FILE COPY Report No.:1 11196 Tit le: THE Author: WORL Ext.: 0 Room Dep 1992 THE WORLD BANK ANNUAL REPORT 1992 r' p  THE WORLD BANK ANNUAL REPORT 1992 O The World Bank Washington, D.C. 20433 2 Photo Credits Cover: Thomas Sobolik for Black Star Page 22: Neeraj Jain Page 110: Belinda Morris Page 113: Ray Witlin Page 124: Tomas Sennett Page 131: Tomas Sennett Page 137: Elizabeth Crayford Page 145: Edwin G. Huffman Page 151: Peter Muncie Cover: The countries of Central and Eastern Europe contin- ued to demonstrate during the year their commit- ment to a thorough transformation of their economic systems. Progress has occurred in establishing a legal framework for private-sector development. Growth in the number of registered private enter- prises has been explosive. In this photo, the owner of a fruit and vegetable stand weighs apples. Cover design by Joyce C. Petruzzelli ISSN: 0252-2942 ISBN: 0-8213-2149-8 3 Letter of Transmittal The details of events covering the period cation to the institution's ideals. They note that July 1, 1991, to June 30, 1992, are found in this the continued professionalism of the staff made Annual Report, which has been prepared by it possible for the Bank to respond to the the executive directors of both the Interna- exceptional challenges posed by the dissolu- tional Bank for Reconstruction and Develop- tion of the former Soviet Union into indepen- ment (IBRD) and the International Develop- dent, sovereign states and the progress ment Association (IDA) in accordance with the towards peace in several of the Bank's regions; by-laws of the two organizations. Lewis T. both events have led to a sharp expansion in Preston, president of the IBRD and IDA and the demand for Bank services. chairman of the boards of executive directors, The annual reports of the International Fi- has submitted this Report, together with ac- nance Corporation, the Multilateral Invest- companying administrative budgets and au- ment Guarantee Agency, and the International dited financial statements, to the boards of Centre for Settlement of Investment Disputes governors. are published separately. The directors express their appreciation to the staff members of the Bank for their dedi- Executive Directors Alternates Ibrahim A. Al-Assaf Ahmed M. A S-Ghannam Fawzi Hamad Al-Sultan Mohamed W. Hosny Aris Othman Aung Pe J. S. Baijal M. A. Syed Mohamed Benhocine Salem Mohamed Omeish Rosario Bonavoglia Fernando S. Carneiro Fdlix Alberto Camarasa Nicolos Flafto E. Patrick Coady Mark M. Collins John H. Cosgrove A. John Wilson Fritz Fischer Harald Rehm Eveline HDrecns Boris Skapin Yasuyuki Kawahara Kiyoshi Kodera Jean-Pierre Landau Philippe de Fontaine Vive J. Ayo Langley 0. K. Matambo Jean-Pierre Le Bouder Ali Bourhane Ernest Leung Paulo C. Ximenes-Ferreira Jorunn Maehlum Helga Jonsdottir Moisds Naim Gabriel Castellanos David Peretz Robert Graham-Harrison Frank Potter Hubert Dean Bernard Snoy Walter Rill Wang Liansheng Jin Liqun August 6, 1992 4 The World Bank, the IFC, and MIGA "The World Bank," as used in this Annual the very poor countries-those with an annual Report, refers to the International Bank for per capita gross national product of $610 or Reconstruction and Development (IBRD) and less (in 1990 dollars). More than forty countries its affiliate, the International Development As- are eligible under this criterion. sociation (IDA). The IBRD has two other Membership in IDA is open to all members affiliates, the International Finance Corpora- of the IBRD, and 142 of them have joined to tion (IFC) and the Multilateral Investment date. The funds used by IDA, called credits to Guarantee Agency (MIGA). The Bank, the distinguish them from IBRD loans, come IFC, and MIGA are sometimes referred to as mostly in the form of subscriptions, general the "World Bank Group." replenishments from IDA's more industrial- The common objective of these institutions ized and developed members, and transfers is to help raise standards of living in developing from the net earnings of the IBRD. The terms countries by channeling financial resources to of IDA credits, which are traditionally made them from developed countries. only to governments, are ten-year grace pen- The IBRD, established in 1945, is owned by ods, thirty-five- or forty-year maturities, and the governments of 160 countries. The IBRD, no interest. whose capital is subscribed by its member The IFC was established in 1956. Its func- countries, finances its lending operations pri- tion is to assist the economic development of marily from its own borrowings in the world less-developed countries by promoting growth capital markets. A substantial contribution to in the private sector of their economies and the IBRD's resources also comes from its helping to mobilize domestic and foreign capi- retained earnings and the flow of repayments tal for this purpose. Membership in the IBRD on its loans. IBRD loans generally have a grace is a prerequisite for membership in the IFC, period of five years and are repayable over which totals 146 countries. Legally and finan- fifteen to twenty years. They are directed cially, the IFC and the IBRD are separate toward developing countries at more advanced entities. The IFC has its own operating and stages of economic and social growth. The legal staff, but draws upon the Bank for admin- interest rate the IBRD charges on its loans is istrative and other services. calculated in accordance with a guideline re- MIGA, established in 1988, has a specialized lated to its cost of borrowing. mandate: to encourage equity investment and The IBRD's charter spells out certain basic other direct investment flows to developing rules that govern its operations. It must lend countries through the mitigation of noncom- only for productive purposes and must stimu- mercial investment barriers. To carry out this late economic growth in the developing coun- mandate, MIGA offers investors guarantees tries in which it lends. It must pay due regard against noncommercial risks; advises develop- to the prospects of repayment. Each loan is ing member governments on the design and made to a government or must be guaranteed implementation of policies, programs, and pro- by the government concerned. The use of cedures related to foreign investments; and loans cannot be restricted to purchases in any sponsors a dialogue between the international particular member country. And the IBRD's business community and host governments on decisions to lend must be based on economic investment issues. By June 30, 1992, the con- considerations alone. vention establishing MIGA had been signed by The International Development Association 115 countries; eighty-five countries had be- was established in 1960 to provide assistance come members of MIGA. for the same purposes as the IBRD, but pri- While the World Bank has traditionally fi- marily in the poorer developing countries and nanced all kinds of capital infrastructure, such on terms that would bear less heavily on their as roads and railways, telecommunications, balance of payments than would IBRD loans. and port and power facilities, the centerpiece IDA's assistance, therefore, is concentrated on of its development strategy emphasizes invest- The World Bank, the IFC, and MIGA 5 ments that can directly affect the well-being of for women, strengthen population-planning, the masses of poor people of developing coun- health, and nutrition services, and develop the tries by making them more productive and by private sector. The Bank's support of eco- integrating them as active partners in the de- nomic restructuring in many of its borrowing velopment process. member countries is based on the knowledge The Bank's efforts to reduce poverty cut that the precondition for restoring economic across sectoral lines and include investments growth-the cornerstone of successful devel- to improve education, ensure environmental opment and poverty reduction-is structural sustainability, expand economic opportunities adjustment. 6 Contents Letter of Transmittal 3 The World Bank, the IFC, and MIGA 4 Glossary 11 Overview of World Bank Activities in Fiscal 1992 15 Section One. The Executive Board 23 Oversight of Financial and Operating Programs 23 Operations Evaluation; Project Implementation and Supervision 24 Review of Policy Proposals 24 Development Committee 27 Committees of the Executive Directors 28 Joint Audit Committee 28 Committee on Cost Effectiveness and Budget Practices 29 Committee on Personnel Policy Issues 29 Committee on Directors' Administrative Matters 30 Ad Hoc Committee on Board Procedures 30 Executive Directors' Steering Committee 30 Section Two. The Economic Scene: A Global Perspective 31 Major Industrial Countries 32 Developing Countries 33 Progress of the Debt Strategy 36 Net Financial Flows and Access to Capital Markets 39 Primary-commodity Market Conditions 41 Trends in World Trade 42 The Environment 44 Section Three. The World Bank-Fiscal Year 1992 46 Implementing the Bank's Poverty-reduction Strategy 46 Poverty assessments 46 Country-specific strategies 47 Progress in improving data bases 49 Guiding Bank staff 49 Improving aid coordination 50 Human-resource Development 50 Education 50 Population, health, and nutrition 51 Women in development 53 The Environment 55 Private-sector Development 60 Debt and Adjustment 64 Section Four. World Bank Finances 70 IBRD Finances 70 Financial Policies 70 Contents 7 Loans 70 Disbursements 70 Lending rate 70 Loans in nonaccrual status 70 Provisioning 71 Liquid-assets Management 71 Borrowings and Liability Management 71 Medium-term and long-term (MLT) funding 71 Short-term funding 73 Capital 74 Reserves 74 IDA Finances 74 IDA's commitment authority 74 IDA's commitment fee 74 Negotiations on a tenth replenishment 75 Cofinancing 75 Disbursements, by Source of Supply 80 Section Five. World Bank Activities, IFC, MIGA, and ICSID 89 Operations Evaluation 89 Completion reports 89 Audits 89 Studies 89 Dissemination of findings 90 The Evaluation Capability Development Program 90 Other activities 90 Internal Auditing 90 Economic Development Institute 91 Training activities 91 Institution building 92 Training materials 92 Scholarship programs 92 Cofinancing 92 Research at the World Bank 93 Poverty reduction 93 Human-resource development 94 The environment 94 Natural resources 94 Macroeconomic issues and management 94 Infrastructure and urban development 95 Technical Assistance 95 Interagency Cooperation 97 Relations with nongovernmental organizations 98 Cooperation with the European Community and with the Organisation for Economic Co-operation and Development (OECD) 101 Cooperation with the regional development banks 101 Cooperation with the International Monetary Fund 102 Cooperation on agricultural research 102 Personnel and Administration 103 International Finance Corporation 105 Multilateral Investment Guarantee Agency 107 Guarantee program 107 Promotional and advisory services 108 Member relations 108 International Centre for Settlement of Investment Disputes 108 8 Contents Section Six. 1992 Regional Perspectives 111 Africa 111 Mixed Economic Performance 112 Special Program of Assistance 115 Reducing Poverty, Developing the Social Sectors 116 Population and health 116 Education 116 Poverty reduction 117 Poverty-conscious structural-adjustment programs 117 Social-action programs aimed at the poor during adjustment 117 Assistance to governments to increase their capacity to assess and monitor poverty 118 Work on food-security issues 118 Gender-responsive development 119 Bank Operations, Fiscal 1992 119 East Asia and Pacific 120 East Asia's Success: Private/Public Partnership 120 Prosperity Not Shared by All 122 Socialist Economies in Transition 124 Making Growth Sustainable 125 Partnership for Better Environment 126 Bank Operations, Fiscal 1992 127 South Asia 128 Regional Issues in Perspective 128 Selected Country Highlights 129 Bank Operations, Fiscal 1992 133 Europe and Central Asia 135 Transition to a Market Economy 135 Protecting the Vulnerable during Transition 138 Addressing Environmental Concerns 139 Reform Begins in the Former Soviet Union 139 Reform in Turkey 141 Graduation in Cyprus 142 Bank Operations, Fiscal 1992 142 Latin America and the Caribbean 143 Policy Adjustments during 1991-92 144 New Programs of Adjustment 146 Privatization and Entry 146 Activities of the Bank, Fiscal 1992 147 Cooperation and cofinancing 149 Middle East and North Africa 150 Recent Economic Developments 150 Long-term Development Challenges 153 World Bank Operations, Fiscal 1992 155 Section Seven. Summaries of Projects Approved for IBRD and IDA Assistance in Fiscal 1992 157 Financial Statements of the International Bank for Reconstruction and Development 197 Balance Sheets 198 Statements of Income 200 Statements of Changes in Retained Earnings 200 Statements of Changes in Cumulative Translation Adjustment 200 Statements of Cash Flows 201 Summary Statement of Loans 202 Summary Statement of Borrowings 205 Contents 9 Statement of Subscriptions to Capital Stock and Voting Power 207 Notes to Financial Statements 211 Report of Independent Accountants 217 Financial Statements of International Development Association, the Special Fund Administered by IDA, and the Debt Reduction Facility for IDA-Only Countries Administered by IDA 219 Statements of Development Resources 220 Statements of Changes in Accumulated Surplus and Grants 221 Statements of Cash Flows 221 Summary Statement of Development Credits 222 Statement of Voting Power, and Subscriptions and Contributions 225 Notes to Financial Statements 228 Report of Independent Accountants 232 IBRD/IDA Appendices 1 Governors and Alternates of the World Bank 234 2 Executive Directors and Alternates of the World Bank and Their Voting Power 237 3 Officers and Department Directors of the World Bank 239 4 Offices of the World Bank 242 5 Development Committee Communiqu6s, Fiscal 1992 248 Index 256 Text Tables Operational and Financial Overview, Fiscal 1988-92 17 World Bank Adjustment Operations, Fiscal 1992 20 1-1 Aid Coordination Group Meetings Chaired by the World Bank in Fiscal 1992 26 2-1 G-7 Countries: Output, Inflation, Investment, and Unemployment, 1981-91 32 2-2 Current-account Balances of the G-7 Countries, 1984-91 33 2-3 Low- and Middle-income Economies: Growth of GDP and GDP Per Capita, 1981-91 36 2-4 Low- and Middle-income Economies: Long-term Debt and Debt Service, Selected Years, 1986-91 38 2-5 Long-term Financial Flows to Low- and Middle-income Economies, 1982-91 40 2-6 Commodity Prices, 1984-91 41 2-7 Selected Trade-performance Indicators, 1965-91 43 3-1 Poverty Assessments, Completed and Scheduled 47 4-1 IBRD Borrowings, Fiscal Year 1992 72 4-2 IBRD Borrowings, after Swaps, Fiscal Year 1992 73 4-3 World Bank Cofinancing Operations, by Region, Fiscal Years 1991-92 76 4-4 IBRD and IDA Foreign and Local Disbursements, by Source of Supply 77 4-5 IBRD and IDA Foreign Disbursements, by Source of Supply 77 4-6 IBRD and IDA Payments to Suppliers in Active Borrowing Countries for Foreign and Local Procurement in Fiscal 1992 78 4-7 IBRD and IDA Payments to Supplying Countries for Foreign Procurement 81 4-8 IBRD and IDA Payments to Supplying Countries for Foreign Procurement, by Description of Goods, Fiscal 1992 84 4-9 IBRD and IDA Foreign Disbursements, by Description of Goods, Fiscal 1990-92 87 5-1 Distribution of EDI's Training Program and Participants, Fiscal 1992 91 5-2 Regional and Sectoral Patterns in World Bank-NGO Operational Collaboration, Fiscal 1974-92 99 5-3 NGO-associated Projects by Sector, Fiscal 1992 99 5-4 World Bank Budget by Expense Category and Work Program, Fiscal Years 1990-93 104 10 Contents 6-1 Africa: 1990 Population and Per Capita GNP of Countries that Borrowed during Fiscal Years 1990-92 111 6-2 Lending to Borrowers in Africa, by Sector, Fiscal Years 1983-92 112 6-3 Net Transfers to Africa 117 6-4 East Asia and Pacific: 1990 Population and Per Capita GNP of Countries that Borrowed during Fiscal Years 1990-92 120 6-5 Lending to Borrowers in East Asia and Pacific, by Sector, Fiscal Years 1983-92 122 6-6 Net Transfers to East Asia and Pacific 126 6-7 South Asia: 1990 Population and Per Capita GNP of Countries that Borrowed during Fiscal Years 1990-92 128 6-8 Lending to Borrowers in South Asia, by Sector, Fiscal Years 1983-92 130 6-9 Net Transfers to South Asia 132 6-10 Europe and Central Asia: 1990 Population and Per Capita GNP of Countries that Borrowed during Fiscal Years 1990-92 135 6-11 Lending to Borrowers in Europe and Central Asia, by Sector, Fiscal Years 1983-92 136 6-12 Net Transfers to Europe and Central Asia 141 6-13 Latin America and the Caribbean: 1990 Population and Per Capita GNP of Countries that Borrowed during Fiscal Years 1990-92 143 6-14 Lending to Borrowers in Latin America and the Caribbean, by Sector, Fiscal Years 1983-92 144 6-15 Net Transfers to Latin America and the Caribbean 149 6-16 Middle East and North Africa: 1990 Population and Per Capita GNP of Countries that Borrowed during Fiscal Years 1990-92 150 6-17 Lending to Borrowers in Middle East and North Africa, by Sector, Fiscal Years 1983-92 152 6-18 Human-resource Indicators, Middle East and North Africa, 1970-90 154 6-19 Water Scarcity in Selected Middle East and North African Countries 155 6-20 Net Transfers to Middle East and North Africa 156 7-1 Projects Approved for IBRD and IDA Assistance in Fiscal Year 1992, by Region 176 7-2 Projects Approved for IBRD and IDA Assistance in Fiscal Year 1992, by Sector 178 7-3 Statement of IBRD Loans Approved during Fiscal Year 1992 184 7-4 Statement of IDA Credits Approved during Fiscal Year 1992 188 7-5 Trends in Lending, IBRD and IDA, Fiscal Years 1990-92 193 7-6 IBRD and IDA Cumulative Lending Operations, by Major Purpose and Region, June 30, 1992 194 Boxes The Challenge of Transition 16 3-1 Commitments to Social-sector and Environmental Lending 51 3-2 World Bank Activities on AIDS 53 3-3 Forestry Policy 57 3-4 Policies Guiding Financial-sector Operations 63 3-5 Checklist of Recommendations for Privatizing Governments 65 6-1 AGETIP-A Promising New Weapon in the Fight against Poverty 118 6-2 Pacific Island Member Countries 123 6-3 New Dimensions in Regional Integration 148 Text Figures IBRD and IDA Lending to the Poorest Countries, Fiscal 1983-92 19 2-1 Nominal Six-month LIBOR Rates, 1984-91 34 2-2 Real Six-month LIBOR Rates, 1984-91 34 6-1 Growth in East Asia and Pacific, 1980-91 121 11 Glossary CFA zone The CFA zone refers to the two committee currently consists of twenty-two groups of western and central African coun- members, generally Ministers of Finance, ap- tries whose (separate and different) currencies pointed for periods of two years by one of the are called by the same name-the CFA franc countries or a group of countries that desig- (CFAF). The CFAF in both groups is freely nates a member of the Bank's or the Interna- convertible with the French franc, at the same tional Monetary Fund's board of executive fixed parity. Two subregional central banks are directors. The committee is required to advise responsible for international payments and do- and report to the boards of governors of the mestic monetary and credit policy for their two institutions on all aspects of the broad respective members. The members of the Cen- question of the transfer of real resources to tral Bank of Western African States (BCEAO) developing countries and to make suggestions are Benin, Burkina Faso, C6te d'lvoire, Mali, for their implementation. Niger, Senegal, and Togo; these countries comprise the West African Monetary Union. (ESAF) The objectives, The members of the Bank of Central African procedural features of the ESAF parallel those States (BEAC) are Cameroon, Central African of the IMF's structural-adjustment facility Republic, Chad, Congo, Equatorial Guinea, (SAP), established in March 1986 to provide and Gabon. International payments for both balance-of-payments assistance on conces- groups are conducted in the Paris foreign- sional terms to low-income developing coun- exchange market, while international reserves tries The ESAF was established in December are kept with, and temporary balance-of- 1987 and is financed from SAF resources and payments financing is provided by, the two grant contributions. Differences between the central banks' Operations Accounts with the SAP and the ESAF relate largely to the mon- French Treasury. itoring and the strength of the programs and Committee of the Whole The Committee of the access to, and funding of, the facilities. Adjust- Whole is a committee made up of all executive ment measures supported by the ESAF are directors; it has traditionally served as a forum expected to be particularly ambitious, with in which preliminary discussion of issues takes a view to fostering growth and achieving a place before they are taken up by the executive substantial strengthening of the balance-of- board. It is also the forum in which the exec- payments position within a three-year period. utive directors act as a preparatory body for Euromarket A general term for the interna- the work of the Development Committee. tional capital markets for offshore transactions Currency swaps Currency swaps are used by that encompass various instruments such as the Bank as a liability-management tool and Eurobonds, Eurocredits, and Euro-interbank essentially involve an exchange of a stream of deposits. principal and interest payments in one cur- European Monetary System An arrangement, rency for a stream in another currency. The introduced in March 1979, for economic and Bank uses currency swaps to obtain borrow- monetary cooperation among the member na- ings in the ultimately desired "target" cur- tions of the European Community. Its most rency at below cost of a market borrowing in prominent feature is the Exchange-Rate Mech- that currency. anism for the stabilization of participating Development Committee This committee is member countries' exchange rates within pre- known formally as the Joint Ministerial Com- determined bands. mittee of the Boards of Governors of the World Foreign Investment Advisory Service (FIAS) Bank and the International Monetary Fund on The FIAS was established in 1986 by the the Transfer of Real Resources to Developing International Finance Corporation. It is now Countries. Established in October 1974, the jointly operated by the IPC, the Multilateral 12 GLossary Investment Guarantee Agency, and the World final decision. The IDA deputies meet as often Bank. The FIAS advises developing countries, as necessary to discuss IDA replenishments at the request of their governments, on how to and related matters. attract productive foreign direct investment. Interim Committee This committee, known After studying the investment climate in a formally as the Interim Committee of the country, the FIAS helps officials or agencies Boards of Governors on the International responsible for foreign investment define their Monetary System, was established in October objectives and develop the policies, regula- 1974 to advise the board of governors of the tions, and institutions needed to encourage International Monetary Fund (IMF) on super- foreign direct investment that will be beneficial vising the management and adaptation of the to the country. The FIAS also conducts re- international monetary system, as well as deal- search on issues raised in the course of its ing with disturbances that might threaten the advisory work and organizes seminars and system. The committee, whose members are conferences that bring together officials, for- governors of the IMF, government ministers, eign investors, and experts to discuss issues or others of comparable rank, reflects the related to foreign investment. composition of the IMF's executive board: G-5 countries France, Germany, Japan, the Each member country that appoints, and each United Kingdom, and the United States. group that elects, an executive director ap- G-7 countries Canada, France, Germany, It- points a member of the committee, which aly, Japan, the United Kingdom, and the currently has twenty-two members. United States. Leasing legislation Leasing is a form of capi- G-24 The inner circle of the Group of 77 tal-investment financing used primarily for (G-77) that conducts many negotiations on capital equipment, involving a contractual behalf of developing countries at the United agreement between two major parties: the Nations. The G-77 is the group of developing owner and the user of the equipment. Varia- countries at the U.N. that attended the first tions in the contract may allow the user, or meeting of the United Nations Conference on lessee, to acquire ownership of the equipment Trade and Development in 1964. The G-24 is from the initial owner, or lessor. Leasing can not to be confused with the G-24 countries, be an attractive alternative source of equip- which is what some call the members of the ment financing because of the flexibility of the Organisation for Economic Co-operation and lease contract. Leasing legislation involves the Development (OECD). regulations and laws governing the leasing in- Global Programme on AIDS (GPA) The GPA dustry. was begun in 1987 under sponsorship of the Living Standards Measurement Study (LSMS) World Health Organization to coordinate re- The LSMS was established by the Bank in search, develop tools, and implement strate- 1980 to explore ways of improving the type and gies to control AIDS. In fiscal 1989, the pro- quality of household data collected by statisti- gram received a special grant of $1 million from cal offices in developing countries. Its goal is the Bank to support operational research. The to sponsor increased use of household data as Bank has since continued its support at the a basis for policymaking. Specifically, the same level. LSMS is working to develop new methods to monitor progress in raising living standards, to Golden shares The term comes from the Brit- identify the consequences for households of ish privatization experience and refers to a past and proposed government policies, and to stipulation, in a general privatization law or in improve communications between survey stat- a particular sales agreement, that the govern- isticians, analysts, and policymakers. ment retains one nonvoting share that gives it the power to reject subsequent sale or major Low-income countries Are those countries capital or physical restructuring of the firm. with a GNP per capita of $610 or less as of 1990. IDA deputies Representatives of IDA donor countries at the negotiations on replenishments Middle-income countries Are those countries of IDA funds. Each of IDA's donor countries with a GNP per capita of more than $610 but appoints a deputy, who is usually a top-level less than $7,620 as of 1990. civil servant from the country's Ministry of Montreal Protocol The Montreal Protocol on Finance, Foreign Affairs, or from its bilateral Substances that Deplete the Ozone Layer (a aid agency. The replenishment agreements ne- protocol to the Vienna Convention of 1985), gotiated among the deputies are presented to adopted in 1987, calls for a 50 percent reduc- the executive directors of IDA, who, in turn, tion in the consumption of chemicals that de- submit a report to the board of governors for plete the Earth's ozone layer by the year 1999. Glossary 13 In June 1990, environment ministers from Rights-accumulation program This program of ninety-three countries agreed at a meeting in the International Monetary Fund (IMF) per- London to phase out both the production and mits a member country with protracted arrears use of chlorofluorocarbons (CFCs) and several to the IMF to establish a track record of other chlorine-based and bromine-based chem- performance related to policy implementation icals by the end of the century. and payments. Members can earn rights Negative-pledge clause Negative-pledge clauses toward future financing from the IMF through are concerned with the granting of security the implementation of a comprehensive eco- interests by a borrower over its assets to its nomic program with macroeconomic and creditors. By the terms of such a clause, the structural-policy