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Document of The World Bank
FOR OFFICIAL USE ONLY
Report No. 48476-AR
INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT
AND INTERNATIONAL FINANCE CORPORATION
COUNTRY PARTNERSHIP STRATEGY
FOR
THE ARGENTINE REPUBLIC
FOR THE PERIOD 2010-2012
May 6, 2009
Argentina, Chile, Paraguay and Uruguay Country Management Unit Latin America and the Caribbean Region
This document has restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
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CURRENCY AND EQUIVALENT UNITS (As of March 31, 2009)
Currency Unit = Argentine Peso US$1 = 3.70 Argentine Pesos
WEIGHTS AND MEASURES Metric System
FISCAL YEAR:
January 1 – December 31
IBRD IFC RegionalVice President Pamela Cox Regional Vice President Jyrki I. Koskelo Country Director Pedro Alba Regional Director Atul Mehta Task Team Leader Andrew Follmer Country Manager Enrique Cañas Task Manager John Barham
The last Country Assistance Strategy for Argentina was discussed by the Executive Directors on May 4, 2006 (Report No. 34015-AR).
FOR OFFICIAL USE ONLY
This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.
ABBREVIATIONS AND ACRONYMS
AAA Analytical and Advisory Activities AFAP Argentina Fiduciary Action Plan AFJPs Argentina’s Private Pension Funds AGN Argentina’s Supreme Audit Institution ANSES National Social Security Administration APL Adaptable Program Loan BAPIN Public Investment Projects Bank (Banco de Proyectos de Inversión Pública) BCRA Proactive Central Bank BOP Balance of Payments CAF Andean Development Corporation (Corporación Andina de Fomento) CAS Country Assistance Strategy CASCR Country Assistance Strategy Completion Report CDM Clean Development Mechanism CEA Country Environmental Assessment CEM Country Economic Memorandum CFAA Country Financial Accountability Assessment CPAR Country Procurement Assessment Report CPI Consumer Price Index CPS Country Partnership Strategy CREMA Recovery and Maintenance Contracts (Contratos de Recuperación y Mantenimiento) EMBI Emerging Markets Bond Index ESW Economic and Sector Work FAC Argentine Carbon Facility FESP Essential Public Health Functions (Funciones Esenciales de la Salud Pública) FFS Fee-For-Service FRESH Focus Resources on Effective School Health FSL Fixed Spread Loan GAC Government and Anticorruption GDP Gross Domestic Product GEF Global Environmental Facility GoA Government of Argentina GPF Governance Partnership Facility GRSF Global Road Safety Facility HH Heads of Household Plan IBRD International Bank for Reconstruction and Development ICR Implementation Completion Report IDB Inter-American Development Bank IDF Institutional Development Fund IFC International Finance Corporation IFIs International Financial Institutions IFPA Integrated Fiduciary Performance Assessment INDEC Argentina National Statistics and Censuses Institute (Instituto Nacional de Estadística
y Censo) INTA Agricultural Technology Institute IRAP International Road Assessment Program ISDA International Swaps Dealers Association LAC Latin America and the Caribbean Region LIL Learning and Innovation Loan MDGs Millennium Development Goals M&E Monitoring and Evaluation MIC Middle-Income Countries MOH Ministry of Health MTESS Ministry of Labor, Employment and Social Security (Ministerio de Trabajo, Empleo y
ABBREVIATIONS AND ACRONYMS
Seguridad Social) NGOs Non-governmental Organizations NOA Northwest Region NPL Non Performing Loans OECD Organization for Economic Co-operation and Development PAMI Argentina’s Public Health Plan for Retired Senior Citizens PERMER Renewable Energy for Rural Markets Project (Proyecto de Energías Renovables en
Mercados Rurales) PIU Project Implementation Unit PJyJHD Heads of Household Plan (Plan Jefes/as de Hogar Desocupados/as) PMM Price Monitoring Mechanism PRAMU Uranium Mining Environmental Restoration Project (Proyecto de Restitución
Ambiental de la Minería del Uranio) PROINDER Small Farmer Development Project (Proyecto de Desarrollo de Pequeños
Productores Agropecuarios) PROMER Rural Education Improvement Project (Proyecto de Mejoramiento de la Educación
Rural) PROSAP Provincial Agricultural Development Project (Programa de Servicios Agrícolas
Provinciales) ProsperAR Argentina’s Investment Agency PTUBA Buenos Aires Urban Transport (Proyecto de Transporte Urbano de Buenos Aires) PTUMA Argentina Urban Transport for Metropolitan Areas Project REDD Reduce Emissions from Deforestation and Land Degradation R&D Research and Development ROSC Reports on the Observance of Standards and Codes SAGPyA Secretary of Agriculture, Livestock, Fisheries and Food SAL Structural Adjustment Lending S&P Standard and Poor’s SEA Strategic Environmental Assessment SECOP Argentina’s E-procurement System SENASA Animal and Plant Health Service SEPA Procurement Plans Execution System (Sistema de Ejecución de Planes de
Adquisiciones) SINAPA National System of Administrative Professionals (Sistema Nacional deProfesionales
Administrativos) SINTyS Social and Fiscal National Identification System SISDIF Argentina’s Web-based Financial Management System SLU Local Unified Integrated Financial System SMEs Small and Medium Enterprises SWAp Sector-Wide Approach UNFCCC United Nations Framework Convention on Climate Change WSS Water and Sanitation Services
ACKNOWLEDGEMENTS
The World Bank Group greatly appreciates the collaboration and contributions of the Government of Argentina in the preparation of this Country Partnership Strategy (CPS). In particular, the World Bank Group thanks the following government officials for their contributions to the CPS: Martín Abeles, Secretary of Economic Policy, Ministry of Economy and Public Finance; Pablo Barone, National Director for Projects with International Credit Institutions, Ministry of Economy and Public Finance; and Aníbal López, Director for Projects with the World Bank, Ministry of Economy and Public Finance; and Maria Florencia Jalda, Secretary for Budgetary Evaluation, Office of the Chief of Cabinet of Ministers; and Pablo Salvioli, Subsecretary for Evaluation of Externally-Financed Projects, Office of the Chief of Cabinet of Ministers; and Jorge Roel, National Director of Externally-Financed Programs and Projects, Office of the Chief of Cabinet of Ministers. Further, the World Bank Group extends a special thanks to numerous non-government and government stakeholders who participated in CPS consultations in November and December, 2008. We also thank the members of civil for their contributions to the preparation of this program through the client consultations as well. Other contributors to the preparation of this CPS include Messes./Mmes: Mariela Alvarez, John Barham, Carla Bonahora, Yanina Budkin, Paloma Años Casero, Diego Cerdeiro, Jasmin Chakeri, Franz Drees-Gross, Frank Earwaker, Geraldine García, Hermann von Gersdorff, Esperanza Lasagabaster, Carla Pantanali, Javier Pereira, Susana Pérez, Kathrin Plangemann, Rafael Rofman, Dena Ringold, Felipe Saez, Verónica Salatino, Eduardo Udarpilleta, and Eduardo Wallentin, who, together with the Country Director and CPS TTL, comprised the Core Team. In addition, Marcelo Acerbi, Anjali Acharya, Alexandre Arrobbio, Rafael Cortez, Michael Crawford, Todd Crawford, Robert Davis, Tanja Faller, Fernando Hernández, Richard Hinz, Magali Junowicz, Fernando Lavadenz, Nick P. Manning, Barbara Mierau-Klein, William Maloney, Ferenc Molnar, Tawhid Nawaz, Beatriz Nussbaumer, Reynaldo Pastor, Luis Pérez, Andrés Pizarro, Verónica Raffo, Fernando Rojas, Klas Sander, Manuel Schiffler, Claudia Sepúlveda, Tomás Serebrisky, María Marcela Silva, Alvaro Soler, Lucía Spinelli, Laura Tuck, Julio Vega, Dorte Verner, Gotthard Walser, Xiaoping Wang, Tevfik Yaprak, and David Yuravlivker provided valuable inputs.
COUNTRY ASSISTANCE STRATEGY FOR THE ARGENTINE REPUBLIC
TABLE OF CONTENTS
EXECUTIVE SUMMARY ........................................................................................................ I
I. INTRODUCTION.............................................................................................................1
II. COUNTRY CONTEXT....................................................................................................2
A. Economic Context ................................................................................................... 2 B. Private Sector Trends .............................................................................................. 6 C. Poverty, Inequality and the MDGs.......................................................................... 7 D. Political and Social Developments.......................................................................... 8 E. Governance.............................................................................................................. 9
III. DEVELOPMENT CHALLENGES...............................................................................10
IV. GOVERNMENT’S DEVELOPMENT VISION ..........................................................14
V. ARGENTINA – WORLD BANK PARTNERSHIP.....................................................18
A. The Current Program............................................................................................. 18 B. Summary Findings from Completion Report........................................................ 21 C. Development Partners ........................................................................................... 22 D. CPS Consultations................................................................................................. 22 E. Rationale for WBG support to Argentina ............................................................. 23 F. Argentina – World Bank Country Partnership Strategy (FY10-12) ..................... 24
Strategic Approach of the Proposed CPS ............................................................. 24 Results Orientation and Monitoring ..................................................................... 24 The WBG’s Indicative 2010-2012 Program.......................................................... 25 World Bank Lending.............................................................................................. 30 IFC Activities......................................................................................................... 30 The Bank’s Analytical Agenda .............................................................................. 31 Treasury Services .................................................................................................. 33 Portfolio and Fiduciary Considerations ............................................................... 33
VI. RISKS...............................................................................................................................33
A. External ................................................................................................................. 33 B. Internal .................................................................................................................. 34 C. Risks to the World Bank Group ............................................................................ 36
TABLES Table 1: CPS Program Objectives and Select Activities ............................................................ 26 Table 2: Planned lending deliverables (FY09-FY10)................................................................. 31 Table 3: Key Elements of the Partnership’s Analytical Agenda – Argentina CPS 2009-
2012.............................................................................................................................. 32 BOXES Box 1: Recent Progress in Public Sector Management .............................................................. 10 Box 2: Argentina and the IBRD Strategy for Middle-Income Countries ................................... 20 Box 3: The Heads of Households Program: A Successful Partnership ..................................... 21 FIGURES Figure 1: Components of export growth in Argentina 1995-2004 (in %) .................................... 5 ANNEXES Annex 1: Economic Performance 2003-2008 (Government of Argentina) Annex 2: Argentina CPS Results Framework Annex 3: CAS Completion Report Annex 4: Argentina’s Public Debt Annex 5: Banking Sector Update Annex 6: IBRD and Carbon Finance Program Summary Annex 7: IFC Program Summary Annex 8: Proposed GEF Program Annex 9: CPS Consultations Annex A2: Argentina At A Glance Annex B2: Selected Indicators of Bank Portfolio Performance and Management Annex B3: IBRD Program Summary IFC Investment Portfolio Operations Program Annex B4: Summary of Nonlending Services Annex B5: Key Social Indicators Annex B6: Key Economic Indicators Annex B7: Key Exposure Indicators Annex B8: Operations Portfolio (IBRD/IDA and Grants) IFC Committed & Disbursed Outstanding Investment Portfolio MAP IBRD 33362
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EXECUTIVE SUMMARY
Argentina’s macroeconomic performance in recent years was largely strong. Consecutive years of rapid and pro-poor economic growth enabled poverty and unemployment to be cut to levels experienced prior to the country’s 2001-2002 economic crisis. However, the economy started to decelerate in late 2008 due to domestic and international factors. The administration of President Cristina Fernández de Kirchner seeks to maintain economic growth and stability, and the development of the global economic crisis in 2008 has reinforced the Government’s view favoring increasing regulation and further heightened the Government’s prioritization of social safety nets and job creation.
The implementation of the 2006 Country Assistance Strategy (CAS) was largely successful with Bank financed operations making significant contributions to the Government’s development objectives. It structured Bank assistance in accordance with the same three pillars established under the previous CAS, namely: (1) sustained growth with equity, (2) social inclusion, and (3) improved governance. The International Bank for Reconstruction and Development (IBRD) lending program consisted entirely of investment loans, thereby completing the transition from adjustment lending to investment lending that started with the 2004 CAS. A key lesson of the 2006 CAS is that by focusing selectively on areas of consensus within the Government’s development agenda, the Bank was able to provide important support as the Government has made remarkable strides in reducing poverty. After a strained relationship during and in the wake of the crisis, the positive relationship that now prevails may be attributed to the successful partnership that has evolved.
The proposed Country Partnership Strategy (CPS) (2010-12) seeks to advance the Government’s development vision by providing pragmatic, performance-based support, consistent with an uncertain policy environment but adequate to the opportunities and reflecting the Bank’s positive experience in Argentina. Given the uncertain economic outlook, a large share of the Bank’s proposed financial support will assist Government strengthening of the social safety net system and other social programs. Given the continuity in Government policy and the expressed demand, the CPS continues to focus on the three pillars successfully supported under the previous CAS. However, there will be a shift in the support provided toward rebalancing the portfolio, giving greater emphasis to the social inclusion pillar as the Bank’s preventive response to the deteriorating economic and social environment.
The CPS has a strong results orientation. In addition to specific support to build institutional capacity for results-based management, the Government and Bank will jointly monitor project-by-project results and their aggregate contribution toward the anticipated country results. In addition, the Bank’s Analytical and Advisory Activities (AAA) portfolio will be even more selective and focused on achievement of the CPS results. This results focus is strengthened by the Bank Group’s program coordination with Argentina’s other development partners, notably the Inter-American Development Bank (IDB) and the Andean Development Corporations (CAF). There is especially
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strong coordination with IDB on fiduciary matters, particularly with the harmonization of procurement rules and procedures.
Government of Argentina Strategic Objectives Pillar I
Sustainable Growth with Equity Pillar II:
Social Inclusion Pillar III:
Improved Governance Outcomes toward which the CPS will contribute
Upgrade Argentina’s infrastructure to address potential bottlenecks to competitiveness, and underpin medium-term growth and poverty alleviation Improve competitiveness, quality, and exports of agriculture and livestock production Address a growing problem of resource degradation
Consolidate the reduction in poverty and expand efforts to reverse the longer-term poverty trend by increasing household incomes and integrating marginalized groups into the productive marketplace Consolidate improvements in health indicators and improve quality of education while reducing drop out rates
Strengthen the effectiveness, efficiency, transparency and accountability of public sector management Expand performance management and improve the quality of public expenditure, enhance service delivery outcomes and trust in institutions Strengthen public sector capacity to spur investment and growth
The CPS proposes an IBRD lending envelope of US$ 3.3 billion for FY10-FY12, front-loaded through two operations to support Argentina’s safety nets during the critical next two years. A rich menu of possible AAA activities will be the basis of annual discussions with the Government to jointly select and commit to analytical activities that respond to the country’s evolving needs.
The International Finance Corporation (IFC) strategy in Argentina is designed to support the growth of export-oriented sectors and a select group of financial institutions, in order to create jobs and meet the needs of low-income populations. The overarching strategy is to proceed cautiously, with sponsors in strong industries that have an established record of sound, profit-oriented, and therefore sustainable management. This means that IFC will concentrate its activities on existing clients in both corporate and financial sectors.
While Argentina is better positioned than it was at the onset of the 2001 crisis, significant risks remain. Among them, Argentina will have to weather the effects of the global economic crisis which, when combined with internal factors such as limited access to external financing and uncertainty over the course of economic policies, contributes to slowing growth and creates fiscal and balance of payment vulnerabilities. Successful mitigation of medium-term risks will require efforts to strengthen the investment climate, support private sector development, and ensure a predictable legal and institutional environment. The impending mid-term elections introduce an additional element of political risk, and this CPS proposes a very proactive agenda for addressing the continuing portfolio risks.
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I. INTRODUCTION
1. The last World Bank Group Country Assistance Strategy for Argentina was presented to the Board on May 4, 2006, at a time when Argentina was on the way to a third consecutive year of rapid growth after a deep economic and social crisis in 2001-02. The IBRD program of US$3.3 billion comprised only investment loans, completing the transition from adjustment lending to investment lending begun with the 2004 CAS. Given the continuity with respect to the long-term strategic goals of the Government, the 2006 CAS proposed that the Bank’s assistance strategy should be structured in accordance with the same three pillars established under the previous CAS, namely: (1) sustained growth with equity, (2) social inclusion, and (3) improved governance.
2. The implementation of the CAS was largely successful with Bank financed operations making significant contributions to the Government’s development objectives. Innovative projects were implemented in the health and infrastructure sectors, and the Bank fully committed the CAS lending targets. The portfolio was almost fully renovated during this time period, and significant actions were taken to strengthen fiduciary safeguards. Despite this good performance, whereas the 2006 CAS projected that Bank exposure may decline from US$6.9 billion at end-2005 to US$5.9 billion by end-2008, exposure had already declined to US$5.1 billion by end-December 2008 largely due to disbursement lags in the wholly investment lending portfolio.
3. Macroeconomic performance during most of the CAS period was largely strong. Consecutive years of rapid and pro-poor economic growth enabled poverty and unemployment to be cut to pre-crisis levels. The economy benefited from a significant reduction in public debt following the 2005 sovereign debt restructuring. However, in 2008, the economy started to decelerate due to domestic and international factors. While the economy grew at a healthy rate of 7.0 percent in 2008, real GDP growth is projected to decline sharply due to weakening private domestic and external demand.
4. This CPS covers the fiscal years 2010-12 and is aligned with the country’s development goals. It will be implemented during a time of economic uncertainty and volatility and proposes to maintain an indicative IBRD lending program of up to US$3.3 billion (frontloaded) to help Argentina weather the global economic crisis and address structural development issues, together with an active IFC program. It also proposes strengthening the Bank’s AAA program and further intensifying the focus on implementation with a newly-approved Institutional Development Fund (IDF) grant.
5. The CPS will seek to advance the Government’s development vision by providing pragmatic, performance-based support, consistent with the uncertain policy environment but adequate to the opportunities and reflecting the Bank’s positive experience in Argentina. Given the uncertain economic prospects, a large share of the Bank’s proposed financial support will assist Government strengthening of the safety net system and other social programs. In addition the CPS will provide for more flexibility in loan design and implementation, consistent with Bank policy. Finally the Bank will consider stronger financial transfers and technical and analytical support to the subnational level.
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II. COUNTRY CONTEXT
A. ECONOMIC CONTEXT
6. Argentina’s economic and social crisis of 2001-02 was one of the most severe losses of income and downturns in living standards on record, and the last several years have been largely dominated by the country’s recovery. Argentina’s focus in 2007 shifted from recovery to sustainability, but now the Government faces the daunting challenge of preserving the strides made against poverty and unemployment against the backdrop of the worst global economic crisis since the Great Depression. While Argentina is, in many ways, much better positioned going into this crisis than in 2001, the country’s ability to implement counter-cyclical policies is limited by weak access to financing sources, particularly external, and uncertainty of the global macroeconomic outlook and the direction of economic policies. Annex 1 presents the Government’s assessment of economic performance.
7. Recovery from 2001 Crisis. In recent years, Argentina’s growth has been strong and underpinned by twin surpluses (fiscal and external). In 2007, the economy grew by 8.7 percent, the fifth straight year of 8-9 percent growth since the financial crisis of 2001-2002. The recovery was supported by a strong domestic demand, including a dynamic expansion in investment spending since 2003, improved fiscal performance and favorable terms of trade (high commodity prices), particularly since 2006. The economy also benefited from a significant reduction in public debt following the 2005 sovereign debt restructuring. Twin surpluses (fiscal and external) allowed the country to accumulate foreign reserves and reduce the debt burden. The Government’s economic framework, aimed at supporting the growth momentum, rested on three main pillars: maintenance of a competitive exchange rate; fiscal prudence; and active income policies. This strategy was very successful. Poverty more than halved from 58 percent in 2003 to 23.4 percent in 2007, and unemployment fell from 21.5 percent in 2003 to 8.3 percent in 2007 – though poverty remains above the levels of 1970s.
8. Recent growth performance. Since 2008, growth was adversely affected by domestic and external factors. The four-month farm conflict that erupted in March 2008 took a toll on the economy, although growth kept its momentum until the second half of 2008 when the global economic crisis began to affect Argentina more strongly. The farm conflict increased economic uncertainty which in turn led to a surge of capital outflows and pressures on the currency, increases in domestic interest rates and a decline in peso-denominated deposits. The Central Bank acted promptly and stabilized the exchange market and banking system. A second wave of financial sector stress resulted from the deepening of the global financial crisis and the October announcement of the nationalization of the private pension funds, but stability returned after intervention by the Central Bank. More generally, market confidence has also been eroded by concerns over inflationary pressures that surfaced in 2007,1 the increasingly unfavorable external
1 In early 2008 in response to these pressures, the Government reduced the real rate of growth of primary expenditures so as to neutralize the fiscal impulse.
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environment, higher financing needs, and uncertainty over the global macroeconomic outlook and the course of domestic economic policies.
9. Response to Global Economic Crisis. Argentina has weathered the global economic crisis relatively well to date, but the sharp decline in commodity prices combined with the world economic slowdown and the strengthening of the peso relative to Argentina’s main trading partners is affecting the economic outlook through its impact on the fiscal and external accounts. In this context, balance of payment pressure (in particular, potential pressures on the exchange rate and capital flight) is likely to be a source of vulnerability in the medium-term. At the same time, Argentina still enjoys ample foreign reserves (US$46.4 billion at end-2008) that could help mitigate the impact of economic shocks. On the fiscal side, the key risk is that revenues are subject to further declines in commodity prices and lower than expected domestic growth, assuming primary expenditures remain contained, given the current need to maintain a counter-cyclical fiscal stance.
10. The Government is taking several counter-cyclical policy measures to mitigate the negative impact of the decline in private aggregate demand and to strengthen the social safety net system. These responses are framed under the authorities’ objectives to preserve the primary fiscal surplus and exchange rate stability and confidence.
11. The medium-term macroeconomic framework (2008-2010)2 incorporates the preliminary impact of the global crisis on the Argentinean economy and the policy measures undertaken by the Government in the second half of 2008 (the nationalization of the pension system and the fiscal stimulus package in response to the crisis, in particular, the increase in capital expenditures, and the recent local debt swap of Guaranteed Loans). The CPS baseline macro projections are summarized below:
• Growth and inflation. Growth is expected to decline sharply in 2009 and 2010, from 7.0 percent to a range of 0-1 percent. Recent activity indicators have all shown sharp declines during the last quarter of 2008. Official figures place inflation at 7.2 percent in 2008, whereas the GDP deflator is of 19.4 percent3. Inflation is also likely to decline in 2009, but projections are subject to considerable uncertainty.
• Fiscal accounts. The primary fiscal surplus of the Central Government was originally estimated to decline from 3.1 percent of GDP by the end of 2008 to about 1.8 percent in 2009 and 2.0 percent in 2010, before the effect of the private pension takeover. Taking into account these additional resources, along with increased capital spending and other counter-cyclical fiscal measures implemented by the Government, the primary fiscal surplus is projected at 2.4 percent in 2009 and 2.6 percent in 2010.
• Financing gap. Gross public sector4 financing needs are expected to remain broadly constant over the medium-term. They are estimated at US$16.3 billion in 2008 and are projected at US$15.8 billion and US$13.2 billion in 2009 and 2010, respectively,
2 Macroeconomic projections assume an average soybean price of about US$ 330 a ton in 2009. 3 CPI figures are contested by market analysts, thus the GDP deflator is also provided. 4 Including federal and provincial governments.
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taking into account the recent debt swap of Guaranteed Loans. The net financing gap of the Federal Government is projected at about US$3.0 billion in 2009 and US$0.1 billion in 2010, after taking into account the additional resources from the nationalized social security contributions. In addition, gross disbursements from international financial institutions (IFIs) -including the World Bank- are expected to amount to US$ 1.0-1.8 billion in 2009, with a remaining financing gap easily met from domestic sources. Argentina continues to lack access to international financial markets, although the Government remains committed to advance in the pending resolution of claims by the Paris Club and holdouts from a 2005 debt restructuring.
• External accounts. The current account surplus is expected to deteriorate, but will remain marginally positive in 2009 (0.1 percent of GDP) and 2010 (0.7 percent of GDP). In 2008, this surplus is estimated to have reached around 3 percent of GDP (2.9 percent in 2007). Due to recent volatility, gross international reserves declined to US$46.4 billion by end-2008 (about 9.7 months of 2008 imports).
• Monetary accounts. Money growth is expected to slow, reflecting weaker domestic demand. Real growth of net credit to the private sector is expected to decline from 11.4 percent in 2008 to -7.5 percent in 2009 and +1.0 percent in 2010. The peso depreciated from 3.14 pesos/US$ at end-December 2007 to 3.46 at the end of 2008. By end-March 2009 the exchange rate had reached 3.70 and is likely to continue depreciating further.
• Financial system. The Argentine banking system is generally well placed to face the international crisis. Bank liquidity is strong at 23 percent of deposits, compared to 17 percent a year ago. However, the flight to quality by investors has resulted in an increase in Argentina’s already-high financing costs with sharp decreases in domestic bond and stock prices and a substantial rise in the country risk premium. The capital markets remain underdeveloped, and the banking system is too small to meet the needs of the economy. As of September 2008, private sector loans represented only 12 percent of GDP. The Central Bank recently announced several measures to bolster liquidity.
12. Medium Term Growth Challenges. Despite five years of solid economic performance, preserving high growth in today’s adverse international environment and sustaining it in the future remains challenging. Prior to 2003-07 economic growth was highly volatile. Breaking out of past volatility requires sustained investment and improved productivity performance. Yet, investment rates have been volatile, and productivity growth has not been as strong as in comparators. Previous studies show that most of the output growth, including that achieved in the last five years, has been driven by factor accumulation, particularly by labor accumulation- as reflected by the substantial increase in employment since the crisis of 2002 (Coremberg, 2008). While this is an expected outcome given the unemployment rates in 2002 (well above 20 percent), this highlights the need for action to further improve the level and quality of investments in the future. This will require further progress in strengthening the investment climate and supporting private sector development, ensuring a predictable legal and institutional environment; including in backbone infrastructure services (energy, transport, telecom
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and finance). These actions would encourage improvements in resource allocation, and support the entry of new more productive firms. Another challenge related to medium-term economic growth is the role of exports. Export growth over the past years has been to a large extent due to the ability of Argentine firms to export existing products, while exports of new products have contributed less to overall export growth (although there are noteworthy exceptions, including in the auto parts, pharmaceutical and medical instruments industries). This calls for policy measures to improve the ability of existing firms to innovate and compete successfully in global markets. Over the longer term, there are the outstanding agendas in the energy sector and the efficiency of public expenditures.
Figure 1: Components of export growth in Argentina 1995-2004 (in %)
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-55-19
47 6 0
-60-40-20
020406080
100120
Increase inexports of existing
products toexisting markets
Fall in exports ofexisting products
to existing markets
Extinction ofexports of existing
products toexisting markets
New exports ofexisting productsto new markets
New exports ofnew products toexisting markets
New exports ofnew products to
new markets
13. Downside Risks to the CPS Base Case. Given the uncertainty surrounding the global crisis, a more pessimistic scenario could entail further drops in commodity prices, and negative GDP growth for 2009 and 2010 (-3 and -2 percent, respectively), as a result of a sharper contraction in both domestic and external demand. In this scenario, the exchange rate would likely depreciate substantially. The fall in output would also impact the fiscal accounts, and the primary fiscal surplus of the Federal Government could be as low as 1.3 percent of GDP. As a result, net financing needs could reach US$7.7 billion, doubling the projected financing needs of the base case.
14. In sum, over the next eighteen months, Argentina will have to weather the global economic crisis. The main transmission channel is trade, since Argentina's fiscal and external positions remain vulnerable to swings in commodity and manufactured export volumes and prices. Given the uncertainty over the global macroeconomic outlook and the direction of economic policies, the Government has a limited margin to use countercyclical policies. On the monetary front, with rapid exchange rate depreciation in neighboring countries the real exchange rate lost competitiveness as the Central Bank implemented a policy of more controlled depreciation to contain financial volatility and inflationary pressures. Fiscal accounts are deteriorating although the Government should manage to keep fiscal primary surpluses if growth of primary
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expenditures is contained. In addition, the global crisis has increased risk aversion, and that implies that Argentina will continue to have limited external financing options. While the Government will likely be able to meet its financing needs during 2009, Argentina’s economic outlook in 2010 would be challenging if world economic conditions do not improve. In sum, a large stock of reserves and small primary fiscal surpluses would help mitigate the negative impact of potential economic shocks.
B. PRIVATE SECTOR TRENDS
15. Response to 2001-2002 Crisis. The years immediately following the crisis were marked by major restructurings and debt renegotiations that allowed the private sector to deleverage and recover. Companies rebuilt their balance sheets and emphasized liquidity. Where possible, large corporates diversified their investments and sales into foreign markets, and consolidated their domestic market shares.
16. Recovery from the 2001-2002 crisis led to increases in capacity utilization in industry and private investment levels. Investment reached 21 percent of GDP by 2006, compared to a low of 11 percent of GDP in the midst of the crisis. Post-crisis investment surpassed levels recorded in the 1990s. Investment was mainly financed through higher retained earnings due to improved firm profitability, and other financing sources played a more modest role. Private sector credit has been increasing since 2004, but at 12 percent of GDP remains low. It is nearly half the level prior to the crisis and nearly a fifth of average levels prevalent in upper middle income countries.
17. Current Context. Argentina’s best performing firms have tended to be in agriculture and agro-industry, especially those with a global market orientation. Argentina is the third-largest world supplier of soybeans and the second largest exporter of corn and sorghum. About 70 percent of the country’s soy production is processed domestically, making Argentina the world’s largest exporter of soybean oil and one of the leading exporters of pellets and flour. Broadly speaking, the rest of the manufacturing sector has alternated tactically between export and domestic markets. Excluding agroindustry, the bulk of manufacturing exports, especially vehicles, goes to Brazil. While there are pockets of excellence, manufacturing industry is generally less competitive in other export markets and lacks economies of scale.
18. Issuances by large corporations in the domestic capital market have been limited. Net external corporate debt financing has been negative in recent years since Argentine corporations could not regain access at reasonable cost to global financial markets after the crisis. The private sector’s low debt levels probably caused some underinvestment, but should enable companies to manage global economic uncertainties with greater ease. Large companies generally are reported to have ample liquidity to cover debt falling due in 2009. Foreign direct investment has recovered somewhat averaging nearly 2.5 percent of GDP from 2004 through 2007 due to acquisitions and some Greenfield investments.
19. Regulation and Governance. Argentina’s overall ranking on the Ease of Doing Business has slipped to 113 in 2009 from 77 in 2006, compared to an average of 75 in 2009 for upper middle-income countries. Argentina’s performance on regulatory fronts
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(starting a business, employing workers, protecting investors, paying taxes and trading across borders) falls below average standards for upper middle-income countries5. Indicators of regulatory quality and government effectiveness point to weaknesses in Argentina6. Some progress has been made in recent years in a few of these areas, but broadly speaking, the pace of reform has been slower than in peer countries.
C. POVERTY, INEQUALITY AND THE MDGS
20. Poverty and Equity. As detailed previously, poverty more than halved from 58 percent in 2003 to 23.4 percent in 2007, and the official number for the first semester of 2008 is 17.8 percent7. Over 11 million Argentines have been lifted out of poverty since the crisis, moving Argentina toward achievement of its Millennium Development Goals. However, poverty and inequality are still high by Argentina’s historical standards. Poverty in the 1970s and until the 1987 crisis was around 10 percent8. After that crisis, poverty fell again but only to 18.5 percent in 1992 and climbed steadily to about 27 percent in the late 1990s. During the crisis of 2001-03 poverty levels increased sharply, and only in 2006 did poverty return to the levels of the late 1990s, much higher than the historical experience. Developments on poverty levels went together with a substantial increase in inequality with a Gini coefficient that increased from 0.344 in 1974 to 0.487 in 20069. Other inequality indicators confirm this trend, during the same period the income share of the poorest quintile declined from 7.1 to 3.7 percent. Therefore, the introduction of a safety net like Jefes y Jefas was not only in response to the 2001-03 crisis but was also an attempt to mitigate a longer term trend.
21. Formal and Informal Labor. Argentina has made great progress in increasing the formality of employment. However, about 40 percent of the employed still have informal jobs. Even in the City of Buenos Aires, about 80 percent of the first jobs for the young (under 29) are estimated to be informal. The economic slowdown is believed to be having a stronger impact on informal employment to date. However, if the situation worsens, as expected, the impact will also be felt by those in formal jobs. Qualified formal sector workers will have access to unemployment insurance, whereas informal workers have no access to any safety net as no new beneficiaries have been added since 2003. In addition to a negative impact on poverty, this could also lead to social tensions.
22. Gender Equality. Argentina has taken important steps to promote gender equity in health, social security, and gender-based violence, with more progress needed in the labor market and domestic violence. Achievements include passing of the Reproductive Health Law and the Sexual Education Law as well as a 2005 Presidential Decree which expands pension coverage for women over age 60. Moreover, the Supreme Court has created an Office of Domestic Violence to provide assistance to victims of domestic
5 Doing Business 2009 – Argentina http://www.doingbusiness.org/ExploreEconomies/?economyid=9 6 La Escuela de Gobierno de la Universidad Torcuato Di Tella, Índice de Confianza en el Gobierno – ICG, January 2009 7 The poverty numbers in recent years are contested by many private analysts who believe that official statistics under-report inflation since early 2007. 8 Based on extrapolation from Greater Buenos Aires to all urban population. 9 See “A Distribution in Motion”, CEDLAS Documento de Trabajo Nro. 78.
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violence. However, women continue to lag behind in access to employment (only 53 percent of women age 25-49 years work compared to 97 percent for men in the same age range). Female wages are on average 30 percent lower than men’s in the same occupation.
D. POLITICAL AND SOCIAL DEVELOPMENTS
23. President Cristina Fernández de Kirchner succeeded former President Néstor Kirchner in December 2007 with high levels of support. She won the first-round election with over 45 percent of the vote, outpacing the nearest rival by 20 percentage points. President Fernández campaigned on the successes of the previous administration, namely strong economic growth, improvement in social conditions, and public debt restructuring. This implied an assertive stand with regard to international creditors and holders of public service concessions, and she has maintained the previous administration’s general policy direction.
24. Despite her strong electoral performance, the President has faced significant challenges. Inflationary pressures and a stand-off with farmers over export taxes dominated the agenda during the first half of 2008, with the latter eroding the support of middle class and small farmers. The Government lost the approval of a key agricultural bill in July 2008, but regained momentum with approval of key initiatives such as the nationalization of pension funds and the extension of the Economic Emergency Law, as well as a tax moratorium and measures to encourage the repatriation of offshore capital.
25. To overcome the impacts of the international economic crisis, President Fernández launched major initiatives to regain public support and keep the economy running. In December 2008 she announced a public works package totaling US$ 32 billion in a bid to sustain growth and employment next year. She also announced tax benefits for middle class workers and initiatives to promote local consumption by subsidizing the buying of new cars, household appliances, and domestic travel.
26. The Government has also announced increases in gas prices for high consumption households and in electricity tariffs as a way to reduce government subsidies to utilities companies. While the increases are targeted to higher income households, they have generated opposition by consumers. Consumer confidence is falling sharply, according to a Poliarquia poll, which showed that 40 percent currently consider that the situation in Argentina is bad and will worsen in 2009, up from 18 percent in December 200710. Also since end-2007, President Fernández’s approval rating fell from 51 to 28 percent, and approval of economic policy from 55 to 29 percent. With the deterioration in the social and economic context, there are increased risks of social tensions.
27. Mid-term legislative elections were scheduled for October, but the Government has advanced them to June. The opposition has started some moves among the Radical, Socialist and Civic Coalition parties to form a pre-election alliance, and some highly visible defections from within the Peronist party have also taken place.
10 Country Profile, Oxford Analytica online. December 2008.
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E. GOVERNANCE
28. Argentina has come a long way on the governance front from the serious institutional and governance crisis that erupted in 2001-02. At that time, large scale social unrest had significantly eroded the legitimacy of all branches of Government, and there was very limited scope for constructing political and social consensus precisely when the need for leadership and social consensus was critical. Argentina was able to handle this acute social and political emergency while adhering to a fully functioning democratic constitutional framework and within a context of social peace and respect for human rights. It is widely recognized that the Bank-supported Heads of Household Program was instrumental in reducing the social tension that would have been expected in such a severe crisis environment. Despite the lessons learned from this extraordinary experience and the substantial progress achieved, some of the ingrained issues affecting governance performance continue to prevail, and the country continues to garner governance ratings disjointed from its income level and human development.
29. The Government has chosen to focus on a strategy of incremental public sector strengthening, with an emphasis on the design and gradual application of new public sector tools. It continues the efforts of the previous administration to approach state modernization on the basis of a sequenced approach targeted at the strengthening of institutions, systems and capacities, to improve the quality of service delivery and respond to citizens’ demands. The strategy is focused on the short- and medium-term, and includes active support to key institutions. Initial work is underway to design a new public sector strategy. An Advisory Council composed of academics has recently been created to advise Government on public sector modernization and help increase institutional quality and credibility.
30. Recent years have shown some progress in public sector modernization at the Federal and Subnational level, both in terms of supply and demand, as shown in Box 1. On the supply side, the Government has expanded the legal framework, strengthened and expanded public management systems (financial management, public investment, public employment, procurement and control); and has built institutional capacity for the design and increasing use of these systems. On the demand side, work has begun towards greater institutional quality through the expansion of channels for citizen participation, initial steps towards the implementation of the Access to Public Information Decree and the use of new technologies to enhance access to public services and improve service-delivery.
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Box 1: Recent Progress in Public Sector Management • Financial management: The financial management systems (SLU and SIDIF) cover 87% of
the federal administration. • Public Investment: The BAPIN II system has been implemented in 23 of the 24 provinces and
in 110 federal agencies. • Public Employment: The electronic registry for public employees includes the totality of
SINAPA employees (i.e., 26,000 employees), which amounts to more than 20 percent of all permanent federal public employees.
• Procurement: Argentina’s e-procurement system (SECOP) is operational for purchases up to Arg.$10,000 (US$3,200) in four agencies (eight procurement units).
• Quality Management: 80% percent of user surveys and focus groups show improved service delivery in line with established targets for participating institutions.
• E-government: 750 procedures are included in the electronic directory of government procedures, out of which 50 can be processed electronically.
III. DEVELOPMENT CHALLENGES
31. The most immediate challenge under the new CPS is to help the Government mitigate the effects of the global economic crisis. However, a continued strong framework for economic growth is important to mitigating those effects in the medium-term, and that will require strategic attention to medium-term constraints such as insufficient infrastructure, energy constraints, a stronger agricultural sector, and a social safety net that sustainably transitions households out of poverty and into employment. The rapid growth up to 2007 has also raised questions about environmental sustainability.
32. Infrastructure Gap. Argentina’s social infrastructure endowments (particularly access to improved water supply and sanitation) lag those of comparable middle-income countries while its productive infrastructure stocks (electricity generation capacity, paved roads and teledensity per worker) are generally somewhat higher. Because of economic volatility and recurrent crises, Argentina’s rate of infrastructure investment has been highly variable over the past 3 decades. While Argentina invested about 3 percent of GDP (most of it from public sources) in infrastructure in the 1980’s, overall investment levels declined to 1.7 percent of GDP in the 1990’s. While this decline reflects a broader Latin American trend, the decline in Argentina was particularly severe, with public financing for infrastructure investment amounting to less than 0.5 percent of GDP between 1995 and 2003. This was only partially off-set by private infrastructure investments, which averaged 1.2 percent of GDP in the 1990’s. Since the 2003 crisis, public infrastructure investment has grown robustly, reaching levels of 1.3 percent of GDP in 200711. A World Bank study12 suggests that improving infrastructure stocks to the level of the regional leader could result in an increase in the rate of GDP growth by 1.3 percentage points per year; while raising infrastructure coverage and quality to the East Asian median could add over 3 percentage points to annual growth. The same study
11 Includes direct investments and capital transfers by the national Government, but excludes provincial investments or those from fiduciary funds or off-budget capital expenditures (such as those by public enterprises). 12 Calderón and Servén, “The effects of Infrastructure Development on Growth and Income Distribution”, The World Bank, 2004.
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finds that the effect on poverty would be substantial as well: improving Argentina’s infrastructure coverage and quality to the level of Costa Rica would reduce its Gini coefficient by 0.04.
33. Electricity. The Government faces several key challenges in the energy sector, notably the significant probable need for generation capacity due to a tight supply/demand balance once growth resumes and under-investments in generation. Bottlenecks in transmission and low investment levels in distribution have been exacerbated by the steep increase in electricity consumption between 2003 and 2008. While residential coverage is relatively high, four percent of the population (mainly in rural areas) continues to lack access to electricity service. The sector in Argentina also faces regulatory challenges, in part the result of the pesification and tariff resetting interventions following the 2001 crisis. These actions and the Government’s overall move to a transitory emergency approach resulted in retrenchment by private investors, reductions in the effective tariff which required increasing government subsidies, and uncertainties about the Government’s sector strategy. Moreover, public investment both in transmission infrastructure and new gas-fired generation capacity has gained relevance as the Government becomes more active in the sector. Overall, some of these policies and measures are helping to re-establish the basis for a stronger sector, but uncertainties remain regarding the Government’s medium and long-term vision for the sector and, in the short term, the success of its new tariff policy, which is being resisted by consumers.
34. Developing Extractive Industries. The challenge of establishing an adequate legal and regulatory framework is exemplified by the contrasting situations in the energy and mining sectors. Although Argentina has the fourth largest natural gas reserves in the region, the country has experienced gas shortages since 2004. Strong economic growth and low prices caused an increase in energy demand, outstripping supply, and Argentina is expected to become increasingly dependent on external gas supplies in the immediate future. The development of the mining sector, where Argentina has benefitted both from sector reforms undertaken in the late 1990’s and -- until recently – a boom in commodity prices, has been markedly different. Since the crisis, the stability of the legal and fiscal framework has attracted the characteristic long term investment needed in mining, and the contribution to GDP of the mining industry has increased from 2.5 percent in 2001 to 6.0 percent in 2006. While the sector is generally still expected to grow, it might do so at a slower pace (3.8 percent annual growth between 2008 and 2012 is expected). Improving social and environmental management capacity in the sector and enforcing established regulatory and fiscal regimes would help maximize both investments and sector contribution to socio-economic development, mainly in rural areas.
