STRICTLY CONFIDENTIAL 1 INTERN.ATIONAL BANK FOR RECONSTRUCTION AND DEVELOPr.'!ENT INTERNATIONAL DEVELOP~1ENT ASSOCIATION SEMINAl!_ Thursday, April 22, 1982 Washington, D.C. A seminar of the Executi~e Directors was convened at 3:00p.m. in the Board noom, 1818 H Street, N.W., Washington, D.C., Mr. Ernest Stern, chairman, presiding. MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 2 C 0 N T E N T S ITEl'-1 PAGE 1 Progress Report on Structural Adjustment Lending 3 Introductory Remarks 3 Mr. Drake 8 ~1r. El-Naggar 19 Mr. Morioka 25 Hr. Hudry 26 Mr. Adusei-Poku 32 Hr. Ragazzi 38 !--1r. Kivanc. 44 Mr. Hennesey. 48 Hr. D. Smith. 52 111r. ~1ayorga 58,63 Mr. Cole 64 Mr. Looijen 68 l\1r. Munzberg. 71 Mr. Soglo 78 Mr. Reddy 86 Mrs. Makonnen 92 Chairman's Summary 95 MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 3 P R 0 C E E D I N G S MR. STERN: Ladies and gentlemen, perhaps we might start. You have before you for this seminar two documents: one, the paper itself, a progress report on structural adjust ment lending, and then issued a week later a series of countr notes reporting on the individual structural adjustment loan operations. The paper was prepared in response to a request made on several occasions for an overview of the structural adjustment lending operations, even though it was generally recognized that the underlying substantive objectives, that is the structural adjustment programs will take a number of years more to progress before we could take a reasonable reading as to whether the basic objectives were being achieve • To start off the discussion I have asked Mr. Please who is very much involved in the design, review, processing of these operations to introduce the topic to us. MR. PLEASE: Thank you, Ernie. Members of the Board: Structural adjustment lending was introduced two years ago as a response to the markedly deteriorated prospect which were then foreseen for developing countries during the 1980s. These more gloomy expectations derived from the problems of stagflation in many parts of the developed MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington. D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 4 world, high interest rates, growing protectionist sentiments, oil prices and the climate for concessionary aid. The World Development Report provides an examination of these global issues each year. It would, therefore, be inappropriate to anticipate the systematic analysis which will be available for the Board when this year's World Development Report is presented to you for discussion. However, it can be expected that this year's WDR will continu to project a gloomy global situation and that the analysis will emphasize the particularly adverse impact which this will have on the developing countries of the world. It is also clear from Mr. Clausen's speeches that the Bank will continue to speak out on these issues whenever it seems pro- ductive to do so. However, each country of the developing world must live in the reality of the world situation which it faces even though governments might be active in various inter- national arenas in trying to improve the global situation. Furthermore, whether a country chooses to adjust is not reall an issue. Adjustment to the international situation is inevitable simply because of the fact that the overall balanc of payments of each country must by definition be balanced. The only question is whether this balancing will be achieved MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 5 with high rates of inflation, with disastrous and unnecessary declines in the level of economic activity and of employment, and with the collapse of investment and human resource development programs designed to increase the productivity and welfare of the economy, or whether the government of a country is willing and able to put in place a program of financial measures and of structural adjustment measures which will ensure that in achieving a viable balance of pay- ments situation, the minimum of damage is done to its program of development and it will in future be able to regain its growth momentum. Structural adjustment lending was introduced and designed to provide maximum support within the staff and financial resources available to the Bank and within its mandate to those governments which had requested such support and which had recognized the need to formulate and introduce, as a matter of urgency, a set of comprehensive measures designed to adjust the structure of productive activities in their economies, to the deteriorated external situations which they confront. This support to governments in the formulation of adjustment programs could begin from the knowledge acquired by the Bank as a result of its involvement over many years MILLER REPORTING CO .. INC. 320 Massachusetts Avenue. N.E. Washington. D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 6 in economic and sector work and in project operations in each of its member countries, although considerable additiona work in developing these programs would still be required. It was recognized that the form which the Bank's response and support could best take would vary from country to countr_, most obviously from the more developed countries such as Turkey and those in East Asia to the least developed countrie of Sub-Saharan Africa such as Malawi. The progress report before you describes the individual structural adjustment loans approved to date by the Board. Clearly any program of adjustment to the external economic environment must include appropriate financial polic'es and exchange rate policies for which the IMF has a primary responsibility. Closer collaboration at all levels within the Fund and the Bank has developed over the past two years. This collaboration is, of course, most important at the working levels. In this connection I would like to mention the program of two to three-day joint Fund/Bank seminars outside of Washington which has been started and which is aimed primarily at the division chief and senior economist levels. The next seminar will be in June. At these seminars the issues of collaboration can be brought down from a generalize MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington. D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 7 discussion to specific issues, such as the implications for collaboration of the differences in each institution's opera- tiona! procedures, the handling of issues such as tax policy in, for example, the context of a program to reform the structure of protection. Despite some disappointments and some delays in the implementation of agreed policy measures, the progress report before you concludes that structural adjustment lendin has enabled the Bank to respond more fully than would otherwi e have been possible to the needs of countries which have sough our assistance. This assistance has been given while maintai the Bank's primary emphasis on project lending in support of programs which address the long-term constraints on develop- ment -- population growth, education and training, infra- structure development including indigenous energy sources and agricultural research. To have failed to provide in collaboration with the IMF the maximum effective assistance to governments in dealin on an urgent basis with their medium-term problems of structu al adjustment would have put these longer-term development pro- grams in jeopardy. However, structural adjustment programs are phased programs which need to be monitored and developed in a sustained and systematic manner over several years. MILLER REPORTING CO .. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 8 Furthermore, it can be hoped that over the next few years additional countries will seek Bank assistance in formulating and implementing such programs. While recognizing the various concerns which Board members have expressed on structural adjustment lending operations, it is our belief that at this critical stage in the development of the poorer countries of the world the Bank has been able to be more fully responsive to their needs by introducing structural adjustment lending operations while maintaining its primary focus on project lending and long- term development. We hope the Board members will have been equally persuaded of this contribution by the Bank and will continue to give its endorsement to this program. Thank you, Mr. Chairman. MR. STERN: Thank you, Mr. Please. Mr. Drake. MR. DRAKE: Mr. Chairman, I welcome this opportunity to discuss this issue and I welcome these papers before us, which I find are responsive to the requests of Board members. Mr. Chairman, I would like to take this opportunity to make a few general comments about structural adjustment lending because it's a program which has been of concern to my authorities. While we have supported the concept, '"e were MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 9 troubled about exactly how it would be implemented. There are three major elements which set the structu ral adjustment loan program apart from other Bank programs. First, the comprehensiveness of the actions to be taken by the government. Second, the uniqueness of the problems and potential of each country. And third, the lack of traditiona analytical tools which could indicate whether a particular structural adjustment loan represents an optimum use of scarce resources. Because of the first two factors we have accepted the need to take a pragmatic case-by-case approach to the development of our understanding of SALs. However, the SAL program did not attract the additional resources once hoped for and, given the potential demand for SALs, we need some framework in which we can allocate resources. I appreciate the problems inherent in the use of the economic rate of return for any loan. These problems are only multiplied in dealing with a structural adjustment loan. However, perhaps the staff would tell us what analytic 1 tools are available to help decide between a project loan and a structural adjustment loan. I would expect that those analytical tools are only illustrative for the staff and would be subject to a great MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 10 deal of interpretation. If that is so, then we are still left with the problem of how we can allocate our resources most effectively. I think the potential for the structural adjustment loan program is clear. At the same time, there are many uncertainties than we face in project lending, many more uncertainties than we face in project lending. We are dealin with a very complex set of economic and political relation- ships which makes it very difficult to assess the potential contribution of an SAL to a country's future development. For example, where a country has adopted inappropriate polici s, we have talked of using the Bank's leverage to correct them through SALs. I think we should be careful with this concept It suggests that we can buy cooperation. Instead, I think that·. the money should be seen only as a means of attracting the attention of the right decision- makers. After that, it is up to the staff to persuade the government that the advocated adjustments are more than worth the social and political costs. If we do not truly persuade the government, then we should not be too surprised if those hard won policy changes are reversed later and, even if we are persuasive, a change in government, such as we had in Senegal or in Bolivia, could still result in the non-imple- MILLER REPORTING CO., INC. mentation of important elements of a structural adjustment 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 11 loan. It is because of this uncertainty and the need to allocate scarce resources that this chair has been calling for the development of guidelines which would allow us to distinguish more easily between good and better structural adjustment loans. In addition, the newness of the program and the lack of an analytical framework has meant that the Board has felt the need to subject individual SALs to greater scrutiny than would normally be true for projects. Now I think we are beginning to emerge from the development stage of the SAL program. We are beginning to develop the necessary guidelines and in my view the more recent SALs have been better than some of the earlier ones, better not only in a substantive sense but also in presenta- tion. There has been recently a much clearer link between the structural problems identified and the proposed actions to be taken. This was particularly true in the SALs prepared for Thailand and Jamaica. In addition, the progress report sets out a general set of guidelines which would seem to be taking us in the right direction. In fact, the guidelines are largely along lines I have been advocating for some time. First, that the SALs need a quote "statement of specific structural objective MILLER REPORTING CO .. