## 1. A Two-Pillar Pension System for Argentina ## Source details **Canonical URL:** [1. A Two-Pillar Pension System for Argentina](https://www.imf.org/-/media/files/publications/cr/2017/cr17409.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2017/cr17409.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2017/cr17409.pdf.json) --- ### Macroeconomic context and recovery - Policy changes: removal of foreign exchange controls; modernization of monetary policy; resolution of bond-holder disputes; realignment of utility tariffs; institutional rebuilding — these "corrected the most urgent macroeconomic imbalances." - Growth and activity: - GDP growing at an annualized pace of 2¾ percent in Q2. - GDP growth increased 1 percent on average (q/q) in 2017H1. - Employment and labor market: - About 225 thousand jobs created in the twelve months to August. - About 60 percent of these jobs are low income, self-employed. - Unemployment around 9 percent. - Labor market informality stable at about 30 percent. - Female labor force participation is low. - Social and investment indicators: - Poverty around 28 percent. - Pick-up in construction and capital goods imports indicating buoyant investment. - Imports have accelerated much faster than exports. ### Inflation and monetary policy - Inflation dynamics: - Inflation peaked at 47 percent in July last year and slowed to 23 percent by October 2017. - Monthly headline inflation has hovered around 1.8 percent since late last year. - Regulated prices (utilities and other) contributed about 6 percentage points to headline inflation in 2017. - Core inflation has followed a broadly similar pattern to headline inflation. - Monetary policy response and related facts: - The central bank (BCRA) raised the ex-ante real policy interest rate to around 11 percent as of November. - Monetary financing: advances and profit transfers amounting to 1½ percent of GDP in 2017. - Sterilization increased the stock of short-term BCRA liabilities to about 125 percent of the monetary base. - Inflation expectations remained sticky and well above central bank targets. ### Fiscal developments and risks - Fiscal balances and debt dynamics: - Primary federal fiscal deficit broadly unchanged in 2017. - Adjusted for the tax amnesty and the economic cycle, the structural primary federal deficit fell by ¼ percent of potential GDP in 2017. - Overall general government deficit rose from 6 percent of GDP in 2015 to 7 percent of GDP in 2017. - Federal debt toward the private sector and domestic financing have risen; significant dollarization in federal and provincial liabilities. - Rapid external borrowing created a large external financing need in coming years. - Current account and external funding: - Current account deficit increased to 3½ percent of GDP (12‑month basis) in Q2. - Higher current account deficits financed mostly by debt inflows as public and private sectors re-leveraged. - Policy-mix side effects identified: - Public debt increase and high dollarization of liabilities. - Monetary financing and large short-term BCRA liabilities complicate disinflation and raise quasi-fiscal costs. - Staff judge the currency to be 10 to 25 percent overvalued. - These forces have been a headwind to FDI and domestically-funded private investment and worsened the net international investment position. ### Outlook, projections, and medium-term scenarios - Growth and fiscal trajectory: - Private consumption expected to strengthen in 2018–19 as real wages recover. - Federal primary fiscal deficit expected to fall by 2 percent of GDP by 2019 and remain relatively stable thereafter. - Federal debt projected to stabilize at a little above 50 percent of GDP. - Provinces projected to lower their primary deficit under the Fiscal Responsibility Law. - Consolidation will weigh against growth in the next two years, holding it to around 2½ percent. - Staff expect growth to gradually pick to 3 percent in the medium term. - External and inflation outlook: - Current account deficit likely to deteriorate further, exceeding 4½ percent of GDP by 2022. - Policy rates could be reduced by around 700 basis points by end-2018 as wage negotiations become more forward-looking and inflation expectations move lower. - Inflation projected to decline to 16½ percent by end-2018 and to single digits by 2021. - Key quantified risks and vulnerabilities: - External financing needs remain high given the relatively small domestic financial system. - A perceived significant currency misalignment could trigger a sudden nominal adjustment and increase public debt-to-GDP due to dollarized liabilities. - Greater-than-expected inflation inertia could require a tighter monetary stance (higher real interest rates and a more appreciated peso), depressing growth further. - Upside scenario: faster growth if structural reforms accelerate following political developments. ### Authorities’ view (summary) - Authorities more optimistic on GDP growth, citing strong third-quarter data and continued strong private consumption and investment. - Anticipate strong prospects in construction, energy, and transportation (PPP projects) and expect mortgage-fueled housing upgrades to boost activity. - Authorities do not regard the exchange rate as overvalued and view the external position as consistent with improving fundamentals. - Expect near-term inflation to be influenced by upcoming tariff increases but foresee favorable base effects, tight monetary policy, and moderate wage increases contributing to lower inflation by end-2018. ### Spending outlook and fiscal targets - Expected reduction in federal spending over next two years implies a decline in the federal primary deficit of around 2 percent of GDP. - General government primary spending will remain high by regional standards and heavily concentrated in wages, pensions and social transfers. - Primary current spending rose by 14½ percentage points of GDP between 2006 and 2017. - A frontloaded reduction targeting elimination of the primary deficit by 2019 would allow a more balanced policy mix and create space for tax burden reduction. ### Measures to rationalize spending (policy recommendations and quantitative impacts) - Reducing public employment: - Two thirds of the 4½ percent of GDP increase in the wage bill between 2006 and 2017 reflects greater provincial employment. - In 2017, public sector employment absorbs 2½ percent more of the labor force than the EM average. - Assuming an attrition rate of 4 percent per year and replacing only half of exiting employees could reduce the wage bill from 12½ percent of GDP in 2017 to about 9 percent in 2027. - A hiring freeze over the next two years would reduce the wage bill by 1 percent of GDP by 2019. - Addressing pension imbalances: - Indexing defined contribution benefits to forward inflation and increasing statutory retirement age for women from 60 to 65 would reduce federal pension spending by 2 percent of GDP. - If provinces adopt similar measures, general government spending could fall an additional ½ percent of GDP by 2027. - Rationalizing social assistance: - Introducing a unique social registry and indexing benefits to future inflation could reduce social program spending by around ½ percent of GDP by 2027. - Reducing other current spending: - Returning goods and services spending to 2006 levels (about 5 percent of GDP) would require savings of 2½ percent of GDP. - A frontloaded reduction (reducing this expenditure by about 4 percent in real terms over next two years) would yield savings of about 1½ percent of GDP by 2019. ### Box 1 — A Two-Pillar Pension System for Argentina (options and steady-state fiscal impacts) - Rationale: pension system actuarially unbalanced due to population aging, high replacement rates, low retirement age for women, and indexation formula that raises benefits above inflation. - Two-pillar option components: - Safety-net benefit: extended to elderly age 65 and above, funded by general revenues, and means tested. - Mandatory contribution-based pension system with contribution rates set at 10 percent for both employers and employees and a retirement age of 65 for all. - Options for the second pillar: - a) Notional Defined Contribution (NDC) pay-as-you-go system. - b) Mandatory fully-funded defined contribution system. - Steady-state cost approximations: - Safety-net: could cost around 1.5 percent of GDP. - NDC plan: a 20 percent contribution rate would yield around 4.8 percent of GDP in notional contributions; estimated pension spending under the NDC system about 4.3 percent of GDP. - In steady state, the new system would cost 2 percent of GDP less than the current (2018) pension system. - Summary table figures (as presented): - Net cost of current system 3.1 - Total pension spending (2018) 10.1 - Contributions (2018) 7.0 - Net cost of two-pillar system 1.0 - Safety-net benefit 1.5 - NDC 4.3 - Contributions to NDC 4.8 - Total net saving 2.1 ### Protecting lower-income households (mitigating measures) - Recommended mitigants: - A subsidized tariff (tarifa social) for gas, water, electricity and transportation to protect the poor from subsidy eliminations. - Protect the basic pension in real terms (elderly poverty rate at 7½ percent). - Reduce payroll taxes and expand coverage of personal income taxes (currently only the top 10 percent pay PIT). - Phase out family allowances more rapidly (fully eliminated at the average wage rather than at 1.5 times the average wage). - Introduce a cash transfer to bottom decile equivalent to about 50 percent of the current minimum wage. - Lower inflation, noting the inflation tax is extremely regressive. ### Macroe effects and illustrative scenario (staff simulations) - Staff simulations indicate the proposed fiscal path would: - Lower real interest rates. - Reduce the external financing requirement. - Lessen appreciation pressures on the peso. - Pace of disinflation unchanged in simulations because tighter fiscal policy costs balance with lower real interest rates and a less appreciated real exchange rate. - Under a frontloaded spending and tax cuts scenario (including hiring freeze 2018-19; indexing transfers and pensions to targeted inflation; lower spending on goods and services, transfers to provinces, and state-owned enterprises; phasing out certain taxes over three years; reducing corporate income tax to 28 percent; and labor income tax reform), debt-to-GDP is placed firmly on a downward path. ### Fiscal Pact with provinces and institutional reforms - Provinces account for about 40 percent of general government spending. - Fiscal Responsibility Law proposals: - Caps growth of current primary spending in real terms (with exemptions). - Contains provincial hiring to population growth. - Prohibits spending increases in last six months of government. - Includes commitments not to raise tax burden and to create countercyclical fiscal funds. - Fiscal Pact commitments: - Gradual (over 5 years) reduction of gross turnover tax rate. - Settling income tax revenue sharing conflict. - Eliminating contingent liabilities for federal government estimated at US$40 billion. - Extending Fiscal Responsibility Law to municipalities. - Institutional strengthening recommended: - Stronger enforcement mechanisms (e.g., preventing provinces in violation from receiving discretionary