Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: 22619

IMPLEMENTATION COMPLETION REPORT(SCL-44050)

ONA

SPECIAL STRUCTURAL ADJUSTMENT LOAN

IN THE AMOUNT OF US$2.52525 BILLION

TO THE

ARGENTINE REPUBLIC

FOR A

SPECIAL STRUCTURAL ADJUSTMENT LOAN (SSAL)

07/30/2002

Argentina, Chile, Paraguay and Uruguay Country Management UnitPoverty Reduction and Economic ManagementLatin America and the Caribbean Region

This document has a restricted distribution and may be used by recipients only in the performance of theirofficial duties. Its contents may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

(Exchange Rate Effective as of July 30, 2002)

Currency Unit = Argentine Peso (Arg $)Arg $3.6 = US$ 1

FISCAL YEARJanuary I - December 31

ABBREVIATIONS AND ACRONYMS

BHN Housing Mortgage BankBNA Federal BankCAS Country Assistance StrategyESW Economic Sector WorkFSAP Financial Sector Assessment ProgramGDP Gross Domestic ProductICR Implementation Completion ReportIDB Interamerican Development BankIFI Intemational Finance InstitutionsIMF International Monetary FundINSSJP National Health Institute for RetireesIPO Initial Public OfferingLIBOR London Interbank Offer RateMERCOSUR Common Market of the SouthOPS Operation Policy StrategyQAG Quality Assurance GroupREPO Repurchase Facility Support LoanSAL Structural Adjustment LoanSSAL Special Structural Adjustment LoanSSN Insurance SuprintendentUSA United States of AmericaVAT Value Added Tax

Vice President: David de FerrantiCountry Director: Myrna Alexander

Sector Director: Emesto MayTask Team Leader/Task Manager: Paul Levy

ARGENTINAAR SPECIAL SAL (SSAL)

CONTENTS

Page No.1. Project Data 1

2. Principal Performance Ratings 13. Assessment of Development Objective and Design, and of Quality at Entry 2

4. Achievement of Objective and Outputs 8

5. Major Factors Affecting Implementation and Outcome 17

6. Sustainability 197. Bank and Borrower Performance 20

8. Lessons Learned 249. Partner Comments 26

10. Additional Information 27Annex 1. Key Performance Indicators/Log Frame Matrix 28

Annex 2. Project Costs and Financing 36Annex 3. Economic Costs and Benefits 37Annex 4. Bank Inputs 38Annex 5. Ratings for Achievement of Objectives/Outputs of Components 40Annex 6. Ratings of Bank and Borrower Performance 41Annex 7. List of Supporting Documents 42

Project ID: P062991 |Project Name: AR SPECIAL SAL (SSAL)Team Leader: Paul Levy TL Unit: LCC7AICR Type: Core ICR Report Date: September 19, 2002

1. Project Data

Name: AR SPECIAL SAL (SSAL) LUC/TF Number: SCL-44050Country/Departmenit: ARGENTINA Region: Latin America and

Caribbean RegionSector/stubsector: Banking (28%); Central government administration

(28%); General finance sector (17%); Compulsorypension and unemployment insurance (15%); Othersocial services (12%)

KEY DATESOriginal Revised/Actual

PCD: 09/12/1998 Effective: 11/03/1998Appraisal: 09/10/1998 MTR:Approval: 11/10/1998 Closing: 12/31/1999 10/31/2000

Borrower/lmplenmenting Agency: GOVERNMENT OF ARGENTINA/AgenciesOther Partners: IDB & IMF

STAFF Current At AppraisalVice President: David De Ferranti Shahid Javed BurkiCountry Manager: Myrna L. Alexander Myrna AlexanderSector Manager: Emesto May Guillermo PerryTeam Leader at ICR: Paul Levy Paul LevyICR Primarv Author: Desmond McCarthy; Herman J.

Nissenbaum; David Rosenblatt

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL-Highly Likely, L=Likely, UN=Unlikely, HUN=HighlyUnlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: U

Susrainabilitj': UN

Institutional Development Impact: M

Bank Performance: S

Borrower Performance: S

QAG (if available) ICRQuality at Entry: HS S

Project at Risk at Any Time: No

3. Assessment of Development Objective and Design, and of Quality at Entry

3.1 Or-iginal Objective:

Background

Following two decades of economic stagnation, hyperinflation in the late 1980s and apoverty rate that had reached 40 percent of the population, Argentina embarked in 1991 on a setof economic policies collectively known as the Convertibility Plan. The name derives from thecurrency board arrangement that established full convertibility of the peso with dollar backing.The currency board itself provided for fiscal discipline, since government deficits could no longerbe financed by borrowing from the Central Bank. But the Convertibility Plan encompassed muchmore than just this monetary arrangement. Trade barriers were lowered, capital controls wereeliminated, state enterprises were privatized, the tax agency was revitalized and governmentexpenditure programs were refocused.

The results during the early 1990s were dramatic. The poverty rate that had reached 40percent in 1990 was reduced to 22 percent in 1994. Economic growth averaged 7.9 percent overthe 1991-1994 period. Following Mexico's devaluation in late 1994, Argentina's commitment tothe Convertibility Plan was tested. Many local and foreign investors expected the currency boardto be abandoned, capital began to flee the country and, by March 1995, the banicing system was atserious risk of a systemic crisis. Argentina's renewed commitment to the Convertibility Plan, astrong program of multilateral financial support and President Menem's reelection in 1995 allhelped renew consumer and investor confidence. The economy suffered a contraction of 2.8percent that year. Nevertheless, this crisis was also an opportunity and structural reforms at theprovincial level began to accelerate, as did regulatory reforms and restructuring of the financialsystem. By the second quarter of 1996, the economy began to recover strongly - eventuallyregistering growth of 5.5 percent and 8.1 percent during 1996 and 1997, respectively. During thefirst half of 1998, growth continued at a 6 to 7 percent pace.

At the time of the Annual Meetings in 1998, Argentina was at a turning point in its recenteconomic development. Growth had been restored following the 1995 crisis; however, socialconditions (including poverty and unemployment rates) had not fully recovered. The reforms ofthe early 1990s that had unleashed strong productivity gains needed to be supplemented byadditional "second generation" reforms. Indeed, Argentina had entered into a period ofconsolidating reforms, especially at the provincial level, at a more measured pace as compared tothe early 1990s. Meanwhile, the external environment had deteriorated dramatically with areduction in international capital flows following the Asian crisis in 1997 and the Russian crisesthat hit in August 1998. These shocks resulted in a decline in international commodity prices andsharp increases in risk premiums for emnerging markets. Furthermore, there were fears ofcontagion with growing concerns that a crisis could unfold in neighboring Brazil - an event thatdid in fact occur within two months after Board approval of the SSAL.

As a result, by the second part of 1998, Argentina's economy began to slip into distress.External capital flows dropped dramatically, jeopardizing the country's capacity to roll over its

-2-

debt and finance its fiscal deficit. The latter increased as revenues began to fall during 1998 withthe decline in economic activity, the trade balance and service accounts deteriorated, creditexpansion slowed, employment and the stock market fell, leading to a rapid deterioration in theeconomy. As one indication of the deteriorating 1998 conditions, urban poverty in Buenos Airesincreased to 29.4 percent.

The Government had been preparing for such possible shocks, and there was heightenedawareness among the IFIs of the risks facing Argentina (See the Bank's CAS Progress Report, datedFebruary 1998). as well as other emerging market economies. The Government had already set upthe Repurchase Facility with private banks to help the banking system face possible liquidityshocks and established a practice of accumulating substantial cash reserves, with advancedborrowings in the markets by approximately one-quarter of its annual needs. The Governmenthas also converted its IMF stand-by arrangement (approved in February 1998) into a US$2.8billion Extended Fund Facility which it had treated as precautionary and began to increase itsprimary surplus.

But it also recognized the need for far more help in order to avoid a deflation comparableto that of the 1995 Tequila crisis. Typically, the Fund would have been the first one to be calledupon to bolster defenses and strengthen market confidence but it was facing a potential liquidityproblem because of other demands on IMF resources and the projected US$90 billion capitalincrease it sought had not yet been approved. Thus, at the juncture of the September 1998Annual Meetings, there was considerable concern that the crisis affecting emerging markets thathad started in Asia in 1997, and was exacerbated by the events in Russia (as well as the failure ofan important hedging financial institution in the USA), could spread uncontrollably to othercountries, especially those in Latin America known to be highly dependent on international capitalflows. Argentina was one of those countries. Moreover, the Argentine authorities had publiclyindicated that the Fund's support was precautionary and that its use could be taken by the marketsas a sign of weakness. Facing these circumstances, the Bank, in collaboration with the IMF andtogether with the IDB, was asked by Argentina to be partners to mitigate the impact of marketclosure resulting from this series of external shocks, taking advantage of the new instrument-theSpecial Structural Adjustment loan-that was being especially designed as a key part of theBank's arsenal in the face of global market shocks facing emerging markets.

This support package was predicated on the macroeconomic framework, with thecurrency board in place, agreed with the Fund as part of its series of programs. Since the late1980s, Argentina had almost continuously operated under a Fund-supported program and therewas a history during the 1990s of the Bank setting its support for Argentina within the context ofsuch a Fund program. With the Convertibility plan in place, there were several sine qua non tosustain that program: one was fiscal discipline since the Government could not rely on printingmoney, and another was productivity increases, since it was not possible to alter relative prices inthe economy other than through productivity changes. Fiscal discipline thus had to be at the coreof Argentina's macro-program and the focus of Fund support.

Given Argentina's history-with fiscal deficits that had averaged about 8 percent of GDPduring the 1980s-there had been admirable progress in reducing the overall fiscal deficit even

-3-

though weaknesses persisted. Only in 1993 did the public sector reach a consolidated fiscalsurplus, helped considerably by privatization proceeds. The Tequila crisis in 1995 set back fiscalperformance further as the economy declined sharply and interest costs rose. During the recoveryyears of 1996 and 1997, the Government continued to pursue a relatively expansionary fiscalstance-with deficits in the order of 1-2 percent, reflecting both the need to address thecontinuing high unemployment (in the range of 15 percent) and the structurl deficit created bythe pension reform in 1994 (estimated at 1-1.5 percent of GDP). By 1998, the federal fiscaldeficit had been reduced to 1.4 percent of GDP, down from 2.2 percent in 1996, and theprovincial deficit had declined to 0.8 percent of GDP.

With an IMF program in place, further progress was thus expected in fiscal managementas well as those elements of the remaining reform agenda that Argentina was facing. Thisincluded among other things reform of labor regulations, reform of federal-provincial fiscalrelations, deepening of reforms in the social sectors that had begun only a few years back, as wellas entering into the new areas of governance, anti-corruption, justice, and public sector efficiencyand effectiveness. These latter actions were broadly part of the second generation reformsArgentina had yet to undertake or needed to reinforce. Equally important were continuingreforms in the financial sector and the deepening capital market development, as an essentialingredient of sound macro-economic management and a key vulnerability in the context of theConvertibility plan.

Thus, when the full impact of the Russia crisis hit Argentina-and other emergingmarkets--in August 1998, the Government turned to the Bank and the IDB for extra-ordinarysupport. Looking back at that period, it was clear that the overwhelming concern globally was toprevent contagion if possible and to respond favorably to those countries-other things beingequal-that had been following policies that were conducive to sustainable development. Suchborrowers had to have had a solid track record on past reforms and a sustainable debt positionover the medium term. But it was also understood that such lending could entail heightened risksfor the Bank and as such there were special terms and conditions, consisting of a significantlyhigher spread for the Bank and a much shorter amortization period. Argentina, followed byBrazil, were the first two countries to benefit from this new kind of support from the Bank.