35. Sustainable Agriculture and Rural Development. The agroindustrial sector continues to be a critical part of the national economy. It contributes around 60 percent of total goods exports, 18 percent of GDP, and 22 percent of the value added of the goods sectors. Crops make up the largest contribution followed by livestock (63 percent and 31 percent, respectively). Agriculture is also a major source of employment, directly generating about 12 percent of national employment and over 20 percent when including transport and commerce services related to food and agriculture. About 11 percent (4.4 million) of Argentina’s 40 million inhabitants live in rural areas, and over a million rural
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inhabitants currently face one or more unmet basic needs. Building a more competitive, diversified and inclusive agricultural sector will depend on strengthened national and provincial institutions, particularly in the areas of agricultural technology, innovation, and finance. Finally, increasing training and capacity building in policy and decision-making will enhance cooperation and harmonization between federal and regional levels, facilitating progressive integration of small-scale producers in efficient product chains, the expansion of their production and their access to increasingly demanding markets.
36. In 2008, these structural challenges were compounded by a severe drought, increasing pressure from the rural sector for a new approach. A drought emergency was declared by the Government in January 2009 and affects 15 provinces under emergency (agricultural losses more than 50 percent) or agricultural disaster (more than 80 percent). Official numbers for 2008/09 estimate a reduction of the cultivated area of 11 percent from last year. Regarding total production, drought affected crucial phases of the cultivation. For wheat, a historical fall of 50 percent of the total production is expected.
37. Environment. Argentina faces serious environmental challenges, some of which compound the financial issues of farmers. The expansion of soy production over the past several years has fueled deforestation, poor water resource management has increased land degradation, and pesticide management practices have increasingly raised environmental health concerns. Land degradation has affected 60 million hectares. The deforestation rate of 0.75 percent in 2006 is twice the Latin American average, and overfishing places stocks of hake, in particular, under significant stress. Water contamination, particularly in the Matanza-Riachuelo and Reconquista urban river basins in the Greater Buenos Aires area -- home to 3.5 million people -- is a grave concern, as well as solid waste management (while 90 percent of municipal solid waste is collected, only 45 percent is properly disposed). Finally, the health care costs associated with air pollution in major urban areas is estimated at 1.6 percent of GDP annually.
38. Social Safety Nets. The main challenge is to increase the level of labor force formality while improving and consolidating existing protection arrangements, both for formal workers and their families and for the most vulnerable sectors. These programs must now move beyond crisis response to a comprehensive system of social protection. Another area where much work is needed is to expand coverage of the social insurance system to include workers who lack or have insufficient contribution histories and thus are not eligible for insurance-based pensions, unemployment and family benefits. The Government recently took a step in this direction with the expansion of pension coverage to elderly who have not made the minimum payroll contributions to be eligible for benefits under the pre-existing system. Challenges inherent to this transition include: covering all vulnerable groups including those in the informal sector, ensuring that benefits are adequate to meet the program’s objectives, avoiding gaps and overlaps between programs, institutions, and levels of government, and ensuring that the overall social protection system is fiscally and politically sustainable.
39. Addressing the Inequities in the Health Sector. Several sources estimate that the population without coverage by union schemes, private health insurance, and PAMI (Public Health Plan for Retired Senior Citizens) equals between 35 and 39 percent of the
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population; i.e., between 13.5 and 15 million individuals. Thus the focus should continue to be on provincial health systems, which would provide care to these populations. There is also inequity across provinces. For example, the infant mortality rate in the Province of Buenos Aires is three times higher than in the City of Buenos Aires.
40. Education Sector, the Key Challenges for Human Capital Formation are Equity and Quality. Universal coverage has basically been achieved, but there is great dispersion in test results between different socio-economic levels, gender and geographical regions. In terms of educational outcomes, Argentina compares favorably with other Latin American countries, but lags behind OECD countries. Recently sanctioned laws take cognizance of these difficulties and set forth clear goals to be achieved, but Argentina could do more to assure high-quality educational opportunities for all, and to address the key issues that include: (i) half of school students do not complete secondary education; (ii) gaps in educational attainment deepen social and regional differences; (iii) the quality of the education of those who graduate from secondary education is not always good enough to have the students ready for higher education or for inclusion into the work force, and (iv) the university system does not prepare graduates with the profile required by Argentina’s current development needs.
41. Opportunities for Argentina’s Indigenous Population. Recent Argentine legislation has advanced indigenous rights, but a gap remains between legal recognition and the practical application of laws both in daily life and in public policy. Land entitlements to indigenous communities, a right constitutionally granted, illustrates this problem. Indigenous peoples are more vulnerable and lag behind other groups in access to public services and incomes. Despite Government effort to increase access to public services and having indigenous peoples take charge of their development—e.g. through the recently-closed Indigenous Peoples LIL supported by the World Bank—indigenous populations have difficulties obtaining equal access to education and health, for example. The literacy rate of the indigenous population age 10 and over is 7 percentage points lower than the average rate of the total Argentine population, and many indigenous people drop out as early as primary school. Few continue on to receive secondary education. While lack of money explains 60 percent of drop-outs, discrimination is also an important factor. Indigenous communities face high levels of malnourishment, infectious diseases, and high rates of adult and infant mortality. Moreover, the majority of communities lack access to safe water, electricity and communication services. Two out of three persons in the indigenous population lack health insurance.
42. Governance. Public sector management remains a major challenge to achieving greater growth and equity in Argentina. Key challenges include (i) strengthen the efficiency, effectiveness and transparency of the public expenditure management; (ii) improve service-delivery outcomes and restore trust in Government; and (iii) make the public sector more accountable and responsive to citizens and the private sector.
43. Strengthen Efficiency, Effectiveness and Transparency of Public Expenditure Management. A key challenge is to expand the use of public management tools to effectively guide policy-making. Important progress has been made through the design of an initial performance-informed budgeting model and nine pilots carried out for
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the 2007 and 2008 budgets, which through further expansion could lay the foundations for an effective performance- management/- budgeting approach across government. The new web-based financial management system, e-SIDIF, is key to achieving these goals. Procurement requires a deepening of reforms, such as through the expansion of the e-procurement system SECOP across government. At the subnational levels, key challenges include improved public expenditure management and greater compliance with the Fiscal Responsibility Law.
44. Improve Public Service Delivery Outcomes and Restore Citizen Trust in Government. Citizens’ trust in Government and public institutions in general was seriously affected by the 2001-2002 crisis, and while the Government has made efforts to regain public trust, much still remains to be done. Citizens’ demands for greater institutional credibility have risen, and require greater assurance that the analysis and decision-making in public institutions will be done on the basis of technical criteria and independent of political intervention. The institutional strengthening of key institutions such as ANSES has contributed to recover citizen’s trust in one of the areas that has been historically lagging behind, by reducing the time in the provision of benefits, expanding the network of service delivery units and implementing enhanced service-delivery quality standards. Within the framework of the incremental strategy, the challenge is to replicate this “island of reform” to other areas of the public sector and help increase trust in Government and restore the credibility of public institutions. It will be critical to restore trust in the National Statistical Agency whose reporting is increasingly questioned by the private sector, press and civil society.
45. Make the public sector more responsive to citizens and the private sector. While much of public sector reform has been oriented towards improving Government internal efficiency, in recent years there has been a shift towards actively responding to citizen’s and private sector demands and needs. Some initiatives, such as reaching out to citizens with simplified e-government tools and processes, beneficiary participation in ANSES and the Citizens’ Charter program, while isolated, have paved the way to deepen responsiveness and social accountability channels. In particular, efforts towards the adoption of law of access to information and effective implementation are promising mechanisms on the demand side that can help improve transparency and accountability in Argentina, effectively strengthening initiatives such as performance-based budgeting.
IV. GOVERNMENT’S DEVELOPMENT VISION
46. The new administration of President Cristina Fernández that took office in December, 2007, largely maintained continuity in the economic and development policy frameworks. The objective for this new administration continues to be the maintenance of economic growth and stability, while a special focus has been put into the building of institutions and strengthening foreign relations. The onset of the global economic crisis in 2008 has buttressed the Government’s pro-regulatory posture and further heightened the Government’s prioritization of social safety nets and job creation. The Government’s
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strategy for dealing with the global crisis includes requesting front-loading of the lending envelope under the CPS while maintaining flexibility with phased operations.
47. Infrastructure. The Government has given high priority to infrastructure development over the past 5 years, both as a tool to reduce social inequality and as a means to overcome potential bottlenecks to competitiveness. As operating deficits for many infrastructure services have widened, the government raised several key tariffs and fares over the course of 200813. In electricity and gas, in particular, tariff increases have been steeply progressive, reflecting the Government’s emerging view that rate increases should both reduce (and where possible eliminate) operating deficits and reduce income inequality. Finally, with the onset of the worldwide economic crisis and slowdown, the Government has come to see an aggressive infrastructure investment program as a key component of a counter-cyclical economic stimulus package.
48. Transport. Argentina has significantly improved the quality of its highway infrastructure over the past decade, with about 90 percent of both its national and provincial networks now in good condition. Going forward, the Government proposes to further roll-out the largely successful CREMA model of highway maintenance (under which private contractors rehabilitate sections of highway and then maintain them under multi-year contracts) to more of the national and especially the subnational network. To reduce logistics costs (which represent about 23 percent of sales costs for commodities on average), the Government also plans to improve rail and road access to the Rosario port system, which accounts for 57 percent of Argentina’s exports (mostly grains and oilseeds) by volume. Finally, in urban public transport, the Government has focused on eliminating localized infrastructure bottlenecks and increasing ridership. Physical measures are increasingly expected to be accompanied by institutional improvements (e.g. creation of a metropolitan transport authority for the Greater Buenos Aires area).
49. Water and Sanitation. At 80 percent piped water supply and 48 percent piped sewerage coverage (2007), Argentina compares unfavorably with other upper-middle income countries and continues to lag behind some of its neighbors (Chile and Uruguay). The same is true of waste water treated (10 percent), a figure that lags well behind both Chile and Uruguay. Against this backdrop, the Government has established the goal of reaching 83 percent piped water supply and 62 percent piped sewerage coverage by 2011.
50. Electricity. In the last few years, the situation in the sector has begun to evolve, with increases in investments, transmission tariffs and the approval of significant increases in distribution tariffs in certain provinces and more recently for the Buenos Aires metropolitan area. The Government has also taken steps to promote private participation in the upstream segments of the sector, introducing the “Energy Plus Regime” in September 2006 and the “Gas Plus Regime” in March 2008. In transmission, the Government has sought financing from several multilateral development banks to overcome bottlenecks, increase the operational security of the system and improve service quality. On the demand side, the Government moved quickly in December 2007
13 These include urban transport fares and electricity tariffs in the Buenos Aires Metropolitan area, gas tariffs nationwide, and nationwide wholesale electricity prices for large consumers.
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to launch a new energy efficiency program and has secured a US$15.2 million grant from GEF to support an aggressive program to replace incandescent light bulbs and to set up an energy efficiency fund. Finally, in rural areas, the Government scaled up its efforts under the US$30 million PERMER project with a US$50 million additional finance loan.
51. Agriculture – the Pampean economies. There is a large gap between the Pampas (which enjoy uniquely favorable natural conditions,) and the non-Pampean “regional” economies. The Government views agricultural commodity exports as an important source of fiscal revenue and maintains a system of export taxes on soy, wheat, corn and sunflower seeds. The Government also argues that these taxes and other restrictions advance longer-term goals in the agricultural sector, such as productivity and crop diversification. Moreover, since 70 percent of soybeans are produced by large farmers that represent only 22 percent of the overall farmer population, the Government argues that export taxes support social equity goals. Given the slowdown in Argentina’s economy, unemployment is another matter of concern for the Government. Comparing different production systems, soy generates 1 job per 100 Ha, while cotton contributes 15 jobs per 100 Ha. The Government’s interest in maintaining lower export tax rates for processed goods such as soybean oil or meal is oriented toward generating not only more value added but also more employment. Other analysts counter, however, that the key challenge facing the agricultural sector is to develop a predictable long-term policy framework that provides incentives for increased production. Export taxes have been raised three times by decree since 2002, making medium and long-term investment planning more difficult. With the steep decline of commodity prices in 2008, in particular combined with the effect of the draught, these analysts are also concerned that the returns on farming of export commodities has declined substantially.
52. Agriculture – the Non- Pampean Economies. In the non-Pampean economies, the Government’s strategy is fundamentally different. It emphasizes enhanced competitiveness by: (i) strengthening the management and efficiency of irrigation systems; (ii) improving roads, electricity, and other rural infrastructure; (iii) transferring technology; (iv) establishing product sanitary and quality systems to meet international standards; and (v) promoting agribusiness through collective actions in value chains. The creation of a new Sub-Secretariat of Family Agriculture in the Secretariat of Agriculture, Livestock, Fisheries and Food signals the Government’s intention to focus more systematically on small holders, non-farm producers, rural workers and migrant workers.
53. Environment. The Government has embarked on an ambitious program in support of the brown environmental agenda (water pollution and solid waste management in particular as well as the remediation of improperly closed uranium mining and milling sites). It has also been active on the green environmental agenda, as evidenced by the 2007 Deforestation Law (Ley No. 26.331 de Presupuestos Mínimos de Protección Ambiental de los Bosques Nativos) and initiatives to safeguard biodiversity, such as the implementation of ecological corridors in rural landscapes, the connection of high-value national and provincial protected areas, and promotion of sustainable resource use in the buffer zones of the Chaco and Arid Patagonia eco-regions. The Government has also pursued an active climate change agenda. The Argentine Carbon Facility (FAC), in particular, has been strengthened to facilitate the development of new investment projects
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with CDM potential14, as part of a broader mitigation policy. The Government is planning to use GEF resources to strengthen capacity in designing sectoral policies as well as measures to mitigate and adapt to climate change as part of the Third National Communication under the UNFCCC.
54. Social Protection Policy. The Government is maintaining the strategy it has followed since 2003 around the three anchors of employment, universal policies, and the effective inclusion of vulnerable sectors with an integral, territorial, and restitution of rights perspective. The Government sees formal employment as the basis of inclusion and has developed several policies to improve its quality and expand formality in the labor market, including the improvement of payroll taxes enforcement programs, use of collective bargaining to define salaries, increases in the minimum wage, and expansion of coverage, increases in benefits and improvements in management of the Family Allowances program. However, it is also updating approaches and programs to adjust to new conditions and to address remaining pockets of poverty. The Government has reaffirmed its vision that poverty is much more than the lack of income and is a problem of economic, social, cultural, and political inclusion of citizens. The Government wants to continue the reform of the program Heads of Households (Jefes y Jefas de Hogar Desempleados-PJyJHD) orienting participants with employability problems towards the program Familias para la Inclusión Social. Those participants with better employment opportunities will be directed towards the training and employment services program Seguro de Empleo y Capacitación. In addition there are high expectations for the Lifelong Learning Program to start achieving high rates of coverage and with this improve earnings of those employed and the employability of those searching for employment.
55. Health. The Government’s vision is to reduce the fragmentation of the public health system while further developing interventions for vulnerable and poor sectors through non-contributive health insurance and the ongoing programs Plan Nacer and Remediar. The authorities are considering expanding the Nacer results-based approach to other population groups. The fourth area of the Government’s Acuerdo Bicentenario begins with health and centers on creating a more integrated national system—with better coordination of public and private providers—through training and human capital development in rural and isolated areas. Specific attention will be paid to generating a new generation of nurses and improving the hospital infrastructure, particularly outside of urban centers. The plan also recognizes the links to broader social issues such as nutrition and other education support for families, and addresses the effects on communities with high and persistent unemployment.
14 FAC provides services including: (i) technical guidance and assistance to projects with regard to the conditions of resource utilization, submission of requests, and other aspects of project execution, (ii) capacity building for different projects, (iii) coordination and implementation of studies at the national level to identify potential projects and support their development, (iv) assistance for decision-makers in the public and private sectors with regard to strategies and mitigation policies, and (v) identification of portfolios of CDM projects eligible for financing.
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56. Education. The Government will continue working towards achieving the targets that it set for itself in recent legislation. Among the most important ones are universal school enrollment of 5 year olds and increasing public spending on education to 6 percent of GDP by 2010, to be financed by national and provincial governments. Current level of education spending is around 5 percent of GDP.
V. ARGENTINA – WORLD BANK PARTNERSHIP
A. THE CURRENT PROGRAM
57. The 2006 CAS proposed that the Bank’s assistance strategy be structured in accordance with the same three pillars established under the previous CAS, namely: (1) sustained growth with equity, (2) social inclusion, and (3) improved governance. The IBRD lending program consisted entirely of investment loans, thereby completing the transition from adjustment lending to investment lending that started with the 2004 CAS.
58. Status of the Bank’s Program in Argentina. The 2006 CAS has shown some strong achievements that have renewed and strengthened the relationship with Argentina:
• Bank lending in the health sector, with the introduction of an insurance-based approach for maternal child care, has become a model for the efficient delivery of basic health services at the provincial level that is expected will be extended beyond maternal child care and also as a model to be replicated internationally.
• Dialogue and solid analytical work have been undertaken to move the Heads of Household Program from emergency income support programs to a more comprehensive, long-term and sustainable strategy for social protection.
• Successful direct lending in three provinces (duly guaranteed by the national Government) has shown promising opportunities for an effective dialogue and developmental assistance at the subnational level.
59. Mainstreaming Governance in the CAS. The 2006 CAS mainstreamed its governance focus and provided space for innovation within the partnership. The Bank has had a selective approach in engaging Argentina in the area of governance via two separate and distinct entry points. First, it has supported the authorities’ strategy of incremental public sector strengthening, with an emphasis on the design and gradual application of new public sector tools. The strategy is focused on the short-and medium term, and includes active intervention in key institutions. Second, it has engaged the authorities in the implementation of the Argentina Fiduciary Action Plan, a comprehensive effort to improve fiduciary performance in the Bank’s investment portfolio in Argentina.
60. The Argentina Fiduciary Action Plan (AFAP). It is a collection of discrete but conceptually linked initiatives in fiduciary management that improves transparency and
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accountability in Bank-supported investment projects. The Plan reflects an approach that is significantly different from past “ring fencing” of individual operations. It focuses on measures that cut across projects and strengthen country systems for financial management and procurement. Key achievements under the AFAP include:
• A web-based information system (known as SEPA) that provides the public with easy access to detailed information on all Bank-financed contracts in the country.
• A methodology (known as IFPA) to simplify, summarize, and communicate technically complex fiduciary assessments (at the project and portfolio level) through an easily understood system of red, yellow, and green “traffic lights.”
• An intensification of dialogue between the Bank and Argentina’s Supreme Audit Institution (AGN). Audit support activities have improved on-time audit completion and, more broadly, strengthened Government audit capacity.
• A Price Monitoring Mechanism (PMM) on civil works contracts to help distinguish higher prices attributable to legitimate supply responses from artificial price inflation.
• An across the board effort to reduce the use and size of Project Implementation Units (PIUs) and thereby strengthen the state’s own institutions and systems.
61. The SEPA is one of the most successful components of the AFAP. Designed in response to project-level challenges to disclose relevant information on project procurement plans and their implementation via the web, its initial scope included all contracts financed by the Bank in Argentina. With a recent decision by IDB to adopt SEPA as its procurement dissemination tool, SEPA will de facto cover a substantial share of Argentina’s public investment program and achieve impressive progress in the transparency of public procurement in Argentina. Beyond Argentina, SEPA has been implemented in Mexico, Honduras, Uruguay and Paraguay. Three additional countries are in the advanced stages of implementation, and another four have recently begun implementation of SEPA. Likewise, concurrent audits designed to ensure fiduciary standards of a Bank-financed results-oriented maternal-child health insurance scheme has gradually become the auditing standard for the health insurance scheme at the national level and it is envisaged it may be adopted in future Government programs in the sector.
62. Portfolio Management. There has been a strong focus on portfolio management which has enabled an intensive dialogue with the Government at the highest levels to address issues affecting the portfolio as a whole and ensure that the commitments made in investments are effectively executed. In addition to regular joint portfolio reviews, the Government has recently: (a) reorganized the handling of loan approvals within the Ministry of Economy with the expectation that it will significantly streamline the process of approval of loan agreements and subsidiary agreements with subnational and other implementing agencies15; and (b) agreed to improve management information systems
15 See Ministerial Resolution No. 108/2009 dated March 16, 2009 issued by the Ministry of Economy and Public Finance.
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utilized by project entities to jointly monitor civil work contracts to identify undue delays. This is a welcome initiative as over 60 percent of Bank commitments finance high-value civil works contracts. The CAS completion report highlighted that progress in this area should be continued and deepened, thus new activities will be supported with an IDF grant and are expected to accelerate the pace of implementation.
63. There have also been shortfalls from initial expectations regarding the pace of implementation of the portfolio. A productive dialogue with the authorities has ensued, and an action plan is in place to address the shortfalls. The overall country relationship has been greatly strengthened in the past three years, consolidating improvements that had steadily accrued since 2001-02. The IFC has realized similar accomplishments by focusing its lending on companies that demonstrate social responsibility and a track record of honoring contractual obligations. The IBRD not only reestablished its presence in a number of sectors but opened new channels, particularly in the form of result-based disbursements and direct lending to provinces, guaranteed by the Federal Government, that have enhanced the Bank’s developmental contribution to the country.
Box 2: Argentina and the IBRD Strategy for Middle-Income Countries (MIC)
Argentina has presented a peculiar challenge in the implementation of IBRD’s MIC Strategy. In the midst of the 2002-03 crisis, the possibilities of developing a strong partnership appeared limited as the Bank was identified by the new authorities as partly responsible for the social and economic debacle. Since then there has been strong progress in building trust and in designing an investment partnership that has shown responsiveness and flexibility as the country transitioned from acute crisis to a rapidly recovering economy. The current CAS period focused the partnership in developing investment initiatives that could contribute to generating a solid basis for continued pro-poor growth. In the growth dimension, the assistance efforts implied a move from traditional transport projects --which continue to play an important role--to a focus on logistic investments aimed at improving transport efficiency, improved non-Pampean agriculture production and addressing major environment challenges. In the social dimension, it implied the phasing out of the emergency assistance schemes for a focus on increasing the employability of the poor through investments in life-long learning schemes and the improvement of health and educational services. The proposed program includes new and challenging efforts to respond to the country’s needs with customized and flexible approaches consistent with Bank policy.
As the country faces new challenges derived from some fragile policy approaches and the international crisis, the Bank stands ready to further expand its partnership by expanding the array of services, particularly in the areas of financial and knowledge services which have been underutilized. In the financial services sector the Bank will continue to make available a full menu of financing and credit-enhancement and risk-management tools that could help the Government optimize the management of its debt and asset portfolios, particularly at a time of significant financial constraints. In the knowledge service sector, the Bank will continue to make available its research and expert services at the sectoral and country levels through analytic work, training, institutional capacity building, technical assistance, and other advisory activities. The recent experience with Fee-for-Service analytical work at the provincial level seems a promising channel for increasing our knowledge contribution to the country.
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Box 3: The Heads of Households Program: A Successful Partnership
The Heads of Household Program was Argentina’s main response to the social and economic crisis in 2002. Government rapidly developed and implemented this assistance program which provides a monthly payment equivalent to US$50 to individuals that (i) are the head of a household; (ii) are unemployed; (iii) live in a household with minors, disabled or pregnant women, and (iv) work 4 hours a day or take training or education classes. The Bank supported the Program through the Heads of Household Project (Loan 7157-AR), approved by the Board on January 28, 2003, and Heads of Household Transition Loan approved on March 23, 2006. The Bank supported the part of the program in which beneficiaries did indeed comply with the workfare requirement. The Program was very successful in (i) calming the social situation (which had nearly erupted into violent conflict), and (ii) targeting the poor, mitigating effectively the impact of the crisis. Government, with Bank support, has improved program governance (better internal controls, database crosschecks and supervision). For example the Bank now finances only transfers made with debit cards, a more transparent mechanism than cash payments. Since 2002, the Bank accompanied Government implementation of the Program with analytical studies of its poverty and inequality impact. Incidence data shows that the Program had good targeting performance. The share of Program participants among the 40 percent better-off households in Argentina was 6 percent in 2005 while the share of Program benefits going to the bottom two quintiles was 80 percent. Given the good targeting performance, the HH Program was instrumental in tilting the overall economic growth period in a pro-poor way. While the number of indigenous beneficiaries is not known, the program is active in dozens of municipalities with high proportions of indigenous populations. Governance improvements to Jefes included building additional cross-checks into the registry databases and adding additional controls within the MTESS. This included regular monthly cross-checks of the registry database with other databases by an independent agency (National System of Tax and Social Identification –SINTyS). The MTESS also introduced cross-checks of the registry against beneficiaries (and family members) among the participants in private health insurance plans. In addition, the spouses of beneficiaries were cross-checked against private employment registries.
Social accountability was also enhanced through greater use of public information and participation mechanisms. The MTESS coordinated with the National Consultative Council staff to hold a series of workshops on the program in order to consult and provide information, promoting the participation of local organizations (non-governmental organizations, unions, business groups, private companies, professional training centers, among others).
With the normalization of the overall economic and social situation, the Government reoriented the HH Program. The strategy was to distinguish among those beneficiaries that have higher re-employment chances from those that require a different type of longer-term safety net, linked to building human capital for children.
B. SUMMARY FINDINGS FROM COMPLETION REPORT
64. Five consecutive years of rapid and pro-poor economic growth beginning in 2003 have enabled poverty and unemployment to be cut back to pre-crisis levels. Many of the country development goals articulated in the CAS were achieved. Whereas the aim was
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to reduce unemployment from 14 percent in 2005 to no more than 11 percent in 2009, unemployment was already below 8 percent in 2008. Similarly a targeted reduction in urban poverty from 38 percent in 2005 to no more than 30 percent in 2009 was already surpassed by 2007. The Government has clearly been successful in further relieving a massive social crisis during the CAS period; however, that achievement was made at the cost of increasing inflationary pressures as detailed above.
65. The anticipated CAS outcomes were largely achieved (see Annex 3). Outcomes with respect to the lending program were also substantially achieved. During the CAS period there was a significant renovation of the country’s investment portfolio which had been virtually exhausted during the post crisis period. The Bank is on track to deliver 20 project loans for a total of US$3,425 million before end FY200916 under the current CAS. There has also been a strong focus on fiduciary matters in all aspects related to the preparation and implementation of the portfolio. The Bank also delivered a strong program of AAA albeit less than envisaged in the CAS.
C. DEVELOPMENT PARTNERS
66. The Bank Group’s program is coordinated with Argentina’s other development partners, notably the IDB and CAF. In the case of IDB, the authorities have promoted a division of labor among the two institutions in line with the requirements of the various sectors. In human development, the Bank has taken a lead role in health while IDB has taken a corresponding position in the education sector. In the case of social protection, the Bank initially took a leading role with the Heads of Household Program; however, IDB has recently become increasingly involved with its financing of the Familias Program. In the infrastructure sectors, the Bank has a leading role in roads, flood protection and water and sanitation; while IDB is predominant in regional infrastructure development in the north of Argentina and urban development.
67. There is strong coordination with IDB on fiduciary matters, particularly with the harmonization of procurement rules and the decision of IDB to adopt SEPA as a tool to make information on IDB-financed procurement available to the public. IDB is currently in the process of preparing its country assistance strategy for the coming four years. Its lending program (about US$1.5 billion per year) has been larger than the Bank’s and has similar priorities and lending modalities. IDB also has greater exposure (about US$8.5 billion) and a larger portfolio (about US$7.1 billion) in Argentina than the Bank.
68. The degree of coordination with CAF is less as they are mainly active in different sectors from the Bank. CAF has a smaller presence (exposure about US$0.5 billion); however, there is dialogue and consultations with CAF representatives in the field.
D. CPS CONSULTATIONS
69. During December 2008, the CPS team conducted seven thematic consultations in Argentina on the issues of: transportation and logistics, water and sanitation, agriculture, 16 One remaining project for US$840 million will be considered by Executive Directors before the end of FY09 (AR Matanza-Riachuelo River Basin Clean-Up).
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environment, social policy, federal-provincial relations, and public sector management. Even with the diversity of topics covered and a methodology that allowed in depth discussion of each topic, there were common concerns expressed: (i) the need to support capacity building for public officials at the local and national level; (ii) the need to identify strategic plans by sectors and the support the Bank could bring to do so; (iii) the opportunity to work at the provincial and municipal levels as well as national, including the need for the Bank to invest in capacity building at these levels; and (iv) participants expressed an overall appreciation of the work done with the Bank yet they mentioned that Bank’s rules could be more flexible to improve the execution of projects. These general findings are reflected in the activities planned under this CPS, and the individual consultations also provided useful input that has been taken on board by the respective sectors. For example, the public sector management consultation yielded a call for reinforcement of results-based management initiatives which will be taken up in a multi-sectoral manner as the CPS proposes to build on such initiatives in the health sector and under the Performance-Based Budgeting project. The sessions on human development and national-provincial relations provided useful input reflected in the CPS aims of greater institutional strengthening of and support to the provinces. Annex 9 provides additional details on these consultations and their outcomes.
E. RATIONALE FOR WBG SUPPORT TO ARGENTINA
70. The strengthening of the relationship between the Bank and Argentina in recent years has provided the basis for a broadened upstream dialogue. Building on the pioneering dialogue in the health and safety net sectors, increasingly strategic dialogue has been developed in sectors such as transport, environment and agriculture. In the current context of potential serious effects from the international economic crisis and amidst signals that the authorities may need to review and eventually revise some of their policy and strategic preferences, it will be particularly important that the Bank maintain its presence and remain a reliable and important source of advice and assistance to the country. Requests for Bank support in mitigating the impact of the crisis with a Social Safety Nets operation constitute an excellent opportunity to help the administration in consolidating a solid social protection system. Likewise, there are potentially other opportunities for the Bank to assist the country in mitigating the impact of the crisis while addressing some of the structural issues derived from the current policy stance.
71. A key lesson of the last CAS is that by focusing selectively on areas of consensus within the Government’s development agenda, the Bank was able to provide important support as the Government has made remarkable strides in reducing poverty. The positive relationship that now prevails may be attributed to the successful partnership that has been evolving towards making the Bank a borrower of choice when dealing with complex investments particularly in the infrastructure and social sectors and, lately, in the emerging field of environmental programs. In fact, the Government’s demand outstrips the available IBRD resources, especially as the pipeline is rebalanced in response to the global economic crisis to fortify Argentina’s social safety nets.
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F. ARGENTINA – WORLD BANK COUNTRY PARTNERSHIP STRATEGY (FY10-12)
Strategic Approach of the Proposed CPS
72. In this complex and challenging context, but capitalizing on the improvement in relations since the crisis, it is essential to continue responding to emerging economic and social issues, while managing risks. Given the continuity in Government policy and the expressed demand, the 2010-2012 CPS will continue to focus on the three pillars successfully supported under the previous CAS: (i) sustainable growth with equity, (ii) social inclusion, and (iii) improved governance. However, there will be significant evolution in the support provided as this flexible but focused framework will allow rebalancing the portfolio toward even greater emphasis on the social inclusion pillar as the Bank’s key response to the deteriorating economic and social environment. The CPS proposes an approach characterized by the following, which are largely derived from the lessons of the previous CAS – as detailed in Annex 6:
• Joint work with the Government that: (1) is strategic and where there is strong demand, and (2) in areas where the Bank has good dialogue with the authorities and feels comfortable with the basic policy and institutional framework.
• Focus on cross-cutting issues such as governance and institutional strengthening.
• Focus on the national level of government and, in line with the federal nature of government in Argentina, seek to deepen its engagement with the subnational levels of government.
• The Bank proposes to capitalize on the value-added of its expertise and experience through more complex and likely larger programs or projects.
• The Bank will strengthen its AAA program.
• The CPS seeks to improve the implementation of the Bank portfolio.
• The CPS proposes further efforts to improve fiduciary safeguards.
73. The CPS will be performance-based. One inherent characteristic of the investment lending-only portfolio is its self-selectivity. Along with macroeconomic stability, portfolio management and fiduciary performance are among the factors that will determine actual lending levels. At the sector level, the quality of the policy framework and implementation performance will continue to determine the pace and extent of new lending. At the project level, Bank-financed activities will continue to be designed around clear development outcomes and incorporate incentives toward those outcomes
Results Orientation and Monitoring
74. The Argentina CPS is based on the Results Framework (Annex 2). This framework identifies and tracks specific outcomes the World Bank program is designed to influence over the next three years. The mid-term CPS Progress Report will provide an opportunity to assess progress and performance, and revisit the Results Matrix in order that it may reflect any evolution in the Bank and Government’s relationship and shared
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priorities. In addition, the Government and Bank’s semi-annual portfolio reviews provide not only an opportunity for project by project results assessments, but also their aggregate contribution toward the anticipated country results. The strengthening of the portfolio management described during the previous CAS period, and the IDF supported efforts that will be implemented under this CPS will further strengthen the linkage between this semi-annual exercise and country results monitoring. The effectiveness of the Bank’s AAA portfolio in supporting the achievement of the CPS results will be strengthened by the joint annual AAA review exercise described previously.
The WBG’s Indicative 2010-2012 Program
Objectives and Outcomes
75. As mentioned previously, the proposed program would provide selective, performance-based support under the three pillars to influence specific outcomes in support of Argentina’s strategic development goals. Annex 6 describes proposed activities in greater detail, and Annex 2 elaborates the outcomes and milestones the activities are expected to support. Given the need for flexibility in this dynamic global context in order to be responsive to the Government’s needs, this list is indicative.
• Objective: Upgrade Argentina’s infrastructure to address potential bottlenecks to competitiveness, and underpin medium-term growth and poverty alleviation
76. The Bank will undertake an innovative approach in supporting the Government’s objective, with activities designed to contribute to improving the transport network, increasing public transport ridership, increasing rural access to electricity supply, and improved access to water and sanitation. The first outcome will be supported by a major operation tackling logistic multi-modal problems affecting transport efficiency. The two-stage APL for the Rosario Metropolitan Area Infrastructure project should help to reduce high logistical costs associated with grain and oilseed exports through the Rosario port system, which accounts for 58 percent of Argentina’s exports by volume. The Bank will also expand its support for urban transport beyond the Greater Buenos Aires area under the Metropolitan Areas Urban Transport project (PTUMA) and continue supporting successful highway maintenance schemes under a National Highway Assets Maintenance III Project. At the same time, the Bank would build on its long-standing involvement in rural electrification (PERMER) and more recent support for energy efficiency (through GEF) with a new Rural Electrification and Energy Efficiency Project. Beneficiaries of these programs include some of the most vulnerable, including indigenous, populations. Finally, the Bank will contribute toward improved access to water and sanitation with a major environmental initiative. The proposed US$840 million loan (APL-1) in support of the Matanza-Riachuelo Basin Sustainable Development Project would finance most of the transmission, treatment and disposal infrastructure needed to provide the infrastructure backbone for cleaning up an urban river basin that is home to some 3.5 million people and more than 4,000 industrial facilities stretching across 14 municipalities and the City of Buenos Aires.
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Table 1: CPS Program Objectives and Select Activities Government of Argentina Strategic Objectives
Pillar I Sustainable Growth with Equity
Pillar II: Social Inclusion
Pillar III: Improved Governance
Outcomes toward which the CPS will contribute Upgrade Argentina’s infrastructure to address potential bottlenecks to competitiveness, and underpin medium-term growth and poverty alleviation Improve competitiveness, quality, and exports of agriculture and livestock production Address a growing problem of resource degradation
Consolidate the reduction in poverty and expand efforts to reverse the longer-term poverty trend by increasing household incomes and integrating marginalized groups into the productive marketplace Consolidate improvements in health indicators and improve quality of education while reducing drop out rates
Strengthen the effectiveness, efficiency, transparency and accountability of public sector management Expand performance management and improve the quality of public expenditure, enhance service delivery outcomes and trust in institutions Strengthen public sector capacity to spur investment and growth
Selected Programs for Support • Improving the transport
network • Increasing public transport
ridership • Increasing rural access to
electricity supply • Improved access to water
and sanitation • Increase the diversification
of production in the agricultural sector
• Improving employability of the most vulnerable
• Expansion of provincial health insurance
• Hospital restructuring and expansion
• Strengthening health sector governance
• Universal access to primary education
• Lower teen dropout rates
• Strengthening transparency of decision-making, increase access to information
• Expanding effective performance-management and performance-informed budgeting
• Improving compliance with the Fiscal Responsibility Law
Cross-Cutting Themes Strengthen capacity of the Government to prepare, approve and implement investment projects in line with the requirements of a medium-term investment partnership. Ensure awareness and knowledge with Government about IBRD financial products that could provide flexibility to Argentina in managing its debt, including the ability to change the financial characteristics of existing and future loans as to better manage the financial risks relating to currency, interest rate, roll over and commodity price volatility
77. Most projects in the infrastructure portfolio generate significantly improved conditions for the poor. While most of the Bank’s infrastructure investments under the 2006-2008 CAS supported maintenance and expansion of the national and subnational highway networks, the new portfolio will present a more diversified picture with investment initiatives conveying increased complexity and value added from the Bank and a growing focus in producing improved efficiency and poverty alleviation.
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• Objective: Improve competitiveness, quality, and exports of agriculture and livestock production
78. The proposed CPS program will contribute to increasing the diversification of production in the agricultural sector. Bank work in support of this objective will continue to focus on enhancing the competitiveness of the non-Pampean (“regional”) economies and increasing the assets and opportunities of small farmers and the rural poor. At the national level, the Bank will seek to engage the Government in a discussion of agricultural policy options that reflect the changing international and domestic context based on just-in-time analytical work. The Government has recently sought additional lending from both the IDB and the World Bank (which approved a US$300 million loan in October, 2008) for the PROSAP program. It has also received an additional financing loan for the PROINDER small farmers project (July, 2007) to reach deeper into poor rural areas. In addition, the Government has expressed interest in a new Rural Poverty operation that would address extremely poor and vulnerable indigenous and non-indigenous populations, including the landless and migrant workers. This project will be the primary IBRD vehicle for combining natural resource management activities with support to indigenous peoples. Finally, IBRD’s ongoing flood protection operations contain strong elements of disaster preparedness planning in addition to physical works.
• Objective: Address a growing problem of resource degradation
79. The Bank program will provide support to (i) increase the areas of forest and forest plantations under sustainable management, (ii) strengthen urban and solid waste management, improve environmental management and governance, and (iii) increase access to international carbon markets. Support for Argentina’s “green” (natural resources) agenda will build on ongoing operations in Sustainable Natural Resource Management (IBRD) and Biodiversity Conservation in Productive Forestry Landscapes (GEF). The latter works with small farmers, including indigenous peoples, to introduce biodiversity-friendly practices in productive forests. These operations will be complemented by a new GEF-funded Rural Corridors and Biodiversity Conservation project which would stitch together conservation corridors necessary for the survival of several endangered species and the sustainable management/ use of native forest and arid steppe while strengthening the federal system of protected areas.
80. The proposed CPS will support the second and third outcomes by expanding the Bank’s work on “brown” environmental issues through the previously discussed Matanza-Riachuelo Basin Sustainable Development Project and a proposed Sustainable Industrial Development Project that will support the conversion of small and medium-size industries in highly polluting sectors to cleaner production processes. These operations will complement ongoing operations in urban solid waste management and in the remediation of improperly closed uranium mining and milling sites. In addition, several new operations will mainstream “brown” issues, such as air pollution control, as parts of loans in other sectors. The upcoming PTUMA Project, for example, will promote increased public transport ridership while the Rosario Logistics Project will alleviate traffic congestion and promote a modal shift from road to rail for agricultural commodities. Finally, Bank support for Argentina’s Third National Communication
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under the UNFCCC is expected to deepen the absorption of climate change considerations in sectoral planning, particularly in infrastructure and agriculture. A country environmental assessment (CEA) (planned for FY10) is expected to help Argentina and the Bank to set priorities for additional investments.
• Objective: Consolidate the reduction in poverty and expand efforts to reverse the longer-term poverty trend by increasing household incomes and integrating marginalized groups into the productive marketplace
81. A key element of the Bank’s ongoing and future policy dialogue toward this objective is to improve the employability of the most vulnerable. The focus of social service delivery has shifted from emergency relief and expanding access to basic services to better inter-governmental coordination and improved quality of services. The Bank is therefore supporting the Government in facilitating the transition of beneficiaries out of Jefes and developing a longer term strategy for social protection. According to the discussions with the national Government, the Bank is proposing to design and implement new operations to extend and complement the existing social protection programs. The first operation would focus on improving the equity, transparency, and efficiency of social programs and on the Seguro Program to: (i) create conditions to extend the services of Seguro to the population generally, beyond the former beneficiaries of Plan Jefes (at this time the only ones eligible); (ii) improve the execution and adaptation of employment services, taking into consideration the particular conditions in each locality where the program is executed; and (iii) adapt the benefits offered to the participants to ensure appropriate support and incentives. The proposed second phase would focus on supporting policies to expand coverage of both programs, in the direction defined by the first phase loan. Thus, the Project would finance further improvements in design and operation of these programs, while supporting the inclusion of vulnerable families and workers currently excluded, with the final goal of increasing the efficiency and effectiveness of Argentina’s social protection policy.
82. Another aspect that has been explored with the Argentine Government at various levels is the possibility of supporting social inclusion policies at the subnational level, as detailed in the next paragraph. To provide updated information on the trends and impacts of social protection programs, the Bank will support the Government to enhance its monitoring capacity by providing technical assistance in the design and implementation of a national “Social Protection Survey”.
• Objective: Consolidate improvements in health indicators and improve quality of education while reducing drop out rates
83. The Bank aims to expand support toward this objective through (i) expansion of provincial health insurance coverage, (ii) hospital restructuring and improving services, and (iii) strengthening the Ministry of Health and health sector governance. The program aims to strengthen the governance capacities of the National Ministry of Health to improve the operation of the health system, as discussed in paragraph 85 below. Expected outcomes would be improved access, effectiveness, and transparency of health services delivery. The proposed health projects would move forward with innovations
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such as: (i) expanding the age groups that would benefit from existing provincial insurance arrangements (e.g. to all school-age children); (ii) defining a broader guaranteed service scope (e.g. to include chronic, non-transmissible diseases); and (iii) introducing health quality attributes to services (e.g. reducing waiting lists). The project would seek to achieve (i) gradual improvement in equity of access by providing all Argentines with a similar health plan regardless of where they live; and (ii) a structured and comprehensive approach to address the disease burden associated with chronic conditions and regional pathologies that disproportionately affect the poorest population.
