Argentina and the IMF
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IMF Approves Augmentation of Argentina's Stand-By Credit
to US$14 Billion and Completes Second Review
The Executive Board of the International Monetary Fund (IMF) today approved an augmentation to SDR 10.6 billion (about US$14 billion) of Argentina's stand-by credit first approved on March 10, 2000 (see Press Release 00/17). SDR 2.1 billion (about US$3 billion) of the augmented total will be provided under the Supplemental Reserve Facility (SRF). Today's decision was made in conjunction with the completion of the second review of Argentina's program under the original stand-by credit and makes SDR 2.25 billion (about US$3 billion) available immediately. Three additional drawings of SDR 976.2 million (about US$1.3 billion) each will be made available during the remainder of 2001 following the completion of further review of the program, the first of which expected to take place towards the end of the first quarter. Further credit will be made available, according to a schedule yet to be specified, in 2002 (SDR 3 billion or about US$4 billion), and in 2003 (SDR 764 million or about US$1 billion).
To ease the government financing constraint in 2001 and subsequent years, the Argentine authorities have arranged a financial support package totaling about US$39.7 billion from official and private sources. In addition to the IMF support outlined above, the package includes about US$5 billion in new loan commitments from the Inter-American Development Bank and the World Bank, and US$1 billion in a loan from Spain. The package also includes about US$20 billion of financing from the private sector that relies on a market-based, voluntary approach intended to complement Argentina's objective of accessing international capital markets as soon as confidence returns.
Following the Executive Board discussion, Stanley Fischer, First Deputy Managing Director and Acting Chairman of the Board said:
"The Argentine government has embarked on a comprehensive and ambitious program aimed at promoting economic growth and ensuring medium-term sustainability of the fiscal and external financial situations, thus restoring confidence at home and abroad. The program contains measures to promote investment, including the elimination of tax disincentives in this area, the creation of a private sector infrastructure fund, and an increase in public investment. It also includes important structural fiscal reforms intended to ensure fiscal sustainability and reduce the public debt burden over the medium term. Key elements in this regard are the new fiscal pact with the provinces, the reform to the social security system, and measures to improve tax enforcement. It will be important that the authorities at all levels of government adhere firmly to the economic program so as to restore market confidence, return the economy to a higher growth path, and protect the country's convertibility regime.
"The structural reform agenda aims at promoting competition in domestic markets and improving competitiveness. The main elements in the program in this regard are: the opening of the national health care system to competition, the deregulation and promotion of competition in key sectors, such as energy and telecommunications, the renegotiation of expiring contracts with privatized enterprises, the elimination over two years of the 3 percent import surcharge, and the continued implementation of the labor reform approved by congress in May 2000.
"The authorities' commitment to these policies has warranted extraordinary support from the international community, as well as the voluntary and constructive involvement of the private sector in providing the required financing. It is essential that these commitments be translated into sustained action, with the support of Argentine society.
"Market reactions to the program and recent external developments have been positive: spreads on Argentine bonds and domestic interest rates have declined significantly in recent weeks and the stock market has rebounded strongly. These developments bode well for a recovery of confidence and economic activity in the period ahead," Fischer said.
Despite substantial efforts by the Argentine government to implement the economic program it had announced in December 1999, and which the IMF has supported with a stand-by credit since March 2000, economic performance in 2000 was worse than expected. A major disappointment was the failure to recover from the recession affecting economic activity since mid-1998. After a short-lived pickup in the last quarter of 1999, the economy again stagnated. This reflected in part the impact of the fiscal tightening on domestic demand, but was mainly the result of a drop in business and consumer confidence, and the progressive hardening of financing conditions in international market, that resulted in rising borrowing costs and reduced market access for Argentine private and official borrowers.
The authorities have responded to these developments by strengthening their policy framework, and accelerating structural reform efforts, while maintaining the current convertibility regime. They are concentrating on promoting a sustained recovery of investment as the foundation of a lasting recovery of domestic demand and output. New policy measures include steps to eliminate, or at least reduce, fiscal impediments to investment, such as the15 percent tax on interest paid by enterprises—which will be phased out by July 2002—and introduce measures aimed at stimulating investment, such as allowing the partial deductibility of interest paid on new mortgage loans.
A gradual recovery in demand and output is expected to begin in the first quarter of 2001, leading to an average rate of GDP growth of around 2 ½ percent in 2001. Investment is projected to rise by nearly 6 percent in 2001, following a cumulative decline of 20 percent in 1999-2000, and the pickup in output should allow a gradual recovery of employment during the course of this year. The program also aims at a gradual reduction of the external account deficit, which would contribute to a lowering of the external debt to GDP ration below 50 percent by 2006. Reflecting the still large output gap and labor market slack, consumer prices are likely to remain flat.
An important component of the government's strategy is the decision to accept in the short run an only moderate reduction in the federal fiscal deficit to 2.2 of the projected GDP to avoid a strong contractionary fiscal impact on the economy. At the same time, however, the authorities fully recognize the importance of reassuring domestic and foreign investors about their commitment to medium-term fiscal sustainability, a necessary condition for a lasting decline of the risk premium on Argentine debt and of domestic interest rates. To this end, they have taken a number of important new policy initiatives. These include a reform of the pension system and a fiscal pact with the provinces, which aim at supporting the commitment made under the revised fiscal responsibility law to attain budget balance at both the federal and the provincial level of government by 2005, at the latest.
Emphasis is also being placed on deregulation and the promotion of competition in the economy, especially in key sectors such as telecommunications and energy; the rapid renegotiation of expiring contracts with privatized enterprises, especially in utilities and transport sectors, to define the "rules of the game" in a medium-term horizon; and the continued implementation of the labor market reform approved by Congress in May 2000.
Argentina joined the IMF on September 20, 1956. Its quota1 is SDR 2.117 billion (about
US$3 billion). Its outstanding use of IMF credit currently totals SDR 2.232 billion (about US$3 billion).