications, technical evaluation of proposals, award delays or cancellation of the bidding process. Future actions to reduce complaints include streamlining procedures for hiring of individual consultants and developing standard bidding documents. The three project specific procurement audit and seven post reviews carried out in the last two years have revealed some procedural problems and inconsistencies with the Bank's Procurement Guidelines. All of these have been followed up at the project level to streamline procedures and change incorrect practices or, in a few cases, referred to the Bank's Fraud and Corruption Investigation Unit and the Government's Anticorruption Offices for investigation. In all, the Bank has declared three cases of misprocurement in Argentina in the last two years. 58. Loan/Amendment Processing. Loan signing and effectiveness continue to be plagued by delays, reflecting the excessive bureaucracy which remains a feature of Argentina's public sector. Although Bank loans do not require separate legislative action, internal administrative procedures require numerous authorizations culminating with the issuing of presidential decree, taking almost six months but with some cases taking more than 18 months. Local authorization of loan negotiations similarly are preceded by internal clearances both before and after negotiations. It should be noted that these procedures apply equally to grants as to loans. DNPOIC has put in place an effective tracking system which could provide a blueprint for further efforts to streamline the process under the Government's modernization of the state program. 21 59. Participation/Transparency. Active consultant with civil society remains part of the Bank's program. Following the consultative process for preparing the CAS in early 2000, the CAS was disseminated in October 2000 along with the Bank's response to the suggestions and criticisms received during the consultative process. This presentation, attended by about 300 persons, was co-sponsored by the NGO Working Group on the World Bank and the National Congress. A notable development during the year has been a web page on Argentina in Spanish which contains the CAS and other related documents, project briefs, the FY00 Poverty Assessment, other pieces of ESW, local contacts and links to project web sites: this page now receives about 210,000 hits per month and the FY00 Poverty Assessment has been downloaded at least 1,000 times. 60. The Bank continues to provide support for follow up to the WBI's program of Alliances for Poverty Reduction with the Foro Social and the NGO Working Group on the World Bank. With the former, the Bank initiated a program of corporate social responsibility, and with the latter, the Bank held a seminar on globalization and employment. The Bank has recently sponsored various events to disseminate work on gender and the judicial system, and we held a seminar on the Bank's anti-corruption and fraud procedures, and plans to follow up on one thematic area as an update to the CAS. Support for civil society through the small grants program continues with funding provided on a competitive basis; this program allows the Bank to provide funding for activities specifically geared towards social capital, consensus building and capacity. 61. Development Outcomes. Recent implementation completion reports and OED evaluations continue to show the strong positive results in meeting development objectives witnessed since the early 1990s in Argentina. Of the 19 projects evaluated by OED in the past five years, only one project have been rated as unsatisfactory, and that was a highly innovative attempt to deepen capital markets in the early 1 990s. During the past year, the five completed projects were all rated satisfactory by staff in terms of outcomes and most have rated well on sustainability and institutional development. Lending/Investments/Guarantees/Non-Lending Assistance 62. Bank lending during FY01 has included five projects for $440.7 million: PRLs for Catamarca and Cordoba, secondary education improvements in the Province of Buenos Aires, and LILs for sustainable fisheries, and community development for indigenous groups. Only one of these operations has been signed while the others are in the final stages of being processed. As noted above, internal procedures for securing authorization to sign are very cumbersome, a situation aggravated by the frequent changes in authorities. Additional operations negotiated in FY01 were a LIL for gender- focused strengthening of poor families, PROFAM, and a provincial reform operation for Santa Fe (accompanying this progress report). The composition and amount of the actual lending program for FY01 as opposed to that presented in the CAS reflects the inability to reach agreement with the Province of Buenos Aires on a viable fiscal program, a delay in the proposed Santa Fe PRL , and the decision to provide more time in agreeing on the strategy and scope of the proposed operation in education. 22 63. IFC's strategy, elaborated in the private sector strategy (Annex A of the CAS), remains valid and IFC continues to focus on: (i) improving access to investment financing for companies that will create growth and employment (through both domestic financial market development and direct financing); and (ii) supporting activity which demonstrates tangible benefits of growth and reform. This focus has translated during FY01 to date into approvals of a credit line, through a commnercial bank, for small-and medium-sized enterprises in the Province of Santa Fe. two projects in the education sector, a SME-financing through supply chains, and a lower-income discount retailer. The implementation of the secondary mortgage market project (approved in FY00) is also on track. Banco de Credito y Securitizacion (BACS), the project entity, received its operating license in September 2000. IFC disbursed $12.5 million as its first installment towards the company's capitalization. BACS successfully issued its first mortgage- backed security of $116 million in February 2001, which is the first of a number of transactions to follow. Going forward, IFC will continue to pursue high impact transactions in the financial sector, provincial infrastructure, health and education, SME financing, and growth generating firms that lack access to long-term financing. MIGA's current pipeline includes four projects, one in each of the following sectors: services, power, manufacturing, and finance. The services project is expected to be finalized in FYOI, and would be MIGA's second project in logistics. In addition, MIGA received five new preliminary applications (one in manufacturing, and four in the power sector), some with IFC's support. While this denotes interest on the part of foreign investors, most projects have had a slower implementation than originally scheduled. In light of the various political crisis, and the stagnation of the economy, the stance of foreign investors remains "wait and see." 64. Anticipated Loans. The center piece of the Bank's program for FY02 is the proposed PSAL of up to $900 million. As described during informal Board briefings in late 2000, the proposed PSAL is consistent with the CAS and is expected to address the areas for further policy reform identified under the high case lending scenario (see Table 3, replicated from the FY 01-04 CAS). The PSAL would be divided into two or three separate loans throughout FY 02, and perhaps into FY 03, depending on progress in realizing the reforms and meeting the triggers for moving to the high case lending scenario as laid out in the CAS. The high case allows for up to an additional $500 million during the CAS period if and when the triggers are met, namely, that: (i) Argentina would continue to have an acceptable macro-economic program in place and be making progress towards realizing its long-term developmental goals; (ii) portfolio performance overall would remain satisfactory; (iii) disbursements and counterpart funding would stay on track taking into account the fiscal situation; (iv) there would be progress on federal-provincial revenues sharing, as demonstrated in the agreements reached on the direction of revisions to federal-provincial revenue sharing, and advances in its implementation as set out in the latest federal-provincial agreement and recent Government proposals; and (v) there would be agreement in any of the specific areas of reforms, including their scope and budgetary impact. The reforms would be agreed in principle as part of the Government's Letter of Development Policy for the first of the 23 PS,4L series. The first loan of the PSAL would be considered as within the base casel° and it is the Government's intention, as and when it meets the high case lending triggers, to apply the additional lending to the subsequent phases of the PSAL. Table 3: Program Triggers Triggers Leading to High Case Base Case Triggers Leading to Low Case Base Case triggers Plus: Macroeconomic framework Significant deviation from the law of fiscal acceptable to the Bank. responsibility and in managing extemal debt (>55 percent of GDP) under conditions of normal access to capital markets. No major problems in counterpart financing at Satisfactory portfolio Unsatisfactory portfolio perfonnance as the provincial level and agreement on new performance. No major indicated by more than 30 percent of the revenue sharing arrangement in line with problems in counterpart portfolio with problems. principles agreed under the SSAL or agreement financing plus specific triggers on consolidation and simplification of social for programs, e.g. reforms in assistance programs, or agreement on deepening housing, pablic universities, reform in health insurance, or agreement on provincial.municipal revenue further reforn to the pension system. The move sharing. to the high case scenario would take into account progress towards a revenue-sharing arrangement, as well as the scope and budgetary impact of the reforms. Satisfactory performance of Failure to progress in labor reforn, co- Monitoring Indicators for participation (i.e. continued discussions), Program. strengthening of social safety net (i.e. food programs) and govemance (i.e. transparency and procurement). 