84. Universal coverage of 5-year old children and retention of teenagers, particularly those in the poorer segments of the population, are two of the key elements of the Government’s strategy for strengthening the education system. The Bank’s program targets exclusion from educational attainment, which is highest among children and teenagers of the poorest families. The latest education legislation is increasing the financing of the education sector to 6 percent of GDP by 2010. The Bank’s involvement in subnational education systems over many years gives it a comparative advantage on issues of improving quality of education and management of the education system. The Bank's emphasis on provincial education can best be seen through an ongoing US$150 million rural education project that will provide support until October 2011.
• Objective: Strengthen the effectiveness, efficiency, transparency and accountability of public sector management
85. The proposed CPS will build on the on-going engagement on public sector management strengthening by deepening engagement on existing loans and responding to new requests with support for additional operational and analytical work. The ongoing State and Subnational Modernization projects are complemented by the Institutional Strengthening of the National Social Security Administration Project and the Social and Fiscal National Identification System (SINTyS) second-phase APL. In addition, a US$350,000 Governance Partnership Facility (GPF) grant for strengthening governance in the health sector formulate and implement sustainable approaches to improving governance in the health sector in Argentina. Achievement of the goals of the GPF grant will be supported by a project to create a multi-stakeholder National Observatory for Health Policy that would (i) deepen analysis of accountability and incentive mechanisms in the health sector, assess lessons from experience and identify opportunities for scaling up; and (ii) pilot and evaluate innovative approaches.
• Objective: Expand performance management and improve the quality of public expenditure and enhance service delivery outcomes and trust in institutions
86. The program will concentrate on strengthening public expenditure management tools, including an increased focus on performance-management and -budgeting, proposed to be supported by the Foundations for Performance-Informed Budgeting Project. While this is an important part of the Government’s long-term agenda, it is also facilitates greater fiscal discipline in the short-term, including specific measures for public financial management reform to address the financial crisis. Sectoral dialogue is also focused on strengthened poverty-targeting in public expenditures, particularly
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through the ongoing health and education portfolios and the proposed Basic Protection Project. The program also emphasizes support to cross-cutting public sector management areas across the federal administration, such as human resource management, e-government, procurement, quality management, and M&E through the State Modernization II loan.
87. Specific organizational reform issues will be addressed through the Institutional Strengthening loan to ANSES, the National Social Security Administration and specific e-government tools will be promoted through the second phase of the National Social and Fiscal Identification System Project. At the subnational level, the program will focus on a variety of public sector management areas at the provincial levels, such as performance management and budgeting, human resource management, tax administration, e-government and strategic planning. This will be supported by the on-going Subnational Governments Modernization Project. In addition, Fee-for-Service products are proposed for a number of subnational governments, starting with the on-going FFS in the province of Corrientes.
World Bank Lending
88. The Bank proposes an indicative lending envelope of US$3.3 billion for FY10-FY12, front-loaded with two operations to support Argentina’s safety nets during the critical next two years. IBRD’s exposure to Argentina declined from US$ 9.4 billion at end-CY2001 to US$ 5.1 billion at end-2008, about the same level as in 1995. This reduction is partly the result of reasonable commitment levels through mainly investment operations that led to lower disbursements. At the same time, the special SALs of the late 1990s increased debt service during this period. With the proposed program, Bank exposure in Argentina is expected to increase to US$5.6 billion by the end of the CPS period as a result of front loaded assistance designed to help the country and its more vulnerable population weather the impact of the global economic crisis.
89. Due to uncertainty over the evolving international economic situation and the need to maintain flexibility, lending amounts for some projects are not yet fixed and, thus, are expressed in Table 2 as ranges. Furthermore, the Government’s desire for flexibility in their response to the global crisis is reflected in a strategy to avoid committing excessively large amounts to projects without a track record of successful implementation and disbursement. Successfully implemented programs may be scaled up through additional financing, repeater projects or multi-phase APLs. Lending plans for FY11-12 will be specified in further detail in a progress report reflecting any changes in demand, country conditions and the Bank’s lending capacity at the time.
IFC Activities
90. IFC’s strategy in Argentina is designed to support the growth of export-oriented sectors and a select group of financial institutions, in order to create jobs and meet the needs of low-income populations, particularly those in frontier regions.
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91. Argentina represents IFC’s second-largest exposure in the region and IFC’s seventh-largest country exposure by committed portfolio. It constitutes 12 percent of IFC's committed portfolio in the Latin American and Caribbean region. IFC’s strategy in Argentina is designed to manage existing risks prudently and seek out new investment and advisory opportunities to selectively support the CPS pillars. The Corporation’s investment bias is mainly toward export-oriented industries and a select group of financial institutions, with a strong emphasis on attending “bottom of the pyramid” population needs, particularly in frontier regions. The overarching strategy is to proceed cautiously, with sponsors in strong industries that have an established record of sound, profit-oriented, and therefore sustainable management. This means that IFC will concentrate its activities on existing clients in both corporate and financial sectors. IFC aims to continue renewing and even expanding trade finance lines to Argentine banks, which have become strong IFC partners for onlending programs to farmers and MSMEs. Additional information on IFC’s program is provided in Annex 7.
Table 2: Planned lending deliverables (FY09-FY10)
Project FY and amount (in US$ Million)
FY09 FY10
Matanza-Riachuelo Development APL 840
Basic Protection Project (Phase I) 450
Foundations for Performance-Informed Budgeting 10-20
BA Provincial Infrastructure (AF) 50
Urban Transport in Metropolitan Areas 150
Provincial Roads (AF) 200
Cordoba Provincial Roads (AF) 30-60
Sustainable Industrial Development 40-60
Rural Poverty 30-50
San Juan Social Inclusion & Local Development 20-50
Provincial Government Modernization (AF) 15
Essential Public Health Functions - FESP (AF) 90
Health Sector Governance Strengthening* 4.5
Road Safety 20
Basic Protection Project (Phase II) 550 *Though listed separately here, will likely be included in FESP AF for a total loan of US$94.5m
The Bank’s Analytical Agenda
92. A complete description of the Bank’s analytical agenda appears in Annex 6. Table 1 summarizes key elements of the proposed agenda. As with the previous CAS, there are few AAA activities planned under the Governance pillar as these are mainstreamed in the operations themselves.
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Table 3: Key Elements of the Partnership’s Analytical Agenda – Argentina CPS 2009-2012 Pillar 1: Sustainable Growth with Equity Country Economic Memorandum (CEM): Productivity and Growth. The study will : • Review short and long-run determinants of economic growth; study role of macro policies in
responding to external shocks and their effectiveness in mitigating output volatility • Study link between the quality and composition of trade, and its long-term growth potential • Look at the link between business environment and firm level productivity Reducing Logistics Costs in the Buenos Aires Container Port System and the Northwest (Logistics II). This study will: • Focus on high logistics costs in the northwest region and policy alternatives to avoid
unnecessary transportation costs from the Port of Buenos Aires • Prepare guidelines on how to set up a National Logistics Council that could become a
forum to anticipate and propose solutions to logistics bottlenecks in Argentina Rural Transport Assessment. • Analyze transportation access to health, education and other public services as well as
obstacles to the movement of goods in rural areas; • Assess the rural and/or secondary road networks in Argentina, including coverage, quality,
management and maintenance, available financing and corresponding expenditures Country Environmental Assessment (CEA) and Strategic Environmental Assessments (SEA). • CEA will focus on environmental implications of key policies, and capacity to address
priorities; • SEA’s will provide analytical options and participatory approaches for mainstreaming
environmental and social considerations in policies, plans and programs in different sectors Private Sector Development, Innovation and Competitiveness Study: • Focus on federal and provincial level based on demand from Governors. Pillar 2: Social Inclusion Safety Nets.
• Supporting efforts to improve effectiveness of the safety net for the poor and vulnerable • Expanding coverage of poverty reduction programs, improving data, and more • Strengthening provincial safety net programs and coordination with national programs
Impact of Labor Market Developments on Inequality. • Analyze the effects of labor and social protection programs on income inequality, • Generate new quantitative data for analysis of income inequality at the provincial level • Analyze income distribution and policy impacts, and inform lending in social protection
Strengthening Management and Governance of Public Hospital Networks. • Support efforts to strengthen hospital networks management • In the framework of a National Plan proposed by the MoH to construct primary health
care and hospitals, document what works and what could work better to improve innovation and entrepreneurial behavior in the public hospital system
Higher Education. • Identify options for higher education to graduate professionals with the knowledge and in
the numbers required by Argentina’s development Pillar 3: Governance Public Sector Management.
• Performance-management and performance-informed budgeting at the subnational levels Provincial Finances.
• Review provincial performance under Federal Fiscal Responsibility Regime and identify options to support provincial fiscal sustainability within the existing inter-governmental fiscal system.
33
Treasury Services
93. Finally, in addition to lending and AAA, the Bank will ensure the Government’s awareness and knowledge of IBRD financial products that could provide flexibility to Argentina in managing its debt, including the ability to change the financial characteristics of existing and future loans to better manage the financial risks relating to currency, interest rate, roll over and commodity price volatility. These products can also be applied beyond IBRD’s loan portfolio, to gain access to IBRD banking products to be applied to Argentina’s other sovereign liabilities (e.g. bonds outstanding, third party loans, etc.), thus taking advantage of the preferential pricing that IBRD’s AAA rating commands. Staff of the World Bank’s Treasury are available to review with Government the flexibility, depth and breadth of IBRD’s full menu of banking products and services, including technical assistance in designing and implementing a broad strategy for public debt management aimed at reducing both market risks and overall costs of funding.
Portfolio and Fiduciary Considerations
94. An important lesson of the previous CAS was that the shift from adjustment lending, which dominated Bank lending at the beginning of the decade, to an all-investment lending program has strained the project implementation capacity of the Government, particularly in areas of loan approval processing and the contracting of high value civil works. Therefore Bank will continue efforts to strengthen the capacity of the Government to prepare, approve and implement investment projects in line with the requirements of a medium-term investment partnership. Key elements of this strategy include (i) support the implementation of new project approval procedures at the national level; (ii) improved design, preparation and approval procedures for subnational projects; (iii) improved procurement capacity; and (iv) improved fiduciary risk and portfolio monitoring. The emphasis on infrastructure and complex projects also brings an increased element of safeguards risks, thus the partnership strategy includes an increased focus on safeguards capacity and supervision.
VI. RISKS
A. EXTERNAL
95. Adverse External Environment. Over the next 18 months, Argentina will have to weather the global economic crisis and a declining primary fiscal surplus. External factors will negatively impact the terms of trade, fiscal and external positions, and competitive devaluations of trading partners. The country has few financing options, and the capital account poses particular risks as a new round of capital outflows would cause foreign reserves to drop. On the internal balances, Federal Government revenues are expected to fall by 0.9 percentage points of GDP while primary expenditures would fall by only 0.1 percentage points of GDP. In addition, the provincial primary fiscal surplus is expected to further deteriorate. However, the Government will be able to maintain a primary fiscal surplus of about 2.4 percent of GDP in 2009, assuming that commodity
34
prices stabilize by end-2009 and that the Government manages to contain nominal expenditure growth in the face of mid-term elections in 2009.
96. Limited Availability of Counterpart Funds. Relatedly, a deepening of the economic slowdown and deterioration of the fiscal position could result in a decreased availability of counterpart funds for the implementation of the Bank’s portfolio. Should this occur, the Bank would respond as it has in previous crises with a restructuring of the portfolio. While such a restructuring would be responsive to the specific needs of the country, current contingency discussions anticipate that such a response would further rebalance the portfolio toward social safety nets and health services, focusing available funds on operations that disburse quickly and provide employment.
97. High Indebtedness. Argentina’s public debt remains high at US$175 billion as of end-September 2008, equivalent to 58 percent of GDP. Medium- and long-term debt currently represent nearly 90 percent of total federal obligations, while short-term debt, mainly due to the Central Bank and other Government agencies (including ANSES and AFIP), accounts for 6 percent of total debt. Interest and capital arrears represent another 4 percent of debt. Once intra-public sector obligations are netted out, public debt as a share of GDP is lower (55 percent). About 52 percent of Argentina’s debt is denominated in foreign currency, while the bulk of the remaining peso-denominated debt is indexed to inflation. The share of foreign currency-denominated and inflation-indexed debt has been relatively stable since 2005, and exposure to foreign exchange and inflation risk thus remains important. The Government has stated its intention of clearing arrears with Paris Club members and has indicated that it will be making a fresh offer to hold-out bond holders. In addition, the Government is taking further steps to improve liability management, including the recently completed debt swap of Guaranteed Loans.
B. INTERNAL
98. Slowing Economic Growth. GDP growth is decelerating, as detailed previously. Consumer demand and private investment are expected to decline, and external factors further complicate the economic outlook. However, the economy is more resilient than it was back in 2001 due to largely solid fundamentals (twin surpluses and sizeable foreign reserves) and a small and more solid banking system. The Government has launched a package of countercyclical fiscal measures to mitigate the negative impact of the economic slowdown. In particular, the authorities plan to use their strengthened fiscal position from the nationalization of the private pension funds to protect the incomes and employment of vulnerable groups through public work programs and through other measures aimed at encouraging domestic consumption.
99. Inflationary Pressures. Inflation remained high in 2008, but it could have begun to recede by year-end. Looking forward, inflation is likely to recede gradually over the next two years as recessionary pressures continue to build and declining commodity prices contribute to this deflationary trend.
100. Financing Gap. The Government will face sizeable financing gaps during the period 2009-2011, but they seem manageable if economic policies are prudent.
35
Refinancing risks have decreased, in spite of limited access to international financial markets and high credit risk. In addition to IFIs and BCRA resources, the Treasury is now allowed to borrow from Banco Nación up to 30 percent of its public deposits, which would enable it to close the financing gap for 2009.
101. Potential Threats to Social Cohesion. If the economic crisis increases the stock of poor not covered by social safety nets, pressures to increase coverage and benefits, and create ad-hoc new social programs could lead to significant fiscal pressures through increased and perhaps less-efficient social spending. The authorities are working with the Bank and IDB to strengthen safety nets in view of the potential deterioration in social conditions. In addition to the threats to social cohesion related to structural problems of poverty and inequality covered earlier, the spring 2008 Farm Crisis has exacerbated growing divisiveness within the country. This is likely to manifest itself more strongly in increased political risk for the Government than in social instability.
102. Political and Social Instability. Mid-term legislative elections were scheduled for October, but the Government has advanced them to June. Polls suggest that the Government coalition will face significant competition and will likely have smaller majorities. The resurgence of the farm conflict and defections from the Government's majority even before the elections in both chambers have increased uncertainty. On the positive side, however, a smaller majority in Congress could result in more efforts by political parties to build consensus to address key national challenges, including working out a response to the crisis. There may also be increased social unrest as the downturn in economic activity results in higher unemployment and poverty. In addition to increasing the difficulty of reigning in public spending, this introduces a degree of uncertainty in the direction of policy. Our program however is in areas where there is wide consensus focusing on medium to longer term development.
103. Legal Risks. Domestic and foreign investors have raised concerns regarding the extension of the economic emergency laws and the legality of the evolving policy aimed at providing the state with a larger role in the provision of social services and regulation of the market. Additional such measures could risk a weakening of legal certainty and rule of law. Recent nationalization measures risk diminishing confidence in GoA’s credibility regarding contract rights and trigger another round of arbitration cases. These, as well as MIGA’s disengagement, could eventually impact the credibility of Argentina vis-a-vis the international financial community and negatively impact the ability to obtain financing during the global crisis. In addition, there are possible legal risks associated with the scope and practical application of the Government’s recently-enacted tax moratorium, designed to encourage the repatriation of offshore capital. Concerns have been expressed about the law’s unintended potential to open a gap in Argentina’s defenses against illegal money laundering practices and terrorist financing.
104. Constrained Ability to Attract Private Capital. Argentina’s below-average (for middle-income countries) performance on regulatory fronts and high corruption perceptions weaken the basis for private investment, particularly in infrastructure. Dialogue between the private sector and the Government to explore possible public-private partnerships would be helpful in mitigating this risk.
36
C. RISKS TO THE WORLD BANK GROUP
105. Strategic and Relationship Risk. Our program needs to adjust to changing needs as the economic downturn deepens. It is important to re-calibrate our program towards shorter term priorities, especially social safety net programs to help protect vulnerable groups. This is also likely to increase disbursements over the next 18 months with the objective of moderating or reversing the Bank's negative net transfers to Argentina during the global economic crisis. In addition, we will strive to support important visible infrastructure programs to address key infrastructure and environmental deficiencies and cement more firmly the Government's demand for our support.
106. Implementation Risk. This reflects the 100 percent investment composition of our lending program, as well as the complex and heterodox economic policy environment. The most important include: (1) weakening in the economic or key sectoral policy and institutional frameworks that would undermine the sustainability and development impact of the Bank’s program; and (2) the standard implementation risks of a large investment portfolio in partnership with weak institutions including implementation performance, and fiduciary concerns; and (3) safeguards risks inherent to the strong focus on infrastructure and complex projects which, while adding value in the context of weak institutions, necessitate vigilance and proactivity in supervision. While such risks are common for many countries, the high corruption perceptions, the size of the country, and the complex inter-governmental relationships perhaps make Argentina particularly challenging.
107. Conflict over Uruguay Pulp Mill. The Argentine authorities continue to oppose the paper plant being financed in Uruguay by IFC. However, the authorities are pursuing their differences with Uruguay over the plant in other international fora. In this regard, the authorities have also indicated that potentially affected communities should refrain from closing transit bridges to Uruguay.
Annex 1 Page 1 of 7
Annex 1 Page 2 of 7
Economic Performance 2003-2008
From 2003 through 2008 the Argentine Government focused its macroeconomic strategy on three pillars: maintaining a competitive real exchange rate, fiscal prudence, and active income policies. The fruit of that strategy was GDP growth averaging 8.8 percent in those years, with repeated balance-of-payments current account surpluses, declining public sector debt, and significant reductions in poverty and extreme poverty.
That 2003-2008 sustained growth chapter anchored in solid macroeconomic fundamentals (budget and current account surpluses) is virtually unprecedented in Argentina. In previous times, recurring balance-of-payments problems typically created fiscal sustainability problems and made the financial system more vulnerable and unstable. With an uncompetitive tradables sector (in many instances associated to an appreciated real exchange rate, as occurred during the 1990s), a constant in previous growth processes was a widening of the current account deficit and ultimately balance-of-payments and financial system crises that took a harsh social and distributional toll.
Such turbulence had serious repercussions on the public finances as well. The public account deficits that had been habitual in Argentina prior to 2003-2008 had prompted systematic fiscal adjustments which slowed economic growth, with adverse consequences mainly for the lowest-income population and for infrastructure spending, a key driver of sustainable long-run growth. In contrast to the primary budget balances of prior decades—deficits averaging 3.1 percent of GDP in the 1970s, 5.4 percent in the 1970s, and 3.8 percent in the 1980s, then an average primary surplus of 0.15 percent of GDP in the 1990s, the 2003-2008 period saw an average primary surplus of 3.3 percent of gross output. Over that latter span the country posted its first public sector financial surplus in more than fifty years.
The economic growth path of these past years cannot be ascribed solely to the above-mentioned twin surpluses or to a relatively benign international environment: it also owes much to structural changes in investment and economic productivity, diversification of the structure of production, workings of the labor market, the financial system, and the public sector.
Investment and Productivity
Medium- and long-term growth sustainability depends, among other factors, on significant investments to scale up production, transportation, warehousing, and distribution capacity and increase productivity of the local supply base.
Gross fixed domestic investment as a proportion of GDP climbed from 11.3 percent in 2002 to 19.8 percent in 2005 and to 23.0 percent in 2008—1.9 percentage points past the 1990s high (21.1 percent in 1998). Moreover, the GDP share of investment in producer durables (the investment component that most heavily impacts the economy’s reproduction capacity and productivity) jumped from 4.7 percent in 2003 to 10.1 percent in 2008, approaching in the latter year Argentina’s all-time highs (over 10 percent in 1961 and in 1977).
The twofold aim of this suite of investments was to expand capacity, to be able to supply the simultaneous increases in domestic and external demand, and to raise productivity. Increases in productivity (measured as the ratio of GDP in constant local currency to employment) took the average for this variable to 4.1 percent between 2003 and 2008. As well as marking a record high, this performance, as a ponderable feature, was associated to modernization of production plant and equipment, reorganization of plant layouts, and investment in R&D, and not to a substitution of capital for labor (a pattern common to previous experiences).
Annex 1 Page 3 of 7
National Government public investment increased steadily in 2003-2008, from 1.2 percent to 3.6 percent of GDP. The bulk of this spending went to infrastructure, gaps in that area being usually one of the most serious bottlenecks to sustained growth of developing economies. By way of this approach the public sector helped achieve a high long-term growth rate without affecting the budget surplus.
Structure of Production
Argentina’s production base became increasingly more diversified between 2003 and 2008, lessening vulnerabilities for sustained GDP growth. Unlike previous expansion eras, economic growth during those years was balanced across the tradables sector (industry, agriculture, mining), services (notably tourism), and construction.
Within the tradable goods sector—a crucial part of the economy for sustained real current-account surplus growth—manufacturing became one of the leaders of this expansive phase. The 9.5 percent average annual growth posted by this sector marked a sixty-year high, surpassing even the increases of the 1960s, the era of fastest industrial growth in our nation’s history.
This manufacturing growth was not concentrated in a handful of industry sectors but was distributed fairly evenly across the industrial aggregate. For instance, in the past six years, the rate of output growth in sectors where small and medium-sized enterprises predominate (textiles, garment making, footwear, metal product industries) generally topped the growth rates of sectors dominated by larger companies, whether export-oriented (automotive, food, base metals) or selling to the home market (construction materials).
The Argentine export basket likewise became more diverse, as evidenced by the strong cumulative growth rates in leading domestic metal industry sectors like the automotive industry (+167 percent between 2003 and 2008) and machinery and mechanical devices (+91 percent), as well as in railroad equipment (+54 percent) and metal manufactures (+63 percent). Growth increases for medical, optical, and precision instruments (+50 percent) and electric equipment and appliances (+73 percent) also outpaced the aggregate.
The automotive sector weighs heavily in the export basket (accounting for 19 percent of the overall increase in exports in constant prices in recent years); other prominent export segments were sundry chemical product industries (11 percent), aircraft and aircraft parts (5 percent), and machinery and mechanical devices (5 percent)—medium-high technology-intensive sectors that made considerable inroads into the global marketplace during the period reviewed here.
These moves to diversify Argentine production had as a fundamental backing an exchange rate policy that sought to counter real exchange rate appreciation pressures stemming from healthy current account surpluses (especially since early 2007, when agricultural commodity prices skyrocketed), keeping “Dutch disease” at bay. In addition to diversifying its export basket in 2003-2008, Argentina recorded one of Latin America’s highest year-on-year increases in export volume.
Social Inclusion
The above-described growth chapter was associated to steady reductions in unemployment, poverty, and extreme poverty rates and real-wage increases, which improved both personal income distribution (Gini) and factor income distribution. On the labor market side, employment-output elasticity averaged a record 0.6 in 2003-2008, a result of steady GDP
Annex 1 Page 4 of 7
increases, diversification of production (with labor-intensive industry sectors contributing heavily), and intensive investment.
A combination of rising labor demand and a stable participation rate drove unemployment rates down from 19.7 percent in the fourth quarter of 2003 to 7.6 percent in the same period in 2008. The declining unemployment rate, in turn, systematically pushed up wages (nominal and real), which recovered completely from their shrinkage during the previous phase of job market decline. Between 2002 and 2008 the wage bill-to-GDP ratio increased from 34.6 percent to 43.6 percent, making for a more equitable income distribution.
Complementing the labor market’s internal dynamic was the National Government’s active income policy. By way of example, systematic adjustments of the minimum wage (a cumulative increase of 520 percent between January 2003 and December 2008) were intended to make sure that wage increases reached primarily lower income workers, so as to maximize the poverty and indigence reduction that comes with labor market recovery.
As for the situation of retirees and pensioners, between 2003 and 2008 the National Government increased average pension benefits by a cumulative 44 percent, in real terms. The recently enacted Pension Portability Law (October 2008) provides for two automatic pension adjustments annually, tied to observed increases in wages in the economy and tax and social security revenue intakes.
The Social Insurance Inclusion Plan furthered the pro-elderly income policy by giving pension entitlement to people who had been left out of the current pension system because of unregistered employment or unemployment problems. Bringing over 1.3 million new people into the social security system has raised coverage rates for women over 60 and men over 65 to more than 70 percent in 2008 (85 percent for those over 65), up from 49 percent in 2003 and, together with the aforementioned increase in pension benefits, contributed to virtually eradicate severe poverty among older adults.
Against that backdrop, the recent transfer of private pension fund contributors to the public pension system was primarily intended to ensure continual increases in benefits to all Argentine pensioners, the private system’s inadequate investments having jeopardized the income of its contributors in the short and medium term.
Financial System Stability
The recent economic growth chapter unfolded concurrently with the rehabilitation of the financial system, which had suffered the consequences of the late-1990s crisis. During that period the system’s soundness indicators had been alarming: bank liquid holdings as a percentage of total deposits was a 19.6 percent low; some 40 percent of all private commercial bank loans were classed as substandard, public sector lending exposure was around 50 percent, bank liabilities were excessively dollarized (49 percent), and there were severe mismatches between loans’ currency of denomination and the currency received by borrowers, both for corporate and household loans.
Prudential regulations adopted since 2003 have made bank balance sheets sounder and more robust. That move, together with the economic growth dynamic, has produced structural improvements in the condition of local financial institutions. In January 2009, financial system liquidity was just under 30 percent of total deposits, with a public sector lending exposure of just 12.5 percent (an all-time low); the arrears rate for private commercial bank loans was 3.3 percent of total private credit, and banks have been posting record profits since 2006. These strengths signal a difference relative not just to previous growth eras in Argentina but also to the
Annex 1 Page 5 of 7
environment that other countries’ financial systems, in developed and developing economies alike, are currently navigating.
The Argentine authorities also brought in a package of regulations to reduce exchange risk, to mitigate one of the greatest drivers of instability in the domestic financial system. For example, dollar deposits in the local banking system can be used only for foreign trade finance. Thus, at present, foreign-currency deposits make up no more than 20 percent of total system deposits.
Fiscal Sustainability
Thanks to the existence of a systematic primary budget surplus in a growing economy, the national public sector gross debt stock plummeted from 138.7 percent of GDP in 2003 to 48.5 percent in 2008. That improvement, along with the 2005 public debt restructuring and the recent bonds-for-loans swap, trimmed the debt and in the process created a sustainable debt maturity profile.
Consequently, Argentina’s public accounts now are sound for the short, medium, and long term. Interest payments on the public debt come to barely 6.6 percent of national government revenues, down from the December 2002 level of 13.5 percent, and borrowing requirements will decline nominally starting in 2010 and systematically through 2014.
Since new debt offerings were mainly local currency bonds, the public sector debt’s foreign currency exposure dropped from virtually 100 percent in 2001 to just 52.5 percent in 2008, further reducing the economy’s external vulnerability. The share of variable-rate debt declined as well, from 34.8 percent in 2002 to 27 percent today.
This improvement in fiscal sustainability indicators was not achieved at the expense of social line items. Social expenditure of the consolidated public sector (aggregate national, provincial, and municipal government outlays) rose from 19.2 percent of GDP in 2003 to 23.7 percent in 2008. Education took up 36 percent of the increase (60 percent of it for basic education), health spending 19 percent, and social security 33 percent (the above-mentioned Social Insurance Inclusion Plan figuring prominently in the latter).
A final noteworthy item is the increase in the Water Supply and Sewerage and the Housing budget lines. Though these two items have less relative weight in the structure of social spending, both increased in GDP share terms by 180 percent and 97 percent respectively, and accounted for 11 percent of the overall growth in social expenditure.
Avenues of Transmission of the Global Crisis
The worldwide crisis is being transmitted via two channels: finance and trade. Because of the nature of Argentina’s growth between 2003 and 2008, financed fundamentally with domestic savings (the flip side of the current account surplus), its economy was better equipped than ever in its history to fend off financial contagion. In Argentina the crisis would be felt almost exclusively via the trade avenue, though thanks to some of the structural changes mentioned above its impact was attenuated.
Financial Channel
The global crisis has spread chiefly through the financial channel; in most developing economies this triggered a flight to safe assets. In numerous instances—especially in economies running current account deficits—the reversal of the capital account balance prompted severe
Annex 1 Page 6 of 7
exchange adjustments and led to drops in countries’ stock and bond values and in local bank system deposits.
This time, unlike past episodes of global turbulence, Argentina was not affected via the financial avenue; there was no significant exchange adjustment or any significant contraction of bank system deposits. The nation’s continuing budget and current account surpluses minimized the impact of the external financing crunch, and its healthy international reserve stocks, bolstered financial system mentioned earlier, and dedollarization of local contracts kept the local money and currency markets stable.
Thanks to the exchange rate policy pursued in recent years there was less volatility in the nominal exchange rate. Since September 2008 Latin American currencies have undergone strong nominal depreciations against the U.S. dollar, ranging from 7.7 percent to 13.2 percent. But Argentina was able to manage the value of its currency with the dual aim of remaining competitive and keeping the financial system stable, as reflected in the low 5.3 percent volatility observed in the depreciation of the local currency when the crisis deepened following the collapse of Lehman Brothers.
A continuing current account surplus in 2009 will keep the Argentine economy’s external and financial sectors stable. On the public finance side, the Government’s strategy to preserve fiscal sustainability by means of liability management and local borrowing operations to ensure that the State can honor its commitments, will cement the nation’s strong position in an adverse global climate.
Trade Channel
Trade is the second avenue of transmission of the global crisis. The worldwide economic downturn is showing up in slipping export growth in the different countries. Argentina has felt the adverse impact of this transmission channel in recent months, but its 2003-2008 growth dynamic has made it more resilient.
Recent years have seen a diversification in Argentine export destinations, with diminishing exposure to the industrialized economies17 (in which growth will slow as a result of the present turmoil) and more sales to recent rapid growth economies (where growth will be comparatively high, albeit slower than in the recent past).
About 60 percent of Argentine exports are products with low elasticity to declines in global income, such as food products. Consequently, the falloff in external demand will be confined mostly to a cluster of local sectors, such as the automotive or steel industries, whose export sales are highly sensitive to global activity levels and in which the government has instituted specific policies to boost domestic demand.
The makeup of Argentina’s export basket also leaves it less exposed to commodity price drops. Generally, countries that export food, energy, and mining commodities are hurt by drops in world prices, but price corrections of Argentina’s agricultural export commodities were less severe than for other products (such as some metal minerals), since previous price movements for these items were not the result of largely speculative factors but of the rising demand for corn and soya for alternative energy production, and sustained demand in emerging nations.
17 In 2008, the United States and the Eurozone took up 7 percent and 19 percent, respectively, of Argentine exports; MERCOSUR and the ASEAN-China-India bloc accounted for 23 percent y 15 percent, respectively.
Annex 1 Page 7 of 7
Outlook for 2009-2010
Comparatively speaking, Argentina is solidly positioned to weather the global crisis, both by virtue of its own experience and relative to other developed and developing economies. This strong position is grounded not just in the country’s continuing “twin” surpluses but also in the structural changes that took place in 2003-2008: an increase in economic productivity, diversification of production, reductions in unemployment and poverty, improvements in the income distribution, financial system rehabilitation, and bolstering of the public finances.
Given this backdrop, domestic economic policy should be able to manage the global crisis via the usual fiscal, monetary, and exchange rate instruments, with the aim of easing the impact of the global turmoil on Argentina’s macroeconomic aggregates without the need for a restructuring of private-sector balance sheets. The immediate challenge is to keep the global troubles from affecting investment in infrastructure and social protection, as occurred in previous episodes of crisis in our region. Public investment and social spending will be critical, given their positive impact on the economy’s systemic competitiveness and what such expenditure can do to protect social welfare gains.
Ann
ex 2
Pa
ge 1
of
5
Arg
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PS
Res
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Fra
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P
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SUST
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MB
A (
Bue
nos
Air
es),
an
d of
5%
in s
elec
ted
med
ium
siz
e ci
ties.
•
25,0
00 h
ouse
hold
s el
ectr
ifie
d w
ith
sust
aina
ble
elec
tric
ity s
ervi
ces
by
2012
•
2000
rur
al s
choo
ls e
lect
rifi
ed w
ith
relia
ble,
ren
ewab
le e
lect
rici
ty
supp
ly b
y 20
12
�
Exp
and
wat
er a
nd s
ewag
e co
vera
ge
for
128,
000
poor
res
iden
ts in
are
as
of B
A P
rovi
nce
with
hig
h sa
nita
ry
or e
nvir
onm
enta
l vul
nera
bilit
y.
�
Initi
ate
cons
truc
tion
of tr
unk
colle
ctio
n, tr
ansm
issi
on, t
reat
men
t an
d di
spos
al in
fras
truc
ture
for
G
reat
er B
ueno
s A
ires
are
a.
�
Red
uce
floo
d ri
sk in
BA
city
and
C
orri
ente
s.
Nat
iona
l Hig
hway
Ass
et M
anag
emen
t AP
L I
an
d II
(a
ppro
ved
FY04
and
FY
07, r
espe
ctiv
ely)
P
rovi
ncia
l Roa
d II
(L
EN
) C
órdo
ba R
oad
Infr
astr
uctu
re +
AF
(a
ppro
ved
FY07
and
LE
N, r
espe
ctiv
ely)
In
fras
truc
ture
Pro
ject
for
the
Pro
vinc
e of
B
ueno
s A
ires
Inf
rast
ruct
ure
(AP
L1,
II
and
AF
) (
appr
oved
FY
05, F
Y07
and
LE
N)
Sant
a F
e R
oad
Infr
astr
uctu
re P
roje
ct
(app
rove
d FY
07)
Arg
enti
na M
etro
polit
an A
reas
Urb
an
Tra
nspo
rt P
roje
ct (P
TU
MA
) (L
EN
) B
ueno
s A
ires
Urb
an T
rans
port
Pro
ject
(P
TU
BA
) and
Add
itio
nal F
inan
cing
(a
ppro
ved
FY
97 a
nd F
Y07
) P
ER
ME
R +
Add
itio
nal
Fin
anci
ng
(app
rove
d FY
99 a
nd F
Y09
) R
ural
Ele
ctri
fica
tion
and
Ene
rgy
Eff
icie
ncy
Pro
ject
(P
ER
ME
R I
I)
(LE
N)
Urb
an F
lood
Pre
vent
ion
and
Dra
inag
e (A
PL
1 an
d 2)
(a
ppro
ved
FY05
and
FY
06)
Bas
ic M
unic
ipal
Ser
vice
s (a
ppro
ved
FY06
) B
ueno
s A
ires
Pro
vinc
e In
fras
truc
ture
(AP
L-1
an
d A
PL
-2)
(app
rove
d FY
05 a
nd F
Y07
) M
atan
za-R
iach
uelo
Bas
in S
usta
inab
le
Dev
elop
men
t P
roje
ct (
AP
L-1
) (L
EN
)
18
In
part
icip
ant P
rovi
nces
: Bue
nos
Air
es, C
órdo
ba, S
anta
Fe,
Ent
re R
íos,
Chu
but,
Cor
rien
tes,
Neu
quén
.
Ann
ex 2
Pa
ge 2
of
5
PIL
LA
R 1
- SU
STA
INE
D G
RO
WT
H W
ITH
EQ
UIT
Y
Cou
ntry
Str
ateg
ic
Goa
ls a
nd I
ndic
ator
s Is
sues
and
Obs
tacl
es
Out
com
es th
e B
ank
Pro
gram
E
xpec
ts to
Inf
luen
ce
Mile
ston
es
Ban
k P
rogr
am I
nstr
umen
ts
2. T
owar
ds M
ore
Sust
aina
ble
Rur
al D
evel
opm
ent a
nd E
nvir
onm
enta
l Man
agem
ent
Impr
ove
com
peti
tive
ness
, qu
alit
y, a
nd e
xpor
ts o
f ag
ricu
ltur
e an
d liv
esto
ck
prod
ucti
on
Add
ress
a g
row
ing
prob
lem
of r
esou
rce
degr
adat
ion.
Bui
ldin
g an
eve
n m
ore
com
petit
ive,
div
ersi
fied
and
in
clus
ive
agri
cultu
ral s
ecto
r w
ill
requ
ire
stre
ngth
ened
nat
iona
l and
pr
ovin
cial
inst
itutio
ns.
Mod
erni
zatio
n of
res
earc
h,
exte
nsio
n an
d re
gula
tory
fr
amew
ork
for
food
qua
lity
and
safe
ty is
req
uire
d to
ens
ure
cont
inue
d an
d im
prov
ed a
cces
s to
ex
port
mar
kets
and
pro
tect
ion
of
dom
estic
con
sum
ers.
E
xpan
sion
of
soy
prod
uctio
n ha
s fu
eled
def
ores
tatio
n.
Poor
wat
er r
esou
rce
man
agem
ent
has
incr
ease
d la
nd d
egra
datio
n,
and
pest
icid
e m
anag
emen
t pr
actic
es h
ave
rais
ed
envi
ronm
enta
l hea
lth c
once
rns.
.
Incr
ease
the
dive
rsif
icat
ion
of
prod
uctio
n in
the
agri
cultu
ral s
ecto
r by
pr
omot
ing
incr
ease
d pr
oduc
tivity
and
co
mpe
titiv
enes
s of
the
regi
onal
ec
onom
ies.
In
crea
se b
y 30
per
cent
are
as o
f fo
rest
an
d fo
rest
pla
ntat
ions
und
er
sust
aina
ble
man
agem
ent
Incr
ease
inve
stm
ents
in u
rban
was
te
Dev
elop
and
impl
emen
t sol
id w
aste
m
anag
emen
t str
ateg
ies.
Im
prov
ed e
nvir
onm
enta
l man
agem
ent
and
gove
rnan
ce, a
s in
dica
ted
by
• in
crea
sed
tran
spar
ency
and
•
a m
ore
part
icip
ator
y ap
proa
ch in
the
min
ing
sect
or in
Arg
entin
a In
crea
se a
cces
s to
inte
rnat
iona
l car
bon
mar
kets
�
Prov
inci
al A
gric
ultu
ral D
evt
Stra
tegi
es d
esig
ned
and
unde
r im
plem
enta
tion
in a
t lea
st 1
2 pr
ovin
ces.
�
50%
impr
ovem
ent i
n ef
fici
ency
of
irri
gatio
n sy
stem
s an
d 2%
im
prov
emen
t in
road
tran
spor
tatio
n in
PR
OSA
P ar
eas.
•
Prop
osal
for
the
sust
aina
ble
use
and
prot
ectio
n of
nat
ive
fore
sts
and
biod
iver
sity
pre
pare
d •
inst
itutio
nal f
ield
cap
acity
. •
Prot
ecte
d ar
ea s
yste
m c
ore
area
s an
d co
rrid
ors
esta
blis
hed
in c
ritic
al
ecor
egio
ns; s
yner
gy b
etw
een
fore
stry
an
d co
nser
vatio
n in
itiat
ives
cre
ated
•
15 p
rovi
ncia
l and
mun
icip
al s
olid
w
aste
man
agem
ent p
lans
com
plet
ed
by 2
012
• 4
sani
tary
land
fills
bui
lt an
d op
erat
ing
by 2
012
• A
t lea
st 5
maj
or s
olid
was
te
dum
psite
s cl
osed
by
2012
•
1 m
inin
g si
te (
Mal
argü
e) s
afel
y co
ntai
ned
and
appr
opri
ate
clos
ure
plan
s pr
epar
ed f
or a
noth
er 8
site
s •
Nat
iona
l RE
DD
str
ateg
y an
d m
onito
ring
sys
tem
for
em
issi
ons
and
emis
sion
s re
duct
ions
pre
pare
d.
• 1
CD
M p
roje
ct, e
stim
ated
ann
ual
redu
ctio
ns o
f 17
6,62
2 C
O2
tons
) •
Red
uctio
n of
125
,502
CO
2 to
ns b
y tw
o st
and
alon
e C
DM
pro
ject
s
PR
OSA
P I
and
II
(app
rove
d FY
07 a
nd F
Y09
) P
RO
IND
ER
and
AF
(a
ppro
ved
FY98
and
FY
08)
IB
RD
Sus
tain
able
Nat
ural
Res
ourc
es
Man
agem
ent P
roje
ct.
(app
rove
d FY
08)
GE
F B
iodi
vers
ity
Con
serv
atio
n in
Pro
duct
ive
For
estr
y L
ands
cape
s (a
ppro
ved
FY07
) G
EF
Rur
al C
orri
dors
and
Bio
dive
rsit
y C
onse
rvat
ion
(F
Y10
) So
lid W
aste
Man
agem
ent P
roje
ct
(app
rove
d FY
06)
Min
ing
Env
iron
men
tal R
esto
rati
on P
roje
ct
(app
rove
d FY
09)
Pet
robr
as G
as T
rans
port
Sys
tem
Pro
ject
(F
Y10
), Sa
lta
Lan
dfill
Gas
Cap
ture
Pro
ject
(F
Y08
), O
lava
rría
Met
hane
Cap
ture
Pro
ject
FY
05)
Car
bon
Fin
ance
TA
(ap
prov
ed F
Y07
) C
arbo
n P
artn
ersh
ip F
acili
ty
For
est C
arbo
n P
artn
ersh
ip F
acili
ty (F
Y09
)
Ann
ex 2
Pa
ge 3
of
5
PIL
LA
R 2
- SO
CIA
L I
NC
LU
SIO
N
Cou
ntry
Str
ateg
ic
Goa
ls a
nd I
ndic
ator
s Is
sues
and
Obs
tacl
es
Out
com
es th
e B
ank
Pro
gram
E
xpec
ts to
Inf
luen
ce
Mile
ston
es
Ban
k P
rogr
am I
nstr
umen
ts
1. S
uppo
rtin
g P
rogr
ess
Tow
ards
Per
man
ent S
afet
y N
ets
and
Fos
teri
ng E
mpl
oym
ent
Con
solid
ate
the
redu
ctio
n in
pov
erty
and
exp
and
effo
rts
to r
ever
se th
e lo
nger
te
rm p
over
ty tr
end
by
incr
easi
ng h
ouse
hold
in
com
es a
nd in
tegr
atin
g m
argi
naliz
ed g
roup
s in
to
the
soci
al fa
bric
and
pr
oduc
tive
mar
ketp
lace
.
Cha
lleng
e of
cov
erin
g al
l vu
lner
able
gro
ups
incl
udin
g th
ose
in th
e fo
rmal
sec
tor,
ens
urin
g th
at
bene
fits
are
ade
quat
e to
mee
t the
pr
ogra
m’s
obj
ectiv
es, a
void
ing
gaps
and
ove
rlap
s be
twee
n pr
ogra
ms,
inst
itutio
ns, a
nd le
vels
of
gov
ernm
ent,
and
ensu
ring
that
th
e ov
eral
l soc
ial p
rote
ctio
n sy
stem
is f
isca
lly a
nd p
oliti
cally
su
stai
nabl
e.