standards associated with borrower agrees with a creditor or group of programs supported by extended and en- creditors to restrictions on its granting, or hanced structural-adjustment facilities. En- otherwise permitting to exist, security interests cashment of accumulated rights can take place in favor of other creditors. Negative-pledge after clearance of arrears. The Bank adopted a clauses are usually standard in Bank loan doc- similar program in fiscal 1991. Under the uments. They may be waived on a case-by- Bank's program, a country in arrears can es- case basis, however. tablish a track record on adjustment measures over a preclearance performance period Nonsovereign borrower All borrowers other (which may last several years). During the than governments. Even institutions in the period, the Bank would develop and process public sector that borrow with government loans, but would not sign them, make them guarantees of repayment are nonsovereign bor- effective, or disburse any funds against them. rowers. After the performance period is over, and Paris Club The Paris Club is the name given to following clearance of arrears, the country the ad hoc meetings of creditor governments would receive disbursements on loans ap- that, since 1956, have arranged, when neces- proved during the performance period, as well sary, for the renegotiation of debt owed to as on loans that had been suspended. official creditors or guaranteed by them. (Debts to commercial banks are renegotiated ferences) were developed by the United Na- with committees of the banks involved.) The tions Development Programme (which also World Bank is not a member of the Paris Club. chairs them) to act rather like consultative- Policy-framework paper (PFP) A policy- group meetings for the least-developed coun- framework paper is a three-year comprehen- tries in particular. The aim is to bring together sive report prepared by national authorities all the parties involved in technical cooper- with the assistance of the staffs of the Bank ation with a particular country. As in the case and the IMF. It identifies the sources of a of consultative-group meetings, the objective country's problems, describes the proposed is to harmonize the activities of different do- remedies, and provides estimates of the asso- nors and implementing agencies and to ascer- ciated financing requirements and the role of tam what funds are available. the major aid agencies. Social-action programs Social-action pro- Project Preparation Facility (PPF) The PPF grams and social funds consist of multisectoral was created in 1975 by the Bank to help operations that mobilize several sources of overcome weaknesses in borrowers' capacity financing to fund special interventions and to complete project preparation and to support targeted projects seeking to alleviate the social the entities responsible for preparing or carry- costs of adjustment, as well as poverty in ing out the projects. Under the facility, the general. The project components that typically Bank can advance up to $1.5 million per proj- get financed include public works, severance ect either to meet gaps in project preparation payments, retraining, and schemes in nutri- or to assist in institutional strengthening so that tion, primary health, and primary education. project implementation can begin before the While the objectives and project content of loan or credit becomes effective. social-action programs and social funds are Punta del Este Declaration The declaration similar, they differ in their institutional set-up. adopted by ministers of the GATT member Social funds finance small, demand-driven countries at their meeting of September 15-20, subprojects and often bypass existing bureau- 1986, in Punta del Este, Uruguay, on the cratic systems and procedures; funding com- occasion of the special session of the GATT mitments are often based on the evaluation of contracting parties. The declaration officially project proposals prepared according to prede- launched the latest round of multilateral trade termined selection criteria. Social-action pro- negotiations, known as the Uruguay Round. gram subprojects are typically appraised by 14 Glossary the World Bank. Whereas social funds are G-5 countries (France, Germany, Japan, the most often parastatal quasi-financial institu- United Kingdom, and the United States). On tions, social-action programs generally cover a June 30, 1992, one SDR was worth $1.43117. A broader array of institutional arrangements, total of SDR21.4 billion had been issued by the such as quasi-autonomous project units or in- Fund as of June 30, 1992. tegration into sectoral ministries. Technical Cooperation Agreement The agree- Social Dimensions of Adjustment (SDA) pro- ment, approved in October 1991, between the gram This program, launched in 1987 as a Union of Soviet Socialist Republics and the joint undertaking of the World Bank, the Afri- Bank, the IFC, and MIGA provided the frame- can Development Bank, and the United work for technical cooperation between the Nations Development Programme, has the ob- Bank Group and the Soviet Union and its jective of helping African governments incor- republics during the transitional period prior to porate social concerns into their economic- membership. Technical cooperation, provided reform programs and long-term development on a grant basis, was funded by a plans. The SDA program provides assistance $30 million transfer from the IBRD's fiscal at both regional and country levels in four 1991 net income. Only Belarus, Kazakhstan, areas: improving management of macroeco- Kyrghyzstan, and the Russian Federation nomic and sectoral policy, formulating social- signed technical cooperation agreements. action programs for poor and vulnerable There are no commitments under the program groups, strengthening national statistical serv- beyond fiscal 1992. ices for better policy and program design, and Toronto terms Toronto terms refer to a menu building up institutional capacity. Thirty Afri- of options that can be chosen to reduce official can countries are now taking part in the pro- debt in low-income, debt-distressed countries. gram. The terms, agreed upon in September 1988 Social fund (See social-action programs.) (following agreement in principle at the eco- SPA-eligible country Country eligibility in the nomic summit held in Toronto three months Special Program of Assistance (SPA) is deter- earlier), include reduced interest, very long mined on the basis of poverty (countries can- grace and repayment periods (at commercial not be eligible for IBRD loans), indebtedness rates), or partial write-offs of debt-service oh- (countries have to have projected debt-service ligations during the consolidation period (with ratios of 30 percent or more in the Special the rest rescheduled at commercial rates and Program of Assistance (SPA)), and efforts to shorter maturities), or a combination of these adjust (countries have to be currently imple- options. menting a policy-reform program that is en- Trinidad terms Trinidad terms represent a dorsed and normally supported by the Bank deepening (over Toronto terms) of concession- and the International Monetary Fund, and ality in existing debt-relief measures. The pro- agreement has to be reached on a policy- posal by John Major. then United Kingdom framework paper). Chancellor of the Exchequer, at the Common- Special drawing rights (SDRs) The special wealth Finance Ministers' Conference in Sep- drawing right is a reserve asset created in 1968 tember 1990, would reduce the stock of out- by the International Monetary Fund for use by standing debt owed to Paris Club creditors by its members and certain prescribed institu- two thirds. An important aspect of the pro- tions, among which are multilateral develop- posed terms is that they would apply to the ment banks and the Bank for International entire stock of eligible debt rather than to the Settlements. Its value is calculated daily by maturities falling due within a near-term con- using a weighted basket of the currencies of the solidation period. 15 Overview of World Bank Activities in Fiscal 1992 In fiscal 1992, the World Bank moved closer a consensus is emerging on the priority devel- to the realization of a dream shared forty-eight opment objectives for the 1990s. They are the years ago by the participants in the June 1944 achievement of sustainable economic growth Bretton Woods Conference-of an institution and the reduction of poverty; actions to protect that would promote the economic development the environment are seen as being essential to of the unified family of nations-when the the achievement of both objectives. Bank's governors approved resolutions that There is also a growing convergence of provided for membership in the institution of views on approaches as well as objectives: all fifteen of the Soviet Union's former repub- greater reliance on markets and a strong, but lics. Their action was an important step in more limited role for government, particularly making the vision of Bretton Woods a reality. focused on the policy framework and on envi- The efforts of the fifteen republics to transform ronmental and social responsibilities. their societies and economies have many risks. In recent years, the World Bank has articu- Their success or failure will have important lated its strategies for reducing poverty, pro- consequences for the entire world. Yet, the moting private-sector development, and con- resources at their disposal are few. The time tributing to the global effort to safeguard the they have is short. There is an urgency in environment. These strategies shaped the bringing all possible assistance to bear on this Bank's activities during the past year and are historic undertaking. expected to continue to do so in the years The dissolution of the former Soviet Union ahead. into independent, sovereign states and the The Bank is now placing greater attention on progress towards peace in several of the concrete issues of implementation: How can Bank's regions have led to a sharp expansion accelerated growth, poverty reduction, and in the demand for Bank services (see accom- environmental strategies best be applied in panying box). Membership in the Bank of specific country programs? How can these Latvia, Lithuania, and eleven other republics objectives and strategies best be integrated of the former Soviet Union-an occurrence into policies and investments in particular sec- that is likely to take place before the end of tors? In the different situations of individual calendar year 1992-would bring Bank mem- countries, how should practical complementar- bership to 173. Bank membership applications ity between private-sector activity and public- submitted by Bosnia-Herzegovina, Croatia, sector intervention he achieved? The emphasis and Slovenia are also under consideration. is thus on pursuing these strategies across all Eight borrowing countries that joined the relevant programs, rather than through nar- Bank during the fiscal 1991-92 period-Alba- rowly focused special programs. Country cir- nia, Bulgaria, Czechoslovakia, Estonia, Mar- cumstances dictate the particular sectoral dis- shall Islands, Mongolia, Namibia, and the tribution of lending and the private/public Russian Federation-are in a start-up phase, sector mix that are the most effective in reduc- which requires incremental resources, particu- ing poverty. This means that-with a few oh- larly for the preparation of lending activities vious exceptions, such as recent increased and economic and sector work. Lending financing for human-resource development programs-in El Salvador, Iran, Nicaragua, and the environment-the pursuit of these oh- Panama, Paraguay, Peru, Romania, Sierra jectives and strategies does not neatly translate Leone, and Zambia-have been reactivated. into trends for lending to individual sectors. The potential also exists for resumption of The Bank's most recent annual report on its lending in the near future to Afghanistan, Gua- portfolio of operations under implementation, temala, Lebanon, South Africa, and Viet Nam, covering fiscal 1991, confirmed that the port- and for initial lending to Cambodia. folio continues to be well oriented toward the The increased demand for the Bank's lend- Bank's primary missions: poverty reduction, ing and advisory services comes at a time when sustainable growth, and an active response to 16 Overview of World Bank Activities in Fiscal 1992 The Challenge of Transition Fifteen new countries have come into being in forts for all republics so that the Bank may begin place of the former Soviet Union. All are ex- lending for reform programs as soon as condi- pected to become members of the Bank in 1992. tions permit. The simultaneous creation of new political and Progress was made in all areas. Implementa- economic systems in countries once dependent tion of the technical-assistance program is well upon a powerful center is posing wrenching prob- advanced. Economic reports are being prepared lems of transition for the authorities. Preparing for nine countries and should be completed for all programs for fifteen new members in such urgent fifteen in fiscal 1993. Preparatory work is also need of help is an equally unprecedented task for under way to initiate lending operations in sev- the Bank. eral new members later in 1992. For the authorities, the task of transition is During fiscal 1992, the Bank assisted the coun- complicated by the disintegration of the old order tries with some of the critical tasks in the transi- and the weakness of public institutions in creat- tion and began to identify some of the major ing a new one. Stabilization programs must be elements of Bank assistance strategies. These designed and implemented even as central banks will be developed for each country and comple- and new systems of taxation are put into place. mented with an assessment of financing needs. Institutions to design and implement fiscal policy The general elements include (a) key aspects of are new and must deal with the absence of systemic reform, especially trade and price liber- large transfers that occurred within the former alization, private-sector development, and priva- Soviet Union. The few privatization agencies that tization; (b) sector-specific reforms, covering in exist are mostly understaffed and must cope with particular the financial, food, energy, transport, privatization programs of an unprecedented and housing sectors; (c) improvements in policies scale. However, the pressure for reform is great: and programs related to social safety nets; and (d) Production disruptions could lead to a further fall human-resource development, including training in output in 1992 in excess of 10 percent. The and institutional development. need for international assistance is thus large and To develop these programs, the Bank has in- immediate. tiated a rapid build-up of the requisite staff, after With special funding approved by the execu- drawing up rules of redeployment to ensure the tive board, the Bank undertook three stages of continued quality of other Bank programs. All of activities in fiscal 1992 to help ease the transition the internal redeployment was completed by the by the republics of the former Soviet Union to end of the fiscal year; most of the external market-oriented economies: recruitment is expected to have been completed * the design, launching, and implementation of before the end of 1992. To serve better the needs a $30 million program of technical assistance for of the anticipated members, four new Country the four states that signed the Technical Cooper- Operations Divisions were created as of April 1, ation Agreement (Russian Federation, Belarus, 1992. However, more decentralization will not Kazakhstan, and Kyrghyzstan); diminish communication among staff: Manage- * the completion of reconnaissance work in ment will ensure that the insights and experiences the other eleven states and the acceleration of from each country are quickly shared and readily membership activities in all fifteen; and applied. * the design of economic and sector work programs and intensive development-training ef- environmental concerns. In particular, poverty tions. The main constraints on ttmely and reduction, including human-resource develop- effective implementation continued to be mnad- ment, was a primary objective for about 20 equate country macroeconomic policies and percent of the portfolio under implementation strategies, frequently resulting in insufficient in terms of commitments ($13.8 billion in 307 financial-resource allocation to projects. Coun- projects). Environmental concerns were also tries that sustained their commitments to struc- addressed in an increasing number of opera- tural and economic reforms improved their tions. About 80 percent of the portfolio was implementation performance significantly. judged to be performing satisfactorily, despite The effective implementation of the Bank's the difficult global and domestic macroeco- portfolio is vital to the growth prospects of the nomic environments for implementation. How- institution's borrowing countries. The advice ever, among projects in their fourth and fifth the Bank provides through the supervision of year of implementation, 30 percent had major its operations is one of the most important problems in all regions except Asia. This dete- forms of development assistance it offers. Suc- rioration was largely driven by the Africa port- cessful implementation of approved operations folio, which reflected difficult country situa- is as important as new annual commitments as Overview of World Bank Activities in Fiscal 1992 17 Operational and Financial Overview, Fiscal 1988-92 (millions of US dollars unless otherwise noted) Item 1988 1989 1990 1991 1992 IBRD Commitmentsa 14,762 16,433 15,180 16,392 15,156 Gross disbursementsa 11,636 11,310 13,859 11,431 11,666 Net disbursementsa 3.428 1.921 5.717 2.090 1.818 Ne,% mediumi to lne-icrm nw ndicat of th Bank devl n e 14e-i incomc~ I II!IN'4 I*-'1. IJ'-44 I t, rc d r 41 h3 i-.-S 1f.h2 I~J 2I 1 4s Sc.iitur lend ing hie 1i1 4- b y .4 ke% raevit Salendar hiyear 1 992 lntemt wcrae e r o.n li of the Lbquid rrao pervnr is the 4rn i Bank se,tff.n theannulrpron mlmna tomioadiunip e.4ri 4 sin o .td h. Ba'n r sor ce aIot to supervision I re gi ons aNi johmot4e tors, ha411d i a-.2s 4 s4 i4.4gi cantl. Neerhles it added som concerns. an indicator of the Bank's development effec- oration in portfolio performance and to mini- tiveness. The priority ofthis area ofthe Bank's mize future risk that projects will not achieve activity was underscored during the year by their original objectives. the appointment of a high-level task force to The Bank is also striving to ensure that the review and make recommendations for im- unfinished agenda of the 1980s is carried proving the institution's portfolio-management through, where appropriate, while the prior- and evaluation process. The task force's report ities for the 1990s are being addressed. In some is scheduled to be completed by the end of instances, the complementarities are obvious: calendar year 1992. Female education, for example, promotes the Implementation is the responsibility of the interests of women in development and en- borrower; supervision is the responsibility of hances human development more broadly. In Bank staff. The annual report on implementa- other instances, the links and tradeoffs are tion and supervision noted that Bank re- more complex and cannot be resolved except sources allocated to supervision in all regions in concrete country programs. and to most sectors had increased signifi- The number and complexity of objectives cantly. Nevertheless, it added, some concerns and policies that are crucial to development remained about (a) the adequacy of supervi- pose new challenges in the design and imple- sion resources, in particular for such sectors as mentation of programs. They are also far more population, health, and nutrition, as well as demanding on Bank resources and staff. De- for projects with environmental impacts, signing a country strategy for agriculture, for where lending has expanded very rapidly and example, is now much more complex and must the ratio of consultants over staff resources has go beyond "traditional" technical and eco- increased: and (b) the adequacy of technical nomic concerns to focus on strengthening the skill inputs. Other areas of concern include roles of the private sector and women, protect- the supervision of complex projects (such as ing the environment, enhancing agriculture's sector-investment loans and loans that com- role in combating poverty within and beyond bine policy and investment components) and the sector, and addressing links to trade and the management of trust-funded and local con- other economywide policies. sultants for supervision. These issues are to be In fiscal 1992, the Bank's longstanding com- reviewed further as part of the fiscal 1992-93 mitment to the reduction of poverty was rein- implementation and supervision action plan, forced when its president, Lewis . PreSton, which is intended to forestall a further deteri- stated that sustainable poverty reduction was 18 Overview of World Bank Activities in Fiscal 1992 the "overarching objective" of the institution. agreed that the GEF should be available as the That statement formed part of the preface to funding mechanism for the conventions on the Bank's Poverty Reduction Handbook, climate change and biodiversity. In subsequent which surveys Bank experience in poverty- negotiations, governments designated the GEF reduction activities and provides guidance to for now as the financial mechanism for both Bank operational task managers about "good- conventions, which were signed by more than practice" operational approaches. In addition 150 countries at UNCED in June 1992. A final to the Handbook, an operational directive on decision will be made by the respective con- poverty reduction, which summarizes Bank ferences of the parties once the conventions procedures and guidelines for operations in have been ratified by the requisite number of poverty reduction, was issued. The handbook countries and have entered into force. and the directive both benefited from a far- The Bank's executive directors also gave ranging review and discussion by members of their approval during the year to a continuation the executive board. of the institution's ability to finance debt- During the year, the Bank published World reduction and debt-service reduction (DDSR) Development Report 1992, its intellectual con- operations. The DDSR program enables the tribution to the June 1992 United Nations Bank to extend financing and/or negative- Conference on Environment and Development pledge waivers for operations that lead to a (UNCED). That report, which explored the reduction in member countries' debt or debt- links between economic development and the service obligations to their commercial-bank environment, concluded that continued, even creditors. A waiver of its negative-pledge accelerated, economic and human develop- clause to Nigeria was the only debt-service ment is sustainable and can be consistent with operation mounted by the Bank in fiscal 1992. improving environmental conditions-if major The directors also agreed to extend the op- policy, program, and institutional shifts, ac- erations of the Debt Reduction Facility for companied by adequate financing, take place. IDA-only Countries, a mechanism established World Development Report 1992 called for in 1990 to ease the burden of commercial accelerating programs for reducing poverty, external debt owed by the poorest developing removing distortions that encourage wasteful countries. A total of seventeen severely in- use of energy and natural resources, clarifying debted, low-income countries have expressed property rights to encourage people and com- an interest in gaining access to the resources of munities to manage resources better, and ex- the Debt Reduction Facility for IDA-only panding programs for education (especially for Countries. Two debt-reduction operations, in girls), family-planning services, sanitation and Mozambique and Niger, have been completed, clean water, and agricultural extension, credit, and it is expected that three others, for Bolivia, and research. The report described targeted Guyana, and Uganda, will be brought to the measures that can bring dramatic improve- executive directors for their approval by the ments in environmental quality at modest cost end of calendar year 1992. in investment and economic efficiency. To Work began in fiscal 1992 on the preparation implement them, the study says, will require of private-sector assessments. Preparation of overcoming the power of vested interests, assessments was one of a series of specific building strong institutions, improving knowl- actions agreed upon in fiscal 1991 to reinforce edge, encouraging more participatory decision- implementation of the Bank's private-sector making, and building a partnership of effort development action plan (the others included between industrial and developing countries. enhanced cooperation among members of the Progress continued in integrating environ- Bank Group and expansion of research on mental concerns into the Bank's operations: private-sector development issues). Assess- Almost 30 percent of projects approved in ments contribute to the formulation of proac- fiscal 1992 were either freestanding environ- tive Bank Group private-sector development mental projects or had some environmental strategies as part of overall country-assistance components. Agreement was also reached dur- strategies and provide a basis for the Bank's ing the year on the principles for a restructur- country-policy dialogue. They identify priority ing of the Global Environment Facility (GEF), policy reforms and actions critical for private- which was set up in 1990 to help developing sector development. The first twenty assess- countries solve global environmental prob- ments are scheduled to be completed by the lems. The principles provide for the goal of end of fiscal 1993. universal membership in the GEF, broader and Total commitments by the World Bank dur- more equitable representation, and greater ing fiscal 1992 amounted to $21,705.7 million: transparency and accountability in the facili- $15,156.0 million from the IBRD and $6,549.7 ty's operations. Participating governments also million from IDA. Commitments by the IBRD Overview of World Bank Activities in Fiscal 1992 19 IBRD and IDA Lending to the Poorest Countries. Fiscal 1983-92 USS millionsi 11 83-8R 198n1n annual average Total 1) 10-8 2 Totlt 11.874 6 1990 1991 1Cl42 Total 9 097.2 Total 10.329 0 Total 9.896.0 ,'j,iTh I :c.: I --.iu~ I i e"~ r .hTh -. r r .: _p *2 r in.m,, 1 ti 1) ir n were off $1,236 million from the fiscal 1991 billion in commitments to that region in fiscal total. IDA lending increased by $256 million. 