65. The proposed PSAL is intended to be the main vehicle for supporting simultaneously structural reforms which address the issues of vulnerability in the financing and delivery of key social services in Argentina. The coverage of the proposed PSAL would thus include: (i) a fiscal dimension to address the fiscal sustainability and the vulnerability to economic shocks of both federal and provincial budgets and the social services that they deliver; (ii) a social dimension to address the nature, coverage, equity and efficiency of social safety nets and other key social services, notably health; and (iii) an institutional dimension to address the core capacity of the Government both to deliver social and other services and to establish and maintain a new fiscal equilibrium. In this way, the proposed PSAL would contribute to renewed growth and poverty reduction, as the fiscal and institutional dimensions aim to help to put Argentina's fiscal situation into balance. It would be a targeted poverty intervention as it would directly contribute to the redirection of public resources to the poor via the design and funding of new social safety net programs and reform of other forms of social security, namely pensions and health insurance. 10 The fiduciary underpinnings necessary for the PSAL are being reviewed under the ongoing CFAA and CPAR. 24 66. Looking more specifically at each of the proposed dimensions, the social dimension would emphasize reforms in the social safety net and healthcare financing. Areas under discussion with the Government include: (I) improvements to social protection, namely (i) the conversion of the Ministry of Social Development to a quasi- autonomous agency, (ii) the accompanying consolidation of social programs into thematic areas with commensurate reductions in administrative costs and overlap; (iii) introduction of new income support programs aimed at three target groups-children, heads of households and the elderly; and (iv) establishment of a central registry of beneficiaries with a uniform system for identifying eligibility, to be shared with the provinces; (2) reforms of the public pension system to revamp the legal basis on which claims are made and handled, now a major source of fraud, to limit benefits for high income beneficiaries and commensurately to expand coverage for those who do not qualify for benefits; and (3) expansion of choice for health insurance coverage by formal sector workers from either the union run insurers or private insurers, sustaining reforms of the old-age health insurance system and extending health insurance benefits to low income formnal sector workers who are presently excluded. The fiscal dimension of the proposed PSAL would address mainly federal-provincial relations and include measures to stabilize federal-provincial fiscal relations, largely based on the implementation of the latest Federal-provincial agreement signed in November 2000. This includes progress in implementing auxiliary measures needed to advance on revising the present federal- provincial revenue sharing system (co-participation), reflected in the latest agreement as well as proposals to limit provincial debt. The institutional dimension of the proposed PSAL in support of the Federal Government's program of state modernization is of vital importance, given the fiscal situation. This component would feature structuring of the central administration, plus targeting interventions to improve the financial and managerial performance of the tax authority and the social security agency, plus the Ministry of Education. In addition, this program would include measures to improve the overall effectiveness of federal services, procurement, transparency and accountability. 67. Besides the proposed PSAL, there would be several possible operations to complement its goals. The first would be a follow-up operation for the Social Protection V Project to support the TRABAJAR program, given the need for support for temporary public employment for the poor. A second would be the Social Protection VI Project which would provide technical assistance to the Government's core agencies to design and implement the reforms supported by the PSAL specifically in the social areas as well as to extend the implementation of the SINTyS. As noted earlier, the restructured former Y2K Project would now be geared to provide technical assistance for the modernization of the state program. 68. And, finally, the continuing series of Provincial Reform Loans would support selected provinces willing and able to undertake structural reforms in key social sectors (education, health, social protection), fiscal policies and financial management. So far, PRLs have been with Salta, Tucuman, Rio Negro and San Juan (all completed), Catamarca and Cordoba (approved in FY00) and the proposed operation for Santa Fe. These operations complement the proposed PSAL addressing many of the same concerns 25 such as social equity and systemic changes in health and education and on basic economic management. Lessons to date indicate that the sustainability of the reforn effort requires adequate time under a single mandate of the provincial governor. Thus, plans for additional PRLs must take into account the elections in 2003. Moreover, selected provinces should meet specific criteria; namely, they should have demonstrated commitment to reform by undertaking first generation reforms, have positive experience under other Bank-financed projects, and have already attained a modicum of fiscal stability. The participating provinces are also intended to serve as leading cases; they should demonstrate high commitment and have the institutional capacity to carry out reformns. In line with these criteria, the Bank would consider programs with one or two more provinces--the Province of Misiones likely meets these criteria and several others (eg. Entre Rios, Mendoza) may be considered. At present, the chances of including the Province of Buenos Aires, albeit a high priority because of its fiscal situation, appear dim. We also propose to continue to provide technical assistance for core economic management by the provinces and their adherence to the Federal fiscal pact, through the proposed Provincial Development III Project. 69. Other adjustments to the program reflect other factors. The proposed Integrated Health and Education Projects have been delayed in order to gain consensus on the strategy and scope, as has been the proposed enhancement for Private Infrastructure Financing, pending greater clarity on regulations and market conditions. Alternative ways to support infrastructure, including financial, regulatory and institutional aspects, as well as reforms to support SMEs, may be examined depending on the outcome of ongoing ESW. Other follow up operations-notably the Water Sector APL II-would only be considered once the triggers are met. In addition, the possibilities for deepening current work in areas such as judicial reforms, transparency, higher education and other second generation reforms, continue to be open assuming agreements on underlying policies and performance on on-going operations. 70. Non-Lending Assistance. Economic and sector work (ESW) for FY01 has largely been completed as anticipated by the CAS. The recently completed and on-going ESW on federal-provincial fiscal relations, rural reproductive health, rural infrastructure, municipal services, and SMEs combined with the experience on various pilot projects can provide the base for possible future programs, as might ongoing work on disaster management and crop insurance. Building on the Poverty Assessment, a series of recent studies on how the poor cope with external economic shocks, social capital formation in Argentina, and the institutional aspects of reforms in social service delivery, as well as follow-up activities to the WBI's Alliance for Poverty Reduction ( para 60), are expected to enrich dialogue on promoting poverty reduction. Progress in fiduciary responsibilities include the recently completed CFAA (para 53), and the ongoing CPAR (para 55) and FSAP (para 47). New proposals for future non-lending assistance (AAA) include work on sources of growth, more detailed analysis of fiscal and external sustainability risks, a review of the new economy, and regional trade relations. The revised lending program is presented in Annex B3 (including a comparison with the original program in the CAS) and the revised AAA program in Annex B4. The instruments within the CAS Matrix (Annex B9) have also been updated to reflected these changes. 26 E. FUTURE OUTLOOK AND RISKS Solvency, Growth and Poverty Reduction 71. External and domestic shocks have raised concerns about Argentina's long-term solvency with attendant implications for achieving Argentina's social and economic development goals. External indebtedness is only moderately high by international comparisons but, due to a small export base, the external debt-to-export ratio is one of the highest in emerging markets. The corporate sector is vulnerable in two areas, as firms mainly meet investment needs with external financing. First there remain some large firms which rely on relatively short-term funding due to the high cost of and the limitation in domestic credit. The number of firms in this category appears to be limited but they are large firmns and could face difficulty in rolling over debt, or face substantially higher costs of borrowing. Second the concessions providing privatized infrastructure services have tended to have higher leverage than the rest of the corporate sector due to initial low capitalization and large investment requirements. 