Mov
e fr
om e
mer
genc
y pr
ogra
ms
to
inte
grat
ed lo
ng te
rm S
P, in
clud
ing
publ
ic in
com
e tr
ansf
ers
that
exp
and
cove
rage
of
child
ren
• C
ompl
ete
tran
sitio
n ou
t of
Jefe
s y
Jefa
s •
Segu
ro d
e C
apac
itaci
ón y
Em
pleo
op
ened
to a
ll A
rgen
tinia
ns th
at
requ
ire
it, a
nd n
umbe
r of
par
ticip
ants
ha
s re
ache
d 30
0,00
0.
• N
umbe
r of
em
ploy
men
t age
ncie
s in
crea
sed
by 1
00.
• A
t lea
st 1
00,0
00 p
artic
ipan
ts in
life
-lo
ng le
arni
ng p
rogr
ams
of w
hich
25
% a
re e
mpl
oyed
with
in a
yea
r.
Hea
ds o
f Hou
seho
ld T
rans
itio
n P
roje
ct
(app
rove
d FY
06)
Lif
e L
ong
Lea
rnin
g P
roje
ct
(app
rove
d FY
07)
Soci
al P
rogr
ams
tow
ards
the
Bic
ente
nnia
l A
AA
(FY
09)
Bas
ic P
rote
ctio
n P
roje
ct
(LE
N)
Em
ploy
men
t Ine
qual
ity
AA
A (
FY10
) )
2. I
mpr
ovin
g Se
lect
ed H
ealt
h an
d E
duca
tion
Out
com
es
Con
solid
ate
impr
ovem
ents
in
hea
lth
indi
cato
rs a
nd
impr
ove
qual
ity
of
educ
atio
n w
hile
red
ucin
g dr
op o
ut r
ates
.
Popu
latio
n w
ithou
t hea
lth
cove
rage
is 3
5-39
%
Ineq
uity
in in
fant
mor
talit
y ra
tes
acro
ss r
egio
ns, s
tagn
atio
n in
de
clin
e of
mat
erna
l mor
talit
y.
Arg
entin
a’s
high
leve
ls o
f sc
hool
at
tend
ance
rat
es m
ask
high
rat
es
of d
rop-
outs
and
rep
etiti
on in
ad
ditio
n to
qua
lity
issu
es.
Lar
ge d
iffe
renc
es in
edu
catio
nal
atta
inm
ent b
y re
gion
, gen
der
or
soci
oeco
nom
ic s
tatu
s.
Hig
h ra
te o
f hi
gher
edu
catio
n pa
rtic
ipat
ion
(16.
6% o
f ag
e gr
oup)
hid
e pr
oble
m o
f re
leva
nce
of c
urri
culu
m.
Bui
ld u
pon
impr
oved
per
form
ance
ac
hiev
ed th
roug
h pe
rfor
man
ce
ince
ntiv
es a
nd r
esul
ts b
ased
fin
anci
ng
tow
ards
: E
xpan
sion
of
heal
th c
over
age
thro
ugh
prov
inci
al h
ealth
insu
ranc
e
Hos
pita
l res
truc
turi
ng a
nd e
xpan
sion
St
reng
then
lead
ersh
ip o
f M
oH a
nd
heal
th s
ecto
r go
vern
ance
. L
ower
teen
age
drop
out r
ates
. H
ighe
r ed
ucat
ion
and
labo
r m
arke
t lin
kage
s
• Pr
ogre
ss to
war
ds M
DG
infa
nt
mor
talit
y ra
te o
f 8.
5/10
00 b
y 20
15
• N
umbe
r of
uni
nsur
ed p
erso
ns d
rops
fr
om 1
5 m
n. to
9 m
n w
hile
reg
iona
l di
ffer
ence
s ar
e re
duce
d.
• H
ospi
tal a
cces
s an
d ef
fici
ency
ta
rget
s ac
hiev
ed
• N
ew p
urch
asin
g pr
oced
ures
es
tabl
ishe
d •
Dec
reas
ed M
orta
lity
rate
•
100%
sch
ool e
nrol
lmen
t for
chi
ldre
n ag
e 5
• In
crea
sed
seco
ndar
y ed
ucat
ion
com
plet
ion
rate
s fo
r th
e 20
-24
age
grou
p
Pro
vinc
ial M
ater
nal-
Chi
ld H
ealt
h A
PL
1&2
(app
rove
d FY
04
and
FY07
) E
ssen
tial
Pub
lic H
ealt
h F
unct
ions
Pro
ject
(a
ppro
ved
FY07
) H
ealt
h Se
ctor
Sup
port
Pro
ject
(L
EN
) H
ealt
h Se
ctor
Gov
erna
nce
Pro
ject
(L
EN
) H
ospi
tal R
estr
uctu
ring
AA
A (
FY10
)
Rur
al E
duca
tion
Im
prov
emen
t Pro
ject
(a
ppro
ved
FY06
) H
ighe
r E
duca
tion
AA
A
(LE
N)
Ann
ex 2
Pa
ge 4
of
5
PIL
LA
R 3
- IM
PR
OV
ED
GO
VE
RN
AN
CE
C
ount
ry S
trat
egic
G
oals
and
Ind
icat
ors
Issu
es a
nd O
bsta
cles
O
utco
mes
the
Ban
k P
rogr
am
Exp
ects
to I
nflu
ence
M
ilest
ones
B
ank
Pro
gram
Ins
trum
ents
1. S
tren
gthe
ning
Pub
lic I
nsti
tuti
ons
Exp
and
perf
orm
ance
m
anag
emen
t and
impr
ove
the
qual
ity
of p
ublic
ex
pend
itur
e, e
nhan
ce
serv
ice
deliv
ery
outc
omes
an
d tr
ust i
n in
stit
utio
ns;
Stre
ngth
en p
ublic
sec
tor
capa
city
to s
pur
inve
stm
ent
and
grow
th.
Key
cha
lleng
es in
clud
e:
• St
reng
then
ing
the
effi
cien
cy,
effe
ctiv
enes
s an
d tr
ansp
aren
cy o
f pu
blic
ex
pend
iture
man
agem
ent;
• Im
prov
ing
serv
ice
deliv
ery
outc
omes
and
res
tore
trus
t in
Gov
ernm
ent;
and
• M
akin
g th
e pu
blic
sec
tor
mor
e ac
coun
tabl
e an
d re
spon
sive
to c
itize
ns a
nd th
e pr
ivat
e se
ctor
.
Stre
ngth
en th
e tr
ansp
aren
cy o
f de
cisi
on-m
akin
g, i
ncre
ase
acce
ss to
in
form
atio
n E
xpan
d ef
fect
ive
perf
orm
ance
-m
anag
emen
t and
per
form
ance
-in
form
ed b
udge
ting
E
nsur
e co
mpl
ianc
e w
ith th
e Fi
scal
R
espo
nsib
ility
Law
• In
tegr
ated
fin
anci
al m
anag
emen
t (S
LU
/web
- SI
DIF
) sy
stem
ful
ly
oper
atio
nal
• Fo
r th
e 20
10 b
udge
t, se
ven
sect
ors
("pl
iego
s")
plan
, pre
pare
and
ne
gotia
te th
eir
budg
ets
on th
e ba
sis
of b
udge
t per
form
ance
indi
cato
rs
sele
cted
in th
e pe
rfor
man
ce-
info
rmed
bud
getin
g pi
lot e
xerc
ises
pr
evio
usly
pre
pare
d. F
or th
e bu
dget
s of
201
1 an
d 20
12, a
ll se
ctor
s pr
epar
e, n
egot
iate
, mon
itor
and
repo
rt b
udge
t exe
cutio
n w
ith
refe
renc
e to
pub
licly
dis
clos
ed
budg
et p
erfo
rman
ce in
dica
tors
. •
Exp
ansi
on o
f th
e pu
blic
inve
stm
ent
syst
em (
BA
PIN
II)
to a
ll pr
ovin
ces
linke
d to
ex
ante
and
ex
post
ev
alua
tions
•
SIN
FO c
over
s 90
per
cent
of
civi
lian
natio
nal e
xecu
tive
bran
ch
empl
oyee
s an
d pe
rson
nel d
ata
pers
onne
l dat
a th
at a
ppea
r in
bot
h th
e SI
NFO
and
LU
PI s
ingl
e fi
le
syst
ems
are
iden
tical
. •
Use
r su
rvey
s sh
owin
g im
prov
ed
serv
ice
deliv
ery
in th
e ag
enci
es
impl
emen
ting
the
Citi
zens
Cha
rter
•
Ele
ctro
nic
dire
ctor
y of
Gov
ernm
ent
proc
edur
es in
clud
es 2
0 %
of
proc
edur
es w
hich
can
be
proc
esse
d el
ectr
onic
ally
•
AN
SES:
Ave
rage
tim
e in
the
prov
isio
n of
new
ben
efits
: 60
days
•
Fede
ral n
etw
ork
of c
ontr
ol a
genc
ies
fully
ope
ratio
nal
• Fi
ve m
inis
trie
s ar
e pa
rtic
ipat
ing
in
the
PIB
sch
eme,
incl
udin
g Pu
blic
W
orks
, Hea
lth, E
duca
tion,
Lab
or
and
Soci
al D
evel
opm
ent
Stat
e M
oder
niza
tion
II
Pro
ject
(a
ppro
ved
FY07
) In
stit
utio
nal S
tren
gthe
ning
of t
he N
atio
nal
Soci
al S
ecur
ity
Adm
inis
trat
ion
Pro
ject
(a
ppro
ved
FY06
) Su
bnat
iona
l Gov
ernm
ents
Pub
lic S
ecto
r M
oder
niza
tion
Pro
ject
(a
ppro
ved
FY06
) SI
NT
yS A
PL
2
(app
rove
d FY
09)
Fou
ndat
ions
for
Per
form
ance
-Inf
orm
ed
Bud
geti
ng P
roje
ct
(LE
N)
Pro
vinc
e of
Cor
rien
tes
–Str
ateg
ic P
lan
(FF
S)
Subn
atio
nal P
ublic
Fin
anci
al M
anag
emen
t A
sses
smen
t P
ublic
Sec
tor
ESW
, cov
erin
g:
• Pe
rfor
man
ce m
anag
emen
t •
Publ
ic f
inan
cial
man
agem
ent
• E
xter
nal c
ontr
ol
• Su
bnat
iona
l str
ateg
ic p
lann
ing
• Su
bnat
iona
l res
truc
turi
ng o
f ex
pend
iture
an
d se
rvic
e-re
spon
sibi
litie
s P
erfo
rman
ce-b
ased
bud
geti
ng N
LT
A
IDF
- St
reng
then
ing
of O
ffic
e fo
r A
dmin
istr
ativ
e In
vest
igat
ions
St
reng
then
ing
exte
rnal
aud
it a
nd th
e co
ntro
l en
viro
nmen
t at t
he s
ubna
tion
al le
vel
Ann
ex 2
Pa
ge 5
of
5
PO
RT
FO
LIO
PE
RF
OR
MA
NC
E
Cou
ntry
Str
ateg
ic
Goa
ls a
nd I
ndic
ator
s Is
sues
and
Obs
tacl
es
Out
com
es th
e B
ank
Pro
gram
E
xpec
ts to
Inf
luen
ce
Mile
ston
es
Ban
k P
rogr
am I
nstr
umen
ts
1. B
uild
ing
up th
e G
over
nmen
t’s
Pro
ject
Man
agem
ent C
apac
ity
Stre
ngth
en th
e ca
paci
ty o
f th
e G
over
nmen
t to
prep
are,
app
rove
and
im
plem
ent i
nves
tmen
t pr
ojec
ts in
line
wit
h th
e re
quir
emen
ts o
f a m
ediu
m-
term
inve
stm
ent
part
ners
hip.
Del
ays
in a
ppro
val o
f pr
ojec
ts a
t th
e na
tiona
l lev
el
Slow
dis
burs
emen
ts
Del
ays
in la
rge
proc
urem
ent
cont
ract
s.
Ove
rall
port
folio
per
form
ance
Impr
oved
app
rova
l pro
cedu
res
of
proj
ects
at t
he n
atio
nal l
evel
Impr
oved
des
ign,
pre
para
tion
and
appr
oval
pro
cedu
res
of p
roje
cts
at th
e su
bnat
iona
l lev
el
Impr
oved
pro
cure
men
t cap
acity
of
agen
cies
impl
emen
ting
inve
stm
ent
proj
ects
Im
prov
ed p
ortf
olio
mon
itori
ng
Impr
oved
fid
ucia
ry r
isk
mon
itori
ng
syst
em
• T
ime
of a
ppro
val o
f lo
ans
by th
e G
over
nmen
t is
redu
ced
to a
m
axim
um p
erio
d of
4 m
onth
s,
alig
ning
it w
ith th
e ap
prov
al o
f th
e lo
an b
y th
e B
ank.
•
Tim
e fo
r ap
prov
al o
f lo
ans
at th
e su
bnat
iona
l lev
el is
red
uced
to a
m
axim
um o
f 6
mon
ths,
alig
ning
it
with
app
rova
l by
the
Ban
k an
d at
th
e na
tiona
l lev
el.
• 80
% P
PRs
refl
ectin
g an
S r
atin
g;
80%
of
PPR
s re
flec
ting
qual
ifie
d pr
ocur
emen
t sta
ff h
ave
been
ap
poin
ted;
60%
of
plan
ned
proc
urem
ent p
roce
sses
und
er
proc
urem
ent p
lans
are
con
trac
ted
as
plan
ned.
•
50%
of
proj
ects
pro
vide
rel
iabl
e in
form
atio
n on
con
trac
ts a
nd
fina
ncia
l tra
nsac
tions
, and
this
in
form
atio
n is
ava
ilabl
e in
a
cons
olid
ated
sys
tem
to b
e us
ed b
y im
plem
entin
g ag
enci
es, a
nd th
e G
over
nmen
t and
the
IFIs
for
m
onito
ring
pur
pose
s.
• A
djus
tmen
t of
exis
ting
risk
as
sess
men
t too
ls to
ens
ure
stra
tegi
c fo
cus
on p
roje
ct f
iduc
iary
ris
ks a
nd
resu
lts.
• Fr
amew
ork
Agr
eem
ent f
or P
hasi
ng
out P
IUs
• Fi
duci
ary
Act
ion
Plan
•
Sem
i-A
nnua
l Por
tfol
io R
evie
ws
IDF
: Im
prov
ing
Inve
stm
ent P
ortf
olio
M
anag
emen
t – B
uild
ing
Up
Inst
itut
ions
, Sy
stem
s an
d H
uman
Cap
ital
.
(app
rove
d 20
08)
Stre
ngth
enin
g an
d st
rong
coo
rdin
atio
n of
fi
duci
ary
team
bas
ed in
Bue
nos
Air
es.
Annex 3 Page 1 of 32
March 16, 2009
ARGENTINA: CAS Completion Report Date of CAS: May 4, 2006: Report No. 34015-AR Period covered by the CAS Completion Report: 2006-2008
Summary This document evaluates the achievement of CAS objectives in Argentina together with the respective contributions of the Government and the Bank. The 2006 CAS was prepared jointly by the IBRD and the IFC at a time when Argentina was well on the way to a third consecutive year of rapid growth after having emerged from a deep economic and social crisis in 2001-02. Poverty and unemployment, while still high, had fallen substantially from the peaks of the crisis years. Progress was evident throughout the economy. The objective of the CAS was to build an investment partnership in support of Government efforts to transition from crisis recovery to sustained private-sector led growth that would result in a reduction of poverty and greater equity. The IFC aimed to provide long-term financing and structured finance products for companies and projects in strategic sectors with an emphasis on export-oriented and export facilitating endeavors especially as they relate to South-South trade. The proposed IBRD operational program was aimed at a substantial renovation and further expansion of the Bank’s investment engagement in the country under the same three pillars that had been established under the 2004 CAS. This new CAS was intended to complete the transition from adjustment lending to investment lending that began with the previous CAS and establish the Bank as a reliable medium term investment partner. A broad program of AAA was also envisaged in support of an active dialogue with the Government, civil society and the private sector. Both the IBRD and the IFC successfully delivered a program of lending and investment operations consistent with the CAS. This period was characterized by dramatic improvement in the economy, greatly strengthened relations between the Bank and Government, and innovation in project design. As envisaged, the IFC effectively focused on sustainable projects with companies that had demonstrated social responsibility and that had a track record of honoring contractual obligations. The IBRD reestablished a presence in a number of sectors and supported projects that were innovative and which contributed meaningfully to advancing the development agenda of the Government. There was also a strong emphasis placed on fiduciary management as it was expected that the expansion in investment lending would heighten tensions in this field. The normal lag in disbursements in investment lending and delays in the approval of loans led to a decline in the overall exposure of the Bank in Argentina during the CAS period. With respect to the program of AAA, the Bank delivered less than had been proposed in the CAS. Some studies were circulated in draft without being finalized. In part, that reflected the Government’s lesser interest in a formally structured policy dialogue at the federal level. Nevertheless, significant analytic work was completed and delivered including a study of logistics costs, a study of rural poverty and policy notes for the incoming administration of 2007. In addition, the lending and investment program of the Bank Group in Argentina affords another avenue for dialogue at the operational level and at the policy level in many sectors and at several levels of government. The overall country relationship between the Bank and Argentina has been greatly strengthened in the past three years, thereby consolidating the previous improvements that have steadily accrued since the crisis of 2001-02. In large part the positive relationship that now prevails may be attributed to the successful partnership that has been evolving towards making the Bank a borrower of choice when dealing with complex investments particularly in the infrastructure and social sectors and, lately, in the emerging field of environmental programs. The Bank Group and Argentina are now well placed to continue moving forward with a development dialogue backed by investment lending strategically targeted at areas where the Bank and the IFC can contribute most effectively.
Annex 3 Page 2 of 32
I. INTRODUCTION
1. The 2006 Country Assistance Strategy (CAS) was the second to be submitted to the Board following the severe economic crisis that beset Argentina in 2001-02. In contrast with the preceding 2004 CAS which had been drafted in the context of a still insecure economic recovery, the 2006 CAS followed three years of strong growth which had lifted GDP to the pre-crisis peak. Prospects for continued growth appeared to be good in the short-term although the longer-term sustainability of growth was seen to depend on structural reforms to consolidate fiscal adjustment and foster investment in public services and infrastructure.
2. In that context the CAS sought to build an investment partnership supportive of Government efforts to move Argentina forward from crisis recovery to sustained private sector growth with equity and with a reduction in poverty which had become increasingly structural. The Bank program of assistance was based upon the same three pillars as the 2004 CAS which had provided an effective operational framework in the previous two years – sustained growth with equity, social inclusion and improved governance. The International Financial Corporation (IFC) would complement International Bank for Reconstruction and Development (IBRD) support by providing long-term finance and structured finance products to companies and projects in strategic sectors with an emphasis on export orientation and groups that were expanding on a South-South basis.
3. It was clearly acknowledged in the CAS that an effective transition from crisis recovery to sustained growth would depend upon the diligent implementation of structural and policy reforms. In particular, the ability of IFC to support private sector engagement in the provision of infrastructure and public services would depend upon the adoption of a clear and stable policy framework conducive to private sector participation. To that end the Bank Group sought to continue its dialogue with the Government and with other stakeholders including civil society. At the same time it was also acknowledged that there was room for advancing shared development outcomes in selected areas, particularly in the infrastructure and social sectors, which provides the Bank Group the opportunity to develop a significant medium term investment partnership with Argentina. It was also recognized that expanding investment lending would stretch the country’s fiduciary and project implementation capabilities, leading to the definition of some specific initiatives aimed at reinforcing portfolio management and fiduciary compliance.
II. LONG-TERM STRATEGIC GOALS
THE GOVERNMENT’S PROGRAM
4. During 2006-2008 the Government continued to implement the broad program that was laid out by President Néstor Kirchner in an address to Congress when he took office in May 2003. The preparation of a new CAS in 2006 afforded an opportunity for the Government to convey to the Bank in detail its economic policy framework which was attached as an annex to the CAS.
Annex 3 Page 3 of 32
5. The economic policy guidelines communicated by the Government were predicated on the view that, following three consecutive years of strong macroeconomic performance, growth should no longer be viewed as a temporary rebound from a crisis situation but as the start of a new era of sustained high growth for Argentina. Sustaining growth would remain a central objective of Government policy.
6. The administration of President Cristina Fernandez that took office in December, 2007, largely maintained continuity in these policies and has, by and large, maintained substantial continuity in the Government teams. The new administration’s objective continues to be the maintenance of economic growth and stability, while a special focus has been put into the building of institutions and strengthening foreign relations.
7. Other important objectives included social policies aimed at reducing unemployment and poverty. Housing construction and improving the quality of education were two special focuses of attention. In October 2005, the Government submitted to Congress a proposal for lengthening the school day, eliminating illiteracy and increasing the access of schools and students to computers and other technologies. The aim was to increase Government funding (both federal and provincial) for education, science and technology from 4.3 percent of GDP in 2005 to 6 percent by 2010.
8. With respect to governance, the Government further developed the vision set forth in a 2004 publication by the Ministry of Production and Economy to make Argentina competitive in the global economy of the 21st century.19 Accordingly, the administration aimed at modernizing state institutions to improve trust in government which, in turn, would enhance inclusion, equity and citizen satisfaction. In terms of modalities the Kirchner administration opted against further macro-reorganizations and legal changes, choosing instead to work within established frameworks. Incremental adjustments were adopted where necessary but the major emphasis was on making the system work. The vision of Government was that the state has a key role in the provision of social services and in regulating the market, including re-nationalizing private enterprises (such as Aerolineas Argentinas) whose poor performance was deemed to threaten key national interests. While a market economy was accepted as the major engine of growth, it should be subject to pro-active regulation and state intervention as needed to ensure consistency with the Government’s broader social and economic agenda.
9. Within that vision the Government reaffirmed that a new policy framework had emerged in Argentina. Whereas, throughout the 1990s, the role of the state in the economy was steadily retrenched, the new framework required the Government to exercise a more active role in addressing long-standing social problems that still beset Argentina notwithstanding good macroeconomic performance and a strong recovery from the 2001 crisis. Social transfer programs for the poor were extended to a significant portion of the population at the time of the crisis, and they still play a prominent role, albeit increasingly tied to employment generation. The Government became much more directly involved in decisions affecting the provision of infrastructure and social services. Government controls extended to tariffs and investments determining access to services.
19 “Argentina: Facing the 21st Century” Buenos Aires 2004 (www.jgm.gov.ar)
Annex 3 Page 4 of 32
10. In late 2008, towards the end of the CAS period, Argentina suffered the effects of a global financial crisis. The crisis prompted many governments, including those of the United States and Europe, to adopt extraordinary measures of intervention to avert a catastrophic financial collapse. Many Argentines interpreted the concerted actions of the international community as a vindication of their own government’s pro-active regulatory posture which had offered a measure of protection to Argentina. Nevertheless, although the banking system remains fundamentally strong, the Argentina Government also found it necessary to adopt additional measures including the nationalization of the private pension system which the Government viewed as necessary to protect the system from the effects of the crisis.
THE BANK’S PROGRAM OF SUPPORT
11. Since there was continuity with respect to the long-term strategic goals of the Government, the 2006 CAS proposed that the Bank’s assistance strategy be structured in accordance with the same three pillars established under the previous CAS namely: (1) sustained growth with equity, (2) social inclusion, and (3) improved governance.
12. The previous CAS had already proposed a substantial shift in the Bank program away from adjustment lending which had dominated the program in the late 1990s and in the early years of the new millennium towards investment lending. The 2006 CAS propelled that shift even further and proposed an all-investment lending program. It was expected that such a lending program would be self-regulating in the sense that it would automatically adjust if project performance, fiduciary management and the sector policy framework fell short of requirements.
13. The CAS also acknowledged that the Bank is a relatively small player in Argentina and that it should be selective in its approach. The focus was on poverty alleviation with projects and programs that would reach the poorest and most vulnerable groups, foster equality of opportunity, strengthen governance and improve the administration of public services to improve access for all Argentines. It was envisaged that the focus on poverty alleviation would span all three pillars of Bank operations.
14. The analytic agenda of the Bank featured prominently in the CAS because the policy dialogue, which had suffered a setback at the time of the economic crisis, was showing promising signs of progress. In particular, the Bank had undertaken a study on growth and equality in close collaboration with authorities in the Ministry of Economy and Production, and the study had successfully stimulated a dialogue on macroeconomic issues such as the nexus between growth, poverty reduction and inequality.20 The sector policy dialogue, especially in areas where the Bank was operationally active or where it was preparing to become active, was also targeted as a focus of analytic work. In addition, economic and sector work at the provincial level was identified as a potentially fruitful focus of the CAS.
20Argentina: Seeking Sustained Growth and Social Equity. World Bank Report No. 32553-AR, October 21, 2005.
Annex 3 Page 5 of 32
III. COUNTRY AND CAS OUTCOMES
15. The CAS Results Matrix is reproduced in Annex A of this completion report together with additional data on outcomes. The broad conclusion that emerges is that the CAS was largely successful in meeting its targets.
PILLAR 1: SUSTAINED GROWTH WITH EQUITY
Macroeconomic performance
16. The CAS adopted the Government’s own macroeconomic projections as a frame of reference for the 2006-08 CAS period while, at the same time taking note that the growth forecast presented in the 2006 national budget appeared conservative.
Table 1: Macroeconomic Indicators (In percent of GDP or annual percentage change unless otherwise indicated)
CAS Projections Outcomes 2006 2007 2008 2006 2007 2008
(est.)
GDP real growth 4.0 3.5 3.5 8.5 8.7 6.0
Investment/GDP 21.5 21.7 21.7 23.4 24.4 n/a
Federal Government primary surplus/GDP 3.3 3.4 3.4 3.5 3.2 3.3
Consumer prices (official index period average) 9.1 8.1 7.5 10.9 8.8 8.6
Exports of goods fob (US$ billion) 41.3 44.4 47.3 46.5 55.7 71.3
Imports of Goods cif (US$ billion) 31.5 34.9 38.0 34.2 44.7 57.6
Sources: CAS projections taken from the 2006 Government budget sent to Congress in October 2005 Outcomes from Ministry of Economy and Production 17. Five consecutive years of rapid and pro-poor economic growth beginning in 2003 have enabled poverty and unemployment to be cut back to pre-crisis levels. Poverty declined – at least until end-2006 when the last reliable data was available. Many of the country development goals articulated in the CAS were achieved. Whereas the aim was to reduce unemployment from 14 percent in 2005 to no more than 11 percent in 2009, unemployment was already below 8 percent in 2008. Similarly a targeted reduction in urban poverty from 38 percent in 2005 to no more than 30 percent in 2009 was already surpassed by 2007 when urban poverty was estimated at 28 percent. It is difficult to determine trends in poverty after 2007 with accuracy because the data is uncertain, but it is clear that Argentina was able to make remarkable social and economic progress during the CAS period.
18. However, that achievement was made at the cost of increasing inflationary pressures. Private sector estimates suggest consumer prices rose by 20-25 percent in 2007, and there is a lack of confidence in Government figures which place inflation only at 8.8 percent for 2007. This inflation has likely negatively affected poverty during 2008, but there is no data to verify this. In addition, the lack of credible inflation figures has
Annex 3 Page 6 of 32
eroded market confidence, which has also had negative macroeconomic impacts, although actual inflation is now abating.
Country Outcomes
19. Sector specific objectives identified in the CAS Results Matrix were largely achieved. The country development goals were extracted selectively from diverse Government publications. Since the sources were Government position papers that frequently had a long-term horizon, they seldom specified expected outcomes for 2008. Hence, reasonable progress towards long-term goals would indicate a positive outcome where data is available.
20. With respect to productive infrastructure, Argentina had already reached by 2008, or was close to reaching, long-term targets cited in the CAS. In the case of oilseed and cereals, the long-term goal was to produce 100 million tons compared with a baseline figure of 75 million tons in 2005. The goal was close to being reached with the 2006/07 harvest which amounted to 93.6 million tons. Similarly, with respect to road maintenance, the Government’s target was to have 90 percent of all national non-concessioned roads in good condition. As of 2008, 89 percent were already found to be in good condition.
21. The CAS also identified a number of country development goals with respect to environmental preservation. They included investments in forestry, urban waste management and access to international carbon markets. Satisfactory progress was made towards those goals as documented in Annex A.
CAS Outcomes
22. Outcomes with respect to the Bank lending program were substantially achieved. During the CAS period there was a significant renovation of the country’s investment portfolio which had been virtually exhausted during the post crisis period. A substantial effort was undertaken to prepare new and innovative investment initiatives and expand the role of the Bank in the development of productive and poverty focused infrastructure and in the social sectors, with a strong emphasis in the health and social protection sectors. There has also been further support provided in the strengthening of institutions and public sector agencies. The Bank is on track to deliver 20 project loans for a total of US$3,425 million before end FY2009 under the current CAS21. Although it is premature to make an overall judgment on the outcomes of this new cohort of investment initiatives, there has been a serious effort to ensure the highest standards in the preparation of these operations and a deliberate attempt to include the lessons learned from previous engagement in the respective sectors. There has also been a strong focus on fiduciary matters in all aspects related to the preparation and implementation of the portfolio. Unfortunately, cumbersome and time consuming approval procedures within the Government have inhibited timely and early implementation of the new operations and affected portfolio performance.
21 One project for US$ 841 Million is in the pipeline to be approved until the end of FY09.
Annex 3 Page 7 of 32
The Bank also delivered a strong program of Analytical and Advisory Activities (AAA) albeit less than envisaged in the CAS. The Bank has been most successful when AAA is undertaken in a sector context where the Bank has an operational presence and where there is an active dialogue. A study of transport logistics and a rural development strategy are examples of high quality analytic work that was successfully delivered and well received.22
23. Infrastructure. The CAS identified infrastructure development as a major focus for Bank support with an emphasis on (i) expanding services to the poor and increasing their mobility, and (ii) further developing the transport system to reduce logistics costs and to enhance trade and commerce. It was envisaged that investment loans would help the Government restore investment in infrastructure which had been declining for many years. Total investment in infrastructure averaged less than 2 percent of GDP during the 1990s which put Argentina far behind several other Latin American countries such as Chile and Colombia which invested upwards of 4 percent of GDP in infrastructure. In previous years Multilateral Investment Guarantee Agency (MIGA) was actively engaged in infrastructure projects but its exposure has been greatly reduced (see Box 1).
24. A key CAS milestone was to increase the percentage of paved non-concessioned roads maintained under the CREMA system, (performance based rehabilitation and maintenance contracts known by their Spanish acronym). A National Highway Asset Management Project (US$200 million), for which an Adaptable Program Loan (APL) had been approved in 2004, was substantially implemented from 2006 to 2008. The principal focus of that project was to improve the national road network by financing CREMA contracts. This system has effectively improved the physical condition of roads over and beyond the technical specifications identified at project appraisal. Building upon that success, a second APL in the amount of US$400 million was approved in March 2008 of which US$360 million will finance additional CREMA contracts.
25. The success of the CREMA system at the national level prompted the Argentine authorities to seek Bank support for a Provincial Road Infrastructure Project (US$ 150 million) and a loan was approved in 2005 to increase private sector participation in the management of the provincial road networks though the expansion of the CREMA system to four provinces. In addition, part of the loan was earmarked to finance road paving and rehabilitation in roads that are crucial to the provincial economy but cannot be included in CREMA-type contracts due to the nature of the work required.
22Argentina: The Challenge of Reducing Logistics Costs. World Bank Report No. 36606-AR; December 2006 ;and Argentina: Agriculture and Rural Development Selected Issues. World Bank Report No. 32763-AR; July 31, 2006.
Annex 3 Page 8 of 32
26. The first phase of the Buenos Aires Sustainable Infrastructure Development Project (US$200 million) has also had a positive impact, largely achieving its road maintenance targets by mid-2008. These works will be augmented by the second phase APL (US$270 million) which began in 2007. The Bank has also lent directly to the provinces of Buenos Aires, Cordoba and Santa Fe, in support of road projects that also contributed to the achievement of these milestones.
Box 1: The role of MIGA As of June 30, 2008, MIGA’s gross exposure in Argentina stood at US$34.5 million, which is approximately 0.4 percent of MIGA’s total gross portfolio. Net of reinsurance, MIGA’s exposure was US$18.5 million, which is approximately 0.5 percent of its net portfolio. This constitutes a significant reduction of exposure since end-FY01. At that time Argentina had the second largest gross exposure in MIGA’s portfolio – amounting to US$693.6 million. The reduction in exposure has resulted from the amortization of MIGA-guaranteed loans and from the cancellation of guarantee contracts. MIGA has not issued any new contract for investments in Argentina since 2002 for reasons explained below.
MIGA has received two claims for expropriation in Argentina. In FY05, MIGA paid US$0.5 million of a loss of US$1.4 million. The investor withdrew its claim to the remaining amount for reasons of its broader commercial interests in Argentina. Argentine authorities have refused to recognize MIGA’s claim for reimbursement of the amount paid. Pending resolution of this matter, MIGA will not support additional foreign investment in Argentina.
MIGA received another claim in FY07 related to difficulties that had arisen with an infrastructure project. However, that claim has been withdrawn for project-specific reasons and the project remains operational.
MIGA has provisioned in connection with another project, which is currently the subject of arbitration by ICSID. MIGA’s liability will depend on the result of the arbitration but would not exceed US$24.2 million.
27. The objective to scale up support for other types of road maintenance, as well as expanding bank support to additional transport sub-sectors has been achieved. Beyond the non-CREMA road support mentioned above, additional financing of US$100 million was approved for the Buenos Aires Urban Transport Project (PTUBA) in 2007. That project began in 1997 and addressed issues of urban rail transport and the interface between rail and road transport in the Buenos Aires metropolitan area. As with many projects of that period, progress was delayed by the financial crisis, but Bank supervision reveals a successful implementation record following the economic recovery of 2003.
28. The CAS also aimed for the National Directorate of Highways to undertake actions under the Institutional Renewal Action Plan covering budgeting, road safety, and environmental management. Support under the National Highway Asset Management Project toward this objective has not been successful to date, and the Government has requested an extension of the closing date to complete the project.
29. The CAS sought to expand water and sewer coverage for approximately 500,000 low income people in Buenos Aires Province. While the water components of the Buenos Aires project are behind schedule, this target has been partially achieved with the regulatory and institutional framework progressing well. The Province has signed Framework Agreements with provincial water operators, and the Basic Municipal Services Project (US$110 million) allocated 60% of proceeds to improving the coverage,
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quality and efficiency of water supply in six provinces. Initial implementation reveals promising progress on these and other urban sub-projects financed by the loan.
30. The CAS sought to reduce flood risk in selected urban areas through civil works and the preparation of flood risk reduction plans. In many parts of Buenos Aires Province, sustainable infrastructure development will only be possible if urban flooding can be prevented. The Bank supported formulation of flood risk reduction plans in six provinces, and Buenos Aires Province has adopted norms for urban land zoning, measures for environmental protection and procedures for management and maintenance of urban drainage systems. The Urban Flood Prevention and Drainage Project (€98 million), is now implementing satisfactorily and expected to make a major contribution toward mitigating flood risk in the city of Buenos Aires. A second APL (US$70 million) was approved in June, 2006, to extend flood protection measures to six other provinces.
31. Agriculture and Rural Development. The Bank has supported a number of initiatives in agriculture and rural development which contribute to growth with equity. The principal objective has been to increase the productivity and incomes of small and medium-sized producers. Hence the focus has been on the “regional economies” in the north of the country and in the Andean region as opposed to the Pampas region where agricultural production is typically on a large scale. The targeted outcomes for agriculture and livestock were substantially achieved.
32. The CAS objective to improve the capacity to analyze, design, and manage agricultural and rural development investments was advanced with the establishment in 2008 of a sub-secretariat of family agriculture and rural development, though the new sub-secretariat will require strengthening before it can fully meet its mandate.
33. Another key milestone was for the National Government to complete an agricultural and rural development strategy and implement it in at least one region. To date, 19 provinces have adopted strategies, though at a national level there is no cleared defined medium and long-term strategy for the agricultural sector.
34. A third targeted outcome was the adoption and implementation of a Mercosur strategy to be free of Aftosa (foot and mouth disease). The strategy was ratified in 2005, and an action plan was adopted in May 2008.
35. The final benchmark, to have a 20% increase in production area under irrigation and to have integrated water resource management piloted in at least one province, was partially achieved. A 6% increase was realized in the amount of cultivated land under irrigation, and the Province of Mendoza has adopted an integrated water resource management program.
36. Achievements against these four benchmarks were supported through the accelerated implementation of a Provincial Agricultural Development Project (PROSAP) for which a loan of US$125 million was approved in 1997 but which suffered delays due to the financial crisis. However, by 2006 implementation was progressing so well that the Bank approved additional financing of US$37 million. Targets have been met with
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respect to the construction of irrigation canals, rural roads, rural electrification and drainage rehabilitation. Farmers have received training in animal and plant health, and ten centers were established to train young entrepreneurs. Impact assessments undertaken by the project unit reveal significant increases in private productive investments that are clearly connected to PROSAP-supported infrastructure investments. Building upon this success and a study of the agricultural sector produced by the Bank in 2006, a loan for US$300 million was approved in 2008 for a second PROSAP.
37. In addition, the implementation of a Small Farmer Development Project (PROINDER) sought to increase the productive and organizational capabilities of poor rural communities through demand-based sub-projects. A loan of US$75 million was approved in 1997, but project progress was impaired for years by the financial crisis. By 2007, however, the project had fulfilled or over-fulfilled all its development objectives and, in July 2007, the Bank approved additional financing of US$45 million to enable the well-performing project to be scaled-up. The original project exceeded appraisal targets and reached some 50,000 families through more than 9,000 sub-projects. Monitoring and impact assessment surveys indicate that the family income of beneficiaries and their quality of life improved significantly along with their organizational capabilities. The additional financing is intended to expand the targeted coverage of rural households to 72,000, but implementation has not been satisfactory to date.
38. Rural Poverty: An important CAS milestone with respect to more sustainable rural development was that the baseline data and analysis of rural poverty be improved. No progress has been made on that front, notwithstanding the delivery of Bank analytic work on rural poverty which clearly identified the data gaps that need to be addressed.23 The lack of good data is a serious shortcoming because Argentina cannot advance further towards a credible policy for poverty reduction without a solid data base.
39. Expanded small and medium farmer investment in forestry was another CAS milestone. The forestry projects described under Environmental Management below are supporting investments by 5,000 small-scale farmers for 15,000 ha. of forests (triple the target) in at least 3 different provinces.
40. Environmental Management. The CAS recognized an urgent need to improve environmental management in Argentina. In that context, it envisaged an Environmental management APL that would provide strategic support for both pollution control and the protection of natural resources. As preparatory work progressed, however, it became clear that the sector issues could be addressed more effectively by dealing separately with “brown” issues of pollution control (especially in urban areas) and with “green” issues of land use management (especially in rural areas). Accordingly, separate lending operations were undertaken in each of those areas. Start-up delays have prevented the achievement of the CAS milestones, but prospects are good that the targeted outcomes will be reached early in the following CAS period.
23 “The Invisible Poor: A Portrait of Rural Poverty in Argentina” Report No. 39947-AR; June 25, 2007
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41. The CAS sought to complete integrated waste management systems in 3 provinces, an objective that was supported by efforts to address “brown” issues of Pollution control under a National Urban Solid Waste Management Project for which a loan of US$40 million was approved by the Bank in 2006. The project was based on a National Strategy that had been developed with Bank assistance. Project implementation was slow in the initial stages but accelerated in 2008. In addition, the Mining Environmental Restoration Project (PRAMU, US$30 million), approved in 2008, will seek to reduce the potential health hazard posed by a uranium processing facility used by the government between 1954 and 1986 but never properly closed. Civil works have already been contracted, and some 30 percent of the investment was complete by May 2008. Containment of 710,000 tons of low grade radioactive milling tailings is consistent with internationally accepted best practice. The project also provides technical assistance to study and design options for cleaning up another 7 sites as well as efforts to strengthen environmental management of the mining sector more generally.
42. Another key milestone was to realize integrated urban transport planning and investment, combined with pollution reduction, in at least five cities. While this has not yet been achieved, 30 pollution control projects are being developed with support from the WBI Carbon Finance Assistance Program. Carbon purchase agreements were signed under the Kyoto Protocol with the cities of Salta and Olavarria for the construction of landfill gas capture systems (see Box 2).
43. While still in the final stages of preparation, the largest and most ambitious Bank-supported environmental project in Argentina is to clean up the Matanza-Riachuelo (M-R) river basin, the most contaminated river basin in Argentina. More than 4,000 industries are located in the water shed and many of them discharge untreated effluents into the storm drainage system or directly into the river. As it passes to the south of the city of Buenos Aires, the river basin is home to one of Argentina’s largest concentrations of urban poor. The project will construct the main sewage transmission, treatment and disposal infrastructure to collect both the residential sewage currently discharged to the river as well as pre-treated industrial effluents.
44. “Green” issues of environmental management also figured prominently in the CAS in support of the Government’s efforts to curb deforestation of native forests and increase planted forests. In June 2007 a Global Environmental Fund (GEF) grant was approved in the amount of US$7 million for Biodiversity Conservation in Productive Forestry Landscapes Project that was blended with a 2008 Bank loan in support of a Sustainable Natural Resources Management Project (US$60 million). The GEF project innovatively seeks to mainstream biodiversity conservation into plantation forestry practices and to demonstrate that the introduction of biodiversity conservation practices is both economically and ecologically viable in the context of commercial plantations.
45. The Sustainable Natural Resources Management Project will finance measures to improve the management of protected areas and conservation corridors and support sustainable plantation forestry in parallel with the GEF-supported project. The project built upon the experience of a previous Native Forests and Protected Areas Project which was closed in June 2007. The Implementation Completion Report (ICR) for that
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project showed that it was successful and achieved nearly all its development goals.24 In particular, significant progress had been made in strengthening the National Parks Administration and increasing tourism in a number of parks consistent with environmental sustainability.
