Argentina and the IMF
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The Executive Board of the International Monetary Fund (IMF) today approved an augmentation to SDR 16.94 billion (about US$21.57 billion) of Argentina's stand-by credit initially approved on March 10, 2000 and augmented on January 2001 (see Press Release 00/17 and Press Release 01/3). Today's decision, which was made in conjunction with the completion of the fourth review of Argentina's program supported under the original stand-by credit, makes SDR 4.94 billion (about US$6.3 billion) available immediately, of which SDR 3.97 (about US$5.05 billion) are under the new augmentation. An additional drawing of SDR 976.2 million (about US$1.24 billion) would be made available later in 2001 following the completion of the fifth review of the program. Further credit will be made available, according to a schedule yet to be specified, in 2002 (SDR 5.44 billion or about US$6.93 billion), and in 2003 (SDR 764 million or about US$ 973 million). Up to the equivalent of US$3 billion of the drawings scheduled for 2002 may be brought forward to support a voluntary and market-based operation to improve Argentina's debt profile.
Following the Executive Board discussion, Anne Krueger, First Deputy Managing Director and acting Chair, said:
"The Fund welcomes the major strengthening of the fiscal effort in the reformulated program of the Argentine authorities which should restore macroeconomic stability and address important structural impediments to a recovery of investment and output.
"The strengthened program aims at restoring the credibility of the fiscal position and the convertibility regime through a fiscal policy geared to the immediate elimination of the federal government deficit as mandated by the "zero-deficit law" approved by congress in late July 2001. The provincial governments are also expected to continue to undertake a substantial fiscal adjustment.
"Firm implementation of fiscal consolidation is needed to ensure the sustainability of the public debt and to produce a lasting decline in the risk premium on Argentine debt and of domestic interest rates, thereby creating the conditions for a recovery of economic activity. The Fund welcomes the free-trade initiatives underway, which will enhance the prospects of sustained, rapid economic growth in Argentina.
"The Fund welcomes the authorities' initiatives to enact further structural reforms aimed at putting the public finances on a sustainable basis. These initiatives include steps to improve tax administration and strengthen tax compliance, a reform of the revenue sharing arrangements between the federal government and the provinces, the streamlining of public administration, and overhauling the social security administration. In addition, the Fund notes the importance of the measures to strengthen the public banks, make labor markets more flexible, and improve the effectiveness of the social safety net. Rapid progress in these areas will be key to lasting success of the program.
"Argentina's convertibility regime and the liquidity defenses of the banking system are important pillars of the country's economic strategy and have been vital in helping withstand turbulent financial conditions. The Fund, therefore, welcomes the authorities' reaffirmation of their commitment to these policies.
"The program also provides for increased voluntary private sector involvement to secure external financing from the combination of bond placements and the expected drawdown of the contingent repo facility with international banks. The Fund welcomes the authorities' efforts to engage creditors in a voluntary market-based debt operation aimed at achieving a lasting easing of financing requirements in the future, and looks forward to an outcome that will support medium-term financing sustainability.
"In strengthening the program, the Argentine authorities have responded promptly and appropriately in difficult circumstances. Their efforts, and the program, deserve the strong support of the international community," Ms. Krueger said.
Despite the augmentation of IMF financial support of the Argentine program approved in January 2001, doubts about the sustainability of the country's public debt resurfaced following the authorities' failure to sustain the fiscal policies underlying the program. A ministerial crisis in March—reflecting the lack of political consensus on needed spending cuts—and the continued weakness of the economy further contributed to erode confidence.
A new economic team appointed in March sought to address these doubts by obtaining limited emergency powers to legislate by decree on tax policy and on the reform of the public sector. Measures were also adopted to tighten fiscal policy, improve competitiveness, and jump-start economic growth. The new policies failed, however, to restore confidence and the authorities were faced with the virtual refusal of the domestic financial sector to continue financing the government. Spreads on Argentine bonds, which had narrowed to about 880 basis points following approval by the IMF of the program's third review in May, widened to over 1700 basis points in July amidst increased volatility before narrowing to around 1,400 basis points in August.
In response to these developments, the authorities announced a major strengthening of the fiscal effort to restore credibility of the fiscal position and the convertibility regime, which regulates foreign exchange transactions, and requested a further augmentation of the IMF support to dispel doubts about the government's ability to avoid a debt default and to calm the fears of depositors.
The authorities' revised program centers on a fiscal policy geared to the immediate elimination of the federal government deficit, in line with the requirements of the "zero deficit" law. New revenue measures in the program include an increase in the financial transactions tax by 0.2 percent (to 0.6 percent) with the elimination of all exemptions. The authorities have also reversed the reduction in gasoline taxes, suspended the increase in income tax deductions and postponed indefinitely the planned move of the VAT from an accrual to a cash basis. In addition, primary spending will be cut by a number of measures which include an across-the board cut of 13 percent in unprotected primary spending, including wages and pensions.
The announced policies, if firmly implemented, are expected to result in a lasting decline in the risk premium on Argentine debt and of domestic interest rates, thus creating conditions for a modest recovery of real GDP growth in the final quarter of 2001 which would pave the way for growth of about 2.5 percent in 2002.
The poor are protected from the worst effects of the spending cuts by the floor on salary and pension cuts, and by the maintenance of targeted subsidies. Given the magnitude of the fiscal adjustment, however, emphasis will be put on more efficient use of resources through better targeting and by concentrating the administration of a variety of social programs under a single facility.
Argentina joined the IMF on September 20, 1956. Its quota1 is SDR 2.117 billion (about
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.
IMF EXTERNAL RELATIONS DEPARTMENT