72. A series of simulation exercises using a macroeconomic consistency framework show that under plausible -assumptions the economy can find a path that ensures simultaneous long run solvency atthe external sector and public federal and provincial administration levels. The main results of this analysis are: * Under conservative assumptions of interest rates, the base case growth scenario of about 4 percent per year used in this CAS progress report would be more than adequate for debt-to-GDP ratios to stabilize and show a declining trend. At this rate of growth, poverty would be expected to decline by about 1.5 percentage points per year (assuming no deterioration in income distribution in the meantime). • These outcomes are sensitive to the growth rate: a minimum economic growth of 2.9 percent per year in the long run is required for debt ratios to stabilize. At this rate of growth, the decline in poverty would be commensurately slower. * Higher international interest rates are another risk factor. However, their major impact comes from their effect on lowering growth rather than on increasing interest payments. That is, growth rate is again the key variable in ensuring solvency. * In addition, simulations reveal that fiscal adjustment is crucial even if growth were higher than expected, refuting the contention that growth may be sufficient without fiscal adjustment. In particular, fiscal solvency requires the federal and provincial levels to keep expenses under control as established in the Pacto Fiscal. * Even if sustainability indicators stabilize, the high level of debt servicing leaves Argentina vulnerable to shocks and, because of the way that these shocks are transmitted through the economy, they have an attendant impact on employment and poverty levels. Therefore, it is important for Argentina's economic and social health not only to stabilize its risk indicators but to engage in their gradual reduction via prudent fiscal management and improved competitiveness. 27 Alternative Scenarios 73. Should external and domestic conditions permit, the economy could be growing at even higher rates, particularly on a rebound from the long recession, allowing for an accelerated reduction in unemployment and poverty. The chances of this scenario materializing, rather than the more conservative base case used above, have been enhanced by the program of reforms being enacted by the new economic team. Nevertheless, an even slower growth pattern to that of the base case scenario cannot be excluded and the risks of a slow growth scenario increase as the current recession is prolonged. Should this more pessimistic scenario develop-one in which growth falls below the minimum needed for fiscal and external sustainability--the country would be facing limited sources of financing and growing unemployment and poverty. 74. It is imperative that economic reactivation occurs soon. In that context, heterodox policies might be tolerated if they succeed in stemming the deterioration in expectations and reversing growth prospects. Nevertheless, it is also imperative that such policies be reversed promptly, as the Government has specified in the case of trade policies and the financial transactions tax (lapsing at end-2002). In the financial and monetary areas, the Government is committed to maintaining strong liquidity and capitalization defenses of the banking system, as well as the independence of the Central Bank. Tax preferences will also be temporary, as the plan of the economic team is to achieve a generalized elimination of inefficient taxes, including labor taxes. Risks and Risk Mitigation 75. International markets perceive risks in Argentina to be relatively high. However, several recent developments ought to have considerably reduced the risks facing the economy. The first of these is that liquidity needs have by and large been met for the year. This is thanks to a combination of the international financial package led by the IMF and the recent voluntary debt swap which has significantly reduced the need for roll- over of external debt in the year as well as for coming years. The second is that the fiscal situation, while still fragile, has been enhanced by the tax and expenditure measures taken since March 2001. These measures go a long way in seeing that the fiscal deficit remains within the bounds established with the Fund and for which financing is assured. Also, the early results from the provinces, under the Federal agreement, indicate that they too are keeping expenditure under control. There are signs that confidence is returning: bank deposits and reserves have stabilized and consumer confidence is being rebuilt. 76. Nevertheless, several risks remain. The first is that sustained, investment-led growth does not emerge during the period for which financing is largely assured and during the time when Argentina does not need to access the international capital markets. Given Argentina's level of debt and debt service requirements, it is not likely that the capital markets would be tolerant of financing the continued high fiscal deficit that would result if there were insufficient growth. This low growth case would not be sustainable and a financial crisis could emerge leading to severe disruptions in the economy related to the current convertibility system. This could lead to a worsening of unemployment 28 and poverty levels. Under such a scenario, the Bank would likely restructure and refocus on-going and planned activities. The Bank might continue with a range of social protection activities included under the low case lending scenario, such as TRABAJAR (work fare), school subsidies, micro-credit schemes and other programs through NGOs and community based organizations (as highlighted in the low case lending scenario) while working on strategies towards the recovery of economic confidence in tandem with other multilateral institutions. The Bank could also be called to honor the policy- based guarantee of $250 million issued in October 1999. To avoid this scenario, it is imperative that pro-competitiveness measures be taken to reduce the costs of production and to increase productivity, as well as to reduce the cost of capital. This is a large agenda, but one in which the present government is fully committed and actively pursuing measures. This agenda is also being supported by the international financial institutions. 77. The second risk is that the banking system suffers from the prolonged recession and it shows incremental signs of strain. Such stress could adversely affect confidence in the system even though present banking liquidity requirements are high and the banking system has so far withstood the effects of the recession. The ongoing FSAP, which will provide more details on the situation, gives comfort that the system remains solid but does confirm that there has been some weakening. This is particularly true for the remaining few, but large public banks which are increasing their exposure to provinces and are offering concessions to debtors as part of economic relief programs. Nevertheless, these banks tend to enjoy an implicit guarantee from the state and the rest of the system is dominated by foreign owned banks: both of these factors give comfort to local depositors. Should that confidence be shaken, a loss of deposits is possible with the attendant effects on banking solvency. In this case, the Bank may be called upon, along with IDB, to disburse $500 million each for the Central Bank's Repurchase Facility with private banks, approved in FY99. In terms of mitigation, the Central Bank is committed to maintaining reserve requirements at present levels. Moreover, the Government, with IDB assistance and technical input from the Bank, including the FSAP, aims at additions measures to improve the overall efficiency and solvency of the financial sector. 78. There are a number of events beyond the control of Argentina that could compound the scenarios outlined above. Should an external shock occur while Argentina is only emerging from the present situation, that recovery would be made even more difficult with a more protracted period of social and economic difficulties. In particular, much higher interest rates would have a serious impact on growth and consequently on employment and poverty. The present international financial package continues to be designed to mitigate against those events--if the shocks are not too large--and our sustainability exercise suggests that, once the current adverse conditions have been overcome, future events can be addressed in an orderly manner. Such events include moderately higher international interest rates, the presence of a very moderate fiscal deficit, and economic growth that is moderately lower than the base case scenario. 79. Finally, there is the long terrn risk that Argentina's competitive situation erodes, as the present reform efforts to promote continued productivity improvements are not effective, leading to stagnation and increasing social costs. In effect, this is the risk that Argentina's economy does not grow at the minimum rate needed to sustain its debt 29 position and to reduce unemployment and poverty. Current efforts by the Government and the support of international financial institutions for structural reforms aim to avoid that this happens and there are sufficient degrees of freedom to carry on with the reforms needed to prevent such a scenario from materializing. 