Box 2: GEF, Carbon Finance and the Montreal Protocol in Argentina As envisaged in the CAS, a decentralized medium sized grants program was established in Argentina in 2006. The program is funded with US$3 million of GEF resources and it constitutes a pilot initiative for the GEF worldwide. Managed by the Argentine authorities, the program has responded to small-scale project proposals from civil society and the six grants that were authorized in 2007 have financed some exceptionally innovative initiatives including (i) the conservation of Patagonian steppe fauna, (ii) restoration of the upper Parana Atlantic forest, (iii) measures to combat land degradation in indigenous communities, (iv) the establishment of an eco-regional corridor in Northern Patagonia and (v) the production and use of hydrogen fuel. Other major GEF financed projects in Argentina begun during 2006-08 include an energy efficiency project and a project to conserve biodiversity in commercially productive forest landscapes. Greater detail on each of those initiatives is given in the corresponding sections on Bank-supported projects. Having ratified the Kyoto Protocol, Argentina participates in the Clean Development Mechanism (CDM) established under the Protocol. In 2006 and 2007 respectively, carbon purchase agreements were signed with the city of Salta and the municipality of Olavarria. Under the agreements, landfill gas capture systems were constructed so that methane may be flared rather than released into the atmosphere. Both projects also included social components. In Olavarria 5090 households were provided with drinking water and a school was provided with solar heating. In Salta a recycling and separation plant was constructed to better serve the needs of waste pickers. The Bank also continued to assist with implementation of the Montreal Protocol during 2006-08. A plant for the production of CFCs was closed in 2008 and supervision will continue for one more year to verify that there are zero emissions. A second sub-project aims to change the propellant used in medical dose inhalers from CFC to non-CFC. When that sub-project is complete, it will conclude the Montreal Protocol program in Argentina.
IFC
46. IFC’s strategy as outlined in the FY06-08 CAS is aimed at primarily contributing to the pillar of “sustained growth with equity”, in the area where IFC has comparative advantage. When the CAS was prepared, short-term credit to the private sector had improved substantially and long-term credit was available but at a low level, and, to a large extent, confined to blue chip companies. In this context, IFC shifted its focus from short-term lines, where there is good liquidity at reasonable prices, to providing long-term financing both for its own account and through its syndication program. In addition to providing long-term financing, IFC’s priorities for its direct investments were focused on providing structured finance products to companies and projects in strategic sectors with an emphasis on groups expanding on a South-South basis and export-oriented or export-facilitating projects. Two important criteria in considering new projects were to focus on corporate social responsibility (CSR) and sustainability, as well as on the track record with respect to honoring contractual obligations. The strategic focus sectors were:
24 Implementation Completion Report No. ICR0000437; December 28, 2007
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oil, gas and mining; agribusiness and forestry products; and the financial sector with a focus on high impact projects such as housing and support of export-oriented small and medium enterprises (SMEs).
47. Since 2006 IFC has committed US$1,597 million (including US$798 million for syndications through the B-loan program) in 15 projects in the hydrocarbons, finance, agribusiness and transportation sectors. As of August 2008, IFC’s committed portfolio stood at US$996 million for IFC’s own account, and an additional US$843 million for participants’ accounts, with oil and gas, food and beverages, and the financial sector accounting for about 80% of the portfolio.
48. In food and beverages, in FY06 IFC committed a US$280 million loan (including US$210 million for syndications) for Arcor Group, a leading producer and distributor of candies, chocolates and biscuits, to finance construction of plants in Chile, Brazil and Mexico (South-South investments) as well as to modernize and refurbished existing facilities. An additional 2,000 jobs are expected to be recreated as a result of these investments. The company has a proactive linkage program to small and medium farmers and expects to increase the number of farmers with which it works from 550 to 600 by 2010. In addition to new jobs created in other countries, Arcor operations support over 13,000 jobs in Argentina. A follow-up loan for US$130 million (including $80 million in B-loans) was committed in FY08 to support further expansion investments.
49. IFC’s investments in the financial sector during the period totaled $418 million under the Global Trade Finance Program in operations with four banks, and a $50 million loan to Banco Galicia for on-lending to SMEs, particularly in the poorer provinces of Argentina. The SME overall portfolio is projected to increase by 15 percent a year. The number of SMEs to be financed and the amount of finance going to poorer provinces are expected to grow at an average of no less than 7 percent a year.
50. Finally, in the oil and gas sector, IFC provided US$237 million from its own account and US$420 million for syndications for three companies. One operation was with an existing client, PAE, for $550 million which included IFC’s largest syndication to date (US$400 million). This investment financed the company’s 2007-08 capital expenditure program which will help them increase oil production by up to 30,000 barrels of oil equivalent and gas production by 62 million cubic feet per day. The incremental production generated from the investment is expected to result in US$2.1 billion in government revenue for Argentina, including $414 million for the provincial governments. In June 2006, IFC committed a $70 million loan (including $20 million in a syndicated loan) for CAPSA, an independent Argentine oil producer operating in the province of Chubut. The loan facility will finance CAPSA’s capital expenditures, working capital requirements, and general corporate activities. At the time, the 10-year facility was the longest IFC-syndicated tenor in Argentina since the crisis in 2001. CAPSA operates in the Chubut province, a region with few employment opportunities other than the oil and gas industry. CAPSA is a source of direct and indirect employment in the region, and the majority of its workforce is sourced locally. The company also procures about half of its purchases locally through community suppliers.
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Other support for Growth with Equity
51. The CAS recognized the need to enhance the business climate and foster private sector development in order to sustain growth. The contribution of the IFC was particularly important in that regard as indicated in the section above. The Bank was supportive of IFC efforts to enhance the business climate and foster private sector development in order to sustain growth with a loan for US$150 million that was approved in 2008 for an Unleashing Productive Innovation Project. The basic objective of the project is to increase Argentina’s capacity for innovation in knowledge-based production. That would be accomplished by (i) facilitating the establishment of new knowledge-based companies; (ii) educating and training human capital in skills that can forge a better linkage between academia and industry and lead to the commercialization of new ideas from research; (iii) financing venture capital in selected areas of the economy; (iv) upgrading the infrastructure for research; and (v) strengthening the policy framework for science, technology and productive innovation.
PILLAR 2: SOCIAL INCLUSION
52. The broad country development goal under Pillar 2 was to consolidate the reduction in poverty achieved since the crisis and expand efforts to reverse the longer term poverty trend by increasing household incomes and integrating marginalized groups into the productive market place.
Country Outcomes
53. Country development goals identified in the CAS were largely achieved, though data limitations make it difficult to precisely quantify recent trends in poverty. Unemployment was reduced to 7.5 percent by end-2007, surpassing the 12 percent target. Social security coverage for working adults easily reached the 61 percent country target, and the Heads of Households workfare program was gradually reduced through a successful, long-term effort to increase the sustainability of Argentina’s social safety net programs and use the labor market as a cornerstone of social policy. As a result, beneficiaries of this successful emergency program are being integrated into the workforce or transferred to other programs according to schedule (see Annex A). A number of country development goals were also identified in the education sector, relating to school enrollment rates and completion rates and to the development of a lifelong learning strategy. Satisfactory progress was made towards those goals in the CAS period as detailed in Annex A.
CAS Outcomes
54. CAS milestones were also largely achieved. The CAS proposed a lending program focused selectively on education, health and social protection – three areas where the Bank has a long record of support for Argentina. Thirty projects were envisaged in the period through FY2009 for a total of US$3,300 million. The Bank is on
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track to deliver twenty project loans for a total of US$3,425 million before end-FY200925 under the current CAS.
55. Under the first component of this pillar – Supporting Progress Towards Permanent Safety Nets and Fostering Employment, the CAS sought improvements to income support programs, notably making the transition from emergency income programs to initiatives that foster employment, and the establishment of more permanent safety nets providing direct support to vulnerable groups. When Argentina was stricken by the economic crisis of 2001, a central focus of Bank support was for a social assistance program targeted at heads of households. In 2006, when Argentina had recovered from the crisis the Bank approved a Heads of Household Transition Project (US$350 million) to move as many of the workfare beneficiaries as possible into productive employment and to transfer the remainder to a longer-term safety net linked to building the human capital of their children. Measures were introduced to increase the employability of program participants by completing basic education, receiving job training and participating in sub-projects designed to provide experience and skills for future jobs. The goal has been achieved, as about one third of the beneficiaries transitioned to the new Familias and Seguro de Capacitación y Empleo programs. Another third were absorbed into the labor force, thus realizing another CAS milestone, the reduction in the number of people needing to participate in workfare programs by approximately one-third.
56. As a compliment, the CAS set as a milestone the definition of an integrated, inter-ministerial lifelong learning strategy. This strategy is being implemented with support from a Lifelong Learning and Training Project (US$200 million), approved in 2006 to develop flexible learning opportunities for the unemployed and for low-income workers to acquire skills to enhance prospects for productive employment in the labor market. The project built upon Bank analytic work which focused on increasing the linkages between the education system and the labor market.26
57. The Bank has continued analytic work in these areas. A labor market study was published in 2008 focusing on informal employment in Argentina.27 The study presented the findings of a two-year program undertaken by the Bank in cooperation with the Ministry of Labor and with the statistical institute (INDEC) to analyze the determinants of informality and its impact on poverty and equity. It showed that informality in Argentina is relatively high, rendering the state less effective in providing social protection, especially for the poor and informal workers who are generally unable to make up for their lack of social protections through private means. An important recommendation of the study was that education and training including lifelong learning programs could be instrumental in helping more workers to find employment in the formal sector and thereby enhance their incomes and improve their overall welfare.
25 Three projects for US$ 273 Million are in the pipeline and may be approved until the end of FY09 (AR Provincial Roads, AR Financial Management, AR Buenos Aires Infrastructure) 26 “Building a Skilled Labor Force for Sustained and Equitable Economic Growth: Education, Training and Labor Markets in Argentina” Report No. 31850-AR, May 5, 2006. 27 “Informal Employment in Argentina: Causes and Consequences” Report No. 36092-AR, March 27, 2008
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Box 3: The Heads of Households Program: A Successful Partnership The Heads of Household Program was Argentina’s main response to the social and economic crisis in 2002. Government rapidly developed and implemented this assistance program which provides a monthly payment equivalent to US$50 to individuals that (i) are the head of a household; (ii) are unemployed; (iii) live in a household with minors, disabled or pregnant women, and (iv) work 4 hours a day or take training or education classes. The Bank supported the Program through the Heads of Household Project (Ln 7157-AR), approved by the Board on January 28, 2003, and Heads of Household Transition Loan approved on March 23, 2006. The Bank supported the the part of the program in which beneficiaries did indeed comply with the workfare requirement. The Program was very successful in (i) calming the social situation (which had nearly erupted into violent conflict), and (ii) targeting the poor, mitigating effectively the impact of the crisis. Government, with Bank support, has improved program governance (better internal controls, database crosschecks and supervision). For example the Bank now finances only transfers made with debit cards, a more transparent mechanism than cash payments. Since 2002, the Bank accompanied Government implementation of the Program with analytical studies of its poverty and inequality impact. Incidence data shows that the Program had good targeting performance. The share of Program participants among the 40 percent better-off households in Argentina was 6 percent in 2005 while the share of Program benefits going to the bottom two quintiles was 80 percent. Given the good targeting performance, the HH Program was instrumental in tilting the overall economic growth period in a pro-poor way. While the number of indigenous beneficiaries is not known, the program is active in dozens of municipalities with high proportions of indigenous populations. Governance improvements to Jefes included building additional cross-checks into the registry databases and adding additional controls within the MTESS. This included regular monthly cross-checks of the registry database with other databases by an independent agency (National System of Tax and Social Identification –SINTyS). The MTESS also introduced cross-checks of the registry against beneficiaries (and family members) among the participants in private health insurance plans. In addition, the spouses of beneficiaries were cross-checked against private employment registries.
Social accountability was also enhanced through greater use of public information and participation mechanisms. The MTESS coordinated with the National Consultative Council staff to hold a series of workshops on the program in order to consult and provide information, promoting the participation of local organizations (non-governmental organizations, unions, business groups, private companies, professional training centers, among others).
With the normalization of the overall economic and social situation, the Government reoriented the HH Program. The strategy was to distinguish among those beneficiaries that have higher re-employment chances from those that require a different type of longer-term safety net, linked to building human capital for children.
58. The second component of this pillar sought improvement in selected health and education outcomes. These outcomes and milestones were also largely achieved.
59. Key milestones included improving health service delivery at the provincial level, a reduction of the infant mortality rate and expanded coverage of maternal-child health insurance. Under the Provincial Maternal-Child Health Investment Project (US$300 million), infant mortality was reduced from 14.4 per 1000 births to 12.9, toward a goal of 12.0 by 2009. Maternal and child health insurance was extended to 79 percent of the eligible population by 2008, surpassing the CAS target of 50 percent. In addition to increasing access to basic services, the project introduced important structural changes in the way health finance is provided to the provinces by the national government and in the
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way the provinces pay health providers. For the first time in Argentina, the national government is linking the provision of finance to outputs and outcomes as verified by independent audits. In order to link financing to outputs, both the national government and the provinces have introduced performance contracts and have strengthened their monitoring and reporting systems. This has fundamentally changed the way in which maternal and child health policy is discussed at the two levels of government.
60. The CAS also sought the definition of a core package of public health goods. With support from the Essential Public Health Functions and Programs Project (US$220 million), this was achieved in 2007.
61. Another key milestone was to raise school completion rates and learning outcomes, especially for children from disadvantaged families, evidenced by expanded coverage of pre-school education and increased effective promotion rate for classes 7-9 in rural areas. With support from a Rural Education Improvement Project (PROMER) (US$150 million), pre-school education rose from 89 percent in 2003 to 93.5 percent by 2007, nearly realizing the 95 percent target for 2010. The 2010 target of 80% promotion from class 7-8 in rural areas was achieved in 2006.
PILLAR 3: GOVERNANCE
62. The Bank supported the Government’s efforts to strengthen the effectiveness, efficiency, transparency and accountability of public sector management; improve service delivery outcomes and trust in institutions; and strengthen public sector capacity to spur investment and growth. Bank support also focused on enhancing the implementation and fiduciary integrity of Bank projects. The CAS envisaged support for five projects in the total amount of US$135 million. The Bank is on track to deliver two projects before end-FY2009 for a total loan amount of US$40 million. A fourth project to improve public sector management at the provincial level has been postponed to the next CAS period to accommodate the needs of the client for additional project preparation. WBI has also been active in this area in Argentina with a focus on issues of governance and corruption. No free-standing AAA was programmed for pillar 3 of the CAS because analytic and advisory services are folded into the project work itself.
Country Outcomes
63. The only specific country development goal identified in the CAS results matrix was that the framework for co-participation should be strengthened to define more clearly the division of fiscal responsibilities between the central government and the provinces. No significant progress was achieved on that account in the CAS period.
CAS Outcomes
64. The CAS sought to deepen the emerging investment partnership in favor of institutional strengthening in selected areas of public sector management including expenditure management, transparency, and service delivery. This was largely achieved, as detailed below, with a package of Bank support. The State Modernization Project began in 1998 and closed at end-2007, and it has been followed by the State
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Modernization II Project which aims to develop and expand public sector management tools including e-government, procurement, human resource management and information management. Another area supported by the Bank has been the Social and Fiscal National Identification System (SINTyS). Established in 1998, SYNTyS aims to enable the exchange and cross-checking of information between government agencies. A first-phase APL in support of SYNTyS closed in 2005, and the Bank supported the initial stages of a second phase by reallocation US$8 million from a State Modernization Loan which closed at end-2007. The ICR for that project indicated that the SYNTyS component fully achieved its objectives.28 In 2008, the Bank approved a second phase APL of US$20 million that would support the second (ongoing) and third (forthcoming) phases of the system. By the end of the project, all public sector agencies wishing to participate in the project should enjoy unencumbered access to information exchange.
65. A key milestone aimed to increase in user satisfaction of ANSES, the National Social Security Administration, as measured by service-delivery outcomes and by citizen satisfaction surveys. ANSES is particularly important because it constitutes the administrative pillar of the social security system which, in turn, accounts for more than one third of total federal government spending. The Bank has been supportive of measures to strengthen the institutional effectiveness of ANSES since 1997. The ANSES II Technical Assistance Project (US$25 million) supported interventions that reduced the average time to process new benefits from 140 days in 2005 to 130 days by November 2007 and increased the number of regional centers and offices serving the public from 244 in 2005 to 298 by November 2007.
66. The CAS also sought to support the expansion of the integrated financial management (SLU/web- SIDIF) system (baseline: SLU covered 71% of federal level public institutions in 2005). This objective was achieved, with the SLU being installed in 82% of federal level institutions.
67. In addition, the CAS included the expansion of the public investment management system (BAPIN II) to additional provinces (baseline: 19 provinces in 2005). It has now been implemented in 23 of 24 provinces and 110 federal agencies.
68. Finally, for provinces participating in the Sub-national Governments Public Sector Modernization Project, the CAS set the following milestones: increase the percent of provincial expenditures on human resources operating under integrated payroll information systems from 30% to 45% in 2008 (and 55% in year 2009), and increase the ratio between collected and emitted tax revenue for provincial real property and motor vehicle taxes from 55 to 65 percent in 2008 (and 70% in 2009). As of 2008, there had been no progress toward these targets.
28 Implementation Completion Report No. ICR0000778; June 30, 2008
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IV. OVERALL BANK PERFORMANCE AND LESSONS LEARNED
69. Bank performance has been strong. A strong lending program was effectively delivered, and a successful partnership was forged in the wake of a period of distrust of the Bank. The CAS proposed an all-investment lending program in the amount of US$3.3 billion to be delivered in the period through FY09. The Bank is on track to deliver a lending program of US$3.4 billion by end-FY09 (see Annex B). Beyond the lending numbers, there has been a substantial dialogue and joint effort to prepare innovative operations that imply significant improvements from past approaches, including the highly successful maternal-child health insurance scheme, a new generation of investment projects contracted directly with provinces and complex infrastructure operations involving significant safeguard and technical challenges.
70. The Argentina Fiduciary Action Plan (AFAP) has implied that Bank-financed procurement activities are subject to close scrutiny by the public and there is an integrated effort to continuously assess the fiduciary related project risks. The strong integration of country, sector and fiduciary teams in matters related to portfolio implementation constitutes an important innovation that has ensured improved supervision and continuous risk assessment of the portfolio. The Plan reflects an approach that is significantly different from past “ring fencing” of individual operations. It focuses on measures that cut across projects and that strengthen country systems for financial management and procurement. Key achievements under the AFAP include.
• A web-based information system (known as SEPA) that provides the public with easy access to detailed information on all Bank-financed contracts in the country.
• A methodology (known as IFPA) to simplify, summarize, and communicate
technically complex fiduciary assessments (at the project and portfolio level) through an easily understood system of red, yellow, and green “traffic lights.”
• An intensification of dialogue between the Bank and Argentina’s Supreme Audit
Institution (AGN), the national body constitutionally mandated to audit all public sector accounts and entities. Audit support activities have improved on-time audit completion and, more broadly, strengthened government audit capacity.
• A Price Monitoring Mechanism (PMM) on civil works contracts is currently
being developed to help distinguish higher prices attributable to legitimate supply responses from artificial price inflation.
• Finally, an effort is being made across the board to mainstream project
implementation by reducing the use and size of Project Implementation Units (PIUs) and thereby strengthen the state’s own institutions and systems.
71. The SEPA is one of the most successful components of the AFAP. Designed to disclose relevant information on project procurement plans and their implementation via the web, its initial scope included all contracts financed by the Bank in Argentina. With a recent decision by IDB to adopt SEPA as its procurement dissemination tool, SEPA will
Annex 3 Page 20 of 32
de facto cover a substantial share of Argentina’s public investment program and achieve impressive progress in the transparency of public procurement in Argentina. Likewise, concurrent audits designed initially to ensure fiduciary standards of a results-oriented maternal-child health insurance scheme financed by the Bank has gradually been converted as the auditing standard for the health insurance scheme at the national level and it is envisaged it may be adopted in future government programs in the sector.
72. There has also been a strong focus on portfolio management which has enabled an intensive dialogue with the Government at the highest levels to address some of the issues affecting the portfolio as a whole and to ensure that the significant commitments that have been made in investments are effectively executed. In addition to regular joint portfolio reviews, the Government has agreed recently to revise its loan approval procedures, improve the management information systems utilized by project entities and to the joint monitoring of civil work contracts to identify undue delays and bottlenecks. This last initiative is a welcome development since currently over 60% of Bank commitments are represented by high value civil work contracts. These actions are expected to contribute to accelerate the pace of execution of investments which has deteriorated in recent years as a result mainly of project start up issues, including lengthy loan approval processes.
73. The ability to deliver a substantial program of investment lending and to work jointly with the government counterparts in ensuring an effective implementation of the portfolio has been an important factor in strengthening the country relationship with Argentina which faces constrained access to the international financial markets and which views the Bank as an important source of external finance for the public investment program.
74. At the same time the quality of Bank lending has been high. Projects supported by the Bank have been innovative and are on their way towards making their expected development contribution as evidenced by the progress made in achieving CAS outcomes. QAG assessments have confirmed largely satisfactory quality at entry, and especially of supervision. The successful implementation of the investment lending strategy has helped dispel the difficulties in dialogue that characterized the crisis years, and it has opened new doors for cooperation and trust building.
75. In addition, AAA was envisioned to strengthen the dialogue on financial accountability and procurement. On financial accountability, this was achieved with the delivery of a Country Financial Accountability Assessment (CFAA) and a (Accounting and Auditing Assessment) ROSC in FY07. The country dialogue on procurement has likewise been significantly strengthened. Agreement was reached with the authorities on protocols for the publication of procurement notices including improvements in technical specifications, short listing, and the standardization of bidding documents. Agreement was also reached on principles for the aggregation of contracts, procedures for evaluation of contracts, and mechanisms for monitoring prices.
76. The CAS included a number of targets related to some of the expected fiduciary improvements. There were targets for increased audit compliance in Bank-supported
Annex 3 Page 21 of 32
projects of 45% in 2005, 60% in 2006, 75% in 2007, and 80% in 2008 which were substantially achieved, albeit with some delay in 2008. Actual audit compliance reached 76% in FY06 and 81% in FY07. The corresponding figure for FY08 was initially only 48% due to delays in delivering audit reports. As of November, 2008, however, compliance had reached 100%. The CAS sought to mainstream project management under a framework agreement for phasing-out project implementation units (PIUs). An agreement was reached in 2005, and there has been steady progress in implementation. As part of this understanding, in the case of repeater and follow-up projects, PIU staff were reduced by 46 percent between 2004/5 and 2006.
77. The CAS provided also some specific outcomes related to portfolio performance, namely, a continuous decline in problem projects and a reduction in the number of projects at risk. The suggested outcomes did not anticipate the difficulties that were encountered in the loan approval process which had a significant adverse effect in the level of projects considered at potential or actual risk. The CAS sought to reduce the incidence of problem projects. As of December, 2008, 13.8% of the portfolio was in problem status, down from 21 percent in 2005. As reflected in Table 2, both problem projects and projects at risk went well beyond their expected ranges during FY07 and 08 and have only recently began their descent towards more acceptable levels.
78. Another key milestone was for the percentage of investment projects at risk by amount to not surpass 20 percent. This target has not been achieved. As of December, 2008, projects at risk amounted to 24 percent of the portfolio, up from 19.5 percent at the beginning of the CAS period.
79. Bank exposure to Argentina declined over the CAS period. Bank exposure had declined to US$5.1 billion by end-2008. This has derived from the initial focus during these years on the renovation of a rather depleted portfolio and a slower pace of disbursement expected from such an investment based portfolio. Efforts to improve portfolio performance are an important part of the dialogue with the Administration and a comprehensive program has been agreed to that effect. There is optimism that after the significant start up problems faced by the project cohort approved in the CAS period, performance will improve in the coming years. FY09 mid year disbursements already suggest a significant improvement from the implementation levels achieved during FY08. The Bank is also discussing with the Government ways to accelerate the approval of new Bank loans so that project start-up may not be delayed.
80. A significant program of AAA was also delivered in parallel to the lending program. Six tasks were already in progress when the CAS was under preparation, and all were completed and delivered on schedule. A further 14 tasks were programmed in the CAS for FY07-08, of which six were delivered. Others were either postponed beyond 2008 or dropped from the program– sometimes for lack of client interest. For example, the authorities requested the Bank not to undertake a CPAR.
81. Experience with the program of AAA indicates that the Government is more interested in analytic work that has a clear and direct operational application. In areas where the Bank and the Government share a common vision of development issues, the
Annex 3 Page 22 of 32
Bank’s AAA has had significant impact. A study on the cost of logistics was particularly well received and is providing valuable inputs for a Rosario Port project that is under preparation. Similarly, a rural strategy that was delivered in March 2006 is helping the Government to design the further development of its agricultural program (PROSAP).
Table 2: CAS Annex B2
As of Date 01/06/2009
Indicator 2006 2007 2008 2009Portfolio AssessmentNumber of Projects Under Implementation a 29 29 28 32Average Implementation Period (years) b 4.6 3.9 4.2 4.0Percent of Problem Projects by Number a, c 27.6 3.4 25.0 12.5Percent of Problem Projects by Amount a, c 31.1 1.0 31.3 16.9Percent of Projects at Risk by Number a, d 48.3 41.4 57.1 28.1Percent of Projects at Risk by Amount a, d 38.1 21.4 60.0 29.6Disbursement Ratio (%) e 38.4 21.7 12.4 8.4Portfolio ManagementCPPR during the year (yes/no) Yes Yes Yes YesSupervision Resources (total US$) 3521 2973 2642 1470Average Supervision (US$/project) 98 90 98 49
Memorandum Item Since FY 80 Last Five FYsProj Eval by OED by Number 105 24Proj Eval by OED by Amt (US$ millions) 17,844.7 3,578.8% of OED Projects Rated U or HU by Number 26.7 16.7% of OED Projects Rated U or HU by Amt 35.2 8.2
a. As shown in the Annual Report on Portfolio Performance (except for current FY).b. Average age of projects in the Bank's country portfolio.c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (d. As defined under the Portfolio Improvement Program.e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only.* All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year.
Selected Indicators* of Bank Portfolio Performance and Management
82. The average cost of AAA reports in Argentina was greater than in comparator countries (see Table 3). Furthermore, the average cost of AAA reports produced in Argentina under the 2006 CAS was 70 percent greater than reports produced under the 2004 CAS when Argentina was ranked as one of the least cost countries. The increase in costs may reflect that a number of reports were begun and later dropped.
83. With respect to the lending program, project preparation costs and supervision costs in Argentina were similar to the corresponding costs in other countries. The Argentina program ranked in the middle of the range.
Annex 3 Page 23 of 32
Table 3: Comparative Costs of Bank Program
Lessons Learned
84. Many lessons of the 2004 CAS are confirmed by the 2006-2008 experience. The shift from adjustment lending, which dominated Bank lending at the beginning of the decade, to an all-investment lending program has strained the project implementation capacity of the Government, particularly in the areas of loan approval processing and also the contracting of high value civil works. This is evident in slow disbursements and underscores the importance of continuing to work with the client to improve its project implementation capacity. There is a constructive on going dialogue with the Government focused on initiatives to bring about improvements in project implementation capability and a specific action plan is being worked out as part of CSP dialogue. There is a high level commitment to make substantial improvements in project implementation capability which is a central factor in making the investment led strategy successful.
85. The Bank should work with the Government to reduce the lag between loan approval and loan signing. Project implementation has been delayed because the Government has been slow to sign loans approved by the Bank. This was particularly acute in 2007, when authorities were preoccupied with elections. However, Government procedures continue to result in long delays between Board approval and loan signing.
86. The progress in CAS implementation –particularly the progress in project preparation and the design of important and high quality investment initiatives-- has proven that there is sufficient space to develop an ambitious investment partnership despite the lack of coincidence in the structural reform agenda proposed by the government. CAS should continue to focus on those areas where the Bank and the Government share a common view with respect to the policy framework and the operational environment. The CAS should also provide for the close monitoring of progress
(FY06-08, U$S Thousand) Source: Business Warehouse as of August 15, 2008
Country Average
Supervision Cost
per Project
Supervision Cost
Ranking
Average Preparation
Cost per Project
Preparation Cost
Ranking
Average Cost
AAA Report
AAA Cost
Ranking
Argentina 95 4 307 4 218 1 Brazil 83 8 270 5 114 7 Chile 84 6 181 8 180 2 Colombia 93 5 238 6 143 4 Mexico 111 1 230 7 133 5 Poland 83 7 445 3 112 8 Russian Federation 98 3 534 2 127 6 Turkey 106 2 549 1 146 3
Annex 3 Page 24 of 32
87. The Bank should tailor its program of AAA to address issues of priority interest to the client. Experience with AAA reveals that the Government is more interested in analytic work that has a clear operational application. An effort should be made to develop a demand driven AAA Agenda that ensures the ownership of the study by the Government and its endorsement by the Bank if there is a clear sense that it is consistent with the Bank’s assistance priorities.
88. Progress in the fiduciary front should be continued and deepened to further ensure transparency and integrity of Bank operations. The Bank should continue to promote a proactive and constructive dialogue with the Government to ensure transparency and competitiveness in the procurement of goods and services under the portfolio. There has been very significant progress made in the area of transparency with the introduction of the Sistema de Ejecucion de Planes de Adquisiciones (SEPA). It provides all actors with an interest in Bank-financed procurement --civil society, private sector, suppliers and executing entities-- a clear picture of the transactions financed by the Bank and facilitates monitoring the efficiency with which executing entities are implementing their respective procurement plans. There has also been progress in identifying and assessing risks related to competition constraints. There are, however, further areas for improved fiduciary management. Among them the systemic review of risk involved in the procurement and financial management of projects through periodic integrated fiduciary assessments and the monitoring of contract processing to avoid bottlenecks and ensure the efficiency of civil works contracting. The Government shares and is committed to implement this expanded fiduciary agenda.
Ann
ex 3
Pa
ge 2
5 of
32
AN
NE
X A
: AR
GE
NT
INA
CA
S R
ESU
LT
S M
AT
RIX
PIL
LA
R 1
- SU
STA
INE
D G
RO
WT
H W
ITH
EQ
UIT
Y
Cou
ntry
Dev
elop
men
t G
oals
29
Act
ual P
rogr
ess
tow
ards
D
evel
opm
ent G
oals
C
AS
Out
com
es a
nd M
ilest
ones
30
Act
ual P
rogr
ess
tow
ards
C
AS
Out
com
es a
nd M
ilest
ones
1.
Inf
rast
ruct
ure
Dev
elop
men
t U
pgra
de A
rgen
tina
’s
infr
astr
uctu
re to
add
ress
pot
enti
al
bott
lene
cks
to c
ompe
titi
vene
ss,
and
unde
rpin
med
ium
-ter
m
grow
th a
nd p
over
ty a
llevi
atio
n.
Tra
nspo
rt
• R
oads
in g
ood
cond
ition
: tar
get
is 9
0% o
f na
tiona
l non
-co
nces
sion
ed r
oads
net
wor
k;
targ
et is
50%
of
prov
inci
al r
oads
ne
twor
k.
• D
ispo
sabl
e in
com
e de
dica
ted
to
tran
spor
t by
poor
est q
uint
ile
redu
ced
to le
ss th
an 1
5%.
Wat
er
• In
crea
se a
cces
s to
saf
e w
ater
of
the
botto
m tw
o qu
intil
es to
75-
80
%.
• In
crea
se a
cces
s to
sew
age
in
grea
ter
Bue
nos
Air
es a
rea
by th
e po
ores
t qui
ntile
to 5
0%.
• In
crea
se a
cces
s to
ele
ctri
city
and
na
tura
l gas
by
the
poor
est
quin
tile
to 9
5% a
nd 5
0%,
resp
ectiv
ely.
�
As
of 2
008,
89%
of
natio
nal
road
s ar
e in
goo
d co
nditi
on.
Dat
a on
pro
vinc
ial r
oads
is
not a
vaila
ble.
�
No
data
ava
ilabl
e �
As
of 2
007,
85%
of
botto
m
two
inco
me
quin
tiles
hav
e ac
cess
to w
ater
net
wor
k.
�
As
of 2
007,
34%
of
poor
est
quin
tile
had
acce
ss to
sew
age.
�
As
of 2
007,
34%
of
poor
est
quin
tile
had
acce
ss to
nat
ural
ga
s.
Tra
nspo
rt
• L
ever
age
the
prog
ress
ach
ieve
d in
roa
d tr
ansp
ort b
y sc
alin
g up
sup
port
for
roa
d m
aint
enan
ce th
roug
hout
the
coun
try
and
expa
ndin
g th
is s
uppo
rt to
incl
ude
road
up
grad
es, a
s w
ell a
s br
oade
ning
the
scop
e of
B
ank
supp
ort t
o en
com
pass
add
ition
al tr
ansp
ort
subs
ecto
rs.
• In
crea
se p
erce
ntag
e of
pav
ed n
on-c
once
ssio
ned
road
s un
der
the
CR
EM
A s
yste
m (
base
line
and
incr
emen
t to
be d
eter
min
ed N
atio
nal h
ighw
ays:
ba
selin
e 9,
174
km in
200
4 an
d ta
rget
of
16,7
25
km b
y 20
09; P
rovi
ncia
l net
wor
k: b
ase
line
0 km
in
200
5 an
d ta
rget
of
2,20
4 km
by
2008
. •
Nat
iona
l Dir
ecto
rate
of
Hig
hway
s un
dert
akes
ac
tions
und
er th
e In
stitu
tiona
l Ren
ewal
Act
ion
Plan
cov
erin
g bu
dget
ing,
roa
d sa
fety
, and
en
viro
nmen
tal m
anag
emen
t.
Wat
er
• C
onso
lidat
e th
e em
ergi
ng p
artn
ersh
ip o
n w
ater
re
sour
ces
man
agem
ent,
enco
mpa
ssin
g w
ater
su
pply
and
san
itatio
n, a
nd f
lood
pro
tect
ion
– in
th
e co
ntex
t of
mov
ing
tow
ards
mor
e st
rate
gic
wat
er r
esou
rce
man
agem
ent.
• E
xpan
d w
ater
and
sew
age
cove
rage
for
ap
prox
imat
ely
one-
half
mill
ion
low
inco
me
peop
le li
ving
in a
reas
of
high
san
itary
or
envi
ronm
enta
l vul
nera
bilit
y in
BA
Pro
vinc
e.
• E
stab
lish
floo
d ri
sk r
educ
tion
plan
s in
at l
east
5
prov
ince
s.
• R
educ
e fl
ood
risk
in s
elec
ted
urba
n ar
eas
incl
udin
g B
A c
ity a
nd e
xpos
ed p
rovi
ncia
l citi
es.
�
Ach
ieve
d: B
ank
supp
ort f
or r
oad
mai
nten
ance
at t
he n
atio
nal a
nd
prov
inci
al le
vels
thro
ugh
perf
orm
ance
-bas
ed c
ontr
acts
. B
ank
unde
rtoo
k an
alyt
ic w
ork
on lo
gist
ic c
osts
and
on
port
s an
d an
inve
stm
ent l
oan
to im
prov
e po
rt f
acili
ties
at R
osar
io is
und
er
prep
arat
ion.
�
Part
ially
ach
ieve
d: A
s of
200
8, th
e C
RE
MA
sys
tem
app
lied
to
13,6
00 k
m o
f na
tiona
l hig
hway
s an
d 1,
000
km o
f th
e pr
ovin
cial
ne
twor
k.
�
Not
ach
ieve
d �
Not
ach
ieve
d �
Part
ially
Ach
ieve
d: C
over
age
exte
nded
to 3
70,0
00 lo
w in
com
e pe
ople
by
2008
. A
dditi
onal
cov
erag
e is
ant
icip
ated
whe
n pr
ojec
t is
com
plet
ed w
ith a
dditi
onal
fin
ance
. �
Ach
ieve
d: R
educ
tion
plan
s es
tabl
ishe
d in
San
ta F
e, C
orri
ente
s,
Ent
re R
ios,
Cha
co, M
isio
nes
and
Bue
nos
Air
es.
�
Part
ially
ach
ieve
d: W
orks
hav
e st
arte
d in
Bue
nos
Air
es.
Red
uced
flo
odin
g ac
hiev
ed in
citi
es in
clud
ing
Sant
a Fe
. .
29
Lon
ger-
term
, hig
her-
orde
r de
velo
pmen
t obj
ectiv
es id
entif
ied
by th
e co
untr
y.
30 C
ount
ry r
esul
ts to
whi
ch th
e B
ank
expe
cts
to m
ake
a di
rect
con
trib
utio
n th
roug
h its
CA
S pr
ogra
m.
Indi
cato
rs in
clud
e sh
orte
r-te
rm m
ilest
ones
whe
re p
ossi
ble.
Ann
ex 3
Pa
ge 2
6 of
32
AR
GE
NT
INA
: CA
S R
ESU
LT
S M
AT
RIX
P
ILL
AR
1 -
SUST
AIN
ED
GR
OW
TH
WIT
H E
QU
ITY
C
ount
ry D
evel
opm
ent
Goa
ls
Act
ual P
rogr
ess
tow
ards
D
evel
opm
ent G
oals
C
AS
Out
com
es a
nd M
ilest
ones
A
ctua
l Pro
gres
s to
war
ds
CA
S O
utco
mes
and
Mile
ston
es
2. T
owar
ds M
ore
Sust
aina
ble
Rur
al D
evel
opm
ent a
nd E
nvir
onm
enta
l Man
agem
ent
Impr
ove
com
peti
tive
ness
, qua
lity,
an
d ex
port
s of
agr
icul
ture
and
liv
esto
ck p
rodu
ctio
n:
• R
each
100
mill
ion
tons
in c
erea
l an
d oi
lsee
d pr
oduc
tion
(bas
elin
e 20
05, 7
5 m
illio
n).
• R
each
US$
3 bn
in m
eat e
xpor
ts
(bas
elin
e U
S$0.
5 bn
in 2
001,
U
S$1.
4bn
in 2
005)
and
red
uce
plan
t and
ani
mal
hea
lth-r
elat
ed
loss
es (
base
line:
ani
mal
hea
lth
loss
es U
S$15
0 m
n an
d pl
ant
loss
es U
S$75
mn
per
year
).
Red
uce
rura
l pov
erty
•
Red
uce
pove
rty
to 2
0% b
y 20
15
(rur
al b
asel
ine
is 3
4% in
200
5).
Add
ress
a g
row
ing
prob
lem
of
reso
urce
deg
rada
tion
. •
Pres
erve
11.
3% o
f na
tiona
l are
a as
nat
ive
fore
st in
201
1 (b
asel
ine
12.6
% in
198
7; 1
1.2%
in 2
007
est.)
; and
incr
ease
for
estr
y in
vest
men
ts (
base
line
2005
: 1.1
m
illio
n ha
s).
• In
crea
se in
vest
men
ts in
urb
an
was
te m
anag
emen
t (ba
selin
e:
60%
of
solid
was
te is
dis
pose
d of
w
ithou
t san
itary
trea
tmen
t).
• In
crea
se a
cces
s to
inte
rnat
iona
l ca
rbon
mar
kets
, US$
150
mill
ion
by 2
010.
(ba
selin
e 20
05: l
ess
than
US$
5 m
illio
n).
�
93.6
mill
ion
tons
in c
erea
l and
oi
l see
d r
each
ed in
the
2006
/7 h
arve
st
�
Tot
al m
eat e
xpor
t wer
e U
S$1.
45 b
n. I
n 20
07.
No
info
rmat
ion
on a
nim
al a
nd
plan
t hea
lth lo
sses
�
No
new
mea
sure
s of
rur
al
pove
rty
sinc
e 20
05.
�
2007
legi
slat
ion
curb
s de
fore
stat
ion
of n
ativ
e fo
rest
. Fo
rest
ry in
vest
men
ts in
crea
se
plan
ted
fore
sts
by 4
0,00
0 ha
. an
nual
ly.
�
New
land
fill
inve
stm
ents
m
ade
in M
isio
nes,
Sal
ta a
nd
Men
doza
pro
vinc
es.
55%
of
solid
was
te is
dis
pose
d w
ithou
t tre
atm
ent.
�
26 C
DM
pro
ject
s ha
ve b
een
subm
itted
for
app
rova
l to
the
desi
gnat
ed A
rgen
tine
auth
ority
for
the
Kyo
to
prot
ocol
.
Agr
icul
ture
and
live
stoc
k •
Impr
ove
the
capa
city
to a
naly
ze, d
esig
n an
d m
anag
e ag
ricu
ltura
l and
rur
al d
evel
opm
ent
inve
stm
ents
at n
atio
nal a
nd p
rovi
ncia
l lev
els:
•
Nat
iona
l gov
ernm
ent t
o co
mpl
ete
and
impl
emen
t its
agr
icul
tura
l and
rur
al d
evel
opm
ent s
trat
egy.
Im
plem
ente
d in
at l
east
one
sub
regi
on b
y 20
08.
• 20
% in
crea
se in
pro
duct
ion
area
und
er ir
riga
tion
(bas
elin
e: 1
.7 m
illio
n ha
, 200
1), a
nd in
tegr
ated
w
ater
res
ourc
es m
anag
emen
t pilo
ted
in a
t lea
st
one
prov
ince
. •
Mer
cosu
r st
rate
gy to
be
free
of
afto
sa (
foot
and
m
outh
dis
ease
) co
mpl
eted
and
impl
emen
ted.
R
ural
pov
erty
•
Impr
oved
bas
elin
e da
ta a
nd a
naly
sis
of r
ural
po
vert
y.
• E
xpan
ded
smal
l and
med
ium
far
mer
inve
stm
ent
in f
ores
try
(at l
east
5,0
00 h
a to
tal,
in 3
dif
fere
nt
prov
ince
s).
Env
iron
men
t •
Inte
grat
ed w
aste
man
agem
ent s
yste
ms
com
plet
ed in
3 p
rovi
nces
by
2007
(ba
selin
e 20
05: 0
pro
vinc
es).
•
Inte
grat
ed u
rban
tran
spor
t pla
nnin
g an
d in
vest
men
t, co
mbi
ned
with
pol
lutio
n re
duct
ion,
in
at l
east
fiv
e ci
ties
(bas
elin
e: 0
citi
es in
200
5).
• W
orld
Ban
k pu
rcha
ses
of a
t lea
st U
S$25
mill
ion
in A
rgen
tine
carb
on c
redi
ts b
y en
d-20
08
(bas
elin
e U
S$0.
6 m
illio
n in
200
5).
�
Ach
ieve
d: S
ub-s
ecre
tari
at o
f Fa
mily
Agr
icul
ture
and
Rur
al
Dev
elop
men
t est
ablis
hed
in A
pril
2008
. �
Ach
ieve
d: N
atio
nal s
trat
egy
is in
pla
ce a
nd 1
9 pr
ovin
ces
have
ad
opte
d st
rate
gies
as
of 2
007.