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 12 and targets", unquote. Second, the SAL program should have quote "a comprehensive set of measures which are to be taken over an approximate five-year period to achieve the adjustmen objectives", unquote. And it remains to be seen whether we will stick to that five-year period, but that's a guideline, that's something we can test. Third, SALs require a moni- torable set of specific actions to be taken by a government either before approval of the SAL operation or during the following 12 to 18 months. To those three guidelines, I would only add the need for the strong commitment of the government to the adjustment program. Leaving aside the extremely difficult problem of political will, the SALs prepared for Thailand, Jamaica and to a lesser extent Malawi came closest to the guidelines. They also demonstrate a need for the guidelines to be flexibl enough to encompass vastly different economic approaches. However, for different reasons other SALs do not easily fit within the guidelines. In my view the problems identified in South Korea and the Ivory Coast were less structural in nature and more of the type which would normally fall under the traditional purview of the IMP. We faced a reverse problem in Senegal where there is MILLER REPORTING CO., INC. 320 Massachusetts Avenue. N.E. Washington. D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 13 certainly a structural problem, although in this case our semantics fail us somewhat for it is difficult to say whether the problems Senegal faces require structural adjustment or a long process of surmounting basic under-development. In the long run Senegal might have benefitted more from technica assistance, more limited sector loans to which necessary conditions could have been attached, as we have done in Tanzania and Bangladesh, and by high priority project financi g. The guidelines should help us focus on countries whi h can benefit from the adjustment side of SALs and not just from the limited balance of payments support. Balance of payments support is helpful in the short run but contributes nothing to the future unless the time bought is well used. However, while the guidelines will help us allocate scarce resources, they are still very flexible and must still leave us with the problem of resource allocation between project and non-project lending. I have heard the suggestion that there should be a maximum of roughly 30 percent for non-project lending in individual countries. Although any number is going to be arbitrary, that percentage seems appropriate as a guideline. However, I believe that we should continue to regard 10 percent as a ceiling for total non-project lending in the MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 14 Bank's overall lending program. Perhaps when SALs are less experimental the staff could make a case for more, but for now 10 percent would seem to be adequate without unduly displacing Bank lending in other high priority areas. Before I conclude, Mr. Chairman, let me say that at the outset of this program one of our misgivings was whether there would be adequate collaboration between the Bank and the Fund. I must say that concern has been totally dispelled. We have been impressed by the collaboration that we have seen and particularly in the region which I know best, the Caribbean, and I can only pay tribute to the effective working relations. Thank you. MR. STERN: Thank you, Mr. Drake. Well, of course, it is -- I'm sure you are not suggesting that it is possible to quantify precisely the benefits of the structural adjustment loan along the lines that we do for project loan and that does leave one with a question of how does one assure oneself that the money is well utilized and where do you strike the balance between project a~d non-project lending? Indeed, how do you decide in the first place that project lending will be inadequate and that one ought to turn to a series of non-project operati ns MILLER REPORTING CO .. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 15 Since this is a problem that concerns us as well, in which we have to necessarily exercise our judgment, I thought perhaps it might be useful to ask Mr. Husain, who I guess holds the record for a region -- if my summary is right -- of structural adjustment loans,to comment on that briefly. And we also have other regional Vice Presidents and senior staff here. So when we get into other country- related issues, they can help us deal with those as well. Shahid, do you want to comment? MR. HUSAIN: Thank you, Mr. Chairman. On the question of the analytical framework for structural adjustment loans, it is also linked with the secon question that Mr. Drake posed, the issue of responses. Firs , although we have conceived structural adjustment loans as -- our structural adjustment programs or the loans as £ ~ contributing to the :;to2uti~n of the basic balance of paymen s issues in some of the developing countries, this balance of payments issue is linked with much of the economic activity and much of the economic program of the governments and the framework within which much of the economic activity takes. So we have taken a very broad view of this. And the question that we have asked is: What is the policy framework within which productive activity, allocation and resource mobiliza- tion is carried out in these countries? And, therefore, how MILLER REPORTING CO .. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 16 can the various elements in the utilization of resources and mobilization of resources be changed both in terms of policy and institution in order to lay the foundation of a more healthy balance of payments environment? And I would like to cite the example that Mr. Drake himself mentioned, Thailand. In the case of Thailand, you would recollect that the program is a very broad program and touches on many areas of the government's activity. To take two or three of these -- energy: energy itself -- the whole area of energy is perhaps one of the most important issues in govern- mental policy. The pricing of energy, which has an implicati n for balance of payments, immediate balance of payments, which has an implication for resource mobilization, since many government agencies are involved, the electric generating authority -- it has its investment program close to 3 percent of GNP. The second area that we have focused upon is domestic resource mobilization. And the third, which in the case of Thailand at the moment, is unique is the overall environment of decision-making on investment priorities which touches upon planning and budgeting issues. So what I wanted to say, Mr. Chairman, is that MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 17 we have conceived it broadly but the fundamentals of the dialogue are not on the basis of a quick diagnosis of the program or of the issues but we have been relying upon the ongoing and continuing economic and sector work of the Bank in many sectors in order to lay the foundations of this. Again to go back to Thailand, the work on public administration, which in this case led to the issues on planning and budgeting -- it has been going on for two or three years and this has been the culmination of a dialogue on this. The work on the issues of the agricultural sector and particularly of land tenure has been the direct outgrowth of our involvement in the agricultural sector through project lending and which led us to the conclusion and the Thais to the conclusion that one of the major issues in the expansion of agricultural production is the whole -- and, therefore, of exports is cleaning up the titles on the lands on which people have squatted in the past. So, in brief, our dialogue is wide; it is based upon a comprehensive examination of issues of resource mobilization allocation and the governmental environment for it. Now as to the question of leverage or responses, my own view is that -- and I think this is the view that we have MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 18 followed generally -- that we should not bring structural adjustment loans to the Board as a means of buying a certain program. The Bank's role is to respond and stimulate and throughout the process of dialogue, which is based upon the intellectual input through economic and sector reports, we have basically stimulated the government into thinking about issues and then have expressed the willingness to respond through our structural adjustment programs and in the countri s where I am involved it has worked very well so far -- in Thailand, Philippines and Korea. Again, the last question that you mentioned, whether these funds by themselves will fill the gap. The answer is no, but they do provide a basis for dialogue and they provide also a basis for the mobilization of capital from the private sources. MR. STERN: Thank you. Well, I think the point about influence, of course "influence" is a bad word and it has been tarnished over the years -- but surely no one here who represents countries would believe that one can literally buy influence or buy a government's change of position by an additional $10 millio or $20 million, particularly since we are not talking about additionality in the first place. It is to raise the level MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 19 of discussion to those primary policy-makers which in fact determine the major elements of a policy framework. And for that it is true that in a country which has a total capital in-take of $2 billion a year and our lending program maybe say $400 million, you can't have a structural adjustment loan of $10 million. on the other hand, there has to remain a balance between project and non-project lending and the kind of maximum of 30 percent of the lending program is something tha has guided us. I think it's a reasonable amount, but one can't get much more precise than that. Dr. El-Naggar. MR. EL-NAGGAR: I also, Mr. Chairman, welcome the opportunity to discuss structural adjustment lending. This is an important initiative on the part of the Bank in dealing with the borrowers. And it's only right that the Board shoul have a look at regular intervals to determine the extent to which this type of lending has achieved the objectives it was supposed and is supposed to achieve. You may recall, Mr. Chairman, that when this type of lending was instituted