Original Objectives

The objectives of the Special Structural Adjustment Loan (SSAL) and accompanyingSpecial Repurchase Facility Support (Repo) Loan were clearly stated in the President's Report(paragraph 107) . In general, the goal was to reduce Argentina's "vulnerability to extemalfinancial shocks" while simultaneously "increasing (Argentina's) capacity for sustainable andequitable growth." The more specific objectives were to: (i) facilitate the reentry of Argentina tothe intemational capital markets and avoid the social and economic costs of forced adjustment tothe closure of market access; (ii) protect vulnerable groups during a period of high uncertainty;(iii) add to the lines of defense of the banking system against potential liquidity shocks; and (iv)continue Argentina's successful reform program in several key sectors, described in more detail insection 4.2. The REPO specifically was to contribute to meeting objective (iii) above.

-4 -

These objectives were fully consistent with the 1997 CAS. That document recognizedthat Argentina continued to be vulnerable to a reversal of capital flows and included the possibilityof higher levels of lending under a shock scenario, foreshadowing the SSAL. The February 1998CAS Progress Report further noted the increase in risks to Argentina after the East Asia crisis andagain indicated the possibility of additional support in the event of an external shock.

The Bank approved the Special Structural Adjustment Loan (SSAL) and RepurchaseFacility Support Loan ("REPO") in November 1998, barely three months after the Russia crisis, inkeeping with the nature of the crisis and the intended purpose of the instrument. A recentlycompleted Financial Sector Review, the accumulation of country knowledge built up by years ofESW and operational activities in the areas of provincial finances, labor markets and povertyanalysis, and ongoing policy dialogue in health and social sectors provided a sound knowledgebase for designing the reform program supported by the SSAL. The knowledge base was criticalin facilitating a rapid response to the Government's request for special assistance: the SSAL andits companion Special Repurchase Facility Support Loan were prepared, appraised and negotiatedin approximately two months.

The SSAL was to provide financing to the Government during what was perceived to be atemporary disruption in international capital flows, aggravated by the Russia crisis that occurredin August 1998. The financing by the IFIs would permit continued servicing of existing debt (thatwould have normally been rolled over in the international capital market) and meeting of the cashflows of the normal operation of the state during this period of temporary closure. Argentina atthe time had to meet financing needs of some US$ 1-1.5 billion per month, and was facingparticularly large debt repayments at the end of 1998 and early 1999. Thus, timing was critical.Moreover, support would allow the Government to focus on the remaining reform agendaduring its last five quarters in office. With key social programs protected and a set of reformsmoving forward, it was expected that the social and economic impact of the intemational financialcrisis could be ameliorated.

The SSAL was part of a broad intemational package. The $2.5 billion SSAL wasdesigned as a three-tranche loan, originally to be drawn over an about 14-month period. Thecompanion $505 million "REPO" Loan was a contingent loan, intended to be drawn only if theCentral Bank required additional resources mainly to meet margin calls on a repurchaseagreement with commercial banks. The IDB co-financed these two operations with its $2.0billion Special Structural Adjustment Program Loan and an accompanying $0.5 billion "REPO"facility loan. The Fund's support first comprised $2.8 billion, approved at the start of 1998, as aprecautionary package. Over time, however, as conditions changed, the Fund's support forArgentina was later expanded to $8.3 billion and further increased to $15.5 billion with theapproval of new Fund Stand-by Arrangements in March 2000 and January 2001. The privatesector's contribution was essentially via the participation of private banks in the REPO facility,roughly US$ 7 billion, followed later in the period with several voluntary debt swaps as part of theexpanded Fund program.

Because of the program's emergency nature, the operation focused on incremental stepsthat would advance the on-going policy dialogue and keep the reform program on track,

- 5-

addressing the next measure required in a sequence of medium term reforms of considerablebreadth, building on the body of knowledge in diverse sectors already accumulated on Argentina.As outlined in the prior CASes, Argentina was seen as a country in the consolidation phase ofreforms, moving at a more measured pace than in the early 1990s, and requiring more time andconsensus building. It was acknowledged that embarking on reforms in totally new areas wouldnot have been consistent with the timing and nature of the proposed operation, nor would reformsthat necessarily required considerable consensus building ex ante. Fortunately, the Bank's yearsof experience in Argentina and the breadth of the Bank's activities in the country were amenableto such an approach. (One of the differences with the other emergency type operations considered in this sameperiod and under similar circumstances--- notably those for Korea and Thailand-did not have this sameadvantage, a point raised in the QAG reviews of these operations). Government officials interviewedreport that the program represented a high degree of consensus between Bank staff andgovernment staff in terms of priorities, realism for enactment given the time period and politicalschedule, as well as specific policy design. Nevertheless, these limitations also meant that thereform package would only be partial in several instances, especially those of an institutionalnature that could take years to develop and internalize fully. Thus, many of these reformsinvolved complex stepwise processes, involving a combination of legislative action andinstitutional development. They also built on prior experiences in the various sectors-each onemoving ahead in a process that would take more time and effort to complete in its entirety. (Theinherent difficulties in these second generation reforms and the step-wise process of these reforms were highlightedin the 1997 CAS and again in the 2000 CAS).

An example is the insurance sector. It was apparent that future private sectordevelopment would be affected by inefficiencies in the insurance sector. Prior to the SSAL, withthe support of the Bank under a previous adjustment operation, the Government had alreadyreduced its direct production role in the sector by privatizing the largest insurance company andclosing the state-run reinsurance company. In addition, new capital requirements and otherregulatory reforms had been initiated. However, much remained to be done and, takingadvantage of the SSAL, additional measures to deepen the existing reform program wereundertaken: for example, new laws for separating life and non-life businesses, strengthening ofthe resolution process and consumer protection norms. In addition, the Superintendency ofInsurance needed to adapt an early warning detection system for identifying firms in trouble, aswell as effectively implement the new capital requirements. This example illustrates thecomplexity of the process and the SSAL's role in promoting the continuation of the reformprocess. It further highlights the operation's technical complexities and the political uncertainties,heightened by the short time span that the administration had to work: November 1998 toDecember 1999 when a new Government would take office.

All these factors escalated the operation's risks and its complexity. Under more normalcircumstances, one might have argued for a smaller, longer phased or otherwise different kind ofBank-supported effort, or even perhaps awaiting the next administration. Programmatic lendingmight have been considered if the approach had been developed at that time. However, therewere compelling concerns about the possible international as well as domestic consequences of alack of prompt multilateral intervention, in view of the difficulties which Argentina then faced, andthe risks of further deterioration in the region, more notably Brazil. These and the scale ofArgentina's needs well justified the inclusion of this operation as the first of the Special Structural

-6-

Adjustment operations approved by the Bank and launched to help mitigate the global crisis'effects.

3.2 Revised Objective:N/A

3.3 Original Conmponents:Paras. 4.1- 4.2 describe the components of the project and its rating.

3.4 Revised Components:N/A

3.5 Quality at Entrv:The quality at entry of this operation is judged as satisfactory. As noted above, it

responded well to the concerns at that time, reflected and was well founded in prior ESW andcountry knowledge, was consistent with the Bank's policies and objectives, and was highlyrelevant. The problems which the operation sought to address may be summarized as those of ahighly indebted country facing a liquidity constraint and.fiscal deficit, all set in a rather complexpolitical milieu. In the face of these factors, the Bank appropriately selected the SSAL instrumentto help Argentina deal with the problem. The latter clearly met the criteria for SSALs:exceptional support for a client with a good track record that was facing a potential or real crisisso as to help them meet extraordinary external financing requirements. (This was discussed ingreater detail in the May 7, 2001 note to the Board on this instrument.)

The above assessment is consistent with the conclusions of the Quality Assurance Reviewcarried out by QAG after the SSAL's approval and while it was being implemented, which theQAG panel had judged as "highly satisfactory". The QAG panel had also carried out a review ofcomparable operations in Korea, Malaysia and Russia, and the operation for Argentina wasconsidered as superior to these other similar operations. This panel applauded the operation'squick preparation. It also said that its technical due diligence had been good, with which the ICRevaluation generally concurs. In addition, the panel considered the operation's preparation tohave been commendable in its selection of the relative priorities of the projected reforms and tosignificant aspects of country performance, which this review endorses. Further, the loandocumentation reflected precise, well formulated criteria for judging the achievement of theenvisaged objectives, along with reasonable assumptions about the SSAL's inherent risks.

In assessing quality at entry for the ICR, several dimensions were tested. The mostpertinent is the range of sectors covered and the number of specific conditions addressing theconcern that the breadth of the operation may have distracted from the main objectives. Analternative might have been to select only a few sectors and reduce the number of conditions.However, the risk of this alternative would be not to maintain momentum and perhaps lose theopportunity to advance the policy dialogue in those areas not selected. Moreover, since the loanamount was substantial, the task team rightly felt that the loan conditions should be wide rangingand engage diverse actors in the Government's program. In retrospect, one of the loan'sadvantages was to engage a broad set of actors and to have clear steps across a broad front inorder to guide the administration in its final months. This helped the authorities in ensuring that

- 7 -

policy makers were moving along the agreed paths and ultimately did provide continuity with thein-coming administration at the end of 1999. Inevitably this requires judgment on how best tobalance between "broad" and "specific" targets and between moving ahead a process, whilesearching for high impact on the short run.

This process required that the team use its understanding of the country constraints,especially political and social. Such judgments were particularly evident in the case of thecondition on labor modernization. The long term goal was to secure a complete modernization oflabor regulations; however, this has been tried in 1995 and had failed to secure congressionalapproval, while equivalent measures by the executive had been declared unconstitutional. Thusthe SSAL focused on only one dimension-severance payments-rather than the morecontentious issues of collective bargaining. Even the effort on converting severance paymentsfrom lump-sum to individual employee saving "unemployment" accounts was difficult. As itdeveloped however, by reviving the previous draft law on collective bargaining in early 2002, thenew authorities were able to secure its passage. Thus they were actually able to achieve muchmore than the SSAL called for. Consequently a waiver was granted on the condition onconverting severance payments. At the same time, the team judged during preparation that it didnot have sufficient understanding of some potential public sector reforms, and so decided to dropthem from the loan. In one area--judicial reform--it was clear that the Argentine counterpartswere ill-prepared and their conviction to undertake genuine reform was dubious.

The second main dimension, given the eventual negative outcome of Argentina'smacro-economic policies by the end of 2001 and early 2002, is whether or not the task teamshould have predicted such an outcome at the time the SSAL package was put together inmid- 1998 and if so, should a different package have been supported, notably one which involvedArgentina's exit from the Convertibility regime. There continue to be differing views on thecauses of the crisis and if, when and how it might have been avoided. But, there continues to beconsensus that the circumstances faced in 1998 justified the kind of support provided by the Bankand the other IFIs. The Bank's approach under the SSAL was consistent with the Concordatbetween the Bank and the IMF and the stance taken by the Fund on key macro-economicquestions; there were no obvious early warning signs at that time; due diligence was undertakento cross-check and to seek external opinions on the appropriate economic policy package forArgentina; and there was a viable range of policy options for Argentina to pursue that wereconsidered to be sufficient at that time to overcome the difficulties then faced. Indeed, someeconomists indicate that the current crisis could have been avoided as late as mid 2001 with theappropriate policy responses by the Argentine authorities. While this may continue to be one ofthe more controversial aspects of this implementation completion report, the conclusion of thisICR is that the many intervening events-some external and some internal to Argentina-couldnot have been predicted at the time the SSAL was developed.

