## _cr04195

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---

### Recent developments and policy implementation
- Real GDP estimated to have risen by 8.4 percent in 2003.
- Unemployment fell by about 2 percentage points to 14.5 percent in the final quarter of 2003.
- Consumer price inflation slowed to 2.3 percent year-on-year in February 2004; wholesale and construction price inflation has begun to pick up.
- Exports at record levels; imports surging; current account remains in substantial—though narrowing—surplus.
- Capital flight appears to have moderated; private external arrears continue to accumulate but at a slower pace.
- Monetary developments:
  - Interest rates on 30-day time deposits declined to about 2½ percent in February 2004, from almost 4 percent at end-2003.
  - The peso trades narrowly at around 2.9 per U.S. dollar.
  - Gross international reserves have risen by US$1 billion since end-2003 to US$15 billion (before the March 9 Fund repurchase).
  - Central bank intensified foreign exchange purchases in Q1 2004, resulting in a higher path of base money than programmed despite increased sterilization efforts.
  - All Arg$7¾ billion of quasi-monies issued during the crisis have been taken out of circulation.
- Banking system:
  - Final quarter of 2003: average monthly profits of Arg$38 million, after losses averaging Arg$548 million per month in the year to September.
  - Improvement driven by decline in deposit rates, lower administrative costs, and reduced need for provisions; private (mainly sight) deposits continue to rise.
- Fiscal:
  - Consolidated primary surplus in 2003 was 3 percent of GDP—½ percent above target.
  - VAT refund arrears to exporters eliminated ahead of end-March structural benchmark.
  - By early March 2004, 7 provinces (representing 113 percent of the 2002 deficit) had ratified their bilateral agreements out of 12 provinces that had signed agreements with the federal government.
- Public debt restructuring: three international investment banks and three domestic banks selected to assist in the debt exchange offer; terms of engagement expected to be made public on March 15.
- Utility tariffs: announced increases for large industrial and commercial electricity and natural gas users of between 10–35 percent; electricity increase retroactive from February 1, 2004; gas increase expected by end–May after public hearings. Estimated impact on inflation about one-half of a percentage point in 2004.
- Labor legislation: Congress approved laws reversing aspects of 2000 labor reforms—reducing employment test period, allowing more centralized collective bargaining, and limiting tax incentives for employment to small and medium-sized enterprises.

### Macroeconomic framework and projections
- Updated projections (staff and authorities):
  - Real GDP growth: 2003 Estimate 8.4; Original 4.0; Revised 5.5.
  - Inflation (e.o.p.): 2003 3.7; Original 10.5; Program band 7–11 (authorities expect inflation to remain at the lower end of the band).
  - Current account balance, percent of GDP: 2003 5.9; Original 5.0; Revised 4.8.
  - Gross international reserves, billions US$: 2003 14.1; Original 15.7; Revised 16.2.
- Staff view: with sustained policies, a higher reserves target could be feasible given sizable reserve buildup so far in 2004; external projections to be reassessed at next review due to uncertainties (notably unresolved sovereign debt).
- Program inflation band maintained at 7–11 percent; staff recommends monetary policy focus on lowering core inflation and avoiding second-round effects from utility tariff increases.