and was being discussed in the Board some two years ago, some members of the Board expressed some doubts about this type of lending. I might mention thre MILLER REPORTING CO., INC. 320 Massachusetts Avenue. N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 20 doubts that were expressed at the time we were considering the introduction of this kind of lending. The first doubt was related to the conditionality attached to a structural adjustment loan. In the mind of many Executive Directors there was a fear that the new type of lending may put the Bank in an area of conditionality similar to that of the International Monetary Fund, knowing that in many instances the conditionality of the Internationa Monetary Fund was seriously questioned by member countries who were also skeptical about introducing a similar type of conditionality here. The second type of doubt that was raised at the time was the question of additionality, the extent to which this type of lending will bring in additional resources that can be set against the commitments that the member country will undertake in its agreement with the Bank on this typ~ of loan. The third type of doubt was the in-house capability to deal with macroeconomic policies. We have in this insti- tution, of course, first-class professional people, but our orientation and our experience since the establishment of the Bank were not a macroeconomic medium-term and long- term policy and objectives but were rather in the microeconom'c MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 ( 202) 5 46-6666 STRICTLY CONFIDENTIAL 21 level. These were the doubts and I, Mr. Chairman, was one of the skeptics. Now two years after the event, during which 13 operations were concluded, it is perhaps too early to say that we can assess structural adjustment lending, that we have enough data and experience to pronounce ourselves definitely that it has achieved the objectives that it was supposed to achieve. But from the little experience that we accumulated during these two years one can say, without hesitation, that there are indications which are positive and there are indications that perhaps our fears at that time were somewhat exaggerated. During this period, one can discern three positive aspects. The first, of course, is the fact -- is that this type of lending is a quick-disbursing type of lending and a country which is in serious balance of payments problems and is intent to carry out a program of reform to bring about a better allocation of resources, to increase productivity, to strengthen incentives, to have better investment prioritie , a country which is suffering from deficit and is intent on carrying out this kind of reform does need a quick-disburs - ment assistance. And structural adjustment lending has met the needs of our borrowing of some of our borrowing MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 22 countries in that respect. The second positive aspect is the fact that it has made it possible for our institution to engage in a dialogue with member governments which is very important in terms of the capacity of our countries to grow and to achieve the objectives of their development plans. I think the fact that this kind of lending has made it possible for our staff to speak with member countries about investment priorities, abou pricing systems, about incentives. It has been very importa both for the countries in question and for this institution also. We cannot claim to be a development institution as we do without being concerned with overall development policies and this kind of lending did provide the opportunity for this kind of intercourse between our institution and the borrowing countries. The third positive aspect of the structural adjust- rnent lending that we can deduce during the last two years is the availability of an objective and disinterested advice which sometimes is needed, not only technically sometimes it's needed but perhaps also politically it is needed to have an outside objective advice that can support a reform program which is well-conceived towards well-established development objectives. MILLER REPORTING CO •• INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 23 These are, Mr. Chairman, some of the positive aspects that one can find in our experience during the last two years. I say this is only a provisional assessment since we do not yet have enough experience to· say definitely that this is the kind of lending that we would like to see on a permanent basis. However, I do hope, Mr. Chairman, that our involvemen in structural adjustment lending will be such as to make our support to member countries effective. And one of the things that we should, I hope the Board here will make clear--that it is not right or rather I would say that we need great flexibility in dealing with different situations in different member countries. I do not think we should cast ourselves in a rigid sort of approach to the problems in different countries and we should take into account that different situa- tions do call for different solutions and different policies. The main point I am making, Mr. Chairman, is the great need for flexibility in the application of any structura adjustment program. The second point is that it is difficult for this kind of lending to set a target neither at the country level nor at the Bank level. I think the Bank should have also the flexibility in deciding at any country level how much of MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 24 its program will be in the form of non-project lending. At the overall Bank lending we did mention at one stage the target of 10 percent. And I feel, Mr. Chairman, that if this kind of lending is to achieve its objective, we should not put any ceiling and we should also try to see the extent to which our countries need this kind of lending without being bound by any figure. Of course, we still remain a project lending institution but I do not think that it is a proper thing to say that it should not exceed 10 percent or it should not exceed a specific figure. These figures are only indicative and we should have the flexibility also to extend any amount within a reasonable limit at the overall Bank level and also at the country level. Mr. Chairman, as I said at the beginning, perhaps we will have to every now and then, at regular intervals, to sit and consider the achievement that we that this kind of lending is capable of bringing about and decide 't'lhat kind of changes that can be introduced in order to make it more effective. Thank you, Mr. Chairman. MR. STERN: Thank you, Dr. El-Naggar. Well, I'm glad that we have at least succeeded in ca·lming your worst fears. We hope to move you from that to an absolutely positv MILLER REPORTING CO .. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 25 approbation in the next year. r~r. Morioka. MR. MORIOKA: Thank you, Mr. Chairman. I found this paper extremely useful and· interesting, and would like too to congratulate the staff for the quality of this paper. The analysis of this paper is very comprehensive analyzing all the important aspects of structural adjustment lending and the contents well balanced and to the point. Comparing this paper with this previous paper of April last year we can easily understand the progress made in this field. Now that the concept of structural adjustment lending have become clearer, a common knowledge and set of procedures have been evolved, the collaboration and the complementarity with the Bank and the Fund have been defined more clearly. Structural adjustment lending is now firmly establis ed in our lending operations and such by we give development. v/ On this occasion I would like to add a brief comment on structural adjustment lending, every share in our total ~ lending. It seems to me from this paper that the management has now changed the earlier indication that non-project lending would not exceed 10 percent of our total lending. But I think we should maintain this kind of limit at least fo MILLER REPORTING CO •• INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 26 more time because structural adjustment lending is still in the parastate and it is too premature to evaluate the economic impact of the structural adjustment program support by structural adjustment lending and possible financial impac on borrowing and on this very effort that sustainable level of Bank lending is reached. Thank you. HR. STERN: Thank you, Mr. Morioka. Mr. Hudry. MR. HUDRY: Thank you, Mr. Chairman. As a brief introduction, let me say, Mr. Chairman, that we have been very impressed by the outstanding quality of the document we are discussing today. And since a certain number of points have been covered, let me focus my comments on two issues. First, the question of the Bank and Fund collabora- tion: We acknowledge that impressive progress has been accomplished but there is certainly a need that the emphasis put by the top management of the Bank on coordination be fully followed at the basic operational level. This means, first, joint missions of Bank and Fund whenever it's possible It means also attempts to schedule missions at the same momen so that if differences occur between the views of Bank and MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington. D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 27 Fund, a common comprehension of the issue and hopefully comma views can be reached through local consultations. There would be some need along these lines to associate more systematically the resident missions of the Bank to missions conducted by the Fund's staff. I would like to stress also that cooperation in the preparation of projects doesn't mean, however, that the two institutions have to take identical views on the country and I am slightly worried about the statement in the paper, according to which conditions adequate to permit access to Fund resources would be a prerequisite to a detailed program of structural adjustment. This doesn't fit really with our views. We don't want a mere addition of conditionalities on a given country. And I suppose that we could face situations where structural adjustment programs in some sectors are needed and can be treated as purely component of particular projects while some broad macroeconomic difficulties could exist with the Fund. So what we wish is a better coordination without subordination to the Fund and without pure addition of conditionalities. I would like to add that in our views a way of MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 28 achieving such a better coordination without merely adding conditionalities would be to make a clearer distinction betwe the range of issues addressed in structural adjustment lendin compared to the issues addressed by the Fund. The Bank might engage in structural adjustment loans more limited in scope dealing mainly with sectoral adjustment programs in fields where the Bank is involved as a project lender and not attempting to address broader issues. This seems to us a way particularly fitting with the needs and constraints of the less developed countries. The second question I would like to address is the question of the size of the structural adjustment loans and the share of the overall Bank lending. We have some concern regarding the mechanism by which additional commit- ment during a five-year period after the first loan entails -- this mechanism entails some preemption of resources for following years. And since the ratio of 10 percent has been reached in 1982, there are not many ways to continue to finance structural adjustment programs for new countries. We