4. Achievement of Objective and Outputs

4.1 Outcome/achievement of objective:

The ICR considers that the SSAL's overall objectives were not met even though thespecific outputs were all achieved. It is clear, in retrospect, that the package of policy reforms

- 8-

supported by the SSAL were necessary but ultimately insufficient to redress the cumulativeimpact of the series of shocks that confronted Argentina in 1999 and 2000. Designed for largelywhat were expected to be the transitory effects of an external shock stemming from Russia'sdevaluatiorn and default in August 1998 (akin to the Tequila crisis), the SSAL eventually was themain instrument used by the Bank to redress: (i) the devaluation of the Brazilian real in January1999; (ii) the negative impacts of adverse campaign rhetoric by the leading presidential candidatesin July 1999; (iii) the appreciation of the US dollar vis a vis the Euro; (iv) market nervousnessbecause of Y2K towards the end of 1999; (iv) the increasingly weak executive capacity of thegoverning Alliance party that took over in December 1999; and (v) allegations of corruption andthe resignation of the Vice President in October 2000. All of these events occurred while generalmarket trends deteriorated: country risk premiums for all emerging markets were rising andcommodity prices fell.

As is well known, the economic, political and social situation in Argentina deteriorateddramatically during the course of 2001, after the SSAL was fully disbursed, leading to a newinternational support package, called the blindaje. This time, the IMF took the lead in providingresources, eventually disbursing US$16 billion between January 2001 and September 2001, withthe Bank's support concentrated on provincial reform and a new SAL of $400 million in August2001. There were three Ministers of Economy in quick succession in March 2001, with the finaleconomic team resorting to increasingly risky and debilitating economic measures in an attempt torestore confidence. Even the injection of substantial resources in September 2001, when theRepo was activated and the Bank's financing for that program disbursed along with that by theIDB and IMF, could not restore confidence in the banking system. This ultimately led to theimposition of banking controls, a popular backlash, and the change of government in December2001. At the end of 2001, default was declared on Argentine public debt (except for that with theIFIs) and in early 2002 the peso was allowed to float. In the meantime, the country continued tobe in a deep recession with poverty reaching 50 percent of the population by July 2002.

A recent retrospective on Argentina suggests that the current economic crisis resultedfrom the interaction of the country's vulnerabilities with inadequate policy responses, the result ofweak institutions and political impasse that worsened as time went by (particularly in the periodfollowing the last disbursement under the SSAL). The retrospective points out that while externalshocks may have been the root of the problems at the end of the 1990s, Argentina-specific factorsbecame increasingly important by the end of 2000, notably with the resignation of the VicePresident in October 2000, the two resignations of the Economy Ministers in quick succession inMarch 2001, the resignation of the President of the Central Bank in April 2001, and other events,combined with the Government's inability to deal with the situation ultimately proved to be thedownfall. It may have been possible to avoid the crisis, or at least to reduce its costs, if theauthorities had the political backing to act in a more timely and consistent fashion. Unfortunately,the retrospective concludes that it is not likely that anyone outside of Argentina could haveeffectively prevented the crisis from happening.

Despite the overall outcome, a number of the SSAL's accomplishments were highlyrelevant. The loan, along with the Repo, facilitated the Government's access to internationalcapital funds for the period 1999-2000, and bolstered the banking system's defenses to deal with

-9-

volatile global markets until such time that poorly conceived domestic policies reversed the manyhard fought reforms of the banking sector in late 2001. The SSAL's achievements were alsoimportant from a sector perspective. The proposed assistance was significant in keeping up themomentum of reforms that had been initiated under previous operations and were still part of theBank's policy dialogue with Argentina, thus seeking to enable the Govenmment to remain focusedon its reform agenda even while attending to pressing financing difficulties and the comingelectoral campaign (with national elections held in October 1999).

The SSAL agenda, furthermore, constituted the bridge from one administration toanother, thus facilitating the transition of power at the end of 1999 and gave impetus to reformsby the new Administration. Although the SSAL was originally conceived to be disbursed withinthe remaining period of the Menem administration (that is by end 1999), there were delays inrealizing third tranche conditions. Thus, when it became apparent that the new governmentwould likely be formed by the Alliance party, the Bank sought to confirm ownership of theremaining measures with the new Administration. This was done starting as early as September1999 and continued into 2000 when a new CAS was prepared. Following an extensive review ofpriorities, the new authorities endorsed the program and the SSAL served as a vehicle formaintaining a policy dialogue and providing the new officials with the instruments for addressingtheir reform priorities. It is important to highlight that the new Administration was committed tomaintaining all important facets of Argentina's economic policy framework including theexchange rate regime.

The beginning of the SSAL's implementation was auspicious and Argentina was the firstemerging market to return to the international capital markets after the Russian devaluation anddefault. In late February 1999, Argentina successfully transacted a 20-year billion dollar issue,despite the Brazilian devaluation in January 1999 and the continuing impact of the Russian crisison intemational capital flows. Access was expensive and somewhat restricted, however, in part,due to the extemal circumstances just described. During 1999, the Argentine federal governmentraised nearly $12 billion (about 4 percent of GDP) in intemational capital markets. Of thisamount, the SSAL's second-tranche played a direct role in the issuing of $1.5 billion inintemational bonds in September 1999, when $250 million of the second tranche was convertedinto a Policy-Based Guarantee (Report No. P-7331-AR). Such market access lasted untilOctober 2000, when country risk premiums rose once again to unsustainable levels following theresignation of the Vice-President.

On the other hand, the shock created by Brazil's devaluation had a significant negativeimpact on Argentina's economy. Mercosur trade collapsed in all directions, with Mercosurcountries the destination of about one-third of Argentine exports in preceding years. WhileArgentina's trade balance with Brazil continued to register a surplus, both imports and exportswith Brazil declined sharply (exports to Brazil fell by 28 percent and imports from Brazil fell by21 percent in 1999). A similar result occurred with the smaller partners of Mercosur. Theappreciation of the dollar, weak international commodity prices and growing domestic concernsover the outcome of upcoming presidential elections added to the country's difficulties. In thisenvironment, an economic contraction was extremely difficult to avoid, and real GDP fell by 3.4percent in 1999.

-10-

A decline in GDP of this magnitude imposes inevitable social consequences. Therefore,establishing a list of effective social programs to be protected in the 1999 and 2000 budget, theSSAL helped to at least preserve key social services during the downturn. However, the need toconvince markets of progress on the fiscal front made it impossible to significantly increase socialsupport programs during the recession. Due to some improvements in labor market distortions,unemployment in 1999 did not rise as substantially as during the aftermath of the Tequila crisis,despite the more severe GDP contraction experienced in 1999. The unemployment rate rose froman average of 12.4 percent in 1998 to an average of 13.8 percent in 1999. While the early part of2000 showed signs of recovery, these were not sustained and the economy continued in recessionduring 2000 and 2001 before collapsing in early 2002. Social indicators have progressivelyworsened, necessitating a more concerted approach to income support for unemployed heads ofhouseholds with children.

The continuing financial sector reform effort under the SSAL, along with the financingitself and the accompanying Special "REPO" loan probably played a significant role in therelatively strong performance of the banking system during 1999 through to mid 2001. Despitethe recession, deposits in the banking system expanded by 2.9 percent during 1999 - continuingthe re-intermediation of the economy that began with the onset of the Convertibility Plan.Domestic credit grew by 1.1 percent, reflecting a cautious use of the expanded deposit base.International reserves of the financial system grew by nearly five percent. Thus, in many respects,it is likely that the reforms supported by the SSAL and Repo, building on previous SALs andFSALS, all contributed to maintaining confidence in Argentina's banking system for a longerperiod than might have been expected. It was not until early July 2001 that depositors began towithdraw their funds from the system and there were no major bank closings or disruptions to thepayments system until the end of 2001, although a number of small banks were closed as part ofthe consolidation of the banling system that had been occurring in previous years. The presentcollapse of the banking system reflects the cumulative impact of measures taken during 2001 thatreversed the earlier reforms by lowering reserve requirements, capturing banking credit by thepublic sector, imposing deposit restrictions, and converting dollar loans and deposits to pesos atdifferent rates in early 2002.

There were advances in certain other sectors. In general, advances were made inrationalizing social programs, improving health sector regulation, advancing the dialogue andunderstanding of provincial finance reforms, and advancing regulatory reforms. As is the case ofthe financial sector, some of these have now been reversed by intervening policy decisions butothers continue in force. As acknowledged at the outset, some reforms remain only partial,reflecting the incremental approach to reform adopted in several areas. Some accomplishmentsconsisted of the completion of reports, guidelines and plans which may or may not be pursued inthe future. Others resulted in the preparation of legislative proposals without any immediateassurances of their subsequent adoption by the Congress Details are summarized in section 4.2and elaborated on in Annex I.

To be sure, the SSAL involved numerous instances in which the Bank sought to push theenvelope and to lay the basis for reforms in the future as part of a continuing, evolving process.

- 1 1 -

Thus, in many areas the ultimate achievements may only be realized if the Bank and theGovernment continue to be engaged. Given the nature of the Bank's relationship with Argentina,there is every expectation that this will be the case. While the immediate impacts may not yet befelt, some authorities believe that the various measures-including some of those which have notso far had an obvious impact--have created a cultural change that could prove to set the stage forvaluable long lasting effects.

4.2 Outputs by conmponents:Human Development Sector Actions

The labor reform objectives sought under the SSAL were successfully achieved and wentbeyond the initial targets set under the SSAL. These reforms should have long lasting impacteven though implementation of the new legislation has been slow. During loan preparation, as inpast attempts at labor reform, the pervasive and rising joblessness plus strong union resistanceappeared to crimp the prospects for transforming the rigid, tightly regulated labor regime,especially rectifying the way in which collective bargaining is conducted. Thus, the Bankaccepted a commitment to study possible options for creating a fully capitalized unemploymentinsurance scheme to replace the costly and outdated system of severance payments. However, thenew administration in 2000 set its sights on bringing about an actual, direct and morecomprehensive reform and resurrected an earlier reform package that had been developed by theprevious administration with the Bank's support. This time, the measures won Congressionalapproval, along with legislation providing for the trimming of labor taxes and easing ofrestrictions on new workers. In the process, the specific target of developing proposal forlowering severance payment costs and creating individual worker accounts-a reform that has notyet been fully debated-was substituted via a waiver with the more comprehensive reform thathad previously been sought. In mid-2001, the Labor Ministry established regulations that wouldlead to renegotiating the many contracts involved, according to the new, more flexible laborlegislation. Once the reform is fully implemented, these new contracts could increase labormobility substantially, easing the re-absorption of displaced workers in the market, and boostingproductivity.