�
Part
ially
ach
ieve
d: A
rea
unde
r ir
riga
tion
incr
ease
d by
6%
. The
pr
ovin
ce o
f M
endo
za h
as a
dopt
ed a
n in
tegr
ated
wat
er r
esou
rce
man
agem
ent p
rogr
am.
�
Ach
ieve
d: M
erco
sur
stra
tegy
was
rat
ifie
d in
200
5. A
n ac
tion
prog
ram
was
ado
pted
in M
ay 2
008.
�
Not
ach
ieve
d: N
o im
prov
emen
ts in
dat
a �
Ach
ieve
d. A
Ban
k-fi
nanc
ed p
roje
ct w
ill s
uppo
rt in
vest
men
ts b
y 5,
000
smal
l-sc
ale
prod
ucer
s fo
r 15
,000
ha.
of
for
ests
in a
t lea
st 3
di
ffer
ent p
rovi
nces
. �
Not
yet
ach
ieve
d. U
nder
a B
ank-
supp
orte
d N
atio
nal S
olid
Was
te
Man
agem
ent P
roje
ct, 1
mun
icip
al s
olid
was
te m
anag
emen
t pla
n is
co
mpl
eted
and
ano
ther
5 a
re u
nder
pre
para
tion.
10
infr
astr
uctu
re
and
equi
pmen
t inv
estm
ents
are
pla
nned
. �
Not
yet
ach
ieve
d. 3
0 po
llutio
n co
ntro
l pro
ject
s ar
e be
ing
deve
lope
d w
ith s
uppo
rt f
rom
the
WB
I C
arbo
n Fi
nanc
e A
ssis
tanc
e Pr
ogra
m.
�
Not
yet
ach
ieve
d. B
ank
purc
hase
s pu
t on
hold
pen
ding
im
prov
emen
ts in
pro
ject
por
tfol
io.
Ann
ex 3
Pa
ge 2
7 of
32
AR
GE
NT
INA
: CA
S R
ESU
LT
S M
AT
RIX
P
ILL
AR
2 -
SOC
IAL
IN
CL
USI
ON
C
ount
ry D
evel
opm
ent
Goa
ls
Act
ual P
rogr
ess
tow
ards
D
evel
opm
ent G
oals
C
AS
Out
com
es a
nd M
ilest
ones
A
ctua
l Pro
gres
s to
war
ds
CA
S O
utco
mes
and
Mile
ston
es
1. S
uppo
rtin
g P
rogr
ess
Tow
ards
Per
man
ent S
afet
y N
ets
and
Fos
teri
ng E
mpl
oym
ent
Con
solid
ate
the
redu
ctio
n in
po
vert
y ac
hiev
ed s
ince
the
cris
is
and
expa
nd e
ffor
ts to
rev
erse
the
long
er te
rm p
over
ty tr
end
by
incr
easi
ng h
ouse
hold
inco
mes
and
in
tegr
atin
g m
argi
naliz
ed g
roup
s in
to th
e pr
oduc
tive
mar
ketp
lace
. •
Red
uce
urba
n po
vert
y fr
om 3
8%
(200
5) to
34
perc
ent (
2007
) an
d 30
% (
2009
).
• R
educ
e E
xtre
me
pove
rty
from
13
.6%
in 2
005
to 1
1% (
2011
) an
d 9%
in 2
009
•
Red
uctio
n of
une
mpl
oym
ent r
ate
from
14%
in 2
005
to 1
2% (
2007
) an
d 11
% in
200
9.
• E
xpan
d co
vera
ge a
nd a
dvan
ce
refo
rm o
f th
e So
cial
pro
tect
ion
syst
em:
1.
Shar
e of
wor
king
adu
lts
cove
red
by s
ocia
l sec
urity
in
crea
ses
from
52.
6 %
(20
05)
to 6
1 %
(20
07)
and
65%
(2
009)
. •
Tra
nsiti
on o
f H
eads
of
Hou
seho
ld
prog
ram
into
new
inco
me
tran
sfer
sc
hem
es, i
nclu
ding
rol
e of
non
-co
ntri
buto
ry u
nem
ploy
men
t be
nefi
t and
/or
expa
nsio
n of
chi
ld
bene
fits
.
�
As
of 2
007,
urb
an p
over
ty
was
20.
6 pe
rcen
t. N
o re
liabl
e es
timat
e av
aila
ble
for
2008
. �
No
relia
ble
data
ava
ilabl
e.
�
As
of e
nd-2
007,
un
empl
oym
ent w
as 7
.5
perc
ent
�
As
of 2
007,
Soc
ial S
ecur
ity
cove
rage
was
61
perc
ent
�
Hea
ds o
f H
ouse
hold
pro
gram
is
bei
ng p
hase
d ou
t with
Ban
k su
ppor
t and
ben
efic
iari
es
tran
sfer
red
to n
ew in
com
e tr
ansf
er s
chem
es.
• Im
prov
emen
ts to
inco
me
supp
ort p
rogr
ams,
no
tabl
y m
akin
g th
e tr
ansi
tion
from
em
erge
ncy
inco
me
prog
ram
s to
initi
ativ
es th
at f
oste
r em
ploy
men
t and
est
ablis
hing
mor
e pe
rman
ent
safe
ty n
ets
gear
ed to
pro
vide
dir
ect s
uppo
rt to
vu
lner
able
gro
ups.
•
Red
uctio
n in
num
ber
of p
eopl
e ha
ving
to
part
icip
ate
in w
orkf
are
prog
ram
s fr
om 1
.4
mill
ion
(200
5) to
one
mill
ion
(200
6) a
nd le
ss
than
0.5
mill
ion
(200
9).
• T
rans
ition
of
Hea
ds o
f H
ouse
hold
pro
gram
into
ne
w in
com
e tr
ansf
er s
chem
es, i
nclu
ding
rol
e of
no
n-co
ntri
buto
ry u
nem
ploy
men
t ben
efit
and/
or
expa
nsio
n of
chi
ld b
enef
its.
• Fo
rmul
atio
n of
inte
grat
ed c
omm
unity
ser
vice
st
rate
gy, i
nclu
ding
how
nut
ritio
nal a
nd c
hild
de
velo
pmen
t str
ateg
ies
will
be
impl
emen
ted
at
loca
l lev
el.
• D
efin
ition
of
inte
grat
ed, i
nter
-min
iste
rial
life
long
le
arni
ng s
trat
egy.
• A
chie
ved.
: Ben
efic
iari
es o
f Je
fes
de H
ogar
pro
gram
now
bei
ng
tran
sfer
red
to n
ew F
amili
as p
rogr
am a
nd to
new
Seg
uro
de
Cap
acita
ción
y E
mpl
eo p
rogr
am.
• A
chie
ved:
Par
ticip
ants
in J
efes
de
Hog
ar p
rogr
am r
educ
ed f
rom
1.
4 m
illio
n in
Jun
e 20
05 to
665
,000
by
June
200
8 an
d 57
0,00
0 by
A
ugus
t 200
8.
• A
chie
ved:
Num
bers
tran
sfer
red
from
Jef
es P
rogr
am b
y m
id-2
008
wer
e as
fol
low
s:
340,
634
to F
amili
as p
rogr
am.
95,8
00 to
Seg
uro
prog
ram
.
• A
chie
ved:
A s
trat
egy
form
ulat
ed b
y th
e C
entr
o In
tegr
ador
C
omun
itari
o is
bei
ng im
plem
ente
d in
195
mun
icip
aliti
es n
atio
n-w
ide.
•
Ach
ieve
d: L
ife-
long
lear
ning
pro
ject
und
er im
plem
enta
tion
with
B
ank
supp
ort.
Ann
ex 3
Pa
ge 2
8 of
32
AR
GE
NT
INA
: CA
S R
ESU
LT
S M
AT
RIX
P
ILL
AR
2 -
SOC
IAL
IN
CL
USI
ON
C
ount
ry D
evel
opm
ent
Goa
ls
Act
ual P
rogr
ess
tow
ards
D
evel
opm
ent G
oals
C
AS
Out
com
es a
nd M
ilest
ones
A
ctua
l Pro
gres
s to
war
ds
CA
S O
utco
mes
and
Mile
ston
es
2. I
mpr
ovin
g Se
lect
ed H
ealt
h an
d E
duca
tion
Out
com
es
Edu
catio
n •
Enr
ollm
ent r
ate
of 5
-yea
r ol
ds
incr
ease
s fr
om 9
1.6
(200
5) to
95
.0 (
2007
) an
d 98
.0 (
2009
).
• C
ompl
etio
n ra
te o
f th
ird
cycl
e of
ba
sic
educ
atio
n fr
om 8
2.9
(200
5)
to 8
7.0
perc
ent (
2007
) an
d 95
pe
rcen
t (20
09).
•
Def
ine
lifel
ong
lear
ning
str
ateg
y be
twee
n th
e M
inis
trie
s of
E
duca
tion,
Eco
nom
y an
d L
abor
.
�
As
of 2
007,
the
enro
llmen
t ra
te f
or 5
yea
r-ol
ds w
as 9
1.2
perc
ent.
�
As
of 2
007,
the
com
plet
ion
rate
for
the
thir
d cy
cle
of
educ
atio
n w
as 8
5 pe
rcen
t. �
Lif
e lo
ng le
arni
ng a
nd
trai
ning
pro
ject
und
er
impl
emen
tatio
n w
ith B
ank
supp
ort.
Hea
lth
• Su
ppor
t eff
orts
to im
prov
e he
alth
ser
vice
de
liver
y at
the
prov
inci
al le
vel;
and
rais
e sc
hool
co
mpl
etio
n ra
tes
and
impr
ovin
g le
arni
ng
outc
omes
, esp
ecia
lly f
or c
hild
ren
from
di
sadv
anta
ged
fam
ilies
. •
Red
uctio
n of
infa
nt m
orta
lity
rate
fro
m 1
4.4
per
1000
bir
ths
in 2
005
to 1
2.0
per
1000
bir
ths
in
2009
. •
Exp
and
cove
rage
of
mat
erna
l-ch
ild h
ealth
in
sura
nce
from
20%
of
elig
ible
pop
ulat
ion
in
2005
to 5
0% in
200
9 (9
NO
E/N
EA
pro
vinc
es).
•
Def
initi
on o
f co
re p
acka
ge o
f pu
blic
hea
lth
good
s.
E
duca
tion
• Im
prov
e co
vera
ge o
f pr
e-sc
hool
edu
catio
n fo
r ch
ildre
n of
5 y
ears
of
age
in r
ural
are
as o
f A
rgen
tina
by 2
009
(bas
elin
e 89
% in
200
3-04
, ta
rget
is 9
5% b
y 20
09-1
0).
• Im
prov
e ef
fect
ive
prom
otio
n ra
te f
or c
lass
es 7
-9
in r
ural
are
as (
base
line
68%
in 2
003-
04, t
arge
t is
80%
by
2009
-10)
.
�
Ach
ieve
d: B
ank
supp
ort f
or a
Pro
vinc
ial M
ater
nal-
Chi
ld H
ealth
In
vest
men
t Pro
ject
Was
app
rove
d in
Nov
embe
r 20
06.
Gra
duat
ion
rate
s fo
r ba
sic
educ
atio
n th
ru 9
th g
rade
incr
ease
d fr
om 8
3% in
200
5 to
85%
in 2
007.
Pre
-sch
ool e
duca
tion
for
rura
l chi
ldre
n in
crea
sed
from
89%
in 2
003/
4 to
93.
5% in
200
6.
�
Ach
ieve
d: A
s of
200
6 in
fant
mor
talit
y w
as 1
2.9
per
1000
bir
ths.
�
Ach
ieve
d: A
s of
200
8 co
vera
ge o
f m
ater
nal-
child
hea
lth
insu
ranc
e w
as 7
9% o
f el
igib
le p
opul
atio
n.
�
Ach
ieve
d: T
he B
ank
and
the
Arg
entin
e au
thor
ities
agr
eed
on th
e de
fini
tion
of a
cor
e pa
ckag
e in
Sep
tem
ber
2007
. �
Ach
ieve
d: A
s of
200
6, c
over
age
of p
re-s
choo
l edu
catio
n fo
r 5
year
-old
chi
ldre
n in
rur
al a
reas
wea
s 93
.5 p
erce
nt.
�
Ach
ieve
d: A
s of
200
6, th
e ef
fect
ive
prom
otio
n ra
te f
rom
cla
ss 7
to
8 in
rur
al a
reas
was
81.
4 pe
rcen
t.
Ann
ex 3
Pa
ge 2
9 of
32
AR
GE
NT
INA
: CA
S R
ESU
LT
S M
AT
RIX
P
ILL
AR
3 -
IMP
RO
VE
D G
OV
ER
NA
NC
E
Cou
ntry
Dev
elop
men
t Goa
ls
Act
ual P
rogr
ess
tow
ards
D
evel
opm
ent G
oals
C
AS
Out
com
es a
nd M
ilest
ones
A
ctua
l Pro
gres
s to
war
ds C
AS
Out
com
es a
nd
Mile
ston
es
1. S
tren
gthe
ning
Pub
lic I
nsti
tuti
ons
Stre
ngth
en th
e ef
fect
iven
ess,
ef
fici
ency
, tra
nspa
renc
y an
d ac
coun
tabi
lity
of p
ublic
sec
tor
man
agem
ent;
impr
ove
serv
ice
deliv
ery
outc
omes
and
trus
t in
inst
itut
ions
; and
str
engt
hen
publ
ic
sect
or c
apac
ity
to s
pur
inve
stm
ent
and
grow
th.
--St
reng
then
the
fram
ewor
k fo
r fe
dera
l cop
artic
ipac
ion
to c
lear
ly
defi
ne th
e fi
scal
res
pons
ibili
ty
resp
onsi
bilit
ies
betw
een
the
natio
n an
d th
e pr
ovin
ces.
�
The
fra
mew
ork
for
copa
rtic
ipac
ion
was
not
st
reng
then
ed f
rom
200
6 to
20
08.
• Dee
pen
the
emer
ging
inve
stm
ent p
artn
ersh
ip in
fa
vor
of in
stitu
tiona
l str
engt
heni
ng in
sel
ecte
d ar
eas
of p
ublic
sec
tor
man
agem
ent i
nclu
ding
ex
pend
iture
man
agem
ent,
tran
spar
ency
, and
se
rvic
e de
liver
y.
• Inc
reas
e in
use
r sa
tisfa
ctio
n of
AN
SES
as
mea
sure
d by
ser
vice
-del
iver
y ou
tcom
es a
nd b
y ci
tizen
sat
isfa
ctio
n su
rvey
s.
• Exp
ansi
on o
f th
e in
tegr
ated
fin
anci
al m
anag
emen
t (S
LU
/web
- SI
DIF
) sy
stem
(ba
selin
e: S
LU
co
vere
d 71
% o
f fe
dera
l lev
el p
ublic
inst
itutio
ns in
20
05).
• E
xpan
sion
of
the
publ
ic in
vest
men
t man
agem
ent
syst
em (
BA
PIN
II)
to a
dditi
onal
pro
vinc
es
(bas
elin
e: 1
9 pr
ovin
ces
in 2
005)
. • F
or p
rovi
nces
par
ticip
atin
g in
the
Sub-
natio
nal
Gov
ernm
ents
Pub
lic S
ecto
r M
oder
rniz
atio
n Pr
ojec
t: 1.
Perc
ent o
f pr
ovin
cial
exp
endi
ture
s on
hu
man
res
ourc
es o
pera
ting
unde
r in
tegr
ated
pay
roll
info
rmat
ion
syst
ems
has
incr
ease
d fr
om 3
0% to
45
% in
200
8 (a
nd 5
5% in
yea
r 20
09).
2.
R
atio
bet
wee
n co
llect
ed a
nd e
mitt
ed
tax
reve
nue
for
prov
inci
al r
eal
prop
erty
and
mot
or v
ehic
le ta
xes
has
incr
ease
d fr
om 5
5 to
65
perc
ent i
n 20
08 (
and
70%
in 2
009)
. • A
rgen
tina’
s ra
nkin
gs o
n W
BI’
s G
loba
l G
over
nanc
e In
dica
tors
of
“Gov
ernm
ent
Eff
ectiv
enes
s” a
nd C
ontr
ol o
f C
orru
ptio
n”
impr
ove
from
cur
rent
per
cent
ile r
anks
of
42.3
, and
42
.9, r
espe
ctiv
ely.
�
Ach
ieve
d: P
ublic
sec
tor
man
agem
ent s
tren
gthe
ned
as in
dica
ted
belo
w in
clud
ing
tran
spar
ency
and
ser
vice
del
iver
y.
�
Ach
ieve
d: A
vera
ge ti
me
for
the
prov
isio
n of
new
ben
efits
re
duce
d fr
om 1
40 d
ays
in 2
005
to 1
30 d
ays
in 2
008.
Dat
a on
ci
tizen
sat
isfa
ctio
n is
not
yet
ava
ilabl
e.
�
Ach
ieve
d: S
LU
inst
alle
d in
863
age
ncie
s w
hich
con
stitu
te 8
2%
of f
eder
al le
vel i
nstit
utio
ns.
�
Ach
ieve
d: B
API
N I
I im
plem
ente
d in
23
of th
e 24
pro
vinc
es a
nd
110
fede
ral a
genc
ies.
�
Not
yet
ach
ieve
d: P
artic
ipat
ing
pro
vinc
es h
ave
deve
lope
d a
stra
tegi
c pl
an to
impr
ove
man
agem
ent,
com
petit
iven
ess
and
grow
th.
1.
Per
cent
of
prov
inci
al e
xpen
ditu
res
on h
uman
res
ourc
es o
pera
ting
unde
r in
tegr
ated
pay
roll
info
rmat
ion
syst
ems
stan
ds a
t 30%
in 2
008.
2.
Rat
io b
etw
een
colle
cted
and
em
itted
tax
reve
nues
for
the
prov
inci
al r
eal p
rope
rty
and
mot
or v
ehic
le ta
xes
stan
ds a
t 55%
in
2008
. �
Ach
ieve
d: I
n 20
07 th
e pe
rcen
tile
rank
ing
for
Gov
ernm
ent
Eff
ectiv
enes
s w
as 5
1.7
and
for
Con
trol
of
Cor
rupt
ion
was
43.
5.
Ann
ex 3
Pa
ge 3
0 of
32
AR
GE
NT
INA
: CA
S R
ESU
LT
S M
AT
RIX
P
OR
TF
OL
IO P
ER
FO
RM
AN
CE
C
ount
ry D
evel
opm
ent
Goa
ls
Act
ual P
rogr
ess
tow
ards
D
evel
opm
ent G
oals
C
AS
O
utco
mes
and
Mile
ston
es
Act
ual P
rogr
ess
tow
ards
CA
S O
utco
mes
and
M
ilest
ones
1.
Bui
ldin
g up
the
Gov
ernm
ent’
s P
roje
ct M
anag
emen
t Cap
acit
y St
reng
then
the
capa
city
of t
he
Gov
ernm
ent t
o pr
epar
e an
d im
plem
ent i
nves
tmen
t pro
ject
s in
lin
e w
ith
the
requ
irem
ents
of a
m
ediu
m-t
erm
inve
stm
ent
part
ners
hip.
•
Enh
ance
gov
ernm
ent p
roje
ct m
gt. c
apac
ity
thro
ugh
(i)
a fr
amew
ork
agre
emen
t to
shif
t im
plem
enta
tion
resp
onsi
bilit
y fr
om s
tand
-alo
ne
PIU
s to
line
min
istr
ies,
(ii)
a f
iduc
iary
act
ion
plan
to im
prov
e fi
duci
ary
cont
rol,
(iii)
in
stitu
tiona
l str
engt
heni
ng in
vest
men
ts to
bui
ld
up c
apac
ity, (
iv)
AA
A to
str
engt
hen
the
dial
ogue
on
fin
anci
al a
ccou
ntab
ility
and
pro
cure
men
t, (v
) en
hanc
ed s
uper
visi
on o
f pr
ojec
ts a
t ris
k, a
nd (
vi)
twic
e an
nual
por
tfol
io r
evie
ws
with
the
auth
oriti
es.
• %
of
prob
lem
inve
stm
ent p
roje
cts
by n
umbe
r de
clin
es c
ontin
uous
ly th
roug
h th
e C
AS
peri
od
(bas
elin
e: 2
0.8%
in 2
005)
. •
% o
f in
vest
men
t pro
ject
s at
ris
k by
am
ount
doe
s no
t sur
pass
20%
(ba
selin
e: 1
9.5%
in f
isca
l 20
05).
•
Aud
it co
mpl
ianc
e fo
r B
ank
proj
ect i
ncre
ases
fr
om 4
5% (
2005
) to
60%
(20
06),
75%
(20
07)
and
80%
(20
08).
• A
chie
ved.
: (i)
A f
ram
ewor
k fo
r ph
asin
g-ou
t PIU
s w
as a
gree
d in
m
id-2
005
and
PIU
sta
ff f
or r
epea
ter
proj
ects
wer
e re
duce
d by
46%
fr
om 2
004/
5 an
d 20
06;
(ii)
A f
iduc
iary
act
ion
plan
is u
nder
im
plem
enta
tion.
Inf
orm
atio
n on
all
Ban
k-fi
nanc
ed c
ontr
acts
is
post
ed o
n th
e w
eb.
Ann
ual f
iduc
iary
ass
essm
ents
are
now
mad
e fo
r al
l Ban
k-su
ppor
ted
proj
ects
. (i
ii) B
ank
loan
s fo
r a
seco
nd
SIN
TyS
Pro
ject
and
a S
econ
d St
ate
Mod
erni
zatio
n pr
ojec
t are
su
cces
sful
ly s
tren
gthe
ning
inst
itutio
ns a
nd b
uild
ing
capa
city
; (
iv)
A C
FFA
and
RO
SC w
ere
deliv
ered
in F
Y07
. (v
) A
dditi
onal
bu
dget
allo
catio
ns w
ere
mad
e in
FY
05-0
8 to
enh
ance
sup
ervi
sion
of
pro
ject
s at
ris
k; (
vi)
Port
folio
rev
iew
s ha
ve b
een
done
twic
e an
nual
ly w
ith th
e au
thor
ities
. •
Not
ach
ieve
d: A
fter
dec
linin
g to
3.4
per
cent
in 2
007,
pro
blem
pr
ojec
ts b
y nu
mbe
r ro
se to
25
perc
ent i
n 20
08.
The
ris
e w
as d
ue to
de
lays
in th
e G
over
nmen
t app
rovi
ng n
ew lo
ans
and
that
pro
blem
is
bein
g ad
dres
sed.
•
Not
ach
ieve
d: P
roje
cts
at r
isk
by a
mou
nt r
ose
to 6
0 pe
rcen
t in
2008
. H
owev
er, t
he r
ise
was
due
to b
road
cou
ntry
-rel
ated
issu
es
and
not t
o pr
ojec
t spe
cifi
c pr
oble
ms.
•
Subs
tant
ially
ach
ieve
d. C
ompl
ianc
e in
crea
sed
to 7
6% in
FY
06 a
nd
81%
in F
Y07
. A
fter
dro
ppin
g te
mpo
rari
ly to
45%
in F
Y08
the
80%
targ
et w
as r
ecov
ered
3 m
onth
s la
ter.
Annex 3 Page 31 of 32
ANNEX B: Lending Program Summary (Base Case)
LENDING STATUS OF DELIVERY as of 09/2008 Fiscal year Proj ID US$(M) US$(M)
2006 AR Governance 21 25 Postponed to FY10 (Foundations for Performance-Informed Budgeting
28
AR Urban Flood Prevention (APL2) 70 Approved 06/06/2006 70
AR Basic Municipal Services 1 110 Approved 06/06/2006 110
Total FY 2006 205 Total FY 2006 180
2007 AR Provincial Agricultural Development (supplemental financing for PROSAP)
30 Approved 01/23/2007 37
AR Mining Decontamination (PRAMU) 35 Approved 07/31/2008 30 (FY09)
AR Cordoba Provincial Investment Loan 75 Approved 07/11/2006 75 (FY08)
AR Santa Fe Provincial Investment Loan 125 Approved 02/13/2007 126.7
AR Catamarca Provincial Investment Loan 25 Dropped
AR Maternal-Child Health Insurance Functions (APL2+3)
300 Approved 11/02/2006 300
AR Essential Health Functions 200 Approved 11/21/2006 220
AR State Modernization 2
25 Approved 05/29/2007
20
AR Provincial Preschool and Basic Education 100 Postponed
AR Urban Public Transport 200 Approved 03/27/2007 As Additional Finance for Loan 4163
100
Total FY 2007 1,115 Total FY 2007 783.7
2008 AR SINTyS (APL2) 15 Approved 07/08/2008 20
AR Environment Management (APL1) 75 Approved 03/18/2008 60
AR National Highway Asset Management (APL2) 200 Approved 06/28/2007 400
AR BA SIDP (APL2) 150 Approved 06/28/2007 270
AR Income Support for the Poor 300 Postponed
AR Infrastructure (Logistics Node of Rosario Port) 100 Postponed 477
AR Provincial Agricultural Development (PROSAP 2) 150 Postponed 300
AR Lifelong Learning 100 Approved 06/28/2007 200
AR Integrated Water Resources Management (APL1) 100 Postponed
Total FY 2008 1,190 Total FY 2008 1055
2009 AR Provincial Roads 150 Postponed 120
AR Infrastructure (Freight Corridors) 175 Postponed AR Environmental Management (APL2 75 Dropped AR Sub-national Governments Modernization 40 Postponed 40 AR Early Childhood Development 90 Postponed 100 AR Innovation 100 Approved09/25/2008 150
AR Basic Municipal Services 2 60 Dropped AR Rural Poverty and Growth 70 Postponed AR Provincial Public Management 30 Postponed
Additional project not included in the 2006 CAS: Matanza-Riachuelo Basin Sustainable Development
…. Programmed for 2009 (841)
Total FY 2009 790
Overall Result 3,300 3,436.7
Annex 3 Page 32 of 32
ANNEX C: AAA Program Summary (Base Case)
ECONOMIC & SECTOR WORK STATUS OF DELIVERY as of 09/2008 Fiscal year Ongoing Studies in Italics
2006 Programmatic Poverty 1 (Informality) AR Programmatic Poverty Delivered 06/29/2006
Old Age Welfare and Social Security Facing the Challenge of Aging and Social Security Delivered 10/13/2006
Logistics and Transport Sector, Competitiveness The Challenge of Reducing Logistics Costs Delivered 07/03/2006
Infrastructure Finance AR Infrastructure Finance Delivered 09/29/2006
Rural Strategy AR Rural Strategy Delivered 03/31/2006
Institutional Governance Review AR Institutional and Governance Review Delivered 06/28/2006
2007 Youth at Risk Social Inclusion: Issues of Youth in Argentina Delivered 06/20/2007
CFAA (Federal Level) CFAA (Federal Level) Delivered 06/19/2008
Fiscal Space for Public Investment Dropped
Programmatic Poverty 2 (Rural) The Invisible Poor: A Portrait of Rural Poverty in Argentina Delivered 06/27/2007
Provincial Economic Memorandum 1 (Central Region) Dropped CPAR (Federal Level) Dropped
ROSC Accounting and Auditing Report (ROSC) Delivered 06/08/2007
2008 Programmatic. Poverty 3 (Urban and Water) Dropped
Programmatic Social Protection (Options to Transition from Heads of Household Program)
Informal Employment in Argentina Delivered 03/27/2008
Provincial Economic Memorandum 2 (Northern Region) Dropped
Country Environmental Analysis Postponed
Policy Notes Policy Notes Delivered 12/19/2007
CPAR (Provincial Level) Dropped
CFAA (Provincial Level) Postponed
2009 Provincial Economic Memorandum (Buenos Aires) Programmed for 2009 Impact analysis of Reform in Education and Health Sectors Not programmed Social Accountability Not programmed
Private Sector Development Not programmed Energy Review Not programmed Innovation Study Not programmed Financing of Development Not programmed
Annex 4 Page 1 of 5
Argentina’s Public Debt Overview
Argentina’s public debt stood at US$175 billion as of end-2008, equivalent to 58 percent of GDP. These figures account for the US$6.3 billion of interest and capital arrears owed to the Paris Club and other bilateral creditors, and also include holdouts from the 2005 debt restructuring that total US$29 billion, equivalent to 10 percent of GDP (Table 1). It also includes approximately US$7 billion of provincial debt owed to creditors other than the Federal Government. Medium- and long-term debt currently represents 86 percent of federal performing debt, while short-term debt, mainly due to the Central Bank and other Government agencies, and interest and capital arrears, respectively account for 10 and 4 percent of debt.
Table 1: Stock of Public Debt (US$ billion) 2004 2005 2006 2007 2008
Federal government debt1 191.3 152.2 162.8 173.6 175.0Performing Debt 191.3 128.6 136.7 144.7 146.0
Medium-long term 141.5 116.0 122.9 128.8 125.7Short term 4.5 7.8 8.4 10.5 14.0Arrears 45.3 4.9 5.4 5.5 6.3
Holdouts 0.0 23.6 26.1 28.9 29.0
Provincial debt2 5.8 5.0 5.5 6.1 7.1
Fed. gov. debt as % of GDPexcl. holdouts 126% 73% 64% 56% 49%incl. holdouts 126% 86% 76% 67% 58%
Prov. gov. debt as % of GDP 4% 3% 3% 2% 2%
1\ Includes federally-guaranteed provincial debt2\ Excludes provincial debt with federal government, and federally guaranteed debt with multilateral organizations
Source: Staff calculations based on data from Ministry of Economy. The average maturity of performing debt is close to 12 years and carries an average interest rate of 4.5 percent. More than 60 percent of this debt is owed to bondholders (US$85 billion) at an average interest rate of 5 percent, and a mean maturity of over 15 years (Table 2). Interest rates on bonds range from 11.2 percent (peso-bonds not linked to inflation) to 2.0 percent (inflation-adjusted consolidation bonds). Loans from international organizations account for 11 percent of total public debt, with the US$5.1 billion owed to the IBRD representing 3.7 percent of performing debt.
Annex 4 Page 2 of 5
Table 2: Composition of performing federal debt by type of instrument
InstrumentShare in
Total Debt %
Average maturity in
years
Average interest rate
%
Public Bonds 61% 15.4 5.0Domestic currency 22% - 5.0Foreign currency 39% - 5.2
Loans 29% 6.2 3.5Guaranteed Loans 9% 5.5 4.4International Organizations 11% 6.4 4.0Paris Club and Official Bilaterals* 1% 3.7 3.0Guaranteed Provincial Bonds-BOGAR 8% 5.9 2.0Commercial Banks 1% 13.6 2.0Other Ceditors 0% 1.1 -
Central Bank Advances 6% 1.0 0.0Short-term intra public sector debt 4% 0.9 9.3
TOTAL 100% 11.7 4.5 * Excludes interest and capital arrears. Source: Ministry of Economy.
52 percent of Argentina’s debt is denominated in foreign currency, while the bulk of the remaining 48 percent of peso-denominated debt is indexed to inflation. The share of foreign currency-denominated and inflation-indexed debt has been relatively stable since 2005, and exposure to foreign exchange and inflation risk thus remains important.
Figure 1: Currency composition of performing federal debt
not inflation indexed
11%
inflation indexed
37%
Other currencies
2%Euro10%
US dollar40%
Peso48%
Source: Ministry of Economy.
Since the debt restructuring in 2005, Argentina has not accessed international capital markets. Debt issuances have been concentrated in short-term notes to public sector agencies, the direct placement of bonds to Venezuela and domestic issuances. In 2008, the Government raised US$5.9 billion, of which 46 percent corresponded to intra-public sector notes, mainly allocated to the social security agency, ANSES (49 percent), and the tax collection agency, AFIP (30 percent). 49 percent were obtained from two direct sales for more than US$2.8 billion in Bonar 2015 bonds to Venezuela (see Box 2), while domestic issuances of peso-denominated bonds only accounted for 4 percent.
Annex 4 Page 3 of 5
Figure 2: Bonds and intra-public sector notes (US$ billion)
1.6
2.9
3.0
2.82.53.1
2.0
2.71.0
0.3
1.4
0%
20%
40%
60%
80%
100%
2005 2006 2007 2008
Intra-Public Sector AR peso-BondsVenezuela Other US dollar-Bonds
Note: Calculations based on cash values. Source: Ministry of Economy
Box 1: Venezuela as a financing source Throughout the past four years Venezuela has bought nearly US$7.6 billion (cash value) in Argentine bonds. Even though total outstanding debt to Venezuela only accounts for 7.7 percent of the stock of performing public bonds, given Argentina’s lack of access to international capital markets, issues to this country have become increasingly important. While in 2006 total direct placements to Venezuela amounted to US$2.3 billion and represented 49 percent of that year’s new bond issues, the US$2 billion of the Boden-2015 series bought by Chavez in 2008 account for more than 88 percent of public bond issues during the year (cash value). The last of these operations, at a record high spread of over 1,100 bps and an interest rate close to 15 percent, triggered fears about the Government’s payment capacity and generated turmoil in the bond market. On August 8, 2008, the day on which this last US$1 billion placement to Venezuela was officially announced, interest rates hiked 700 bps above those observed at the beginning of the year, and were also 300 bps higher than those registered at the worst point of the conflict with the farmers earlier in the year.
Argentinean Public Bonds Bought by Venezuela (US$ million)
2005 2006 2007 2008 TOTAL*Nominal Value 1,563 2,865 2,254 2,825 9,506
% of total new bond issues 39.2% 53.4% 34.2% 91.0% 49.9%
Cash Value 1,290 2,300 2,021 2,000 7,611% of total new bond issues 38.3% 49.1% 33.5% 88.3% 46.5%
Return 8.5% 8.1% 10.2% 13.9% 10.4%Spread /UST 434 333 598 1029 620Price 82.6% 80.3% 89.7% 70.8% 80.1%
*Total price, interest rate, spread, and average life figures correspond to nominal value weighted averages
Annex 4 Page 4 of 5
Debt Sustainability Analysis Under the baseline scenario, the public debt-to-GDP ratio would be on a gradual downward path. Based on the macroeconomic assumptions of the base case scenario presented in Table 1 of the main text, public sector debt would fall only slowly from 58.3 percent in 2008 to 57.9 percent of GDP in 2010, as the primary balance is projected to remain well below 3 percent of GDP and growth below 2 percent. Beginning in 2011, as the fiscal accounts and economic growth recover, debt levels are projected to decline at a faster pace, reaching 49.3 percent of GDP in 2013 (Table 3).
Table 3: Base case debt projections* Act. Proj.
2007 2008 2009 2010 2011 2012 2013
Base case scenarioPublic sector debt 1/ 67.3 58.3 58.1 57.9 57.2 53.1 49.4
o/w foreign-currency denominated 23.9 18.6 23.2 23.2 22.9 21.2 19.7o/w domestic debt excl. short-term intra-public sector debt 39.3 35.0 28.7 26.8 24.6 22.7 20.7o/w short-term intra-public sector debt 4.1 4.7 6.1 8.0 9.7 9.2 9.0
Key assumptions for baseline scenarioReal GDP growth (%) 8.7 7.0 1.0 1.5 3.0 3.0 3.0Primary balance (% of GDP) 3.4 3.1 2.4 2.6 2.8 3.1 3.0Overall balance (% of GDP) 1.4 1.3 0.2 0.9 1.0 1.0 1.0
1/ Defined as short-, medium- and long-term Federal Government and federally-guaranteed provincial government debt. Includes intra-public sector debt. Source: Ministry of Economy, and Bank staff estimates. Stress tests show that public debt is particularly sensitive to a decline in real GDP growth. Stress tests show that the most important deterioration of public debt levels vis-à-vis the base case scenario would take place in a scenario of a combined shock to the real domestic interest rate, real GDP growth and primary surplus of 1 standard deviation in 2009 and 2010. In this case, the public debt ratio would increase to 91.2 percent of GDP by end-2010, compared to 57.9 percent under the base case scenario. Another scenario with significantly worse outcomes than the base case is a scenario in which real GDP growth falls two standard deviations below the historical average in 2009 and 2010, which would lead to an increase in the debt stock to 75.3 percent by end-2010 (Figure 4). However, stochastic simulations assign a low probability to the above-mentioned extreme scenarios. According to the results of stochastic simulations, there is a 97.5 percent probability that the debt ratio will remain between 29 percent and 72 percent of GDP during the projection period. There is only 2.5 percent probability that debt will be above 72 and below 29 percent by the end of the projection period (Figure 5).
Annex 4 Page 5 of 5
Figure 4: Debt ratios under sensitivity tests (% of GDP)
Figure 5: Probability of different public debt levels (% of GDP)
0
10
20
30
40
50
60
70
80
90
100
2008 2009 2010 2011 2012 2013
Baseline
Second most extreme stress test (B2)
Most extreme stress test (B4)0
10
20
30
40
50
60
70
80
2008 2009 2010 2011 2012 2013
2.5-25 25-75 75-97.5 Baseline
B2: Real GDP growth is at historical average minus two standard deviations in 2009 and 2010 B4: Combination of shocks to interest rate, GDP growth and primary balance
Annex 5 Page 1 of 7
Banking Sector Update In the last years, the Banking System has consolidated its recovery and seems to have left behind most of the effects of the 2001-2002 crisis. Proactive Central Bank (BCRA) policies coupled with proper banking regulation and supervision were key elements in the recovery process. Beginning on the third quarter of 2003, financial system deposits and credit started to recover and have grown at a strong pace since then (Figure 1). Asset quality has improved as well with non performing loans (NPLs) reaching record low levels in the third quarter of 2008, but with high variations among individual banks. Banks profitability continued to improve and additional capital contributions have helped to further strengthen systemic solvency, but capital adequacy ratios still need some improvements among banks. Although deposits have become the core source of funding for most financial institutions, banks have gradually started to make use of alternative sources of financing to manage their liquidity needs in the form of debt issuance, capital inceptions, loan sales and securitizations, among others.
Figure 1: Financial System Deposits and Loans
0
30,000
60,000
90,000
120,000
150,000
180,000
210,000
240,000
270,000
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Ar$
Mill
ion
Total Loans Total Deposits
Source: Staff calculation on BCRA data.
Nevertheless challenges remain: mainly the increase in long term credit to the private sector and better access to financial services of certain groups of the population, including low-income households, microenterprises and small farmers. In light of the international financial crisis, reforms introduced after the 2001-2002 crisis have helped the system to be better prepared against the turbulences striking from abroad. Local banks are adopting different measures to weather the storm. In addition, Central Bank intervention has become a constant need to assure financial stability. The International Financial Crisis and its effects on the Financial System This section examines the channels of impact the current international financial crisis has taken on the Argentine economy: 1) Stock and Bond Market 2) Banking Sector 3) Real Economy 1) A Volatile Stock and Bond Market One of the most apparent effects of the international crisis has been the surge of a widespread risk aversion. This has translated into increased volatility in the Argentine stock and bond market. As it has been the case with many Latin American countries and other emerging economies, the Argentine stock market has not been able to shield itself from the global developments. During 2008, the Argentina Merval index lost 54 percent of its value. Additionally, the cost of the Credit Default Swap for sovereign debt has increased substantially reaching nearly 50 percent of the insured amount, as of December 2008.
Annex 5 Page 2 of 7
The Argentine bond market has also not been immune from its effects. Prices of Government bonds have deteriorated with a partial rebound in December 2008. On October 31, 2008, S&P downgraded the rating of the Argentine long term and short term debt from B to B- and from B to C, respectively. The lower ratings were based upon a weakening economic and political environment. A similar course of action was taken by Fitch. At the end of December, 2008, the EMBI spread for Argentina was above 1600 bps, representing approximately 1200 bps increase on a year basis. 2) Banking System indicators experienced improvements although liquidity risk has become a concern After the domestic financial crisis of 2002, the banking system gradually recovered and deposits soon became the core source of funding for most financial institutions. As of December 2008, deposits represented more than 70 percent of total funding. In addition, banks have made use of alternative funding to promote financial intermediation and manage their liquidity needs in the form of debt issuance, capital contributions, loan sales and securitizations, among others.
Figure 4: Banking system profitability
-70.00%
-60.00%
-50.00%
-40.00%
-30.00%
-20.00%
-10.00%
0.00%
10.00%
20.00%
98 99 00 01 02 03 04 05 06 07 08*
-10.00%
-8.00%
-6.00%
-4.00%
-2.00%
0.00%
2.00%
4.00%
ROE ROA (right axis)
*As of October 2008. Source: Staff calculation on BCRA data.
Despite the international financial crisis, the overall profitability of the financial
system continued to improve during 2008 with a ROA of 1.6 percent and ROE of 14 percent as of October, 2008 (Figure 4). Furthermore, NPLs as a percentage of total loans maintained its decreasing pattern and achieved new record low levels (below 3 percent) in the third quarter of 2008 while provisions covered approximately 135 percent of NPLs. The capital adequacy ratio for the system appears adequate, although there is variability among banks. Under current circumstances results have experienced some pressures due mainly to a gradual slowdown in origination volumes coupled with increasing funding costs, growing administrative expenses and the poor performance of investments in public bonds (most of them marked to market). Systemic liquidity measured as liquid assets (excluding BCRA paper) relative to total deposits remains at adequate levels. As of October 2008, these liquidity levels were 25.5 percent relative to 21.1 percent a year earlier. Liquidity Stress Episodes Remain
In the last year and a half the Argentine banking system has witnessed the development of three liquidity shortages that placed financial institutions under relative stress. These successive episodes have contributed to show the ability and commitment of the BCRA to preserve financial stability: • In the second half of 2007, the Argentine financial system experienced the first significant episode of liquidity stress as a consequence of the negative prospects attributed to the subprime crisis. Yet, by the end of the year the situation went back to normal as BCRA
Annex 5 Page 3 of 7
interventions contributed to a recovery of confidence. • Another situation of distress took place in the second quarter of 2008, a consequence of the farmers’ lock-out. In this case, the system lost approximately Ar$ 3,300 million in deposits and the BADLAR rate rose from an average of 9 percent observed in the first quarter to a peak of 18 percent. A package of measures introduced by the BCRA brought relief to the system. • Finally, a third episode of liquidity stress was unleashed in November 2008 due to the nationalization of private pension funds. As a result, deposits fell by Ar$ 4000 million pesos on average as of December 2008 relative to the levels observed in October 2008. Interest rate on time deposits, measured in terms of the BADLAR benchmark rate, increased significantly from around 12 percent to a peak of 25 percent in November while asset dollarization stepped in as a reasonable response to existing uncertainty. Interbank call market rate soared from 10 percent to a 19.5 percent in November evidencing an incipient funding shortfall. The Central Bank introduced additional measures to again ease the stress. Adverse conditions seem to have eased but banks continue to maintain a conservative approach. Liquidity Distribution within the System The liquidity stress seems to be evidencing an uneven distribution of liquidity within the system. The value and interest rate of interbank money market operations from entities that only lend funds to entities that only borrow
funds increased from a level of less than 10 percent in October to almost 19 percent in the first week of December 2008. Additionally, time deposits originally held by AFJPs which now belong to ANSES pose additional uncertainty towards liquidity distribution among the system. At this point, the situation seems to be contained although elevated costs of funding still persist.