could either reduce the amount of following loans for existin programs but this is not -- I don't think it would be very realistic to expect to give sizable scope for new countries and new programs in doing so. And we could also raise the MILLER REPORTING CO •• INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 29 ceiling of the 10 percent ceiling. I must say that we have no dogmatic view on the proper ceiling that we should achieve. And we are not in principle opposed to an increase of this ratio. Our main concern is how to control and to monitor closely the policy of the Bank in this field. I think we should take a much clearer view of the long-term consequences of the addition of several successive loans to a given country in terms of share of the overall program of the Bank in the long run. We should also ask ourselves what kind of criteria could be \'Torked out regarding the appropriate size of each loan. I have said that earlier discussing some particular loans. It is in the very interest of the institution to establish guidelines, giving a framewor for negotiation of structural adjustment loans. The few last loans that the Bank and the Board has approved were sized in a very wide range of amounts compared to relevant economic criteria. This is true, in particular, if we consider the relative amount compared to the regular project lending programs of the Bank. And I am asking again for setting of the framework in which the resources devoted to structural adjustment lending would be allocated and this on t..,.To levels: Firstly, MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 30 on a case-by-case basis we need some criteria; one of those mentioned earlier could be to limit the non-project lending to a portion of the global lending program on a country on a multi-year basis. This, I'd say, ratio I mentioned earlier as 25 percent or 30 percent of the total project lending of the Bank. This idea is consistent with the idea that structural adjustment lending serve mainly the purpose of improving the efficiency of project lending of the Bank. Secondly, the global share of resources of the Bank on a long-term prospect, taking into account the recurrence of loans to a given country, has to be looked at more deeply. Thank you, Mr. Chairman. MR. STERN: Thank you, Mr. Hudry. Well, we very much agree with your first point. The conditionality is not intended to be simply a repetition or a superimposition of the same kind of issues that the Fund deals with. I don't think that has been the case. We believ that they are very much complementary in the sense that, while in general it has been true that the Fund program has preceded the structural adjustment loan -- and I think while it is conceivable to think of cases where this might not be necessary -- in today's world it's hard to think of any practical examples at the moment. MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 31 In the Fund stabilization program, the Extended Fund Facilities lay the basis for redressing important imbalances in the economy. The structural adjustment loan tries to go in a different direction, not deal with those issues, but tries to deal with the longer-term structural changes which are necessary. They can be of an institutional nature, as for instance, the main theme has been in the case of Turkey, or of affecting the framework of incentives, as has been true in the case of Philippines with tariff reform, or other issues. But they don't -- we certainly try not to duplicate or to dwell in the same areas as the Fund and vice versa. Bu we believe, as one of the earlier speakers said, that the objective is not to correct only the balance of payments in the short term; the problems are likely to recur unless some basic changes are undertaken and those are the focus of the structural adjustment lending operations. And, of course, they can very much, as you suggest, in some of the lower income conntries, be focused on one sector only. For instanc in the case of Senegal and in fact there was a heavy emphasis on agriculture and that indeed would likely be the case in other low-income countries in which these loans can be under- taken. MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 32 As to the size, we have tried to stay in about that range of 30 percent of the lending program over a number of years. I think there has only been one serious exception to that which was the case of Jamaica recently. But as we explained at the time, that was because over the past several years the lending program -- the project lending program to Jamaica has been reduced to very, very low levels because of performance problems, so there was really no proper base to judge it from. And it is certainly our intention broadly to stay in that range on an individual country basis. r-1r. Adusei-Poku. MR. ADUSEI-POKU: Mr. Chairman, the basic cause of economic crisis in many developing countries can be traced to the area of trade and payments. The balance of payments difficulties which is often a reflection of the structural weaknesses and the economic system has become one of the major problems to which the structural adjustment lending is supposed to tackle. Within that framework, it is extremely difficult to see how project lending by itself could really solve some of the structural imbalances and problems within the developi g countries. And this is why the African study, for example, has placed sufficient emphasis on the need to move gradually MILLER REPORTING CO .. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 33 into the broader frame,.,ork of structural adjustment processe . In fact, the message of the African report is exactly along the lines of the structural adjustment program which has been pursued by the Bank. If you look broader into the nature of the programs -- and here I would like to confine myself to the African situation, you see that the impact of the World Bank activities will not be strongly filled if we were to depart wider away from the structural adjustment program which we are pursuing now. In the very early years of the Bank's existence we understand two-thirds of the whole lending program was non-project lending. And this, I guess, was a benefit to quite a number of countries in those days. Africa today seems to be in the same situation. And this is why we strongly believe that the emphasis that the Bank is placing on structural adjustment to be able to redress the domestic policy imbalances is very much supported and I think we should be able to encourage it. And as SAL began to assume greater importance in some of the least developed countries, especially in Sub- Saharan Africa, its share in total world lending -- the total Bank lending should also be expected to expand. And here, of course, there will be a need for flexibility regarding thi MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 34 10 percent ceiling. All the more emphasis we place on structural adjustment policy reforms in some of the lesser developed countries, the more it becomes important for us to devote a greater portion of the Bank resources to this aspect of activity. You take the case of Turkey where after a year or two of structural adjustment support with quite a sizable amount of money \'lhich the Bank has been able to devote to this program, Turkey is in a position to go to the capital markets and to supplement the funds that are being devoted by the Bank. In many of the African countries this is not possible. And this is why the size of Bank lending total ~ank lending devoted to structural adjustment for these countries becomes very important. For many of these countries to be able to pursue the policy reforms which the structural adjustment lending calls for, there is need to increase the concessionary resour es as fully spelled out in the Africa report. And here, I am beginning to wonder whether bilateral aid could not be used for cofinancing some of these programs under structural adjustment lending. After all, the bilateral donors are interested to see that any money they put into these countrie are well-utilized. And in the absence of better policy l MILLER REPORTING CO., INC. framework too much emphasis on project lending is not going ti 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 35 be of great help. And there is where I think if bilateral donors would be able to channel part of their resources in support of structural adjustment lending, they might be able to make a greater impact on the developing countries and see a better use of their own resources being channeled into these countries. I understand the Africa report has been well receive and, in fact, if we were to take Chapter 9 away from it, the rest of it would become something like a bedtime story book for many of the donor countries. With this I would suggest that possibly the Bank may wish to look into this possibility of how far bilateral aid could be utilized for cofinancing the structural adjust- ment programs. Now, Mr. Chairman, coming directly to the program itself, we would like to support strongly the Fund and Bank complementarity. And I think this should be encouraged, especially at a time when the EFF of the Fund is now being placed on a yearly basis -- it is known for years that used to be the case -- and taking into account the need for enormous resources for policy reforms, it would be necessary to see that both the Bank and the Fund join hands in support of this type of program, at least to increase the size of MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 36 resources that could flow into the developing countries. Here again, I would like to emphasize the importance of country/economic and sector work. We should also give an early warning sign to impending difficulties the developin countries may be facing so that structural adjustment could be prepared and put in place before they meet a crisis. This is the question of prevention being better than cure, which has always been supported by this chair. Good examples of these are the programs that have been put in place for Thailand and the Philippines. I don't think the Bank found it necessary to wait until there was really a crisis and then move in headlong in order to face the crisis. Usually, in a crisis situation governments get panicked and begin to resort to short-term, ad hoc measures, instead of sitting down to think through properly and carefully prepared long- term adjustment programs. Again, where the adjustment programs are taken in good time, the impact is less demanding, less drastic; there- fore, governments are able to accept them and thereby prevent political and social upheavals. I I think two years is too short a time to be able to give a proper assessment of the impact of this program, but on the whole this chair would like to give its strong MILLER REPORTING CO .. INC. 320 Massachusetts Avenue. N.E. Washington. D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 37 support to the program and express the hope that all others will be able to support and act a little more with flexibilit~ with regard to the ceiling which, of course, has been agreed on previously. As we go along, we will be able to see some improve- ments and I think the Bank will be able to make the necessary changes that would increase the impact of the program on developing countries. Here, of course, increase in country economic and sector work becomes very important. And again, the avoidance of overly ambitious targets is something which I think we should also take into account in the preparation of the programs. There is also the need for realistic time span and the pace of change which should be recognized in order to avoid any counterproductive elements that could be introduced into the implementation of the programs. Where countries are faced with enormous internal problems, if the Bank is too much in a hurry to set targets and to hasten the pace of change within these countries, the end results could only be political upheavals and social difficulties and, in some cases, the military stepping in to take over. So on the whole, Mr. Chairman, this chair would like to give very strong support to the program and express MILLER REPORTING CO .