International Bank for Reconstruction and Development FOR OFFICIAL USE ONLY 60378 SecM93-1275 FROM: The Deputy Secretary December 14, 1993 EXECUTIVE DIRECTORS' MEETING - DECEMBER 14, 1993 Modification to IBRD's Negative Pledge Policy with Respect to Lending for Investment Projects (R93-199, R93-199/1) Statement by Mr. Thalwitz Attached is a copy of the statement on the above made by Mr. Thalwitz at today's meeting of the Executive Directors of the Bank. Distribution: Executive Directors and Alternates Office of the President Executive Vice Presidents, IFC and MIGA Vice Presidents, Bank, IFC and MIGA This document has a restricted distribution and may be used by recipients only in the performance of their officialduties. Its contents may not otherwise be disclosed without World Bank authorization. MR. THALWITZ'S RESPONSE ON THE NEGATIVE PLEDGE WAIVER IN THE BOARD MEETING OF TUESDAY, DECEMBER 14, 1993 Thank you, Mr. Chairman. the I am referring to the amendments and gauging the improvements in macro situation in those countries (Russia and Uzbekistan), and I would like in June on to reaffirm that indeed the results and the presentations you heard Russia and in October on Uzbekistan on the occasion of the loan for the valid. institution-building technical assistance project essentially remain And, I will note whether there are further improvements beyond the situation presented to you at the time of those earlier discussions. people Let me start with Uzbekistan briefly because it appears that many have less information on Uzbekistan than they have on Russia. Undeniably, It originally Uzbekistan is a late comer, if you want to say, a late bloomer. tried to insulate its own economy from the upheavals that they thought they as saw in the Russian reform program; it tried to avoid the price shocks relative prices changed in Russia. buying They were rather successful in terms of stabilizing output and social peace. In fact, the reduction of output in Uzbekistan this year would Soviet Union be less than 5 percent, which is a lot less than in many former countries, and, essentially, there was social peace. But, it is also side had to be undeniable that this stability on the output and on the social bought with very substantial imbalances on the macro management side by a economy. slowing down of the movement in decentralizing down from the command It led to very substantial inflationary pressures, which in fact were larger than in Russia. of the I was there in October. The Deputy Prime Minister in charge economy indicated that it was time to turn the rudder around and, in fact, and a macro they had started doing that. This has a structural component impact. On the structural components, obviously they had to go the elements of privatization route and they went very fast. On the small scale the production structure, there have been some 40,000 small enterprises very complete with quickly privatized. The housing privatization is practically almost 95 percent of title delivered in Tashkent and about 80 percent in the rest of the country. for On large-scale privatization there is a program under preparation implementation beginning in 1994 and the very loan that you approved earlier, are also the technical assistance loan, is going to help them. But, there imbalances. elements that are directly helping to restore some of the macro The most important is getting away from price control, which automatically has happened means a reduction of the budgeted subsidies. And that, indeed, consumer within the last few months. The government has reduced direct subsidies for most commodities and what is left is only bread and flour. I and on the expect this to have a beneficial impact on the macro balances budget itself. -2- reform. It is a very And, the second element is the social sector benefits and are considering a costly system. They have started targeting the Cabinet at the moment. reform of the pension system. It is with Hamidov, the Deputy Prime This morning I received a letter from Mr. concerted effort to assist the Minister, asking the Bank to make now a reforms, bringing in the IMF, Government in moving forward with the structural with the imbalances on the macro side. deepening the reforms and also dealing the rehabilitation loan if we come to And, they have asked us to go ahead with of the structural change. a conclusion on the nature and direction is that until a few months ago, The message I am essentially giving you reform movements in the former Soviet Uzbekistan was not a forerunner in the But, under the shock and the strain Union. It may still not be a forerunner. zone arrangement, it is turning to of not being able to agree on a new ruble policy changes that would make it its own resources; it is turning to the own currency and defend it. possible for the country to introduce its assistance in the If this is the case, it will need external After the experiences we have neighborhood of $500 million to $600 million. putting financial packages together, I gained in Kazahkstan and in Moldova in in tapping private resources, think it will be imperative to assist Uzbekistan proposed today and to make a some of which would be helped by the policy of the macro conditions. reality of the intended change for the improvement its modification allows us to go In that sense, I believe paragraph 6 in ahead. is obvious that in the Let me say very little about Russia. It quarter of this calendar year there constitutional uncertainties of the third And, it was equally obvious that were slippages. There were big slippages. the STF became out of reach in the some of the targets set up by the IMF under third quarter. uncertainties, there are two Nevertheless, with all the constitutional to emphasize at this stage. One are elements that have gone ahead that I want depends, which have, in fact, some parameters on which the rate of inflation months a slowing down of financing improved. There has been in the last two of the banking system by the central bank. factors to the decline of This, I think, is one of the contributing have the latest number at this inflation. The monthly rate today--we don't percent, certainly down from the 25 stage-- may be somewhere between 15 and 18 we had witnessed in the third percent or more inflation per month that quarter, which was a bit disappointing after the promising start last spring. perhaps as many as 100 banks, and In financial intermediation there are now principles. These banks charge certainly 20 or 30, that function by market positive rates given the inflation. of import subsidies, which The Government has also reduced the amount is to eliminate import subsidies again has a stabilization impact. The plan - - year. That, of course, will be the entirely by the beginning of the new we cannot gauge at this stage. business of the new government that has accelerated. It has Privatization continues and, in fact, 13 percent of total output is produced accelerated to the extent that now some in very little privately owned assets in private industry. There are still a big sector in Russia. agriculture and that is, of course, difficulties and the difficulty So, in spite of all the constitutional the hard elements of a structural and of mustering the political will for are witnessing some improvements which macro development program, I think we entitle us to go ahead. under the language before you should