BCRA Commitment to Enhance Systemic Liquidity Starting in 2007 and throughout 2008, BCRA has been implementing several measures aimed at enhancing systemic liquidity, achieve exchange rate stability and ultimately assure financial stability. Among these measures the most traditional ones include repurchases of Central Bank Notes (Lebac and Nobac), repo facilities, open market operations of Government securities and a liquidity window; while less common and more sophisticated actions include the acceptance of more exotic assets as collateral to receive liquidity assistance. Recently, BCRA introduced additional tools to boost systemic liquidity, mainly the opening of a window to pre-approve collateral in order to obtain liquidity upon request; and redefined its strategy in order to incorporate a wider range of financial entities (mainly smaller and segment oriented entities) in its liquidity bailout program. For the time being, actions taken by the BCRA seem to have maintained adverse conditions under control. Moreover, the BCRA has demonstrated its willingness and ability to preserve financial stability.
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3) Strong Growth on the Real Side of the Economy Higher disposable income resulting from strong economic growth triggered increased household consumption and demand for credit. The overall level of household indebtedness appears sound. Despite the surge in consumer and housing credit in the recent years, the ratio of indebtedness to formal wages only increased slightly to over 2 percent, which is still a comparatively low level. While the economy continues to perform relatively strong, there are first signs that the global economic situation led to a deceleration of growth most likely due to a slowdown of exports of primary goods and agricultural manufactures. Most recent forecasts predict a further slowdown of economic activity for 2009. If current forecasts finally materialized it could have negative implications for the financial system in terms of financial intermediation, asset quality, profitability and liquidity. Banks Have Left Behind Many of the Effects of the 2001-2002 Crisis Figure 8: Deposits Distribution by Sector
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50,000
100,000
150,000
200,000
250,000
300,000
2000 2002 2008
Ar$
Mill
ion
Public Sector Private Sector
Source: Staff calculation on BCRA data. Economic recovery consolidation and the gradual improvement in confidence have contributed to the normalization of total system liabilities. In the last years, private and public deposits have experienced further growth (Figure 8).
As of December 2008, total deposits represented more than 70 percent of total funding relative to 62 percent in December 2005. However, measured as a percentage of GDP, deposits are still below pre crisis level. Moreover, deposits are still very short term. More than 75 percent of the deposits are for less than 60 days, which continues to limit the capacity of banks to provide long-term credit. Consumer and commercial credit maintains its dynamism but long term credit still shows signs of stagnation. While consumer lending has significantly surpassed its pre-crisis level, mortgage and corporate credit still have the potential for further improvement. As a ratio to GDP, private sector credit represents approximately 12 percent compared to 23 percent prior to the crisis (Figure 11) Figure 11: Private sector loans evolution
0,00%
5,00%
10,00%
15,00%
20,00%
25,00%
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
(% of GDP)
Source: Staff calculation on BCRA data. Banks continued with the process of reducing their balance sheet mismatches (interest rates, currency and term) The exposure to foreign currency mismatches has been reduced significantly thanks in part to BCRA regulation. In particular, dollar denominated credits may only be granted to borrowers whose income is also denominated in foreign currency. Additionally, these loans have to be
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funded with foreign currency deposits. As of mid- 2008, foreign currency mismatch relative to net worth had declined to 27.3 percent from 40 percent as of end-2005. Interest rate mismatch has also decreased from 124 percent of net worth as of December 2005 to about 75 percent of net worth as of June 2008. Therefore, the risk of interest rate mismatch shows up as moderate while different measures are being considered to reduce it even further such as the introduction of interest rate swaps. Part of the improvement observed in balance sheet mismatch indicators should also be attributed to a recovery in net worth figures in the last years (Figure 13) As of June 2008, the banking system had reported seven consecutive semesters of profits (Figure 4). In general terms, recovery of systemic profitability can be explained by increasing banking intermediation activity mainly related to the private sector. Specifically, high interest rate margins and the introduction of new products combined with a wider client base and increased fees and commissions were the main drivers behind the recovery. However, part of the positive effect on net results has been recently offset by the volatile performance of bonds and securities holdings and increasing administrative expenses. Overall, the system seems to have stabilized and strengthened its recurrent earnings while declining NPLs and loan loss provisioning provide additional profitability enhancements. Still, the full effects of the recent international crisis are not yet apparent. Since 2005, banks have managed to reduce significantly their exposure to the public sector (Figure 14). In particular, public sector share (including BCRA
paper) of total system assets decreased from a high 32 percent in December 2005 to approximately 19 percent in October 2008. Different BCRA requirements such as the introduction in July 2007 of a 35 percent limit for holdings of public related assets have contributed to the observed reduction in public sector exposure. Figure 13: Banking system net worth
Source: Staff calculation on BCRA data.
The system has improved its efficiency since 2003. The efficiency ratio measured as financial margin relative to operating expenses has increased from 93 percent in 2003 to 169 percent in October 2008. However, systemic efficiency might deteriorate as financial intermediation decelerates and operating expenses increase due in part to effects of the international financial crisis. The capitalization of the financial system has improved during the last years as a result of an increase in earnings and new capital contributions (Figure 13). A more favorable operating environment and a recovery of confidence have allowed the financial sector to increase financial intermediation and stabilize its sources of recurrent earnings. BCRA regulations have also contributed to enhance systemic solvency. Improvements in asset quality have also contributed to the strengthening of capital levels. Moreover, legal proceedings (amparos)
0
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Annex 5 Page 6 of 7
inherited from the crisis are no longer significant for the system. Therefore, the systemic capital adequacy ratio has improved in the last years reaching a level of 17.1 percent in October 2008 relative to 14 percent in December 2003. Figure 14: System exposure to public sector
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
35.00%
40.00%
2000 2001 2002 2003 2004 2005 2006 2007 2008
Public Sector Assets / Total Assets + Net worth
*As of October 2008. Source: Staff calculation on BCRA data. During the last three years, banks have cancelled most of the BCRA assistance received during the crisis. Moreover, the number of entities indebted declined from 24 to 1. As of June 2008, banking debt to the BCRA represented 0.4 percent of total system liabilities. Therefore, this debt has finally disappeared from banks´ balance sheets. As a result of the 2001-2002 crisis, some foreign banks left the country and others including local banks reduced their operations in the market. However, since 2004 increasing financial intermediation has led to a marked recovery in the number of employees, branches and ATMs. The number of entities has remained stable, above 80 franchises, after the significant dropped experienced during the crisis and the aftermath. The regulatory environment ruling the Argentine banking system has been significantly enhanced after the 2001-2002 crisis. At this moment, the system exhibits a solid regulatory framework which is in line with international
standards. In addition, BCRA has proved to be very effective in supervising and enforcing current regulation. The Current Challenges and Vulnerabilities During the last years, the system has benefitted from high consumer lending interest rates and low deposits rates, even negative in real terms. However, increased competition among institutions added to the episodes of liquidity shortages have led to a reduction in the interest rate gap. Moreover, deposits interest rates which are currently high in nominal terms are also positive in real terms thanks in part to a slowdown in inflation (Figure 17). The tax on financial transactions is another pending issue that does not show signs of an imminent resolution. The financial transaction tax lowers the demand for payment services and reduces banks´ fee-based income. However, given its importance in fiscal revenues, it is unlikely that this tax will be eliminated in the foreseeable future. Domestic supply of long-term lending to the private sector remains a major challenge. Although credit has recovered since the crisis, major improvements have only been observed in consumer lending. In addition, available long term credit usually supposes a relatively high cost of financing. As part of the steps for long-term credit recovery, measures are needed to reconstitute domestic long-term funding and therefore reduce the risks of long term lending. These efforts become even more important taking into account the effects of the international financial crisis.
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There have not been any significant improvements in the reconstitution of long term funding in local currency. The system has not been able to revert to the predominance of very short-term deposit funding as deposit confidence is still very fragile. During the last years, private pension funds (AFJPs) and life insurance companies were seen as options to fill the gap of long-term financing. However, no significant improvements were achieved except for their contribution in the development of the structured finance market which still remains mostly short-term. The recent nationalization of private pension funds has provided ANSES with the opportunity and the challenge of developing missing long term financing.
Figure 17: Time deposits interest rate (real terms)
-10
-8
-6
-4
-2
0
2
4
6
ene-05
feb-05
mar-05
abr-05
may-05
jun-05
jul-05
ago-05
sep-05
oct-05
nov-05
dic-05
ene-06
feb-06
mar-06
abr-06
may-06
jun-06
jul-06
ago-06
sep-06
oct-06
nov-06
dic-06
ene-07
feb-07
mar-07
abr-07
may-07
jun-07
jul-07
ago-07
sep-07
oct-07
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dic-07
ene-08
feb-08
mar-08
abr-08
may-08
jun-08
jul-08
ago-08
sep-08
oct-08
30 days More than 60 days
Ann
ual %
, in
real
term
s. M
onth
ly ave
rage
*As of October 2008. Source: Staff calculation on BCRA data.
Financial trusts have consolidated their role as an alternative source of funding linking banks and long term investors. In particular, after the financial crisis of 2002, securitizations have emerged as an attractive investment choice in Argentina. Despite the current international financial crisis, the domestic securitization market has maintained its dynamism compared to other financial assets such as corporate bond issuances in Argentina. The Argentine securitization market has also been very active when compared to other markets in the region. However, the market is still concentrated in consumer
loans and credit card receivables securitizations.
Broadening access to financial services to the under-served remains a major challenge. Low income households, small farmers and microenterprises continue to have limited access to financial services although some progress has been observed. The domestic microfinance industry remains underdeveloped relative to other countries in the region. However, many improvements have been introduced on this matter such as the “Microcredit Promotion Law” passed in 2006 that assigns specific funds to support originators of micro-credit. The BCRA has also introduced certain facilities to promote the microcredit industry. Although, commercial banks presence in the microcredit industry is still low, many banks are showing increased interest in the business. Additionally, credit to small and medium sized enterprises has still significant room for improvement. What lies ahead?
Economic prospects for the upcoming months are not very promising. However, the banking system continues to exhibit relatively good performance as it is evidenced by most financial indicators. In addition, it benefits from the legacy of the 2001-2002 crisis in terms of enhanced regulation and more conservative business strategies. Therefore, the system seems to have some cushion to resist a deteriorating operating environment. Moreover, the menu of measures introduced by the BCRA during the last year has so far demonstrated its willingness and ability to preserve financial stability.
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IBRD and Carbon Finance Program Summary
Strategic Approach of the Proposed CPS 1. The 2010-2012 CPS will continue to focus on the three pillars successfully supported under the previous CAS: (i) sustainable growth with equity, (ii) social inclusion, and (iii) improved governance. However, there will be significant evolution in the support provided as this flexible but focused framework will allow rebalancing the portfolio toward greater emphasis on social inclusion as the Bank’s key response to the global economic crisis. The CPS proposes the following approach:
2. Joint work with the Government in sectors or themes that: (1) are strategic and where there is strong demand not only from the authorities but from Argentine society more generally, and (2) in which the Bank has developed good dialogue with the authorities and feels comfortable with the basic policy and institutional framework. The progress in implementing the previous CAS– particularly in project preparation and the design of important and high quality investment initiatives – has demonstrated that there is sufficient space to develop an ambitious investment partnership despite the lack of coincidence is some areas of the Government’s agenda.
3. The CPS will focus on cross-cutting issues such as governance and institutional strengthening through a focus on public sector governance work both on the supply and demand-side, in line with the Bank’s GAC agenda, as well as through greater integration and mainstreaming of public sector governance across sectors. The latter will be achieved through appropriate institutional strengthening activities tailored to the needs of the specific sector, complemented by specific portfolio management activities to enhance the quality of project management and impact.
4. The CPS is performance-based. One inherent characteristic of the investment lending-only portfolio is its self-selectivity. Along with macroeconomic stability, portfolio management and fiduciary performance are among the factors that will determine actual lending levels. At the sector level, the quality of the policy framework and implementation performance will continue to determine the pace and extent of new lending. At the project level, Bank-financed activities will continue to be designed around clear development outcomes and incorporate incentives toward those outcomes.
5. The CPS will focus on the national level of government and, in line with the federal nature of government in Argentina, seek to deepen its engagement with the subnational levels of government. This aspect focuses on strengthening the partnership with subnational governments, particularly provinces. Strategic engagement with the provinces takes place on the basis of the estimated social and economic impact, particularly the poverty impact, as well provincial leadership and demonstrated reform commitment. Collaboration with subnational governments will be carried out through operations channeled through the national Government or operations and other support in close coordination with (and duly guaranteed by) the national Government to ensure full synergies between federal and subnational operations. This strategy includes using AAA and NLTA to support conceptualizing development approaches and investment loans in provinces that have demonstrated strong capacity to implement. To further complement
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lending and responding to strong subnational governments’ demands for Bank support, the use of FFS at the subnational levels of government, such as the on-going FFS with Corrientes province, may be expanded. Multi-sector SWAps, through which strategic impact is feasible, are also explored in small provinces with high levels of poverty.
6. The CPS proposes to capitalize on the value-added of its expertise and international experience by preparing and implementing more complex and likely larger programs or projects. Such an approach is responsive to the Government’s expectations of the partnership and is more likely to make a significant impact on growth constraints and/or poverty traps.
7. The Bank will strengthen its AAA program, in particular by being more selective and ensuring active client participation in identifying any significant activities to be carried out. The key instrument to strengthen client demand will be to prepare with the client annually a list of AAA to be carried out the following FY during the spring portfolio review in which all main counterpart agencies participate.
8. The CPS seeks to improve the implementation of the Bank portfolio. A key lesson of the 2006 CAS is that the shift from adjustment lending to an all-investment lending program has strained the project implementation capacity of the Government. This CPS responds to those issues. The authorities will implement --with the support of an IDF grant – the new procedures referred to in paragraph 62 (a) of the main text. The country team is reviewing with the authorities the modalities of support to provinces both to reduce administrative constraints and more importantly respond more flexibly to requests from selected subnational governments.
9. The CPS proposes further efforts to improve fiduciary safeguards. The experience of the Fiduciary Action Plan under the last CAS has shown that attempts to ring-fence Bank investments from potential fiduciary risks can be designed to expand their impact beyond discrete Bank investments to encompass a broader sector and/or national dimension. There are significant benefits to this bottom-up fiduciary approach for developing a relevant governance dialogue in a country where there have traditionally been misgivings regarding the role of IFIs in this area. The pilot nature of project-level innovations like SEPA and their unpretentious approach in resolving practical fiduciary challenges have opened productive opportunities for cooperation which could generate important benefits to the country as the pilots are successfully mainstreamed.
The WBG’s Indicative 2010-2012 Program
10. The Country Team is proposing an IBRD lending envelope of US$ 3.3 billion for FY10-FY12. As mentioned previously, the proposed program would provide selective support under the three pillars to influence specific outcomes in support of Argentina’s strategic development goals. Annex 2 elaborates the outcomes and milestones the activities are expected to support, and an indicative listing of the planned activities is detailed below.
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Table 1: CPS Program Objectives and Select Activities Government of Argentina Strategic Objectives
Pillar I Sustainable Growth with Equity
Pillar II: Social Inclusion
Pillar III: Improved Governance
Outcomes toward which the CPS will contribute Upgrade Argentina’s infrastructure to address potential bottlenecks to competitiveness, and underpin medium-term growth and poverty alleviation Improve competitiveness, quality, and exports of agriculture and livestock production Address a growing problem of resource degradation
Consolidate the reduction in poverty and expand efforts to reverse the longer-term poverty trend by increasing household incomes and integrating marginalized groups into the productive marketplace Consolidate improvements in health indicators and improve quality of education while reducing drop out rates
Strengthen the effectiveness, efficiency, transparency and accountability of public sector management Expand performance management and improve the quality of public expenditure, enhance service delivery outcomes and trust in institutions Strengthen public sector capacity to spur investment and growth
Selected Programs for Support • Improving the transport
network • Increasing public transport
ridership • Increasing rural access to
electricity supply • Improved access to water
and sanitation • Increase the diversification
of production in the agricultural sector
• Improving employability of the most vulnerable
• Expansion of provincial health insurance
• Hospital restructuring and expansion
• Strengthening health sector governance
• Universal access to primary education
• Lower teen dropout rates
• Strengthening transparency of decision-making, increase access to information
• Expanding effective performance-management and performance-informed budgeting
• Ensuring compliance with the Fiscal Responsibility Law
Cross-Cutting Themes Strengthen capacity of the Government to prepare, approve and implement investment projects in line with the requirements of a medium-term investment partnership. Ensure awareness and knowledge with Government about IBRD financial products that could provide flexibility to Argentina in managing its debt, including the ability to change the financial characteristics of existing and future loans as to better manage the financial risks relating to currency, interest rate, roll over and commodity price volatility
Pillar 1: Sustainable Growth with Equity
11. Country Economic Memorandum (CEM). This key AAA activity will review short- and long-term determinants of economic growth and examine the role of macroeconomic policies in responding to external shocks and their effectiveness in mitigating output volatility. It will study the link between the quality and composition of trade, as well as its long-term growth potential. In addition, and among other issues, it will look at the link between business environment and firm-level productivity.
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12. Private Sector Development, Innovation and Competitiveness Study. This study would analyze the evolution of credit and support the authorities in identifying alternative sources of credit to maintain its availability to the economy’s most vulnerable sectors. This would include analysis of countries – to be identified in conjunction with the Central Bank -- representing the Americas, Europe and Asia and utilizing the value added of the Bank’s international perspective to draw lessons from other contexts to inform the formulation of a strategy for Argentina.
• Objective: Upgrade Argentina’s infrastructure to address potential bottlenecks to competitiveness, and underpin medium-term growth and poverty alleviation
13. Over the next several years, the Bank will both broaden the range of infrastructure sectors it supports in Argentina and deepen the impact of its technical value-added by focusing on those interventions within sectors that make best use of the Bank’s knowledge and comparative advantage in complex, multi-jurisdictional projects. Many of these projects (particularly in urban transport, water supply/sanitation and urban flood protection/drainage) are also expected to expand the infrastructure assets of the poor, including indigenous populations. While most of the Bank’s infrastructure investments under the 2006-2008 CAS supported maintenance and expansion of the national and subnational highway networks, the new portfolio will present a more diversified picture with several complex investment operations that leverage the Bank’s technical value-added and a growing focus on improved efficiency and poverty alleviation. The Bank will undertake an innovative approach in supporting the Government’s objective, with activities designed to improve the quality and safety of the transport network, increase public transport ridership, increase rural access to electricity supply, and improved access to water and sanitation. New activities to support these objectives include:
14. Matanza-Riachuelo Basin Sustainable Development Project. The Bank will contribute toward improved access to water and sanitation with this major environmental initiative. The US$840 million loan (APL-1) will finance most of the transmission, treatment and disposal infrastructure needed to provide the infrastructure backbone for cleaning up an urban river basin that is home to some 3.5 million people and more than 4,000 industrial facilities stretching across 14 municipalities and the city of Buenos Aires. An APL-2 loan in support of the same project is likely to be presented to the board after the end of the proposed 2009-2012 CPS period.
15. Rosario Metropolitan Area Infrastructure Project. The objectives of this proposed two stage APL program are: (i) to reduce logistics costs for cargo shipped to and from the Port of Rosario by improving accesses to port facilities and increasing the railway’s modal share in freight transport; and (ii) to improve the quality of life in the Metropolitan Area of Rosario by reducing traffic congestion and using the urban land released by the project (i.e. railway tracks, warehousing and maneuver facilities) to improve the quality of the urban environment. An APL-1 loan for US$460 million is expected to be delivered under this CPS. Additional analytical work on logistics bottlenecks hampering development of Argentina’s poor northwest as well as the Buenos Aires container port system may provide the basis for further engagement.
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16. Metropolitan Areas Urban Transport project (PTUMA). This proposed two-phase APL would expand Bank support for urban transport beyond the Greater Buenos Aires area and build on the results of Buenos Aires Urban Transport Project (Proyecto de Transporte Urbano de Buenos Aires, PTUBA). PTUMA is being designed to improve the quality, sustainability and efficiency of urban transport systems in selected cities. The objectives are to: (i) support the creation of institutional frameworks and initiatives that enhance the authorities’ ability to make decisions, plan, set priority and assign resource for public transport; (ii) improve the physical integration of public transport networks and safety conditions in Greater Buenos Aires; (iii) improve the quality and operation of existing public transport systems in selected cities.
17. National Urban Drainage project. Flooding is a major natural hazard in Argentina. Floodplains cover over 1/3 of the country's geographic area and include most of the developed industrial and agricultural zones. Over the past 50 years, the country has seen 11 major floods. In terms of GDP exposure to flood risk, Argentina ranks number two in LAC (behind Ecuador) in GDP terms and number one in absolute terms. The proposed operation would build on the ongoing Argentina Flood Prevention and Drainage APL-2 loan to further strengthen flood protection planning and defenses, primarily in Argentina's highly vulnerable Littoral Provinces.
18. National Highway Assets Maintenance III project. Under the ongoing National Highway Asset Management program (APL-1 and APL-2 loans for US$200m and US$400m, respectively), the Bank has supported a successful roll-out of Rehabilitation and Maintenance contracts (CREMAs) with private contractors to nearly 15,000 km of the non-concessioned national highway network. The Bank may continue support to highway maintenance as first-generation CREMA contracts turn-over and are replaced by contracts with greater emphasis on maintenance and less on rehabilitation.
19. Provincial Roads Project (Additional Financing). This operation would help to complete the rehabilitation and/or upgrading of nearly 1,970 km of provincial roads, in part by extending the use of Rehabilitation and Maintenance Contracts (CREMAs).
20. Córdoba Road Infrastructure (Additional Financing). This operation would allow the execution of rehabilitation and maintenance contracts (CREMAs) covering 287 km of the provincial road network and a paving contract for a selected segment of 48.9 km. It would build on achievements of the ongoing project, contributing to reducing the maintenance and infrastructure backlog and enabling the Province’s road assets to keep pace with the demands of its agriculture and tourism sectors.
21. Second Generation Road Safety project. The Bank may provide support to the National Road Safety Agency to reduce Argentina’s high traffic injury and fatality rates. The objective of the proposed operation would be to support the reduction of road traffic fatalities and injuries and resulting economic losses through the development of improved institutional capacity to manage for results, enhanced monitoring and evaluation of road safety performance, and the achievement of safety improvements with targeted investments on defined pilot corridors. The Bank is leveraging its resources in Argentina to bring the best in international practice and knowledge through pilot
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initiatives such as iRAP (International Road Assessment Program) and the Global Road Safety Facility (or GRSF).
22. Buenos Aires Province Sustainable Infrastructure Development Project (Additional Financing). This operation will scale up a successful operation covering water supply and sanitation, provincial roads and storm water drainage in the Province of Buenos Aires, primarily in Greater Buenos Aires. The additional financing is expected to provide access to sanitation to 120,000 poor beneficiaries, improve stormwater drainage in an area with 555,000 poor beneficiaries and rehabilitate 185 km of provincial roads.
23. Reducing Logistics Costs in the Buenos Aires Container Port System and the Northwest (Logistics II). In 2006, the Bank completed a study entitled Argentina: The Challenge of Reducing Logistics Costs. The study identified four areas that need to be addressed in the short/medium term: road and rail bottlenecks (and their interface with ports) in the area of Rosario, capacity constraints in the Port of Buenos Aires, high logistics costs in the NOA region and the lack of an adequate institutional set up to improve logistics performance. The logistics problems in Rosario will be addressed by the Rosario Metropolitan Area Infrastructure Project. The other areas will be the subject of a deeper analysis to be conducted during 2009. More concretely, the proposed analysis will focus in the explanatory variables of high logistics costs in the northwest region (NOA) as well as policy alternatives to avoid unnecessary transportation costs that would arise from the Port of Buenos Aires operating at full capacity. Finally, the study will give guidelines on how to set up a National Logistics Council that could become a forum to anticipate and propose solutions to logistics bottlenecks in Argentina.
24. Rural Transport Assessment. This study will analyze transportation access to health, education and other public services as well as obstacles to the movement of goods in rural areas. The objective will be to assess the rural and/or secondary road networks, including coverage, quality of networks, management and maintenance practices, available financing and corresponding expenditures. To provide a useful national snapshot of the situation, the study will be based on a sample of provinces so as to provide sufficient depth, but the sample should be representative of the national situation.
25. Assessment of water and sanitation service (WSS) providers. Argentina has more than 1700 public, private and cooperative WSS service providers of different sizes. This would assess the performance of the larger WSS service providers as well as a sample of smaller ones to identify strengthening needs.
26. The Bank and Borrower may also consider a Rural Electrification and Energy Efficiency Project (PERMER II) and/or a Power Transmission Project. The PERMER II project would help further develop the energy efficiency and renewable energy markets, building on the PERMER project and the GEF-financed energy efficiency operation. Activities would include investments in rural electrification and small hydro generation projects and mechanisms to foster investments in energy efficiency. A Power Transmission Project would seek to increase availability, quality and reliability of the power supply network, increasing the competitiveness of the country and fostering economic growth. The project would finance the construction/upgrade of key regional transmission lines identified as high priority to reduce risks of power supply
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interruptions and to increase service quality. Such reinforcements will also help reduce the total fuel cost of the power sector by lessening transmission constraints.
• Objective: Improve competitiveness, quality, and exports of agriculture and livestock production
27. The CPS will contribute to increasing the diversification of production in the agricultural sector. Bank work will continue to focus on enhancing competitiveness of the non-Pampean economies and increasing the assets and opportunities of small farmers and the rural poor. At the national level, the Bank will seek to engage the Government in a discussion of agricultural policy options that reflect the changing international and domestic context based on just-in-time analytical work. The Government has recently sought additional lending from both the IDB and the World Bank (which approved a US$300 million loan in October, 2008) for the Second Provincial Agricultural Development (PROSAP) project. It has also received an additional financing loan for the PROINDER small farmers project (US$45 million in July, 2007) to scale up the successful strategy of supporting productive and community projects for small farmers and strengthening institutional capacities for the implementation of rural development strategies at the national and provincial level. New activities are proposed to include the following.
28. Rural Poverty Reduction Project. The project would be complementary to PROINDER and PROSAP, targeting indigenous people, rural workers, landless farmers, and other rural citizens who are among the most impoverished in Argentina. The project is being designed under a CDD format and would include resources for strengthening the newly-formed Subsecretariat for Rural Development and Family Agriculture.
• Objective: Address a growing problem of resource degradation
29. The Bank program will support increasing the areas of forest and forest plantations under sustainable management, strengthen urban and solid waste management, improve environmental management and governance, and increase access to international carbon markets. Support for green (natural resources) issues will build on ongoing operations in Sustainable Natural Resource Management and Biodiversity Conservation in Productive Forestry Landscapes (GEF). The proposed CPS will expand the Bank’s work on brown environmental issues through the previously discussed Matanza-Riachuelo Basin Sustainable Development Project.
30. Rural Corridors and Biodiversity Conservation project. This GEF-funded project would assist the Government of Argentina in its efforts to conserve biodiversity of global and national importance by strengthening the Protected Areas System. At least six new protected areas (including marine and terrestrial ecosystems) are to be incorporated into the national system and effectively managed. The operation would stitch together conservation corridors necessary for the survival of several endangered species and the sustainable management/ use of native forest and arid steppe.
31. Sustainable Industrial Development Project. The main objective of this project would be to help small and medium enterprises (SMEs) in Argentina with inadequate
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access to credit to improve their compliance with environmental regulations, while simultaneously boosting their industrial competitiveness. Focused on selected highly polluting sectors, this would support Government efforts to better control, manage, and prevent industrial pollution of river basins and other sensitive ecosystems. The project would support conversion of small and medium-size industries in highly polluting sectors to cleaner production processes.
32. Argentina’s Third National Communication. Bank support for this activity under the UNFCCC is expected to deepen the absorption of climate change considerations in sectoral planning, particularly in infrastructure and agriculture.
33. Country Environmental Assessment (CEA) or Strategic Environmental Assessments (SEA). This analytical work is expected to help Argentina and the Bank to set priorities for additional investments and was identified during CAS consultations as one of the key country-level diagnostic tools which will help evaluate environmental priorities for Argentina, the environmental implications of key policies, and the country’s capacity to address the priorities identified. In parallel, SEAs will provide analytical options and participatory approaches for mainstreaming and upstreaming environmental and social considerations in policies, plans and programs to influence decision-making and implementation processes at the strategic level in different sectors.
34. Carbon Finance (CF). The Bank will complement the above lending and analytical work with the Petrobras Gas Transport System project, a CF transaction to recover waste heat from the combustion turbines of the gas compression plants on the San Martín and Neuba II gas pipelines. By converting waste heat to energy, the project will reduce the need for new thermal electricity generation, thereby limiting future greenhouse gas emissions. The Petrobras project will complement two ongoing CF transactions: The Salta Landfill Gas Capture Project (FY08) (which flares methane gas release by three municipal landfills) and the Olavarría Methane Capture Project (FY05) (landfill gas flaring at one municipal landfill). The pipeline for future CF transaction will be built using the ongoing CF Assist grant for the national Secretariat of Environment.
Pillar 2: Social Inclusion
• Objective: Consolidate the reduction in poverty and expand efforts to reverse the longer-term poverty trend by increasing household incomes and integrating marginalized groups into the productive marketplace
35. A key element of the Bank’s ongoing and future policy dialogue toward this objective is to improve the employability of the most vulnerable. The focus of social service delivery has shifted from emergency relief and expanding access to basic services to better inter-governmental coordination and improved quality of services. The Bank is therefore supporting the Government in facilitating the transition of beneficiaries out of Jefes and developing a longer term strategy for social protection. According to the discussions with the national Government, the Bank is planning to design and implement new operations to extend and complement the existing social protection programs.
Annex 6 Page 9 of 12
36. Basic Protection Project. The first phase of this two-phase APL focus on increasing the effectiveness of Argentina’s income transfer programs for the unemployed and families with children by improving design features, transparency and accountability in two core social protection programs and transferring beneficiaries from other, less effective schemes to them. It would seek to improve the equity, transparency, and efficiency of social programs and on the Seguro Program to: (i) create conditions to extend the services of Seguro to the population generally, beyond the former beneficiaries of Plan Jefes (at this time the only ones eligible); (ii) improve the execution and adaptation of employment services, taking into consideration the particular conditions in each locality where the program is executed; and (iii) adapt the benefits offered to the participants to ensure appropriate support and incentives.
37. Social Protection Survey. This AAA will be undertaken, under the above project, to provide updated information on the trends and impacts of social protection programs. The Bank will enhance the Government’s monitoring capacity by providing technical assistance in the design and implementation of the survey.
38. Safety Nets AAA. The proposed AAA would study the key social programs to identify beneficiaries, overlaps, and conflicts to propose integration options to increase the coverage of the most effective programs while improving the efficiency and effectiveness of Argentina’s safety net.
39. Impact of Labor Market Development on Inequality AAA. The objective of this programmatic AAA is to deepen the analysis of the effects of labor and social protection programs on income inequality, and generate dialogue among stakeholders about policy approaches to reduce inequality and expand opportunities. The AAA will generate new quantitative data for analysis of income inequality at the provincial level. It will focus on answering key policy questions facing the Government including: (i) how has income inequality in Argentina evolved over the past 10 years? (ii) why has inequality been stagnant despite reductions in poverty and unemployment since the 2002 crisis? (iii) what is the potential impact of existing social protection programs and labor market policies on inequality over the medium term? (iv) what are the equity impacts of some specific public spending policies (in particular, social spending and subsidies)? (v) what potential policy reforms could reduce inequality and expand opportunities – through transfer and labor market programs?
40. An additional aspect that has been explored jointly by the Bank and the Argentine Government at various levels is the possibility of supporting social inclusion policies at the provincial level. The implementation of programs that complement (in a coordinated manner) the services of the national programs, financed and executed by provincial governments, is a challenge which the Bank can help address based on its experience in other countries and by providing technical training for their start up.
• Objective: Consolidate improvements in health indicators and improve quality of education while reducing drop out rates
41. The Bank aims to expand the scope of its support for the realization of this goal through (i) expansion of health coverage through provincial health insurance, (ii) hospital
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restructuring and expansion, and (iii) strengthening the leadership of the Ministry of Health and health sector governance. Specific Bank-financed activities will focus on promoting institutional transformations, improving information systems, increasing transparency of outcome data, and providing financial incentives for provincial health systems.
42. The health project to continue the Plan Nacer would support the best options to improve health outcomes and coverage. Currently this option is to expand provincial health insurance, an alternative that was already identified in the San Nicolás Agreement, as the base of the current Plan Nacer, that aimed at addressing insurance coverage at the national level, supported by the provincial structure. The project would move forward with several innovations, such as: (i) expanding the age groups that would benefit from existing provincial insurance arrangements (for example to all school age children); (ii) defining a larger service scope to be guaranteed (for example, related to chronic, non-transmissible diseases); and (iii) introducing health quality attributes to services (for example reducing waiting lists). Once again, the federal administration, acting as primus inter pares with all the provinces, could utilize the experience of the Plan Nacer in terms of outcomes, incentives, and administrative systems to support the provinces in extending effective coverage to other population groups and in a greater number of services. This project would render positive results in terms of equity of access and health outcomes, including (i) gradual improvement in equity of access, by providing all Argentines with a similar health plan regardless of where they live; and (ii) with the services to be defined, a structured and comprehensive approach could be generated to address the disease load associated with chronic conditions such as cardiovascular diseases, diabetes, cancer and regional pathologies affecting in greater level the poorest population.
43. Health Sector Support Project. Based on AAA on strengthening management and governance of the public hospitals network, the project would introduce a new management system for the hospitals network that would improve the articulation between first and second levels of health care. There would be clear criteria for patient references to improve quality of health care and optimize use of resources. The new management model would determine decisions to recover existing facilities and to construct new ones. The Bank support to the funding of new health facilities would be provided within a result-based framework, similar to existing Bank projects in Argentina, to ensure close coordination between national and provincial health authorities.
44. Essential Public Health Functions (FESP) (Additional Financing). The proposed additional financing would include support for a Health Human Resources program. Argentina has a serious imbalance in the health sector’s human resources. In the public sector the clearest indicator of the problem is that there are too few nurses for the number of doctors, with the source of the problem being both too many medical doctors and too few nurses. The project would focus mainly on addressing the deficit of nurses. Key project activities in this direction would be further professionalization of nurses and a scholarship program. However, an improved supply of nurses by itself will not solve the problem. The project would also work with health institutions in the provinces to ensure improved hiring practices.
Annex 6 Page 11 of 12
45. The Health Sector Governance program would reinforce the governance capacities of the National Ministry of Health to improve the operation of the health system in Argentina, in aspects related to the fairness of access, effectiveness and transparency of health services delivery through the developing of management, procurement and transparency and accountability arrangements.
46. Strengthening Management and Governance of Public Hospitals Networks AAA. The main objective of this study is to assist the National Health Ministry to improve the current hospital management approach and create a framework for regulating the hospital network decentralized system effectively. The findings will support policy decisions in the context of the National Plan proposed by the MSN to construct primary health care and hospitals and to strengthen hospital networks management for improving health services access to the poorest and most vulnerable groups, strengthening the efficiency and increasing the quality of care in public hospitals.
47. “Healthy Schools”. The client has expressed its interest in having a proposal from the Bank in the area of “healthy schools,” which could be supported under a health sector support operation. Organizations such as UNESCO, UNICEF, WHO and the World Bank partnered to develop the FRESH (Focus Resources on Effective School Health) framework, an approach for effective implementation of health and nutrition services within school health programs. Building upon the FRESH framework the Bank is ready to support the MOH in identifying a system specifically designed for Argentinean schools to identify and certify effective Healthy Schools.
48. Universal coverage of 5-year old children and retention of teenagers are two key elements of the Government’s strategy for strengthening the education system. The Bank’s program targets exclusion from educational attainment, which is highest among children and teenagers of the poorest families. Although attendance to primary school is similar among all income groups, there are large differences in attendance to pre-primary school and even larger ones in the attendance of the higher levels of secondary education. The latest education legislation is improving the financing of the education sector to 6% of GDP by 2010. The sector needs support to improve educational attainment and retention rates in secondary education in poorer school districts. The Bank’s involvement in subnational education systems over many years gives it a comparative advantage to improve quality of education and management of the education system. The Bank's emphasis on provincial education can best be seen through an ongoing US$150 million rural education project that will provide support until October 2011.
49. Higher Education AAA. The Government is committed to improve the competitiveness of the economy through innovation. Argentina’s universities produce some outstanding research but mostly cater to three traditional studies. Law, business and economics, and medicine provide 44% of university graduates living in the country. To help shape the discussion of reform options the proposed study will evaluate the contribution of knowledge institutions to economic growth and in particular how universities contribute to the dynamism of the local private sector. It will identify options for the use of local knowledge institutions to promote local economic development.
Annex 6 Page 12 of 12
Pillar 3: Governance
• Objective: Strengthen the effectiveness, efficiency, transparency and accountability of public sector management
50. Building on the Government’s objective, the proposed CPS will build on the on-going engagement on public sector management strengthening by deepening engagement on existing loans and responding to new requests through support to additional operational and analytical work. The ongoing State and Subnational modernization projects are complemented by the Institutional Strengthening of the National Social Security Administration Project and the Social and Fiscal National Identification System (SINTyS) second-phase APL. In addition, a study of provincial finances will be undertaken to review provincial performance under the Federal Fiscal Responsibility Regime and identify options to support provincial fiscal sustainability within the existing inter-governmental fiscal system.
• Objective: Expand performance management and improve the quality of public expenditure and enhance service delivery outcomes and trust in institutions
51. The Bank program will concentrate on strengthening public expenditure management tools, including an increased focus on performance-management and budgeting. The program also emphasizes support to cross-cutting public sector management areas across the federal administration, such as human resource management, e-government, procurement, quality management, and M&E through the ongoing State Modernization II loan. Specific organizational reform issues will be addressed through the Institutional Strengthening loan of ANSES, the National Social Security Administration and specific e-government tools will be promoted through the second phase of the National Social and Fiscal Identification System Project. At the subnational level, the program will focus on a variety of public sector management areas at the provincial levels, such as performance-management and –budgeting, human resource management, tax administration, e-government and strategic planning. This will be supported by the on-going Subnational Governments Modernization Project. In addition, Fee-for Services products will be carried out in a number of subnational governments, starting with the on-going FFS in the province of Corrientes.
52. Foundations for Performance-Informed Budgeting Project. This operation will focus on public expenditure management, performance-management and budgeting. Performance informed budgeting as a critical public sector reform aimed at improving the whole public investment cycle has been identified as a longer term focus of Bank interventions both at the national and provincial level.
Annex 7 Page 1 of 5
IFC Program Summary
1. IFC’s strategy in Argentina is designed to support the growth of export-oriented sectors and a select group of financial institutions, in order to create jobs and meet the needs of low-income populations, particularly those in frontier regions. The overarching strategy is to proceed cautiously, with sponsors in strong industries that have an established record of sound, profit-oriented, and therefore sustainable management. This means that IFC will tend to concentrate its activities on existing clients in both corporate and financial sectors.
2. Argentina’s private sector recovered strongly from the crisis of 2001-2002. Companies did so first by reutilizing idle capacity and then by financing investments from cashflow as their domestic and export markets grew strongly. However, they have continued to face difficulties in raising long-term financing for investments. This problem is likely to become more acute as the global financial crisis deepens. IFC will deploy existing and new financial structures to support viable companies during this period of uncertainty.
3. IFC will work to provide medium- and long-term financing for select companies. It will also work with its banking partners in Argentina to help meet the liquidity and working capital needs of small companies and farms through trade finance and dedicated MSME lines. The Corporation will concentrate its attention on those MSMEs, companies, and banks that focus on underserved groups and frontier regions.
4. Argentina represents IFC’s second-largest exposure in the region and IFC’s seventh-largest country exposure by committed portfolio. It constitutes 12% of IFC's committed portfolio in the Latin American and Caribbean region. IFC’s exposure to Argentina peaked in 2000 and fell by half through 2005. Nonetheless, IFC remained active in Argentina during this period. It worked closely to support those clients which demonstrated underlying competitive strengths and helped clients restructure their liabilities. Private sector demand for fresh IFC financing declined in the post-crisis period as companies rebuilt their balance sheets and financed expansion mainly from their own resources.
5. By 2004-2005, companies began to seek additional financing. However, the local banking system and capital markets were not able to fully meet private sector requirements. Normally, companies would access global markets that typically offer longer-term financing at lower costs than is available in the local markets. However, access to international financial markets by Argentine banks and corporates narrowed considerably in the post-crisis years (see Figure 1).
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Figure 1: Access to international financial markets narrows
Private sector external indebtedness - % of GDP
0%
10%
20%
30%
40%
50%
60%
70%
2002 2003 2004 2005 2006 2007
Non-financial sectorborrow ers
Financial sectorborrow ers
Source: Ministry of Production 6. IFC’s role in supporting Argentina’s private sector has grown in importance as a result of this pattern. Our exposure to Argentina has climbed since 2005 to reach a forecast US$860 million in FY 2009 (see Figure 2).
Figure 2: Argentina - Outstanding IFC Balance - $ million
7. Argentina was able to sustain a strong recovery in investment levels. Gross fixed capital formation as a percentage of GDP rose steeply and leveled out in 2006-2008 at its highest level in over 25 years (see Figure 3). It is IFC’s objective to continue supporting companies’ investment programs whenever this is feasible in risk and market terms, and is aligned with our strategy to reach underserved low-income populations, frontier regions, and industries with strong job-creation capacity.
Annex 7 Page 3 of 5
Figure 3: Investment rebounds
Source: World Bank, EIU
8. The Corporation’s investments since 2007 (see Figure 4) have focused on financial institutions, (with a heavy emphasis on trade finance), extractive industries, and agribusiness. These investments have provided a good balance between risk management objectives and financial returns.