• INC. 320 Massachusetts Avenue, N.E. \Vashington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 38 the hope that within this decade many of the African governme t~ will find it necessary in their attempt to implement the recommendations of the Africa report to turn more to the Bank and to assert programs to be put in place for them. Thank you, Mr. Chairman. MR. STERN: Thank you, ~1r. Adusei-Poku. Mr. Ragazzi. MR. RAGAZZI: I certainly agree with the previous speaker that in the absence of appropriate macroeconomic framework project financing as such may not be so effective in fostering development. So I think that we all consider extremely useful that the Bank may provide the benefit of its advice and experience and cooperation with -- in the devising of macroeconomic policies and that structural adjust ment loans are an effective way for the Bank to raise this level of dialogue to the highest ranks of government. However, of course, one can -- from this premise one can draw different conclusions. One is obviously that of increasing this share of structural adjustment lending. The other one, however -- the other alternatives could be to try to increase the role of the Bank in this field of, let's say, macroeconomic policies even when during our normal project lending efforts. Here I must say that I have always MILLER REPORTING CO .. INC. 320 Massachusetts Avenue. N.E. Washington. D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 39 been somewhat distressed to see structural adjustment lending proposed for countries where the Bank has had a very high level of project lending for many years, countries that we have considered often and again examples of good economic performance or else anyhow countries where we have been present in very many different sectors with active and high levels of lending and then we see almost without warning and without a clear indication as to the reasons structural adjustment lending we proposed as if the structural develop- ments of these countries had been out of line for many years and needed big changes. Now this, I think, has been one of the reasons for criticism that have been raised in this Board to some of these structural adjustment operations. So I would like to propose to the attention of the Board and of your -- of the management that the Bank should try to have periodically every two years -- I don't know -- a dialogue at the highest level of government on the overall economic situation and development of the country. This is justified because, although our loans may be directed to specific sectors, overall the Bank is a large lender to some countries, is a very long-term lender which necessarily meets -- takes into account the long-term view. And, therefo e, MILLER REPORTING CO., INC. 320 Massachusetts Avenue. N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 40 I think that there is scope for the Bank to have a greater role in the macroeconomic sector of countries -- at least of some important countries -- even in presence of project lending. I think in this respect that it might be useful to consider the idea of discussing in the Board project reports every couple of years which would address -- sorry, economic reports that would address exactly the same topics that are discussed in structural adjustment loans. I do not suggest at all that the Board should discus the level of the lending program. This, I think, is a sensit ve issue; it should be left to the management, but still it might be useful also for the management to have an indication an occasion to discuss in the Board the overall outlook of some countries which are major customers of this institution. And I do not consider that this would be necessarily a very sensitive issue for the borrowers. After all, I don't see why we should discuss the macroeconomic problems of borrowing countries only when they are in deep trouble and come here with the structural adjustment loan. So I entirely take up your suggestion of preemptive -- of curing the ills before they are too serious. And, therefore, I strongly put forward this suggestion, that we do discuss the broad macroeconomic issues for some countries even in the MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 41 absence of structural adjustment lending and not in the way these are discussed in the IMF, which is mainly short- term or relatively short-term look at balance of payments or fiscal monetary policies. We could focus on the issues which are proper of the Bank -- the structure of investments and the structural aspects. So for this reason I am not in favor at the moment of increasing the share of Bank lending devoted to structural adjustment, also because I think it would be -- this develop- ment would have -- entails a danger, which is to reduce the impact that the Bank can have in specific sectors with the experience, the technical experience that has been accumulate in this institution in sector work -- in project work is extremely important is in itself of great help to receivin countries and, if of course we were to increase substantially the share of structural adjustment lending, inevitably part of this experience would be less utilized, whereas we would tend to increase our knowledge of macroeconomic problem , getting perhaps inevitably closer to what the IMF does. I think the cooperation between the Bank and the Fund is now useful precisely because we have specific knowledge of sector and projects and management, et cetera, that the Fund does not have. But if we go towards the direction of increasing MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 42 substantially structural adjustment lending, we are inevitabl. going to lose somehow on this peculiarity which is of the World Bank. I -- therefore, I think one of the conclusions also what I have been saying is that perhaps I would consider normal that the structural adjustment lending is given to countries that perhaps for a number of years have received less -- a lower volume of Bank lending that would normally somehow go to these countries because the Bank might have perceived that the macroeconomic framework was not conducive to development and, therefore, that there was some reason to somehow reduce the presence of the Bank in the country. And when a change comes in the overall approach to developmen , then the Bank puts that in with large structural adjustment lending, which would be additional to project lending. Therefore, I see very little merit in speaking of a ceiling -- of a ratio between structural adjustment and project lending for single countries. In my view if the macroeconomic policies are not conducive to development, the World Bank should reduce the volume of lending. And if there is instead a change and the need of particular support, we should increase the overall volume of lending, including structural adjustment lending. MILLER REPORTING CO., INC. 320 Massachusetts Avenue. N.E. Washington. D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 43 I feel in this context also that when we provide structural adjustment loans they should be relatively large or should certainly be more than a token amount compared to the needs of the country, because otherwise we inevitably give the impression of buying our seat in the government table where the decisions are made. I think it is not very logical to give very limited loan to an important country under the structural adjustment name. This has not much sense. If we do intervene, it should be for a considerable amount. And perhaps I think that we might in establishing some kind of flexible guidelines as to the amounts, we might have some consideration for the amounts which are negotiated by the IMF under the EFF, but certainly some kind of guidelines as to the amount should be, if not formalized in the Board, at least certainly developed in the practice of the management along these lines. Thank you. MR. STERN: Thank you, Mr. Ragazzi. We would be very happy to discuss economic reports with the Board. We used to have such a practice a few years ago. I think at least one of the sides tired of it pretty soon and we gave the practice up. But I will be glad to ask MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 44 the Secretary's Department to check around and if all or a number of you wish to do so, we would be very glad to arrange for discussions of the economic reports. We do, of course, have in addition to the formal exchange of views on the economic reports in all important borrowing countries quite regular high level discussions on policy -- economic reports, summarize them -- and I think generally in quite a comprehensive way and, as I say, '\-,re would be glad to arrange for discussions of those. I guess we are in the process of developing a male companion for SAL known as the prophylactic adjustment loans. PAL Pal can go with SAL. (Laughter.) MR. STERN: All right. Mr. Kivanc. MR. KIVANC: Mr. Chairman, we \'lelcome this opportunit to discuss the structural adjustment lending. First of all, I would like to commend the staff for this excellent report and country case studies and express our thanks to Mr. Please for his enlightening presentation. We appreciate in particular Chapter 4 on emerging issues and the progress report. On this occasion, I would like to repeat our full support of our constituency for the endeavor of the Bank to assist developing countries in adjusti g MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 45 their economies to the changed environment. This adjustment process is a crucial point of political and socio-economic policies of developing countries because it covers complex policy reforms and implementation issues which take place over a medium-term. The failure to adopt appropriate adjustment measures at the right time and in the right sectors during this medium-term period causes additional imbalances which will be very difficult to correct. Mr. Chairman, we believe that SAL should be develope on a case-by-case basis. This gives flexibility for the appraisal and evaluation of each country's special environ- ment and conditions. Therefore, the objectives of SAL, as shmm in paragraph 2 of the progress report, should be considered in this framework. As indicated in paragraph 5, structural adjustment requires a strong and sustained government commitment. Mr. Chairman, it is also our understanding that SAL should be based on or designed in parallel to do recipient governments' newly introduced economic stabilization or austerity programs~ In this connection, the Letter of Development Policy approach shown in paragraph 7, is an appropriate one as a basis for the program of action. MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 46 Mr. Chairman, we note with satisfaction that as a matter of policy no country should be ineligible for SALs only because it lacks the technical capacity to elaborate and educate structural adjustment program and in such cases the management is ready to step up its country, economic and sector work to assist the government to design suitable