In the health insurance sphere, the Government sought to extend its previous reforms forthe liberalization of the market under the Health Insurance Reform Loan. That loan had openedcompetition among union-run health insurers, set up a mandatory package of health services andestablished a health superintendency. Building on these reforms, the SSAL called for the NationalHealth Institute for Retirees (INSSJP) to outsource its services and improve its cost effectiveness.While this condition was technically met, this approach suffered a legal setback. Consequently, thenew authorities recast the goal to aim at substantially expanding the number of providers andengaging them through far more transparent procurement procedures than had previouslyprevailed. This was achieved. Early on, INSSJP signed 75, mainly new, contracts covering thevast majority of eligible services. These were initially reported to be generating savings exceeding$17 million monthly, thereby helping to reduce the Institute's serious budget deficit (althoughunder current crisis conditions the situation appears to be worsening). In the process also, somebeneficiaries obtained freer choices of providers. Meanwhile, the Government verified theimplementation of the new prudential and consumer protection norms set to govern beneficiaryservices, regulation of medical programs, marketing, etc. Likewise, it fixed suitable standards for

- 12 -

the union-run carriers' public performance reporting, and triggered more open, frequentpublication of the results. These actions were constructive but much more basic improvements areneeded for the development of a competitive health care market and to make the Government'sprogram cost effective.

Three federal nutrition programs were consolidated into a single entity while steps werealso taken to better target their services in order to cut duplication and overlap. To the same end,the Government prepared new eligibility criteria for recipients of pensions granted by thelegislative and executive branches in order to raise this program's efficiency and its curb abuses.It called for their better auditing and cross-checking of beneficiaries, while also extendingimproved poverty measurement criteria to a new total of 14 social programs.

Several well intended proposals were introduced which could signal the directions forsignificant higher education system changes-but they gained little standing. A plan was set out,with active Bank assistance, for improving the equity and efficiency of public university finance.Its implementation could provide badly needed improvements: greater opportunities for lowincome students, expanded cost recovery, and stronger weight in student selection on merit andtransparency. While budget cuts have curtailed the use of this formula, it is currently beingapplied during 2002 as a way of rationalizing the distribution of at least some resources to publicuniversities with the prospect for more general application over time. In addition, theGovernment issued a resolution to create a national fund which would help initiate actions tothese ends. Nevertheless, these initiatives are not assured of sustained backing, and theconstituency for changing education funding is not very powerful so far. The hope is that theseinitiatives will lead to a broad debate on how to finance the tertiary education system moregenerally. The Government also arranged for aptitude testing of all third year secondary schoolstudents and for distribution of its findings to schools, parents and the public. The resulting datacould be useful for meeting Argentina's need to demonstrate the school system's accountabilityfor its performance to the public, as well as increasing the skilled labor supply and better aligningthe system with changes in the economy. But so far there is not a "culture" of using suchstandardized test results, and the ultimate use rests on the Federal authorities' success inpersuading their provincial counterparts (who bear the sector responsibility) to pursue this effortmore actively.

The authorities undertook several direct poverty alleviation measures in addition to theaforementioned improvements in social protection activities for better targeting and effectiveness.The action with immediate consequences was to provide some protection of adequate spendinglevels for effectively targeted, high quality social programs against the 1999 budget cutbacks, andgive them further support in 2000. This broke with tradition since Argentina's social expenditurepattern has been one of declining spending on priority programs when economic activity fell andpoverty increased. The Government moreover enlarged the list of these programs agreed in theSSAL targets with added health and employment assistance. It also put in place a bettermethodology for calculating " basic needs" indices and moved to apply it starting in 2000. Theauthorities expanded the usage of this methodology to install proxy means testing in fourteensocial programs and the same number of provinces, which should help to eliminate inappropriatebeneficiaries. These measures should likewise lend more transparency to these programs.

- 13-

Financial Sector Actions

After the Tequila crisis, the banking sector was strengthened through improvementsmainly in regulation and supervision, together with privatization. However, the mid-1990s'experience had also demonstrated a need for further reductions in the public banks' role in thesector. One of the SSAL's goals accordingly called for bringing the Government's second-tierhousing mortgage bank (BHN) to the point of sale to private enterprise. In the event actually, theGovernment surpassed the target and sold commercial investors a controlling interest in the bank.

On the other hand, national sentiment continued to oppose the privatization of theremaining federal bank (BNA). It was decided therefore to only seek a more transparentaccounting of BNA's financial condition. This was obtained: BNA was comprehensively audited;its operations and guarantees were documented more openly; its accounts are published in StockExchange reports; and its condition is shown in BNA's "website." These have lifted some of the"veil of secrecy" regarding the institution--but not altered its problematic status. The currentbanking crisis leaves the role of the public banks unresolved and will no doubt have to be thefocus of a renewed reform effort.

The SSAL assisted in enhancing the private banks' regulatory framework. With itsassistance, a new "Permanent Commission on the Evaluation of Financial Regulation" began toengage in better coordinated surveillance of, and attempts to resolve, banking system problems.It produced recommendations on liquidity management which led to rule changes. It alsoproposed changes regarding security markets and insurance from which legislative proposals wereprepared. A parallel temporary inter-agency committee reviewed bank failure and closureprocedures in order to assess the adequacy of the mechanisms for resolving problems in thesefields. It produced recommendations that could improve existing laws and regulations byupgrading the legal security of assets, deposit carve-outs and transfers. Further, the committeeand a consultant examined the Central Bank's governance regulations, which they found adequate.Also, proposals were drafted to amend the Central Bank charter so as to tighten bank licensingand other governance requirements. These so far have not won Congressional approval forpolitical reasons. In complementary activity, the Government and Central Bank jointly reviewedthe criteria being used for supervising public banks vis a vis private banks, as well as theirenforcement. They found these criteria compatible. Further, the authorities submitted to theCongress proposals for protecting banking regulators and supervisors from personal liability forgood faith actions. These failed to obtain a favorable reaction, reportedly because of differencesover the immunity provisions. (This action was also politically inopportune since the Central BankPresident then faced Congressional investigation, and so the proposed law appeared to beself-serving.) This recommendation was followed up in the 2001 FSAP, jointly undertakenbetween the Bank and the IMF. This proposal continues to be debated in mid-2002 forCongressional consideration. Separately, the Central Bank established a special unit dealing with"money laundering" that reviews suspicious transactions in line with Argentina's newly revisedlegislation (which is consistent with the international Financial Action Task Forcerecommendations).

-14 -

In order to deepen the capital market, the Government won Congressional approval ofnew laws for facilitating the growth of leasing finance and permitting mutual fund investmentsoutside the MERCOSUR area. It also requested, but has not yet won comparable approval oflegislation which would promote the use of secured transactions in credit contracts. Under theSSAL as well, there was a study of the tax treatment of different financial instruments todetermine whether corrective legislation was needed to achieve greater tax neutrality. Thisconcluded that there was not any but it found the prevailing framework unclear and inconsistent.The Government therefore created a commission which addressed these problems and a March2000 decree resolved issues of differential treatment of repurchase agreements versus pledges orguarantees. These findings were followed up through an IDB operation.

Further, the Government reviewed, and then prepared an action plan to reform, the ratingsindustry. This would eliminate obligatory ratings on IPOs, debt instruments and equities whilelessening the Securities Commission's reviews. Similarly, it sent the Congress high qualityproposals to modernize the insurance market's framework, regulation and practices. Neither ofthese efforts have so far progressed to the accomplishments desired but there already have beensome commendable improvements in the insurance area. Under the SSAL's influence, "bestpractice" concepts of solvency monitoring and early warning systems, along with greater attentionto consumer protection concerns, are beginning to enter the industry. Meanwhile, the InsuranceSuperintendency constructively tightened life insurance companies' compliance with minimumcapital requirements. And its more rigorous enforcement policies led to orders to over 40companies to cease operations over the subsequent two years.

Intergovernmental Fiscal Sector Actions

The Federal and provincial authorities reached a long sought accord in principle onrevising Argentina's complex way of financing sub-national governments and revenue sharing, asignificant advance. The 1994 Constitutional Reform had called for Congressional enactment ofchanges in the system by the end of 1996, given the widespread appreciation of its inadequacies.But such changes had been hard to realize, even after several rounds of difficult negotiations withthe provincial governments. Accordingly, the SSAL addressed the issues, taking into account thelarge sums involved (just under 6 percent of GDP in 1997) and their contribution to Argentina'spublic finance problems. It called for measures to help advance the dialogue, particularly aboutsimplifying intergovernmental transfers and changing the formula for their allocation among theprovinces. Under the program, intergovernmental proposals were prepared which wouldsubstantially change the rules and procedures governing transfers to the provinces. Their creationplus subsequent Congressional approval of the "Federal Commitment" document affecting thesystem presaged important changes. In fact, the reform proposals already influenced the adoptionof a moving average provincial share of transfers for 2001-05 as part of a Federal-provincialagreement reached in November 2000. This was considered to constitute an agreement tosimplify the system and to include social security finances in the primary distribution package.Moreover, arrangements were made for Federal-provincial negotiations on propositions forsimplifying the revenue distribution formula to make it more transparent, equitable and morecapable of motivating stronger provincial accountability and efficiency. At least, these majorissues are now on the table and are the basis for ongoing negotiations in the design of a new

-15-

federal provincial fiscal agreement. Correspondingly, there are also proposals for decentralizingthe tax system, which would provide the provinces new instruments and greaterrevenue-generating authority.

Infrastructure Sector Regulatory Actions

The extensive restructuring of and participation of new players in infrastructure servicesby the late 1990s have made it necessary to rationalize the myriad changes. This coincided withgreater recognition that Argentina's high transport costs and poorly integrated modes werecausing costly economic difficulties. In response, the SSAL supported an effort to improve theinstitutional framework. It supported the preparation of proposals for the creation of anintegrated freight transport regulatory agency keyed to encouraging multi-modal services.

In addition, the Government designed a plan to increase the autonomy and independenceof sector regulatory agencies through advancing the implementation of improvements inregulators' selections and tenure, as well as in these entities' funding sources. A draft lawpreviously submitted to the Congress for harmonizing regulatory standards was revised to tightensome elements but it has not yet been passed. Meanwhile, the Attorney General sanctioned theabstention of traditional executive branch agencies from technical and economic issues inregulatory disputes, thereby fortifying regulatory entities' independence in these matters.

4.3 Net Present Value/Economic rate of return:N/A

4.4 Financial rate of return:N/A

4.5 Institutional development impact:There were constructive advances made, including some of long term importance, such as

placing the housing mortgage bank under commercial management. The consolidation ofresponsibilities for nutrition programs and the further strengthening of banking supervision andregulation mechanisms figure as well. The Insurance Superintendency progressed, although it stillneeded to be fortified. In general, the supervision and regulation of the financial system served asstrong points during the prolonged recession/stagnation of 1999-2001. Clearly, the bank run oflate 2001 - due to macroeconomic considerations and concerns about the currency regime -along with the devaluation of 2002, led to tremendous stress on the financial system, perhapspermanently destroying some of the institutional achievements gained during SSALimplementation.

Institutional improvements could accrue from the emerging consensus with the provinceson intergovernmental finances. The process of preparing high quality technical analysis of thereform of provincial taxes and transfers, along with the debate engaged with the provincialauthorities, advanced the policy dialogue significantly. The ideas developed and presented at thattime continue to serve the basis of discussions in Argentina on this complicated and politicallydifficult reform.

-16-

All these are judged to more than balance the unsuccessful efforts to rationalize theNational Health Institute (INSSJP) and the so far unpromising development of the transportregulatory agency. On these grounds, the SSAL's institutional development impact is rated"Modest" for the period covered during the project implementation. Sustainability of theseinstitutional reforms will be discussed in Section 6.