transfers). - Introducing medium-term debt targets (debt-to-GDP for federal government; debt-to-total revenue for provinces) with operational links and limited escape clauses. - Federal government to provide three-year budget forecasts with policy details and fiscal risk analysis. - Create an operationally independent Congressional Budget Office with autonomy and adequate staffing. ### Authorities’ views and alternative scenario on spending - Authorities stress measured pace for rationalizing spending. - Net of one-off revenue, general government primary deficit about to decline by 1.5 percent of GDP in 2017. - Primary expenditure decreased by about 2 percent of GDP since 2015; equivalent tax cuts occurred. - Federal employment fell by 4 percent in 2017. - Authorities plan to change indexation formula for pensions and social transfers to link to inflation only and propose comprehensive pension reform in 2019. - About 60 percent of general government expenditure is wages and social transfers, constraining fast adjustment. - Alternative scenario: keeping primary spending flat in real terms and sustaining growth at 3½ percent would reduce general government expenditure from about 40 percent of GDP in 2017 to 32 percent by 2023, funding a tax burden reduction of about 3 percent of GDP and bringing the primary deficit to zero. ### Monetary and exchange rate policy implications - Reducing inflation remains a key priority; requires continued restrictive monetary stance. - Real ex-ante short-term interest rates are high; disinflation slow due to wage inertia, weak monetary transmission, and second-round effects from tariff adjustments. - Faster disinflation would impose significant costs on growth and employment; a larger fiscal deficit reduction would facilitate a faster reduction in real interest rates and enable the BCRA to eliminate monetary financing. - Institutional recommendation: prohibit future central bank financing of the government once monetary financing is eliminated to bolster BCRA credibility and lower inflation expectations. - FX reserve goals: - BCRA intends to increase FX reserves from about 8¾ to 15 percent of GDP over next few years. - If achieved by end-2019, reserves would reach 165 percent of the IMF’s reserve adequacy metric (from current 115 percent). - Caution: sustained reserve accumulation may weaken the nominal exchange rate and slow inflation decline; BCRA should prioritize inflation objectives over reserve accumulation. *International Monetary Fund staff report excerpt.* ### 1. A Two-Pillar Pension System for Argentina ____________________________________________________ 13 ### 1. A Two-Pillar Pension System for Argentina ### Macroeconomic context and recovery - Argentina has removed foreign exchange controls, modernized monetary policy, resolved bond-holder disputes, realigned utility tariffs, and rebuilt institutions; these changes "corrected the most urgent macroeconomic imbalances." - Recovery from the mid-2015 recession is steady: GDP growing at an annualized pace of 2¾ percent in Q2, with GDP growth increased 1 percent on average (q/q) in 2017H1. - Employment and labor market: - About 225 thousand jobs created in the twelve months to August. - About 60 percent of these jobs are low income, self-employed. - Unemployment around 9 percent. - Labor market informality stable at about 30 percent. - Female labor force participation is low. - Poverty remains high at around 28 percent. - Investment indicators: pick-up in construction and capital goods imports point to buoyant investment. - Trade: imports have accelerated much faster than exports. ### Inflation and monetary policy - Inflation dynamics: - Inflation peaked at 47 percent in July last year and slowed to 23 percent by October 2017. - Monthly headline inflation has hovered around 1.8 percent since late last year. - Regulated prices (utilities and other) contributed about 6 percentage points to headline inflation in 2017. - Core inflation has followed a broadly similar pattern to headline inflation. - Monetary policy response: - The central bank (BCRA) raised the ex-ante real policy interest rate to around 11 percent as of November. - The high fiscal deficit has been partly financed by the central bank through advances and profit transfers amounting to 1½ percent of GDP in 2017. - Sterilization of monetary impact has resulted in a large increase of the stock of short-term BCRA liabilities (currently at about 125 percent of the monetary base). - Inflation expectations have remained sticky and well above central bank targets. ### Fiscal developments and risks - Fiscal balances and debt: - The primary federal fiscal deficit has remained broadly unchanged in 2017. - Adjusting for the tax amnesty and the economic cycle, the structural primary federal deficit fell by ¼ percent of potential GDP in 2017. - The overall general government deficit increased from 6 percent of GDP in 2015 to 7 percent of GDP in 2017. - Stock of federal debt toward the private sector and domestic financing have risen; significant dollarization in federal and provincial government liabilities. - Rapid external borrowing has created a large external financing need in coming years. - Current account: - The current account deficit increased to 3½ percent of GDP (on a 12-month basis) in Q2, driven by import growth and declines in service and income balances. - Higher current account deficits have been financed mostly by debt inflows as public and private sectors re-leveraged. - policy-mix side effects identified: - Public debt increase and high dollarization of liabilities. - Monetary financing and large short-term BCRA liabilities complicate disinflation and raise quasi-fiscal costs. - Staff judge the currency to be 10 to 25 percent overvalued. - These forces have acted as a headwind to FDI and domestically-funded private investment and worsened the net international investment position. ### Outlook, projections, and medium-term scenarios - Growth and fiscal trajectory: - Private consumption expected to strengthen in 2018–19 as real wages recover. - The federal primary fiscal deficit is expected to fall by 2 percent of GDP by 2019 and remain relatively stable thereafter. - Federal debt projected to stabilize at a little above 50 percent of GDP. - Provinces projected to lower their primary deficit under the Fiscal Responsibility Law. - Consolidation will weigh against growth in the next two years, holding it to around 2½ percent. - Going forward, staff expect growth to gradually pick to 3 percent in the medium term. - External and inflation outlook: - Current account deficit is likely to deteriorate further, exceeding 4½ percent of GDP by 2022. - As wage negotiations become more forward-looking and inflation expectations move lower, policy rates could be reduced by around 700 basis points by end-2018. - Inflation projected to decline to 16½ percent by end-2018 and to single digits by 2021. - Key quantified risks and vulnerabilities: - External financing needs remain high given the relatively small domestic financial system. - A perceived significant currency misalignment could trigger a sudden nominal adjustment and increase public debt-to-GDP due to dollarized liabilities. - Greater-than-expected inflation inertia could require a tighter monetary stance (higher real interest rates and a more appreciated peso), depressing growth further. - Upside scenario: faster growth if structural reforms accelerate following political developments. ### Authorities’ view - Authorities are more optimistic on GDP growth, citing strong third-quarter data and continued strong private consumption and investment. - They anticipate strong prospects in construction, energy, and transportation (PPP projects) and expect mortgage-fueled housing upgrades to boost activity. - Authorities do not regard the exchange rate as overvalued and view the external position as consistent with improving fundamentals. - They expect near-term inflation to be influenced by upcoming tariff increases but foresee favorable base effects, tight monetary policy, and moderate wage increases contributing to lower inflation by end-2018. *International Monetary Fund staff report excerpt.* ### 9. General government spending is projected to remain high despite the planned ### 9. General government spending is projected to remain high despite the planned ### Spending outlook and fiscal targets - Expected reduction in federal spending over the next two years would imply a decline in federal primary deficit of around 2 percent of GDP. - General government primary spending will still be high by regional standards and heavily concentrated in wages, pensions and social transfers. - Such a high level of spending is described as unsustainable, precludes a reduction of Argentina’s high and distortionary tax burden, and impedes investment, competitiveness, job creation, and growth. - A frontloaded reduction in general government spending—that targets an elimination of the primary deficit by 2019—would allow a more balanced policy mix and create space for a reduction of the tax burden. - Primary current spending rose by 14½ percentage points of GDP between 2006 and 2017. ### Measures to rationalize spending (policy recommendations and quantitative impacts) - Reducing public employment: - About two thirds of the 4½ percent of GDP increase in the wage bill between 2006 and 2017 reflects greater employment at the provincial level. - In 2017, Argentina’s public sector employment absorbs 2½ percent more of the labor force than the EM average. - Assuming an attrition rate of 4 percent per year, a policy to replace only half of those employees exiting could reduce the wage bill from 12½ percent of GDP in 2017 to about 9 percent in 2027. - A frontloaded reduction strategy, based on hiring freeze over the next two years, would reduce the wage bill by 1 percent of GDP by 2019. - Addressing pension imbalances: - Indexing existing defined contribution benefits to forward inflation and increasing the statutory retirement age for women from 60 to 65 years would reduce federal pension spending by 2 percent of GDP. - If similar measures were adopted by provinces, general government spending could fall an additional ½ percent of GDP by 2027. - Rationalizing social assistance spending: - Integrating and coordinating provision of services (for example, by introducing a unique social registry) could reduce duplication, improve targeting, and lower administrative costs. - Indexing benefits to future inflation could reduce spending on social programs by around ½ percent of GDP by 2027. - Reducing other current spending: - Bringing goods and services spending back to 2006 levels (about 5 percent of GDP) would require savings of 2½ percent of GDP. - A more frontloaded reduction (reducing this expenditure by about 4 percent in real terms over the next two years) would allow savings of about 1½ percent of GDP by 2019. ### Box 1 — A Two-Pillar Pension System for Argentina (options and steady-state fiscal impacts) - Rationale: Argentina’s pension system is actuarially unbalanced due to population aging, high replacement rates, low retirement age for women, and an indexation formula that increases benefits above inflation. - Two-pillar option components: - Safety-net benefit: extended to elderly of