Argentina and the IMF
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The International Monetary Fund (IMF) today approved a three-year credit for Argentina equivalent to SDR 2.08 billion (about US$2.8 billion) under the Extended Fund Facility (EFF)1 to support the government’s medium-term economic reform program for 1998¯2000. The government attaches importance to the Fund’s approval of its policy framework. It intends to treat the EFF credit as precautionary, and will only draw under it if adverse external circumstances make it necessary.
Argentina registered a strong macroeconomic performance in 1997. The economy grew very rapidly, the unemployment rate fell, and inflation was virtually zero. The fiscal position improved as programmed, and there were no major difficulties in financing a widening of the external current account deficit. The prudent borrowing strategy followed by the public sector, and especially the strengthening of the banking system achieved in recent years, allowed Argentina to weather the turbulence that affected international capital markets in the latter part of the year without major immediate consequences for the economy.
The authorities attach the highest priority to maintaining stable macroeconomic conditions in the context of the convertibility regime—which pegs the Argentine peso to the U.S. dollar and enjoys broad political and social support—and continuing structural reform and modernization of the economy.
Medium–Term Strategy and the 1998 Program
The program for 1998–2000 assumes that the expected slowdown in the growth of world trade caused by the crisis in emerging economies in Asia will result in a deceleration of Argentina’s real GDP growth in 1998, but that real GDP growth should recover to potential output by 2000. The rate of unemployment should continue to decline gradually, inflation should remain in the neighborhood of 1 percent in 1998, and the current account deficit, as a result of an expected upturn in exports, should decline to about 3.5 percent of GDP by 2000.
The program envisages the continuation of fiscal adjustment, with near balance being reached in the public sector accounts by 2000. A reduction of the overall federal government deficit from the equivalent of 1.4 percent of GDP in 1997 to 1 percent of GDP in 1998 and further to 0.3 percent of GDP by 2000 is envisaged, despite the transitional costs of theswitchover to privately administered pension funds, equivalent to about 1 percent of GDP annually.
Revenues in 1998–2000 should rise somewhat faster than GDP, reflecting the introduction in 1998 of a tax simplification for small businesses and the full effect of reforms in tax and customs administration, which already had begun to show positive results in 1997. To help contain expenditures, the present system of monthly budget authorizations will continue to limit outlays of spending ministries, and further savings are expected from the final stage of the restructuring of the social security administration.
The rules-based monetary framework under the currency board arrangement aims to strengthen confidence by maintaining a sound financial system and providing for an adequate cushion of liquidity that could compensate for the limited role of the central bank as a lender of last resort in the event of a crisis.
The structural reform agenda for 1998–2000 includes reforms in the labor market, in the tax system, and in budgetary procedures, the conclusion of the privatization process, and reforms in the health and judicial systems.
The program envisages putting in place a reform of the labor market by mid 1998. A comprehensive tax reform will seek to improve efficiency and equity of the tax system and promote the competitiveness of the economy. Reforms in budgetary procedures aim at promoting transparency and efficiency in public spending and include widening the coverage of the budget, moving to a pluriannual process, preparing annual assessments of the cost of fiscal benefits and incentives, and introducing the use of expenditure efficiency indicators.
Having divested itself from most of its enterprises over recent years, the federal government recently leased airports to the private sector and intends to proceed with the leasing of telecommunication frequencies by mid 1998. Other privatizations envisaged by the government for the period 1998-2000 include several power plants and the National Mortgage Bank. The government has also announced its intention to privatize the Banco de La Nación–the largest bank in the country.
Initiatives in health care will include a revision of the regulatory framework for private health care providers and the final phases of the restructuring of health insurance system for retirees and of health organizations run by unions. As part of a broader initiative to reform the judiciary system, the program also includes undertakings to modify judicial procedures to speed up the resolution of tax cases and increase legal security in credit markets.
Addressing Social Needs
Building on the significant progress made in 1997 in the area of poverty alleviation, the government intends to continue its efforts to restructure social programs to better targetbudgetary resources toward vulnerable groups. In addition to programs providing health care, food, assistance, and schooling respectively to needy mothers and infants, homeless children, needy elderly, and teenagers, low-cost housing will also be provided for at least 50,000 families a year, and basic infrastructure will be made available for the 1,000 poorest municipalities.
The Challenge Ahead
The strong growth of productive investment over recent years should result in further substantial gains in productivity and competitiveness, helping to moderate the widening of the current account deficit that accompanied economic recovery in 1997. To consolidate this process, a continued strengthening of financial policies, and further progress in structural reforms, especially in the labor market, are crucial to ensure the simultaneous achievement of a steady improvement in competitiveness and a further sustained decline in unemployment.
Argentina joined the IMF on September 20, 1956. Its quota2 is SDR 1,537.1 million (about US$2,078 million). Its outstanding use of IMF credit currently totals SDR 4,246 (about US$5,739) million.
1 The EFF is an IMF financing facility that supports medium-term programs that seek to overcome balance of payments difficulties stemming from macroeconomic imbalances and structural problems. The repayment terms are 10 years with a 4 ½-year grace period, and the interest rate, adjusted weekly, is about 4.2 percent per annum.
IMF EXTERNAL RELATIONS DEPARTMENT