reports. Mr. Chairman, in relation to the effectiveness of IBRD/IMF collaboration, I would like to stress that we are in favor of cooperation and collaboration with the IMF and we give special emphasis to this relationship. We believe their functions in this framework, as discussed in paragraph 33 and 35, are complementary. Mr. Chairman, in this pilot stage it is gratifying to note that SAL has provided an instrument to the IBRD for achieving a sharp macroeconomic and development policy focus at the top decision-making policy levels of developing countries. It will be fair to claim that the IBRD wouldn't take this opportunity in many cases with project lending. We believe the maintenance of this leverage will be beneficia to both sides. In the discussion on the SAL to Ivory Coast, we suggested to discuss general methods of development policy an MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 47 STRICTLY CONFIDENTIAL economic measures appropriate to enhance the development process together with our project lending program. We believ. that the discussion of the lending program of IBRD and IDA should take place from time to time under decision-making policy level. This discussion could deal with the developmen issues in a broader scope. It would cover matters "'hich are of interest and importance for the different sectors of administration and it could play a coordinating role. In this general framework the project lending and proqram lending, such as structural adjustment lending, shoul provide the Bank with an appropriate leverage to play its role successfully in the development process of developing countries. Mr. Chairman, the issue of SAL as a share in the total IBRD lending is explained clearly in paragraph 55. It is indicated that program loans and credits might amount to some 7 to 10 percent of our total lending commitments. This decision was taken 12 years ago and it is our impression that it is not a strict ceiling. We believe that it should be reconsidered in the light of the 1980s' conditions and an appropriate flexibility should be given to the management. I ,.,ould also like to emphasize that the proper equation between the project lending and program lending can MILLER REPORTING CO .. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 48 be established by the management on a case-by-case basis. Thank you, Mr. Chairman. MR. STERN: Thank you, Mr. Kivanc. Mr. Hennesey. MR. HENNESEY: Thank you, Mr. Chairman. We have studied these papers that you presented us and we very much appreciate them and they have assisted us in focusing our thoughts with regard to the structural adjust ment program. And, as the program evolves, I think our thinking evolves along with it and our views on the program evolve. Basically, there is a lot in the structural adjust- ment program that is of keen interest to us, particularly with respect to the idea that the proper policy environment in which the Bank deals in creating the proper policy environ ment is of primary concern and perhaps one of the principal elements in working towards development in developing countri s per se. So there is a lot here that we find that dovetails with the approaches and the demarches we have been making in this institution and in other multilateral institutions. And you have our interest with respect to the structural adjust- ment program ,oqr keen interest. The paper before us we think is more useful in this MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 49 effect than the Bank's paper that was provided last April and we look forward to increasingly frank appraisals as the Bank gains more experience with the program. With respect to the program I would like to comment that we hope that developing countries with structural adjust ment problems will continue to come forward and more will come forward, we would hope, to work with the Bank in develop'ng programs of adjustment, since it appears that these loans can be more effective in eliciting necessary economic reform and at the same time oroviding a reliable source of finance. Also it's clear that experience with additional programs will help us to better gauge the overall merits of the structural adjustment program, and we think the progra in our view towards will continue to evolve, as I mentioned. We concur with the Bank's assessment that the program must still be regarded as experimental and we are pleased that there is no intention to displace project or sectoral lending by structural adjustment lending. In this regard we adhere to the 10 percent ceiling on non-project lending for the moment and we need to continue monitoring the program closely in that context for the foreseeable future. Regarding the program, as I mentioned, when the MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 50 Board approved the structural adjustment program for Thailand, we believe that henceforth structural adjustment loans should be tranched in the absence of some exceptional reason not to do so. The structural adjustment loan documents now summarize action programs in a matrix form and we like that format and commend the Bank for its design. In this connection, such a format could be expanded and could facilitate a more specific list of implementing actions which should be completed before a loan is fully disbursed. We believe that there is room for improvement in this area. Regarding our other key concern, which is also shared by many others, Bank/Fund coordination, we are pleased that the Bank has made considerable improvements in reporting in structural adjustment loan documents on the substance of such efforts. Presumably, this reflects the improvement in Bank/Fund coordination occasioned by having both institu- tions provide funds in support of programs focused on policy and management issues. We strongly urge the Bank to continue upgrading the standards of coordination with the Fund. And in that regard we recognize that there may be some longer range issues which will have to be addressed at one point regarding the respective roles -- the broad respective roles MILLER REPORTING CO .. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 51 of the Bank and the Fund. These are questions that we have discussed internally over in Treasury and within the u.s. Government, ones that we don't have any immediate solutions or directions for, but ones that we think will require attention in the future and that is the broad role of the Bank and the Fund in the area of policy reform, non-project lending, et cetera. So, in conclusion, I would like to say once again that there is a lot in the structural adjustment program that commends itself to us. We consider it to be still experimental but one which is beginning to take on a clear focus and one that we would like to continue to work \>lith the Bank and others in shaping in the future. Admittedly, there are questions unanswered such as the optimal size of structural adjustment loans, what are the essential elements in terms of policy reform that we might be seeking, the question of the 10 percent ceiling which, as I have mentioned, we would continue to adhere to for the time in the foreseeabl future. But we appreciate the papers before us and we consider them a very fine review of an emergent program and look forward to working on it in the future. Thank you, sir. MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 52 MR. STERN: Thank you, Mr. Hennesey. Hr. Smith. MR. D. SMITH: Thank you, Mr. Chairman. I too welcome the opportunity to discuss structural adjustment lending on the basis of what I think is a very good paper prepared by the management and I don't propose, r1r. Chairman, to disturb the general harmony that seems to be prevailing this afternoon. MR. STERN: Little pools of peace are hard to find. MR. D. SMITH: When we first approached this subject of structural adjustment lending, I wasn't one of those who was skeptical about the concept, but I did at the time express a number of concerns about the way in which structura adjustment lending was going to be implemented. Whereas we remain satisfied with the concept, we agree with the Bank's argument that it is only a SAL type of non-project lending which can contribute effectively to the necessary macroeconomic and sector reforms and we agree also that the adjustment process requires a -- or would normally require a series of loans or credits for the country concerned. Turning then to the implementation, ,...,.e think that it's evolving broadly in the directions that we ,..,rould wish to see and we are happy that individual countries should be MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 53 dealt with on a case-by-case basis within the general para- meters for the design of structural adjustment lending outlined in paragraph 2 of the paper. Again, to go back to the beginning of the process I was one of those, I think, who continually made a fuss about collaboration between the Fund and the Bank. And like Mr. Drake and Hr. Hudry and some other speakers, I think that remarkable progress has been made in this area and that collaboration is now very good. And I think too that the distribution of respon- sibility between the Fund and the Bank, as described in paragraphs 32 to 41 of the paper, has got the distribution of responsibilities about right. Like .Mr. Hudry, we took the view at the outset that a Fund program shouldn't necessarily in all cases be a pre-condition for a structural adjustment lending by the Bank. But here again I think that the paper has got it just about right in the way in which it describes the position in paragraph 36, if one then reads it with what is said in paragraph 53. But I assume from what you said, Mr. Chairman, that there hasn't in fact yet been a case "'here we felt it appropriate to make a structural adjustment j. o l\N'~ loan except !'a-i-ling upon a Fund program and I can well MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 54 understand in the way in which events have evolved that that would be the natural course of events. We have observed from Table 2 -- it's Table 2 beginning on page 5 of the paper that in very few cases has a change in the exchange rate been written into a structural adjustment loan as one of the conditions to be met. I assume that this is really largely for the reasons given in paragrap 33 of the paper; in other words, that we would normally expect that the Fund would take the lead on this, but in taking the lead that they ~111ould take into account fully the concerns of the Bank about the effect·of the .exchange rate on pricing policies and so on. On the overall level my authorities remain in fact -- they remain with the view in fact, their actual words are that they remain firmly of the view that structural adjustment lending program should be contained within the existing 10 percent guideline for non-project lending. On one or two points of more detail, Mr. Chairman, paragraph 9 of the paper indicates that all but two loans have been tranched and this was a point touched upon by Mr. Hennesey. I assume that we tATould expect tranching to be a normal feature of structural adjustment loans, but that otiJ there might be the~ case where it wasn't appropriate. I MILLER REPORTING CO .. INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 55 think that we would regard tranching as the normal model to be followed. On paragraph 10 of the paper I think it's entirely right that where conditions are such that the country concern d with assistance from the Bank isn't able to put together a creditable structural adjustment program, that the Bank should then attempt to address the issues through sector lending, but