age 65 and above, funded by general revenues, and means tested. - Mandatory contribution-based pension system with contribution rates set at 10 percent for both employers and employees and a retirement age of 65 for all. - Options for the second pillar: - a) Notional Defined Contribution (NDC) pay-as-you-go system. - b) Mandatory fully-funded defined contribution system. - Steady-state cost approximations: - Safety-net: could cost around 1.5 percent of GDP. - NDC plan: a 20 percent contribution rate would yield around 4.8 percent of GDP in notional contributions; estimated pension spending under the NDC system about 4.3 percent of GDP. - In steady state, the new system would cost 2 percent of GDP less than the current (2018) pension system. - Summary table figures (as presented): - Net cost of current system 3.1 - Total pension spending (2018) 10.1 - Contributions (2018) 7.0 - Net cost of two-pillar system 1.0 - Safety-net benefit 1.5 - NDC 4.3 - Contributions to NDC 4.8 - Total net saving 2.1 - Total Savings (percent of GDP) ### Protecting lower-income households (mitigating measures) - A subsidized tariff to protect the poor from the planned elimination of subsidies (the tarifa social for gas, water, electricity and transportation). - Protecting the basic pension in real terms (noting elderly poverty rate at 7½ percent). - Reducing payroll taxes and expanding coverage of personal income taxes (currently only the top 10 percent of the income distribution pays the personal income tax). - Phasing out family allowances more rapidly (fully eliminated at the average wage rather than at 1.5 times the average wage). - Introducing a cash transfer to those in the bottom decile of the income distribution (equivalent to about 50 percent of the current minimum wage). - Lowering inflation, since the inflation tax is extremely regressive. ### Macroe effects and illustrative scenario (staff simulations) - Staff simulations suggest the proposed fiscal path would: - Lower real interest rates. - Reduce the external financing requirement. - Lessen appreciation pressures on the peso. - The pace of disinflation would be the same because tighter fiscal policy costs would be balanced by lower real interest rates and a less appreciated real exchange rate. - The debt-to-GDP would be placed firmly on a downward path under the frontloaded spending and tax cuts scenario, which includes multiple measures such as freezing public sector hiring in 2018-19; indexing social transfers and pensions to targeted inflation; lower spending on goods and services, transfers to provinces, and state-owned enterprises; phasing out certain taxes over three years and replacing them with other tax measures; reducing the corporate income tax rate to 28 percent; and a reform of labor income taxation as discussed in Box 3. ### Fiscal Pact with provinces and institutional reforms - Fiscal Pact highlights: - Provinces are responsible for about 40 percent of general government spending. - Proposed Fiscal Responsibility Law caps growth of current primary spending in real terms (with exemptions), contains provincial hiring to population growth, prohibits an increase in spending during the last six months of government, and includes commitments not to raise the tax burden and to create countercyclical fiscal funds. - Fiscal Pact commits provinces to gradually (over a 5-year period) reduce the rate of the gross turnover tax, settling income tax revenue sharing conflict and eliminating contingent liabilities for the federal government estimated to be in the order of US$40 billion; commits provinces to extend the Fiscal Responsibility Law to municipalities. - Needed institutional strengthening: - Enforcement of the Fiscal Responsibility Law: stronger enforcement mechanisms, e.g., preventing provinces in violation from receiving discretionary transfers; narrow exemptions; clearer definition of capped spending. - Introducing a medium-term debt target: e.g., a debt-to-GDP ratio for the federal government and a debt-to-total revenue ratio for provinces, with direct link to operational targets and limited transparent escape clauses. - Budget framework improvements: federal government to provide three-year budget forecasts (as mandated), including details on policies expected to achieve medium-term goals and analysis of fiscal risks (important if increasing PPPs or reforming pensions). - Operationally independent Congressional Budget Office: ensure autonomy, adequate staffing, full operational independence including over its budget. ### Authorities’ views and alternative scenario - Authorities’ points: - Rationalizing spending is key but should proceed at a measured pace. - Net of one-off revenue, the primary deficit of the general government—including provinces—is about to decline by 1.5 percent of GDP in 2017. - Primary expenditure has decreased by about 2 percent of GDP since 2015, with taxes being cut by an equivalent amount. - Federal employment fell by 4 percent in 2017. - Authorities plan to change the indexation formula for pensions and social transfers to link them to inflation only, and to propose a more comprehensive pension reform in 2019. - About 60 percent of general government expenditure is in wages and social transfers, which prevents a fast adjustment of the fiscal deficit. - A scenario where primary spending is kept flat in real terms, in line with the proposed Fiscal Responsibility Law, and growth sustained at 3½ percent would reduce general government expenditure from about 40 percent of GDP in 2017 to 32 percent by 2023; this would fund a reduction of the tax burden of about 3 percent of GDP and bring the primary deficit to zero. ### Monetary and exchange rate policy implications - Reducing inflation remains a key priority and requires a continued restrictive monetary stance. - Real ex-ante short-term interest rates are high, and the pace of disinflation is relatively slow due to inertia in wage formation, weak monetary transmission, and second-round effects from tariff adjustment. - A faster pace of disinflation would impose a significant cost on growth and employment and is not advisable; but a larger reduction in the fiscal deficit would facilitate a faster reduction in real interest rates and enable the BCRA to eliminate monetary financing of the fiscal deficit. - Institutional change recommended: prohibit future central bank financing of the government once monetary financing is eliminated to strengthen credibility of the BCRA’s inflation targeting framework and lower inflation expectations. - FX reserve accumulation: - BCRA intends to increase FX reserves from about 8¾ to 15 percent of GDP over the next few years. - If achieved by end-2019, this would take FX reserves to 165 percent of the IMF’s reserve adequacy metric (from the current 115 percent). - While increasing FX reserves is necessary, a sustained increase may weaken the nominal exchange rate and slow the decline in inflation; hence, the BCRA should prioritize its inflation objectives, subordinating reserve accumulation goals to achieving a more entrenched path for disinflation. *Source: IMF staff estimates and analysis contained in the provided chapter.* ### 18. Authorities’ view. The authorities stressed that they remain committed to maintaining a ### 18. Authorities’ view. ### Monetary policy stance and exchange rate policy - Authorities remain committed to maintaining a tight monetary policy stance to achieve their inflation targets. - Authorities judged the loosening of the policy stance in the first quarter of 2017 to be premature, which led to high inflation and a rise in inflation expectations. - The effects of the subsequent monetary tightening may take time to materialize, especially given excess liquidity in the financial system after the inflows from the tax amnesty. - Tariff adjustments continue posing headwinds to disinflation. - The BCRA does not have a specific timeline to achieve the stated FX reserves target of 15 percent of GDP and will continue to build reserves in a balanced way. - Disinflation remains the primary objective. - As reserves rise, the BCRA may eventually start selling some of the foreign exchange obtained from external public debt issuances (the BCRA acts as the financial agent for the government). - The BCRA remains committed to a flexible exchange rate regime. ### Recent monetary developments (as described) - BCRA kept the policy rate unchanged since April, before hiking the rate 250 basis points in October-November. - Real interest rates have increased sharply in 2017. - The BCRA has increasingly flattened the LEBAC yield curve. - Monetary base growth has slowed since the peak early this year, but remains relatively high. - Fiscal financing has been the main source of money creation. - Sterilization efforts have resulted in further build-up of the stock of LEBACs. - Sources cited: Banco Central de la República Argentina (BCRA) and IMF staff calculations. ### The urgency of supply–side reforms: objectives and diagnosis - Achieving a stronger, sustained, and equitable growth path hinges on boosting private investment and raising productivity growth. - Decades of frequent crises and recurrent government interventions produced significant macroeconomic volatility, a premium for policy risk, and low levels of both investment and potential growth. - Argentina’s capital-labor and capital-output ratios are well below the EM median; the infrastructure gap is particularly severe (especially in the transportation and energy sectors). - Argentina faces declining labor force participation (due to demographics) and a particularly low participation rate for women and the young. - Average labor productivity growth since 1980 has been close to zero (versus an EM average of 2½ percent). ### Scope and quantified impact of supply-side reforms - There is significant space to undertake supply-side reforms to strengthen private investment and productivity. - If tax, labor and product market (including trade) reforms were implemented that close half the gap with the EM average in each area, potential growth could be increased by 1½ percent (Box 2). - Productivity-boosting supply-side reforms would also reduce currency overvaluation and help mitigate inflationary pressures. ### A. A less distortionary tax system — diagnosis - Taxes in Argentina are high and distortionary. - Taxation of labor income is one of the highest in Latin America and close to the OECD average. - The tax wedge on labor income arises mostly from social security contributions; the personal income tax covers only the top 10 percent of the income distribution (due to a minimum threshold that is twice the average wage). - The corporate tax statutory rate is 35 percent. - The financial transaction tax and the gross turnover tax together account for 5½ percent of GDP in revenues. - Argentina has a complex system of VAT exemptions and deductions, and low property taxes compared with other countries in the region. ### A. The authorities’ proposed tax reform — key elements (phased over five years) - Reducing the tax burden on investment: - Reduce statutory corporate tax rate from 35 to 25 percent for reinvested earnings. - Accelerate reimbursement of VAT on investment. - Revalue the value of assets in line with past inflation. - Lowering the marginal tax rate