80. The biggest challenge at present is to restore growth with the attendant positive impact on unemployment and poverty. All of the energies of the new economic team are being devoted to this task. The Bank is actively working with the Government in the design of a set of social and fiscal reforms which support these overall effort in the formn of a programmatic structural loan plus complementary programs of technical assistance, social protection, and provincial level reforms. At this point, we are not proposing to deviate from the parameters of the program as outlined in the CAS and updated in this report. Should conditions warrant, as the situation evolves in the coming months, the CAS would be updated as appropriate. James D. Wolfensohn PRESIDENT By: Sven Sandstrom Peter Woicke Washington DC, June 25, 2001 Attachments 30 Annex Al Page 1 of 1 Key Economic & Program Indicators - Change from Last CAS Actual Forecast in last CAS Current C'AS forecaxt Economy (CY) 1999 3\ 2000 4\ 2001 2\ 2002 2\ 2003 \2 2001 In 2002 m 2003 2\ 2004 2\ Growth rates GDP -3.4 -0.5 4.5 4.3 4.3 0.9 3.0 4.0 4.0 Exports -1.4 1.8 8.0 7.6 7.6 8.4 7.8 8.3 6.9 Imports -11.7 0.2 4.1 4.4 5.1 1.9 10.6 7.8 7.3 Inflation (°/O) -1.2 -0.8 1.4 1.5 1.5 0.2 0.7 1.0 1.0 National Accounts (% GDP) Current account balance -4.4 -3.3 -4.7 -4.7 -4.4 -3.5 -3.7 -3.4 -3.2 Gross investment 17.9 16.0 20.0 20.4 20.8 15.8 17.3 18.4 18.9 Public finance Fiscal balance s -2.5 -2.4 -1.0 -0.4 -0.1 -2.3 -1.8 -1.3 -0.8 Foreign financing 3.2 3.0 1.1 0.7 0.1 3.2 1.9 1.1 0.2 Internationalreserves7\ 26,407 25,122 26,446 27,917 29,553 21,335 22,129 23,244 24,416 (as months of imports) 6\ 9.7 9.2 9.2 8.7 8.4 7.4 6.9 6.6 6.4 Program (Bank's FY) FY99 31 FYOO 31 FYO 1 l FY02 21 FY03 21 FYOI 31 FY02 21 FY03 21 FY04 21 Lending ($ million) 3,226 57 1,105 945 675 446 1,476 460 615 Gross disbursements 2,071 1,446 1,266 1,560 860 1,113 1,250 726 577 (S million) I\ Estimated year. 2\ Projected year. 3\ Actual outcome. 4\ Last CAS was presented to the Board in June 2000. 5\ Federal Government only. 6\ Goods and services (non-factor services only). 7\ In last CAS, gross reserves included dollar-denominated bonds held as backing of monetary base. Annex A2 Page I of 2 Argentina at a glance 29105/2001 Latin Upper- POVERTY and SOCIAL America middle- __ Argentina & Carib. income l 1999 Development diamond Population, mid-year (millions) 36.6 509 573 GNP per capita (Atlas method, USS) 7,550 3.840 4,900 Life expectancy GNP (Atlas method, US$ billions) 276.1 1,955 2,811 Average annual growth, 1992-99 Population (%) 1.3 1.6 1.4 i Labor force (% 2.1 2.5 2.1 Most recent estimate (latest year available, 1993-99) per primary Poverty (% of popuiaton below national poverty line) 18 capita , enrollment Urban population (% of total population) 90 75 76 Life expectancy at birth (yeals) 73 70 70 Infant mortality (per 1,000 five births) 19 31 27 1 Child malnutrtion (% of children under 5) 2 8 7 Access to safe water (% of population) 65 75 78 Access to safe water llliteracy(% ofpopulation age 15+) 3 12 10 Gross primary enrollment (%of school-age population) 111 113 109 Male 111 .. Argentina Female 111 .. Upper-middle-income group KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1980 1990 1999 2000 Economic ratios GOP (US$ billions) 77.0 141.4 283.3 285,0 Gross domestic investment/GOP 25.3 14.0 17.9 16.0 Exports of goods and services/GDP 5.1 10.4 9.8 10.8 Trade Gross domestic savings/GDP 23.8 19.7 16.2 16.9 Gross national savings/GDP 22.8 15.4 13.5 14.3 Current account balance/GDP -6.4 1.2 -4.4 -3.3 D Interest payments/GDP 3.8 4.6 4.0 4.4 Investment Total debt/GDP 35.3 44.0 51.5 51.6 Savings / Total debt service/exports 47.6 18.7 85.6 93.0 Present value of debV/GDP 50.3 Present value of debt/exports 403.7 Indebtedness 1980-90 1990-00 1999 2000 2000-04 (average annual growth) GDP -0.7 4.4 -3.4 -0.5 3.7 Argentina GNP per capita -2.5 3.7 -4.9 -1.4 2.1 upper-midd1e-incomegroup Exports of goods and services 3.8 8.2 -1.4 1.8 2.8 U STRUCTURE of the ECONOMY 1980 1990 1999 2000 Growth of investment and GDP (%) (% of GDP) Agriculture 6.4 8.1 4.4 4.5 20 Industry 41.2 36.0 26.0 26.0 10 Manufactunng 29.5 26.8 17.0 16.7t(I Seroces 52.4 55.9 76.0 76.5 *o vs97 \98 Private consumption 76.2 77.8 70.1 69.3 -20 General government consumption 16.1 17.2 13.7 13.8 8 Imports of goods and services 6.5 7.4 11.5 11.4 -GO OGDP 1980-90 1990-00 1999 2000 Growth rates of exports and imports I%) (average annual growth) Agricuiture 0.7 3.6 1.6 -2.7 40 Industry -1.3 3.9 -6.7 -3.0 70 Manufaotunng -0.8 2.9 -7.7 -2.8 25 Services 0.0 4.5 -1.5 0.5 *x Pnvate consumption -04 5.2 -2.7 -0. 1 General govemment consumption 2.6 2 2 0.8 -0.4 v Gross domestic investment -8.3 92 -12.8 -8.3 20_ Imports of goods and services -1 5 12.6 -11 7 0.2 Expons --imripons Gross national product -0.9 4 0 -3.7 -07 _ Note: 2000 data are preliminary estimates. The diamonds show four key indicators in the country (in bold) compared with its income-grOup average. If data are missing. the diamond will be incomplete. Annex A2 Page 2 of 2 Argentina PRICES and GOVERNMENT FINANCE __ 1980 1990 1999 2000 Inflation (%) Domestic prkces (°% change)o== Consumer prices 100.8 2,314.0 -1.2 -0 8 Impliat GDP deflator 90.8 2,076.8 -1.9 1.1 Government finance (% of GDP, includes current grants) Current revenue 32.2 .. 24.7 24.1 -zo Current budget balance 4.0 .. -1.8 -2.1 - GDP deflator "CFI Overall surplus/deficit -3.7 .. -3.1 -34 _4 TRADE 1980 1990 1999 2000 Export and import levels (USS millions) (USS millions)I Total exports (fob) .. 12.488 23.333 26,642 35 00o Food 1.374 2,063 2,356 30 m000 Meat .. 873 829 946 2S.0007 Manufactures .. 3,364 6,952 7,938 20000 * *E U Total imports (cf) 4,197 25,508 26,011 tsoos Food .. 366 4,522 4,611 10,000 Fuel and energy .. 423 730 745 5,000 _ * h * l Caprtatlgoods .. 1,338 11.902 12,137 a 94 90 94 91 98 99 00 Export price index (1993=100) .. 87 96 Import price index (1993=100) .. 91 89 * Exports *Imports Terms of trade (1993=100) .. 95 108 _ _ BALANCE of PAYMENTS (USS millions) 1980 1990 1999 2000 Current account balance to GDP ratio (%) (USS millionsJ Exports of goods and services 9,893 14,727 27,764 30,828 0 Imports of goods and services 13,081 6.954 32,630 32,594 Resource balance -3.188 7.773 -4.866 -1,766 Net income -1,609 -6.203 -5,247 -5.061 Net current transfers -101 71 -2.331 -2,533 -3 Current account balance -4,898 1,641 -12.444 -9,361 !4 - Financing items (net) 6,776 1.352 13,645 8.921 Changes in net reserves -1,878 -2,993 -1,201 439 Mermo: Reserves including gold (US$ millions) .. 10,814 27,831 26,465 Conversion rate (DEC. locaLVUS$) 0.0 0.5 1.0 1.0 EXTERNAL DEBT and RESOURCE FLOWS 1980 1990 1999 2000 (US$ millions) Composition of total debt, 2000 Total debt outstanding and disbursed 16,774 48,676 145,955 147.186 (USS M.) I1RD 367 2.281 8.314 8,789 | 476 1ej IDA 0 0 0 0 2009 Total debt service 3.190 4.953 23,140 24,343 IBRD 60 423 998 1,239 IDA 0 0 0 0 Composition of net resource flows 0 Official grants 2 21 6 6 3274 Official creditors 58 456 1,538 1,957 7017 Pnvate creditors 6,038 -974 3,977 -3,752 Foreign direct investment 678 1.836 8.236 10,696 369 Portfolio equity 0 13 -112 15 World Bank program Commitments 27 0 132 441 A - IBRD E - Bilateral Disbursements 71 405 1.573 1,019 - - Shorn-term Principal repayments 34 233 445 538 C- IM1 Net flows 37 172 1.128 481 Interest payments 37 181 553 701 Net transfers 0 -9 575 -220 Annex B2 Page 1 of I CAS Annex B2 - Argentina Selected Indicators* of Bank Portfolio Performance and Management As Of Date 05125/2001 Indicator 1998 1999 2000 2001 Portfolio Assessment Number of Projects Under Implementation a 42 44 39 42 Average Implementation Period (years) b 2.6 2.8 3.3 3.9 Percent of Problem Projects by Number a, c 11.9 4.5 12.8 9.5 Percent of Problem Projects by Amount C c 14.3 7.5 9.6 12.7 Percent of Projects at Risk by Number ad 19 6.8 12.8 11.9 Percent of Projects at Risk by Amount d 18.7 8.8 9.6 14.7 Disbursement Ratio (%) e 20.9 22.5 22.7 22.6 Portfolio Management CPPR during the year (yes/no) Yes Yes Yes Yes Supervision Resources (total US$ thousand) 4,753 4,865 4,745 4778** Average Supervision (US$ thousand/project) 74 77 77 7* Memorandum Item Since FY 80 Last Five FYs Proj Eval by OED by Number 57 19 Proj Eval by OED by Amt (US$ millions) 8512.6 3384.1 % of OED Projects Rated U or HU by Number 26.8 5.3 % of OED Projects Rated U or HU by Amt 26.1 3.1 a. As shown in the Annual Report on Portfolio Performance (except for current FY). b. Average age of projects in the Bank's country portfolio. c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP). d. As defined under the Portfolio Improvement Program. e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only. * All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year. ** Preliminary estimates. Annex B3 Page 1 of 2 CAS Annex B3 - Bank Group Program Summary Argentina Proposed IBRDIIDA Lending Program Fiscal year Project US$(Millions) Strategic Rewards b Implementation b (H/M/L) Risks (H/M/L) 2001 Catamarca Provincial Reform (PRL3) 1 70.7 H H Cordoba Provincial Reform (PRL5)' 303.0 M M Second Buenos Aires Province Secondary Ed 1 57.0 M L Indigenous Communities LIL 1 5.0 H M Sustainable Fisheries LIL 1 5.0 H M Result for FY01 440.7 2002 Social Protect V (SINTyS II) 30.0 M L Santa Fe Provincial Reform (PRL6) 2 330.0 M M Social Protection VI (TRABAJAR) 150.0 H M Private Infrastructure Financing 250.0 H M Mining Decontamination 16.0 M M Provincial Development III 150.0 M L Provincial Reform 7 250.0 M M Programmatic SAL 13 300.0 H M Family Capacity Building (PROFAM) LIL 5.0 H H Result for FY02 1,481.0 2003 Drainage Infrastructure Management 100.0 H H Secondary Education IV 210.0 M H Integrated Health 150.0 M M Result for FY03 460.0 2004 Watershed Pilot 35.0 H M Rural Poverty/infrastructure 75.0 H M APL Water Sector Reform II 40.0 H M Municipal Reform 300.0 H H Life Long Learning 100.0 M H Provincial Reform 8 65.0 M M Result for FY04 615.0 Total FY01-FY04 2,996.7 11 Already approved by the Board. 2/ Accompanies this CAS Progress Report. 