I assume that there will be a balanced approach here and that we will approach the issues through sector lending only in circumstances where we are reasonably satis- fied tnat the overall macroeconomic context is sufficient for the effective implementation of sector policies. As far as the distributional aspects of structural adjustment lending are concerned, these are described in paragraph 50 of the paper. I think that we would probably all accept that the effects they have on distribution are pretty indirect and, therefore, probably not very large. In fact, the paper does say that the impact of the structural adjustment members on the poorest sectors of the society should be minimized. And I'm sure we all agree that this in no way substitutes for the type of rural development projects directly benefitting for the poor which is and we expect to remain a major part of the Bank's program. MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. \Vashington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 56 Turning now to the section in the paper on evalua- tion, it's as I think as a number of other speakers have said, it's 30 days to judge the effects of structural adjust- ment lending but I take it that the Bank will be continually monitoring and evaluating the effects with a view to deter- mining what went wrong and why and perhaps equally important what went right and why it went right. I have one other small point to make. Paragraph 59 of the paper talks about many countries lacking the political and technical capacity to formulate credible pro- grams. This is clearly so, but we very much hope that the Bank would in fact use to the maximum extent possible the various tools which it has to address this problem as outline in paragraph 52 of the paper and in particular, as has been the case with many structural adjustment loans, that the building in of a technical assistance component or a parallel technical assistance loan then will be adopted. Thank you, Mr. Chairman. MR. STE~T\T: Thank you, Mr. Smith. Well just briefly, certainly that is our intention. We won't let the inadequate technical capacity stand in the way. If the government in fact recognizes its problems and wishes to do something about it, there will always be a way MILLER REPORTING CO., INC. 320 Massachusetts Avenue. N.E. Washington. D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 57 in which we can assist them in formulating the program and assist them in developing their capacity to implement it. On the distributional side it is, of course, very difficult to be precise about that and not so much in the individual structural adjustment loans as in the review of the structural adjustment program, we are very conscious of the impact of lower income groups. Sometimes these adjust- ments, these changes in policy are painful, but I think it is also very important to remember that poor policy framework and misallocation of resources in fact turn out to be most expensive for the poor and I think, although sometimes increa in prices and other such changes affect low income groups as well and that is difficult, the opportunity to regenerate a higher rate of growth and to get resource allocations more optimal will have important benefits in terms of employment as well as income for low-income groups. On tranching, yes, it is our general view that loans again should be tranched, but, as you suggested, there may be cases where this is not appropriate and we discussed both the Mauritius and the Thailand case at the time and the reasons why we thought in those two cases, in addition to establishing the fact that not everything has to be one way, that there were good substantive reasons for not tranching MILLER REPORTING CO., INC. 320 Massachuserrs Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 58 those. On the exchange rate our close and increasingly close coordination with the Fund makes it very clear that we will not drive the exchange rate conditions in our structu al adjustment loans; that we will leave that issue to the Fund, where it belongs. Clearly, in the countries where there are EFF or stabilization program operations in structural adjustment loans, yes, of course, there are lots of discussio s about the appropriateness of exchange rates and ,.,hat view of those one ought to take over a oeriod of time. But this is clearly the Fund's primary responsibility and I think we are quite reasonably satisfied that they do listen to our input and our analysis. Mr. Mayorga. MR. ~L~YORGA: Mr. Chairman, we have been very favora ly impressed by the analysis presented in the documents before us. They reaffirm in the old saying that the passing of time and the accumulation of experience are always the best teachers. In particular, we welcome the discussion of the proper linkage for mutually reinforcing nature of project and non-project lending as an integral part of the Bank's financing strategy for its member countries' development and the increasing clarity for the division of labor and MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 59 coordination between the Bank and the Fund. We are also in agreement with the Bank's conclusion of considering our present policy as still in an experimental and formative stage in the sense that we are still in the learning orocess, not that·we are questioning its existence, because we believe that it has already become -- SAL -- a permanent part and component of our lending process. We also strongly support the increasing awareness within the Bank of examining the effects of SAL lending a~d poverty alleviation)basic provision of basic needs, human ~ resource development and income redistribution. And when we find here that this is an attempt to reconcile what we have been discussing very recently in the Board, the possi- bilities of obtaining both growth and distributional aspects. Third, we recognize the importance for program preparation of technical assistance, particularly for the poorest countries. Four, maintain the required flexibility without arbitrarily predetermined limits in the size of our SAL lending. Unless we proceed in this manner, we would not be responding to the real needs and priorities of our member countries. And fifth, examining in greater detail and depth in some of the previous cases of financing where rather small MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 60 -- the financing was rather small in comparison not with the overall external imbalance we accept that this is not the purpose of SAL -- but with the more complex and extensive and pervasive nature of the proposed policy and institutional reforms. We are particularly concerned in these aspects, Mr. Chairman, of the small size of financing in the cases of Guyana and Mauritius. In the case of Guyana paragraph 36 states "somewhat greater difficulties around the Guyana SAL partly because the extent of the structural adjustment requir d were insufficiently appreciated by both the government and the Bank." We would like some comments on that. Regarding the issue of additionality, we are par- ticularly concerned about the conclusions of paragraph 57 of the document where it is said quote "Because SALs disburse more quickly than other forms of Bank lending, an increase in SAL lending would have a financial impact on Bank operations. Roughly speaking, each $100 million of SAL financed by the Bank will increase current year borrowing requirements by about $80 to $100 million above the amount assumed on the basis of aggregated project disbursement profiles." There are other types of Bank financing, Mr. Chairma , which are subject also to tast disbursements. Have we also estimated for them their impact in current year borrowing and MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 61 STRICTLY CONFIDENTIAL if so, what is the reason to select only SAL lending for this type of comment? Finally, Mr. Chairman, could we have some updating on all these activities started last year on the evaluation of SAL lending? To what extent are our project completion reports and the ongoing evaluations of OED examining the possibility in certain problem cases of changes in program design or of anything similar to what is called in project lending ~eappraisal?- Thank you, sir. MR. STERN: Thank you, Mr. Mayorga. On the question of project completion, the first project ·completion report relates to the first Turkish structural adjustment loan and it is, I guess, in penultimate draft in OED and, therefore, I suppose -- I don't have the exact date offhand, but I expect it will be issued quite shortly. In terms of the comment that you referred to on page -- in paragraph 57 under disbursement, the reason we picked that out for commenting on SAL is because there is a paper about SALs and during earlier discussions in the Board, this question in fact had been raised. It is certain! true there are other forms of quick disbursing assistance, MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 62 although -- or quick-disbursing operations but I think even others such as sector loans or time slices of investment programs or loans to DFCs don't move nearly as rapidly as structural adjustment loans or program loans. In the case of DFCs even where the commitments may be completed in an 18-month to two-year period typically, disbursements out of those commitments are still likely to take four to five years and the only point really -- the only relevance of this is that all of the other type of lending is already in ouJ· disbursement profile and it is taken into account when we estimate our borrowing requirements. The SAL was a new type of operation. It is the most rapidly disbursing one and this was simply to indicate the impact of that on the borrowi g program. Mr. Please, could you comment on the question on Guyana? MR. PLEASE: Well, concerning in general, Mr. Chairman, the important question is getting in place a progra which will increase the flow of commercial money to a country and concessionary money as well. And that's the significant focus of what we're trying to do. In the case of Guyana, quite clearly, the whole question of trying to get the industrial sector moving again which would be able to attract MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 63 foreign commercial funds for this extremely important effort to try to relate the precise amounts that we committed under SALs to the -- the actual resource gap, resource needs is of course not the way to look at it. The way to look at it is in terms of what proportion of our total commitments were going in SAL as compared with other activities. And in the case of Guyana it was extremely high; it was a larger pro- portion of our lending program. I don't think there is anyon here from the LAC Region, but a larger proportion of our lending program than in most other countries. The other country I think you mentioned was Mauritius and I think there Mr. Wapenhans certainly might confirm this. Once again, it was -- although it's a small amount in absolute terms, it in fact is one of the higher proportions in terms of our total lending to countries. MR. STERN: Mr. Mayorga. MR. MAYORGA: Well, Mr. Chairman, I recognize in my exposition that the SAL amount should not necessarily be any given percentage of the imbalance or external imbalance of the country. But since the staff has said that the Guyana loan was primarily directed to the manufacturing sector, the question remains of whether this loan of only $22 million could not have been addressed to the manufacturing sector MILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 64 without necessarily having a SAL loan? MR. STERN: You mean where there could have been a sector loan only? MR. MAYORGA: Yes. MR. STERN: Well, yes, but as I recall it I don't have all the 13 loans later I don't have it all in mind but I think the Guyana loan also covered changes in the agricultural sector. Well, in fact, if you look on page 5 you will see that, although an important emphasis was on the industrial sector, it certainly was not limited to that. MR. PLEASE: And if I might just add, Mr. Chairman, one part of that loan was in fact earmarked for the industria sector through the Export Development Fund. MR. STERN: Mr. Cole. MR. COLE: Thank you, Mr. Chairman. From the outset this chair's position on structural adjustment loans has been one of cautious support. We cer- tainly preferred them to other forms of non-project lending and we continue to do so. We have long been members of the club that believe that sound government economic policies are a key determinant of a successful development strategy and we are encouraged that the introduction of structural adjustment loans reflected increased emphasis by the Bank on ~ILLER REPORTING CO .