on labor income for low and middle-income earners: - Exempt employers from paying social security contributions on the first 12,000 pesos of the monthly wage. - Introduce a single contribution rate of 19.5 percent for all employers. - Remove the existing income cap on employee contributions. - The tax wedge on labor income would decline, on average, from 27 to 19 percent. - Reducing cascading taxes: - Allow full deductibility of the financial transaction tax from income taxes. - New fiscal pact with provinces envisages (within five years) reducing the gross turnover tax. - City and Province of Buenos Aires announced intention to reduce the turnover tax rate and increase property taxes to help cover part of revenue losses. - Taxing capital income and carbon: - Introduce a tax on financial income above a certain threshold. - Introduce a tax on capital gains from the sale of real estate properties. - Introduce a carbon tax. ### A. Fiscal and growth cost estimates (staff and authorities) - Staff estimate: - Revenue loss from the government’s reform, after five years, will be about 3¾ percent of GDP (1½ percent from the reduction of the gross turnover tax and 2¼ percent from the other measures). - Authorities’ view: - Excluding the change in the gross turnover tax, the tax reform will have an overall direct cost of 1.5 percent of GDP by 2022. - They estimate it will boost GDP growth by 0.5 percent per year. - They estimate additional revenues from stronger economic activity will help reduce the overall cost to just 0.3 percent of GDP for the federal government (whereas provinces would benefit by an aggregate 0.6 percent of GDP). - The gradual elimination of the gross turnover tax at the provincial level is estimated to cost 1.5 percent of GDP in 5 years. - Authorities were confident that the spending caps included in the proposed Fiscal Responsibility Law will give provinces enough space to absorb the revenue losses and eliminate the fiscal deficit in the next few years. - Staff caution: Relying on uncertain growth effects to offset the revenue losses from the tax reform warrants caution. ### B. A more flexible labor market — diagnosis and reforms - Argentina has relatively rigid labor market institutions and regulations; OECD indicators suggest Argentina is more inflexible than both Latin America and OECD averages. - Main shortcomings: - High termination costs. - Complex procedures for collective dismissals. - Restrictive conditions for temporary employment (including for part-time work and apprenticeships). - Collective bargaining takes place at the sectoral level and covers about 70 percent of workers (even though only 30 percent of workers are unionized). - Pressures to modernize labor market institutions have increased given recent reforms in Brazil. - Recommended legislative changes: - Streamline dismissal procedures and reduce uncertainty regarding lay-off costs. - Lower the level of required severance payments. - Simplify collective dismissal procedures. - Facilitate the use of temporary contracts (including apprenticeships) and part-time work arrangements. - Limit the extension of coverage of collective bargaining agreements beyond the direct signatories. - Offer a wider use of opt-out clauses from collective bargaining (rather than the current presumption that the agreement would cover all firms in a particular sector independently on the degree of unionization). - Index the minimum wage to targeted inflation to balance formalization incentives and protection of the poor (current minimum wage is 45 percent of the median wage and covers about one third of the labor force, and about half of informal workers). ### Box summaries and targeted measures - Box 2 (supply-side framework findings): - Structural reforms can have a significant impact on long-term GDP growth through capital accumulation, labor utilization, and technical efficiency. - Reducing trade tariffs and payroll taxes to close half the gap with countries on the frontier could add about 0.1 percentage points to real GDP growth per year. - An ambitious reform effort to improve Argentina’s business regulatory environment could boost real GDP growth by about 1 percent per year. - OECD (2017) finds that converging to the OECD average over a ten-year period could increase the annual growth rate by 1½ percent. - Box 3 (reducing Argentina’s tax wedge) — illustrative reform package and quantified effects: - Reform measures include lowering social security contribution rates for both employees and employers to 10 percent of the gross wage (with an additional 9 percent combined rate for obras sociales); eliminating sectoral/location-based discounts to social contributions; increasing PIT coverage to the top two deciles; phasing out family allowances at the average wage; providing income transfers of about fifty percent of the minimum wage to all workers in the bottom 10 percent. - Effects estimated: - Lower the average tax wedge by 9 percentage points and bring it to zero for the bottom decile of wage-earners. - Net cost of formalizing labor relations would fall by 13 percentage points for low wage earners and by 8 percentage points for second earners. - Average payroll tax rate for employers would fall by 6 percentage points. - The reform would have a net cost of 0.3 percent of GDP, would increase formal employment by 3.4 percent, and raise long-term output by 1.2 percent. - A dynamic costing finds the reform to be broadly revenue neutral. ### Expected labor market and equity outcomes - Lower taxation of labor income and better labor market institutions are expected to: - Lessen informality (in 2016 informal employment accounted for between 30 and 40 percent of workers). - Increase female labor force participation. - Improve opportunities for the undereducated and the young. - Policy focus suggested: - Eliminate the tax wedge for second earners to remove an obstacle for women’s participation. - Ease restrictions on temporary employment to facilitate access for young and female workers. - Improve active labor market policies (training, job search assistance, education programs), potentially conditional on receiving existing cash transfers. *Source: Banco Central de la República Argentina (BCRA) and IMF staff calculations; text and estimates provided in the supplied content.* ### 28. Authorities’ view. The authorities said that they were considering a series of changes ### 28. Authorities’ view. The authorities said that they were considering a series of changes ### Labor market and informality measures - Measures under consideration to reduce informality and foster job creation: - A “labor amnesty” that exempts firms that formalize unregistered workers from paying fines and past obligations to the social security administration. - Reduction of penalties that can be added to severance payments (for any violation of labor contracts), with those penalties directed to the social security system rather than to employees to reduce litigation risk. - Introduction of sectoral severance funds that firms could choose to participate in to guarantee the immediate availability of funds for severance payments. - Introduction of apprenticeship contracts that can last up to one year (current maximum is three months). - Greater flexibility for workers with children under the age of four. - Longer paternity leave. - Extended unemployment insurance for cases of productive restructuring. - Legislative action: - A bill with these measures was sent to Congress in mid-November. ### Product market regulation and trade - Authorities’ view on red tape and competition: - Reducing red tape and fostering competition considered essential to increase productivity. - Recent and planned measures expected to yield near-term benefits: - Entrepreneurship Law that allows a firm to be set up in only one day. - A one-stop mechanism (Ventana Unica de Comercio Exterior) to reduce administrative requirements on imports and exports. - Creation of a Secretariat of Productive Simplification. - Digitalization of public administration and automatic authorizations via a “single window” concept. - Trade integration priorities: - Authorities note Argentina has trade agreements with only 9 percent of the world GDP (against Chile’s 90 percent) and emphasize integrating into global value chains and advancing on EU-Mercosur trade agreement. - They see the recovery as an opportunity to gradually (unilaterally within Mercosur) reduce trade tariffs and non-automatic import licenses. - Competition policy: - Focus on cartel investigation, especially in public procurement. - Confidence that the Competition Law will be approved soon. ### Financial sector deepening and inclusion - Authorities’ view on financial deepening and inclusion: - Financial deepening and inclusion viewed as key policy objectives. - Confidence expressed that the new Capital Market Law will be approved by end-2017. - Expectations on credit: - Credit growth expected to continue next year but to slow in the future as excess liquidity wanes. - Subsidized credit line to small and medium enterprises will be phased out next year, in line with FSAP recommendations. - Bank lending characteristics: - Banks have tight loan-to-value and debt-to-income ratios, and are lending mainly to their own existing clients and for the purchase of first homes. - Although mortgages are growing rapidly, mortgage-to-GDP ratio remains well below historical peaks. - Financial inclusion initiatives: - Establishment of a financial inclusion committee at the inter-ministerial level to foster access to banking and financial services. - Public banks expected to play a positive role by stepping up provision of micro credits. - Introduction of a new financial instrument (Obligación Negociable Simple Garantizada) intended to ease SMEs’ access to capital markets. ### Anti-corruption and integrity - Authorities’ view on fighting corruption: - Fighting corruption, increasing transparency, and strengthening integrity are high priorities. - Ongoing and planned initiatives: - A new public integrity law to give autonomy and power to the Anti-Corruption Office (ACO). - A roadmap to preempt collusion and corruption, including a high-level hotline for the newly launched PPP program. - Strengthening corporate governance in about 40 state-owned enterprises, with first guidelines expected in February 2018. - Whistle-blower legislation. - Reforming the financial disclosure regime. - Implementation challenges: - Low level of implementation of new laws (including the Law of the Repentant) attributed to the need for better training of prosecutors and judges, better enforcement protocols, and a reform of the Penal Code. - Reported procurement savings from improved practices: - Authorities estimate procurement improvements saved approximately US$1.9 billion for the year ended 2016, and year-to-date savings for 2017 are US$1.5 billion. ### Contextual policy and macro concerns referenced by authorities - External and macro posture referenced by staff appraisal (for context in authorities’ views): - The peso was described as overvalued by 10–25 percent. - Staff recommended a more frontloaded fiscal consolidation that would reduce the federal primary deficit by 3–4 percent of GDP by 2019. - Noted social context: one third of the population living below the poverty threshold. *Source: cr17409 - 28. Authorities’ view (IMF report excerpt).