### Fiscal policy, revenue overperformance, and structural measures
- Consolidated revenues expected to overperform by about 2 percent of GDP in 2004.
- Authorities’ stance: maintain consolidated primary surplus target of 3 percent of GDP for 2004, and use additional revenues to cut taxes and make room for spending increases.
- Projected Allocation of the Revenue Overperformance (In Billions of Arg$ / In Percent of 2004 GDP):
  - Projected revenue overperformance: 8.8 / 2.1
  - A. Federal government: 3.7 / 0.9
    - Tax Measures (incl. FTT reductions): 1.8 / 0.4
    - Increased spending 1/: 2.0 / 0.5
  - B. Provinces (increased spending) 2/: 4.6 / 1.1
  - C. Higher nominal primary balance: 0.5 / 0.1
  - 1/ Minimum pensions, reduction in arrears, and discretionary transfers to provinces for the homogenization of social security systems.
  - 2/ Including for capital and social spending.
- Staff recommendations and conditionalities:
  - Reduce significantly the financial transactions tax (FTT) as quickly as possible; authorities plan to begin reducing the FTT from mid-2004.
  - Consider temporary, targeted tax incentives for new investment; staff prefers incentives be temporary and aimed at new investment.
  - Monitor closely the quality of increased provincial expenditures under revenue-sharing and prioritize well-targeted social programs.
- Structural fiscal reforms in progress:
  - Intergovernmental fiscal reforms: new fiscal responsibility and coparticipation laws drafted; reform blueprint to be discussed with governors to secure formal agreement on main elements by end-March 2004 (structural performance criterion); legislation expected submitted to Congress by end-May 2004 and ratification by federal and provincial legislatures by end-August 2004.
  - Tax administration reforms: package by end-March 2004 to strengthen provincial tax administration and increase compliance on customs and social security obligations.
  - Pension reform: preparatory technical work ongoing; initial intergovernmental stage to be completed before initiating pension reform, likely delaying submission until H2 2004.
  - Expenditure management: request for Fund technical assistance to strengthen provincial expenditure management systems and launch an integrated financial management information system in two pilot provinces.

### Monetary policy and central bank reforms
- Monetary policy aim: target inflation at lower end of program band.
- Authorities view recent base money pickup as anchored in stronger money demand; see room for easing base money targets in H2 2004; agreed to wait until third review to revise program targets (including international reserves).
- Central bank institutional framework:
  - Preliminary recommendations on reforms to the central bank charter expected finalized by end-March 2004 and issued for comment; legislative amendments to be prepared by end-September 2004.
  - Updated safeguards assessment: progress in reducing operational risks; plans to strengthen internal audit and financial reporting.
  - Assessment recommended publication of audited annual financial statements based on IFRS; authorities agreed to provide end-2003 financial statements in accordance with IFRS to Fund staff.

### Banking system policies and supervision
- Policy focus: strengthen individual banks via business plans and tightened prudential requirements.
- Authorities committed to:
  - Submission of three-year business plans by all banks due by end-March 2004.
  - Agreement with all banks on strategies to ensure viability of operations by June 2004.
- Supervision measures:
  - Financial reporting obligations fully reinstated.
  - Capital adequacy regime reintroduced in January 2004 requiring gradual buildup of capital against exposure to the public sector and interest rate risk.
  - Intensive program of full-fledged on-site inspections for all banks during the remainder of 2004.
- Bank compensation and verification:
  - Slippage in finalizing bank compensation; request to reset end-March 2004 performance criterion to end-June 2004.
  - Central bank verification found banks overestimated compensation by about Arg$4½ billion; banks to write off that amount and take ownership of bonds to cover verified compensation of Arg$28¼ billion by end-June 2004.
  - Asymmetric indexation compensation delayed to Q2 2004; estimated compensation Arg$1½–2 billion out of an approved ceiling of Arg$2.8 billion.

### Strategic review of public banks
- Bids launched February 27, 2004 for selection of financial advisors for due diligence and strategic reviews of Banco Nacion and Banco Provincia.
- Performance criteria proposed:
  - Selection of advisors: end-June 2004.
  - Preparation of time-bound action plans for strengthening the banks: end-December 2004.
- Meanwhile, all public banks participate in diagnostic exercises and submit annual and multiyear business plans.

### Corporate restructuring and utility reforms
- Private corporate debt restructuring:
  - About 27 percent of the debt of the companies surveyed (accounting for over US$29 billion, or about 60 percent of Argentina’s estimated total private corporate debt) identified to be in need of restructuring have completed negotiations with their creditors.
  - Some restructurings completed under pre-packaged bankruptcy procedure.
  - Working group concluded current insolvency system is adequately supportive of restructurings.
- Utilities and concessions:
  - Interim agreements on utility tariffs and revenue-enhancing measures reached in most transport concessions; ports and airports partially redollarized.
  - Announced electricity and gas tariff adjustments primarily help nonregulated utility companies; tariff increases for regulatory companies yet to be initiated.
  - Joint Bank-Fund mission found renegotiations hampered by uncertainty over broader regulatory changes; World Bank raised concerns over draft regulatory legislation.
  - Authorities agreed to delay submission to Congress of new regulatory framework legislation to the second half of 2004.