5. Major Factors Affecting Implementation and Outcome

5.1 Factors outside the control of government or implementing agency:

Argentina confronted severe external shocks that affected its economic performance, andthe implementation of this loan. After growing by 3.9 percent in 1998, the economy suffered acontraction of 3.1 percent in 1999. A recession begun in the fourth quarter of 1998, following theRussian crisis and subsequent turbulence in international financial markets. These financial factorsinitiated the recession, but then the Brazilian devaluation of early 1999 (Argentina's largest tradingpartner), falling commodity prices (terms of trade fell by over 10% in 1998/99), the appreciationof the US dollar vis a vis the Euro, and unfavorable weather conditions for the agricultural sectorcontributed to the downturn. In the second half of 1999, uncertainty over the presidentialelections further complicated the panorama. So did the market fears about the costs anddisruptions of Y2K in developing economies. As a consequence of external developments in1999, part of that year's second tranche release was diverted to a policy based guaranteeoperation, enabling the authorities to strengthen the liquidity position of the government, andfacilitate the transition to the new administration.

Tracing the evolution of country risk ratings reveals the sensitivity of the markets to theimpact of both external and internal events. Argentina's country risk ratings rose sharply whenfirst Russia and then Brazil devalued. There was a jump again when statements were made byleading political figures about the desirability of defaulting the country's external debt in July 1999during the presidential campaign. These jumps reflected increases in sovereign spreads, domesticinterest rates with an impact on economic activity, and Argentina's ability to access theinternational markets and its pattern of capital flows. A pronounced contraction in capital flowsbecame evident starting in 1998, which was accentuated in 2000. The electoral campaign periodand the presidential transition had a significant impact on the conduct of economic policy, andslowed the loan's implementation. The other source of adverse real shocks was the global growthdecline that started in 2000.

Various parties involved in this operation likewise affected its outcome. For one, theSSAL's preparation and subsequent implementation benefited to a very large extent from theaforementioned earlier sizeable Bank investment in economic and sector work, as well as itsintensive Government dialogue. There was also close coordination with the IMF, especially in thedevelopment and review of the Government's program and preparation of the Loans. The EFF inplace provided an essential element for the underlying macroeconomic program, and there werefrequent consultations on Argentina's conditions and prospects;

The IDB participated comprehensively as well. The two banks' loans were wellcoordinated during identification and preparation through joint missions, followed by continuous

- 17 -

dialogue in the course of implementation. The closely parallel conditionality of the Loans andworking cooperation helped keep the Government focused on the shared reform program. TheIDB made a special contribution in seeking to strengthen the quality of social services, forexample in co-supervising the extension of irnproved poverty measurement methodology toadditional Argentine programs. It also aided the activity in the education sector.

5.2 Factors generallv subject to governnent control:

The implementation of the SSAL was affected considerably by the change in theBorrower's counterparts following the late 1999 elections, impacting the pace of reforms and thedisbursement of the third tranche. The short timeframe planned for the three tranches imposed atight schedule for complying with conditionality. The change in Government affected thetimetable of meeting the SSAL's conditions in order to give the new administration the time tointemalize and commit to the remaining reforms. Ultimately, one waiver was granted at the timeof the third tranche release concerning the labor reform condition (mentioned in section 4.2). Thiswaiver, however, was largely technical. While the specific action was not completed, theGovernment secured legislative approval of a much broader labor reform than was originallyestablished in the legal agreement. The advent of the new administration furthermore necessitatedan initial extension of the Loan's Closing Date. The Bank worked with the new administrationto take time and assess the SSAL's consistency with its own policy objectives, and to confirm itscommitment to them. This led in tum to a further delay subsequently in order to help ensureGovernment's compliance with all Loan conditions and the solution of some procedural problems.In August 2000, a final extension was approved in order to enable the administration to completethe administrative processes required for submitting legislation to the Congress.

The severity of Argentina's macro problems helped to shape the outcome. This wasjudged to have aided in pushing the reform agenda more forcefully than would have occurredwithout that impetus. This might have contributed to the Govenmment's exceeding some SSALtargets and its especially strong support of reforms under the direct purview of the Ministry ofEconomy.

The fiscal situation remains a weak spot, as it did earlier when it led the Government tosponsor a Law of Fiscal Responsibility, passed in July 1999. This law laid out the path to abalanced fiscal budget by 2003, and the creation of a "rainy day" fund. Albeit well intended, thislaw never had teeth. The Govemment did not meet the fiscal targets included under theaccompanying Fund program and there was a considerable overshooting of public spending in1999, an election year. The lack of fiscal discipline-at a time when it was needed to generateconfidence in the Government's ability to adhere to its commitments-proved to be one of thefactors that affected the market's perceptions of Argentina's ability to stick to underlying tenets ofthe Convertibility plan. The new government, moreover, addressed its larger than expected fiscaldeficit with new taxes in early 2000, as part of the expansion of the Fund's program. Again, whilewell intended, the negative impact of these measures on consumer confidence (as they mainlyincreased taxes on the middle class) and on the market's perception of the Government's ability toaddress the underlying fiscal issues more than offset the positive impact on tax revenues. Thus,once again, the lack of a real effort to tackle Argentina's fiscal imbalances continues to drag downconfidence.

-18 -

By late 2000, the continuing concerns over fiscal performance were compounded by apolitical crisis that eventually divided the two-party alliance governing Argentina. Economicactivity, which had been largely flat during the first three quarters of the year, turned sharplynegative during the fourth quarter. Access to international capital markets became restricted, andthe Government sought a new international financial package at the end of 2000. Thus, when theSSAL had fully disbursed in September 2000, the Government soon faced an even worse crisis ofconfidence that ultimately led to another international support package led by the IMF.

However, despite this new much more substantial international financial package, politicaltensions and an unfavorable external environment contributed to continuing economic difficultiesduring 2001. A greater crisis of confidence unfolded as Argentines began to withdraw depositsfrom banks, and capital flight followed starting in July 2001. By the end of the year, in the midstof a full-fledged bank run, capital controls were imposed, as well as restrictions on the withdrawalof cash from banks. President De la Rua was forced to resign, and during a period of a week, fiveinterim Presidents passed through the Presidential palace.

5.3 Factors generally subject to implementing agency control:N/A

5.4 Costs andfinancing:

During the implementation of the SSAL, Government financing needs surpassedexpectations due to the depth and persistence of the economic downturn. Part of the Bank'sresponse to this situation was to leverage the second tranche, canceling $250 million andallocating this amount to a Policy-Based Guarantee that raised about US$1.1 billion in the capitalmarkets in October 1999. As noted above, the SSAL program, once disbursed, was subsequentlyfollowed by an even larger program, amounting to about US$ 40 billion, including the voluntaryparticipation of private banks in public debt swaps.

6. Sustainability

6.1 Rationale.for sustainability rating:

The events that followed the closing of the loan demonstrated that the reforms supportedby the SSAL and the accompanying and subsequent Fund programs were not sufficient to sustainArgentina's economic policy framework. Moreover, the collapse of the banking sector is a clearcase of past efforts to strengthen the system being undermined. Nevertheless, a number ofspecific actions from the SSAL reform program may still prove to be sustainable. For example,the Mortgage Bank (BUN) is still in private sector hands; however, the banking system is in direstraits and suffers from a variety of governmental restrictions. Other examples include theproposals for intergovernmental fiscal reform prepared under the SSAL, which remnain in thecenter of discussions between the federal government and the provinces, and will likely have itsimpact when a new revenue sharing agreement will need to be approved by the end of 2002.Some of the health sector reforms advanced somewhat over the last year, but they may face anuncertain future. Further consolidation of social programs, initiated under the SSAL, is now morenecessary than ever. Efforts to provide legal protection to Central Bank managers in the

- 19-

execution of their lawful duties, a proposal tabled to Congress in the context of this loan,continues being debated today in Argentina.

Currently, the authorities are contemplating a stabilization and reform effort that wouldbolster credibility in national institutions and renew confidence among domestic and internationalinvestors towards the recovery of economic activity and reduction in unemployment and poverty.The SSAL established a framework for a number of operations which could be activated by theBank and the IDB in such renewal efforts. As part of the Bank's contribution to the subsequentinternational package, the focus was on intensifying reforms in the social sectors, public sectorinstitutional reforms, and intergovernmental fiscal relations. The IDB meanwhile also moved tofollow up on some of the SSAL social sector, insurance, and capital markets initiatives.Currently, the consolidation of the social sectors, protection of social expenditures, reform offederal provincial and federal fiscal relations, reforms in public administration, financial sectorreform, and private sector development, all having roots in the SSAL operation, are underconsideration by the authorities for a renewed multilateral support effort.

On balance, the overriding factor in rating sustainability as "unlikely" is that the generalpolitical and economic environment does not bode well for continuing some of the specific fiscal,regulatory and social sector reforms that had advanced well during the SSAL implementation.However, the continued implementation of such reforms remain an integral part of the newagenda for the current Administration in the context of an ongoing stabilization and reform effort.

6.2 Transition arrangement to regular operations:N/A

7. Bank and Borrower Performance

Bank7.) Lending:

The Bank's performance during lending is judged to have been satisfactory. It wasespecially notable in providing timely and atypical assistance to a borrower impaired byexceptional and unanticipated financing needs. In particular, the time it took to proceed from theagreement to consider the Borrower's urgent loan request and bring it to fruition was exemplary.The Government requested the Bank support in August 1998; it was agreed to at the AnnualMeetings, and the SSAL was prepared in about three months.

It bears noting that a QAG sub-panel did not consider the Bank's work in preparing theSSAL fully adequate in terms of the treatment of fiduciary concerns regarding accounting andauditing. But the overall QAG report differed from the sub-panel's finding on the grounds of lackof clarity of the Bank's expectations in these areas with respect to adjustment operations. Sincethe sub-panel's criticism appears to have related more to IBRD adjustment operations generallyrather thain this SSAL, it will not be fully addressed here. Nonetheless, it merits attention that theBank met two of the overall QAG report's recommendations before the SSAL's approval. Thesewere that a preliminary assessment be made of the adequacy of accounting and auditingarrangements relating to the Government's use of the funds, and general consideration be given totheir institutional framework. The Bank had already assessed the Government's audit agency andfound its practices and standards with project audits, acceptable.

-20-

7.2 Supenrision:

The Bank's performance during supervision is judged to have been highly satisfactory,particularly in light of the operation's complexity and broad coverage. This necessitated themanagement of specialized teams in numerous sectors, including highly qualified external andinternal experts on issues such as tax laws, regulation, banking supervision, health insurance,poverty measurement, and so on. This generated some high quality Bank and Bank-supervisedanalytic work done during the SSAL's execution, e.g., in drafting the proposed legislation oninsurance sector policies and secured transactions. Bank supervision also is reported to havehelped bridge divergent interests of the two Governnent teams responsible for conducting theprogram without substantial slippage on policy grounds. This was deftly done, considering thatthe second administration was faced with satisfying the conditionality for the final tranche, someof whose provisions they had disagreed with when they were in the opposition. In thisconnection, a former Economy Ministry Undersecretary commended the Bank's team for helpingto overcome "public choice" difficulties and resolving differences among Government officials.The Bank supervision team also displayed constructive flexibility in meeting some requests formodification of the original conditionality from some of the second administration's officials, forwhich the latter praised the Bank. The record shows intensive, sharply focused, sustained, highlyresponsive attentiveness to program implementation and high level problem solving, abetted byheavy Bank staff inputs. While only 7.4 staffweeks were expended on lending through December1998 leveraged by substantial and relevant ESW available at the time of the request for suchoperation. this multiplied to over 47 sw by end FY99, and, ultimately to over 128 sw by FYO1 forsupervision.