* ### 41. The authorities’ proposed tax reform is a good step forward to overhaul ### 41. The authorities’ proposed tax reform is a good step forward to overhaul ### Tax reform: assessment and fiscal implications - The authorities’ proposed tax reform is "a good step forward to overhaul Argentina’s inefficient tax system." - Recommendation: shift the tax burden away from labor and eliminate distortionary taxes. - Caution: do not rely on unpredictable growth effects to offset revenue losses from tax reform. - Fiscal policy prescription: lower public spending will be needed to cover the cost of the tax reform while still lowering the deficit. ### Boosting productivity and growth: structural measures - Required reforms: - Remove trade and investment barriers. - Continue developing local capital markets. - Commendations: - Removal of FX controls and trade restrictions that severely limited Argentina’s integration into the global economy. - Recent initiatives to reduce red tape. - Further recommendations: - Accelerated reduction in import tariffs. - Elimination of most import licenses. - Boost domestic competition by removing barriers to trade, investment, and firm entry, and addressing anti-competitive business practices. - Continue developing the financial system and increase financial inclusion while strengthening oversight and protecting financial stability. ### Institutional changes: labor market, informality, and inclusion - Objective: create quality jobs for all Argentinians to reduce poverty, raise output, increase productivity, and expand opportunities. - Diagnosis: - Argentina’s labor market is far from inclusive. - Women, the less-educated, and the young participate in the labor force at lower rates and are more likely to work in the informal sector. - Recommended measures: - Lower the marginal tax rate on labor income—particularly for lower-income workers, as in the authorities’ proposed tax reform, and for second earners—to encourage formality and reduce gender-bias. - Allow more flexible work arrangements and provide childcare support to facilitate employment access for working families. - Implement active labor market policies (training and job search assistance) designed to support women, the young, and lower-income workers to increase employability. ### Institutional timing - Staff proposal: the next Article IV consultation takes place on the standard "12-month cycle." *IMF staff analysis as presented in the source content.* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### A. Current Account - Argentina’s external position is vulnerable to a rapidly growing current account deficit; the exchange rate is assessed to be overvalued. - Recent dynamics and historical context: - Export share of GDP fell from over 24 percent of GDP in 2005 to 9 percent in 2015. - 2016 trade balance improved to 0.8 percent of GDP from -0.1 in 2015, helped by a cut in export taxes on agricultural products and improved terms of trade (lower fuel import prices). - Starting early 2017 the trade balance deteriorated due to a surge of import volumes (consumer and capital goods) as domestic demand accelerated; terms of trade worsened because of a recovery in oil prices and falling soy prices. - Service imports grew rapidly as removal of foreign exchange restrictions and the strong peso encouraged overseas travel by Argentine residents. - Dividend payments broadly flat; interest payments grew by over 40 percent over the previous four quarters due to increasing share of debt held by non-residents. - On a cumulative four quarter basis, the current account deficit reached 3.4 percent of GDP as of 2017Q2. - Projections and drivers: - The current account deficit is expected to continue increasing, slowly drifting above 4½ percent of GDP by 2022. - Staff forecasts embed a further 8 percent rise in the real effective exchange rate by 2022. - The terms of trade are expected to steadily deteriorate largely as a result of rising fuel prices. - Combined effects (imports, services and income balances) lead to a projected current account deficit of 4.7 percent of GDP by 2022. - From a saving and investment perspective, a modest rise in national saving—largely from a decline in the fiscal deficit—will be more than offset by a gradual rebound of private investment. - Assessment relative to benchmarks: - The 2017 cyclically-adjusted current account position is moderately weaker than the level implied by medium-term fundamentals and desirable policies. - IMF EBA model suggests a 2017 current account ‘norm’ around a deficit of 2½ percent of GDP, implying a gap of 1.7 percent with the 2017 predicted outturn. - The overall fiscal balance in 2017 is judged to be 4 percent of GDP higher than its desirable medium-term level, accounting for the bulk of the gap. - The external stability (ES) approach suggests the 2017 current account deficit was 1.5 percent of GDP larger than that needed to stabilize the net IIP at Argentina’s estimated medium-term steady-state. ### B. Capital and Financial Accounts - Funding composition and recent flows: - Growing current account deficit has been mainly funded by debt-creating portfolio flows, especially to the public sector. - In 2016, gross bond issuance amounted to US$35 billion (5.7 percent of GDP), 60 percent issued by the federal government and 20 percent by the provinces. - In 2017, the federal government issued a similar amount of external debt; borrowing will remain elevated in coming years. - Foreign direct investment (FDI) low at ¾ percent of GDP as of 2017: Q2 (cumulative over the last four quarters) versus an average 1.5 percent of GDP during 2006-16. - Net inflows from international financial institutions largely offset by repayment of Paris Club loans. - Resident outflows and deposit dynamics: - Capital outflows by residents continued in 2017 following the lifting of capital flow management measures; exception was end-2016 repatriation during the tax amnesty. - Dollar deposits rose to one quarter of all deposits as exchange rate volatility increased. - Net non-resident inflows from January-September 2017 were US$7.4 billion, largely into high-yield local currency debt. - Medium-term funding outlook: - FDI and private sector debt issuance expected to become larger sources of funding over the medium term. - Net public debt issuances remain significant under staff baseline, but government reliance on international markets expected to decline as fiscal deficit narrows and domestic markets deepen. - Private debt issuance to steadily grow as investment picks up; FDI expected to gradually rebound to 2 percent of GDP over the medium term. - Outflows from residents expected to persist but decline as disinflation takes hold and confidence in peso assets improves. ### C. FX Intervention and Reserves - Reserve accumulation and composition: - Large scale government bond issuance has allowed the central bank to rebuild international reserves. - Current level is US$52 billion and equals 115 percent of the Fund’s reserve adequacy metric; net reserves substantially lower largely due to the US$10.4 billion swap arrangement with the People Bank of China (renewed for a further three–year period in July 2017). - Authorities’ reserve target and operations: - Authorities announced a target level of reserves of 15 percent of GDP (US$93 billion at 2017 GDP). - BCRA began daily open market purchases of foreign exchange in US$100 million increments in May; suspended after 11 days due to exchange rate volatility. - As pressure on the currency grew in July and August, the authorities sold US$1.8 billion of reserves. - Projections: - Under current assumptions, reserves projected to continue growing, reaching US$70 billion by 2022 (around 8 percent of GDP or 110 percent of the Fund’s reserve adequacy metric). ### D. Real Exchange Rate - Recent movements: - REER depreciated about 40 percent between November 2015 and March 2016 after removal of FX restrictions and lifting of the peg; then steadily appreciated as debt inflows stabilized the nominal exchange rate while inflation differential with trading partners widened. - Appreciation continued in early 2017 but was interrupted in June–July 2017 when election-related uncertainty led to significant capital outflows (doubling in July the monthly average for 2017). - The REER stands close to its January 2017 level, 20 percent more depreciated than at end-2015. - Valuation assessment: - REER assessed to be overvalued within a range of 10–25 percent compared to the level implied by medium-term fundamentals and desirable policies. - IMF EBA exchange rate model shows end-2017 REER is 10 percent more appreciated than the level implied by fundamentals. - Applying an elasticity of -0.06 between the current account and the REER implies closing a 1.5 percent of GDP gap would require the REER to depreciate by around 25 percent. - Compared to the 1997–2017 average, the REER is around 20 percent higher. - Compared to the price of a basket of identical goods in the United States, the peso is estimated to be between 5 to 20 percent overvalued. - Outlook and drivers of future appreciation: - Staff baseline assumes continued modest appreciation of the REER over the next four years (by an average of 2 percent per year). - Drivers: continued large capital inflows supporting the nominal exchange rate and inflation remaining above trading partners. - Mitigating further overvaluation will require significant supply-side reforms to raise productivity. - Historical evidence cited: countries with balance sheet expansions experienced an average REER appreciation of 3.2 percent per year; countries with significant TFP growth experienced almost 2 percent real appreciation a year. ### E. External Balance Sheet - Recent status and trends: - Net IIP position continued to deteriorate in 2017. - External liabilities rose sharply in 2016 and H1 2017 by almost 10 percentage points of GDP relative to end-2015 following significant external borrowing by the public sector and the depreciation of the exchange rate. - The largely dollar denominated external asset position meant the exchange rate shock had relatively small effects on the net position. - Composition and vulnerabilities: - Only 25 percent of liabilities are equity (regional average 40 percent); reliance on debt poses balance sheet risks. - Around a third of debt is short-term financing, mainly intra-company lending, trade credit, and public sector borrowing. - Gross external financing needs expected to be around 20 percent of GDP in 2018 and beyond. - An unexpected tightening of global liquidity conditions could lead to significant rollover risks, particularly for the public sector. - A 30 percent real depreciation would lead external debt to reach 70 percent of GDP by 2022, posing rollover and solvency risks to the government and the private sector. - Projections: - Net IIP expected to deteriorate as external liabilities increase; by 2022 the net IIP is expected to become negative and reach -6 percent of GDP. - Baseline projections show external debt-to-exports ratio rising (examples from table): - External debt-to-exports ratio: 307.7 (2016), 318.5 (2018), 402.7 (2022). - Gross external financing need (in percent of GDP): 21.5 (2016) rising to 20.8–21.9 in later projection years as shown in the debt sustainability table. - Key macroeconomic assumptions underlying baseline (selection): - Nominal GDP (US dollars): 621.8 (2017), 651.8 (2018), 722.3 (2019), 775.1 (2020), 825.1 (2021), 877.4 (2022). - Real GDP growth (in percent): 2.3 (2017), 5.2 (2018), 2.8 (2019), 2.5 (2020), 2.8 (2021), 3.1 (2022). - Current account balance, excluding interest payments (percent of GDP): 0.4 (2017), -3.3 (2018), -3.3 (2019), -3.4 (2020), -3.6 (2021), -3.8 (2022). - Net non-debt creating capital inflows (percent of GDP): -0.9 (2017), -0.9 (2018), -1.2 (2019), -1.6 (2020), -1.8 (2021), -2.0 (2022). - Stress-test scenarios (high-level): - Permanent shocks and one-time real depreciation scenarios show substantial increases in external debt ratios and gross financing needs under adverse scenarios (including real depreciation of 30 percent and combined shocks). *Source: Annex I. External Sector Assessment (cr17409).