3/ Under the High Case Scenario, follow-up PSAL 2 and 3 ($300 million each) would be added in FY 02 and FY03, respectively. A reduction of $100 million in the remainder of the portfolio would be effected, in consultation with the Government. Annex B3 Page 2 of 2 CAS Annex B3 (con.) Argentina ProDosed CAS Proaress ReDort Last CAS. June 2000 Fiscal US$ US$ year Project (Millions) Project (Millions) 2001 Catamarca Provincial Reform (PRL3) ' 70.7 Buenos Aires Social Reform BASAL (PRL4) 400.0 Cordoba Provincial Reform (PRL5) ' 303.0 Cordoba Provincial Reform (PRL5) 300.0 Second Buenos Aires Province Secondary Ed' 57.0 Second B. Aires Province Secondary Ed 50.0 Indigenous Communities LIL 1 5.0 Gender LIL 5.0 Sustainable Fisheries LIL 5.0 Education 200.0 Result for FY01 440.7 Santa Fe Provincial Reform (PRL6) 150.0 Result for FY01 1,105.0 2002 Santa Fe Provincial Reform (PRL6) 330.0 Social Protect V (SYNTyS II) 30.0 Social Protect V (SYNTyS II) 30.0 Family Capacity Building (PROFAM) LIL 5.0 Social Protection VI (TRABAJAR) 150.0 Integrated Health 150.0 Private Infrastructure Financing 250.0 Urban Infrastructure 175.0 Mining Decontamination 16.0 APL Water Sector Reform II 40.0 Provincial Development III 150.0 Provincial Development III 150.0 Provincial Reform 7 250.0 Provincial Reform 7 250.0 Programmatic SAL 1 3 300.0 Private Infrastructure Financing 150.0 Result for FY02 1,481.0 Result for FY02 945.0 2003 Drainage Infrastructure Management 100.0 Rural Poverty 75.0 Secondary Education IV 210.0 Urban Poverty 200.0 Integrated Health 150.0 Municipal Reform 300.0 Result for FY03 460.0 Judicial Reform 50.0 Sustainable Fisheries 2 50.0 Result for FY03 675.0 2004 Watershed Pilot 35.0 Watershed Pilot 35.0 Rural Poverty/Infrastructure 75.0 Rural Infrastructure 100.0 APL Water Sector Reform II 40.0 APL Water Sector Reform II 40.0 Municipal Reform 300.0 Teacher Training 100.0 Life Long Learning 100.0 Provincial Reform 8 65.0 Result for FY04 615.0 Result for FY04 275.0 Total FY01-FY04 2,996.7A Total FYO1-FY04 3,000 0 1/ Already approved by the Board 2/ Accompanies this CAS Progress Report 3/ Under the High Case Scenario, follow-up PSAL 2 and 3 (of $300 million each) would be added in FY 02 and FY03, respectively. A reduction of $100 million in the remainder of the portfolio would be effected, in consultation with the Government. Annex B3 (IFCIMIGA) Page I of I CAS Annex B3 (IFC & MIGA) for Argentina Argentina - IFC and MIGA Program, FY 1998-2000 1998 1999 2000 IFC approvals (USSm) 169.50 293.40 285.00 Sector (%) CEMENT & CONSTRUCTION 15 5 F[NANCIAL SERVICES 61 30 81 FOOD & AGRO-BUSINESS 11 4 INFRASTRUCTURE 26 9 MANUFACTURING 9 4 MINING & METALS 17 MINING & MINERALS 2 OTHER SOCIAL SERVICES 19 3 TIMBER, PULP & PAPER 5 Total 100 101 100 Investment instrument(%) Loans 66 75 75 Equity 21 2 21 Quasi-Equity 12 20 4 Other 1 3 0 Total 100 100 100 MIGA guarantees (US$m) 217.65 437.97 435.07 Annex B4 Page I of I CAS Annex B4 - Summary of Nonlending Argentina Services - Produict Completion FY Cost Audiencea Objective (US$000) Recent completions Poverty Assessment FY00 $332 G,B,P Kg,Pd,Ps Fisheries Study FY00 $133 G,B,P Ps Labor Markets & Unemployment FY00 $70 G,B,P Pd Anti-Corruption FY00 $125 G,B Kg,Ps Policy Options FY00 $73 G,P Ps Water Resources FY00 $207 G,B Kg,Ps Social Protection Framework FY00 $120 G,B Kg Judicial Sector Assessment FY00 $35 G,B Kg Competitiveness FY00 $100 G,B Kg Traffic Safety FY01 $95 G,B Kg Provincial Finance FY01 $18 G,B Kg,Ps Social Sector Institutions FY01 $200 G,B Kg Social Capital FY01 $200 G,B Kg Rural Reproductive Health FY01 $95 G,B,P Pd,Ps Coping with Economic Crises FY01 $170 G,B Kg Country Procurement Assessment FY01 $200 G,B Ps Underway Financial Sector Assessment (FSAP) FY02 $285 G,B Kg,Ps Small and Medium Size Enterprises FY02 $200 G,B,P Kg,Ps Transport/Infrastructure Assessment FY02 $175 G,B Kg, Ps Municipal Finance & Services FY02 $175 G,B Kg Fiscal Sustainability FY02 $250 G,B Ps,Kg Country Fin. Assessment (CFAA) FY02 $50 G,B Ps Rural Infrastructure FY02 $175 G,B Kg Planned Health Sector Strategy FY02 $250 G,B,P Pd Provincial Finance FY02 $50 G,B Kg Disaster Insurance FY02 $175 G,B,P Pd,Ps Sources of Growth FY03 $250 G,B Kg Post-Secondary Education FY03 $250 G,B,P Kg,Pd MERCOSUR/Trade Relations FY03 $400 G,B,P Kg Prov Finance/Co-Participation FY03 $250 G,B Kg,Ps Social Security (with Chile) FY03 $250 G,B Kg Public Expenditure Review FY03 $250 G,B Kg,Ps New Economy (Regional) FY03 $250 G,B,P Kg Poverty Update FY04 $250 G,B,P Kg,Pd Policy Options FY04 $175 G,B,P Pd Development Policy Review FY04 $250 G,B Kg Urban Mobility FY04 $175 G,B,P Pd, Ps a. Government, donor, Bank, public dissemination b. Knowledge generation, public debate, problem-soiving. CAS Annex B6 - Key Economic Indicators - Argentina Annes B6 Page I of 2 Actual Estimate Projected Indicator 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 National accounts (% of GDP) Gross domestic product 100 0 100.0 100.0 100.0 100.0 1000 100 0 100 0 1000 100.0 100 0 Agnculture' 5.7 60 56 5.6 4.6 4.8 48 48 48 48 48 Industry' 28.0 28 4 29.1 28.6 27.6 27 6 27.6 27.6 27 6 27 6 27 6 Services' 66.3 65.6 65.3 65 8 67.7 67.7 67.7 67.7 67.7 67.7 67 7 Total Consumption 82.4 82.5 82.8 826 83.8 83.1 843 83.1 81 8 81 0 803 Gross domestic fixed 17.9 18 1 19.4 199 17.9 160 158 17.3 18.4 189 19.4 investment Govemment investment 2.2 2.0 2.0 2 0 1.8 0.9 0 9 0.9 0 9 0 8 0 8 Privateinvestment(includes tncrease in 15.8 16.1 17.3 17.9 16.1 15 1 14 8 16.4 17.5 18 1 186 stocks) Exports (GNFS)b 9.7 10.5 10.6 104 9.8 10.8 11.7 12.2 13.0 13.6 14 1 Imports (GNFS) 10.1 11.1 12.7 12.9 11.5 114 11.7 12.7 13.1 13.5 13.9 Gross domestic savings 17.6 17.5 17.2 17.4 16.2 16.9 15.7 16.9 18.2 19.0 19.7 Gross national savings' 15.9 156 15.2 15.1 13.5 14.3 12.3 13.7 15.1 15.9 165 fenorandum items Grossdomesticproduct(US$bn,currentprices) 258.0 272.1 292.9 298.9 283.3 285.0 288.2 2989 314.0 329.8 3464 Gross national product per 7380.0 7750.0 8150.0 8020.0 7550.0 7430.0 7337.0 7506.6 7765.3 8028.8 8296.4 capita (USS, Atlas method) Real annual growth rates (%, calculated at 1993 prices) Gross domestic product at market prices -2.8 5.5 8.1 3.9 -3.4 -0.5 0 9 3 0 4 0 4.0 4.0 Gross Domestic Income -2.8 5.5 8.1 3 8 -3.4 4.5 0 9 3 0 4.0 4.0 4.0 Real annual per capita growth rates (V., caJculated at 1993 prices) Gross domestic product at market prices 4.2 4.2 6.8 2.6 4.6 -1.7 -0.3 1.8 2.9 2.9 2.9 Total consumption -4.9 4 7 6.7 1 8 -3.8 -0. 1 -0.8 0.1 1.4 1 4 1.4 Private consumption -57 5.4 7.5 1.8 4.4 0.2 -1.2 0.1 1.4 1.4 14 Balance of Payments (USSm) Exports (GNFS)5 24909 28345 30853 31087 27764 30828 34127 37149 41332 45393 49649 Merchandise FOB 21162 24043 26430 26441 23333 26298 29187 31882 35689 39377 43235 Imports (GNFS)b 25983 30121 37396 38663 32630 32594 34504 38661 42083 45586 48889 Merchandise FOB 18804 22283 28554 29558 24103 23756 25407 28820 31332 33898 36497 Resource balance -1074 -1775 -6543 -7577 -4866 -1766 -377 -1513 -751 -193 760 Netcurrenttransfers 428 334 342 297 274 180 191 213 239 248 258 (including official current transfers) Current account balance -5308 -6943 -12424 -14708 -12444 -9361 -10202 -11070 -10610 -10528 -10268 (after official capital grants) Net private foreign direct 3258 5229 4672 4538 8236 10696 626 4400 4040 6228 6290 investment Long-term loans (net) 3034 6507 10656 13954 6234 780 6087 6256 6620 4364 4058 Official 3516 2027 645 2349 1143 1957 6716 517 -1995 -3630 -5631 Private -482 4480 10011 11605 5091 -1177 -629 5739 8615 7993 9688 Othercapital (net, including -1087 -910 369 -345 -824 -2554 -500 1250 1125 1170 F217 errors and omissions) Change in reservesd 102 -3882 -3273 -3438 -1201 439 3989 -836 -1175 -1234 -1296 Afemorandum items Resource balance (% of -0.4 -0.7 -2 2 -2.5 -1.7 -0.6 -0 1 -0.5 -0.2 -0.1 0 2 GDP at current market prices) Real annual growth rates (1995 prices) Merchandise exports 25.3 6.4 13.9 11.4 -2.6 2.4 8 5 8 2 8 7 7.1 6.6 (FOB) Primary 22.3 13.2 1.6 29.1 -12.0 -13.8 10 I 82 8.7 7A 6.6 Manufactures 26.8 -0. 1 21.2 11.2 .4.3 -14.0 10.1 8.2 8.7 7.1 6.6 Merchandise imports (CIF, USS bn.) 20.1 23.8 30.5 31.4 25.5 25.2 26.9 30.5 33.2 359 38.6 (ConTnced2 Template created on 6/22#2001 COUNTRY - Key Economic Indicators Annex B6 Page 2 of 2 Actual Estimate Projected Indicator 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Public finance (% of GDP) Current revenues 19.0 17.2 18.7 18 8 19.3 19.4 19.9 20.0 19.8 19.6 194 Current expenditures 18.8 18.1 19.1 191 208 20.9 21.3 20.9 20.3. 19.7 19.3 Current account surplus(+) 0.2 -0.9 -0.4 -0.3 -1.5 -1.5 -1.4 -0,9 -0.5 0.0 0 2 or deficit (-) Capital expenditure 1.2 1.3 1.3 1 3 1.1 1.0 1.0 1.0 0.9 0.9 0.8 Foreign financing 2.4 3.2 2.3 3 2 3 6 2.7 1.3 1.7 1.0 0.8 0,5 Mlonetary indicators M2iGDP (at current market 20.8 23.7 27.9 30.3 32 6 33.3 27.9 27.9 27.9 27.9 27.9 prices) GrowthofM2(%) 4.3 20.0 26.9 10.6 2.1 2.7 -15.1 3.7 50 5.0 50 Privatesectorcreditgrowth/ -21.7 98.2 106.6 129.6 -1049 100.0 100.0 100.0 100.0 100.0 1000 total credit growth (%) Price indices( 1993 =100) Merchandiseexportpriceindex 108.8 115.9 111.9 100.5 87.0 95.7 98.1 99.1 102.1 105.1 108.3 Merchandise import price index 106.9 105.6 103.2 97.9 91.3 88.6 93.0 94.4 95.3 96.3 97 3 Merchandise terms of trade index 101.8 109.8 108.4 102.7 95.3 108.0 105.5 105.0 107.1 109.2 III 4 Real exchange rate (USS/LCU)f 0.85 0.82 0.78 0.77 0.80 0.78 0.77 0.77 0.77 0.77 0.77 Real interest rates Consumer price index (% growth rate) 3.4 0.2 0.5 0.9 -1.2 -0.8 0.2 0.7 1.0 1.0 1.0 GDPdeflator(%growthrate) 3.2 -0.1 -0.5 -1.7 -1.9 1.1 0.2 0.7 1.0 1.0 1.0 a. If GDP components are estimated at factor cost, a footnoote indicating this fact should be added. b. 