1991 temporarily depleted the Bank's pipeline The reduction in IBRD lending resulted from of operations. The shortfall in the Middle East shortfalls in commitments in the South Asia, and North Africa region was the result of the Europe and Central Asia, and Middle East and deferral of two large planned operations, in North Africa regions. Commitments to the Algeria and Egypt. South Asia region were delayed because of the World Bank assistance to the poorest coun- need of the governments of India and Pakistan tries-those with a per capita gross national to forge a consensus on elements of their product of $610 or less-totaled $9,896 million: reform programs. Lending to countries in Cen- $4,662 million from the IBRD and $5,234 mil- tral and Eastern Europe decreased as a result lion from IDA (see accompanying figure). of the advancing, to June 1991 (fiscal 1991), of Adjustment lending amounted to $5,847 mil- five projects whose commitments totaled more lion, or 27 percent of commitments (see table than $1 billion. The record delivery of $3.9 on adjustment lending); in fiscal 1991, lending 20 Overview of World Bank Activities in Fiscal 1992 World Bank Adjustment Operations, Fiscal 1992 (millions of US dollars) World Bank financing Country Project IBRD IDA Total Sector-adjustment loans Argentina Public-sector reform 325.0 - 325.0 Bangladesh Financial-sector adjustment (supplement) - 2.9 2.9 Burkina Faso Agriculture-sector adjustment - 28.0 28.0 C6te d'Ivoire Financial-sector adjustment 150.0 50.0 200.0 C6te d'Ivoire Human-resources adjustment 125.0 25.0 150.0 C6te d'Ivoire Regulatory reform 75.0 25.0 100.0 Ghana Financial-sector adjustment - 100.0 100.0 Ghana Agriculture-sector adjustment - 80.0 80.0 Honduras Energy-sector adjustment - 50.6 50.6 Honduras Energy-sector adjustment (supplement) - 31.5 31.5 Hungary Enterprise restructuring/privatization 200.0 - 200.0 India Oil and gas sector development 150.0 - 150.0 Kenya Education-sector adjustment - 100.0 100.0 Kenya Export development (supplement) - 49.2 49.2 Madagascar Public-sector adjustment (supplement) - 1.3 1.3 Malawi Agriculture-sector adjustment (supplement) - 5.2 5.2 Mauritania Public-enterprise sector adjustment (supplement) - 2.5 2.5 Peru Trade-policy loan 300.0 - 300.0 Peru Financial-sector reform 400.0 - 400.0 Tanzania Financial-sector adjustment - 200.0 200.0 Tanzania Agriculture-sector adjustment (supplement) - 11.3 11.3 Zambia Privatization/industrial reform - 200.0 200.0 Total 1,725.0 962.5 2,687.5 Structural-adjustment loans Bangladesh Public-resource management adjustment - 150.0 150.0 Bolivia Structural adjustment - 40.0 40.0 Bolivia Structural adjustment (supplement) - 10.4 10.4 Bulgaria Structural adjustment I 250.0 - 250.0 Burundi Structural adjustment III - 30.0 30.0 Ghana Private investment (supplement) - 6.1 6.1 Guyana Structural adjustment II (supplement) - 3.1 3.1 India Structural adjustment I 250.0 250.0 500.0 Lao P.D.R. Structural adjustment II - 40.0 40.0 Malawi Entrepreneurship development and drought recovery - 120.0 120.0 Morocco Structural adjustment II 275.0 - 275.0 Mozambique Economic recovery - 180.0 180.0 Nicaragua Economic recovery - 110.0 110.0 Nicaragua Economic recovery (supplement) - 10.3 10.3 Panama Economic recovery 120.0 - 120.0 Peru Structural adjustment I 300.0 - 300.0 Romania Structural adjustment I 400.0 - 400.0 Senegal Structural adjustment IV (supplement) - 4.7 4.7 Sierra Leone Import support - 43.1 43.1 Sierra Leone iir.nIruenon p imn. upplrnnri - 0.3 0.3 Sri Lanka L-..non. r-IrlMurinc I'uppl1knij - 5.2 5.2 Tunisia Ec...m. nd nan ,ll-ref,irm upp..rn 250.0 - 250.0 Uganda F.con.-,m. r ri 11r-urpln1Li - 1.6 1.6 Uganda Structural adjustment I - 125.0 125.0 Zambia Economic recovery (supplement) - 10.0 10.0 Zimbabwe Structural adjustment I 125.0 50.0 175.0 Total 1,970.0 1,189.8 3,159.8 Grand total 3,695.0 2,152.3 5,847.3 - Zero. Overview of World Bank Activities in Fiscal 1992 21 for adjustment-excluding $215 million pro- on membership in the IBRD for Armenia, vided for debt and debt-service reduction sup- the Azerbaijan Republic, Belarus, Bosnia- port-was $5,671.4 million. Herzegovina, Croatia, Georgia, Kazakhstan, Net disbursements from the IBRD to mem- Kyrghyzstan, Latvia, Lithuania, Micronesia, ber countries totaled $1,818 million, down by Moldova, Slovenia, Tadjikistan, Turkmeni- $272 million from the fiscal 1991 total. IDA's stan, Ukraine. and Uzbekistan. net disbursements were up $167 million, to Albania became a member of IDA on Octo- $4,441 million. ber 15, 1991, Switzerland became a member on The IBRD borrowed the equivalent of $11.8 May 29, 1992, and the Russian Federation billion in the world's financial markets. Net became a member on June 16, 1992, bringing income was $1,645 million. total membership in the association to 142. Albania joined the IBRD on October 15, At the end of the fiscal year, action was 1991, Marshall Islands joined on May 21, 1992, pending on membership in IDA for Armenia, Switzerland joined on May 29, 1992, the Georgia, Kazakhstan, Kyrghyzstan, Latvia, Russian Federation joined on June 16, 1992, Micronesia, Moldova, Namibia, Portugal, Sl- and Estonia joined on June 23, 1992, bringing venia, Tadjikistan, Turkmenistan, Ukraine, the total membership in the IBRD to 160. At and Uzbekistan. the end of the fiscal year, action was pending 22 Overview of World Bank Activities in Fiscal 1992 lir_ lik ønbr- l \il Hank oper,tion all, to rai-e fund, tren mårket %ulCe,. and polic' ad' c affecung the finåniål ,ector Sound. ,ell-periirmng financi,il iniermediar. mi,si he casi- L n. ih cohetent. e \plie.i sra- ie, .ire etenn.J to fin,n, l-sec ier efficienc . ,nd eg, l,r he i.rr,- in. L(i,mnir. f linancialeciøi re be i ice lul urir,duernr ! p,lie, reorrn,. de' elprieni Finan,.iaiieCtar irte'. h.e here an internedir doe- not urreni reet , &perntn 11 must be lirml, b.éed on pltc dia. .eptåble ýt.ndard, ,l perf'rnån.e ind -inan. logee iih borrou ing tO:.nrnment, Eh cin,ul- in.l oundnes as palicipatun inå Bank-ti. [artn And coirJinatein th be Internatinal n.n,eJ rinancial-lnernediari ,an uill retjuirk: F inånce Ciirpcrain ilF i and [he Iimet nånrnal an ågreed insutienalde. elonent plan thai l,netar% Furid ir, the f,rmulatirn tf linintiål. deriin,tr,Le, te insntui, k abih' to ,ur% ,.e in ,ectou 't saiegle, ire e.enrual an in..reårigl% compeiti,e. market-ha,ed e,, tåreaier cli,i rener i rL,cLirce m.b:uii ånd rem N here an -nter'ediar, , eAknee-s ,re ,ll,ca in i, generallx eilectd b. rLdu ing niar. åtributatle Le e ,iernal pob niee .td i'ndiiion,. kei diriitens, .panding the ,cope t.r ni.ke- Brk ,iippeirt c .Il he e:%ndlti,nnJ en rpr,prråte ba'ed deci.inmikin2. and promiiiin ciimpc- nieare, to c ,rreci [h,:ir Li e. narkel -ernenied in,auin' \ herý MIinager, el lin.iri,il niermediate, ,uild be ierest-rak dist.riirn,rc ,gnticani. Bank li- indeperidni [rom i.-ernn.ent iierterence in nancial-sect,'r tiperart'n rnpit be condironid h, breit lending deti'nt minagerial autnomi el an agreed pr.igr.im 1ir m nnin tere. trate, ,Le-o.. red iniermediaries i, el parti, ulr impir- LarJ mdnrkel lekel and stiutire nd b; ilre tånse nir%dIu Lin .f a å rutaei'r. met hanm for the \k ,rld Bank lendng hrough inietmedlrie, ådiuimrent i omlerei r.e, i' meci hnngm r .ill be -. 'ndioned ,.n ehe ci in,e et tita - es Cninli cendtion,. t,, % e Icel nd ti iiu,iåre mi iere,t rate-. er en in .\c'tdin Li. BAnk pili... bie .mpirtance and unders ,n. i h ihe Lhi.rie, reg.idink iuii in e, f e .tng J.rcI ed re-liprogr.m, piol e 0 11.,rd h.r end ill be .n.l.?ed ie. part .[ ihe formulr. n a il e,,,lua,irn et 1Iniln,al-sc,,,,i ,rateic, he s- ieti'e f diree d :redit pr,'grani sheuld be lm li iheir .i u' n ihe B.ink c\ ut e dire umiulate normal credit .t ttlareted Lriup, iusi t:riirn.ed their suppir r ihe eera pre ii.iusl. e cluded ira,rn red rritarket. ulti - n i n, ef be 1M) tak-torie reprti .n I-. niatel. permittling [be p %a ut t iihe pro- nancial-siter iperuen-c'nilui o, th.t -ram,. in general. dire,ted rent proerani, nti ,1rengihried ihe Bink' focut on ihe d.eltip- undertaken in bhe cntes! t i prglåm til pro- ment i i%und rnarket-hmed finanei. setor' mnoie rmarket aee should be. elimnateid \t i h free e.'di.onire and inetficenerie- minimum. [he henelii,rie, l d e d eredi \\ hile ihere c.ere ittereriec, el c in l rnI 'b uld p., po,tiie i ere t re . 31 eniphai,-ori [he suble i et direedsredt.on .Atient.n it bhe adequae\ el .cCounLine nd the need to take iiull, mi, ctuni a plat iuular du ,lelo-ure sndaird and ti ,ih leal iamnerk i, borro.isei. 'L.:t. if deicl blpn .,nd ir. um- an indi pen,.able eiemrnent i in.ial .er de.el- -an,e rm the loin.Ition 'f Bank rance oprneni 'iritegie, ..nd Banl, upp,rt r- secoi ,tråreg; and ipeiaiirn. ei ecample-i ere -ic ref-rm if e liminanon et hairner, Fl cenipetit n till ,rpii fi r i he Bank', ni. tcu, 64 The World Bank-Fiscal Year 1992 been technical assistance, training, studies, will be completed by the end of fiscal 1993.' and policy dialogue. The report concludes that The countries were selected jointly by Bank the Bank's effectiveness in this area can be and IFC staff on the basis of the urgency of improved by, among other things, giving addressing private-sector development issues greater weight to public-sector management and the potential of their private sectors, tak- issues in the country dialogue, reviewing more ing into account, as well, the role of the Bank thoroughly a country's sociopolitical context, and the IFC in the country and the govern- and giving more systematic attention to public- ment's commitment to pursue private-sector sector management-related investment and development-oriented reforms. technical-assistance operations. The assessment for Kenya, now being com- According to the Bank study on privatiza- pleted, is typical of the genre. It analyzes the tion, two main lessons of experience can be main characteristics of the private sector and drawn. its importance in the economy, the main con- * Private ownership itself makes a differ- straints it faces, and future World Bank Group ence. Some state-owned enterprises have been strategy for assisting the development of the efficient and well managed for some periods, sector. but government ownership seldom permits The assessment was based on Bank-IFC sustained good performance over more than a field missions, which included extensive enter- few years. prise surveys, as well as prior Bank Group * The process of privatization, though not knowledge of the private sector gained from simple, can and has worked; this is true for a previous operational and sector work. The variety of enterprises in a variety of settings, most important constraints identified in the including poor countries. assessment were the pervasive system of reg- Most privatization success stories come ulations and controls, uncertainties resulting from high-income or middle-income countries, from the country's overall macroeconomic sit- however. It is harder to privatize in least- uation and the uneven application of laws and developed settings, and the process there is regulations, and the size of the public sector more difficult to launch. But even in low- and its potential crowding-out of private activ- income countries, the results of some privati- ities. Enterprises in the survey ranked the cost zations have been highly positive. It is the task of credit and collateral requirements as their of government and the agencies assisting them, biggest obstacles in the area of financing. including the World Bank Group, to structure The Bank's research program on private- the enabling environment and the transactions sector development issues ranges from studies in such a way that the potential of privatization on the informal sector, sectoral regulatory en- is fulfilled (see Box 3-5). vironments, and land tenure, to competition, The management of the Bank Group is com- the effect of divestiture on efficiency, and the mitted to reinforce the implementation of its determinants of private investment. Resources private-sector development action plan. A devoted to private-sector development in- number of measures were adopted late in fiscal creased substantially in fiscal 1992, with rede- 1991 to strengthen the Bank Group's efforts in ployment from debt and adjustment activities. developing the private sector.2 They included A major research study begun during the past the undertaking of country-specific private- year, "East Asian Miracle," is examining how sector assessments, enhanced cooperation government action (or inaction) has affected among the Bank, the IFC, and MIGA, and an growth in Japan and in the developing coun- expansion of research on private-sector devel- tries of East Asia, and a progress report on opment issues. private-sector development is scheduled to be Work began during fiscal 1992 on private- reviewed by the Development Committee in sector assessments. These assessments are de- April 1993. signed to contribute to the formulation of Bank Group country-assistance strategies address- Debt and Adjustment ing private-sector development priorities In fiscal 1989, the executive directors ap- (alongside similar work on other priority areas proved the use of World Bank resources to such as environment and poverty reduction) support debt-reduction and debt-service reduc- and will provide a basis for the Bank's country- policy dialogue. Private-sector assessments will identify priority policy reforms and actions For details, see page 67-70 of the World Bank's Annual critical for private-sector development. Report for fiscal year 1991. The Bank Group, in consultation with the The countries are Brazil, Cameroon, Colombia, C6te d Ivoire, Ghana, Honduras, Hungary, India, Indonesia, respective governments, has identified the Kenya, Madagascar, Mexico. Morocco, Nigeria, Pakistan, countries where the first twenty assessments the Philippines, Poland. Senegal. Sri Lanka, and Zimbabwe. Debt and Adjustment 65 Box 3-5. Checklist of Recommendations for Privatizing Governments / The more market-friendly a country's policy V Rather than restrict the market by excluding framework-and appropriate policy is correlated foreign investors and favoring certain ethnic with capacity to regulate-the less difficulty it groups, experiment with golden shares and par- will have in privatizing a state-owned enterprise tiat-share offerings to win acceptance for foreign and the higher the likelihood that the sale will and other buyers. turn out positively. I Avoid large investments in privatization can- / State-owned enterprises functioning in com- didates: The risks usually outweigh the rewards. petitive markets, or in markets easily made com- Instead, prepare for sale with legal, managerial, petitive, are prime candidates for privatization. and organizational changes, financial workouts, Their sale is simple, compared to public monop- and labor shedding, olies, and they require little or no regulation. I/ Experience shows that labor does not, and V An appropriate regulatory framework must need not, lose in privatization if governments pay be in place before pn %aizirg monopohe' Failure attention t ea,ine the dl co,f of anemplo%- to regulate properli an hurt consumers ind men[ through adequate secrance pa . uner- reduce public supp,.rt for pmatization pi., meni bene6i,. rraining. ond loh.earch as- The prmar' obje,tie of priatizatn.n iancc should be to tmre.ae efficienc%-not to m\il- let the market the price and ell rize retenue f Ior eiample. b selling into pro- r cash. Reali,wilk. negoiated Nei.lemenri tected mirkeii mr e%c-n to dioribute 0. rer hip :,nd fiiancing arrangements it debteqU11' s'.ap' . adels .t the e\pense of manageral efficien,:. t,, te unjo.oiiNe CounirieN .an henefit from pri.tiring ran. In Ll pri'.jtiztiofl . in ill countries, the igement through nianagenient coniruci%l' tran,aclion trha re trnparetb. contracfting ouo. or concer v nnone. tion operations in heavily indebted, middle- macroeconomic program, usually supported income countries. The program was instituted by an International Monetary Fund (IMF) ar- as a three-year program, with regular reviews rangement, be in place; that the operation be and evaluations.d Following discussion of a agreed to voluntarily; and that it contribute third annual review of the program, the exec- materially to a country's development pros- utive directors agreed in fiscal 1992 that the pects. Bank should maintain its ability to finance The World Bank does not play a direct role debt-reduction and debt-service reduction op- in the negotiations between a debtor country erations when such operations are found to be and its commercial-bank creditors. It provides justified in the special circumstances of mem- information to each party about its program ber countries. The directors also generally and modalities, as requested, and about the endorsed and approved proposals that the ini- financial parameters that would justify the tial ceiling, set for the three years fiscal Bank's support. The Bank also offers technical 1990-92, of $6 billion for "additional lending" assistance on external-debt management to related to the program, be maintained and that, member countries that request it. on a case-by-case basis, taking into consider- Since the start of the program, the Bank has ation the criteria of justifiable need and cost supported six such operations. In four cases effectiveness, the additional funds could be (Mexico, the Philippines, Uruguay, and Vene- used to purchase principal collateral for par zuela), the Bank provided financial support for bonds carrying below-market interest rates. the operation and, where needed, granted a The program has enabled the Bank, when it waiver of its negative-pledge clause to permit judges circumstances appropriate, to extend the creation of collateral with respect to ex- financing and/or negative-pledge waivers for change bonds. In two cases (Costa Rica and operations that lead to a reduction in member Nigeria), the Bank did not participate in the countries' debt or debt-service obligations to financing of the operation, but provided waiv- their commercial-bank creditors. ers of its negative-pledge clause. The waiver of The Bank's support is made available on a its negative-pledge clause to Nigeria was the case-by-case basis under a set of conditions specified by the executive directors in fiscal 1989. The most important conditions are that For details of these reviews, see pages 50-52 in the World the country have a sound financing plan, which Bank's Annual Report for fiscal 1990 and pages 64-65 in includes debt reduction; that a sustainable the World Bank's Annual Report for fiscal 1991. 66 The World Bank-Fiscal Year 1992 only debt-service reduction activity conducted debt-service reduction operations have had a by the Bank in fiscal 1992.' measurable developmental impact, and, on this Progress under the program has been slower account, the program has been successful. than originally anticipated. The reasons are The effect is most visibly seen in the case of varied. Some debtors have experienced diffi- Mexico. The ratio of total gross fixed capital culties in implementing appropriate adjustment formation to gross domestic product (GDP) programs. In other countries, perceived polit- rose by 1.4 percentage points in Mexico in 1991 ical uncertainties have contributed to the pro- (relative to 1990); private fixed investment longation of negotiations. increased by almost five percentage points in For their part, commercial banks no longer both 1990 and 1991; nominal interest rates fel] feel as threatened as in the recent past by the by twenty percentage points in Mexico during level of their claims on developing countries. the negotiation period, and real interest rates In general, commercial banks have signifi- fell by almost 60 percent in a six-month period cantly improved their financial positions over as negotiations evolved; stockmarket prices the past few years. More recent difficulties, rose in the negotiation period; credit ratings by such as the need by most banks to meet private-market participants rose significantly; strengthened capital requirements, the reces- and the net transfer of external capital inflows, sion in the United States, as well as develop- mostly in the form of direct and portfolio ments in the real-estate market in the United investment, totaled more than 5 percent of States, issues related to Eastern Europe (for GDP in 1991-an increase of more than $13 European banks), and the fall in the stock billion compared with 1990. market and real-estate market declines in Ja- The data for Venezuela show an improve- pan, are now the focus of most attention by the ment in development prospects: In 1991, GDP commercial banks. The presence of these is- grew by 9.1 percent, a figure that is among the sues on the banks' agendas, in combination highest in the developing world. Data for Costa with increasingly strong provisions against de- Rica and, to some extent, Uruguay, suggest veloping-country risks, has diverted attention measurable improvements, particularly on the from the task of reaching agreement with external front, which were dampened by the debtor countries. occurrence of adverse terms-of-trade shocks. As a result of these factors, the amount of The Philippines operation, in relative terms, resources allocated by the Bank to debt and was the smallest of the first five Bank opera- debt-service reduction operations has been tions, and the effect was less significant than less than what was estimated in fiscal 1989. was expected. Three years ago it was thought that additional lending by the Bank under the three-year pro- gram might amount to as much as $6 billion. In On August 30, 1991, the government of the Philippines fact, only $1.44 billion in additional lending has announced its intention to conclude a debt and debt- been committed, and available Bank support in service operation with its commercial-bank creditors. n Broad agreement was reached on the terms on which debt the form of "set asides" has totaled $1.23 would be restructured, and an official term sheet was billion, compared with a potential maximum of issued on February 29, 1992. Signing of the agreement was $4 billion anticipated in fiscal 1989.' planned for April. but in view of the impending election, Despite the slower-than-anticipated pace of the government and the banks concurred in postponing stgning until after the election and the new government the program, it appears that the program has could confirm its support for the agreement. The gover- contributed significantly to the debt-work-out ment has requested assistance from the Bank and other process and, in several cases, has been a donors. The Bank is studying the request, including the necessary element in the adjustment process of possible modalities of support, and is discussing the over- all resource requirements with the IMF and with major the affected countries. bilateral donors. in April 1992, the government of Argen- The channels through which debt and debt- tina reached an agreement in principle with its commercial service reduction operations affect the devel- creditors on a debt and debt-service reduction package. opment process vary in importance, depending Negotiations are under way on the details of the agree- ment. on the unique situation of each debtor country. In fiscal 1989, it was agreed that although the level of Bank Countries benefit most when debt and debt- support would be determined on a case-by-case basis, it service reduction has a significant develop- would involve a figure of around 25 percent of a country's mental impact. In turn, a significant develop- adjustment-lending program over a three-year period, or around 10 percent of its overall lending program. The mental impact requires a strong policy executive directors also agreed that, where justified, addi- framework in order for the beneficiary country tional resources-up to 15 percent-of the overall three- to exploit the development opportunities avail- year lending program could also be made available and that able under the new debt arrangements. While it that limit could be exceeded if the excess amounts were is til ooeary rora's deducted , or "set aside," from the lending program so that is still too early to observe the program's the excess would not result in a further increase in the net effects fully, evidence suggests that debt and commitment of the Bank. Debt and Adjustment 67 There seems to be a clear parallel between $230.8 million of principal commercial indebt- the success of the operations (in terms of their edness has been retired, along with interest developmental impact) and good policies. In arrears totaling some $90 million. the case of Mexico and, to a somewhat lesser Approximately $13.8 million of facility re- degree, Venezuela, improved and strong ad- sources has been used to date, in addition to justment policies, sustained over several significant support from bilateral donors. Swit- years, have generated the largest development zerland and France granted $7.5 million and benefits from debt reduction. The gains have $12 million, respectively, for the operations in been smaller in the other countries, where the Mozambique and Niger, while the Netherlands policy frameworks have not been as support- and Sweden provided grant funds of $2 million ive. This reinforces the presumption that a and $4.5 million, respectively, for the Mozam- strong policy framework is required to achieve bique operation. All funds, except for the a significant developmental impact from debt French grant to Niger, were provided by way and debt-service reduction. of contributions to the facility. Late in calendar The directors of the Bank also agreed during year 1991, Switzerland agreed to make avail- the year to extend the operations of the Debt able a further contribution of SwF20 million to Reduction Facility for IDA-only Countries. the general resources of the facility for use in That facility was established in fiscal 1990 in such future operations as are mutually agreed recognition of the absence of adequate mech- upon by Switzerland and IDA. In addition. anisms for easing the burden of external com- Canada, France, Japan, Switzerland, and the mercial debt owed by IDA-only countries. The United Kingdom have provided financial sup- facility was financed by the transfer to it of port for preparatory activities directly con- $100 million of the IBRD's net income for nected to facility-supported operations. fiscal 1989. Although interest on the part of indebted Facility resources are made available on a countries in participating in facility operations grant basis-normally up to a limit of $10 has been strong, progress in carrying out those million to any one country-to allow for the operations has been slower than expected. maximum possible impact in reducing a coun- Several factors have contributed to this situa- try's external commercial debt. tion: difficulties in carrying out adjustment All IDA-only countries with heavy debt bur- programs, debtor-country constraints, com- dens are eligible for facility support. Support, mercial-creditor reluctance, legal complexi- however, is decided on a case-by-case basis ties, and funding considerations. and is contingent on the existence of: Debtor-country constraints refer to the diffi- * a medium-term adjustment program that is culties that some potential facility beneficiaries acceptable to IDA, as demonstrated, for exam- have in acquiring complete and accurate infor- ple, by the existence of an operational policy- mation on how much they owe and to whom. framework paper (PFP), a structural- Facility operations have also been delayed by adjustment program, or a country's inclusion human-resource constraints in debtor coun- in the IMF's enhanced structural-adjustment tries that result in the understandable relega- facility (ESAF); and tion of relatively small commercial-creditor * a strategy for debt management that is claims, as opposed to far larger official- satisfactory to IDA and that (a) includes a creditor claims, to the backburner. program for resolving the commercial-debt The extent of commercial-creditor reluc- problem through funds provided by the facility tance has been unexpected. And the scenario and other sources; (b) provides for substantial that had banks responding favorably to cash debt relief from official bilateral creditors offers to extinguish claims on very poor coun- through an agreement with the Paris Club, tries with histories of severe debt-servicing preferably on terms that offer the most favor- problems has proved to be, for a variety of able treatment accorded by that body; and (c) reasons, somewhat optimistic. materially enhances the country's prospects Finding methods of pursuing debt-reduction for growth and development. operations that are consistent with the under- To date, seventeen countries have expressed lying contracts the debtor has with its commer- an interest in gaining access to the facility's resources.7 Two debt-reduction operations have been completed (in Mozambique and Niger);' and it is expected that three operations Benin, Bolivia, The Gambia, Guinea, Guinea-Bissau, Guy- (for Bolivia, Guyana, and Uganda) will be ana, Madagascar, Mali. Mozambique, Nicaragua, Niger, brought to the executive board for its consid- 5o Tomd and Principe, Senegal, Tanzania, Togo, Uganda, and Zaire. eration during the first half of fiscal year 1993. For details, see page 67 in the World Bank's Annual In the cases of Mozambique and Niger, about Report for fiscal year 1991. 