* ### Annex Table 1. Argentina: External Debt Sustainability Framework, 2012 ### Annex Table 1. Argentina: External Debt Sustainability Framework, 2012 ### Debt vulnerabilities and policy context - "Debt vulnerabilities have risen as the external imbalances have grown, making fiscal consolidation essential to secure debt sustainability." - Federal government debt is expected to "remain slightly above 50 percent of GDP over the medium term." - Risks highlighted: - "Risks to solvency are moderate, but the high share of foreign currency denominated debt creates vulnerabilities from a large exchange rate depreciation and the normalization of global monetary conditions." - "Elevated gross financing needs is a risk, only partly mitigated by the high share of debt held by other public sector entities." ### Background and recent debt dynamics - End-2017 gross federal debt (including intra-public sector debt) expected to be AR$5,450 billion or 52.8 percent of GDP. - This excludes provincial debt, ANSES and the BCRA, and "the nominal value of around AR$200 billion of GDP-warrants." - Recent dynamics: - Gross federal debt expected to decline by about 1½ percent of GDP in 2017 due to inflation eroding the nominal value of domestic debt, offsetting the high primary deficit. - Debt held by other public sector agencies has declined while debt with the private sector increased from "26½ percent of GDP at the end of 2015 to an estimated 28½ percent of GDP by the end of this year." - External bond and loan issuance in 2017 has been US$22.5 billion. - Domestic U.S. dollar denominated treasury bills issuance in 2017 amounted to US$14.1 billion following a tax amnesty and a rise in U.S. dollar domestic deposits. ### Currency composition and exposure - "Nearly 70 percent of Argentina’s debt stock is denominated-in or linked-to a foreign currency, mainly the U.S. dollar." - Of peso-denominated debt, "just under one-quarter is linked to inflation." - Historical note: "While the level of foreign currency debt is similar to the late 1990s, the exchange rate was probably more overvalued then, underestimating the real burden of this debt." ### Maturity profile and short-term instruments - "The average residual maturity of Argentina’s debt at end-2016 was over 13 years." - Partly reflects the 2005 and 2010 debt exchanges (many bonds maturing in 2038) and long-maturity issuance, including a 100-year external bond sold in June 2017. - Short-term paper: stock of short-term treasury bills increased from 2 to 4½ percent of GDP between 2015 and 2017. ### Debt holders and creditor composition - By end-2017, federal debt held by other public sector entities represented 45 percent of the total stock. - Within that, the BCRA holds (effectively) zero-interest bonds equal to 18 percent of GDP. - Non-resident share of debt has grown following large-scale bond issuance. - Domestic creditor base has become more diversified: non-banks (including retail investors and mutual funds) hold an increased share, driven in part by saving of tax amnesty funds in US$ T-bills. - Illustrative creditor shares (as reported): - Gross Federal Debt by Creditor, 2016: BCRA 34%, ANSES 12%, Other public 4%, Banks 6%, Non-banks 11%, Bond markets 23%, IFIs 10%. - Gross Federal Debt by Creditor, 2017: BCRA 31%, ANSES 10%, Other public 5%, Banks 5%, Non-banks 13%, Bond markets 27%, IFIs 9%. ### Key quantitative facts and figures - End-2017 gross federal debt: AR$5,450 billion = 52.8 percent of GDP. - Nominal GDP-warrants value excluded: around AR$200 billion. - 2017 change in gross federal debt: decline of about 1½ percent of GDP. - Private-sector-held federal debt: 26½ percent of GDP (end-2015) → estimated 28½ percent of GDP (end-2017). - External bond and loan issuance in 2017: US$22.5 billion. - U.S. dollar domestic treasury bills issued in 2017: US$14.1 billion. - Share of debt denominated or linked to foreign currency: nearly 70 percent. - Average residual maturity at end-2016: over 13 years. - Short-term treasury bills stock: increased from 2 percent of GDP (2015) to 4½ percent of GDP (2017). - BCRA holdings of zero-interest bonds: 18 percent of GDP. - Gross Federal Debt by Creditor (selected shares shown above for 2016 and 2017). *Source: Annex Table 1. Argentina: External Debt Sustainability Framework, 2012 (Staff Report for the 2017 Article IV Consultation).* ### Box 1. Fiscal Outlook for Provinces ### Box 1. Fiscal Outlook for Provinces ### Overview - In 2017, provinces are projected to run an overall fiscal deficit of 0.9 percent of national GDP. - Total debt of all provinces is expected to be AR$ 590 billion in 2017 (5.7 percent of national GDP), of which around a quarter is held by the federal government. - Over the first three quarters of 2017, external debt issuance has been US$4.5 billion, concentrated in the province of Buenos Aires, and to a lesser extent, Cordoba. ### Current debt levels and issuance - Provincial total debt (2017): AR$ 590 billion (5.7 percent of national GDP). - Share held by federal government: around a quarter of provincial debt. - External debt issuance in first three quarters of 2017: US$4.5 billion. - Provincial debt issuance in external markets (selected amounts in Millions of U.S. dollars, October 9, 2017): examples shown include 4,536 for BA province, 2,000 for BA city, 960 for Córdoba, 725 for Chubut, 700 for Mendoza, 500 for Salta, 350 for Santa Fe, and smaller amounts for others. ### Outlook and projections - Overall provincial fiscal deficit is expected to decline, ending in 2022 at 0.2 percent of GDP. - Provincial debt is projected to slightly decrease to 5.3 percent of GDP (and 42 percent of revenues) by 2022. - Baseline: national debt is expected to remain relatively flat over the forecast horizon at slightly above 50 percent of GDP. - By 2022, national debt is expected to be about 53 percent of GDP. - The share of national debt held by private creditors and IFIs is expected to grow from 27 percent of GDP in 2016 to 35 percent in 2022. - Gross financing needs (GFN) are expected to remain elevated, but declining somewhat after 2018. GFN in 2018 only narrowly miss breaching the 15 percent high risk threshold for emerging markets. ### Risks, heterogeneity, and sensitivity to exchange rates - Debt-to-total-revenues ratio ranges widely across provinces from 1 (San Luis) to about 75 percent (Chubut). - Provinces with the greatest debt-to-revenue ratios also tend to have the largest absolute debt stock, suggesting potential contingent liability risks for the federal government. - Sixty percent of provincial debt is denominated in foreign currency, with great heterogeneity across provinces (this share varying between 0 and 90 percent). - A sharp depreciation of the exchange rate would raise the debt level, potentially jeopardizing continued market access and forcing a sizeable fiscal adjustment. - Example sensitivity: an additional 20 percent depreciation in 2018 would increase provincial debt by 0.6 percent of GDP (to 6.4 percent of GDP). ### Baseline scenario assumptions and macro linkages - Growth and inflation: - Growth is expected to recover in 2017 and slowly accelerate to about 3 percent by 2020. - Inflation will gradually decline over the forecast period, but will continue to erode the real value of long-maturity peso denominated debt (mainly held by the BCRA), supporting debt dynamics. - Primary deficit: - Fiscal consolidation in 2018 and 2019 will have a short-run negative impact on growth, but will help to contain the accumulation of debt going forwards. - In staff baseline, a persistent primary deficit of around 2 percent of GDP is expected to remain from 2020 onwards. - Exchange rate: - A real exchange rate appreciation is expected to support debt dynamics, although this effect is likely to be smaller in the medium term. *Source: IMF staff estimates and calculations as presented in Box 1. Fiscal Outlook for Provinces.* ### Annex I) is expected, but this remains a risk. If the ### Annex I ### Financing assumptions - The share of financing from the public sector, notably the advances from the BCRA, will decline over the horizon period (Table 1). - Domestic creditors, in particular the non-banking sector, will provide part of the remaining financing, but the majority is expected to come from international markets, with net issuance of around US$15 billion a year. - The increase in the reliance on T-bills witnessed in 2016 and 2017 is expected to rollover across the projection period. - The average effective interest rate on total debt is expected to increase from 4 percent in 2016 to 9½ percent in 2022. ### Shocks and Stress Tests — Solvency risks - Exchange rate vulnerability - Given the high share of foreign currency denominated debt, a shock to the exchange rate is a major vulnerability. - The standard DSA stress test (50 percent real depreciation with 0.25 pass-through) shows that debt could jump to 66 percent of GDP in such a scenario, only slightly below the high-risk threshold. - Growth vulnerability - A growth shock under the stress test could raise debt to 65 percent of GDP. - Interest rate risk - Given the relatively long debt maturity profile, a shock to interest rates is not a major risk. - Fiscal consolidation importance - If the primary balance were to remain unchanged at its 2016 level (-4.2 percent of GDP), debt would follow an upward trajectory, exceeding 60 percent of GDP by 2022. - A ‘combined macro-fiscal’ shock would cause debt to rise to 90 percent of GDP, likely triggering a crisis. ### Shocks and Stress Tests — Liquidity risks - Gross Financing Needs (GFN) and market access - High GFN, financed largely through external issuance, will leave Argentina exposed to global liquidity conditions. - Stress test shocks to the exchange rate or growth will generate GFN close to 19 percent of GDP, significantly above the high-risk threshold for emerging markets. - A combined macro-fiscal shock will lead to GFN of 24 percent of GDP. In such a scenario, it may not be possible to finance this through market access, triggering the need for steep fiscal consolidation and/or direct financing from the BCRA. - Mitigants - Liquidity risks are somewhat mitigated by the significant share of debt held by public sector entities. - The public sector holds around half of the federal debt stock, but the