Argentina and the IMF
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The International Monetary Fund (IMF) today approved a stand-by credit for Argentina authorizing drawings up to the equivalent of SDR 720 million (about $1,041 million), over the next 21 months, in support of the Government's 1996-97 economic and financial program.
With the adoption of the Convertibility Plan in March 1991, Argentina pegged the peso to the U.S. dollar, abolished indexation and capital controls, drastically reined in central bank credit, and launched an extensive program of structural reforms. Inflation declined from over 2,000 percent in 1990 to 3.9 percent in 1994, while average real GDP expanded by 7.7 percent a year during 1991-94, reflecting structural transformation, large reflows of private capital, and the expansionary effect of rapid disinflation on domestic demand.
The combination of fiscal adjustment and economic restructuring gave credibility to the exchange-rate anchor and helped reduce inflationary expectations. In the public sector, almost all federal enterprises were sold off, the federal social security system was revamped, markets deregulated, all price and exchange controls removed, trade liberalized, and distortionary taxes abolished. Exports grew rapidly in 1993-94, as exporters modernized plant and equipment and rationalized employment. Shipments of manufactured goods rose by 27 percent a year, while imports, led by capital goods, more than quadrupled from 1990 to 1994.
The crisis in Mexico in late 1994, together with growing fiscal instability, triggered a slump in confidence. Argentina experienced large outflows of capital and by April 1995 international reserves had fallen by one-third. The implementation in April 1995 of an IMF-supported program, which included a strong package of fiscal measures, helped stabilize the financial situation. As confidence gradually strengthened, deposits reflowed into the country, interest rates declined, and access to foreign borrowing was restored. While real GDP contracted by 4.4 percent, inflation declined to 1.6 percent in 1995, the lowest level in 50 years. The external current account deficit narrowed by more than 2 percentage points of GDP from 1994, mainly due to an increase of more than 30 percent in exports.
Structural reforms during 1996 and 1997 will center on the restructuring of the federal and provincial governments. A number of public institutions will be either merged or eliminated to achieve further efficiency gains. This reform will increase the efficiency and quality of government services resulting in important budgetary savings over the medium term and assist in achieving the expenditure objectives for 1996.
Provincial government reforms will include strengthening provincial tax administration, the privatization of enterprises and banks, and a gradual transfer of pension systems to the federal Government. These measures are expected to reduce the overall provincial deficit and clear provincial wage and pension arrears that accumulated in 1995. In 1996, the authorities also intend to privatize the remaining state-owned electricity companies and to sell share holdings in a number of companies already under private majority ownership. To foster employment, the Government implemented the last stage of a 30 percent reduction in employer social security contributions, is implementing the law on work-related accidents which is expected to lower industrial wage costs by up to 9 percent, and plans to seek further reform of collective bargaining arrangements and to make collective agreements more flexible as these come up for renegotiation. The health care sector will be reformed to promote competition and attain greater efficiency in the management of health care funds.
The Challenge Ahead
The outcome of the economic program for 1996-97 is predicated on the speed of the economic recovery and the effectiveness of tax administration measures in 1996. It is therefore crucial that fiscal developments, particularly revenue collections, be monitored closely in the coming months. Implementation of structural reforms will be essential for attaining a sustained increase in employment.
Argentina joined the IMF on September 20, 1956. Its quota1 is SDR 1,537.1 million (about $2,223 million). Its outstanding use of IMF credit currently totals the equivalent of SDR 4,307 million (about $6,229 million).
Sources: Argentine authorities; and IMF staff estimates.
1. A member's quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its allocation of SDRs.
2. The authorities estimate the current account deficit to be about 0.3 to 0.5 percent of GDP lower, on account of increased receipts of interest earnings.
IMF EXTERNAL RELATIONS DEPARTMENT