68 The World Bank-Fiscal Year 1992 cial creditors has proved to be complex. In 1992, an increase of $176 million over the addition, significant delays in structuring indi- previous year's total. Lending for adjustment vidual deals have often been caused by the represented 27 percent of total Bank lending. difficulty in obtaining relevant documentation The increase resulted primarily from initial (the underlying contracts, for instance) that is adjustment operations in India and Peru ($650 required to ensure that the proposed debt- million and $1 billion, respectively) and contin- reduction operations will actually achieve their ued high levels of adjustment lending in Cen- objectives-the legal extinguishing of claims. tral and Eastern Europe ($850 million). Finally, delays in obtaining bilateral funding Adjustment lending has been a part of the to permit the timely hiring of external financial landscape of the developing world for over a and legal advisors have led, in some cases, to decade. It has been central to policy debate in delays in the detailed preparation of facility Latin America and sub-Saharan Africa and operations. important in other regions. A few countries- Despite its slow progress, the facility has Chile and Thailand, for instance-have clearly shown that it can contribute substantially to graduated from adjustment lending; barring the reduction of commercial debt in the very major new shocks, they will no longer need poorest countries. The facility remains the adjustment loans to support policy reform. only financing mechanism that offers heavily Others-Morocco and Tunisia, for exam- indebted, low-income countries the prospect of pie-are on the road to graduation. Adjustment obtaining the financing required for substantial lending is going to remain important in the debt reduction of commercial-debt obligations. 1990s: It already has become a major vehicle of The creation of the facility has also had assistance to formerly command-driven coun- positive secondary effects. Its existence has tries, it is being used for the first time in India, encouraged several countries to address more and there are old and new clients in most other systematically and comprehensively the man- parts of the world. agement of their external liabilities-both cur- A third review of adjustment lending, com- rent and future. Its existence has also encour- pleted by the Bank in fiscal 1992, concludes aged greater efforts at coordination in donor that, overall, adjustment lending is associated assistance in the field of debt management. with a recovery in growth rates and improved In agreeing to extend the life of the facility policies. Middle-income adjusting countries until July 31, 1994, the executive directors also did better than low-income adjusting countries, decided that the standard by which an opera- however: If initial conditions, external shocks, tion is judged-that it resolve a country's com- and official flows are controlled for, the former mercial-debt problem in a comprehensive man- group of countries enjoyed growth four per- ner-should be interpreted in a way that centage points higher than would otherwise permits facility resources to fund partial debt- have occurred; the low-income group barely reduction operations in appropriate cases. grew in per capita terms. The executive directors also agreed that: The review noted that the adjustment pro- * facility resources could be employed to cess generally takes years, and that there can hire financial and legal advisors to help coun- be significant costs in the transition. Again, a tries prepare debt-reduction operations;9 distinction was found between middle-income * facility resources could be provided to a adjusting countries and low-income ones. The third-party entity for a debt-reduction opera- more difficult path toward recovery followed tion for the benefit of a member country in by the poorer group can be explained by the those cases where it was not feasible to make a fact that most low-income countries have a grant to the member country because of legal relatively weak base in infrastructure and hu- constraints; and that man capital, small private involvement in the * facility resources could also be employed formal sector, and weak public institutions. in the reduction of all external commercial debt They also started off with more distorted econ- that is not otherwise guaranteed or collateral- omies than did the middle-income countries. ized-that is, short-term as well as medium- The evidence to date, the review suggests, is term and long-term debt. Short-term debt that structural adjustment in low-income coun- would only be eligible, however, if such debt tries is a necessary-but not usually sufficient- had been in arrears for some time and if IDA's management were satisfied, on a country-by- country basis, that such inclusion was unlikely Late in fiscal 1991, a grant of up to $340,000 from the to impair a country's access to short-term facility was provided to Guyana to finance the costs of credit on reasonable terms. financial and legal advisors to assist in the preparation of a proposed commercial bank debt-reduction operation. The Adjustment lending. Adjustment lending by funds for the grant were contributed to the facility for this the Bank totaled $5,847 million during fiscal purpose by Canada. Debt and Adjustment 69 condition for transition to sustainable growth. tional difficulty that the formal private sector It concludes that while most of this group will has always been less developed. In addition, continue to need adjustment-related support most of the conditions for private-investment during the 1990s, this support will pay off only recovery are also worse than in middle-income if long-run development problems are tackled countries: Market distortions are often worse, simultaneously. These problems will continue infrastructure is less developed, and the finan- to require substantial support, through project cial system is weaker. and sectoral investment lending, from the in- Misallocation of public-sector resources, at ternational community. least from a developmental perspective, re- Although the review found that adjustment mains a problem, according to the review. It policies help most poor people-at least in the found that general spending cuts have often medium term- it acknowledged that economic- been at the expense of critically important reform programs often cause temporary wel- operations and maintenance spending (and fare declines for some. A well-designed adjust- sometimes at the expense of necessary public ment policy, however, can moderate losses investment); that spending is misallocated and bring swifter gains to the poor. Well- within the social sectors (not enough spending targeted public-transfer programs, such as on complementary inputs, such as medicine public-employment schemes, or food and nu- and textbooks, relative to staff, for instance); trition programs, have a role in cushioning and that there has been relatively little prog- declines in income for vulnerable groups. ress in reducing public-sector employment. In addition to updating the analysis on the Looking to the future, the review recoi- effects of adjustment lending on growth in mended that the Bank (a) stay the course on aggregate income and on the poor, the review adjustment lending to committed governments devoted special attention to two problematic and complement such assistance with invest- areas in the adjustment process-the recovery ment lending to develop economic and social of private-sector investment and reform of infrastructure and institutions; (b) increase the public spending. attention it gives in the design of adjustment The review found that although private- programs to policy reforms that support the sector investment eventually recovers where business environment; (c) increase the atten- policy conditions are good, it remains a prob- tion it gives to the allocation of public-sector lem in low-income countries. The lagging re- spending; and (d) reinforce efforts to design sponse by private investors is normal, the adjustment programs that promote poverty- Bank study concludes, and it need not be a reducing growth. problem-provided that policies are put in The third review of adjustment lending was place to secure an eventual recovery. Most discussed by the Bank's executive directors, low-income countries usually have the addi- who endorsed its overall findings. 70 Section Four World Bank Finances IBRD Finances tion of the IBRD's commitment fee on undis- bursed balances from seventy-five to twenty- In fiscal year 1992, the IBRD achieved a five basis points. strong level of financial performance, high- Based on the first year of operation, this new lights of which include: policy has proved highly successful. Excluding * loan disbursements of $11.7 billion; the countries in nonaccrual status, late pay- * borrowing the equivalent of $11.8 billion in ments over thirty days declined sharply in the the world's capital markets; first twelve months following implementation * average borrowing costs, after swaps, of of the policy. Because of the improvement in 6.69 percent; the timeliness of payments, over 70 percent of * financial return on the investment portfolio all the IBRD's borrowers are currently eligible of 8.07 percent; and for the interest-spread waiver. * net income of $1.6 billion, which enabled the IBRD to continue to meet its financial Loans objectives. Disbursements. Gross disbursements by the Allocations of fiscal 1991 net income in- IBRD to countries were $11.7 billion, up from cluded: fiscal 1991's total of $11.4 billion. Net dis- * an allocation to the general reserve of $450 bursements were $1.8 billion, compared with million, which brought the IBRD's reserves-to- $2.1 billion during the previous year. loan ratio to 11.5 percent (excluding prefund- Lending rate. Under the IBRD's current ing of interest waivers) at the end of fiscal semiannual variable lending-rate system, the 1992; and interest rate was 7.73 percent for the first and * an allocation of $370 million to the IBRD's second semesters of fiscal 1992. By compari- surplus. son, the other variable-lending rate-applica- ble to loans for which invitations to negotiate Financial Policies were sent before May 18, 1989, and not con- At the beginning of fiscal 1992, the IBRD's verted by borrowers to the new system-was new approach to encourage borrowers to make 7.71 percent and 7.72 percent, respectively, for timely loan payments became effective. The the first and second semesters of fiscal 1992. approach stipulates that if a payment becomes The difference between the rates is due to thirty days overdue, no new loans to the bor- differences in allocations of borrowings to rower will be presented to the executive board lending and/or to investments and to the for approval or will be signed, and the bor- weights applied to currency-specific costs. rower will become ineligible for any applicable Loans in nonaccrual status. Six countries waivers of the interest spread. If a loan pay- were in nonaccrual status at the end of fiscal ment from a nonsovereign borrower becomes 1992-Congo, Guatemala, Iraq, Liberia, Peru, forty-five days overdue (and the country is not and Syria. With the exception of Congo, five itself the delinquent borrower), no new loans were holdovers from fiscal year 1991. Guate- to, or to be guaranteed by, that country will be mala, Peru, and Syria, however, are making presented to the board for approval, and no debt-service payments to the Bank. previously approved loans to, or guaranteed Nicaragua, Panama, and Sierra Leone came by, that country will be signed. out of nonaccrual status during the year. Nic- During the fiscal year, the IBRD waived aragua cleared its arrears on September 13, twenty-five basis points of the fifty basis-point 1991 with a payment of $218.9 million. Panama spread included in the semester interest rate on cleared its arrears to the IBRD on February 5, loans, provided that the borrowers had made 1992 with a payment of $220 million. Sierra all loan-service payments within thirty days of Leone, which had been in nonaccrual status their due date. This waiver was in addition to since August 1987, cleared its arrears on the continuation during the year of the reduc- April 15, 1992 with a payment of $9.65 million. Borrowings and Lbity Management 71 While Zambia reentered nonaccrual status on cess or fiscal treatment of its securities or that January 15, 1992, it cleared its arrears later in offer other prospects for cost savings. The the same month with a payment of $50.51 IBRD seeks to borrow the volume of funding, million. consistent with its target fiscal year-end liquid- Provisioning. The IBRD increased its accu- ity ratio, in an after-swap currency composi- mulated provision for loan losses to $2.5 bil- tion that allows it to maintain the targeted loan lion, maintaining the provision equal to 2.5 currency-pool ratios for dollars, yen, and the percent of the sum of total loans outstanding deutsche mark group. The IBRD continues to and the present value of guarantees. The level be an active participant in both the currency of loan-loss provision is based on an assess- and interest-rate swap markets to obtain fund- ment of the collectibility of loans in nonaccrual ing at lower costs than it could otherwise status, together with an evaluation of general obtain through direct market borrowings in risk in the remainder of the portfolio. core currencies, to undertake intrayear inter- Liquid-assetsest-rate management in core currencies, and to Liqud-asets anagmentmaintain a diversified capital-market presence. At the end of fiscal 1992, the IBRD's liquid- Medium-term and long-term (MLT)funding. ity totaled $20.86 billion, equivalent to about During fiscal 1992, the IBRD raised $11.8 48 percent of anticipated net cash requirements billion through MLT borrowings in eleven cur- over the next three fiscal years. At the end of rencies and currency units. After $3.2 billion of fiscal 1991, liquidity amounted to $20.0 billion. currency swaps and a notional par volume of The IBRD's primary objective in holding such $3.7 billion of interest-rate swaps, all of the liquidity is to ensure flexibility in its borrowing year's borrowings were fixed-rate liabilities decisions should borrowing be adversely af- denominated in United States dollars, Japa- fected by temporary conditions in the capital nese yen, deutsche mark, and Swiss francs. markets. The average maturity of this funding was 7.3 The IBRD's liquid assets are invested exclu- years, and the after-swap cost was 6.69 percent sively in fixed-income instruments and are (see Tables 4-1 and 4-2). actively traded in various capital and money Noteworthy transactions during the year in- markets under stringent risk-management guide- cluded two global-bond offerings in United lines. The attendant portfolio-management activ- States dollars (aggregating $3.0 billion) and the ities are supported by a comprehensive risk- IBRD's first global-bond issue denominated in management and monitoring setup covering both Japanese yen. The V250 billion ($1.9 billion credit risk and interest-rate risk. Trading perfor- equivalent) ten-year offering incorporated mance is continuously measured against detailed many of the liquidity-enhancing features of the market-by-market benchmark portfolios. IBRD's earlier global offerings in United Enhancements were made in the manage- States dollars, such as simultaneous offering ment of the IBRD's liquid assets in the follow- and trading in Europe, the United States, and ing areas: (a) the use of a greater variety of Japan and multimarket clearing and settlement instruments and further exploitation of multi- conventions. This approach provided the ple trading approaches; (b) completion of the IBRD with lower yen funding costs relative to integration of the supporting computer systems that of other borrowers of comparable credit across trading, accounting, and control func- and to its traditional yen offerings. The IBRD tions; and (c) continued improvements in the used anticipatory rate-setting arrangements for performance-measurement system and in var- the first time in connection with one of its ious risk-monitoring systems. United States dollar global-bond issues and During fiscal 1992, the IBRD's financial re- used deferred rate-setting arrangements for all turn on its portfolio was 8.07 percent. The three global-bond issues during the fiscal year financial return on investments in fiscal year to separate the timing of interest-rate fixings 1991 was 9.23 percent. from that of issuance. In addition, the IBRD established a multi- Borrowings and Liability Management currency medium-term note (MTN) facility in In framing its direct-market borrowing August 1991 to take advantage of small place- plans, the IBRD seeks to maintain, on the ment opportunities arising at various times in finest terms possible, a broadly diversified, different segments of the European markets. multicurrency, multimarket borrowing pro- By the end of fiscal 1992, it had raised $0.6 gram. The centerpieces of this approach are (a) billion through the facility in seventeen trans- global offerings, where appropriate, and (b) the actions involving Italian lire, European cur- most extensive use (consistent with prudence rency units, and United States dollars. The and practicability) of markets in which the IBRD also undertook its first two borrowings IBRD enjoys comparative advantages in ac- denominated in Portuguese escudos during fis- 72 World Bank Finances Table 4-1. IBRD Borrowings, Fiscal Year 1992 (amounts in millions) US-dollar Type Issue Currency of issue equivalenta Medium- and long-term public offerings Eurobond market 8.25% five-year bond, due 1997 ECU 150 184.8 Ten-year floating rate bond, due 2002 ECU 200 250.0 Ten-year floating rate bond, due 2002 ECU 250 311.4 8.375% eight-year bond, due 2000 F 1,000 175.4 9.05% five-year bond, due 1996 HK$ 500 64.5 10.875% ten-year bond, due 2001 Lit 500,000 381.8 10.8% ten-year note, due 2001 Lit 500,000 405.4 10.4% ten-year bond, due 2002 Lit 500,000 407.0 Ten-year floating rate bond, due 2002 US$ 250 250.0 6.0% five-year bond, due 1996 V 75,000 563.2 6.0% five-year bond, due 1996 V 80,000 626.6 Germany 8.75% ten-year bond, due 2001 DM 300 179.6 Portugal 12.0% five-year bond, due 1996 Esc 15,000 104.6 11.5% five-year bond, due 1997 Esc 16,900 123.2 Spain 11.0% five-year bond, due 1996 Ptas 15,000 144.4 Sweden 10.0% ten-year bond, due 2002 SKr 500 86.4 Global 7.25% five-year bond, due 1996 US$ 1,500 1,498.5 6.75% ten-year bond, due 2002 US$ 1,500 1,486.1 5.25% ten-year bond, due 2002 V 250,000 1,870.1 Total medium- and long-term public offerings 9,113.0 Medium- and long-term placements with central banks and governments Germany 8.94% five-year note, due 1996 DM 250 143.1 8.01% five-year note, due 1997 DM 250 155.9 Intemationalb 7.3% two-year note, due 1993 Sw F 300 205.0 7.25% two-year note, due 1994 Sw F 252 168.5 6.49% two-year bond, due 1993 US$ 150 150.0 5.35% two-year bond, due 1993 US$ 150 150.0 5.58% two-year bond, due 1993 US$ 150 150.0 5.28% two-year note, due 1993 US$ 144 144.0 United States Continuously Offered Longer-term Securities (COLTS) Program US$ 66 66.0 Total medium- and long-term placements with central banks and governments 1,332.5 Medium- and long-term other placements Eurobond market 20.0% five-year step-down note, due 1996 US$ 50 49.9 6.0% ten-year bond, due 2001 V 10,000 76.2 Europe 9.0% five-year note, due 1996 ECU 20 24.0 Five-year floating rate note, due 1996 ECU 10 11.8 Five-year floating rate note, due 1997 ECU 65 79.4 Ten-year floating rate note, due 2002 ECU 50 62.5 Zero coupon five-year note, due 1996 Lit 100,000 46.3 10.625% five-year note, due 1996 Lit 40,000 30.8 10.625%, five-year note, due 1996 Lit 50,000 39.9 10.75% five-year note, due 1996 Lit 50,000 40.3 10.5% five-year note, due 1996 Lit 50,000 39.3 10.5% five-year note, due 1996 Lit 50,000 40.7 10.5% five-year note, due 1996 Lit 50,000 40.6 10.5% five-year note, due 1996 Lit 50,000 40.7 10.65% ten-year note, due 2002 Lit 50,000 44.0 10.8% five-year note, due 1996 Lit 50,000 39.1 Five-year floating rate note, due 1996 US$ 25 25.0 Five-year floating rate note, due 1996 US$ 20 20.0 Five-year floating rate note, due 1996 US$ 19 18.5 Japan 6.9% seven-year loan, due 1998 V 62,500 482.6 Switzerland 7.0% seven-year loan, due 1998 Sw F 125 91.6 Total medium- and long-term other placements 1,343.2 Total medium- and long-term borrowings, fiscal 1992 11,788.7 Borrowings and Liability Management 73 US-dollar Type Issue Currency of issue equivalent' Short-term borrowings outstanding' Centrof tank t'cIht i U.S. dollar I 2,600 2,600.0 COPS . iranesi S% f 35 24.5 Discour noie; it 5 dollar ' LS* 2,749 2,749.1 Short-icirm borroa ng% oui..andming , o(June 711. 1992 5,373.6 a MeJ,umn. nJ long-irrm ame..ant haieJ on gr.:), proceed... e\tiimd vt eac.n r)ls riv. ihng ithe iimi, oflaunoi F. Thce ! ucu; o= cr. placcJ wih ccriif.l ban rk 6, .einmrr.inie 3nd interraii.,rnal orz3nozanon, ,:. Nlrurng ,Irh.n one .c r d Coniinujoui,k -if(crizi ra.mlcril ricril 1in fr,n:. Table 4.2. IBRD Borrowings. after Swaps. Fiscal Year 1992 .Tiu l-T L- m l 1T1f I.L qU .J1C-T Ain-uria\ ar amr ...-.ni u trr.unl -r T t d la r, 4.i 11 I l 4 .1 I ( I. .4 11 3 69 Jaenral tn k e n .hlI . I 1 .- 311 Dci<~c mark 4 t, 4 I, 9 7 nI I' i,, fr.t n, 4t .S JollarY .'."49.1 I 1 311 ~ Is~ ' 4 ~ 3 4 1' X .4 11) 4N Tot~III~ ii' 3 I1F11 lil -3 6 69' Cenir.I bjnk fa,cilil. iLl S doIlh:r; i 2.11 41 I , 4 31) COPS .I4 frarc' 24 11 '. 61, Diwount note I L .S dollar, i .w I 337 Total s o' June 311. 1992 5.33 6 11111 (1.4 N-,rE Det II m. noi aJd o s al .1 be-,cu .4 rouridr I Repre-iiri torro ire in Europri urren. uniri. Fren,h frar., H nt Kong doll a . Iiaii.rn lire Portuoue e eCudc. 5. Spni. rii. jnd 5-fdi;h kr...ror C 1oni,nuLui,l, .tCrcd p.nmnl right -n S, -I Ir, - Inc lude Other .bolri-e,rm r--rket h.rr,v, 1% in L1 ' dollir d Si-.o-i.rrn h rr. * rie . .:Ul-tr din: .r i,rne iI Iii p41 ioi ,d i - ii millon cal 1992, bringing the total number of curren- outstanding amounted to $91.7 billion, or 94 cies or currency units in which the IBRD has percent of total outstanding debt. This in- borrowed since July 1947 to twenty-eight. cluded $91.6 billion of fixed-rate funding and During fiscal 1992, the IBRD called an ag- $0.1 billion of variable-rate funding. As of gregate volume of $4.6 billion of outstanding June 30, 1992, the average maturity of total borrowings for prepayment, comprising $3.1 MLT debt was 6.4 years, and its average cost, billion of Japanese yen borrowings, $1.3 billion after swaps, was 7.10 percent. of United States dollar borrowings, and $0.15 Short-term funding. During the fiscal year, billion of ECU borrowings. In addition, it the IBRD refinanced the $5.4 billion of short- redeemed $0.2 billion of United States dollar term borrowings that had been outstanding at borrowings through market repurchases. the end of fiscal 1991. At June 30, 1992, short- At the end of the fiscal year, MLT funding term borrowings outstanding were $5.4 billion 74 World Bank Finances equivalent, comprising $2.6 billion from offi- macroeconomic and sectoral adjustment and cial sources through the IBRD's central-bank good economic performance. and protection of facility, $2.8 billion from market borrowings in the environment. Processes were instituted United States dollars, and $25 million equiva- and programs and projects oriented to reflect lent in short-term Swiss franc borrowings. The better these priorities in IDA country strate- cost of these borrowings at the end of the fiscal gies. The allocations at the sectoral, country. year was 3.75 percent, compared with 6.12 and regional levels also reflected the deputies' percent at the end of fiscal 1991. advice. The directors expressed satisfaction The IBRD's policy is to limit the share of that progress was being made toward achieving interest-sensitive liabilities in its portfolio to the key objectives set for IDA-9. the extent that short-term borrowings consti- IDA's commitment authority. IDA's com- tute no more than 10 percent of total debt mitment authority for fiscal 1992 amounted to outstanding and that short-term and variable- SDR4.76 billion and was derived mainly from rate funding do not exceed 15 percent of this the receipt of the formal notifications to con- volume. On June 30, 1992, short-term and vari- tribute and the release of the second tranche of able-rate funding aggregated $5.5 billion equiv- donors' contributions to IDA-9. During the alent, representing about 6 percent of total course of the year, the association received outstanding debt. formal notifications to participate in IDA-9 Capital. On June 30, 1992, the total sub- from Belgium, Czechoslovakia, Italy, the scribed capital of the IBRD was $152.2 billion, Netherlands, and the Russian Federation, as or 83 percent of authorized capital of $184.05 well as an additional contribution of $25 million billion. During fiscal 1992, subscriptions to the from Kuwait. These notifications and Kuwait's $74.8 billion general capital increase (GCI), additional contribution increased IDA's com- approved in April 1988, continued smoothly: mitment authority during the year by SDR397 Twenty-two countries subscribed an aggregate million. Commitment authority also increased $8.1 billion. A total of 423,916 GCI shares ($51 by SDR3.31 billion when the association re- billion, or 65 percent of total allocations, in- ceived a substantial portion of the United cluding additional GCI shares allocated to new States' second installment to IDA-9. With this members that joined the IBRD after April installment, contributions from other donors, 1988) have now been subscribed by fifty-seven who have submitted their notifications to par- members; 231,360 shares ($27.9 billion) remain ticipate in IDA-9, were released on a pro-rata to be subscribed. At the end of fiscal 1992, the basis with the United States' payment. permissible increase of net disbursements, that Other sources of commitment authority for is, "headroom," was $67.6 billion, or 40 per- fiscal 1992 included the transfer from the cent of the IBRD's lending limit. IBRD's fiscal 1991 income of SDR260 million, In April 1992, the board of governors ap- as well as funds available from future reflows proved the increase in authorized capital of amounting to SDR795 million. Funds available 77,159 shares ($9.3 billion) to accommodate from future reflows include: (a) advance com- the membership of the fifteen republics of the mitments of SDR650 million for general IDA former Soviet Union. credits, (b) "annual allocations" of SDR118 Reserves. On June 30, 1992, reserves amount- million to finance supplemental adjustment ed to $11.2 billion, and the reserves-to-loan ratio credits to IDA-only countries with outstanding stood at 11.5 percent (excluding prefunding of IBRD debt, and (c) a special allocation of interest waivers). SDR75 million to support IDA-only countries undertaking debt-reduction operations. Of the IDA Finances special allocation, SDR27 million was used to Fiscal 1992 was the second year of the ninth finance an economic-recovery project in Nica- replenishment of IDA (IDA-9). During the ragua; the balance will be carried forward in year, 110 IDA credits were approved in the fiscal 1993. amount of SDR4.8 billion. In December 1991, IDA's commitment fee. IDA's commitment the executive board approved the recommit- fee was set at 0 percent from fiscal 1989 ment of SDR477 million of cancellations of through fiscal 1992. IDA's basic financial pol- IDA credits to India. SDR184 million was icy is to cover administrative expenses through recommitted in fiscal 1992; the balance is income from credits. The latest financial pro- scheduled to be