contribution of this debt to the medium-term GFN profile is relatively small: over 2017-22, less than one-fifth of the GFN is driven by the amortization of publicly-held federal debt. - Even if these principal payments were rolled over in full, a significant GFN profile would remain. ### Argentina Federal Government: Funding Needs and Sources (selected figures) - Primary deficit (billions U.S. dollars; percent of GDP) - 2016: 23.2 (4.3 percent of GDP) - 2017: 25.9 (4.2 percent of GDP) - 2018: 20.8 (3.2 percent of GDP) - 2019: 15.8 (2.2 percent of GDP) - 2020: 15.6 (2.0 percent of GDP) - 2021: 16.0 (1.9 percent of GDP) - 2022: 16.2 (1.8 percent of GDP) - Interest payments (billions U.S. dollars; percent of GDP) - 2016: 8.9 - 2017: 13.1 - 2018: 14.8 - 2019: 18.0 - 2020: 19.6 - 2021: 24.5 - 2022: 30.0 - Overall balance (billions U.S. dollars; percent of GDP) - 2016: 32.1 (5.9 percent of GDP) - 2017: 38.9 (6.3 percent of GDP) - 2018: 35.6 (5.5 percent of GDP) - 2019: 33.8 (4.7 percent of GDP) - 2020: 35.2 (4.5 percent of GDP) - 2021: 40.5 (4.9 percent of GDP) - 2022: 46.2 (5.3 percent of GDP) - Amortization (billions U.S. dollars; percent of GDP) - Gross amortization 2016: 33.4 (6.1 percent of GDP) - Gross amortization 2017: 51.8 (8.3 percent of GDP) - Gross amortization 2018: 57.0 (8.7 percent of GDP) - Gross amortization 2019: 44.9 (6.2 percent of GDP) - Gross amortization 2020: 61.4 (7.9 percent of GDP) - Gross amortization 2021: 60.0 (7.3 percent of GDP) - Gross amortization 2022: 58.9 (6.7 percent of GDP) - Amortization net of public sector (billions U.S. dollars; percent of GDP) 2016: 23.4 (4.3 percent of GDP) rising to 45.3 (5.2 percent of GDP) in 2022. - Gross financing needs (billions U.S. dollars; percent of GDP) - Total GFN 2016: 65.5 (12.0 percent of GDP) - 2017: 90.7 (14.6 percent of GDP) - 2018: 92.6 (14.2 percent of GDP) - 2019: 78.8 (10.9 percent of GDP) - 2020: 96.6 (12.5 percent of GDP) - 2021: 100.5 (12.2 percent of GDP) - 2022: 105.1 (12.0 percent of GDP) - GFN net of public sector 2016: 55.5 (10.2 percent of GDP) to 91.5 (10.4 percent of GDP) in 2022. - Total net new financing (billions U.S. dollars; percent of GDP) - Ranges from 32.2 (5.9 percent of GDP) in 2016 to 46.2 (5.3 percent of GDP) in 2022. - Financing sources (selected) - BCRA profit transfer: 2016: 7.4; 2017: 3.6; 2018: 0.0; 2019: 4.9; 2020: 2.6; 2021: 1.5; 2022: 0.8 - Borrowing: 2016: 24.8; 2017: 35.2; 2018: 35.6; 2019: 28.9; 2020: 32.6; 2021: 39.0; 2022: 45.4 - Domestic creditors (billions U.S. dollars): grows from 5.3 in 2016 to 18.8 in 2022; non-banking sector: 4.4 in 2016 to 17.6 in 2022; banking sector (incl. Banco Nacion): 1.0 in 2016 to 1.2 in 2022. - External creditors 2016: 10.5; 2017: 18.3; 2018: 16.4; 2019: 19.9; 2020: 19.5; 2021: 22.3; 2022: 25.0 - IFIs: increases from 0.2 in 2016 to 7.5 in 2022. - Memo items: - Federal gross debt (percent of GDP): 2016: 52.8; 2017: 51.7; 2018: 50.6; 2019: 50.5; 2020: 51.4; 2021: 52.7 - Federal gross debt to public sector and to private sector and IFIs provided in table. ### Public Sector DSA — Baseline scenario and key projection metrics (as of September 12, 2017) - Nominal gross public debt (percent of GDP): 2015: 49.0; 2016: 56.0; 2017: 54.3; 2018: 52.8; 2019: 51.7; 2020: 50.5; 2021: 50.6; 2022: 51.5; 2022 (another cell): 52.9 - Public gross financing needs (percent of GDP): 2015: 3.2; 2016: 9.4; 2017: 11.4; 2018: 13.5; 2019: 14.9; 2020: 10.7; 2021: 10.7; 2022: 10.2; then 12.1 - Real GDP growth (in percent): 2015: 3.4; 2016: 2.6; 2017: -2.2; 2018: 2.8; 2019: 2.5; 2020: 2.8; 2021: 3.1; 2022: 3.1; 2022 alt: 3.2 - Inflation (GDP deflator, in percent): 2015: 22.0; 2016: 24.5; 2017: 40.6; 2018: 4.6; 2019: 20.6; 2020: 13.3; 2021: 10.4; 2022: 9.6; 2022 alt: 9.1 - Effective interest rate (in percent, defined as interest payments divided by debt stock): values shown include 4.3, 6.1, 5.6, 6.5, 8.2, 8.4, 8.5, 9.0, 9.4 across years per table. ### DSA decomposition and automatic dynamics (selected) - Change in gross public sector debt (cumulative) over projection: entries include -2.5 (2015), 12.4 (2016), -1.7 (2017), -1.5 (2018), -1.2 (2019), -1.1 (2020), 0.1 (2021), 0.9 (2022), 1.4, -1.4 - Identified debt-creating flows and primary deficit paths: - Primary deficit contributions (percent of GDP): 2015: 3.4; 2016: 4.1; 2017: 4.3; 2018: 4.2; 2019: 3.2; 2020: 2.2; 2021: 2.1; 2022: 1.9; cumulative 15.5 - Automatic debt dynamics contribution (percent of GDP): series include -5.3, 5.1, -6.7, -9.4, -6.6, -3.6, -2.4, -1.8, -1.5, cumulative -25.2 - Exchange rate depreciation contributions noted (e.g., 3.2, 12.5, 5.9). ### Alternative scenarios and realism checks - Baseline underlying assumptions (selected): - Real GDP growth: 2017: 2.8; 2018: 2.5; 2019: 2.8; 2020: 3.1; 2021: 3.1; 2022: 3.2 - Inflation: 2017: 24.6; 2018: 20.6; 2019: 13.3; 2020: 10.4; 2021: 9.6; 2022: 9.1 - Primary Balance: 2017: -4.2; 2018: -3.2; 2019: -2.2; 2020: -2.1; 2021: -2.0; 2022: -1.9 - Effective interest rate: 2017: 5.9; 2018: 8.2; 2019: 8.4; 2020: 8.5; 2021: 9.0; 2022: 9.4 - Constant Primary Balance scenario retains Primary Balance at -4.2 across projection years; effective interest rate series slight variations provided. - Realism of baseline assumptions assessed via forecast track record and boom-bust analysis; percentile ranks and distributional diagnostics are presented (e.g., Argentina median forecast error for Real GDP Growth: -1.10; percentile rank 28%; for Primary Balance median forecast error -1.01; percentile rank 28%; for Inflation (Deflator) median forecast error 3.51; percentile rank 95%). ### Stress test variants and results (selected) - Defined shocks include: - Primary Balance Shock, Real GDP Growth Shock, Real Interest Rate Shock, Real Exchange Rate Shock, Combined Shock, and Combined Macro-Fiscal Shock. - Sample projected impacts (selected): - Real exchange rate shock baseline: Effective interest rate series and other macro variables adjust (e.g., Effective interest rate in one shock: 5.9, 11.0, 7.9, 8.0, 8.5, 9.0). - Combined macro-fiscal shock underlying assumptions: Real GDP growth 2.8, -2.7, -2.4, 3.1, 3.1, 3.2; Inflation 24.6, 19.2, 12.0, 10.4, 9.6, 9.1; Primary balance -4.2, -5.1, -6.0, -2.1, -2.0, -1.9; Effective interest rate 5.9, 11.0, 8.4, 8.7, 9.5, 10.1. - Stress test outcomes - Debt could reach 66 percent of GDP under a 50 percent real depreciation with 0.25 pass-through. - Debt could reach 65 percent of GDP under a growth shock. - A combined macro-fiscal shock would cause debt to rise to 90 percent of GDP. - GFN could approach 19 percent of GDP under exchange rate or growth shocks; 24 percent of GDP under a combined shock. ### Market and risk indicators (selected) - EMBIG (bp) noted as 394 (table), 5-year CDS 278 (bp) in one table. - Sovereign ratings listed: Moody's B3 (foreign), B3 (local); S&P's BB; Fitch BB. - External financing requirement definition: sum of current account deficit, amortization of medium and long-term total external debt, and short-term total external debt at end of previous period. ### Statement by the Staff Representative (December 18, 2017) — key updates - Economic outlook - Monthly indicator of economic activity slowed to 1.2 percent (saar) in September from 2.4 percent in August. - An alternative private indicator shows no seasonally adjusted growth in October. - Consumer confidence stabilized in November after rising rapidly through September. - Construction indicators remain robust and formal employment growth picked up in September. - Trade deficit worsened further in October as imports accelerated; the REER appreciated 2 percent in November compared to the previous month, and is up by about 6 percent since August. - Monetary policy and inflation expectations - Inflation expectations for end-2018 from the BCRA's survey inched up by about 0.6 percentage points in December, and are now at 16.6 percent. - Announced adjustments in utility tariffs during the month led to a 45 percent average increase in gas prices and a 44 percent average increase in electricity tariffs. - Wage growth of private sector employees was running at 28½ percent (y/y) in September. - Fiscal policy and revenues - The primary deficit of the federal government reached 2.5 percent of annual GDP in October, 0.8 percentage point less than the first ten months of 2016. - Primary spending fell by about 1½ percent in real terms during this period, driven by lower energy subsidies. - Tax revenue grew robustly in November at 30 percent (y/y), excluding one-off revenues from the tax amnesty late last year. - This suggests the federal government may close 2017 with a better-than-targeted primary fiscal deficit, although authorities could bring forward some of next year’s spending. - FX reserves and debt issuance - International reserves reached US$55 billion in December, mainly reflecting public debt placements. - The province of Rio Negro made its first global issuance in early December, becoming the 14th province to issue in international markets since the holdout settlement in April 2016. - Moody's upgraded Argentina’s rating to B2 from B3, with stable outlook. - Legislative progress - The Senate approved and sent to the lower house the fiscal pact, fiscal responsibility, and pension indexation reform laws; labor market reform bill still under discussion. - Approved indexation formula would update pensions by a weighted average of consumer prices (0.7) and wages (0.3) each quarter, instead of solely on the CPI. - The tax reform and asset recovery bills are being discussed in the lower house; the lower house has approved competition and capital markets laws and sent them back to the Senate. - The government called for extraordinary sessions of Congress in late December to seek approval of many bills and of the 2018 Budget. ### Statement by Mr. Lopetegui, Alternate Executive Director on Argentina (December 18, 2017) — key points - Background and reforms - Since taking office two years ago, Argentina’s new administration made progress implementing an ambitious policy agenda: removing price, currency, and trade controls; lifting foreign-exchange market restrictions; eliminating export taxes; settling disputes with private foreign creditors; reducing public service subsidies; setting fiscal targets; adopting an inflation-targeting regime; and rebuilding INDEC. - Economic outcomes - Economic activity has been expanding since the second half of 2016; growth set to reach close to 3 percent in 2017. - Recession that began in late 2015 ended in Q2 2016 and was the mildest in terms of output loss among recent recessions. - Up to Q2 2017, growth was 2.7 percent year-on-year, led by investment (7.7 percent year-on-year) and private consumption (3.8 percent). - Labor market improved: unemployment rate declined to 8.7 percent in Q2 2017 (from 9.3 percent same quarter last year), with more than 200,000 new jobs created. - Real wages increased and poverty rate decreased to 28.6 percent. *Source: Fund staff calculations and estimates, Argentina Public Sector Debt Sustainability Analysis and related statements.