'GNFS" denotes 'goods and nonfactor sermices." c. Includes net unrequited transfers excluding official capital grants. d Includes use of IMF resources. e. Should indicate the level of the govenunent to which the data refer f "LCU" denotes "local currency units." An increase in USS/LCU denotes appreciation. Template created on 6/22/2001 Annex B7 Page I of I CAS Annex B7 - Key Exposure Indicators - Argentina Actual Estimate Projected Indicator 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 Totaldebtoutstandingand 99.1 110.7 125.1 141.9 146.0 147.2 150.0 155.1 161.7 168.1 174.4 disbursed (TDO) (US$bn)' Net disbursements (US$bn)a 13.2 11.5 14.4 16.9 4.0 1.2 2.8 5.1 6.6 6.4 6.3 Total debt service (TDS) 12.4 16.0 19.9 19.8 23.8 28.5 32.2 34.6 36.5 37.7 37.2 (US$bn)' Debt and debt service indicators (%) TDOAXGS' 396.3 388.7 404.3 456.1 525.8 479.7 446.5 423.9 397.1 375.7 356.2 TDO/GDP 38.4 40.7 42.7 47.5 51.5 51.6 52.0 51.9 51.5 51.0 50.3 TDS/XGS 49.6 56.0 64.5 63.6 85.6 93.0 95.8 94.7 89.7 84.4 75.9 Concessional/TDO .. .. .. .. .. .. .. .. IBRD exposure indicators (%) IBRD DS/public DS 9.3 7.8 5.2 5.7 7.8 7.9 5.7 8.7 7.6 3.8 3.6 Preferred creditor DS/public 32.4 25.6 17.1 18.7 22.7 .. .. .. OS (%)- IBRD DS/XGS 2.3 2.1 2.1 2.3 4.2 4.0 4.3 7.0 6.2 2.9 2.6 IBRD TDO (US$m)d 4913 5372 5494 7188 8552 9034 9363 8292 7124 6371 6027 Of which present value of 245 238 238 237 0 0 guarantees (US$m) Share ofIBRD portfolio (%) 4.0 4.4 5.0 5.1 6.2 7.4 7.4 6.4 5.5 5.1 4.8 IDA TDO (US$m)d 0 0 0 0 0 0 0 0 0 0 0 IFC (US$m) 788 799 914 880 1019 1196 Loans 655 658 628 592 716 822 Equity and quasi-equity / 133 141 286 288 303 374 MIGA MIGA guarantees (US$m) 150 122 169 218 .. .. a Includes public and publicly guaranteed debt, pivate nonguaranteed, use of IlF credits and net short- term capital. b. "XGS" denotes exports of goods and services, including workers' remittances. c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for Intemational Settlements. d. Excludes present value of guarantees. e Includes equity and quasi-equity types of both loan and equity instruments. Annex B7 Supplementary Table Argentina - Simulated IBRD Lending Scenarios US$ Million IBRD Single Borrower Exposure Limit Debt Outstanding Commitments o/v Adjustment Disbursements Historical Data FY96 4,812 1,509 875 733 FY97 5,372 1,480 300 1,127 FY98 5,522 1,333 300 812 FY99 7,319 3,226 3,030 2,071 FY00 8,537 57 0 1,446 Projected Data - Base Case FYOI 13,500 9,003 441 374 1,113 FY02 13,500 8,997 1,481 880 1,250 FY03 13,500 7,791 460 0 726 FY04 13,500 6,959 615 365 577 FY05 13,500 6,434 375 125 574 Projected Data - High Case FYOI 13,500 9,003 441 374 1,113 FY02 13,500 9,297 1,776 1,180 1,550 FY03 13,500 8,391 760 300 1,026 FY04 13,500 7,559 515 365 577 FY05 13,500 7,034 375 125 574 Figure Al: Argentina - IBRD Exposure FY01 - FY05 Base Case 16,000 i 14,000 ' - 12,000 10,000 8,000 6,000 ~~ 4,000 2,000 0 FYOI FY02 FY03 FY04 FY05 Anne. 8a (IBRD) Page 1 of 2 CAs Ano.. 8118 IRDI Argantin. statlI o6 tnt Gk ropp.,at,. on. (Oerwron- PottIolo 01 Of D.t. 0s012001 CaWd Pn4nds 71 IBRDIIA- TOM Dh.gd (AC) 2,028 20 d.aO, h. I_ r.d 275 a TOI D0,.4d fc.adl 11.748 co ad _ n ns_a 5.031 0 T_W D.-d (Ac.. CWd) 13,77417 i _d t_ r_n s~~~~~~~~~~~~630s "s TrW UONin_t t48o 2.469 37 TO U (C110.) 0 TON un (4 8 C0 ) 2 4 37 Att8T, Pr D.".-. r c0-tn Lotl P9SR Eop-etd tmd AMoal S.PeM.iof Rating OijaI Ae,o8nt In UsS Mi8tion- D.burn Pro,t li Pr.1a Nt. DO.. n lo,,,, FIttI Y-a, IBR0 IDA GRANT Cancel. Utnd,b. Onlg. Fnn Reod P044447 AR Catamarca Provinoal Reform S S 2001 70.7 0 0 0 707 27 0 P038344 AR Cordoba PRL5 NA NA 2001 303 0 0 0 303 0 0 P057473 AR INDIGENOUS COMMUNITY DEVELOPMENT LIL S S 2001 5 0 0 0 5 0 0 P050713 AR MODEL COURT DEV. S S 1998 5 0 0 0 39 39 0 P046821 ARPENSIONTA S S 1997 20 0 0 0 5.9 56 0 P006018 AR PROV DEVT II S HS 1995 225 0 0 0 514 -0.9 0 P037049 AR PUB.INV.STRENGTHG S S 1996 16 0 0 5 5 6.5 12 0 P055481 AR SOC&FISC NTL ID SYS HS S 1999 10 0 0 0 47 47 0 P062992 AR SPEC REPURCHASE S S 1999 505 0 0 0 500 0 0 P057449 AR State Modernization S S 1999 30.3 0 0 0 25.9 22 5 0 P057459 AR Sustinable Fishenes Managetmnt Proj S S 2001 5 0 0 0 5 0 P064614 AR- SeCond Sacon.a.y Educabon Project NA NA 2001 57 0 0 0 57 0 0 P043418 AR-AIDSANDSTOCONTROL U S 1997 15 0 0 0 23 22 0 P063388 AR-HEALTH INSURANCE FOR THE UNINSURED S S 2000 4 9 0 0 0 4 9 3 0 P045687 AR-HEALTH INSURANCE TA 5 S 1996 25 0 0 0 04 04 0 P034091 AR-HIGHER ED. REFORM S S 1996 165 0 0 0 636 630 8 P008059 AR-MATERNAL&CCHILDHLTH &NUTRITION2 S S 1997 100 0 0 0 522 86 0 P006030 AR-PROV. HEALTH SECTOR DEVELOPMENT U S 1996 101.4 0 0 0 2 334 336 0 P055482 AR-PUB HLTH. SURV. & DISEASE CONTROL S S 2000 52 5 0 0 0 406 18 2 0 P005992 AR-SECONDARY ED 1 S S 1995 190 0 0 21 3 15 9 37 2 17 2 P00S057 AR-SECONDARYED.2 S S 1996 1155 0 0 0 543 527 0 P050714 AR-SECONDARYEDUCATION3 S S 1998 119 0 0 0 157 157 0 P0o42e9 AR-SOCIAL PROTECTION 3 S S 1998 284 0 0 0 19 9 19.9 0 PD08058 AR-SOCIAL PROTECTION 4 S S 1999 90.8 0 0 0 ee 5 18 4 0 P039584 F.A.URE.TSP U U 1997 200 0 0 0 125 9 812 -0 1 P039787 8IODIVER.CONSEV PROJ S S 1998 0 0 101 0 83 0 0 P055935 EL NINO EMERGENCY FLOOD PROJECT S S 1998 42 0 0 0 26 5 26 5 22 2 P00D052 FLOOD PROTECTION S S 1997 200 0 0 0 145 2 121 2 84 9 P008040 FORESTRY/DV S S 1996 16 0 0 0 74 52 0 P006055 MINING SCTR DEVT HS S 1996 30 0 0 0 18 14 0 P055477 MININGTA S S 1998 395 0 0 0 12.1 121 0 PO00060 MUNIC DEVT 11 HS HS 1995 210 0 0 0 525 -32 1 0 P040808 N FOREST/PROTC S S 1997 195 0 0 0 121 -0 4 0 P052590 NAT HWY REHAB&MAINT S S 1996 450 0 0 0 107 3 128 4 0 P051695 P RFM(R.NEGRO) U U 1998 0 0 0 0 0 0 0 P051894 P.RFM(S.JUAN) HU U 1998 0 0 0 0 0 0 .0 POOBO50 POLLUTION MGT S S 1998 18 0 0 0 16 9 11 7 4 3 P005010 PROVAGDEVTI S S 1997 125 0 0 0 112 434 172 a. Intended ,mbumrserntnts to date mmus actual disbursemelts to date as projeCted at appraisal. Annex B8 (IBRD) Page 2 of 2 Adisr wcLs ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Oifl.r.,c. Bew.Inn LAM PSR E.pdt.d .nd A.I.ai S.pe-riion R.ting Oriainal Amo.nt in USS Million. D,be,.n,.e.tL Pro-id ID PrO.t N..- vefejdemnet np,2ntntion Fic.-I Y.e. IBRD IDA GRANT C.nAe. Undisb. Or. Fnm R.vd obincti-e Pro.,Q., P005980 PROV ROADS S S 1997 300 0 0 0 236 187 0 P005920 REDUCTION OF OZONE D S S 1997 0 0 25 0 12.3 -9.5 0 P045048 RENEWENERGY R.MKTS S NA 1999 0 0 91 0 8.8 25 0 P006043 RENEWENERGY R.MKTS S S 1999 30 0 0 0 29.1 6 7 0 P005968 SEGBA v U U 1987 276 0 0 10 5 17.2 27 7 0 P00b041 SMALL FARMER DV. S S 1998 75 0 0 0 42 3 30 5 30 5 P008043 WATER SCTR RFRM S S 1999 30 0 0 0 28.2 15.9 0 OveraR resu8 Result 4,576.1 0 44.2 374 2,498.7 1,0014 181.3 a Intended disbursefmefnts to date minu& aectuai d1sbursaments I odate as proedced at applai-sa Annex B8 (IFC) Page 1 of 2 Argentina Statement of IFC's Held and Disbursed Portfolio As of 04/30/2001 (In US Dollars Millions) Held Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1998 AUTCL 5.25 0 0 0 5.25 0 0 0 1994 AceiteraChabas 0 0 3.1 0 0 0 3.1 0 1994 Aceitera General 6.25 0 6.9 0 6.25 0 6.9 0 1960/95/97/99 Acindar 77.36 16.43 10 27 77.63 16.43 10 27 1994/95/96 Aguas 49.99 6.95 0 96.13 49.99 6.95 0 96.13 1977/84/86/88/94/96 Alpargatas 19.23 6.05 6.37 48.79 19.23 6.05 6.37 48.79 1999 American Plast 10 0 0 0 10 0 0 0 1993 Arg Equity Inv. 0 2.84 0 0 0 2.84 0 0 2000 Argentina SMMC 0 12.5 0 0 0 12.5 0 0 1989/91/96 BBV Bco. Frances 3.23 0 0 0 3.23 0 0 0 1994/99 BGN 12 0 36 0 12 0 36 0 1996/99 Banco Galicia 68 0 0 245 68 0 0 245 1996 Bansud 3.02 0 0 0 3.02 0 0 0 2000 Bco Hipotecario 25 0 0 102.5 25 0 0 102.5 1996 Brahma- ARG 13.5 0 0 9.9 13.5 0 0 9.9 2001 BSFE 20 0 0 0 0 0 0 0 1996 CAPSA 7.64 0 5 21 7.64 0 5 21 1999 CCI 0 20 20 0 0 20 6 0 1995 CEPA 6.67 0 3 1.2 6.67 0 3 1.2 2000 Cefas 10 0 5 0 6 0 5 0 1999 CorreoArgentino 63 6.82 5.18 0 63 6.82 5.18 0 1999 DI TELLA 9 0 0 0 0 0 0 0 1994/95 EDENOR 6.5 0 15 1 6.5 0 15 1 1998 F.V. S.A. 9.75 0 4 0 9.75 0 4 0 1998 FAID 0 2.75 0 0 0 2.75 0 0 2000 FAPLAC 10 0 5 0 10 0 5 0 1992 FEPSA 1.65 0 2 0 1.65 0 2 0 1997 FRIAR 10 0 2.5 7 10 0 2.5 7 1996 Grunbaum 6 0 2 3.33 6 0 2 3.33 1997 Guipeba 11.79 0 5 0 11.79 0 5 0 1998 Hospital Privado 9.6 0 0 0 6.5 0 0 0 1995/97 HSBC Argentina 29 0 20 0 29 0 20 0 1992 Huantraico 0 27 0 0 0 0 0 0 1995/97 Kleppe/Caldero 10.21 0 0 0 10.21 0 0 0 1996 MBA 0 0.16 0 0 0 0.16 0 0 1992/93/96 Malteria Parnpa 6.1 0 1 1.06 6.1 0 1 1.06 0/97 Milkaut 6.25 5.03 10 2 6.25 2.86 10 2 1978/81/86/87/91/93/96/99/00 Minetti 45.83 0 14 113.64 45.83 0 14 113.64 1993/94 Molinos 0 5.55 0 0 0 5.55 0 0 1995 Nahuelsat 12.5 5 0 0 12.5 5 0 0 1996/99 Neuquen Basin 0 31.4 0 0 0 3.85 0 0 1993 Nuevo Central 1.88 3 0 1.25 1.88 3 0 1.25 1992 Oleaginosa Oeste 0.76 0 1.25 0.31 0.76 0 1.25 0.31 1992/95 PAE - Argentine 12.1 0 0 11.77 12.1 0 0 11.77 1998 Patagonia 5 0 1 0 5 0 1 0 Annex B8 (IFC) Page 2 of 2 Held Disbursed FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic 1998 Patagonia Fund 0 19.97 0 0 0 7.49 0 0 1996 Pecom 10.91 0 0 12 10.91 0 0 12 1990/94 Petroken 14.54 0 5 3.2 14.54 0 5 3.2 1994 Quilmes 6.35 0 0 1.25 6.35 0 0 1.25 1992 Rioplatense 5.33 1 0 1.67 5.33 1 0 1.67 1999 S.A. San Miguel 9.08 0 0 0 9.08 0 0 0 1995 SIDECO 0 15 0 0 0 15 0 0 1995 SanCor 10 0 20 3 10 0 20 3 1995 Socma 8.34 0 0 20 8.34 0 0 20 1997/98/99 Suquia 35 0 10 25 35 0 10 25 1997 T61 8.89 0 5 22.5 8.89 0 5 22.5 1987/89/90/96/97 Terminal6 14.14 0 0 11.92 14.14 0 0 11.92 1995 Terminales Port. 5.5 0 0 0 5.5 0 0 0 1995/00 Tower Fund 0 20.73 0 0 0 18.72 0 0 1995 Tower Fund Mgr 0 0.14 0 0 0 0.14 0 0 1996 Transconor 21.68 0 18.86 170.31 21.68 0 18.86 170.31 1998 U.Belgrano 7 0 0 0 0 0 0 0 2001 USAL 10 0 0 0 4 0 0 0 1997 Vicentin 20.31 0 0 5 20.31 0 0 5 1993 Yacylec 4.4 5.04 0 1.6 4.4 5.04 0 1.6 1996 Zanon 11.67 0 6 0 11.67 0 6 0 Total Portfolio: 807.19 213.36 248.16 970.31 758.09 142.15 234.16 970.31 Approvals Pending Commitment Loan Equity Quasi Partic 2000 ALEF 25,000 - - 150,000 2000 APSF 20,000 5,000 - 30,000 1999 American Plast - 350 - - 2000 Argentina SMMC 100,000 37,500 - 450,000 1999 Biopork 5,200 - 2,000 5,000 2000 Hipotecario USCP 25,000 - - - 2001 ITBA 7,000 - - - Total Pending Commitment: 182,200 42,850 2,000 635,000 Annex B9, Page 1 of 10 Argentina CAS Program Matrix (FY2001-FY2004) The program has three pillars: (i) enhancing social development, including poverty alleviation and human resource development; (ii) improving the performance and institutional capacity of government, particularly sub-national governments, to deliver key, social, infrastructure, and environmental services; and (iii) consolidating structural reforms, including public finance, labor markets and the financial sector to ensure successful implementation of the assistance program and enhance governance through institution building. 