recommitted in fiscal 1993. jections for the fiscal 1993-to-fiscal 1995 period In September 1991, the executive directors indicate that income from service charges will discussed a report on IDA's policies, opera- fall short of administrative expenses at an tions, and finances during the first year of annual average amount of $29 million. IDA's IDA-9. The report described progress made in financial position. however, continues to be the key priority areas of poverty reduction, strong, as its cumulative surplus increased Cofinancing 75 from $543 million at the end of fiscal 1991 to technical skills on the highest priority activities $1,259 million at the end of fiscal 1992. In view in the Bank's borrowing countries. of the overall financial surplus of IDA, it was The volume of cofinancing anticipated in agreed that the commitment fee for fiscal 1993 support of World Bank-assisted operations ap- be continued at 0 percent proved in fiscal 1992 was $13,266 million. Negotiations on a tenth replenishment. Ne- Roughly 52 percent of all Bank-assisted gotiations on a tenth replenishment of IDA's projects and programs attracted some form of resources (IDA- 10) were launched with a meet- cofinancing (see Table 4-3). By region, 37 ing of IDA deputies in January 1992 in Paris percent of the cofinancing volume was for and a subsequent meeting in April 1992 in operations in Africa, 25 percent in East Asia Washington. Deputies from thirty-four coun- and Pacific, 22 percent in Latin America and tries took part in these meetings. Among the the Caribbean, 9 percent in Middle East and major issues covered during the two meetings North Africa, 5 percent in South Asia, and 2 were: IDA's role in supporting economic percent in Europe and Central Asia. In terms growth and poverty reduction during the past of number of cofinanced operations, the distri- decade, an examination of IDA's allocation bution by region indicates that 42 percent was criteria, IDA's role in development aid, and in Africa, 19 percent in Latin America and the measures to supplement IDA's donor re- Caribbean, 14 percent in East Asia and Pacific, sources. At the April 1992 meeting of the 10 percent in South Asia, 9 percent in Middle Development Committee, ministers, while rec- East and North Africa, and 6 percent in Eu- ognizing the budgetary constraints of many rope and Central Asia. donors, nonetheless recognized the need for The sectors receiving the most cofinancing IDA deputies to reach agreement by the end of support were power, water supply, and non- 1992 on a tenth replenishment, preferably at a sector specific. Sectors showing a large gain in level substantially above that of IDA-9. cofinancing support, when compared with fis- Additional meetings were scheduled to be cal 1991, were power, water supply, and indus- held in July 1992 in Dublin and in September trial development/finance. Investment loans 1992 in Washington to discuss issues of size received the biggest share of cofinancing sup- and burden sharing. Resources contributed un- port, followed by sector-adjustment and struc- der IDA-10 will provide the association with tural-adjustment loans. funds to cover credit commitments in the pe- The largest source of cofinancing in fiscal riod fiscal 1994 through fiscal 1996. At those 1992 continued to be official bilateral and mul- meetings, deputies will also consider a pro- tilateral development institutions, which, to- posal, made by the Bank's president, Lewis T. gether, accounted for $8,872 million, or 67 Preston, to delegates attending the United Na- percent of total cofinancing. Official cofinanc- tions Conference on Environment and Devel- ing from Japan, mainly through the Overseas opment, to establish an "Earth increment," Economic Cooperation Fund and the Export- entailing incremental resources to be used dur- Import Bank of Japan, continued to account ing the IDA-10 period to help the poorest for the largest percentage of support of Bank- countries meet their environmental objectives. assisted operations. This cofinancing aggre- If donors are prepared to support this initia- gated $1,379 million equivalent for thirty-one tive, Bank management would propose to the projects approved in fiscal 1992, or 37 percent executive board that an annual allocation from of total bilateral cofinancing. A sizable cofi- the IBRD's net income be made available as nancing contribution also came from the the Bank's contribution to the "Earth incre- United States ($675 million) and Germany ment" to help address national environmental ($379 million). South Africa moved to fourth issues. position, as a result of its support to the Highlands Water Project in Lesotho ($241 mil- Cofinancing lion). Large amounts of bilateral cofinancing Since the creation of the Vice Presidency for also came from France ($209 million) and the Cofinancing and Financial Advisory Services United Kingdom ($190 million). Cofinancing (CFS) in 1989, the Bank's role as a catalyst for with multilateral institutions totaled $5,157 mil- promoting the flow of additional financial re- lion. Cofinancing with the Inter-American De- sources to developing countries has continued velopment Bank ($1,958 million) continued to to grow. The CFS helps mobilize financial be the largest in this category, accounting for resources by providing general coordination of 38 percent of the total. Other increased cofi- official and private-sector cofinancing of Bank nancing support came from the African Devel- projects. In early 1992, CFS put in place a new opment Bank, the Asian Development Bank, organizational structure to streamline the pro- and the Arab Fund for Economic and Social cess of resource mobilization and to focus its Development. 76 World Bank Finances Table 4-3. World Bank Cofinancing Operations, by Region, Fiscal Years 1991-92 (amounts in millions of US dollars) Projects Source of cofinancinga World Bank cofinanced Officialb Export credit Private contribution Total project Region and year No. Amount No. Amount No. Amount No. Amount IBRD IDA costs Africa 1991 54 2,215.3 53 1,973.0 2 147.0 3 95.3 650.7 1,848.2 6,169.2 1992 48 4,868.8 48 2,959.4 1 1,174,2 1 735.2 548.0 2,445.5 9,268.2 East Asia and Pacific 1991 15 698.6 15 613.2 1 85.4 - - 1,519.3 309.9 3,907.2 1992 16 3,297.0 16 1,167.5 4 1,956.2 2 173.3 2,088.5 147.0 11,193.1 South Asia 1991 15 1,894.1 14 1,130.5 1 745.6 1 18.0 676.0 717.8 5,508.4 1992 12 639.4 11 284.2 2 206.7 1 148.5 1,045.0 903.3 4,067.6 Europe and Central Asia 1991 11 1,203.2 10 845.0 2 226.9 1 131.3 2,287.0 - 6,445.3 1992 7 307.5 7 307.5 - - - - 872.0 41.1 1,852.5 Latin America and the Caribbean 1991 20 1,743.4 20 1,654.4 - - 1 89.0 1,844.0 105.7 4,922.9 1992 22 3,000.9 22 3,000.9 - - - - 2,363.3 323.6 7,078.0 Middle East and North Africa 1991 12 965.1 11 865.1 - - 1 100.0 933.0 205.6 2,582.1 1992 10 1,152.3 10 1,152.3 - - - - 940.0 158.0 3,304.4 Total 1991 127 8,719.7 123 7,081.2 6 1,204.9 7 433.6 7,910.0 3,187.2 29,535.0 1992 115 13,265.8 114 8,871.7 7 3,337.1 4 1,057.0 7,856.8 4,018.5 36,763.8 - Zero. NOTE: The number of operations shown under different sources add up to a figure exceeding the total number of cofinanced projects because a number of projects were cofinanced from more than one source. Details may not add to totats because of rounding. a. These statistics are compiled from the financing plans presented at the time of approval of the World Bank loans by its board of executive directors. The amounts of official cofinancing are, in most cases, firm commitments by that stage; export credits and private cofinancing amounts are, however, generally only estimates since such cofinancing is actually arranged as required for project implementation and gets firmed up a year or two after board approval. The statistics of private cofinancing in these tables for any fiscal year do not necessarily reflect market placements in that year. b. These figures include cofinancing with untied loans from the Export-Import Bank of Japan. There was also a notable increase in the ized for the Philippines. Export-credit agencies volume of export-credit cofinancing planned from Germany, Japan, Korea, Switzerland, for projects approved during the year-from and the United States wilt participate in this $1,205 million in fiscal 1991 to $3,337 million in facility. The Philippines' EXCEL facility com- fiscal 1992. The main reason for the increase plemented a $175 million IBRD loan for an was an expansion of Bank lending for sectors Industrial Restructuring Project. that attract a substantial proportion of export The focus of CFS's project-financing activi- credit (power and water supply and sewerage, ties is to provide assistance on large infrastruc- for example). The volume of private cofinanc- ture projects undertaken by the Bank. In struc- ing also increased, to $1,057 million. turing cofinancing for these projects, emphasis The export-credit enhanced leverage is placed on combining private-sector capital (EXCEL) program completed its first year of and finance with support from governments operation. The program is intended to secure and the Bank. One vehicle for project financing export credit to private-sector borrowers for is the Expanded Cofinancing Operations investments evaluated and supported by a (ECO) program, which, by providing partial Bank-assisted financial intermediary. The first World Bank guarantees, is intended to support EXCEL facility, totaling $75 million, was final- eligible Bank borrowers seeking to gain or Cofinancing 77 Table 4-4. IBRD and IDA Foreign and Local Disbursements, by Source of Supply iam-ura, In mailli-in, o.f UIS do IBRD and IDA Nei ,r,:, d,hur 'eften' To l Pe r':.o Arnm0nu Prr.aunT m.n t ,lan..,uror '4 uws T.I*.2 1 .I1 i -11 I .44 l nri[d Aiim u io..n m.re 3m. iu' 1t A..um 3mo 4n 1 .Aaioura I. l d,h'r ,n i,r i ur,c nit ni- fi I'-.1 -T i,,n in F N w' i '%IIr. IlI wr. in F -I -,no 41 millwo. In IFYC. ir a o sy I ri F NqInd icatd io 11 n, 11 , m er cil n -F 'i -r IF.X. h. \. A1 ar,c di.i,ur.. menT. r.. jr~ad- ,m Le i,.~. c- : c n o -~ .( :i-our-1 : r- cd 1 irn.'i[ Ior -.Ii.h IN B.rink r. ipplic-d e,i& n CC L- I t%perdIIi,fe i., rez .er% o! ih.; out,indiria J% jo,e Table 4-5. IBRD and IDA Foreign Disbursements. b Source of Supply mlituain on tillina of Lh exI g in,e IbRD ID.% pEo pra NspeialyLC D i v aeE-csre Npio jEC e) Such oe,rto unn wlint birntpirp oirsed aftoun nXoanil ou nid o B p h b f June 311. 1,),% 45.FIS NN 'h 1i3 11 i1 'II 13.,N44 2.Kol I' 661 Fi cai 1,sls 444 T' MS' i 72.4 1. .1, '4 '4 '.423 Fi c.1j I i)vi 1 1.2 1 h.h 11 1 4t'l f --I, 34 22l Fimiacl bnks1 o.ul1 ni a .s 3 u S4 e a.t 50 I .694 F 14c.,I ],4Q' I.Li6i 4 .-7( It t2 . "2Ii1 1.34 64 54 36 2.33- C u onu . a p s, LE c June 3''1. 1110 "11.4 2h %% 13.4i 16 ' l -ISh I 14t 0 23 - Y ~'s NOTEr )i.I'urm': w l m 1r , .r dehi eJu.Tiio ir 1 nc i. ir - ji-ur,erriri, ir n:.Iudeo '.r LBR ) nolIi DA Dk(il ... m'. i improve access to syndicated commercial- 100 percent of sovereign risks, provided that bank loans or international capital markets. In there had been an appropriate division of risks May 1992, the program was reviewed by the between the public and private sectors. In any executive directors, who approved its contin- event, the Bank's cover should be the mini- uation on the basis of the existing guidelines, mum necessary to mobilize the necessary fi- except for two modifications: nancing for a productive purpose. * ECOs on a stand-alone basis may be ap- The Bank intends to catalyze private cofi- propriate, especially in private-sector projects. nancing in a broader range of developmental Such operations will be proposed after normal projects in more member countries through Bank appraisal of the project has been carried increased flexibility and a renewed commit- out and other Bank procedures have been fully ment to consider ECO program applications satisfied. more systematically in the process of formu- * While the maximum cover for ECO guar- lating individual country strategies. antees on lending to the public sector by com- Two examples of project-financing opera- mercial banks would continue as before at 50 tions that were processed in fiscal 1992 were percent on a present-value basis, ECOs could the Hub Power Project in Pakistan and the cover on loans to private-sector projects up to Energy Sector Deregulation and Privatization 78 World Bank Finances Table 4-6. IBRD and IDA Payments to Suppliers in Active Borrowing Countries for Foreign and Local Procurement in Fiscal 1992 (millions of US dollars) Lx :. F.lr.*,,n T.a. i *111a Borrowing courirrre, pro:curenent rr. munenr md,0r,i di,ur-emr i. Algeria~ I T T Argentina 96 98 194 1.18 Bahama;. The t 34 34 0.21 Banglades.h 134 4 138 0.84 Barbado- I 1 * Beh7c 2 t 2 Benin 10 2 12 0.07 Bhutin t t I * Boli a 17 3 20 0.12 Botswana 8 1 9 0.05 Brazil 444 266 710 4.32 Bulgaria - 1 1 * Burkina Faso 23 7 23 0.14 Burundi 16 1 17 0.10 Cameroon 37 2 39 0.24 Cape Verde 1 t 1 * Central African Republic 8 t 8 0.05 Chad 10 t 10 0.06 Chile 199 15 214 1.30 China 764 215 979 5.95 Colombia 152 15 167 1.02 Comoros 2 - 2 * Congo t - t * Costa Rica 3 12 15 0.09 C6te d'Ivoire 61 30 91 0.55 Cyprus 8 10 18 0.11 Czechoslovakia - 16 16 0.10 Djibouti 2 5 7 * Dominica - 3 3 * Dominican Republic 7 7 * Ecuador 42 66 108 0.66 Egypt 9 24 33 0.20 El Salvador 5 4 9 0.05 Equatorial Guinea 2 - 2 * Ethiopia 16 t 16 0.10 Fiji 1 t 1 * Gabon 4 6 10 0.06 Gambia, The 3 - 3 * Ghana 30 2 32 0.19 Grenada t 1 2 * Guatemala t 11 11 0.07 Guinea 7 t 7 * Guinea-Bissau 3 t 3 * Guyana - t t * Haiti 3 t 3 * Honduras 18 1 19 0.12 Hungary 54 10 64 0.39 India 1,124 66 1,190 7.24 Indonesia 671 14 685 4.17 Jamaica 2 t 2 Jordan 35 16 51 0.31 Kenya 35 16 51 0.31 Korea, Republic of 98 127 225 1.37 Lao People's Democratic Republic 2 - 2 Lesotho 6 - 6 Madagascar 7 t 7 * Malawi 39 2 41 0.25 Cofinancing 79 Percentage Local Foreign Tot.d if Total B FLrrom r'utrite, pr%ocurernt r.rox uremrnenr am.unt d ur,e rnet, Malas sia 145 61 2U6 l.25 N1aldies il NIal i I' t l' h 13 3% [24 lIh Vi Co,nsulan , I 3 '5 l4' 6- 54' 446 - EIuipment 2.541 424 2 --4 2 '4 422 ;46 25>' [96 2.425 Räw maler< lI' 5 21 'h5 144 '' 25 ¯ Al enther ..;ood, l50 lu< 2:1 I 2 I 143 5 l'n Toa1 3.r'.s l, 4 45< t - x1t9 j5.,,. 3 <4 "-th 4 3rIu . nsi u li ura in1u1 .lt -i '1 11. 'ti ll 2uu >6. l Ciil ..rk, 2r 1~'3 't, 'ihr.h 3" 42 3 16 4k45 Con;ulftari, 52h h- 1 4% on Å'v 'nh ~~1- Eqtupmeri 3 ( h 1 C.4 1 4 241 x.hut h,s 4..54 3.4 is hhtl 4.1 ¯ R.t materal.' 1 xsu 2.345 1 AV sY' 2 154 I.2'3 D. ' 2.56i All erer unleld, 5 332 h" IlIP 30 ~1 o- n I4 '14 '34 Agr1.aullural mrputs SI 14 4 h" 1; ii~ l , work 34 r Os s 2 5 con,.ul[.lnr S Il 2 0 ~ h Equiprnent i IS 4, 4 I 4 9 4 l b 4t Rat. maler.,I 2 38 2" il 34 24 5<1 mn '8 \ll ,Yher g. d, 111 ; la h 34 l2 rh 34 l ~iiI ¯ 2.1 luu <1 25 lulu "i Du 0 Nt t D ..i;ur .meru.i.- fr Ichi rcjdu itarrn e. enahlint thcrri t. Co e the-i re u%iained id toip i nien i - ri fouLIC% f, donie-1 -C I-ifle Iap-. mainlain hich in -t humanire-our e dc1ciopn1vit irid If , rnent it inl relall'rc 1T CDP .,nd . i tid he. .. %eltit ni ti il n irincd Fir hL ild it e ir .il debt- Nori,kith tandifn he fator-hic lt ,cCtJre i rapid iaic i et1noriii Ort- ih f-:in-, .a runbe r m inipeditrivni lo..edl the, ihr1i1hiii ithe 14,1 Cc-noirlt gr ith Fir;l ibe-t colini ie -ullered v in oneedtol, Lo promiOlt irom trequent n Iul1i a diaterc. %%ith con%cqu.n ete and pr ale-wooi d ei,irient .id'.e'C tilp.iaci on eeonorric loo th 'Sccond in dc, eul"rLd %coiowl,i enirontcnr. logerthe poilli. a l Jc.elopmenl in .ornre "inin e- l;. Ib 'ripilii : roie%e. idet elr hinlin rc- IUpied ek ononiie peirforian,-e hilld mii rn ourcc' arid ci-effceiv e -n,1rlulwn- the o1htr .e-tnier concenir.aed oi1 t*iidinL i - nint rh 1i0LIP Can J1s..r IJe1im C a .irm and o i iLI infra iIcir cIT . - th Ilinuted outpui pat tl -iin ri .i in the Cain, in the hort Terr Finaii priaiec in'.,t:t- ITrin iI the prLdu:11 it cir-r %\a, e%ee dinli k I.eak. %-r-it. par l, to the latk of a iiipporil.e Pi I,, n artcunairent and 1ans i wcn,rc if d d noine de- gr,,.i..ih ;iralcgi'. 11t. % r.hn,i Ia ..t iave It. .een ir N duciv 1990 earthquake, which killed nearly 1,600 only 0.7 per cent. Inflation temporarily accel- people and wiped out assets valued at I per- erated to about 16 percent before declining to cent of GNP. the Gulf crisis, which added single-digit levels late in the year. The Philip- some $400 million to the country's bill for pines has many strengths: a highly educated imported oil and which displaced Filipinos labor force, well-established access to the U.S. working in the Middle East; the June 1991 market, and a sustained program of structural eruption of Mount Pinatubo; and the Novem- reforms. However, the country faces substan- her 1991 typhoon in the Eastern Visayas that tial constraints such as low levels of domestic- triggered massive mudflows, killing some 4,000 resource mobilization, a heavy burden of people. Although an effective stabilization pro- foreign debt, rising domestic debt, and, despite gram was implemented in 1991 (which had the some reduction in absolute numbers since intended effect of reducing the country's fiscal 1986. widespread poverty in urban and rural and current-account deficits), GDP growth was areas. 124 1992 Regional Perspectives I 244 yz 7 Harvesting rice in Indonesia. Economic growth in the East Asia and Pacific region was impressive in 1991, inflation was low, and growth in export volume was in double digits. Socialist Economies in Transition the exception of Mongolia, these policies stim- ulated a good supply response in 1991. Differ- The region includes four socialist econ- ent policies have been adopted on price re- omies-China, Lao People's Democratic Re- form, however: China is following a two-track public, Mongolia, and Viet Nam-that are in approach, keeping part (declining over time) of the process of becoming more market- production at government-determined prices oriented. Each has followed a different path of and allowing market forces to determine prices change. Over the past twelve years, China has for the rest of production. Mongolia has de- followed a gradual approach toward reform, dared its intention to liberalize the prices of while Viet Nam, faced with severe external most commodities and to deregulate its trade shocks, has had to make sharp adjustments. and distribution systems. Lao PDR and Viet All four countries are implementing policies Nam have implemented programs of radical of liberalization in the agricultural sector: with price liberalization that have freed virtually all East Asia and Pacific 125 prices, raised interest rates, and devalued the difficulties in 1990 and 1991 resulting from the exchange rate. cut-off of Soviet aid, which once totaled $1 Policy differences among the four countries billion a year. The industrial sector stagnated, are most significant with regard to state-owned and inflation accelerated to the 60 percent- enterprises (SOEs). to-70 percent range. Still, GDP, buoyed by China has thus far followed a two-pronged expanding agricultural output, growth in the approach of encouraging nonstate enterprises services sector, and a vigorously emerging to emerge in fields not monopolized by the private sector, grew about 3 percent in 1991. SOEs and of reforming the SOEs. Indeed, the Lao PDR, benefiting from substantial external source of vigorous growth in the coastal prov- assistance, succeeded in maintaining GDP inces of Guangdong, Fujian, Zhejiang, and growth of about 5 percent in 1991, and inflation Jiangsu has been the dynamic nonstate sector declined to 10 percent. down from 68 percent that is made up of collectives, joint ventures, in 1989. foreign ventures, and individual enterprises. Reforming SOEs is the central challenge for (The GDP of Guangdong, which borders Hong China and Viet Nam. Despite continuing bud- Kong, grew by an estimated 13 percent in 1991, getary subsidies and bank credit, SOE output while the national economy grew at a little and employment growth in China remain rela- more than half that rate.) Mongolia has an- tively sluggish, unsold production is accumu- nounced its intention to privatize almost all lating in warehouses, indebtedness is mount- small state enterprises and has completed ing, and at least three of every ten SOEs are preparations for the privatization of large ones. losing money (the government estimates that Lao PDR is also following a policy of fairly its SOEs ran up losses totaling $5.7 billion in rapid privatization-the number of state enter- 1991). The Chinese authorities now recognize prises is to be reduced from 640 to around 30 that, ultimately, state firms can only be fully over a ten-year period. Viet Nam is now ready exposed to hard budget constraints, with atten- to speed up enterprise reform after having dant bankruptcies and unemployment, to the reduced direct subsidies to enterprises and extent that their 100 million-strong work force restrained their access to bank credit. is freed from its dependence on the "work These reforms are influenced as much by unit" for housing, pensions, and income secur- initial country conditions and associated exter- ity. This realization has led the government to nal shocks as by the nature of the reforms pursue programs of housing reform and themselves. China's reforms have been the schemes for communitywide pension pooling longest lasting and the most successful in stim- and unemployment insurance. Plans have also ulating growth and productivity without sacri- been announced to create selected "enterprise ficing stability or equity. During 1987-88, when groups" through the merger of SOEs that cut growth soared to double-digit levels, the Chi- across geographical and administrative bound- nese economy began to experience inflationary aries and permit labor redeployment to be pressures. However, by late 1989, macroeco- internalized. Such measures will take time to nomic stability was largely restored, and this bear fruit, and, in the short term, the authori- stability was sustained through 1991. ties are resigned to the necessity of providing In Mongolia, the government's reform pro- further financial injections to the SOE sector. gram was launched in the face of several In Viet Nam, the SOEs receive indirect external shocks: a sharp decline in Soviet aid, subsidies and are thus a cause of unacceptably collapse of trade among members of the social- high rates of inflation. In early 1992 the gov- ist trading block, poor market conditions for ement indicated a new willingness to move Mongolia's main hard-currency exports- rapidly with enterprise reform and requested cashmere, wool, and leather products-and a foreign technical assistance to help accelerate poor harvest. These shocks contributed to a the process. Factors that constrain the govern- sharp deterioration in Mongolia's economic ment from moving rapidly on this front include situation. In 1991, external trade fell drasti- the country's mounting unemployment prob- cally, and shortages of key imported inputs, lem and a lack of resources to build a well- along with frequent electricity outages, led to a targeted safety-net mechanism for displaced sharp decline in GDP. Government efforts to workers. Key to addressing these problems pursue a tight monetary policy were hurt by an effectively is Viet Nam's ability to link up with inability to reduce the budget deficit in 1991, the global economy and receive external assis- and, in stark contrast to decades-long price tance. stability prior to 1990, inflation rates soared into the 120 percent-to-150 percent range. Viet Nam, after achieving satisfactory rates The region's rapidly growing economies of growth in both 1988 and 1989, also faced share a major concern: how to make such 126 1992 Regional Perspectives Table 6-6. Net Transfers to East Asia and Pacific (millions of US dollars; fiscal years) China Korea Indonesia Total region start start start start Item 1992 1992 1988-92 1992 1992 1988-92 1992 1992 1988-92 1992 1992 1988-92 IBRD and IDA commitments (undisbursed) 4,820 608 4,660 13,510 IBRD and IDA commitments 2,526 7,738 220 993 1,587 7,873 5,457 22,069 Gross disbursements 1,371 5,545 150 1,341 1043 6,361 3,612 17,606 Repayments 160 632 425 3,523 630 2.621 1,958 10,952 Net disbursements 1,211 4,913 -274 -2,182 413 3,741 1,654 6,654 Interest and charges 270 989 226 1,461 816 3,538 1,918 9,106 Net transfer 941 3,924 -500 -3,643 -403 203 -264 -2,452 NOTE: Disbursements from the IDA Special Fund are included. The countries shown in the table are those with the largest amounts of public or publicly guaranteed long-term debt. Details may not add to totals because of rounding. growth sustainable over the long run. Most commensurate with the region's leadership recognize that the process of structural reform role in economic adjustment. Serious concerns must be maintained. These countries also are mounting about urban pollution and con- know that they must confront those public- gestion, waste disposal, depletion of re- policy issues-provision of infrastructural fa- sources, and poor forest-management policies. cilities and expansion of human skills, for In many East Asian cities, levels of hazardous instance-that are key to sustaining growth particulate matter and sulfur dioxide in the air over the long term as countries move up the exceed World Health Organization standards technology ladder. The fact that structural for as many as 100 days a year, the level of reforms have secured public support and that a heavy metal and organic wastes in many rivers consensus has been reached in favor of their is well above accepted standards, and ground- continuation should make the process sustain- water resources are overused and are being able. Efforts are now increasingly being fo- contaminated by pollutants seeping in from the cused on longer-term issues in Indonesia, Ma- surface. laysia, and Thailand. Pressure on the region's natural resources, In Indonesia, increasing attention was paid particularly forest resources, is intense and in 1991 to building efficiency in the transport, growing. In the past ten years, deforestation power, and telecommunications sectors and to has been most extensive in Viet Nam, followed developing human-resource skills, and the gov- by Thailand and the Philippines. Although Fiji, ernment's development-expenditure program Indonesia, Malaysia, Papua New Guinea, and has been increased in these areas. In recogni- the Solomon Islands still have a large propor- tion of the magnitude of the effort required, tion of land area left in natural forests, certain greater private provision of what, in the past, quarters have expressed concern over threats had been exclusively public services is being to these areas, mainly from indiscriminate log- encouraged through regulatory reforms. Ma- ging and agricultural encroachment. Indiscrim- laysia's sixth five-year plan (1991-95) details mate felling of the rainforests is taking place in what major public investments in infrastruc- some parts of Southeast Asia as a result of a ture, human resources, and other sectors are ban on logging in Thailand and the consequent needed to permit the country to realize growth expansion of logging in Cambodia, Lao PDR, through technology-based industrial produc- Myanmar, and Viet Nam. tion rather than from exploitation of natural The past year witnessed a sharply growing resources. Similarly, Thailand's seventh five- concern about environmental issues in the re- year plan, launched in 1991, emphasizes devel- gion. In Thailand, new life was breathed into a opment of infrastructure and human resources; costly program aimed at alleviating Bangkok's the plan also seeks to bring a better regional notorious urban congestion and pollution prob- and social balance to the development process. lems when the government acted to bring proj- Partersip fr Btte Envronentect costs in line with financing. Action plans- Partnership for Better Environmenta Bank-financed highway East Asia's record in protecting and improv- project-were introduced to deal with harmful ing the environment has come a long way, atmospheric pollution caused by vehicle emis- East Asia and Pacific 127 sions, and, as a first