A request for an inspection by the Bank's independent Panel was received during thecourse of implementation. This request, focusing on the budgetary protection provided to thetargeted social programs, was considered to be without foundation by the Panel based on apreliminary review of the Bank's supervision efforts.

The Bank supervision also took special precautions on the fiduciary side. In addition tosupplementing the safeguard checks the measures on the fiduciary side taken before approval, theBank requested an external audit of the disbursements which generated an unqualified satisfactoryopinion on the Special Account. The Bank undertook a special review of this Account coveringlater transactions associated with the policy-based guarantee. Its conclusion was also satisfactory.

The only area in which one might reflect upon is whether or not there was adequateassessment of the impact of the very rapidly changing conditions as the successive external anddomestic shocks hit Argentina during implementation and whether these changing conditionsshould have triggered a different stance by the Bank as it proceeded with the SSAL. Thisquestion could be raised for example, when Brazil devalued in early 1999 in terms of what impactthis had on the sustainability of Argentina's overall economic program.

While in many dimensions the answer to this question goes beyond the SSAL programitself and goes to the heart of the reflection by the IFIs on whether or not the Argentine crisiscould have been avoided, if alternative policy options had been pursued earlier. The general

- 21 -

response provided in the Region's retrospective on Argentina is no. Many leading economistconsider that Argentina's economic program remained viable until mid-2001 or later. Even withthe exchange rate shock of the 1999 Brazil devaluation, there were reasonable prospects thatArgentina could have regained competitiveness. This was borne out by ESW carried out inAugust 1999, assessing Argentina's competitiveness vis a vis Chile, Uruguay and Brazil, and wasconsistent with the Fund's calculations of Argentina's effective exchange rate at the time, eventhough more recent calculations by the Bank may show that the real exchange rate hadappreciated considerably by 1999.

More broadly, the Bank was cognizant of the additional effort-going beyond theSSAL--that Argentina would have to had undertaken to sustain its economic program and therisks of alternative exchange rate regimes, particularly if such a change were to be done undercrisis conditions. On the fiscal side, the Bank's concerns were borne out by the risk assessmentcarried out in February 2000 that identified issues of debt sustainability if the persistent fiscalproblems were not addressed while the Fund continued to insist on fiscal targets as part of itscontinuing support. Equally, the Bank had diagnosed and formulated an agenda to enhanceproductivity as well as strengthen the social safety net, all underpinning the Convertibility plan.Thus, the need for more intensive reformns in the public sector-particularly public expendituremanagement - and competitiveness was clearly laid out in the May 2000 CAS (see paragraphs 52and 53).

7.3 Overall Bank performance:

Overall the Bank's performance is considered satisfactory.

Nevertheless, this operation flags the issue of the appropriateness of the IFIs - particularlythe Bank--helping countries prevent or mitigate vulnerability to economic shocks, or cope withvolatile capital market access. However, such questions appear to have been resolved when theBoard approved assistance to such countries as Korea in response to the 1997/98 crisis, per the"Financial Crisis and Structural Reform: The Bank's Role and Instruments" paper ( ref.SecM98-743). These issues were moreover debated during the EDs' discussion on theSSAL/"REPO" in November 1998. And the EDs' approval in April 1999 of the extension of theBank's credit guarantee program to encompass sovereign borrowings is considered to haveaugmented Bank sanction of the SSAL's approach (ref. "World Bank Policy-Based Guarantees,"R99-53).

In addition, this operation raised the question of the proper price and fee structure forprogram lending that is large, unexpected, and has strong liquidity features. The incrementalfinancial risk to the Bank and discouraging the abuse of an incremental financing option justifieda higher charge. The formula set provided that these loans would have five-year maturity periods,including three years of grace, and interest rates of LIBOR plus 400 basis points, in addition to aone percent front end fee and a commitment charge of 75 basis points over LIBOR. Theseconditions were judged adequate to compensate the Bank for its extra risk. On their face, theseterms provided considerable price differentiation between IBRD products. They also took intoaccount the SSAL's differential costs and attractiveness to the Borrower (especially after theBoard approved more austere conditions for such lending in October 1998 than had applied to thefirst Korean emergency loan). It is believed therefore that they were appropriate for the

-22 -

circumstances. But a more specialized, extensive assessment than this review can provide wouldbe needed to definitively determine whether or not these terms fully reflected the costs to theBank, as well as efficiently rationed the Bank's constrained capital and covered all relevant risksincluding those to cash flow. Additionally, in the context of the current crisis, the use of specialterms with their significantly shorter than customary repayment needs, bears reexamination.

Borrower7.4 Preparation:Ref para. 7.7

7.5 Government inmplementation performance:Ref para. 7.7

7.6 Iniplementing Agency:N/A

7.7 Overall Borr7ower peifoirnance:

The Borrower entered into the commitments under the SSAL with the understandableimperative of obtaining its resources. But despite this, the Government generally pursued thereforms satisfactorily. To this extent, the SSAL accomplishments derived from and reflected aconsiderable degree of "broad ownership" of the thrust of the proposed changes, especially fromthe more reformist-minded officials. This was evident at the outset. Moreover, some of thesecond administration's leaders provided fresh momentum and desire for reforms which proveduseful, especially on the labor regime. Certainly, there were mixed Government views on many ofthe planned actions, as well as (with the benefit of hindsight) what was ultimately achieved. Butthere was a reasonable consensus, even among differing government groups, on the issues forwhich new directions were needed, and those were reflected in the SSAL. Further, there wasoften good professional accord with the Government and partner institutions on the appropriatepolicy responses. However, this sometimes tended to be truer in dealing with technical rather thantop Argentine policy-making levels, particularly with the waning enthusiasm and political capitalof the outgoing officials towards the end of the Menem Administration. The Ministry ofEconomy, Central Bank, and the Chief of Cabinet's Office, in addition to the Attorney Generl'sOffice, made especially helpful contributions in the implementation of this loan.

Conversely, others manifested less avid backing, especially those concemed with theeducation and health system reforms, with outright dissent in some instances. Even the forcefulsupport of Economy Ministry officers was sometimes insufficient to persuade their colleagues,some of whom appeared hesitant about the political costs and benefits of the proposed changes.And several had to contend with strong vested interest groups, whose powers stood to bepossibly jeopardized. The officials responsible for these sectors are also understood to haveresisted some proposals on the grounds that they were asked (during strong fiscal restraint) toperform difficult tasks without adequate incentives such as compensation from the Loan.Furthermore, quite a few proposals also encountered opposition from the Congress. Theseproblems indicate that stronger Executive Branch control and backing for the proposals wereneeded.

-23 -

Overall, the extent of the Borrower's collaboration in the preparation and implementationof the operation is judged to have been suitable under the circumstances.

8. Lessons Learned

An OPS review of experiences with the first SSALs aptly drew the following lessons, withwhich this ICR concurs:

(a) The Bank had developed a "rapid response capability" to help borrowers deal quicklyand effectively with unexpected, turbulent international financial and economic difficulties.

(b) The Bank could successfully adapt its instruments to emerging, unforeseen needs-inthis case, to help overcome the severely limited ability of developing nations to access privatecapital markets. It confirmed that it could offer loans and guarantees to finance the attendantrequirements to retrieve long-term stabilization, including financial system reconstruction. Thisdoes not indicate that the Bank should become a short-term crisis lender. Nor does it deal withwhether the Bank has adequate flexibility for rapidly managing its risk profile or raising additionalrisk capital. But the new instruments demonstrated that the Bank can provide an importantelement of long term finance when it is not available for timely support of urgent reforms.

(c) These lessons also point that for recent or possible IBRD "graduates", graduationdoes not mean that the Bank could not return quickly to support them during a crisis, even middleincome countries with prior access to private capital markets.

This SSAL allowed the Bank to respond flexibly and in an exceptional manner to thespecial circumstances of Argentina's 1998 crisis. This experience however raises some questionsabout this new instrument, which bear review. -

(a) This SSAL was prepared with the intention of sustaining a reform effort underrestricted financial conditions. It also played a role in assuring a dynamic reform trajectoryleading up to elections that would occur approximately one year after the loan's approval. This,however, begs the question of whether local political institutions would be strong enough to carryon the reform agenda following the political transition. While intensive supervision effortscontributed to the new Government's eventual compliance with third tranche conditions (with onenotable technical exception discussed above), these efforts did not prove sufficient. Although theBank recognized the risks of the political transition, it may not have been in a position to predict,based on previous experience, that political institutions would later fail under a newadministration, leading to serious doubts about the sustainability of the reform program.Nevertheless, the trade off between the desire to sustain a reform effort under tight financialconstraints, and institutional capacity to implement it during unpredictable political transitions,remains an issue of concern in other operations;

(b) There may be a potential conflict in the concept of SSALs advancing structuralreforms simultaneous while meeting urgent liquidity objectives. The Argentine experienceillustrates the practical limitations of attempting this approach in a country with a potential toenter into a crisis. In this circumstance, it took a prodigious effort in the limited time available to

-24-

define and fix the reform package with the desirable detail. Fortunately as noted, the requisiteanalytical background was largely available thanks to a reservoir of several years' ESW studiessupported by local competence. But it is questionable if this would normally prevail in mostcircumstances.

(c) An inherent conflict/moral hazard may be created, on the government side, betweenthe commitment to enact structural reforms of sufficient depth, and the desire to circumventdifficult external financing problems. Implementation of structural reforms entail laborious,time-consuming efforts within the broad government spectrum. Not all parts of the Governmentmay have a similar incentive to support such an effort. As a result, the need to solve suchproblems in a SSAL situation can create undesirable tensions between activities to mobilize fundswhile pressing for definitive reform measures. It may not therefore be always true that suchemergency-type circumstances as trying to manage grave external finance shortages afford good"windows of opportunity for reforms that might otherwise have remained closed."

(d) The failure to achieve legislative approval for many of the proposed laws under theSSAL indicates a continuing lack of effectiveness of this form of conditionality and may point tothe need to reassess when and how such conditionality is applied.

This ICR did not address the issues of whether there might be better ways of addressingliquidity crises, and whether this could be done in a more efficient and less costly way. The Bankmight devote some effort to analyzing whether alternate instruments might be more appropriate invarious circumstances, as well as whether the Bank needs to have a more comprehensive arsenalof instruments available. In particular, in terms of financial conditions, this SSAL points to therisks inherent in providing short-term financing that complicates, rather than alleviates themedium-term financing requirements. In the case of Argentina, "special terms" resulted in a loanmaturity that was significantly below the average maturity of Argentine public sector debt at thattime. We also need to look at which types of structural reforms may be best combined withliquidity support operations.

The experience under this SSAL offers lessons about ways of seeking good structuraladjustment results. In this instance, those were obtained where three conditions were satisfied:

(i) conditions need to be based on a good understanding of the country situation;

(ii) all government counterparts need to have commitment to, and the authority to carryout, the desired changes; and

(iii) the incentive structure needed to be sufficiently supportive for both the individuals incharge and those likely to be impacted, possibly requiring a large effort to inform and winover these parties.

It is also important to ensure that the aforementioned good understanding of the countrysituation is readily available at the design stage. The Bank therefore needs to retain a minimumlevel of pertinent knowledge of each of its client countries, which has to be updated on a regular

-25-

basis. This could be somewhat along the lines of the periodic Fund updates but putting emphasison those areas of most interest to the Bank. In addition to traditional economic information, it isalso essential to have at least a basic understanding of the political, social and cultural dimensions.