1. SOCIAL DEVELOPMENIt Strengthen social policy coordination and the delivery of social assistance during the adjustment period. Support transition to more nlexible labor markets to reduce poverty. Rebuild the institutional basis lbr improvements in human resource de elopment to improve social welfare and th productivity of the work force. Diagnosis Strategy/Actions Country Performance Self-Evaluation Indicators Instruments Indicators World Bank Group Major Related Activities of .______________________________ .________________________ O ther D onors Poverty AAA Although the level of social Improve poverty analysis, monitoring Social assistance spending ISLC Program/SYNTyS Rural Poverty (97) IDH engaged in sites and spending is high relative to and targeting of social assistance. levels protected in cyclical Il/SIEMPRO have equipped Regional ISLC /Social services activities in poor comparator countries, social downtums, and reoriented Gov't for more effective Program IDF Grants (98) urban areas, Social Sector, indicators lag and economic Ensure adequate funding of safety net toward effective/targeted poverty monitoring and Gender Review (99-00) SAL, and other targeted social recessions have exposed weak programs and improve efficiency in safety net programs. targeting. Poverty Assessment (00) programs (e.g. youths, job social assistance delivery to address social spending. National Unified Registry of Soc. Prot. Framework (00) training). structural and transitional poverty, beneficiaries adopted Social Capital (01 ) Proposed programs for low In particular, rural poverty has Coverage of identitied Rural Reproductive Health (0 I) cost housing. received little anention. vulnerable groups increased Coping with Economic Crisis (0 I) Target delivery of basic matemal and Maternal mortality rate FIocused matemal child Small Grants 1'rogram for child health services to the poorest reduced to 12 per 1,000 programs operating in the Social Innovation (00+) families. births nationally, with larger poorest provinces SMEs (02) percentage decreases in poor provinces. Maternal and child care integrated into basic health service package Annex B9, Page 2 of 10 Diagnosis Strategy/Actions Country Performance Self-Evaluation Indicators Instruments Indicators World Bank Group Major Related Activities of Other l)onors Ensure that the poorest households are National strategy for attaining Programs supporting Project Financing covered by the health insurance universal participation in development of Insurance Series of Provincial Retorm system and other parts of the social health insurance agreed, for the Uninsured in 25% of Loans security system. the provinces. Indigenous Peoples (01 ) Family Capacity Building (01) Increase focus on rural poverty and Increased number of poor Community-based projects Integrated Iealth (03) indigenous groups. Increase focus on families in rural areas served operating in rural and poor Social Protect V-SINTyS (02) basic services for the poor, including by infrastructure and social urban areas. Rural poverty Social Protect VI (02) actions to strengthen their social services. strategy designed and Programmatic SAL (02-03) capital and access to basic services. implemented started in pilot Rural Poverty/Infra (04) National housing strategy areas. Mun. Reform (04) devised, with commensurate Supervision changes,in FONAVI Development mechanisms Series of Provincial Reform for more integrated social Loans service delivery to the poor Matemal/Child Health 11(98) along with continued Small Farmer Devt. (98) support for innovative social SINTyS (99) programs and partnerships Renewable Energy (99) Soc. Protection III (98) Soc. Protection IV (99) Insurance for the Poor (00) Annex B9, Page 3 of 10 Diagnosis Strategy/Actions Country Performance Self-Evaluatioji Indicators Instruments Indicators World Bank Group Major Related Activities of Other Donors Education AAA Education system has deteriorated, Assist the provinces to improve the Increase secondary Successful implementation Prov. Social Services (97) IDB dealing with primary and threatening the future basis for leaming outcomes of secondary graduation rate from 53% to of Bank program supporting Education Review (99) vocational education. improved competitiveness and school students through enhanced 70%. the Federal Education Capacity Assessment of Social scholarships for poor families. income distribution, resource allocation, particularly for Reform and targeted efforts Institutions (01) New IDB program for students from poor families. Redirect Decrease in repetition rates to poor students in Post Secondary Ed (03) secondary education proposed. public spending in higher education to and desertion rates for poor secondary schools. reach the poor. secondary students Supervision New approach to school Secondary Ed. 1, 11, 111, IV Compensatory education level budgeting piloted in at Higher Education (96) programs reaching more than least one province Cordoba PRL (01 ) 25% of poor schools Catamarca PRL (01) School Autonomy piloted in Education attainment at least one province Project Financing increased proportionately Secondary Ed IV (03) more in poor provinces Pilot program of full-day Life-Long Learning (04) schooling in poor areas of Santa Fe PRL(02) Buenos Aires Province PRL 7 (02) replicated in some other Programmatic SAL (02-03) provinces. IFC support for private higher education Continuing dialogue on higher education reform and education alternatives Annex B9, Page 4 of 10 Diagnosis Strategy/Actions Country Performance Self-Evaluation Indicators Instruments Indicators World Bank Group Major Related Activities of Other Donors lhealth Services Argentina spends at OECD levels Increase competition in the health Market fully opened to Provincial I IMOs reformed AAA IBD active at primary care but receives poor health services insurance market, and reform of obras include national and and increased spending for Provincial Social Scrvices (97) level. due to monopolies in health provinciales and PAMI. Allocate provincial HMOs and private public health services in at Traffic Safety (00) insurance financing. Too little greater spending for public health health insurance. PAMI with least 25% of the provinces. Capacity Assessment of Social spending for health promotion, services and health promotion sustainable financing. Institutions (01 ) particularly for diseases affecting programs. Increased spending in Health Strategy (02) the poor., responsible parenthood promotional programs. Proiect Financing and traffic safety Public hospitals Santa Fe IPRI(02) lack accountability, subsidize non- Programmatic SAI. 02-03) poor and are overburdened by Improve efficiency and targeting of Decentralized public hospitals Programs eflectively PRL 7(02) clients seeking primary level public hospital services in the linked to primary care supporting hospital Integrated Health (03) attention. provinces by decentralizing decision- networks decentralization in one-third Supervision making. of the provinces. Aids Prevention (98) Hlealth Surveillance (00) IFC private hospital Cordoba PRL(0 I) Catamarca PRL(0 I) Water and Sanitation Limited access to safe water (73%, Increase investment to improve Increase access to safe water Support for concessioning in AAA DII) support for small in 1991 coverage compared to 87% service and increase coverage of the to at least 87%. the provinces that include Reforming Provincial Utilities mtnicipal systems. in comparator countries) and poor through private sector programs to facilitate access (96) sewage services, particularly participation. by the poor. New Regulatory Challenges among the poor, increases the (97) incidence of water bome diseases. Promect Financing Water Sector APL (01-04) IFC support for private concessions Annex B9, Page 5 of 10 2. PROVINCIAI REFORM AND DEVELOPMENT Provinces, which are responsiblefor over 80% of spending in education and healtil haveyet to undergo requiredflscal adjustments. Following process ofprivatization and decentralization, provincial government increasingly responsible for providing infrastructure. Small and medium sizedfirms in tile prov nces need to take advantage o open economy. Diagnosis Strategy/Actions Country Performance Self-Evaluation Indicators Instruments Indicators World Bank Group Major Related Activities of Other Donors Fiscal Reform/Social Sector Snendine AAA IDB financing for Cordoba, La Public expenditures in most Deepen first generation fiscal reforms Zero aggregate provincial Under PRL operations Provincial Fiscal Update (00- Rioja, Mandoza. City of provinces should be sufficient to with focus on social spending. deficit by 2003. New co- improved tax collection and 04) Buenos Aires. and Province of provide for health and education, Increase local resource mobilization participation regime in place. structure of spending, with Fed. Provincial Taxes (99) Buenos Aires. but spending is inefficient and and improve incentives under revenue greater targeting of the poor. Municipal Finances and UNDP assistance in preparing service of poor quality. Pro- sharing. Facilitate reform of revenue Services (02) provincial programs. cyclical transfers and poor fiscal sharing and transition to Proiect Financine management foment financial new system. Catamnarca PRL(0 1) crises and social and political Prov. Development III (02) turnoil. Cordoba PRL(0 I) Infrastructure Santa Fe PRL(02) PRL 6 (02) Argentina lags bchind most high- Rebuild and upgrade infrastructure Selected provincial network: Support to Gov't in Programmatic SAL (02-03) income developing counties in the base. Enhance local level public rehabilitate 5,500 km; attracting private financing Municipal Reform (04) quantity and quality of infrastructure and promote private upgrade and new construction for infrastructure, and Supervision infrastructure services, particularly sector investment in power and of 3,200 km. Expand promote private sector Provincial Development 11 (95) in the provinces, increasing transport. electricity coverage to about participation in maintenance MA business and logistic costs. 