Argentina and the IMF

Press Release: IMF Managing Director to Recommend to Executive Board the Letter of Intent of the Authorities for the First Review of the Stand-By Arrangement with Argentina
January 09, 2004

Country's Policy Intentions Documents

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Argentina—Letter of Intent

Buenos Aires, January 9, 2004

The following item is a Letter of Intent of the government of Argentina, which describes the policies that Argentina intends to implement in the context of its request for financial support from the IMF. The document, which is the property of Argentina, is being made available on the IMF website by agreement with the member as a service to users of the IMF website.

Mr. Horst Köhler
Managing Director
International Monetary Fund
Washington D.C.

Dear Mr. Köhler:

Considerable progress has been made in implementing the economic program that has been supported by a stand-by arrangement with the IMF since September 2003. Macroeconomic developments continue to be favorable and well in line with the program's macroeconomic framework for 2003 04. The end-October quantitative performance criteria were met with significant margins. Based on recent data, we expect, for 2003, real GDP to grow by at least 7.8 percent and inflation to be 3.7 percent. Growth in 2004 has the potential to be again better than programmed, and the 2004 macroeconomic framework will be reassessed at the next program reviews.

Fiscal and Monetary Policies

Fiscal policy is in line with the program, with tax collections outperforming projections, and spending remaining tightly controlled. The 2004 budget was approved by Congress on November 28 in a manner consistent with the fiscal targets of the program. Fiscal performance is expected to be further strengthened as a result of the approval by Congress of the anti-tax evasion package shortly after the expected end-November date, for which we request a waiver. The outturn for provincial finances in recent months also has been better than expected, mainly reflecting higher own-tax revenues and co participation transfers. Bilateral agreements for 2004 have already been signed by ten provincial governors of provinces accounting for over 79 percent of the 2002 consolidated provincial deficit.

As regards the monetary program, performance criteria for end-October 2003 were met with wide margins and the growth of augmented base money was in line with the program's indicative target. The redemption of quasi monies is proceeding rapidly, with only about Arg$300 million, of an original stock of Arg$7.5 billion, remaining in circulation. Full monetary unification is expected by end-March 2004. During the coming year, the central bank intends to strengthen its ability to conduct discretionary monetary policy through the development of a repurchase market in central bank instruments.

At this stage, the fiscal and monetary targets of the program remain unchanged, and the end-June 2004 indicative targets for the primary balance of the federal government, the federal government debt stock, and central bank NDA and NIR are proposed to be converted to performance criteria.

Structural Fiscal Reforms

Technical preparations for the implementation of structural fiscal reforms envisaged under the program are being advanced. An initial step toward the reforms of intergovernmental relations was taken with the creation, in September 2003, of a commission to coordinate proposals for a revised co-participation law, and to develop a fiscal responsibility law. In addition, an inter-ministerial working group has been created to develop guiding principles for reform of the pension system. Finally, in December 2003 Congress approved legislation eliminating all remaining competitiveness plans.

The Banking Strategy

Several measures have been taken recently to strengthen the banking system. The compensation to banks for the asymmetric pesoization (Arg$24 billion) is substantially complete, and the few pending decisions—related to auditing—on payments to banks will be taken by end-December 2003. Compensation for the asymmetric indexation (up to Arg$2.8 billion) has been approved by congress and the implementing decree will be issued promptly. The government undertakes to proceed with the completion of the placement of the compensation bonds by end-March 2004 (a structural performance criterion) rather than end-December 2003, as originally intended, for which we request a waiver. The legislation provides for individual banks to be issued government bonds. Accordingly, they will receive principal payments and be able to dispose of the bonds pari passu with new lending and refinancing, as already established in the law, while they receive interest payments independently of their lending policy. Congress also has approved the mortgage refinancing law, which should address uncertainties surrounding extended stays on creditor rights. This legislation ensures a fair solution to this sensitive social problem with only a minimal restraint on the rights of nonbank creditors, for which we request a waiver. Finally, all banks have submitted to the central bank their business and cash flow projections for the next 12 months.

The strategy to strengthen the banking system further will continue to focus on: (i) improving the policy framework for bank profitability; (ii) strengthening supervisory oversight; and (iii) developing an approach to resolving difficulties in weak banks. This strategy should allow banks to increase lending in proportion with the high liquidity they built-up in the last semester, rebuild capital through retained earnings, and create the conditions that will elicit commitments of new private shareholder capital. The central bank expects that by end-2003, the only remaining losses for the system as a whole will be attributable to the amortization of deferred losses linked to amparos.

The main aspects involved in carrying the banking strategy forward are:

• Putting in place a stable regulatory framework, including the elimination in December 2003 of temporary forbearance on the classification and provisioning of private loans and restructured loans, and the new capital adequacy rules that come into force in January 2004. These actions are providing additional incentives for banks to rebuild their capital.

• Steps to reduce impediments to financial intermediation, including through: (1) a continuing reduction in deposit reserve requirements (which have bean reduced by about half over the last 12 months); and (ii) a reduction in the financial transactions tax during the first half of 2004, once Congress approves compensating revenue measures.

• Bank-by-bank analysis of multi-year business plans and cash-flow projections that include time-bound recapitalization plans in line with the scheduled increase in minimum capital requirements. These plans are to be submitted to the central bank by private and public banks by March 2004. Following on from this, the central bank will aim to reach agreement with each bank on a strategy to ensure the viability of operations, including by strengthening profitability and the capital base.