Ultimately, however, even this knowledge base in this case was not sufficient to foreseethe unfortunate events of 2001 and early 2002. An understanding of political, economic, socialand cultural dimensions may not be sufficient in predicting the institutional collapse that ensued.

9. Partner Comments

(a) Borrotver/i,nplententing agency:

(b) Cojinanciers:

IMF. The IMF official concerned commended the Borrower for its successful fiscaladjustment performance in 1996-98. But the program began to go off the track towards the endof that period. He said that the Asian and Russian crises and the hedge fund debacle in the USwere substantially involved. He noted that Argentina had pioneered borrowing in advance, since1996. As a result, he said, when the global contagion spread, there was an immediate possibilitythat the Government would run out of funds by December 1999.

Against that backdrop, he considered that the program supported by the SSAL and theconfinanciers to help the country was successful. He underscored its contribution in assisting theGovernment to regain access to the markets. In this connection, he questioned whether theaccompanying "REPO" loan was the most suitable method for providing Argentina's Central Bankthe guarantee it entailed. Perhaps a better vehicle might have involved a direct IBRD loan to thatBank, and for the latter to have established an escrow account for the purpose.

He agreed with the SSAL's provisions, especially in addressing what the Fund consideredto be the right issues. He felt that the targets relating to Federal-provincial revenue/sharing wereparticularly important. He hoped that the new intergovernmental pacts would be fullyimplemented, which would be quite beneficial. He commended the Bank's support of these efforts,including the envisaged replacement of the tumover tax.

EDB. An IDB official judged that the SSAL along with the complementary assistancefrom the IDB and the Fund had been well justified in the light of Argentina's difficultcircumstances in 1998. He said that the IDB had also been concerned about the potential dangersof the spillage of Argentina's crisis to affect other Latin American economies. In retrospect, theaforementioned assistance had been salutary in helping to stem the country's immediate liquidityshortage. The IDB is currently evaluating the performance and impact of the program which theSSAL and IDB's parallel loans supported. He added that the two banks' collaboration, had beenpositive and beneficial.

(c) Other partners (NGOs/private sector):

-26-

10. Additional Information

The individuals interviewed in the course of this preparation of this Report included:

Marcelo AcunaMyrna AlexanderMiguel Angel BrodaGuillermo CollichDaniel CotlearAriel FiszbeinRogelio FrigerioRicardo GarcioffiJose Luis GuaschPablo GuidottiNorman HicksAnjali KumarMiguel KiguelPaul LevyMoises LichtmajerRoberto Garcia LopezLuis LucioneJose Luis MachineaDonald McIsaacMargaret MillerFerenc MolnarRonald MyersJohn PageCarola PessinoThomas ReichmannDavid RosenblattMaria Cristina UeharaRene VandenvriesWalter Zunic

-27-

Annex 1. Key Performance Indicators/Log Frame Matrix

Outcome /Impact Indicators:

|Indcator lat :.-x ProjectedrlnlasltPSR - Achta1Labtst EsUnmateINTERGOVERNMENTAL FISCAL None of the Indicators shown in the left handRELATIONS oolumn were amended

a. Reform of the "copartidpation system' to a. An agreement (the 'Federalimprove Federal revenue transfers to Commitrent") now exists to move towards aArgentina's provinces and to simplify the new system for the divison of revenuessystern between the Federal and provincial levels.

It constituted a de facto simplification ofthe system for 2001-03 (which was laterextended to 2005). A secondinter-governmental accord calls for a furthersimplification under which all federal taxes tobe shared would enter a general pool.

b. Rationalization of the distribution of b. Under the Government proposals,Federal revenues provinces with srnaller tax bases would

receive larger transfers per capRta than thosewih larger tax bases (application of the"equalization" formula).

The proposals would strengthen theuse of needs-based crteria in revenueallocations.

The present five-fold disparity in percapita revenues between the highest andlowest provincial recipients would bereduced.

-Improvement of data bases as a -Better tax bases should facilitate morefoundation for determining per capita tax aocurate fund distributlonbases

.. Consolidabon of numerous special c. Under the Govemment proposals, allc. Consolidation of numerous spearal revenue tansfers would follow a singlesector programs for whIch earmarked taxes formula. The sector programs induded In theare now levied pool would no longer obtain "automatic"

resources.

Govemrnent spending would becomemore transparent

d. Strengthening the provinoes abiltimes toraise greater revenues on their own d. A proposed provincial VAT would be

superior to the present gross receipts tax.

Its administrative costs should be lessthan the combined costs of the current grossreceipts tax and federal VAT.

A dual VAT should fadlitatecross-checking between Federal andProvincial agendes, and facilitate moreautomatic complance.

The proposed provision that provindalresidents pay the VAT where they lve couldhelp link tax payments with the correspondingservices taxpayers receive.

FINANCIAL SECTOR

a. Neutralizing the impact of tax policies on a.-The Govemments decree on the tax

-28 -

financial instruments so that they better treatrent of repurchase agreements andrespond to market forces pledges/guarantees brought Argentina in line

with intemational practices on theseinstruments. However, the decree onlyaffects a relatively small set of theseinstruments. Greater activity was limited bythe need to ensure neutral fiscal effects.

In this connection, the Govemmentcreated a commission to pursue the fiscalneutrality of financial instruments. It isworking to reduce or eliminate distortions.

b. Greater protection of sector regulatoryofficers b. The Govemments proposal to increase

these officers' liability protection was notapproved by the Congress, partly because ofopposition to the immunities recommended.

c. Coordination of financial sector regulabon c. A new permanent commission onand supervision regulatory coordination recommended new

rules for banks' liquidity management, whichwere changed, It also provided the basis fordraft laws on security markets and insurance.Studies on the consistency of regulatorypractices showed that the criteria for andregulabtion of public and private banks areessentialy similar, as are supervision andenforcement procedures. No additionalactons for achieving greater homogeneitywere found to be needed.

The Commission's acUvities haveencouraged greater cooperation andcoordinaton among financial entifies. It isreported to be contributing to the solution ofsector issues.

BANKING SECTOR

a. Reduced public sector role in the banking a. The sale of the Govemmenrs housingsystem mortgage bank (BHN) to private investors

resuled in their obtaining control of itsboard.

BHN's sale reduces the Govemmenrsfiscal burden. It also lessens possiblesysterric risk In the event of associatedfinancial and fiscal crises.

-The Central Banks audit of the Banco dela Nacion (BNA) and the publication of itsGovemment guarantees and data on itsaccounts provided a clearer, moretransparent picture of its financial conditionthan existed before. The extent of thisinformation is limited though.

Meanwhile, BNAs problematic status isunchanged.

b. Facilitate weak banks' departures from thesystem

b. An inter-agency committee's review ofbank closure mechanisms led to someproposals which were not implemented. .

The committees review of aspects ofbank govemance found the Central Bank's

c.. Enhance the marketability of residual bank regulations generally adequate.

-29-

portfoios

c. The new authorization to sell loan

ACCESS TO CREDIT portfolios from liquidated public banks couldstimulate future prnvatiztions

a. Providing small businesses greateraccess to non-bank finance

a. The new lasing law would eliminatbarrlers to the growth of lasing finance. It

b. Overcome constraints to the use of could produce more flexible term finance thanmovable collateral (secured transctions) in traditional loan contracts. The law iscredit conbacts considered to represent a substantial

improvement over its predecessors.

CAPITAL MARKETS b. The proposed secured transactions lawwas not approved by the Congress.

a. Diversify financial instruments

a. The amendment of the Fund Law tob Improve the rating lndusts quality and remove restrIctions on intemational

competitiveness Investments of mutual funds could Improvethe diversification of portfolios

b. The acton plan produced after review ofthe rating Industry was not implementedbecause of strong opposition.

c. Modemize the insurance indusbys c. The legislative proposals on theframework insurance industry incorporated some 'best

practie concepts, e.g., "early waming,solvency monitoring. " However, theCongress failed to pass them.

-Secure more adequate captalizaton ofthe insurance companies Greater industry competition is not yet

forthcoming. But there are advances towardsgreater consumer protectbon and the newcapltal requirements are being enforced well.

-Strengthen preventive supervision of the Quarterly reporting to the InsuranceIndustry Superintendent (SSN) is now the practice.

The new data SSN received and its morerigorous monitoring led to the suspension of40 oompanies in the past two years.

HUMAN DEVELOPMENT

a. Improved targeting and efficiency of a. The new methodology for measurngpoverty-reducing social programs. poverty eliminates some deficiencies of the

previous index, i.e., the absence of a healthindicator and excessive relianoe on housingyardstcks.

The expanded application of improvedbeneficary Identification (to 14 moreprograms) pefmits cross-checidng amongprograms. It could help limit duplicatory

b. Improved efficiency of overlapping, poorly servbes.targeted programs. b. The establishment of an integrated

nutrition program with coordinationarrangements unified the three previousoperations under the Social DevelpmentSecretariat.

Collateral actions produced a unifiedregistry of beneficaries, which could help

- 30 -

control duplication and overlapping of foodand nutrition assistance activites.

c. Improved targeUng of the program of c. Review of the program showed that, savenon-contributory pensions (granted at the for pensions issued at legislators discretion,discretion of the legislative and executive the remainder generally followed reasonablebranches) needs-based criteria

The Govemments acton plan forimprovements includes better guidelines,beneficiary cross-checking, limits on pensiontransfers, and auditing. Its effectiveimplementation could cut the number of

d. Safeguarding the social programs critical non-elgibles.for the poor frorn budget cuts d. The Govemments commitments to

1999-2000 expenditure levels for agreedprograms protected the maternal and childhealth and nutrftion services, AIDS, smallfarmers' extension services, primary schoolsupgrading and community garden activitieswhich were IBRD/IDB-supported.

The Govemment subsequently addedemployment programs and activifles toImprove indigenous peoples' health to theprotected list.

e. Improved system of unemployment e. The Govemments proposal forinsurance and lower non-wage labor costs decentralized collective bargaining was more

comprehensive and surpassed the policyImpact of the original SSAL goal (a fullyfunded capitalized Insurance scheme). Thedecentralization:

-gives lower level unions morejurisdiction in negotiations;

-permits more choices on negotiationslevels;

-phases out the systems which keptlapsed oontracts valid; and

-provides incentives for resolvingconflicts through mediation and arbitration.

The Congress approval of acomplmentary law provides for simplifyingregistration of new workers, lengthening theirprobationary period, and reducing taxes onthem.

Additional cuts in labor costs andstrengthening the safety net for theunemployed, along with other improvements,still await changes in theseverance payments and unemploymentInsurance systems.

f. Improved equity and efficency In public f. The Govemments strategy plan on higherspending on higher education education financing signalled efforts to make

appropriate policy changes. However, theplan failed to receive high level, widespreadsupport and was not Implemented.

A parallel proposal to launch a "nationalfund for university equity' recommends costrecovery measures, merit-basedscholarships, consolidated universitybudgeting. It was not implemented and, Inany event, would not apply to the 85% of

- 31 -

public funding for tertiary education that theCongress allocates.

9. Improved secondary education g. The standardized aptitude testng of 5thyear public secondary students produceduseful data on their achievements and on theeducation evaluation system.