30,000 new rural customers activities. Transport Assessment (02) by 2002. Disaster Insurance (02) Rural Infrastructure (02) Annex B9, Page 6 of 10 Diagnosis Strategy/Actions Country Performance Self-Evaluation Indicators Instruments Indicators World Bank Group Major Related Activities of Other Donors 28% of the poor live in flood-prone Create provincial capacity to deal with System to deal with recurrent Provide analytical support Proiect Financing IDB financing fbr urban dev. in areas and periodic flooding causes recurrent flooding, protect most floods in place for Parana for development of disaster Private Financing of large cities; expon corridors major economic losses, important assets, and develop disaster Basin, major urban centers insurance. Infrastructure (02) and ports; provincial insurance mechanism. protected, poor relocated and Drainage Infrastructure (03) regulatory reform; and El Nino insurance system in place. Rural Poverty/lnfrastr (04) emergency rehabilitation. IFC financing of Transfer lessons of housing concessionaires program under Flooding Supervision project to more general Municipal Dev. 11(95) housing policies Provincial Roads (97) Flood Protection (97) BA Urban Transport (97) National Highway Rehab (98) El Nino Emergency (98) Annex B9, Page 7 of 10 3. StlS'l'AINABLE GROWTH Economy remains vulnerable to external shocks. Return to a sustainable and strong pattern of grothv requires continuity of reforms infactor markets andfiscalpriidence. Lags in effectvely managing seriols pollution problems need to be addressed given civil society's growving demandfor measures to promote environmentally sustainable environment and potential losses in export competitiveness as global markets increasingly require environmental performance benchmarks. Diagnosis Strategy/Actions Country Performance Self-Evaluation Indicators Instruments Indicators __ World Bank Group Major Related Activities of .______________________________ O ther l)onors Economic Policyl/overnance AAA Continuing fiscal deficits increase Reduce the structural deficit by reform Attain investment grade status Provide AAA support tbr Introducing Civic l.ducation IMF monitoring. I1)i3 lending country risks and vulnerability of of the state at national and provincial for government paper. 1und program and possible into Schools IDE Grant (97) in suppon of puhlic sector extemal shocks. Confidence also levels, increase formality and reduce Increase X/GDP. emergency financing. Financial Sector (98) modernization and citizen weakened by poor public sector tax evasion. Continue with trade Operations to support state CFAA (99) se.urity issues. efficiency and transparency and reform effort modernization, public ethics Policy Options (00) weak judiciary. Need to resist and judiciary. Labor Market (00) protectionist pressures Anti-Corruption IDF (00) Judicial Assessment (00) Competitiveness (00) Labor Markets Anti-Corruption Strategy (00) 'I'ransport Assessment (02) Labor cost and market rigidity Promote the liberalization of labor Collective bargaining Provide AAA for continuing Country Procurement undermines productivity markets and reduce labor taxes. decentralized and severance reforms, especially for Assessment (01 ) improvements and contributes to program initiated. integration of informal SMEs (02) high unemployment. Significant Unemployment in single sector into social security FSAP (02) pans of economy operate in black. digits and health systems, and to Fiscal Sustainability (02) reduce evasion Sources of Growth (03) Social Security (03) MERCOSUR (03) Annex B9, Page 8 of 10 Diagnosis Strategy/Actions Country Performance Self-Evaluation Indicators Instruments Indicators World Bank Group Major Related Activities of Other Donors Financial/Private Sector Develonment Financial system has reduced its Reduce crowding out by improving Increase level of credit to Support ongoing Project Financing IDB support for restructuring vulnerability to extemal shocks but fiscal performance, increase private sector relative to GDP privatization of provincial Public Sector Management and of SMEs. intermediation is weak, with competition by reducing the role of and depth of capital market in banks through PRLs. Performance (ex-Y2K) (00) domestic credit at only 25% of public banks and broaden and deepen line with other upper-middle Continue Bank/lFC AAA Programmatic SAL (02-03) GDP. capital markets. income economies, support for broaden capital IFC operations in capital markets. markets (including housing finance), middle-market firms, Small and medium sized firm in the Support development of instruments Increased SME exports and Expanded IFC focus on and lines for SMEs. provinces (SMEs) lack access to to accelerate credit access, improve access of SMEs to banking/ SME financing. Supervision intemational capital, technology project formulation and export credit system Public Sector Investment and markets lag behind larger firms strategies by SMEs. Strengthening (96) in taking advantage of trade and Pension TA (97) economic liberalization. SINTyS (99) REPO (99) Model Court Pilot (99) Annex B9, Page 9 of 10 Diagnosis Strategy/Actions Country Performance Self-Evaluation Indicators Instruments Indicators World Bank Group Major Related Activities of Other Donors Reduce Pollution AAA Increased growth and urbanization Coordinate management at national Pollution abatement targets Pilot integrated pollution P'ollution Study (96) IDB supporting specific site have not been matched by and subnational levels, and strengthen and compliance schedule management approach Municipal Environmental Mgt. clean-ups, petroleum establishment of an environmental regulatory analysis and participatory agreed between polluters and introduced at municipal IDF Grant environmental mitigation, and framework with clear jurisdictions processes. govemment in two or three level. Increased use of Water Resources Mgt (00) institutional development of and enforcement, nor effective polluted areas; incorporation public hearings under Bank Hazard Waste Mgt (00) the Federal Environment tools to promote responsible of cost-effectiveness analysis operations. BA City Flooding (00) Secretariat. UNDP-Phase If of environmental behavior, and monitoring framework. BA Air Quality (00) the GEF Project on Patagonia particularly in industry. Municipal Finances and Coastal Zone Management Meeting commitments under Completion of Montreal Services (02) Plan. OAS initiative for global environmental Protocol with adoption of Proiect Financing Guarani Aquifer. agreements. local regulations. GEF-Coastal Contamination (01) Continued building of GEF Mining Decontam. (02) pipeline, including Municipal Reform (04) preparation of GEF-for Supervision biodiversity conservation, Municipal Development 11(95) global warming and Mining TA 1(95) and 11(98) intemational waters MP-Reduction of Ozone- objectives. Depleting Substances (96) BA Urban Transport (97) Pollution Mgt.(98) GEF-Climate Change Mitigation /Overlay (99) Annex B9, Page 10 of 10 Diagnosis Strategy/Actions Country 1'erformance Self-Evaluation Indicators Instrunients I ndicators World Bank Croup Major Related Activities of .___________________________ Other Donors Conserve Natural Resources Increased private investment in Promnote sustainable management of' Comprehensive approach to Provide examples of how to AAA 11)13 active in rehabilitation of' natural resource development natural resources and protection of natural resource managensent address critical natural Forest Sector Review (94) irrigation systems, Yacyreta, requires clear regulatory biodiversity by redefining and developed at national level, resource management in a Rural Poverty (98) and indigenous peoples. framework and strengthened public modemizing role of the public sector. with effective management variety of'sectors, keeping Environ. Impact (98) sector oversight capabilities programs in forestry, mining, abreast of the country's Fisheries (00) water, and fisheries emerging natural resource Water Resources (00) issues, most notably, Disaster Insurance (02) fisheries, protection of Proiect Financine sensitive areas in Patagonia, Fisheries LIL (01) etc. Adding the poorer Fisheries GEF (01) Andean to the areas in Indigenous Bio-diversity GEF which we are active on (01) promoting conservation. Desertification GEF (02) Small Farmers GEF (02) Agreement on a long-term Watershed Pilot (04) agenda for watershed Supervision management and at last one Yacyreta/SEBGA (93) pilot Forestry Development (96) Mining T'A 1(95) and 11(99) Increased confidence in the Native Forests (97) Bank's supervision ofthe Provincial Agriculture (97) Yacyreta project. Small Farmers (97) Bio-diversity GEF (98) Indigenous Peoples (01) Fisheries LIL (01 ) IBRD 29348 71o' r 60 1O' 510° -20¢ ] I BOLIVIA f\ 0 0_{@ f,-, rPARA GU AY '' wo f>is-_dos Iivuyd I- B R A Z I L V g _ ~~~S A l TA _'.omsi ,- 2, uX /e, 8 sCav, marE3TERO ,C !ACO ~~~~~~TC JN I, Resistencia' _,,j' da (f'°'q 5 ~ *^* R/0A\@SANTIAGO\ . _j , AN ; C93.a.SatS -30, JUMENDOZA r FE ?~ ~~~a il -J -' : 6 BUEorNOS ' {}i f ~~Sant Rioss U-i , i LAN, IRS iQ r LUI PAires 9j L j A ARGESTN Nequ - C E f0 NRYNECPTL Q_ R @ NX tCAIA <;< zN ' -'-GENTEAIONA BtRE /~~~~~~~~~~~~~~~~~~ PRVIC CAiL j SA NTA o =, CR UZ . ~FALKLANLj ISLANDS r-' 95s-~~~~ e {MAIVINAS) g t ~~~ <3th' Gallegos 0S 100 200 :30CK AOD 50 00 KILOEERS >=9+ F- t _ _ ewRs r _s_~W-MAWN_M 0 100 200 3DO 400 A" < 99 .. \ -. ..... lXiX c~~is m wo pmdoced by dre Map Omign Unit of rhv WotHf Ba. ;. i- jWhu - -ER 7The booilarlos, ok, dof eomrniali4 and anyotber hAarmnfano shown '-:- ' ... cTIRRAv "rnap do not inply, on the port of rh WwQ 4tanl rovp, any ':'1fDEl FUEGO nnc efos fy*rritory, or a y ed"t or I I 0 - _ J- j ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~APRIL 1998