step, the government Lending operations in China and Indonesia arranged for the successful introduction of accounted for about 75 percent of the total. lead-free gasoline in major urban areas. In Commitments to the Philippines totaled $430.3 Malaysia, major programs for environmental million. Lending operations have stabilized in monitoring and environmental improvements, recent years in mature borrowers such as Thai- covering issues relating to pricing policies, land and Malaysia; lending levels in those institutional development, and investments for countries during the year were in the $200 controlling urban and industrial pollution, were million-to-$300 million range. In Korea, the introduced. In Indonesia, policy focused on government and the Bank have agreed to phase strengthening the regulatory institutions re- out Bank lending by fiscal 1995. During the sponsible for reducing urban and industrial phase-out period, lending will average between pollution. $300 million and $400 million annually, and China, because of its size, as well as the loan amounts will progressively diminish. Dur- depth of its environmental problems, presents ing this period, lending will concentrate on the the region's most serious environmental chal- social sectors, social infrastructure, small and lenge. Levels of air and water pollution in medium industry, the environment, and other some of its major cities are among the highest areas that have been neglected. in the world. Depending inevitably on coal as a In the other economies of the region, which major energy source, China faces a tremen- accounted for 2 percent of the year's lending, dous challenge in finding effective ways to Bank resources devoted to policy work are on improve the environment through reducing the rise. In Viet Nam, projects are being pre- emissions of "greenhouse" gases. The Chi- pared in several key sectors such as agricul- nese authorities are actively engaged in tack- ture, transport, and education. Bank staff have ling these issues. Over the past decade, China worked with the Vietnamese government in has set up comprehensive environmental laws preparing sector studies on agriculture and and regulations, as well as an impressive insti- food; transportation; energy; education; popu- tutional network for policy enforcement and lation, health, and nutrition; and the financial monitoring. In 1991, the government marked sector. In addition, in collaboration with the the tenth anniversary of the passage of its International Monetary Fund, the Bank is ad- National Environment Protection Law by vising the government on monetary, fiscal, and strengthening further the law's provisions for trade reforms. In Lao PDR and Mongolia, the on-site enforcement and by introducing new Bank's role is a broad one, encompassing measures to prohibit the use of heavily pollut- resource transfers, economic and sector anal- ing industrial technology. China also ratified ysis, policy advice, technical assistance, and the Montreal Protocol on Substances That training. Deplete the Ozone Layer, opening the way for Relatively few adjustment operations have assistance from the Bank and other interna- been designed for countries in the region. The tional agencies in developing strategies and reasons are twofold: East Asian economies investment programs for the phase-out of chlo- have been relatively free of balance-of- rofluorocarbons and other chlorine-based and payments crises; in addition, the emphasis of bromine-based chemicals. the Bank on policy dialogue, through its eco- Bank Operations, Fiscal 1992 nomic and sector work, has enabled policy reforms to be supported through investment Through its lending and policy advice, the lending. Bank continued to play an active role in pro- Only one adjustment loan was approved moting development through structural re- during the year-to Lao PDR in support of forms and private-sector development; in ad- programs of privatization, public-investment dition, long-term constraints on development reform, and social-sector improvements. In the were addressed through operations designed to first full year of Mongolia's membership, an reduce poverty, develop infrastructure, and economic report was prepared, and two oper- protect the environment. ations, totaling $35 million, were approved- During fiscal 1992. commitments by the for economic rehabilitation and for technical Bank amounted to $5,457 million, an amount assistance designed to strengthen new institu- 19 percent higher than in the previous year. tions of macroeconomic management. 128 1992 Regional Perspectives South Asia A fifth of the world's population lives in the India's record of 5.3 percent was also notewor- countries of South Asia (Afghanistan, Bang- thy. But performance was noticeably weaker ladesh, Bhutan, India, Nepal, Pakistan, and Sri in Bangladesh, Nepal, and Sri Lanka. Except Lanka). Economic growth during the 1980s in in Sri Lanka, population growth rates re- these countries was modest but respectable. mained high during the decade, slowing in- Nonetheless, incomes remain low, and large creases in per capita incomes. numbers of South Asians-estimated at be- At the start of the 1990s, South Asia's econ- tween 310 million and 560 million in 1990,2 or omies appeared poised to continue expanding half the worldwide total of poor people-con- at the steady, if unspectacular, rate of the past tinue to live in poverty, with inadequate access decade. The GDP in Bangladesh, India, and Sri to basic social services, and lack employment Lanka, in fact, grew quite rapidly during 1990 and other income-generating opportunities. partly as a result of bumper harvests. The Because of rapid population growth, averaging region's economies suffered from the effects of 2.4 percent a year, pressure on already over- the oil shock in late 1990 and the political stretched public services is likely to mount, upheavals in 1991 in the Soviet Union, which implying that governments will be under even sharply diminished traditional export markets more pressure in the 1990s to deliver rising for some countries, notably India. The cumu- standards of living. lative result is that GDP growth in 1991 was Regionalforecast to have averaged only 2.8 percent, and ReginalIssus i Perpeciveexpectations are for continued slow growth in During the past decade, South Asian coun- 1992. India was particularly hard hit, and GDP tries encountered their share of the difficulties is projected to have grown only 2.5 percent in that faced most of the developing world. None- 1991. theless, real growth of gross domestic product The external shocks brought into sharp fo- (GDP) in the region averaged 4.8 percent a cus major weaknesses in the region's econo- year over this period, compared with only 4.3 mies in terms of lack of outward orientation of percent a year among low-income countries in trade policies, weak financial sectors, restric- general (excluding China). Growth was impres- tive labor markets, inefficient parastatals, and sive in Pakistan, at 6.4 percent a year, and constraints on the private sector. In most countries, the stru ctural- reform process, until very recently, had been slow and tentative, and, to a large extent, the economic and social Table 6-7. South Asia: 1990 Population transformation required for dynamic and sus- and Per Capita GNP of Countries that tamable growth remained unrealized. At the Borrowed during Fiscal Years 1990-92 same time, the sustainability of macroeco- Per capita Populationa GNPb Country (thousands) (US dollars) Bangladesh 106,656 210 2 The higher estimate reflects the count based on an inter- India 849,515 350 national poverty line set at S31 per person per month, in 1985 constant purchasing-power parity (PPP) prices. The Nepal 18,916 170 lower count is based on a lower poverty line, at $23 per Pakistan 112,351 380 person per month in 1985 constant PPP prices. The world- Sri Lanka 17,002 470 wide total of poor people for the high and low poverty lines is 1. 138 million and 644 million, respectively. To appreci- NOTE: The 1990 estimates of GNP per capita presented ate the meaning of PPP prices, note, for example, that above are from the "World Development Indicators" tndia's per capita gross national product of $340 in 1990 section of World Development Report 1992. translates into $1,150 in PPP prices. The $31 poverty line in a. Estimates from mid 1990. PPP prices is thus roughly equal to $9 per person per b. World Batik Atlas methodology, 1988-90 base period, month. The latter is the cost in India of maintaining a minimum caloric intake, at prices prevailing in India. South Asia 129 nomic imbalances increasingly became a major Overall, there were hopeful signs in fiscal concern, as rapidly rising recurrent public 1992 that South Asia's economies will emerge spending tightened pressures on the banking from the current wrenching changes better system and the balance of payments. Managing poised to deliver faster, sustained, and pover- the resource squeeze confronted governments ty-reducing growth in the 1990s. The fragility with hard choices and tradeoffs. Cutbacks on and sparseness of economic and social institu- subsidies and unproductive spending were typ- tions continue to pose serious obstacles, how- ically constrained by political considerations ever. In the weaker economies of Bangladesh and the difficulty involved in reducing private and Nepal, limited implementation capacity consumption. exacerbates an already demanding situation. In These trying circumstances made it all the all countries, the success of reform ultimately more necessary for governments to reconsider depends on governments' capacity to stay the their macroeconomic and sectoral policies. course of economic stabilization and restruc- Experience elsewhere suggests that growth is turing and to manage the inevitable difficulties essential for poverty reduction, that macro- in distributing the burden of adjustment among economic stabilization and structural reforms major socioeconomic groups. A more favor- are essential for growth, and that private- able external environment, in terms of favor- sector development is a key component of able movements in terms of trade, continued reforms. The private sector can contribute to access to capital flows, and further liberaliza- development, however, only when there is an tion of trade, is also needed. adequate enabling environment within which it Selected Country Highlights can expand. Essential to this environment are such ingredients as maintaining macroeco- Recent developments in India, Pakistan, and nomic stability, avoiding major price distor- Bangladesh are particularly noteworthy. Al- tions, creating sound financial systems, and though different in the details of their policy providing adequate physical infrastructure and context, these countries, together with Nepal a legal environment that respects property and Sri Lanka, share a continuing agenda of rights and enforces contracts. Of particular achieving macroeconomic stabilization, initiat- importance in recent years have been pro- ing and deepening structural reforms, encour- grams for divesting public-sector enterprises aging private-sector development, and reduc- and reducing restrictions on entry of the pri- ing poverty. vate sector, both domestic and foreign. Expe- The government of India that took office in rience elsewhere also provides valuable les- June 1991 inherited an economy in crisis. For sons on ways to reduce poverty, notably that three consecutive years, previous govern- sharper targeting of public antipoverty pro- ments had been unable to reduce the fiscal grams can increase their effectiveness while deficit to below 9 percent of GDP, and foreign- minimizing their fiscal burden and that long- exchange reserves had declined to around $1 term and sustained investments in basic edu- billion (equivalent to the value of two weeks' cation and health services are necessary for imports). India's access to commercial credit genuine progress toward poverty reduction. had been severely curtailed as its credit rating In light of these lessons, it is encouraging to was downgraded, and foreign commercial note the recent pragmatic responses of South banks sought to reduce their exposure to India. Asian governments. The effort to encourage The new government swiftly implemented growth through open markets and private-sec- decisive macroeconomic stabilization and tor development has gathered speed. At the structural-reform measures. Within the first same time, there is a recognition of govern- month in office, it devalued the rupee by 22 ment's role in providing social safety nets to percent (in terms of rupees per United States protect the poor during macroeconomic adjust- dollar) and introduced a trade-liberalization ment, as well as of government responsibility package. A revised budget, which set as a for investments in social and physical infra- target a reduction of the fiscal deficit to 6.5 structure. The press of short-term problems percent of GDP, followed quickly. notwithstanding, most governments in the re- Significant measures were taken to deepen gion recognize the dangers of postponing or reforms in trade and finance. Partial convert- overlooking longer-term goals of social devel- ibility of the rupee was achieved. Virtually all opment and poverty reduction and are making capital transactions and most current-account efforts to expand investment in basic education transactions at free-market exchange rates and health services. Investments in physical have been permitted. Progress in trade liberal- infrastructure, in turn, are being recognized as ization is being realized through a major reduc- a focal point for public activity to support an tion in quantitative restrictions and some re- expanded private-sector role in the economy. ductions in tariffs. In the financial sector, the 130 1992 Regional Perspectives government has announced a reduction in the prises to state-owned financial institutions, statutory liquidity ratio from 38.5 percent to an with further divestiture being planned. The incremental rate of 30 percent, which is ex- budget for India's 1993 fiscal year (April 1, pected to ease credit availability. It has also 1992 to March 31, 1993) provides for an initial taken action to strengthen capital markets, allocation to the National Renewal Fund to including a relaxation of controls over corpo- help cover the cost of retraining and redeploy- rate capital issues and the pricing of equity ing employees affected by public-enterprise shares. retrenchment and reform. As India's fiscal and balance-of-payments During the short time that the current gov- crisis unfolded in 1990 and 1991, the govern- ement has been in office, it has altered ment recognized that much greater reliance on India's policy framework perhaps more funda- private-sector development was needed to mentally than during the whole previous dec- achieve sustainable growth over the longer ade of gradual reform. Further, it has made term after the short-term goal of stabilizing the clear that the measures taken so far are part of economy had been realized. Accordingly, the a much broader program to change the devel- "new industrial policy," introduced in July opment strategy that India has followed since 1991, explicitly reduced the areas reserved for the 1950s. Despite the commendable progress public-sector investment, lowered investment- to date, the government continues to face licensing requirements, eased foreign-invest- difficult issues in the design of its reform ment restrictions, and reduced controls over program, especially regarding the pace of pub- large firms. The production, refining, and mar- lic-enterprise reform and the risk of a tempo- keting of oil and gas were opened to private rarily higher rate of inflation as structural mea- investors, both domestic and foreign; price and sures are implemented. distribution controls in the steel industry were India's longer-term goal of poverty-reduc- deregulated: and a first step toward the dives- tion depends crucially on the success of re- titure of public-sector enterprises was taken forms because of their implications for sus- through the sale of shares in selected enter- taed growth. In the 1980s. the incidence of Table 6-8. Lending to Borrowers in South Asia, by Sector, Fiscal Years 1983-92 (millions of US dollars) Annual average, Sector 1983-87 1988 1989 1990 1991 1992 Agriculture and Rural Development 924.3 988.3 976.8 668.0 773.8 336.1 Development Finance Companies 118.0 - 638.8 175.0 3.5 28.4 Education 81.5 4.2 314.2 580.8 307.1 145.6 Energy Oil, gas, and coal 417.4 295.0 590.0 - 735.2 330.0 Power 875.9 814.9 1,147.0 1,012.3 200.0 730.0 Industry 2s17.7 467.4 235.0 500.0 577.0 - Nonproject 150.0 - 62.5 94.4 7.0 655.2 Population, Health, and Nutrition 43.4 74.5 124.6 192.5 388.5 377.5 Public-sector Management - - - - - t Small-scale Enterprises 29.3 20.0 kft71.0 e - Techniciue arieance i - - Inlea'smlmuongcriiio ,- t 5 vt Trtionri,rnai4 de 4end c il on th sc oift, re Lfrtorrm e.c o ethincrir 14'.1 41. -frs- er -upp8. Lnd S Bor rws int" 4 Ai by Sector, Fic14 Ya 9.83 -9 2 s ..9SX I e hich IBR1 93 - 198 1 1 1.991 1 19 4s. 1D I.tn 1 1.-' 5 . 1.4 '.4I6b1.4.1 h-IS Education 81f 5 41.2 314 580. 3071 145. Nnier gy .perauons O.-il. gas.., a -..nd wId1 ,1ah coa 4 17. 295 590m0 ri 73 .2 33. South Asia 131 f -A Women working in a rice paddy in Sri Lanka. The Bank has lent more than $3 billion in support of agriculture and rural-development projects in the South Asia region. poverty declined markedly, especially in rural poverty-reduction programs that increased areas, mainly because of overall buoyant eco- growth will foster. nomic growth. Still, the country had between Despite the effects of external shocks, Paki- 226 million and 448 million poor people in 1990, stan's economy has continued to experience depending on which poverty lines, cited in quite rapid growth in recent years. In 1991, footnote 2, one accepts-roughly 35 percent to GDP grew by about 5.5 percent, with exports 40 percent of the world's poor under either growing by about 20 percent in United States definition. dollar terms. Despite good growth perfor- There is, however, concern that some of mance, Pakistan has found it difficult to keep these gains in poverty reduction may be eroded its fiscal and balance-of-payments deficits in the short run in the context of India's within stable ranges. current adjustment program. Available evi- To address these concerns, the government dence suggests that the poor remain highly has moved forward with a program of struc- vulnerable and may be adversely affected by a tural reforms-initiated in the late 1980s- number of components essential to the reform aimed both at strengthening fiscal and balance- package, including probable increases in basic of-payments performance, as well as restruct- food prices (which would follow in the wake of uring the respective roles of the public and exchange-rate depreciation), reductions in sub- private sectors. The government's overall vi- sidies for fertilizers and power, and short-term sion is to develop an outward-oriented econ- unemployment in the urban-manufacturing and omy that is increasingly free of public controls, service sectors (as firms adjust to increased has a policy and regulatory environment con- competition following industrial and trade ducive to private-sector investment, and in liberalization). While the government has which the public sector concentrates primarily taken steps to mitigate the effect of the adjust- on overall policy environment, as well as on ment program on the living standards of the those development tasks that cannot be han- poor, much more will need to be done in the dled by the private sector. As part of this near future, as a complement to the broader effort, structural reforms in finance, public- 132 1992 Regional Perspectives Table 6-9. Net Transfers to South Asia (millions of US dollars; fiscal years) India Pakistan Bangladesh Total region start start start start Item 1992 1992 1988-92 1992 1992 1988-92 1992 1992 1988-92 1992 1992 1988-92 IBRD and IDA commitments (undisbursed) 12,788 3,232 1,661 18,877 IBRD and IDA commitments 2,192 12,190 324 3,243 253 1,904 2,989 18,685 Gross disbursements 2,230 10,707 664 2.571 236 1,660 3,321 15,847 Repayments 703 2,672 141 481 20 71 881 3,284 Net disbursements 1,527 8,035 523 2,089 216 1,589 2,440 12,563 Interest and charges 780 3,249 175 657 36 158 1,011 4,157 Net transfer 747 4,786 348 1,432 180 1,431 1,429 8,406 NOTE: Disbursements from the IDA Special Fund are included. The countries shown in the table are those with the largest amounts of public or publicly guaranteed long-term debt. Details may not add to totals because of rounding. enterprise pricing, and industry and trade pol- and women's living conditions are far poorer icy have been accelerated since late 1990. than for comparable countries. Pakistan's pop- Financial-sector reforms have included im- ulation growth, currently averaging 3.1 percent provements to prudential regulations, intro- a year, remains the highest in Asia. duction of a market-based system for funding Because some 29 percent of all households the government's domestic debt, the elimina- in Pakistan are estimated to be poor, poverty tion of credit ceilings, and steps to reduce reduction remains one of the government's concessional and directed credit. Reforms in most challenging tasks. It is also a task that industry and trade have concentrated on a requires continued strong political commit- reduction in the maximum tariff and nontariff ment for its realization, an accelerated effort to barriers to imports. expand the provision of basic services by both The government also launched an ambitious the public and private sectors (including family plan in early 1991 aimed at the almost total planning and female education), sharp in- privatization of state-owned enterprises. creases in public funding in the social sectors, Nearly all of the 115 publicly owned industrial and widened access by the poor to opportuni- enterprises, except in the steel industry, are to ties for increased incomes and productive em- be privatized. Bids for some forty firms have ployment. To assist in this effort, the govern- been accepted, and, by June 30, 1992, twenty- ment, with donor support, is preparing a five industrial units had been sold to the pri- social-action plan that is intended to establish vate sector. realistic development targets in the social sec- The government is also beginning to tors, while clearly specifying the policy and strengthen reform initiatives in two critical implementation reforms needed to achieve the areas where policy changes and action pro- country's human-resource development and grams have moved quite slowly. The first poverty-reduction goals. At a meeting in April involves public-expenditure and resource- 1992 of the Pakistan consortium, members mobilization issues. The second area concerns welcomed the government's presentation of its social and human-resource development and social-action plan and noted with approval the poverty reduction, where Pakistan's efforts to active participation of the provinces in the translate economic progress into social gains plan's preparation, as well as its strong empha- have achieved only limited success. sis on family planning and education of girls. Pakistan's social indicators underscore the Shortly after the establishment of a broad- urgency of accelerating efforts to improve ba- based government in May 1991, the new gov- sic services and tackle poverty concerns. The ement of Bangladesh was faced with a slow- country's adult literacy rate is 26 percent, its down of economic activity caused, in part, by primary-school enrollment ratio stands at 50 the Gulf crisis and by the cyclone that struck in percent, life expectancy is about 55 years, and April 1991. The slowdown was exacerbated by infant-mortality levels are about 107 per 1,000 severe flooding in August and September of births. These indicators compare poorly with 1991, which ravaged agriculture and impover- the averages of other low-income countries. ished the northern part of the country. Indus- Malnutrition is widespread among children, trial production remained depressed during the South Asia 133 second half of 1991, and the execution of the caused by the floods of 1988, 1989, and 1991. public-investment program was sluggish in the Recent efforts aimed at reducing poverty have face of administrative problems associated focused on reorienting the pattern of public with the political transition. To stimulate pri- spending that goes to help the poor. In the vate-sector activity, the government lowered past, traditional programs targeted to benefit interest rates and reduced margin requirements the poor, such as food-for-work and vulnerable for opening letters of credit for imports. Begin- group-development programs, were expanded ning December 1991, it also began intensive when resources permitted; efforts to enhance monitoring of the public-investment program the developmental effect of these programs to speed up implementation. Preliminary evi- proved to be only marginally successful, how- dence indicates that economic activity began ever. More recently, an independent founda- to accelerate at the beginning of 1992. Agricul- tion has been established to provide credit for tural output (mainly foodgrain) is expected to income-generating programs directed at the further expand, while industry is showing signs very poor. If growth in the economy takes of recovery. place, as envisaged, poverty is likely to decline Since mid 1990, a program of fairly wide- in the next few years. ranging structural reforms and private-sector development has been initiated in Bangladesh. In agriculture, all restrictions on the import, The Bank's operational activities in South distribution, and siting of irrigation equipment Asia support the major development chal- and power tillers has been eliminated, and the lenges faced by the region. Its economic and role of the private sector has been progres- sector work has already had the effect of sively expanded in fertilizer distribution and redirecting the Bank's policy dialogue with, marketing. The industrial sector is also being and lending operations in, the countries of the liberalized. Under an industrial policy adopted region: Of the forty-six studies completed in 1991, only airlines, railways, the production since the beginning of 1991, thirteen have and distribution of electricity, and the owner- concerned poverty and related social-sector ship of telecommunications facilities are being issues, eleven explored matters related to reserved for the public sector. In all other structural reform, and three were on private- sectors, the intention is to gradually privatize sector development; the remaining nineteen public enterprises. To date, forty-two enter- dealt with a variety of topics. prises have been targeted for privatization. All Poverty assessments have been completed shares in government-owned industries are to in all countries except for Sri Lanka (for which be sold, wherever appropriate. Foreigners are a study is planned in fiscal 1993). The assess- now permitted to invest in shares through the ments, a key ingredient in the Bank's poverty- stock exchange, and full foreign ownership of reduction program, form the basis for sharp- enterprises is allowed in any part of the coun- ened policy dialogue on poverty issues. In try. Comprehensive adjustment programs are Pakistan, where issues relating to social devel- also being pursued in the financial sector to opment are especially urgent, the design of that improve the efficiency and viability of financial country's social-action plan and a follow-up institutions. poverty assessment were noteworthy efforts To improve efficiency and mobilize re- aimed at focusing on a priority item of policy sources, reform of the tax system, the center- dialogue with the government. piece of which was the introduction of a value- Bank and IDA lending to countries of the added tax in July 1991, has