Figure 4: IFC Commitments - Argentina 2007-2009 Sector Commitments (US$
million) Global Financial Markets Group 408.8 Oil, Gas, Mining And Chemicals 187 Global Manufacturing & Services 70 Agribusiness 60 Infrastructure 35 Private Equity and Investment Funds 10 TOTAL 770.8
9. IFC’s largest exposure in Argentina by sector is to the financial services industry, where IFC has established partnerships with six foreign- and locally-owned banks. Trade finance lines accounted for nearly all of IFC’s committed portfolio to Argentine banks of almost US$409 million in 2007-2008. Trade finance has become a lifeline for Argentine companies, particularly after the collapse of US banks in late 2008 that had provided liquidity to this market.
10. Argentina has a large agribusiness sector and a significant oil and gas industry. IFC finances export-oriented companies in both these sectors. Internationally-traded commodities such as soy, wheat, and oil, are priced in dollars and are produced almost entirely for export. This enables IFC to provide competitive financing for these companies. Agribusiness and oil and gas producers withstood the 2001-2002 crisis well
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and have proven resilient to recent declines in international commodity prices due to their efficiency.
11. IFC’s exposure to Argentina’s oil and gas industry is about US$335 million, with an additional US$510 million in B loans disbursed and outstanding. The portfolio comprises six oil and gas projects. IFC clients in this industry are fully funded for the foreseeable future, either through internal cash generation or through existing debt facilities. The main risk to these companies’ future cash generation would be through a severe and continued reduction in oil prices, or further Government intervention. These risks are limited since the Government has capped domestic producer prices at US$42 per barrel—now above market levels.
12. IFC’s agribusiness portfolio in Argentina is mainly composed of export-oriented companies, which demonstrated their resilience during the 2001-2002 crisis and grew steadily during the global commodity price boom. IFC has supported the transformation of Argentina’s oilseeds complex into one of the most competitive in the world by financing four major players in the industry. IFC has partnered with locally-owned companies with South-South expansion plans. IFC has also reached medium-sized agribusiness companies through specialized funds.
13. Given its great competitiveness, IFC expects Argentina’s agribusiness sector to sustain its operations even in volatile market conditions. However, companies may be constrained by working capital limitations. IFC’s trade finance lines can help clients manage their liquidity and short term financing requirements more effectively during the global financial crisis. IFC will also support established agroindustrial exporters to enhance the competitiveness of Argentina’s food supply chains. The Corporation will provide technical and financial support to farmers and agricultural MSMEs on a sustainable basis. The Corporation has successfully worked through local banks to offer secured lending to marginal farms in remote regions that have traditionally struggled to access the financial system.
IFC’s Role In Supporting Argentina’s Small Companies 14. Micro, small, and medium-sized enterprises (MSMEs) employ about 11 million people, over half Argentina’s work force. MSMEs are typically under-capitalized, which leaves them vulnerable to shifts in economic and market conditions. IFC aims to increase its support for viable companies, allowing them to maintain employment levels during the current crisis and position them for growth as the economy recovers.
Annex 7 Page 5 of 5
Figure 5: Employment and employers – Q1 2005 Employment and employers - Q1 2005
8%
54%47%
43%45%
3%
0%
20%
40%
60%
80%
100%
Employment Number ofcompanies
Large companies
Small companies
Micro companies
Source: Ministry of Production
15. Argentine MSMEs rely on short-term financing, usually cashflow and bank overdraft facilities, to finance their operations. As a result, these companies are among the first to reduce output and lay off workers when economic activity weakens. IFC intends to support competitive MSMEs and small farms with longer-term financing at more affordable rates provided through the banking system and microfinance partners. This would enable viable companies suffering liquidity problems to remain in operation and maintain employment levels.
Job creation by employers - Q1 2005
31%
28%
25%
45%
47%
51%
24%
24%
24%
0% 20% 40% 60% 80% 100%
Net change
Jobs created
Jobs lost
Large companies
Small companies
Micro companies
Source: Ministry of Production
16. IFC reaches small companies through its microfinance, trade finance, and dedicated SME lines provided through partner banks in Argentina. IFC has also established partnerships with banks to support small companies and farms in northern and western frontier regions. This support will become increasingly important as conditions in local and global credit markets continue deteriorating.
Annex 8 Page 1 of 2
Proposed GEF Program The GEF provides financing for activities that achieve global environmental benefits. It is the designated financial mechanism for the international conventions on biological diversity, climate change, persistent organic pollutants, and desertification. It also collaborates closely with the Montreal Protocol - the legal instrument to implement the objectives set out in the Vienna Convention on Ozone Depleting Substances - and regional and international waters agreements. The three main GEF implementing agencies in Argentina are the World Bank, UNDP, and UNEP. Current GEF program The current World Bank GEF program in Argentina comprises six operations with total financing of US$ 38.14 million. Operations span biodiversity, climate change and international waters. The Bank's GEF strategy in Argentina is to blend GEF-financed activities with Bank loans, not only to better leverage GEF resources but also to better mainstream global environmental concerns in country programs. World Bank’s comparative advantage for implementing GEF projects is based on the following:
- Leveraging investments, particularly as part of co-financing with IBRD operations in the area. The GEF helps develop, catalyze, and complement investment operations.
- Leveraging dialogue based on areas of current engagement and technical expertise. The GEF is often a new entry point for dialogue in key sectors, including energy and transport.
- Fostering new ideas and innovation, often with NGOs, the private sector, and others. The last Bank program included GEF co-financing in rural development, transport and environmental projects, including in the following:
- Biodiversity Conservation in Productive Forestry Landscapes Project (US$7.0 million) - Energy Efficiency Project (US$15.1 million) - Sustainable Transport and Air Quality Project (US$3.9 million) - Decentralized Medium-Sized Grants Program (US$2.5 million) - Coastal Contamination Prevention and Marine Management Project (US$8.5 million) - Second National Communication to the Convention on Climate Change (US$1.14
million) GEF potential in Argentina Argentina is a large client country that not been engaged in GEF as much as other countries of its size. Many areas have been addressed – from land degradation, protected areas (national parks) and coastal areas to climate change priority-setting and renewable energy -- but potential remains for program deepening in nearly all GEF thematic areas. Current Government priorities are in the areas of climate change, biodiversity, land and fisheries management, and air and water quality.
Whereas biodiversity and climate change have been the dominant areas of World Bank GEF programming over the past few years, there are additional opportunities in nearly all areas eligible for GEF support. Currently the World Bank is implementing large-scale projects on biodiversity (Biodiversity Conservation in Productive Forestry Landscapes), climate change and energy (Energy Efficiency) and smaller-sized ones in multi-focal areas (Decentralized Medium-Sized Grants Program). These large projects are typically a blend between GEF-funds and WB loans while some only receive financing from the GEF.
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A crucial issue to consider is the evolution of the Resource Allocation Framework that the GEF Council adopted in September 2005, which implies a maximum allocation for Argentina in the areas of Climate Change (US$14.5 million) and Biodiversity (US$15.1 million) over 4 years divided among all Implementing Agencies. The current administration has decided to take maximum advantage of GEF. Although not all projects have thus far been endorsed by the GEF Secretariat, Argentina has planned the use of 96% of its biodiversity allocation and 53% of its climate change allocation. A challenge in the future will be the size and the assignment of a new Resource Allocation Framework for biodiversity and climate change, to be replenished by the GEF Council during FY10. During the proposed CAS period, the Bank will continue its strategy of blending GEF activities with Bank loans and will support stand-alone operations in those areas where there is a high potential of sector transformation while addressing global environmental issues. As an example of this approach, the Bank will work with Argentina to finance the incremental costs of conservation in rural areas by means of a corridors strategy in Arid Patagonia and Chaco thereby strengthening the Federal System of Protected Areas. The potential of renewable energies and energy efficiency in rural services programs (PROSAP) will be explored, and a new grant to prepare Argentina’s Third National Communication under the UNFCCC is expected help mainstream climate change considerations in sector planning. In addition, the Bank’s financial support for infrastructure, environment and rural development under the proposed CPS are expected to open additional opportunities for GEF co-financing.
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CPS Consultations
During December of 2008, the CPS team carried out a series of seven thematic CAS consultations in Argentina on the issues of: transportation and logistics, water and sanitation, agriculture, environment, human development, federal-provincial relations and public sector management The consultations were designed with the objective to engage in in-depth exchanges with key opinion leaders from specific areas. Each thematic consultation was led by the respective World Bank Sector Leader with the participation of other Bank staff. Participants were representatives of the national and provincial government, private sector, academia and non-governmental organizations. Even with the diversity of topics covered and the methodology used that allowed in depth examination of each topic, there were common cross-cutting concerns expressed:
• The need to support with capacity building for public officials at the local and national level.
• The need to identify strategic plans by sectors and the support the Bank could bring to do so.
• The opportunity to work at the provincial and municipal levels and not just at the national one. In relation to this, participants mentioned the need for the Bank to invest in capacity building at these levels if there is a decision to work with them.
• Participants expressed an overall appreciation of the work done with the Bank yet they mentioned that Bank’s rules could be more flexible to improve the execution of projects.
More specifically in the session on public sector management there were recommendations that Argentina could develop a map of existing initiatives in public sector management both at the national and provincial level in order to identify inequalities and focus on the weaker regions. Other participants mentioned the possibility of reinforcing results-based management initiatives in the areas of health, education and social policies. The need to develop a medium term strategic framework to promote results-based management was agreed among all participants as well as the need to strengthen the professionalization of public officials in order to be able to implement results based management, especially at the provincial and municipal level. In the session on the environment, issues covered ranged from the need to enhance the use of Clean Development Mechanisms to the need to promote the institutional strengthening of the Secretary of Environment both at the national and local government level. In terms of institutional strengthening participants also mention the need to do it for non-governmental organizations. In relation to the experience of working with the Bank, Government representatives highlighted that the experience has been very positive, especially in the forestry sector and biodiversity conservation. A common concern expressed by the participants, was the need to enhance training of public officials in topics such as environmental impact evaluation or territorial development. Another important concern raised during the consultation was the need to strengthen capacity
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building at the provincial level since in Argentina 80% of the natural resources are protected areas depending from the provinces. In terms of the human development agenda, the issue of institutional strengthening at the provincial level was one of the main comments received. In terms of the education agenda, the main issue to solve is the quality of education and the integration between the national and provincial systems of education. In this regard, ideas to strengthen the monitoring role of the national Government were expressed. In terms of the health agenda, ideas to strengthen the formation of nurses and to implement a national health program at the school level were mentioned, as well as the need to strengthen hospital infrastructure. In terms of the social agenda, the need to open social programs such as Heads of Households or other existing programs was presented. During the session on water and sewerage the main discussion was around the issue of tariffs in relation to water in Argentina, the need to cover with the tariff the operating costs of the service and how to expand access to rural areas. Another key topic mentioned by the participants was the need to have a strategic plan to identify priorities and the idea of creating an institute to regulate the sector at the national level like the one that exists in Brazil or Colombia. At the consultation on agriculture the main concerns expressed by participants were the recuperation of the grain market and how prices are determined at it; issues of access to land, land distribution and taxing of land, infrastructure development at the rural level; the impact of taxes in the development of the sector; rural poverty and how to diminish it; The Bank also held a specific session on national-provincial relations in which participants representing provinces in which the Bank has projects and Government officials executing projects from the national Government at the provincial level highlighted the significant support in terms of resources and technical contributions these projects represents. Some participants proposed to focus investments in the north east and north west, the poorest regions of the country. Others proposed to focus investment at the municipal level rather than the provincial one to maximize implementation of them. The session on transport was very effective to identify possible bottle necks to improve the sector. Discussions range from the need to invest in a stronger railway system in which most participants agreed, to whether to develop the Atlantic or the Pacific Rim, or to re design the net of roads and expand coverage of provincial roads. In general, participants expressed support to the CREMA model in which contracts are allocated to maintain and recuperate a road for 5 years.
Annex A2 Page 1 of 2
POVERTY and SOCIAL Argentina
2007 Population, mid-year (millions) 39.5 GNI per capita (Atlas method, US$) 6,050 GNI (Atlas method, US$ billions) 238.9
Average annual growth, 2001-07
Population (%) 1.0 Labor force (%) 2.3
Most recent estimate (latest year available, 2001-07)
Poverty (% of population below national poverty line) Urban population (% of total population) 92 Life expectancy at birth (years) 75 Infant mortality (per 1,000 live births) 14 Child malnutrition (% of children under 5) 2 Access to an improved water source (% of population) 96 Literacy (% of population age 15+) 97 Gross primary enrollment (% of school-age population) 112
Male 113 Female 112
KEY ECONOMIC RATIOS and LONG-TERM TRENDS
1987 1997
GDP (US$ billions) 111.1 292.9
Gross capital formationlGDP 19.6 19.4 Exports of goods and serviceslGDP 7.9 10.5 Gross domestic savingslGDP 19.9 17.1 Gross national savingslGDP .. 15.2
Latin America & Carib.
Upper- -
income
Life expectancy
Gross primary
capita enrollment
Access to improved water source
A r g e n t i n a
- Upper-middle-income group
Economic ratios'
Trade
Current account balancelGDP Interest paymentslGDP Total debffGDP Total debt servicelexports Present value of debffGDP
Domestic , , Capital savings formation
Present value of debffexports .. 200.8 Indebtedness
1987-97 1997-07 2006 (average annual growth) GDP 4.1 1.9 8.5 8.7 A r g e n t i n a GDP per capita 2.7 0.9 7.4 7.6 Upper-middle-income group Exports of goods and services 8.6 5.2 7.4
STRUCTURE of the ECONOMY 1987 1997 Ioo6 2007 Growth of capital and GDP ( X ) I (% of GDP)
Agriculture Industry
Manufacturing Services
(average annual growth) Agriculture lndustry
Manufacturing Services
Household final con'sumption expenditure 75.4 70.8 58.6 .. General gov't final consumption expenditure 4.7 12.1 12.4 Imports of goods and services 7.6 12.8 19.2
Growth of exports and imports ( O h ) I
-60 1 G C F -GDP
Household final consumption expenditure General gov't final consumption expenditure -75 1
E x p o r t s -Imports I Gross capital formation Imports of goods and services
Note: 2007 data are preliminary estimates.
This table was produced from the Development Economics LDB database.
* The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will be incomplete.
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Argentina
PRICES and GOVERNMENT FINANCE1987 1997 2006 2007
Domestic prices(% change)Consumer prices 169.2 0.3 9.8 8.6Implicit GDP deflator 127.1 -0.5 13.5 14.1
Government finance(% of GDP, includes current grants)Current revenue 0.0 18.4 24.2 ..Current budget balance 0.0 -0.4 4.3 ..Overall surplus/deficit 0.0 -1.5 1.8 1.6
TRADE1987 1997 2006 2007
(US$ millions)Total exports (fob) 8,934 26,431 46,569 52,238 Food 744 3,007 2,964 .. Meat 655 1,025 1,610 .. Manufactures 3,661 8,335 14,801 ..Total imports (cif) 5,820 30,450 34,159 43,700 Food .. .. .. .. Fuel and energy 653 970 1,729 .. Capital goods 973 13,259 14,384 ..
Export price index (2000=100) 83 114 123 ..Import price index (2000=100) 104 112 108 ..Terms of trade (2000=100) 80 102 114 ..
BALANCE of PAYMENTS1987 1997 2006 2007
(US$ millions)Exports of goods and services 8,134 30,943 54,058 ..Imports of goods and services 7,627 37,481 41,121 ..Resource balance 507 -6,538 12,937 ..
Net income -4,738 -6,202 -5,456 ..Net current transfers .. .. .. ..
Current account balance -4,239 -12,224 7,997 6,246
Financing items (net) 2,070 8,951 -11,527 ..Changes in net reserves 2,169 3,273 3,530 ..
Memo:Reserves including gold (US$ millions) 1,617 22,320 .. ..Conversion rate (DEC, local/US$) 2.10E-4 1.0 3.1 3.1
EXTERNAL DEBT and RESOURCE FLOWS1987 1997 2006 2007
(US$ millions)Total debt outstanding and disbursed 58,458 128,156 122,190 .. IBRD 2,146 5,494 6,206 5,674 IDA 0 0 0 0
Total debt service 6,244 18,192 18,994 .. IBRD 224 635 1,480 1,387 IDA 0 0 0 0
Composition of net resource flows Official grants 5 37 47 .. Official creditors 664 -69 -761 .. Private creditors 939 8,765 2,515 .. Foreign direct investment (net inflows) -19 9,160 4,840 .. Portfolio equity (net inflows) 0 2,319 662 ..
World Bank program Commitments 639 1,221 960 1,184 Disbursements 795 797 459 505 Principal repayments 133 299 1,134 1,037 Net flows 662 498 -675 -532 Interest payments 91 335 346 350 Net transfers 571 162 -1,021 -882
Note: This table was produced from the Development Economics LDB database. 9/24/08
-2
0
2
4
6
8
10
01 02 03 04 05 06 07
Current account balance to GDP (%)
0
20,000
40,000
60,000
01 02 03 04 05 06 07
Exports Imports
Export and import levels (US$ mill.)
-10
10
30
50
02 03 04 05 06 07
GDP deflator CPI
Inflation (%)
35039
6206
8635
67351
4959
A - IBRDB - IDA C - IMF
D - Other multilateralE - BilateralF - PrivateG - Short-term
Composition of 2006 debt (US$ mill.)
Annex B2Page 1 of 1
As of Date 04/23/2009
Indicator 2006 2007 2008 2009Portfolio AssessmentNumber of Projects Under Implementation a 29 29 28 32Average Implementation Period (years) b 4.6 3.9 4.2 4.2Percent of Problem Projects by Number a, c 27.6 3.4 25.0 12.5Percent of Problem Projects by Amount a, c 31.1 1.0 31.3 15.8Percent of Projects at Risk by Number a, d 48.3 41.4 57.1 25.0Percent of Projects at Risk by Amount a, d 38.1 21.4 60.0 26.9Disbursement Ratio (%) e 38.4 21.7 12.4 12.6Portfolio ManagementCPPR during the year (yes/no) Yes Yes Yes YesSupervision Resources (total US$) 3521 2973 2642 1983Average Supervision (US$/project) 98 90 98 66
Memorandum Item Since FY 80 Last Five FYsProj Eval by OED by Number 106 25Proj Eval by OED by Amt (US$ millions) 17,844.7 3,578.8% of OED Projects Rated U or HU by Number 26.5 16.0% of OED Projects Rated U or HU by Amt 35.2 8.2
a. As shown in the Annual Report on Portfolio Performance (except for current FY).b. Average age of projects in the Bank's country portfolio.c. Percent of projects rated U or HU on development objectives (DO) and/or implementation progress (IP).d. As defined under the Portfolio Improvement Program.e. Ratio of disbursements during the year to the undisbursed balance of the Bank's portfolio at the beginning of the year: Investment projects only.* All indicators are for projects active in the Portfolio, with the exception of Disbursement Ratio, which includes all active projects as well as projects which exited during the fiscal year.
Selected Indicators* of Bank Portfolio Performance and ManagementCAS Annex B2 -
Annex B3Page 1 of 2
ArgentinaAs of Date 04/23/2009
Proposed IBRD/IDA Base-Case Lending Program a
Fiscal year Proj ID US$(M)
Strategic Rewards b
(H/M/L)
Implementation b Risks (H/M/L)
2009 AR Basic Protection Project 450.0 H LAR (APL1) Matanza-Riachuelo Basin Sustain. Develop. 840.0 H H
2010 AR (AF-C) Buenos Aires Province Sustainable Infrastr. 50.0 M LAR Foundations for Performance-Informed Budgeting process 10.0 - 20.0 H MAR (AF) Cordoba Road Infrastructure 30.0- 60.0 M LAR Sustainable Industrial Development 40.0- 60.0 H MAR Metropolitan Areas Urban Transport Project 150.0 H MAR-(AF-C) Provincial Road Infrastructure 200.0 M MAR Rural Poverty 30.0- 50.0 H HAR San Juan Social Inclusion & Local Develop. 20.0- 50.0 H MAR (AF) Provincial Government Modernization 15.0 H MAR (AF) Essential Public Health Functions- FESP 90.0 H MAR Health Sector Governance Strengthening 4.5 H MAR Second Generation Road Safety Project 20.0 H LAR Basic Protection Project (Phase II) 550.0 H L
2011-12 AR Rosario Metropolitan Area Infrastructure 460.0 H HAR National Urban Dreinage Project 100.0 M MAR National Highway Asset Maintenance Project III 200.0 M MAR Provincial Roads II 100.0 M MAR Health Sector Support 200.0 H MAR Provincial Health 300.0 H MAR Communities Integrating Social Services 170.0 L H
CAS Annex B3 - IBRD/IDA Program Summary
a. This table presents the proposed program for the next three fiscal years. b. For each project, indicate whether the strategic rewards and implementation risks are expected to be high (H), moderate (M), or low (L).
Annex B3Page 2 of 2
Annex B3
Argentina: IFC Investment Operations Program
2006 2007 2008 2009*
Commitments (US$m)Gross 666.50 177.47 973.28 263.52Net** 283.50 117.47 483.28 173.52
Net Commitments by Sector (%)EQUITY 7.66GUARANTEE 70.21 40.61 48.13LOAN 92.77 29.79 51.73 48.99QUASI LOAN 5.29 2.88RISK PRODUCT 1.94Total 100 100 100 100
Net Commitments by Investment Instrument (%)Equity 7.66Guarantee 70.21 40.61 48.13Loan 92.77 29.79 51.73 48.99Quasi loan 5.29 2.88Risk product 1.94Total 100 100 100 100
* As of March 31, 2009** IFC's Own Account only
Annex B4Page 1 of 1
As of Date 04/23/2009
Product Completion FY Cost (US$000) Audience a Objective b
1. Recent completions ESW Programmatic Poverty (Rural) FY07 168.8 Infrastructure Finance FY07 301.3 Country Financial Accountability AssesFY07 195.2 A&A ROSC FY07 164.7 Social Inclusion (Youth) FY07 239.1 Logistics and Transport Sector CompeFY07 159.9 Policy Notes FY08 157.3 Programmatic Income Support (ESW) FY08 634.2 Programmatic Poverty (Informality) FY08 90.5 Technical Assistance & External Training Seminar of Exports and Growth FY07 120.0 CFAA Follow-up NLTA FY08 164.2 Ministry of Interior Strategic Planning PFY08 1.6 Pollution Mngt , EIs and Inst FY08 12.8
2. Underway CFAA Provincial Level FY09 170.9 Analysis of impacts of export taxes FY09 80.0 Corrientes Strategic Plan FY09 200.0 IFMS Province of Buenos Aires FY09 125.0 Prov. Performance Informed BudgettinFY09 150.0 Prov Econ Memo Buenos Aires FY09 182.6
3. Planned Employment Inequality FY10 130.0 Provincial Fiscal Framework FY10 100.0 Logistics II AAA FY10 170.0 Prov Econ Memo Buenos Aires FY10 182.6 Country Environmental Assessment FY10 Accountability services delivery FY10
____________a. Government, donor, Bank, public dissemination.b. Knowledge generation, public debate, problem-solving.
CAS Annex B4 - Summary of Nonlending Services - Argentina
Annex B6Page 1 of 2
2008 2009 2010 2011
National income and pricesGDP at constant prices 7.0 1.0 1.5 3.0 Domestic demand (contribution to growth) 6.9 0.9 1.3 2.7 Net exports (contribution to growth) -0.4 0.1 0.2 0.3GDP deflator 19.4 12.2 12.9 11.6
External sectorTrade balance (billions of US$) 16.6 4.3 5.0 5.0Exports, f.o.b. (billions of US$) 71.3 53.9 55.6 59.2 Of which: net exports of hydrocarbonsImports, c.i.f. (billions of US$) 57.6 52.2 53.2 57.0Export growth (in US$ terms) 27.6 -24.5 3.3 6.4Import growth (in US$ terms) 28.8 -9.4 2.0 7.1Export volume -10.2 2.6 5.0Import volume -9.4 2.0 4.0Terms of trade -15.9 0.6 -1.6Commodity prices Wheat (USD/ton) 332 190 190 190 Corn (USD/ton) 200 150 150 150 Soy (USD/ton) 442 330 330 330 Sunflower (USD/ton) 482 280 280 280 Copper (USD/lb) 347 190 190 190 Oil (USD/barrel) 97 35 35 35Exchange rate (pesos per U.S. $) Period average 3.29 3.71 4.19 4.67 End of period 3.45 3.97 4.40 4.93Real exchange rate (ratio of domestic to foreign prices, p 20.6 22.8 16.3 14.5Gross international reserves 46.4 41.9 38.0 33.8 (In months of imports of goods and services) 8.3 8.1 7.2 6.0Net international reserves 38.2 33.7 29.8 25.5
Consolidated public sectorNominal revenues (yoy) 28.8 9.8 12.0 13.7Nominal expenditures (yoy) 31.0 13.2 11.4 13.0Primary fiscal balance 3.2 2.2 2.3 2.4 Federal government primary fiscal balance 3.1 2.4 2.6 2.8Overall balance 1.2 -0.1 0.5 0.5 Revenues 33.0 31.9 31.2 30.9 Expenditures 31.7 32.0 30.7 30.3Total debt (end-of-year) Of which: external debt
(Annual percentage changes, unless otherwise indicated)
(In percent of GDP)
CAS Annex B6 - Key Economic IndicatorsAs of Date 04/23/2009
Annex B6Page 2 of 2
2008 2009 2010 2011
GDP ‐ demand sideConsumption 71.6 74.3 73.6 73.3 Private 58.3 60.8 60.5 60.4 Public 13.3 13.5 13.1 12.9Investment 24.1 25.2 25.6 25.9 Private 20.6 21.2 21.5 22.0 Public 3.4 4.0 4.1 3.9
Saving‐investment balanceGross domestic investment 24.1 25.2 25.6 25.9 of which: public sector 3.4 4.0 4.1 3.9Gross national saving 26.6 24.3 25.3 25.5 of which: public sectorCurrent account balance 3.2 -0.4 0.2 0.1Trade balance 5.3 1.3 1.6 1.5Net foreign direct investment 1.2 1.0 0.9 0.8Non financial private sector capital account -3.6 -0.9 -0.9 -0.9
Gross international reserves (billions of US$) 46.4 41.9 38.0 33.8 In months of imports of goods and services 9.7 8.1 7.2 6.0Net international reserves (billions of US$) 40.0 36.0 31.3 26.9
Money and Credit M0 yoy growth 13.3 9.3 14.1 21.7M1 yoy growth 10.3 9.0 11.6 16.7M3 yoy growth 18.0 9.0 11.6 16.7M3 velocity (ratio of nominal GDP to end-period stock of 3.2 3.3 3.4 3.4Credit to the private sector 15.2 14.7 14.9 15.2Nominal growth of credit to private sector 33.6 10.2 16.0 17.1Real growth of credit to private sector 11.4 -4.2 4.5 4.6
International prices (average cpi of advanced economies 2.6 -1.0 1.0 2.0Real GDP growth in advanced economies 1.3 0.0 1.0 2.0Nominal GDP (billions of pesos) 1036.2 1174.2 1346.0 1547.4
Annex B7Page 1 of 1
Argentina - Key Exposure Indicators
Actual Indicator 2004 2005 2006 2007 2008 2009 2010 2011 2012
Total debt outstanding and 165043 133045 121292 101032 95120 91918 88836 86327 83760disbursed (TDO) (US$m)a
Net disbursements (US$m)a -4184 -3019 -8018 3900 -9679 -4989 -4385 -3956 -4327
Total debt service (TDS) 2362 3122 4173 4696 4283 2605 2551 2342 2164(US$m)a
Debt and debt service indicators (%) TDO/XGSb 477.3 329.4 261.1 180.6 133.3 170.7 159.7 145.9 .. TDO/GDP 107.8 72.6 56.6 38.5 30.2 29.0 27.6 26.0 .. TDS/XGS 6.8 7.7 9.0 8.4 6.0 4.8 4.6 4.0 .. Concessional/TDO 0.8 0.9 .. .. .. .. .. .. ..
IBRD exposure indicators (%) IBRD DS/public DS 42.3 37.6 37.5 16.4 15.7 22.4 21.6 21.1 20.7 Preferred creditor DS/public 78.5 68.2 80.5 40.9 37.3 47.8 48.1 50.1 52.1 DS (%)c
IBRD DS/XGS 3.1 3.0 3.2 2.5 1.7 1.7 1.5 1.3 .. IBRD TDO (US$m)d 7447 6881 6206 5674 5069 4864 5036 5541 6089 Of which present value of guarantees (US$m) 0 0 0 0 0 0 0 0 0 Share of IBRD portfolio (%) 6.7 6.6 6.2 5.7 5.0 4.1 3.7 3.7 3.7 IDA TDO (US$m)d 0 0 0 0 0 3 0 0 0
IFC (US$m) FY04 FY05 FY06 FY07 FY08 FY09* Loans 582 463 557 578 764 769 - - - Equity and quasi-equity /c 79 65 55 50 61 61 - - -*as end of Mid-MarchMIGA MIGA guarantees (US$m) 0 0 0 0 0 0 0 0 0
a. Includes public and publicly guaranteed debt, private nonguaranteed, use of IMF credits and net short-term capitalb. "XGS" denotes exports of goods and services, including workers' remittances.c. Preferred creditors are defined as IBRD, IDA, the regional multilateral development banks, the IMF, and the Bank for International Settlements.d. Includes present value of guarantees.e. Includes equity and quasi-equity types of equity instruments.
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-
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Annex B8Page 2 of 2
ArgentinaCommitted and Disbursed Outstanding Investment Portfolio
As of 03/31/2009(In USD Millions)
Committed Disbursed Outstanding
FY Approval Company Loan Equity**Quasi Equity *GT/RM
Partici pant Loan Equity
**Quasi Equity *GT/RM
Partici pant
2004 Aceitera general 31.25 0 15 0 7.5 31.25 0 15 0 7.52006/08 Arcor 103.85 0 0 0 197.6 103.85 0 0 0 197.62000 Asf 0.73 0 0 0 0.75 0.73 0 0 0 0.751998 Autcl 5.02 0 0 0 0 5.02 0 0 0 02000/06 Bacs 13.1 6.25 0 0 0 13.1 6.25 0 0 005/08/1999 Banco galicia 81.63 0 0 0 14.28 79.13 0 0 0 14.282006 Capsa 50 0 0 0 20 50 0 0 0 202009 Cencosud arg 50 0 0 0 90 50 0 0 0 902009 F.v. s.a. 15 0 5 0 0 0 0 5 0 00 Grupo galicia 0 1.25 0 0 0 0 1.25 0 0 01998 Hospital privado 0 0 8.1 0 0 0 0 8.1 0 01992 Huantraico 0 27 0 0 0 0 0 0 0 02004 Jumbo argentina 0 34.94 0 0 0 0 34.94 0 0 00/97 Milkaut 5.33 1.23 9.44 0 1.44 5.33 0 9.44 0 1.441996/99 Neuquen basin 0 31.4 0 0 0 0 0 0 0 02006 Noble argentina 12 0 0 0 19 12 0 0 0 192005/08 Pae - argentine 222.23 0 15 12.98 478.75 222.23 0 15 11 478.752008 Pampa fund 0 20 0 0 0 0 4.27 0 0 01998 Patagonia fund 0 0.1 0 0 0 0 0 0 0 02008 Roch 20 17.36 0 0 0 7.25 10.36 0 0 02005 S.a. san miguel 19.21 0 0 0 7.5 19.21 0 0 0 7.51995 Sancor 8.52 0 19.48 0 0 8.52 0 19.48 0 01997 T6i 0 0 5 0 0 0 0 5 0 02000 Tower fund 0 0.85 0 0 0 0 0 0 0 01995 Tower fund mgr 0 0.05 0 0 0 0 0.05 0 0 02007 Trp project 29.82 0 0 0 8.09 29.82 0 0 0 8.092001 Usal 3.34 0 0 0 0 3.34 0 0 0 02005 Vicentin 16.67 0 15 0 33.48 16.67 0 15 0 33.48
Total Portfolio: 687.7 140.43 92.02 12.98 878.39 657.45 57.12 92.02 11 878.39
B8 (IFC) for Argentina
* Denotes Guarantee and Risk Management Products.** Quasi Equity includes both loan and equity types.
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Río Gallegos
MendozaSan Luis
San JuanCordoba
ParanáSanta Fe
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Santiago Del Estero
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La PlataBUENOS AIRES
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CerroAconcagua(6960 m)
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ToValparaíso
ToLa Serena
ToCopiapó
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To Tarija
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ARGENTINA
This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.
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IBRD 33362R
AUGUST 2008
ARGENTINAFALKLAND ISLANDS (ISLAS MALVINAS)
A DISPUTE CONCERNING SOVEREIGNTY OVER THEISLANDS EXISTS BETWEEN ARGENTINA WHICH CLAIMSTHIS SOVEREIGNTY AND THE U.K. WHICH ADMINISTERS
THE ISLANDS.
SELECTED CITIES AND TOWNS
PROVINCE CAPITALS
NATIONAL CAPITAL
RIVERS
MAIN ROADS
RAILROADS
PROVINCE BOUNDARIES
INTERNATIONAL BOUNDARIES
ARGENTINA ADDENDUM TO THE PROPOSED COUNTRY PARTNERSHIP STRATEGY
The purpose of this note is to update Executive Directors on most recent economic developments in Argentina, to be considered together with the Country Partnership Strategy (CPS) that is scheduled for Board consideration on June 9,2009'.
While economic forecasts are subject to high uncertainty in Argentina, the economic slowdown has led to a downward revision in the real GDP growth forecast for 2009. The consensus forecast for Argentina's real GDP growth in 2009 has widened, now ranging from 1.7 to -5.8 percent (note that the dispersion in consensus forecasts is significantly wider for Argentina than for other countries in the world, as shown in the graph below). Nevertheless, most analysts have revised Argentina's growth projections downward, reflecting the economic contraction since the last quarter of 2008. The economic deceleration results from weak demand in Argentina's main export markets as well as adverse domestic demand and supply factors, including a severe drought. Ensuing imports decline has been deeper than projected at the beginning of the year. Given these developments, we have revised downwards Argentina's real GDP growth forecast for 2009 (from 1 percent in March 2009 to a lower range, between 0 and -1.5 percent, as of May, 2009). Official economic indicators are more positive, and Government officials still expect positive real GDP growth in 2009.
Consensus Forecasts GDP Growth in 2009
6
- USA -ARG - - LAC I
The slowdown in economic activity results from supply and demand factors. According to private estimates2 the economy contracted at an average rate of 4 percent (yoy) for six consecutive months (November 2008 through April 2009). The economic deceleration reflects both demand and supply factors:
' Cut-off date for the update is May 4,2009 Source: Index of economic activity estimated by OJ Ferreres & Asociados. A similar pattern is observed in the IPI (index of
industrial production estimated by FIEL).
On the demand side, the slowdown reflects weakness in both external and domestic markets. On the external side, exports fell by 27.2 percent in the first quarter of 2009 (yoy). On the domestic front, with the exception of public consumption, all other domestic demand aggregates (private consumption, private investment) have contracted since the last quarter of 2008. With regards to net exports, while they fell in the last quarter of 2008, the sharp contraction in imports results in a positive contribution to growth in the first quarter of 2009.~
On the supply side, the slowdown is generalized across all sectors. In March, overall economic activity fell by 2.4 percent (yoy)4. Industrial production dropped by 12 percent (yoy) while the fall in the automobile sector reached 55 percent5. There are also signs of deceleration in construction and other services (retail trade). Agricultural production is expected to drop by around 27 percent6, due to the most severe drought in the last fifty years, depressed domestic and especially external demand, and continued concerns in the farm sector about the level of export taxes and other regulations.
The combined impact of the global and domestic economic slowdown on external balances is positive. The trade and current accounts are likely to deteriorate less than expected. Whereas the dollar value of exports dropped about 24 percent (yoy) in February, 2009, imports fell about 37 percent (yoy). These developments result in an improved trade and current account position compared to our earlier forecasts. Nevertheless, the current account surplus is expected to be lower, between 0 and 1.1 percent of GDP, compared to the previous year (3.2 percent of GDP in 2008).
In contrast, the fiscal accounts are likely to deteriorate. The lower levels of activity, the drought and the smaller demand for Argentinean exports will affect tax revenue collection and overall fiscal accounts. In March 2009, government revenues from export and import taxes fell sharply (by 13 percent and 16 percent, respectively) while income taxes, and in particular VAT revenues increased (3 percent and 9.5 percent respectively). Nevertheless, the Federal Government maintained a primary fiscal surplus during the first quarter of the year (of about 1.7 percent of GDP) thanks to the additional social security contributions following the nationalization of the private pension funds. As a result, the 2009 overall fiscal balance is expected to close with a slight deficit of -0.4 percent of GDP. The revised fiscal projections also take into account recent developments in the exchange rate (see below) and in the fiscal position of provincial governments. In particular, we have accounted for the measure announced by President Cristina Fernandez on March 19, 2009 (about 30 percent of soybeans export tax revenues would be subject to revenue sharing with provincial governments). While this measure might result in a slight improvement in the fiscal position of provincial governments, the
'According to official data (Indec), in the first quarter of 2009 exports quantities fell by 13.0 percent (yoy), whereas imports quantities contracted at 32.5 percent (yoy).
Source: OJ Ferrers &Associados Source: FlEL
6The harvest area for soy and other commodities has declined according to official data and private analysts. Available data from the Secretary of Agriculture points to a decline of about 26.8 percent (yoy) in the harvest area for wheat.
provincial primary fiscal balance is expected to remain in deficit in 2009 (-0.2 percent of GDP).
In spite of recent depreciation pressures, the Central Bank continues to maintain exchange rate stability. Following continued market uncertainty, and the announcement of early elections, pressure on the peso has been rising in recent months. Argentina's Central Bank, which still enjoys a comfortable reserve stock position, intervened in the foreign exchange market during March to maintain exchange rate stability. The exchange rate is currently at AR$ 3.71/US$ (about 7 percent higher than as of the end of 2008). Futures contracts (for operations dated on May 4, 2009) suggest that the exchange rate might reach levels slightly above AR$4NS$ by end 2009.
Despite this higher volatility, financial markets are stabilizing. Financial market volatility increased during the month of March, on account of growing demand for hard currencies and reduced supply from exporters. But the domestic financial conditions improved in April, supported by external factors (improved global market sentiment following the G20 meetings and an increase in soybean prices) and domestic events (strong Central Bank intervention in the foreign exchange markets and increased forex sales by soybean exporters). Higher volatility led to a slight increase in short-term interest rates in March (by about 75bps), but since then interest rates have remained broadly stable, since commercial banks have accumulated strong liquidity positions.
The combined result of these developments points to a moderate shift in the relative weight of economic risks identified in the CPS. While the CPS underscored balance of payment risks over fiscal risks, the main vulnerability now seems to lie on the fiscal front. With low economic growth and collapsing imports, the consolidated primary fiscal surplus will be lower than expected, at a time when public financing requirements are high and financial conditions are tight. To offset the fiscal risk, growth in primary expenditures (in the first quarter it reached 28 percent yoy) could be reversed during the second half of the year as the government attempts to preserve its primary surplus target. In this context, parliamentary elections (scheduled for June 28, 2009) contribute to increased uncertainty as the outcome of these elections might eventually lead to a change in policies.
Our updated CPS baseline macro projections for 2009 are summarized below:
Growth and inflation. In view of the deteriorating global and domestic economic situation, we have adjusted our previous baseline scenario, correcting the outlook for real GDP growth in 2009 from +1 percent to a lower range (between 0 percent and - 1.5 percent).
Fiscal accounts. The primary fiscal surplus of the central government is estimated to decline from 3.1 percent of GDP in 2008 to 2.1 percent (if the economy contracts by 1 percent) or to 2.2 percent (in the case of 0 percent growth).
Financing gap. Gross public sector7 financing needs are estimated at US$16.3 billion in 2008 and are projected at US$15.6 billion and US$13.0 billion in 2009 and 2010, respectively. The net financing gap of the Federal Government is projected at about US$3.9 billion in 2009 and US$0.6 billion in 2010, after taking into account the additional resources from the nationalized social security contribution^.^
External accounts. Compared to 2008 (3.2 percent of GDP), the current account balance is expected to deteriorate, but will remain positive in 2009 and 2010. In 2008, this surplus is estimated at 3.2 percent of GDP (2.9 percent in 2007). In 2009, if the economy contracts by 1 percent, the current account surplus is projected at 1.1 percent of GDP, whereas in the case of zero growth the current account would reach 0.7 percent of GDP.
Monetaly accounts. Money growth is expected to slow, reflecting weaker domestic demand. In 2009 the monetary base is expected to increase by 7-8 percent in nominal terms,9 after growing at 10.2 percent in 2008.
The table below presents a summary of the medium-term macroeconomic framework, under a baseline operational assumption of real GDP growth of -1 percent in 2009.
' Including the Federal and Provincial Governments. The figures of the financing gap correspond to the scenario with -1 percent growth. In the case of zero growth, the financing gap is
projected to reach US$3.7 billion in 2009 and US$0.4 billion in 2010. This number does not take into account expected gross disbursements of some US$I -1 .S billion by IFIs in 2009.
7.2 percent if the economy contracts at 1 percent, and 8.4 percent in the zero-percent growth scenario.
Table 1. Argentina: Selected Economic and Financial Indicators
2008 2009 2010 2011 (Annual percentage changes, unless otherwise indicated)
National income and prices GDP at constant prices GDP deflator
External sector Trade balance (billions of US$) Exports, f.0.b. (billions of US$) Imports, c.i.f. (billions of US$) Export growth (in US$ terms) Import growth (in US$ terms) Export volume Import volume Terms of trade Commodity prices Wheat (USDJton) Corn (USDJton) Soy (USDIton) Sunflower (USDIton) Copper (USDIlb) Oil (USDIbarrel)
(In percent of GDP)
Consolidated public sector Nominal revenues (yoy) Nominal expenditures (yoy) Primary fiscal balance Federal gove;nment primary fiscal balance
Overall balance Revenues Expenditures
GDP - demand side Consumption Private Public
Investment Private Public
Saving-investment balance Gross domestic investment of which: public sector
Gross national saving Current account balance Trade balance Net foreign direct investment Non financial private sector capital account
Gross international reserves (billions of US$) In months of imports of goods and services
Net international reserves (billions of US$)
Money and Credit MO yoy growth M l yoy growth M3 yoy growth M3 velocity (ratio of nominal GDP to end-period stock of M3) Credit to the private sector Nominal growth of credit to private sector
International prices (average cpi of advanced economies) Real GDP growth in advanced economies Nominal GDP (billions of pesos)