However, the attempt to distribute the testresults was poorly received andImplemented. Consequenty, publicaccountability to parents and students isunlikely to have been increased.

h. Strengthened regulatory framework of h. The Govemmenfs implementation of newhealth insurance. prudential and consumer protection norms

for the union-run health plans (ObrasSociales-OS) provides a basis for improvedgovemance of beneficiary services and theirmarketing and regulation. It also fixedsuitable standards for OS' public

-Better public information on OS perfornance reportng.performance and consumer satisfaction. -The Health Insurance Superintendent

began issuing annual reports onbenefidaries' services, medical programregulabtion, marketing and treatment ofcomplaints. Consumer satisfaction polls werelaunched and their findings publicized.

I. Development of a competitive mansged I. The scheme for the Health Institut forcare market for providing health services to Retirees (INSSJP) to out-source its servicespensioners was replaced by measures to contract many

more providers to meet pensioners' healthcare needs.

Initially some 23 (now 75) providerswere contracted through more transparentbidding procedures than previouslyemployed. A limited number of beneficiariesgained freer choices of providers. TheseacUons however do not consttute substantialstrides towards the competitive health caremarket goal

REGULATORY REFORMS

a. More efficient regulation of Infrastructure a. The approval of the Executive Branch'sservices abstention from regulatory disputes on

technical and economic issues could makethe regulatory agendes more independent

The proposed new law on harmonizingregulatory practices, r passed, could:

-strengthen the division ofresponsibilites between the executive andlegislatve branches;

-limit legislators oversight ofregulatory agendes in the process;

-stabilize operating conditions forpresidents of regulatory commissions.

but Congressional support for the proposalhas been limited

b. Integration of transport regulaton b. The creation of a multi-modal transportdirectorate provides a potential mechanismfor seeking consistency among differentfreight carriers and possible rationalization of

- 32-

roads, ports and railways. It has been slowhowever In moving towards that goal.

Output Indicators:

v . IndlcatorlMatrix Projected In last PSR Actla/Latest Estimate

INTERGOVERNMENTAL FISCALRELATIONS

a. Proposal of new system of inter a. Prepare a proposal for putting all major a. Develped policies to revise the presentgovemmental financial transfers federal taxes to be distributed Into a single methods of dividing federal tax proceeds

pool, and otherwise simplify the system between the Federal and provincial levels

-Obtain agreement with the provincial -Intergovernmental agreement endorsed byauthorities on the proposal the Congress, changes the amounts to be

transferred, moving to a fixed sum

-Consensus has been reached withprovincial authorities to discuss furtherchanges

b. Rationalization of the distribution of funds b. Prepare proposals for future funds b. Designed "equalization-oriented" formuladistribution in line with an "equalization" and disswsed it with the provincialformula authorities

c. Improvement of data bases as a c. Improved data on provincial consumpton,foundabtion for determining per capita tax autormrobile and property valuesbases

d. Consolidation of special sector programs d. Prepare proposal for incorporation of d. Designed and advanced the proposal withfor which earmarked taxes are now levied special programs In the Federal budget as the provinces

line items or including them in the general

e. Strengthening the provinces capabilities co-participabon poolto raise more revenues on their own e. Design proposals for decentralized tax e. Prepared proposal for new provinial tax

powers. Instrument to replace present distortUonarypowers. taxes. It calls for a provincial VAT whose

rates would be set kxlally.

FINANCIAL SECTOR

a. Neutralizing the Impact of tax policies on a. Review tax treatment of financial a. Review perfomed did not Indicate anyfinancial instruments Intem ediation and propose measures to need for corrective legisltion. Govemment

achieve neutrality established a commission aimed at Improvingtax rules and guidelines

b, Improving the protecton of financial b. Design proposals to strengthen bank b. Preparation of a draft law aimed atsector regulators regulators' and supervisors' protection Increasing Iability protection.

against legal actions affecting them

c. Coordinating financial sector regulation c. Establish and make operational an c. Creation and activation of a Permanentand supervision inter-agency committee of financial regulatory Commission on the Evaluation of Financial

agencies Regulation

BANKING SECTOR

a. Reducing public sector role in the a. Bring the second Uer housing mortgage a. The Govemment sold its controllingbanking system bank (BHN) to the point of sale interest In the BHN to private investors

b. Facilitating weak banks' departure from b. Creaton of an inter-agency mechanism to b. A temporary inter-agency commissionthe system improve the resolution of bank failure reviewed bank falure mechanisms and

problems and govemance guidelines, and govemance provisionspropose remedial measures

c. Enhancing the marketability of residual c. Authorization of federal banks to sell loan c. Authoriation provided

- 33 -

bank portfolios portfoltos from liquidated banks

ACCESS TO CREDIT

a. Developing competitive leasing industiy a. Submission of revised leasing law to the a. Draft revision submitted to the legislatureCongress

b. Overcoming legal Impediments to the b. Submission of new legislative proposals b. New proposals given to the Congressuse of secured transactions

CAPITAL MARKETS

a. DiversIfying financial hstruments a. Presentaton to the Congress of draft bw a. Government submitted such proposalsto remove the restriction on mutual fundsInvestments intemationally

b. Increasing compettiveness in the ratng b. Contract a review of the Industry and b. Govermment review and plans completedIndustry Implement proposals based on Its findings

and recommendationsc. Proposals submitted for revised legislation

c. Modemizing the insurance industry's c. Present revised laws to Congressframework, supervision and regulation incorporating more advanced concepts and

greater attentiveness to consumer protection -Draet pegislatin calls fr early waminginterests detKon practkes

-Strengthen preventive supervision -Install early waming detection system in - Stricter SSN enforcement launched

Insurance Superintendent (SSN)-Securing more edequate industry

capitalization -Adoption of SSN plan to enforce newcapItl requirements

HUMAN DEVELOPMENT

a. Improved targeting of poverty-reducing a. Proposal of new poverty line and a. Definition of new methodology forsocial programs methodology for measuring unsatisfied measuring poverty

'basic needs'

-Expanded coverage of beneficiary - Application of improved information -Extension to 14 more social programsidentification systems systems to more social programs

b. Trm cetainsocil prgmms b. esig andimplnion proosal fbr b. Merger under the Social Developmentb. Trim certain social programs' b. Dtesign and implement proposals for Secretariat of food and nubtition programsoverlapping and poor targting Integrating food and nutrition programs Into an Integrated acvtivty.

-Review the distribution of -Review was conducted and plannon-contributory pensions programs and prepared for improved distributionpropose new eligibility criteria

c. Safeguarding spending levels for key . . c. crttsraasocial programs against budget cuts c. Obtain commitments for 1999 spending c. Commitments obtained

on key programs

d. Improving unemployment insurance d. Examine options for installing fully d. The study was carried out. it was thensystem and lowering non-wage labor costs capitalized unemployment insurance scheme replced by a Govemment proposal for, and

and prepare the instruments needed Congressional ratification of, thedecentralIation of collective bargaining.

e. Preparation of funding policy changes and Addition of complementary supportive law.e. Achieving greater equiy and efgiency in resolution for Education Ministry fntroduction e. Plan prepared and Governmentof incentives for greater cost recovery, announcement of intention to establishmerit-based scholarships and consolidated national fund for university equity reledinguniversity budgets those principles

f. Improving secondary education f. Aptitude testing of all 1998 fifth yearsecondary education students, and f. Testing perfomied and resutts provided tocertifcation of the resuling grades Federal Council education officers for public

-34 -

distribution

g. Strengthenirg health insurance's g. The Health Supenintendents g. SHSs reports attesting to satisfactoryregulatory tramework implementation of prudental and consumer implementation provided

protecion norms, and reportng on theunion-run health programs' performance -2.500 beneficdaies were surveyed

under consumer polls, comparing services ofrestructured union-sponsored providers withthose not restructured.

h. Development of more competitive heft h. INSSP (GovemmenVs health p ISJPcotatigrxenernmerocar prvelogoramst for more compensionersfor the retired) out-souring servces to major care providers with some provisions for

providers greater transparency and service choices

REGULATORY REFORMS

a. Rationalizfaon of infrastructure regulation a. Reducfion of Executive Branch's role in a. Verification that Executve Branch

regulatory disputes organizations need not hear appeals of

regulatory agendes' decisions on technicaland analytical matters.

Govemment prepared plan for increasingb. Integraton of transport servie regulation regulatory agendies autonomy

b. Preparafton of design and implementatonplan for an integrated Federal agency on .

freiht ranpor b. Proposed agency established.,fr3ight transport

End of project

- 35 -

Annex 2. Project Costs and Financing

N/A

N/AN/AN/A

- 36-

Annex 3. Economic Costs and Benefits

SSAL operations do not lend themselves to conventional rates or return or equivalent calculations ofeconomic costs and benefits.

- 37 -

Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle No. of Persons and Specialty Performance Rating

(e.g. 2 Economists, I FMS, etc.) Implementation DevelopmentMonth/Year Count Specialty Progress Objective

Identiflcation/PreparationSeptember 1998 13 Mission Leader, Fiscal Sector,

Financial Sector, Human Capital,Regulatory Issues, Public Sector

SupervisionDecember 1998 11 Mission Leader, S S

Sub-national Issues,Financial Sector, LaborRegulation, Health Sector,Education Sector, SocialSectors, Regulation,Insurance

May 1999 9 Mission Leader, Financial S SSector, Health Sector, SocialSector, Regulation, LaborRegulation, Sub-National Issues,Education

November 1999 9 Mission Leader, Social Sector, S SSub-National Finances, Labor &regulatory, Social Sector,Financial Sector, EducationSector, Health Sector

February 2000 10 Mission Leader, Social Sector, S SLabor & Regulatory,Sub-National Finances,Transport, Health Sector,Insurance, Financial Sector,Education Sector

March 2000 3 Mission Leader, Sub-National S SFinance Labor & Regulatory

July 2000 8 Mission Leader, Labor & S SRegulatory, Sub-National &Finance, Finance, Health

ICRJune 2001 1 Consultant

-38 -

(b) Staff:

Stage of Project Cycle Actual/Latest Estimate

No. Staff weeks US$ (000)Identification/Preparation 33.92 231.90Supervision 128.11 740.60ICR 9.00 40.32Total 171.03 1012.82

Costs include travel and consultant fees.

- 39 -

Annex 5. Ratings for Achievement of Objectives/Outputs of Components

(H=High, SU=Substantial, M=Modest, N=Negligible, NA=Not Applicable)Rating

O Macro policies O H OSUOM * N O NAOI Sector Policies O H *SUOM O N O NAOI Physical O H OSUOM O N * NAL] Financial OH *SUOM ON ONA3I Institutional Development 0 H O SU 0 M 0 N 0 NAF Environmental OH OSUOM O N * NA

SocialO Poverty Reduction O H *SUOM O N O NAL Gender O H OSUOM O N * NALI Other (Please specify) O H OSUOM O N * NA

Ol Private sector development 0 H * SU O M 0 N 0 NAOI Public sector management 0 H O SU * M 0 N 0 NAl Other (Please specify) O H OSUOM O N * NA

-40-

Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bankperformance Rating

D Lending OHS OS OU OHUEl Supervision OHS OS O U O HUO Overall OHS OS O u O HU

6.2 Borrowerperformance Rating

O Preparation OHS OS O u O HUrl Government implementation performance O HS O s 0 U 0 HUEl Implementation agencyperformance OHS OS O U O HUOl Overall OHS OS O U O HU

-41 -

Annex 7. List of Supporting documents

Argentina: A Retrospective Review

-42 -

Report No.: 22619Type: ICR