also taken place. A region totaled $2,988.8 million, a decrease of recent evaluation indicates that tax revenues $616 million over fiscal 1991 amounts. Twenty- have increased as a result. Efforts are also three operations were approved. Given the under way to strengthen reforms in income pervasiveness of poverty in South Asia, the taxation and tax administration. In the area of Bank's lending program stresses both short- public expenditures, the government has intro- term and longer-term measures to address the duced a rolling, three-year public-investment- needs of the poor. Two lending operations, program that, although limiting the growth of totaling $200 million, whose primary objective current expenditures, emphasizes high-priority is to reduce poverty, were approved. projects in agriculture, rural development, ed- Adjustment operations increased from rela- ucation, family planning, and health and pro- tively modest levels: Five adjustment opera- tects targeted programs benefiting the poor. tions were approved in the amount of $808 Poverty in Bangladesh retreated modestly in million, accounting for 22 percent of all the early 1980s, but this salutary trend appears projects, or 27 percent of lending volume. In to have been halted during 1987-91 by the India, the government's recent policy shift economic slowdown and the devastation toward a major opening of the economy to 134 1992 Regional Perspectives domestic and international competition pro- bursed loans and IDA credits was canceled and vided the basis for a structural-adjustment op- set aside for recommitment to India as new eration, approved in fiscal 1992 in the amount quick-disbursing credits. Adjustment support of $500 million to support reforms in trade, was also provided to Bangladesh in the form of industry, finance, and public-sector enter- a public resource-mobilization adjustment prises. In addition, about $650 million in undis- credit. Europe and Central Asia 135 Europe and Central Asia Developments in the Europe and Central passes the countries of Central and Eastern Asia region during fiscal 1992 were dominated Europe and the Soviet Union's successor by the historic events leading to the dissolution states, as well as Cyprus, Portugal, and Tur- of the Soviet Union, the subsequent establish- key. In August 1991, the Bank's executive ment of the Commonwealth of Independent board had approved a $30 million Technical States by a majority of the republics of the Cooperation Program (TCP) through which former Soviet Union, and the initiation of the systematic Bank work on economic issues in long and difficult task of transforming the the Soviet Union could be funded during fiscal command-driven economies of the newly inde- 1992. Resident missions were established in pendent countries into ones that are market Bucharest, Moscow, and Sofia. Albania be- based. The countries of Central and Eastern came a member of the 1BRD and IDA in Europe, which had begun the transformation October 1991; membership in the Bank was earlier, continued to experience severe de- approved by the board of governors in April clines in output, suggesting that the task will be for thirteen of the fifteen former Soviet repub- arduous and will require the Bank's continuous lics; and membership was approved in early assistance. The transition process has proven May for the remaining two republics. The to be more difficult than initially envisaged. In Russian Federation and Estonia officially be- particular, more attention must be paid to the came members of the Bank on June 16 and social and political impact of economic poli- June 23, respectively. Membership applica- cies. tions from Bosnia-Herzegovina, Croatia, and To respond to these historic developments, Slovenia are also being processed. the Bank established on December 1, 1991, a Transition to a Market Economy new regional vice presidency that encom- new egioal ice resdenc tht enom- The countries of Central and Eastern Europe continued during the year to demonstrate their commitment to a thorough transformation of Table 6-10. Europe and Central Asia: their economic systems within the context of 1990 Population and Per Capita GNP of parliamentary democracy and in the face of Countries that Borrowed during Fiscal severe economic adversity. The transforma- Vears 1990-92 tion process is proceeding against the back- drop of massive terms-of-trade shocks resulting POPh.r 14u from the collapse of the previously dominant I i I dohi, Soviet export market, and, for some countres, a heavy burden of external debt and external- AIn. ni financing shortfalls. The process of disman- Bulgaiaa a tling one economic system in favor of another systematicinvolves macroeconomic stabilization and a Czechio,u'Ar ak- 1'-'; tv,4 t reorientation of the role of the state; reform of Pon9. incentives and price systems; enterprise re- LA90o form and privatization; reform and develop- Ro'mani. 2 3-'oI L.e'40 c ment of the financial sector and banking sys- October 1991;S mebrsi inheankwa .... aprv tern; the abolition of state monopolies on )101o UTI~ a 3.11t)t foreign trade, foreign exchange, and produc- -TEir The I A- e'I,rnJr GNP r-er .7.,rit.j pre enr tion; the installation of legal frameworks for A%e r, fromn vhe '%%orIJ Delell:'Pi[Leffl Ino-iiary the development of market economies; and the ;eviodr, it 11-- !dr R ri Russia construction of social safety nets. n a Nc-i ,, jil-,h'ic The transition process in Central and East- JuneE2, respctivelc.Membrship pplica l'..E,imiaie, irom id r14911l eov Europe reveals a diversity of experience, nThstanding thenta mnd Eatern Eope nowthecnmicnytmsti the contfetuet ofms 136 1992 Regional Perspectives reform programs. Differences in the historical priorities, several common characteristics and institutional heritage are affecting the out- emerging from the reform process can be dis- come and speed of the adjustment process. On tinguished: Price liberalization has generally the one hand, Hungary and Poland have ben- resulted in some easing of shortages, for exam- efited from previous experience with enter- pie, while the establishment of legal frame- prise autonomy, and the private sector already works for the emergence of private-sector ac- employs more than 25 percent of the urban tivity has resulted, in some countries, in the labor force in those countries. For Albania, on beginnings of development. the other hand, the transition process is just The external-trade shock, coupled with mas- beginning. The emphasis on stabilization in sive cuts in investment that reflected a harden- Czechoslovakia, coupled with the tight finan- ing of constraints on the budgets of state- cial policies of the previous regime, will allow owned enterprises and the realignment of the country to emerge from the initial period of relative prices, led to large declines in real adjustment with a relatively low debt burden gross domestic product (GDP) in 1991 for the and a low rate of inflation. In Romania, by second consecutive year. Output declines contrast, the draconian cuts in consumption ranged from about 8 percent in Hungary and implemented in the late 1980s to facilitate Poland (notwithstanding the continued rapid foreign-debt repayments resulted in an initial growth of exports to the industrialized coun- upsurge in consumption and hard-currency im- tries) to about 23 percent in Bulgaria, the ports, complicating the ensuing stabilization country most dependent on the Soviet market effort. and therefore the country most adversely af- While each country in Central and Eastern fected by the demise of the Council for Mutual Europe clearly faces different challenges, re- Economic Assistance (CMEA). Output de- flecting, among other things, the conditions dines in 1991 in Yugoslavia and Albania can that existed prior to the initiation of reform, the only be estimated; surely, however, they were duration of the reform effort, and political larger than Bulgaria's. In Yugoslavia, the out- Table 6-11. Lending to Borrowers in Europe and Central Asia, by Sector, Fiscal Years 1983-92 (millions of phm dollars) Annual average, Sector 1983-87 1988 1989 1990 1991 1992 Agriculture and Rural Development 335.9 100.0 490.0 263.0 100.0 1550 Development Finance Companies 132.6 580.0 29.8 260.0 48.0 - Education 36.7 147.8 - 90.2 250.0 - Energy Oil, gas, and coal 57.0 30.1 110.0 - 520.0 246.0 Power 334.1 - - 250.0 600.0 270.0 Industry 120.8 250.0 344.5 66.0 330.0 - Nonproject 190.4 - - 600.0 1,000.0 691.1 Population, Health, and Nutrition - p75.0 - - 280.0 Public-sector Management bou- - - 200.0 Small-scale Enterprises 20.0 300.0 - - - 60.0 Technical Assistance - - - - 17.0 9.2 Telecommunications 14.0 d - - 270o - Transportation 192.1 103.0 233.0 445.0 300.0 - Urban Development 30.8 - - - - 200.0 Water Supply and Sewerage 46.2 218.0 60.0 216.0 - 32.0 Total 1,510.6 1,7289 1,342.3 2,190.2 3,867.0 2,143.3 Of which: IBRD 1,510.6 1,728.9 1,342.3 2,190.2 3,867.0 2,102.2 IDA - - - - - 41.1 Number of operations 14 13 10 14 19 14 - Zero. NOTE. Details may not add to totals because of rounding. Europe and Centra Asia 137 II Moscow's central pedestrian shopping area, the Arbat, where entreprenearship has quickly taken hold. break of hostilities among some republics dfcto h osldtdgnrlgvrmn caused further disruption to economic activity, bugtws08pretoGD. while in Albania, the initial transition phase Nowtsadn thexralhck,a- proved particularly traumatic given the rigidity ac-fpyet efrac n19 a and degree of isolation of the prior regime and mr aoal hnatcptdi oecss the relatively higher incidence of poverty. Cehsoai n ugr eoddcr Starting from negligible levels in 1989, unem- retacutsple,atatdsbtnil ployment rose throughout the subregion, frindrc netet(bu 15blini reaching about 12 percent of the labor force in thcaeoHugran$60mlinnte Poland and even more in some other countries,. aeo zcolvka,adacmltdsg Despite substantial progress in reducing fis- nicatfrg-ehnersrv.Byo- cal expenditures (as shares of GDP), fiscal tat ugraadRmnafcdfrin deficits rose in several countries, reflecting ecag hrae u otetc fetra even steeper contractions of revenue. The lat- fnnig ntecs fBlai,tesotg ter phenomenon, perhaps most apparent in waexcrtdbyheuviliiyofcm Poland, resulted from that country's prior mrilcei ie edn nareetwt heavy reliance on enterprise profits, which fell comrilbnsndeteuto.Wrd with the economic downturn. As a result. Bn tutrlajsmn on oBlai Poland, which managed to reduce inflation to an Ro niadanDActcl-m rs about 60 percent in 1991 from hyperinflation- crdtoAlai,ouedwhInrainl ary levels in 1989, must renew its emphasis on Mntr udsadyporm,ama le fiscal austerity to prevent a deteriorating pub- vitnfoeg-xhgesraeswleup lic-finance outlook from undermining its stabi- potnthpliyfae rkorstmcr- lization effort. Bulgaria managed to reduce its fomadsbizton fiscal deficit significantly in 1991, and inflation Wieteetra hcsadivsmn is expected to decline in 1992. Bulgaria also cusdrtlafeedopt,heieeny needs to tighten fiscal policies further, how- soe n oedfiutpoeso dut ever, to prevent deficits from widening. Roma- metathenrpielvllscotand nia ad vey tghtfisal plic in199 (te teii supl thesonsied gneraply gonenace trc bug t,s08preto D) NowtsadnTh xenlsok,bl Mosow' cntrl edetran hopin ara,theArawhnrepyentusihs prform ancen 199lwa and egre ofisoatin oftheprir reimeand more favorable than anticipated in some cases. thereltivly ighr icidnceof ovety. Czechoslovakia and Hungary recorded cur- Staringfro negigile eves in198, uem- rent-account surpluses, attracted substantial ployentrosethrughot te suregon, foreign direct investment (about $1.5 billion in reahin abut 2 prcet o th laor orc in the case of Hungary and $600 million in the Polad ad een orein sme the contres. case of Czechoslovakia), and accumulated sig- Desitesubtanialprgres i reucig fs- nificant foreign-exchange reserves. By con- cal xpeditues as hare ofGDP) fical trast, Bulgaria and Romania faced foreign- defiitsros in eveal ounries relecing exchange shortages due to the lack of external evenstepercontactonsof evene. he at- financing; in the case of Bulgaria, the shortage ter henoeno, pehap mos aparen in was exacerbated by the unavailability of com- Polad, esuted romtha coutrys pior mercial credit lines pending an agreement with heay rliace n nteprie pofts,whih fll commercial banks on debt reduction. World withthe conmic ownurn.As reslt, Bank structural-adjustment loans to Bulgaria Polnd,whih anaed o rdue iflaionto and Romania and an IDA critical-imports abou 60perentin 991 romhyprinlaton- credit to Albania, coupled with International ary eves i 198, mst ene itsempasi on Monetary Fund standby programs, aim at alle- fiscl asteityto revnt deeriratng ub- viating foreign-exchange shortages while sup- licfinnceoutookfro unermnin it stbi- porting the policy framework for systemic re- lizaioneffot. ulgria anaed o reuceits form and stabilization. fisal efiitsigifianly n 191,an inlaton While the external shocks and investment is epeced o dclie in199. Blgaia lso cuts directly affected output, the inherently need totigten iscl plices frthr, ow- slower and more difficult process of adjust- ever topreent efiitsfro widnin. Rma- ment at the enterprise level also constrained nia had a very tight fiscal policy in 1991 (the the supply response to rapidly enacted price 138 1992 Regional Perspeclives and trade liberalizations. Hence, acceleration Protecting the Vulnerable during of enterprise reform will be critical in generat- Transition ing a response to the reformed incentive struc- ture. The magnitude and duration of the declines In this respect, the progress already in output and the resulting fiscal constraints achieved in establishing a legal framework for have brought into focus the importance of private-sector development and privatization implementing policies that can protect vulner- holds promise. Growth in the number of regis- able groups during the transition to a market- tered private enterprises throughout the subre- based economy. Pre-reform labor markets gion (supported in the case of Poland by the were characterized byjob security, hoarding of Bank's Private Enterprise Development Proj- labor, and a blurring of the distinction between ect) has been explosive; privatization in the wages and income transfers. A central part of agricultural sector and of small-scale enter- current reforms is the move towards market- prises, shops, and restaurants has also pro- determined prices, wages, and employment. gressed rapidly. An inevitable result is a widening distribution Although privatization of enterprises has of earnings and income, including rising unem- proceeded more slowly than had been ex- ployment and increased poverty. pected, improved understanding has been Policies to protect vulnerable groups fall into reached on the complexity and time required to three categories. Policies that aim at poverty enact ownership changes, whether through relief cover the development of systems of mass privatization schemes or on a case-by- unemployment benefits and proactive labor- case basis, or whether through "giveaways," market policies-that is, employment services sales, or "pilot" privatization. The preparation that provide information to job seekers and for large-scale privatization was most ad- employers, training and retraining, and mi- vanced in Hungary, Poland, Czechoslovakia, croenterprise development; the development and Romania; in the latter three countries, top of systems of social assistance to which means priority was given to the design of mass priva- tests are applied; and the provision of a mini- tization schemes that were finalized during the mum level of unemployment benefits, sick past year.' The number of completed privati- pay, and pensions at or above the level of zations is expected to increase throughout the subsistence. A second category, made up of subregion in fiscal 1993. Completed privatiza- cost-containment measures, seeks to improve tions through fiscal year 1992 progressed fur- the targeting of benefits that go to the most thest in Hungary, which, despite relying on vulnerable by (a) reducing old-age pensions to more traditional methods, benefited from a individuals who continue to work full time, (b) more developed legal framework and capital providing only partial indexation of benefits markets, larger inflows of foreign capital, and a above the minimum benefit, and (c) improving longer history of experimenting with market- the incentive structure of benefits. The third based reforms. In Romania, the first privatiza- category involves policies designed to improve tion of shops and restaurants occurred in De- administration; they might involve ways to cember 1991; asset-selling accelerated in 1992. streamline the structure of benefits, increase In May 1992, the free distribution of 30 percent institutional capacity, and strengthen proactive of stock to the whole population through a set labor-market policies. of mutual funds was begun. In addition, most Policies to protect vulnerable groups are enterprises have been commercialized (trans- being implemented with World Bank support. formed into joint stock companies or limited Technical assistance is being provided, for liability companies) with a view to their future example, to Bulgaria, Russia, and Ukraine. In privatization. Russia, the Bank has advised on ways to Given the complexity and time required to safeguard minimum consumption levels as carry out privatization, increased attention to price subsidies are removed, on how to protect issues of governance and to the restructuring and redeploy those who become unemployed of state enterprises is required in parallel with as the economy is restructured, and on the the privatization process. Governance con- cerns have been given serious attention in Hungary, where, with support from the Bank The coupon-privatization process was begun in Czechoslo- in the form of a $200 million loan for enterprise vakia in May 1992. About 8.6 million holders or privatiza- reform, a comprehensive program to reform tion coupons-more than half of the country's population- the state enterprise sector has been developed. may opt to pool them in any or the 437 privatization- Bulgaria is expected to get similar Bank sup-investment funds, or they may invest their coupons directly Bulgriais xpetedto gt smilr Bnk up- in any of some 1,500 companies slated ror privatization port for private-sector development and indus- during the first year. The process involves industrial assets trial development. with an estimated book value of almost 9 billion. Europe and Central Asia 139 introduction or adoption of institutional ar- ter. The fate of "mothballed" industries and rangements to protect minimum living stan- nuclear power plants will involve important dards in a market-oriented economy. Support environmental considerations. is also being provided through sector work in A lack of funds to pay for cleanup activities, Hungary, Poland, and Romania. In Romania, coupled with weak implementation capacity, for example, the social sectors, labeled "non- implies an urgent need to establish priorities. productive sectors" under the regime of Nico- Specific environmental investments Will need lae Ceausescu, were politicized and severely to be targeted at those problems that will not underfunded. Under the post-revolutionary he ameliorated by changes in resource prices government, social-sector spending has in- and industrial restructuring. Initial evidence creased to 17 percent of GDP. Work on devel- suggests that, because some of the most severe oping a strategy for social-sector reform has environmental problems have a limited number begun. With World Bank support, problems in of causes, a few crucial policy and investment different sectors are being identified, and re- measures are likely to have a far-reaching form priorities are being set and implemented effect. Moreover, major environmental im- (in the health and education sectors, for exam- provements may be achievable at lower cost ple). In some cases-in Bulgaria and Czecho- than frequently mentioned-provided that re- slovakia-implementation of social policies is alistic intermediate targets are set over the an integral part of Bank-supported structural- next ten to twelve years. Nonetheless, impor- adjustment programs. In still other cases-in tant environmental-policy issues-such as the Hungary and Poland-Bank assistance is being strictness of environmental standards, liability provided through traditional project lending. for past environmental damage, responsibility Thus, in Poland, a $100 million Bank loan is for transboundary pollution-remain unre- supporting a program designed to minimize the solved and are creating uncertainty for enter- adverse effects of mass layoffs. Specifically, prises and potential investors who want to be the program focuses on early intervention at reassured that unambiguous rules will be the plant or enterprise prior to layoff. In addi- spelled out and be uniformly enforced. tion, integrated materials and techniques for Environmental-strategy studies have been occupational counselling are being developed, completed by the Bank, in collaboration with and staff from local labor offices are being the respective governments, for most Central trained to use them. and Eastern European countries, and a policy Addressingdialogue on environmental issues has been Addrssig Evirnmenal oncrnsestablished with the Soviet Union's successor Environmental degradation has become a states. The Bank is playing a major role as a stark symbol of the old system's profligate participant in the environmental programs for and, inevitably destructive, command-driven the Baltic sea and for the Danube river basin, economic regime. Low resource prices, wide- and is serving as the secretariat of a task force spread subsidies, lack of accountability and preparing an environmental-action program for enforcement, and perverse incentives all con- Central and Eastern Europe. It has also pre- tributed to a situation in which environmental pared, in concert with the United Nations pollution was implicitly encouraged as an inev- Development Programme and the United Na- itable side-effect of the achievement of eco- tions Environment Programme, a draft work nomic and political objectives. plan for the Global Environment Facility-sup- In Central and Eastern Europe, however, ported Black sea project, designed to initiate most of the ground rules have changed during the development of a long-term program to the past twelve to eighteen months, and the reverse the environmental degradation and to same thing is likely to occur in the Soviet rationalize management of the natural re- Union's successor republics. Economic trans- sources of the Black sea. Environmental is- formation, the rapid adjustment of prices to sues have also been dealt with in a number of international levels, and the consequences of sector reports and operations, such as the initial industrial restructuring have resulted in Power and Environmental Improvement Proj- a dramatic drop in production and, thus, lower ect in Czechoslovakia, the major portion of pollution-emission levels. Urgent problems re- which is dedicated to environmental improve- main, however. The widespread use of coal for ments. home heating in many areas, for example, as well as the continued operation of some heav- ily polluting large enterprises, continues to The newly independent states that were have a substantial adverse effect on health. once constituent parts of the Soviet Union face Similarly, pervasive water pollution will re- the daunting task of introducing systemic eco- quire major investments to provide clean wa- nomic reforms while creating the institutions 140 1992 Regional Perspectives needed for the governance of independent na- enterprises and shops, to commercialize larger tions. Several factors make the task of transi- enterprises, and to prepare for mass privatiza- tion more difficult than in Central and Eastern tion must be accompanied by concomitant Europe. For all the countries (save for Estonia, actions to clarify property rights and enact Latvia, and Lithuania), the longer duration of commercially oriented laws. In this regard, the communist legacy implies that a greater special attention should also be given to the effort will be required to build the skills and consistency of the legal framework. institutions needed to make a market economy Policies that spur competition are also nec- function. In most states, the question of essary; such policies would ensure that demo- whether and when to adopt a national currency nopolization is carried out in conjunction with has not yet been resolved: The difficulties privatization and that the formation of new associated with coordination of financial poli- private enterprises is encouraged. In addition, cies in what is still the ruble zone must be efforts to restructure the commercial banking weighed against the lack of resources and system and to improve prudential regulations institutional capacity needed to adopt separate and surveillance must be accelerated. Overly- currencies. Finally, for the smaller, natural ing all these issues are serious questions that resource-poor states (Belarus and Kyrghyz- relate to the issues of governance. As the stan, for example), the terms-of-trade shocks public sector adapts to a market economy, the that are resulting from the move to world responsibilities of various levels and branches prices, together with the disruption of domes- of government require urgent clarification, es- tic production caused by collapsing interrepub- pecially on fiscal issues. lic trade, are likely to be greater than those While Russia is the largest of the republics of experienced in Central and Eastern Europe. the former Soviet Union and has moved more given the republics' greater dependence on rapidly than most with a program of economic such trade in the past. Even an agriculturally reform, other republics are also engaged in the rich and outward-looking republic like Georgia difficult process of reforming their economies. has been adversely affected by these economic In its dialogue with the Bank and the Interna- uncertainties. tional Monetary Fund, Ukraine is drawing up a Against the background in 1991 of a decline reform plan that will be discussed in partia- in output by about 10 percent, inflation esti- ment. At the same time, the Bank is helping mated at 140 percent (notwithstanding perva- Ukraine improve its institutional capacity sive price controls), a budget deficit in excess through the provision of technical assistance. of 20 percent of GDP, and growing shortages of The republics of the former Soviet Union, in food, medicine, and fuel, the Russian Federa- varying degrees, are aware that the outcome of tion embarked on a decisive liberalization of the Russian stabilization and reform effort will prices, the exchange rate, and trade in January influence greatly their parallel efforts, particu- 1992. All but 5 percent of consumer prices larly with respect to inflation. Most followed were freed in a two-stage process that was the Russian example by liberalizing prices in completed in April 1992. Prices on energy January 1992, in part to avoid the outflow of products, however, are expected to reach goods to markets where prices were freed. world levels more gradually. Imports were Despite such price liberalizations, nearly all almost completely liberalized, and an inter- the states erected export barriers to interre- bank foreign-exchange auction began to func- public trade to prevent the outflow of scarce tion, with foreign exchange available for im- commodities. This action, coupled with the ports and profits remittances. declining use of the ruble (and the increasing The Russian government also took forceful use of barter), is expected to result in sharply action in the first quarter of 1992 to reduce the lower levels of such trade in 1992. The result- budget deficit. Military expenditures, invest- ing disruption to production and the almost ments, and subsidies were reduced, while the total lack of foreign exchange in several states introduction of a value-added tax and new tended to exacerbate the shortages of food, petroleum taxes allowed the budget to capture medicine, and critical spare parts and contrib- much of the benefits from higher energy prices. uted to a substantial decline in output. For stabilization to succeed, these fiscal ad- Central and indispensable components of the justments will need to be continued and reform effort involve the large-scale transfor- strengthened and be complemented by tight mation of existing state-owned enterprises into monetary policy. efficient and profitable private companies that Progress has been slower in establishing the respond to market signals in a competitive institutions and legal and regulatory frame- environment and the establishment of a wide work needed for a market economy. Govern- range of new private enterprises. The Soviet ment initiatives to privatize rapidly small-scale Union's successor states are currently saddled Europe and Central Asia 141 Table 6-12. Net Transfers to Europe and Central Asia (millions of US dollars; fiscal years) Fr I '.I 1 lbRT Q li I% i jr,4r .