The initial step in the reforms of public banks will be to conduct due diligence examinations and strategic reviews for Banco de la Nación and Banco de la Provincia de Buenos Aires. Terms of reference have been agreed with Fund staff and the bids to conduct the reviews are to be relaunched by end-February 2004. We expect to select the consultants by end-April 2004 and to carry out the work by end-August 2004. Based on the resulting recommendations, an agreed strategy will be developed for strengthening the public banking sector by end-October 2004. In the meantime, the Superintendency of Banks will monitor the operations and adherence to regulatory standards of all public banks.

Utility Services

In line with commitments under the program, the Congress approved Law 25790 on October 1, 2003, which (i) extends the renegotiation period for the utility concessions to end-2004; (ii) gives the executive the power to renegotiate the concessions on a fast- track basis; and (iii) permits the executive to agree on amendments of the concession contracts, and to introduce temporary adjustments in the financial conditions of the contracts. A newly created Unit for Renegotiation and Analysis of Public Service Contracts, co-chaired by the Ministry of Economy and Production and the Ministry of Federal Planning, Public Investment and Services, is responsible for carrying out the renegotiation of 62 contracts. The government expects to complete the renegotiation of 54 contracts by end-June 2004, including those for electricity and gas, inter-urban roads, freight railways, urban road access ports, airports, bus terminals, water and sanitation, and waterways. The renegotiation of the remaining concessions is expected to be completed in the second half of 2004, including those for urban railways, and telecommunications. The renegotiated agreements will reflect the long term commitment of the government to supporting sustainable public-private partnerships.

The renegotiation process will require an accompanying effort to strengthen the regulatory framework and institutions. A bill has been drafted and is to be sent to Congress soon that establishes: (i) clear rules to assert the committed investments and the quality and sustainability of offered services; and (ii) effective mechanisms for the monitoring of the contracts and to allow their amendment in accordance with the evolution of services. Upon completion of the renegotiation process, the existing sectorial regulatory frameworks will regain full effect, modified to refer to the new general framework and to reflect the renegotiated concession contract. In addition, the government is preparing legislation aimed at ensuring the accessibility to, and affordability of, basic electricity, gas, and water services. Submission of legislation in both these areas is expected by end-March, 2004. The work in this area will be carried out in cooperation with the World Bank.

Corporate Restructuring and Legal Reforms

Progress has been made in corporate debt restructuring. We expect to have completed a detailed survey of corporate debt restructuring by end-January 2004, and to have developed nonstatutory workout principles for restructuring by end-March 2004. In addition, a working party reviewing the framework for corporate debt restructuring is scheduled to report by end-January 2004 on whether changes are needed in the insolvency law to support debt restructuring, and if the exemptions from the "cramdown" provision of the insolvency law need to be more limited in scope. No fiscal resources will be made available to support corporate debt restructuring.

Program Financing Assurances

The government wishes to reiterate its determination to promptly complete a comprehensive public debt restructuring consistent with the elimination of financing gaps and achieving medium-term debt sustainability. Recent steps taken toward this end are as follows:

• In September, immediately following approval of the stand-by arrangement, the broad outline of a debt restructuring proposal was announced, further details of which are posted on the website of the Ministry of Economy and Production which includes facilities for users to assess the implications of different assumptions and projections.

• Meetings were held with creditor consultative groups and financial institutions during October-December in Buenos Aires, Frankfurt, Los Angeles, New York, Rome, Tokyo, and Zurich to elicit their views ahead of finalizing a more detailed public debt restructuring proposal.

• In addition, expressions of interest were elicited from 15 banks (of which 12 were foreign-owned) to operate as regional managers and provide advice with regard to the modalities of the offer. Ten of the banks solicited have expressed their interest in participating, and the government is moving rapidly to conclude the selection of the banks that will help the Republic with this transaction.

Following on from the presentation outlined in Dubai, and the approach taken in the subsequent meetings, the government intends to launch a debt exchange offer that aims at attracting broad creditor support. We will be developing modalities with advisors to achieve participation in the debt restructuring as envisaged in paragraph 18 of the September 10, 2003 Memorandum of Economic and Financial Policies (MEFP). We will continue to consider the suggestions of private creditors, and will provide feedback and engage in further discussions with them, on Argentina's payments capacity, the coverage of the debt restructuring, and the design of debt instruments.

In regard to payments capacity, the government reaffirms that its position with regard to the primary surplus for 2004 and beyond is consistent with the commitment set out in paragraph 8 of the September 10, 2003 MEFP. The primary surplus contained in 2004 budget passed by Congress exemplifies our intention to fulfill the pledge made in this regard, to be continued in future years.

The government expects that, during the period of the current arrangement, relations with private creditors will be normalized permitting the eventual responsible reaccess to financial markets, and the economy and its external position strengthened. These conditions should allow a reduction in obligations to the Fund. However, discussions on policies and access under a possible successor arrangement with the Fund, if any, must wait until mid-2006 so as to benefit from a reasonable assessment of the then prevailing economic situation and prospects.

As regards debt to Paris Club creditors, we have written to the Paris Club secretariat indicating our wish and preparedness to begin debt restructuring negotiations. This process has been delayed at the request of some Paris Club members, but we would hope that negotiations can begin in March 2004.

In view of the progress made under the program, we request completion of the first review under the SBA. We anticipate that only the end-October fiscal data will be available by the time of the Board meeting for the first review, and although we expect the end-December fiscal quantitative performance criteria to have been met, we request a waiver of their applicability for the purchase associated with the review. Observance of the end-December performance criteria will remain a condition for the purchase pursuant to the Second Review under the arrangement.

As we implement our program, we will continue to maintain a close policy dialogue with the Fund and the rest of the international community.

Yours sincerely,

Dr. Roberto Lavagna
Minister of Economy and Production
Lic. Alfonso Prat-Gay
President of the Central Bank of Argentina