* ### 32.2 percent in the first half of 2016. ### 32.2 percent in the first half of 2016. ### Macroeconomic developments and inflation - Inflation is on a clear downward trend after being very high for many years, with peaks up to about 40 percent. - It will finish 2017 below 25 percent, more than 10 percentage points below that of 2016. - The central bank has built reserves accommodating strong capital inflows. - Reserves increased to more than US$ 54 billion, close to 10 percent of GDP and about 10 months of imports. - The current account remains negative, mainly reflecting the strong rebound of investment and imports of capital goods explaining a large share of the trade deficit. ### Fiscal policy, public spending, and debt - Execution of fiscal policy in the referred year is on target, with: - a real increase in tax collections; and - a reduction of primary expenditure in terms of GDP. - Between 2015 and 2017, consolidated primary spending of the general government—including provinces—would decline by 2 points of GDP. - Utility tariffs are increasing to be aligned with production costs and subsidies have been reduced (by 23 percent in nominal terms during the first 10 months of 2017) and oriented towards those in need. - Credit rating and public debt cost: - Argentina’s sovereign debt was upgraded twice by Moody’s and three times by S&P during the last two years. - In line with rating upgrades, the cost of public debt continues declining and is at historical lows. - Fiscal projections and targets: - Authorities expect consolidated public spending to decline from 41 percent of GDP in 2017 to 33 percent of GDP in 2023 (assuming the economy grows at 3.5 percent per year). - For the federal government, the primary deficit will decline to 3.2 percent of GDP in 2018, with primary spending falling to 22 percent of GDP. - The debt of the federal government with the private sector and international organizations will increase to 31 percent of GDP in 2018 and is expected to stabilize at 37 percent of GDP by 2020. - Provinces are expected to achieve a primary balance in 2018—from a deficit of 0.5 percent of GDP in 2017. - According to the authorities’ projections, the total tax burden (federal and provincial) will decline by 3 points of GDP in the next five years, totaling a decline of five points of GDP since 2015. - Contingent liabilities: - A large number of lawsuits pending before the Supreme Court of Justice create contingent liabilities for the federal government of up to 7 percent of GDP. ### Fiscal reforms and tax policy - Fiscal responsibility and tax reduction are priorities to reduce the size of the State and the tax burden and to reduce the public sector deficit. - A political agreement with provinces aims to pass legislation by end-2017 on fiscal responsibility, a fiscal pact, a tax reform, and a social safety net reform; laws implementing this agreement are expected to be approved by Congress before year-end. - Fiscal responsibility law (draft) includes: - limits to the growth of public spending at national and subnational levels, aiming to maintain real expenditures constant and ensure a decline in terms of GDP; - commitment by all jurisdictions to avoid an increase of public employment above population growth. - Fiscal pact with subnational governments: - Will rebalance revenue-distribution and, most importantly, result in most provinces dropping judicial claims against the federal government. - Tax reform (expected reduction of 1.5 percent of GDP over five years) — key features include: - reducing the corporate income tax rate from 35 to 20 percent when profits are reinvested; - accelerated refunds of VAT credits on investment; - elimination of employers’ social security contributions for workers earning less than AR$12,000 (approx. US$685) per month, while eliminating the cap on social security contributions for wages above AR$82,000 (approx. US$4,685) per month; - crediting the financial transaction tax against the corporate income tax; - rebalancing excise and fuel taxes; - taxing individuals’ financial income; - allowing a one-off voluntary adjustment in the value of corporate assets at a cost of 5 percent of such revaluation to address lack of inflation adjustment of businesses’ income statements. - In the context of the fiscal pact, provinces commit to gradually reduce their most distortive taxes over time—mostly Ingresos Brutos and the stamp tax. - Reducing and focalizing subsidies: - Authorities will adjust electricity, gas, and transport rates aiming at achieving cost-recovery ratios between 80-90 percent by end 2018 and near 100 percent in 2019. - Social tariffs for electricity and gas will remain in place to protect lower income households. ### Monetary policy and financial sector - Monetary policy: - The central bank will continue operating an inflation-targeting regime, with the objective of reducing inflation to 5 percent over the medium term. - Given still high inflation, monetary policy is expected to maintain its contractionary stance through high real policy interest rates. - Banking and credit: - Banks remain strong with adequate levels of capital and liquidity. - Domestic credit availability is increasing, with total bank credit to the private sector growing above 20 percent in real terms over the last 12 months. - Interest rates have declined, particularly for mortgages, which are at historical lows. - The implementation of indexation of long-term loans (mortgages) was a key factor in explaining the decrease in interest rates. ### Social policies and inclusion - Strong social policies remain in place: - Universal Child Allowance reaches 3.9 million children (7 percent more than in 2015). - Family Income Policy framework reached 4.2 million children, of which 1.2 million were incorporated in 2017. - The National Plan for Early Childhood was launched at the beginning of 2016 to eradicate malnutrition in children under the age of four. - Education: for the first time, the public system has covered all children over the age of three, benefiting more than 638,000 children. - Public pensions have been increased through legislation that brought pensions to the levels mandated by law, reducing litigation by beneficiaries and contingent liabilities of the public sector. - Social safety net reform: - A new formula for quarterly indexation of social transfers will be enacted reflecting inflation (70 percent) and salary growth (30 percent). - A fundamental analysis of the pension system and a proposal for reform—addressing sustainability and equity—are expected to be concluded in a couple of years. ### Employment, state modernization, and investment - Employment generation: - The strategy focuses on formal employment creation as the sustainable way to inclusion and poverty reduction. - Labor reform measures under discussion include formalizing employment relations, reducing the tax wedge on low-income earners, reducing litigation related to labor relations, and expanding on-the-job training. - A new law clarifying the framework for workplace accidents has been enacted and provinces are expected to gradually adhere. - Expanding access to credit and capital markets: - A new capital markets law, expected to be approved before year-end, aims to support SME financing, increase investor protection, facilitate public offerings, spur mortgage market development, promote long-term savings, strengthen market infrastructure, and improve supervisor independence and oversight. - The central bank will promote local-currency saving instruments to finance credit expansion in local currency at longer maturities and lower rates. - Priorities include increasing access to bank services and promoting electronic payments to contribute to formalization of economic activity. - Modernization of the State: - Administrative simplification measures include elimination of redundant requirements, online fulfillment of requirements, unification of registries, implementation of e-files, and online procurement to increase transparency and competition. - Procedures now allow registration of a business in 24 hours. - A one-stop online system for trade is being built and currently 80 percent of export and import requirements can be filled online. - A plan to set optimal personnel allocations in the public sector is ongoing to rationalize public employment while maintaining service quality. - Rebuilding infrastructure: - The new law for public-private partnerships approved in 2016 allows private-sector investment with limited fiscal risks and high transparency standards. - About 60 projects have been identified and included in the 2018 budget under PPPs, resulting in additional investment of about 1 percent of GDP per year in the next three years. - Successive budget laws will include clear information on project progress and fiscal impacts through public spending commitments and public guarantees. ### Institutional strengthening and anticorruption - Reforms aim to improve the justice system, the electoral system, and prevent and punish corruption. - Transparency and anticorruption measures: - New law of Access to Public Information enacted in 2016 increases transparency. - The new Repentant law reduces sanctions to individuals that provide information contributing to avoiding a crime or clarifying facts under investigation. - A law is under discussion in Congress to punish private corporations for corruption offenses. - Executive decrees clarify disclosure rules to avoid conflicts of interest and strengthen financial disclosure of public sector officials. ### Concluding remarks and risks - Authorities emphasize a fundamental policy change toward sustainable macroeconomic policies while avoiding major macroeconomic crisis. - The government’s overarching objective is to sustainably reduce poverty through higher investment, growth, and employment. - Growth assumptions and fiscal stance: - The economy is expected to grow by 3.5 percent in 2018; the government’s medium-term goal is to maintain this level. - Authorities’ fiscal objective: continue with the 1-percent-of-GDP annual reduction of the primary deficit until a primary surplus is achieved. - Staff assumes the fiscal position measured by the primary balance remains at a deficit of broadly 2 percent of GDP beyond 2019, while the authorities expect medium-term growth to stand at 3.5 percent of GDP compared to about 3 percent assumed by staff. - External sector and energy: - The increase in the external current account deficit calls for vigilance but reflects a rebound in investment after years of financial autarky. - In the last five years to 2016, the energy trade balance averaged a deficit of 0.8 percent of GDP, compared with a surplus of 2 percent of GDP in the preceding decade. - Authorities expect exports to improve with better regional growth prospects, notably in Brazil, and believe energy sector incentives will help restore net energy export status over time. - Policy balance: - Authorities argue that a faster pace of deficit reduction would put the economic recovery and social cohesion at risk and that significant cuts to the wage bill or social transfers of the magnitude and timing suggested by staff would have a large impact on domestic demand and growth. - Authorities remain open to accelerating fiscal consolidation should upside risks to growth materialize. - Monetary policy will continue aiming at achieving a gradual reduction in the inflation rate. *Source: cr17409 - 32.2 percent in the first half of 2016.* --- _Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17409.pdf_