--ur..cJfi 1I I , NI'J. II- wit RR() rd Iof a c Ientr T,n tth of th s s of \r c b w i d e sr ei - N.c r. I 14- 2~'3' 4r -4111 -. N- r D-),Ur-~me'rT lror,i) I [DA Nr -i 1-ud irerisclidcd rh c...rr ~h)*f ti- n . it , ilie .rc Th,. -' 01 , 11 W -Ii~ .Im. WrLI a rui , *:.r rui-i.k -. , ,nILCd I. .1--Iefn del i i... n,-i -1di i,- r-,i,i r., o, i ., r Ji, with (a) the remnants of a centrally directed In addition, action plans are being developed economic system in which both production and under proposed rehabilitation loans to estab- trade tended to be more advantageous to the lish clear understandings with all states on the center than to that of the successor states of direction, pace, and content of their reform the Soviet Union; (b) a large state-owned sec- programs as a basis for further support. The tor characterized by widespread inefficiency, action plans also seek to establish policy un- technological obsolescence, and excessive derstandings on issues such as price, trade, backward integration; (c) a distorted industrial financial- sector, and legal reforms; sector-spe- structure that favors heavy industry and mili- cific reforms in areas such as agriculture, en- tary production over consumer and civilian ergy, and housing; improved social safety-net goods and services; and (d) the virtual absence arrangements during the transitional period; of private enterprises and a competitive envi- and training programs and institutional re- ronment. A number of states have made enter- forms. In all cases, the Bank is working closely prise transformation a basic objective of re- with the European Bank for Reconstruction form and are attempting to establish the legal and Development and other major donors to and institutional framework needed to achieve coordinate the assistance that is being offered. this goal. Their immediate need is for substan- tial amounts of technical assistance to help design the basic framework and policies and, The new government in Turkey, installed in subsequently, to initiate implementation. November 1991, inherited a public-sector deficit Institutional capacity building is more that had grown to about 13 percent of gross needed in the republics other than Russia, national product (GNP) and an inflation rate that since their economic development and external had reached 70 percent. The external current relations were controlled through Moscow. account, however, shifted into surplus for the There exists little experience in dealing with year, reflecting not only the sharp slowdown in the design of policy frameworks or with com- economic activity and the receipt of Gulf crisis- munication with the outside world, related grants but also the export sector's suc- During fiscal 1992, the Bank provided tech- cess in finding new markets for its goods and nical assistance for the design of the frame- services to replace those that had been lost in the work for privatization, foreign investment, and Middle East. new enterprise development in the four repub- The government has stated its intention to lics that signed technical-cooperation agree- accelerate the privatization process and reform ments following the collapse of the Soviet of public enterprises. Given the size of the Union-Belarus, Kazakhstan, Kyrghyzstan, state-enterprise sector and its contribution to and Russia. Follow-up loans, which would the fiscal deficit, it is unlikely that any stabili- provide comprehensive packages of technical zation effort in Turkey would succeed without assistance and equipment to help implement forceful action-in particular, action to limit privatization and enterprise reform, are cur- the drain on the budget of the largest loss- rently under consideration. makers-on this front. 142 1992 Regional Perspectives Graduation in Cyprus Bank Operations, Fiscal 1992 Cyprus is in the process of a transition to Commitments by the Bank to the countries meet the challenge of the impending unification of the region in fiscal 1992 totaled $2,143.3 of the European Community and is focusing its million for fourteen operations in eight coun- efforts on competing within this market. The tries, including a first operation in Albania. In Bank's assistance strategy has been to support comparison, commitments in fiscal 1991 to- the government's efforts to diversify the coun- tated $3,867 million for nineteen projects in try's economic base and foster exports, as well eight countries. Of the operations approved in as to protect the environment, particularly its fiscal 1991, five projects, totaling over $1 bil- coastal waters. This strategy was supported in lion, were advanced to the last month of the fiscal 1992 by a $32 million Bank loan designed fiscal year, thus temporarily depleting the proj- to address the drainage and wastewater prob- ect pipeline in fiscal 1992. lems in three towns on the island's southeast coast. With this project, Cyprus graduated from the status of Bank borrower. Latin America and the Caribbean 143 Latin America and the Caribbean By the end of fiscal 1992, almost all coun- many existing programs were strengthened and tries in the Latin America and the Caribbean deepened. region had adopted programs of structural ad- These programs invariably emphasize greater justment. During the year, new adjustment macroeconomic stability through reductions in programs were adopted in a few countries, and public-sector deficits; reforms of public-sector institutions so as to make progress in public finances sustainable; a realignment of prices, Tabl 6-.1. ati Amricaandtheexchange rates, and interest rates to reflect Table 6-13. Latin America and themarket conditions; reductions in import restric- Caribbean: 1991 Population and Per tions and tariffs; the privatization of public- Capita GNP of Countries that Borrowed sector enterprises; and the encouragement of during Fiscal Years 1990-92 private-sector involvement in the operation of KI' infrastructure, public utilities, and financial-sec- 1t 6 tor institutions. r iT ,4J.i I L ,If Many countries have also introduced social safety-net programs and have retargeted social Barbad,J. h ~ .S-111 expenditures to better reach the most vulnera- Bch/ I Is 1 '411 ble groups in society. The qualitative changes B-1 introduced in all these programs have been Broilmcil r stb.SIt designed to make growth sustainable. hile13.1 -1 .ui These reforms are beginning to bear fruit. In 01s t4 1 1991, total output in Latin America grew by L-cNi., Ric, : ~ about 3.0 percent, marking the first time in four D01111n1C.11 years that per capita income grew in real Rcipublic - terms. Excluding Brazil, which is in the midst Ecuador 1111s4 4IeI of a recession, the region's growth was about LIi alk.1dor 1 i 1.1 4.3 percent, indicating substantial progress in Cuitna if most countries. Nevertheless, per capita in- i come still remains below the level attained in Hordura, i. .fty 1979. Inflation rates have fallen in most coun- J., n w: 4 111 1s51 tries (although they still could be lower); the Nit:-,Ic Nv. 14 2. 411 average rate for the region in 1991 was about 75 percent. In Argentina, for example, inflation Vanrnma 2. 41', it1 1%1 was about 139 percent, compared with over P4.31p1 1 II o 1,900 percent and 3,000 percent in the two Peru I~ TI preceding years. In Peru, the 1991 inflation 14 Kiu .d Ne% I 411 3 1111 rate of 379 percent, while still high, is a con- St Lu,i., ' ' 1.9111 siderable improvement over the 6,800 percent Trine,dr .End of the year before. lobap) 1.111 lt1 The private sector is clearly responding to Uriigua% ~ 1.114 ' s-, greater economic stability and to the new set of % vne.,ucla 14. "IS 1.5h,i incentives being put in place. Overall, domes- N._Trc Tr.,- 1'-1~~i .k - t-,'.P r, r -f-1, reracri tic investment in the region rose by about 4 ho.e ii. Iroin ihe ,%%orid D-1.ricra Irdir, percent in 1991. Several countries-such as I ii .., n..' -~ R ** ~:Guyana, for example-have had a significant n c r NNi pe caipii d Eorr. riLd 1,141, V. . -i,. JI-A cIh-oI, , h-C 4r Uc nweighted average, excluding Nicaragua (2,770 percent in 1991). Data refer to changes in estimated GDP decators. 144 1992 Regional Perspectives supply response in the agricultural sector, as average of 27 cents at the end of 1989 to 49 farmers respond to market-determined prices cents in March 1992. and greater accessibility of inputs. While much has been accomplished in im- An additional positive sign has been the proving macroeconomic balances and the envi- renewed access of many countries to interna- ronment for private activity and investment, tional capital markets. Led by Mexico, capital much remains to be done. Serious social and inflows to Latin America were the highest institutional problems remain in many coun- since the early 1980s. In Mexico, a jump in tries. Priority areas for future attention include inflows of nearly $10 billion was about evenly the need to eradicate the worst aspects of accounted for by the proceeds of privatization, poverty, to accelerate human-resource devel- a rise in foreign direct investment, and in- opment and the quality of social services, and creased purchases of outstanding securities. to improve public administration. Chile continued to attract significant capital Policy Adjustments during 1991-92 inflows that were reflective of foreign inves- tors' interest in the country. Several countries in the region added to on- Broad advances were registered elsewhere going reform programs by taking major policy in Latin America, as flight capital returned and steps during the past year. These reforms in- direct investment rose. Latin American coun- eluded changes in trade regimes, tax reforms, tries raised $18 billion in 1991 in international and improved programs in the social sectors. capital markets, about twice the amount raised In Argentina, the maximum external tariff during the previous year. Major participants was reduced to 22 percent, ad valorem import included Argentina, Brazil, Mexico, and Ven- duties were eliminated, and export taxes were ezuela. Another positive sign was the upward reduced. In Brazil, most nontariff barriers movement in secondary-market prices for were eliminated, and a program of tariff reduc- Latin American debt, which moved from an tion is being implemented that will decrease Table 6-14. Lending to Borrowers in Latin America and the Caribbean, by Sector, Fiscal Years 1983-92 (millioms of US dollars) Annual average, Sector 1983--87 1988 1989 1990 1991 1992 Agriculture and Rural Development 1,095.8 1,404.8 161.8 855.7 941.5 1,569.6 Development Finance Companies 402.0 970.0 1,164.3 47L.1 844.5 577.0 Education 83.7 88.3 140.0 - 595.3 786.1 Energy Oil, gas, and coal 125.3 - 94.0 - 260.0 110.1 Power 601.4 423.0 736.0 897.5 - - Industry 74.6 1,065.0 860.0 - 200.0 300.0 Nonproject 460.1 250.0 692.0 1,378.0 422.3 593.8 Population, Health, and Nutrition 39.4 109.0 99.0 389.2 337.3 47.5 Public-sector Management - - 500.0 350.0 604.0 325.0 Small-scale Enterprises 278.6 - 155.0 77.5 - - Technical Assistance 22.4 - 50.7 59.0 68.8 48.2 Telecommunications 6.0 - 45.0 - - - Transportation 455.1 210.6 149.3 1,029.0 114.0 438.2 Urban Development 205.8 491.0 675.0 450.0 364.0 616.0 Water Supply and Sewerage 171.1 252.3 320.0 7.7 485.0 250.0 Total 4,021.3 5,264.0 5,842.1 5,964.7 5,236.7 5,661.5 Of which: IBRD 3,949.2 5,152.0 5,703.7 5,726.7 5,067.2 5,256.5 IDA 72.1 112.0 138.4 238.0 169.5 405.0 Number of operations 44 37 43 41 44 45 - Zero. NoTE: Details may not add to totals because of rounding. Latin America and the Caribbean 145 -t A 1 I& VI Children in a classroom in Medellin, Colombia. Average annual Bank lending for primary education during the period fiscal 1991-93 is expected to be triple the amount realized in fiscal 1990. the average import tariff from 32.2 percent in also included a reduction in the implicit tax 1990 to 14.3 percent as of July 1993. Colom- rate on coffee exports and a lowering of the bia's program of tariff reduction-in which maximum tax rates for personal and business average tariffs have been reduced to 15 percent income. In Guyana, tax reforms have simpli- from 44 percent in 1989-was completed three fied the structure of income taxes and reduced years ahead of schedule. Trade reform in that rates at the upper end, taxes on imports have country was also extended to the agricultural been decreased, and the structure of consump- sector, where quantitative restrictions on im- tion taxes has been simplified. In Paraguay, a ports were virtually eliminated and a system of large number of taxes was replaced by a few ad variable tariffs was introduced for key agricul- valorem levies, and a new value-added tax was tural products. Most import tariffs in Honduras introduced. In the Dominican Republic, tax were adjusted to the 5 percent-to-30 percent reform has eliminated many exemptions and range, while import permits and foreign-ex- deductions, lowered the level of rates, and change allocations have been eliminated. Ven- exempted incomes of the poorest from taxa- ezuela's program of tariff reform was also tion; however, important problems of tax ad- completed three years ahead of schedule. Prior ministration remain. to 1989, maximum tariffs in Venezuela were Expansion of programs to cushion the effect 135 percent; in 1991, the maximum stood at 40 of adjustment on the poor took place in El percent, and the government is committed to Salvador, where the minimum taxable-income reduce tariffs on nonagricultural imports to the limit was raised and several short-term safety- 10 percent-to-20 percent range by the end of net programs were introduced, and in Venezu- 1992. In Jamaica, foreign-exchange controls ela, where nutritional and maternal-child affecting capital transfers were removed. health-care reforms were introduced, including Many countries have taken steps to reform improvements in the targeting of maternal- their tax systems and improve tax administra- child health programs and expanded coverage tion. In El Salvador, tax reforms (carried out in of community day-care programs for needy both 1991 and 1992) have reduced distortions children. In Honduras, a pilot food-coupon and improved incentives. The reforms have program has been broadened and targeted to 146 1992 Regional Perspectives the poor by using primary health-care centers were eliminated, and tariff levels were simpli- and primary schools in poor areas as distribu- fied and reduced. In addition, the monopoly tion points. The use of redeemable coupons rights of twelve public enterprises were abol- has eliminated the logistical problems of food ished, the insurance business was deregulated, distribution. In Bolivia, the government is in- customs procedures and port services were creasing budget allocations for primary health liberalized, and the country's rigid labor legis- care and primary education, but these need to lation was significantly relaxed. The govern- be supported by improved implementation. ment also announced that it would seek to Newprivatize twenty-three public enterprises, and New rogams f Ajustentit repealed the 1987 law nationalizing the bank- Countries that have recently adopted adjust- ing system and introduced a new banking law, ment programs with the assistance of the Bank which will open Peru's commercial banking to and that are now beginning to deal with funda- foreign investment. Prodded by the need to mental structural problems include Nicaragua, raise public revenue, the government has em- Panama, Peru, and Guatemala. barked on a tax-reform program and is restruc- When the present government of Nicaragua turing tax administration. Despite significant came to power in April 1990, it was faced with achievements in the short term, the country's a country in economic ruin from a ten-year stabilization prospects depend on a still precar- civil war and a bureaucratic apparatus that ious fiscal balance. Much of Peru's external controlled almost every facet of economic ac- debt of $21 billion is in arrears, and rights to tivity. A major reform program, launched in future lending by the International Monetary March 1991, included a 400 percent devalua- Fund and the Bank are being accumulated on a tion of the cordoba and a package of policies contingent basis pending the eventual clear- aimed at fiscal and monetary austerity. The ance of arrears. public-sector deficit was brought under control Guatemala is another country in the process by reducing current expenditures, particularly of adopting a significant adjustment program. those for defense and internal security. Public- The government has reduced the fiscal deficit sector monopolies in trade and marketing were and the rate of inflation, reduced import tariffs abolished, and full access to foreign exchange to a 5 percent-to-30 percent band, begun to by the private sector was established. Public eliminate quantitative import restrictions, and employment was reduced, the tax system was lifted all remaining price controls. A major overhauled, and privatization of about one tax-reform package was passed in April-May third of 350 public enterprises was completed. 1992, which eliminated exemptions to the val- The implementation of this reform program has ue-added tax, simplified and reduced rates for received support from the Bank and other the personal income tax, and reduced the cor- official donors through the mechanism of a porate income tax to 25 percent. The govern- consultative group chaired by the Bank. In ment is also moving ahead with reforms that September 1991, Nicaragua cleared $223 mil- will reduce the presence of the public sector in lion in arrears owed to the Bank; shortly banking and increase expenditures and ser- thereafter, a $110 million economic-recovery ices in the social sectors. credit was approved-the first commitment by Privatization and Entry the Bank to the country since 1982. Panama adopted a comprehensive adjust- The broad objective of every adjustment ment program in 1992. The program seeks to program is the creation of a more efficient lower tariffs and remove quantitative restric- economy. Privatization of public enterprises, tions on imports, reform the social-security along with deregulation of government con- and tax systems, reduce public-sector employ- trots on the private sector and the elimination ment, and privatize public enterprises. This of barriers to entry, has been an integral part of strategy is being supported by a $120 million this strategy in most Latin American countries. economic-recovery loan from the Bank. Pa- In the past, public enterprises often suffered nama eliminated its arrears to multilateral or- from excessive administrative controls, over- ganizations in February 1992 and is initiating staffing, poor management, and poor invest- discussions with its private-bank creditors on a ment decisionmaking. Loss-making enter- rescheduling of its private-sector debts. prises were often unable to increase efficiency In Peru, the government of President Al- by replacing obsolete capital equipment. Priva- berto Fujimori continued to make progress in tization and increased access by the private correcting the major distortions and fiscal im- sector to new areas can restore efficiency by balances that had been introduced into the increasing competition, while reducing the fis- economy during the previous five years. Dur- cal drain caused by loss-making public enter- ing 1991, quantitative restrictions on imports prises. In the case of natural monopolies, how- Latin America and the Caribbean 147 ever, the public sector must continue to including the telephone company and hotels, maintain its regulatory responsibilities. Freed and is committed to privatizing an additional from the fiscal and administrative drain caused sixty-seven entities, representing 50 percent of by public-enterprise problems, government of- total assets. During calendar years 1991-92, ficials can concentrate on those activities that Brazil auctioned off nine enterprises, including are best suited to the public sector: the provi- the large steel complex, USIMINAS. Another sion of essential public goods and infrastruc- group of eighteen state-owned enterprises is ture in support of development and the funding slated to be privatized. This group includes of programs in the social sectors that both enterprises in the steel, petrochemical, mining, assist the poor and help develop human-capital energy, transportation, fertilizer, and capital- resources. goods industries. Privatization programs are Since 1973, Chile has sold-or in some also underway in Bolivia, Guyana, Nicaragua, cases, closed-about 500 state-owned enter- Paraguay, Peru, and Uruguay. prises, including banks, as part of an environ- ment of sustained macroeconomic and regula- tory reforms. The private sector has full The Bank continues to play an important freedom of entry into the public-utilities and role in the adjustment process in Latin Amer- infrastructure sectors. Since 1982, Mexico has ica. This role ranges from the advice it gives merged, liquidated, transferred, or sold more through its economic and sector work to direct than 900 out of a total of 1,155 state-owned lending in support of adjustment and debt- enterprises. This program was started with service reduction programs, as well as its more smaller enterprises in mind and its focus was traditional project lending. The Bank continues essentially on mergers and liquidation. After a to place a high priority on projects that provide period of success, privatization of large enter- targeted interventions that reach the poor and prises, such as the airlines (1988), the tele- vulnerable groups, develop human resources, phone company (1990), and commercial banks and help protect the environment. (1990), has been emphasized. All eighteen pub- In fiscal 1992, new commitments totaled lic-sector commercial banks have been sold, $5,662 million, involving forty-five operations. and the fertilizer and steel industries are in the This amount represented a slight increase over process of being privatized. the $5,237 million level of the previous year. Accelerated privatization is at the center of The largest commitments were to Mexico ($1.5 Argentina's present stabilization and reform billion), Peru ($1.0 billion), and Brazil ($798 efforts. Privatization of major state-owned en- million). About $1.7 billion, or 30 percent, of terprises, including the national airline, some total commitments was in the form of adjust- electricity-generating plants, and telecommu- ment lending; of this amount, however, over nications companies, has been completed. The half ($1.0 billion) went to Peru in the form of government plans to privatize virtually all three adjustment operations. Commitments to other enterprises before the end of 1992, in- Peru are being made under the Bank's program cluding gas, water, and power companies; the for countries with protracted arrears. Under merchant fleet; the post office: and enterprises this arrangement, Peru accumulates "contin- under the defense ministry, particularly steel gent disbursements" from approved adjust- and petrochemical plants. The state petroleum ment loans. Actual disbursements will not take company has been stripped of its monopoly place, however, until arrears have been powers and is being turned into a commercial cleared, an event that is expected to take place entity, while most of its oil fields have been in fiscal 1993. At that time, and assuming that sold. Finally, the government intends to down- all of the loan conditions have been met, the size the overdimensioned public banking sys- Bank will disburse the three loans approved in tem and promote the development of capital fiscal 1992. markets. About 60 percent of total World Bank lend- Venezuela's strong program of public-sector ing in the region represented projects in such reform has resulted in the privatization of three traditional areas as agriculture, water supply, banks, the country's international airline, the and transport. Projects aimed at poverty re- telecommunications company (sold for $1.9 duction constituted about 20 percent of total billion), a shipbuilding company, and a cellular lending. They included projects in support of phone company. It has targeted an additional primary-education development in Costa Rica, 70 enterprises for privatization, with priority Ecuador, and Mexico; a low-income, barrios- given to ports, sugar refineries, hotels, the improvement project in Venezuela; a social- domestic airline, and water and electric-power investment fund in Honduras; a small-farmer enterprises. Jamaica has divested close to 20 services project in Chile; and a rural-develop- percent of its total pu blic- enterprise assets, ment project in Ecuador. 148 1992 Regional Perspectives Box 6-3. New Dimensions in Regional Integration The past year has seen further development of vides for the free movement of goods, services, regional trading agreements in the Americas. capital, and labor within the common market and Attempts at regional integration in Latin America a mechanism for the coordination of macroeco- are not ne., There I, ho a er. a ignificant norim p,ree qualitame driterenLe ber i.ccr paL eirerifrnme Dr'cii-iorI hw% ko hcen iniated io,ard thc and the urrcni ini.it.e% In the p.i qln% ro,&.tv reneal .,ofthe Cenlr.d AlsrIai - regional triding arr.tngem-cni kere haed .n the noiic Conrti . hi,h nighr inchude Panama erection of i:1. ijiff h.arrILrs again.t itiport! ;ind Fcti;' an ell a t iic r-tr.il nieriiri from nonmemnelir countric and %,ere ba,i alk i [ f 6-ta Rec, El a.d .IC.1l:i oriented to.' ard the prormorion of reciiinal import i nd Ncricu.i SiLbhin arrancenucil substitution Thi, niard orienratton cleiir, lie- ha, beer fac tIer aed h thi pricr :1ureemen ot the ited potential iain and nroet of the,e .rrane- Cenirol AnerrcLn LOiintic to euablr4h a mw& ments e, entuall. cc'flap'cd Toda%. tariff. ar, rnrn taritff I perecni ['. the end ci N,42 and to being low ered. and quanitni e retricriori are jon Yhe c A I r being Hried ai p.:iri i -ountrie' idi i.du.l truc- In jddti.n he it e -_rlriiie% it The %ndein tural-adiu,tmcnr rr.granm- Thu.. the potenial PactIi%1.Aotoiia t-uador.Peru.and%ert for lasting agreement on tree-trade a.oid. c ecl h%e greed io n?e to%.rJ a region.l much 'betler The 4l t _.crir- .aid unc iltirn tie-irade .rranocnicni dunn thc period outcome -f the L ruoual Round or muiliaeral Ihe goat of the Nnde:ii 6roup i. one of econIMIC trade necgitition hatC I'lo ncrea;ed interent in ricer.ion includirceinat free Ir-dc a c.l- organning recreinal arranmentnti nivi v\rnal i,nfl ind a toodinied regional Mexco '. urretilt. riectralnO a Ieetradf apti'.',c h i .-rci, H,-.er. recent nepoi- arrangement itn the t nIred St.tes anJ C.nad... tion, hate pro.ur. dieII1. and proeic,- to'%ard which 1%uld hL kno'.,n a ie Noith Amerian [ile'e p_l t, Ic'" talled Free Tr.ide .\remrenr iNFT.Ai The rnawr Bilateral and rril.freial di,cu-ion, r abe' rak issues xv he re%-i%ed include rhc race of diu- irL: Nice i necatat rig inured trade- ment nece