• INC. 320 Massachusetts Avenue, N.E. Washington. D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 65 those sorts of issues. However, we are concerned about several possible problems in implementation -- concerned about overlap with the Fund, about whether it was possible to achieve policy adjustments through SALs when policy attitudes weren't cooperative enough to allow similar changes in policies to be achieved through sector and project loans and about the limits on the Bank's overall resources and the lack of any clearly defined limit and likely course for this new type of lending and the problem of squeezing out of the Bank's traditional lending role the projects. In short, we supported the theory but we were concerned about whether it was going to be able to be imple- mented effectively. Reflecting this, our authorities have generally taken much more interest in structural adjustment loans than in other loan proposals and their policy instructi ns have been conservative and have emphasized the need for caution, supported the concepts of 10 percent ceiling on total non-project lending and supported the concept of tranching. And also our Australian authorities in particular have urged that the Bank seek some objective criteria for determining the amount of each individual structural adjust- ment loan. liLLER REPORTING CO .. INC. 20 Massachusetts Avenue. N.E. Vashington, D.C. 20002 '202) 546-6666 STRICTLY CONFIDENTIAL 66 These concerns have been commented by many other chairs and particularly at the beginning who expressed over and over again in one form or another and usually by several Directors when every individual such structural adjustment loan was presented to the Board. We share the views that most other directors have expressed today that there have been substantial improvements both in the presentation and in the content of the structural adjustment programs that have been presented with structural adjustment loans over the past year or so, particularly the past year. And we think really that this has been reflected in the bouquets ~ that the last three or four structural vi adjustment loans have been given when they are being con- brJ(:A hc4"fr~ sidered around the Board in marked contrast to the bl;:~.e-a-bra-s that the earlier ones were prone to get. But this is still very much an ex ante assessment of the structural adjustment program and very few of the .•~ "" ftj loans have been completed aJ::.--,a.ny one I think has been really completed and got the completion report prepared but not yet circulated. And the Bank seems to be learning as it 1P--t goes and it has jUst clearly been responsive to Board comment • I personally feel a lot more comfortable about structural adjustment loans now than I did a year ago and my experience \liLLER REPORTING CO., INC. 320 Massachuserts Avenue. N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 67 in the negotiation of the Korean structural adjustment loan certainly let me know personally that there is a lot more to structural adjustment lending than doling out quick-disbur ing balance of payments support. My Australian authorities, however, still are sus- pending their judgment on the program until a longer track record of implementation is available. In particular, they still support retention of the 10 percent ceiling as a ceilin . And finally, I would like to make two brief comments of detail. The first is on tranching and my position is fairly similar to that of Derrick Smith. I agree that tranching should be the normal rule. On the other hand, I can see that there ought to be scope in cases where the immediate and urgent measures are being implemented as a condition of effectiveness of the structural adjustment loan and where further measures need study and greater definition before they can be implemented for small structural adjust- ment loans with an early repeater. And I favor this approach because in those circumstances this would give the Board an opportunity to see the second set of measures in detail before approving the second set of money. The alternative approach would mean that the details were worked out and on the basis of tranching management would be approving the ~ILLER REPORTING CO., INC. l20 Massachusetts Avenue, N.E. Washington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 68 funds. And I think in cases where the second stage of policy measures still lacks definition, I think I would prefer the small loans, second, and an early repeater approach. My second point is one of statistics and it arises out of my Australian authorities' concern about the 10 percen limit. We would be pleased to see more information on structural adjustment loans in the pipeline including repeate loans included in the monthly summary of operations. But my understanding is that you don't include second and third and fourth repeater loans in the monthly summary of Bank operations. MR. STERN: Well, if we don't, we will be very glad to do so. There is no particular reason why they shouldn't be in there. So we will be glad to -- if that in fact is correct, we will be glad to add them in the future. Well, I'm very glad to hear that there are substan~ v/ ~reasons for the better reception of the later loans and sometimes I thought it was simply weariness which was getting the better of us. (Laughter.) MR. STERN: Mr. Looijen. MR. TJOOIJEN: Mr. Chairman, I also want to commend ~ILLER REPORTING CO., INC. 320 Massachusetts Avenue, N.E. \Vashington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 69 management for a very good paper. I would be inclined to say disappointed in the uncontroversial paper because I like a seminar to be more like a debating club and that looks kind of like the rehearsal of a close harmony choir; there are still some dissonances but that belongs to a rehearsal, I think. ~1r. Chairman, I will say very little because it's quite clear that we are on the right way with these loans and we will continue in that way. It has become quite clear in the last two years that a structural adjustment loan is not a cheap way out to get a quick-disbursing program loan. On the contrary, accepting a SAL obliges the borrowing countries very often to take difficult and very hard policy decisions, and it's our task to help them to reach any decisions. And our influence I think is very important in this. It means also, Mr. Chairman --and that's quite clear from this paper -- that the fact that such decisions have to be taken limits the number of our loans because a large number of governments are not prepared to take such harsh decisions and I suppose if you would give loans to industrial countries, there will be many industrial countries still where the governments would hesitate to take the measur s ~ILLER REPORTING CO., INC. ~20 Massachusetts Avenue. N.E . .Vashington, D.C. 20002 (202) 546-6666 STRICTLY CONFIDENTIAL 70 which you would recommend, especially when elections are near. Mr. Chairman, anyway the fact that the number is still limited has meant that up till no~1 the ceiling, 10 percent, has not become a constraint for our loans. It ·may become so in the future. If it will be the case, if we become bottlenecked, I think we shall not be dogmatic but consult whether we should extend the ceiling or not. As long as the impact of our loans is satisfactory, we should be prepared I think to go further if necessary and also as far as the ceiling per loan is concerned, I think we should be very flexible and it depends, in my opinion, very much on the character of each case on the question whether the structure of a country has to be changed very much, in which case there is much more sense to do it via structural adjust- ment loan or whether the changes are relatively minor in which case this quality should be much more improved for project and sector loans. f.1r. Chairman, that means that we should remain flexible and come back and I should not hesitate if I were you to come back to us if you think that there are certain things we should discuss again and if the guidelines are not satisfactory. IlLLER REPORTING CO., INC. 20 Massachusetts Avenue, N.E. Vashington, D.C. 20002 202) 546-6666 STRICTLY CONFIDENTIAL 71 Anyway, Mr. Chairman, I am convinced that up till now for the countries where we have acted in this '~iTay, it has been beneficial. I hope also that this experience of being more exposed to the political situation in the countrie which we deal with is beneficial for our staff members becaus we too can learn from the facts of life in the political environment in which we are working. Thank you, Mr. Chairman. MR. STERN: Thank you, Mr. Looijen. Mr. Munzberg. MR. MUNZBERG: Thank you, Mr. Chairman. We very much welcome the opportunity for having this seminar and I think the harmony in the seminar this afternoon proved that it was a good idea to have a seminar. I will certainly not disturb the harmony that prevailed until now and we always felt that we are very sensitive to the necessity for structural adjustment everywhere and always found that this idea of structural adjustment loan was a good one. The concerns we raised in the Board here addressing the shape of the instrument and we felt that the new instrume t was not always quite clear as far as its limits and its exact shape are concerned. And I think we have gone a far way if you look back at these last two years and the instrume t ~ILLER REPORTING CO., INC. 120 Massachusetts Avenue, N.E. Nashington, D.C. 20002 ~202) 546-6666 STRICTLY CONFIDENTIAL 72 is now very much clearer that it has been last April when you last discussed this whole matter. I welcome the Board paper and I feel that it is a very good paper, addressing in a very elaborate way the concerns we raised. It's not only a response to questions we ask; it's also very responsive to the concerns which have been voiced in the Board. I can so limit my remarks to only one -- some short comments on points the Federal Republic has always had in mind in addressing this new instrument. The first one is the relationship between the Fund and the Bank. It is quite clear that those institutions over these last years have broadened the scope of their fields of interest. The Fund has lengthened its maturities inter alia and the Bank has come more into macroeconomic field than it used to do before. And so necessarily there comes to a point where you need to find the limitation of both institutions' tasks. I don't know if we can find the theoretical -- I think that the paper tries to find a theoretical limitation bet\