### Debt restructuring strategy and creditor engagement
- Authorities’ framework for collaborative debt restructuring (March 10, 2004 LOI):
  - (i) Appoint and retain investment banks throughout the restructuring process.
  - (ii) Engage in meaningful and constructive negotiations with all representative creditor groups.
  - (iii) Formulate an offer to result in a sustainable debt and attain broad creditor support.
- Process and timetable:
  - March 9, 2004: authorities invited 21 representatives of creditors (including GCAB) to hold separate discussions in Buenos Aires during March 24–April 16, 2004.
  - By mid-April 2004 they will seek agreement with creditors on a follow-up process and timetable.
- Offer timing and design:
  - Authorities expect exchange offer would not be launched before June 2004 and expect to launch not later than August 2004.
  - Authorities to finalize, with banks’ assistance, an appropriate minimum participation threshold for the eventual debt offer.
- Paris Club: authorities expected to write formally to the Paris Club Secretariat by mid-March 2004 indicating request for scope and type of treatment.

### Program monitoring, conditionality, and performance criteria
- Review of second review performance:
  - All quantitative and structural performance criteria for the second review were observed, except for the continuous criterion on the nonaccumulation of arrears to multilateral and bilateral creditors; staff reports a waiver for this breach.
  - End-December 2003 ceiling on the federal debt was met by a margin of Arg$2 billion.
  - End-December indicative targets on consolidated public sector debt and provincial primary surplus were observed.
  - Two structural benchmarks implemented with minor delays: provincial financing data reporting and Insolvency Law reform report.
- New program conditionality through Q3 2004:
  - End-September 2004 indicative targets on federal government debt and the BCRA’s net international reserves and net domestic assets proposed to be converted to performance criteria.
  - End-September 2004 floor for the federal primary surplus proposed to be converted to a performance criterion and revised upward slightly.
  - Performance criterion on bank compensation proposed to be reset to end-June 2004.
  - Additional structural performance criteria and benchmarks proposed to monitor intergovernmental reform, tax administration, strategic review of public banks, and implementation of multi-year business plans by all banks.

### Staff appraisal — key findings and recommendations
- Macroeconomic policy and recovery:
  - Continued cautious macroeconomic policies key to recovery with low inflation.
  - Fiscal performance in 2003: stepped up tax collections and maintained spending discipline, far exceeding original primary surplus target.
  - Monetary policy: restrained, enabling reduced interest rates, a stable peso, and further accumulation of reserves.
  - Recommendation: continue disciplined macroeconomic policies to ensure durability of the recovery and medium-term sustainability.
- Fiscal policy guidance:
  - Strong budgetary performance provides opportunity to lock in fiscal consolidation and move ahead with debt negotiations.
  - Staff suggests increasing government savings and early significant reduction in the financial transactions tax.
  - Monitor provincial spending to ensure efficient use for well-targeted social and public investment programs.
  - An upward trend in the primary surplus required over the medium term to ensure fiscal sustainability.
- Monetary and inflation risks:
  - Monetary policy needs to account for narrowing output gap and anticipated utility tariff increases, which could raise inflation expectations.
  - Program target band: 7–11 percent; monetary policy should maintain low inflation expectations.
  - At next review, assessment of potential easing of base money path and adopting a more ambitious target for international reserves will be made.
- Banking system and supervision:
  - Financial conditions improving, but many banks remain vulnerable to interest rate increases and rebuilding adequate capital will take time.
  - Reintroduction of capital adequacy regime in January noted as an important milestone.
  - Staff regrets delays in pending bank compensation and due diligence and strategic reviews of the two main public banks; urges completion of bank compensation and implementation of agreed schedule.
- Corporate debt and bankruptcy law:
  - Private corporate debt restructuring essential to restart credit flows and support growth; substantial progress supports reliance on a market-based framework.
  - Recommendation: resist pressures for amendments that would weaken creditors’ rights.
- Utilities:
  - Authorities urged to follow tariff adjustments for regulated concessionaires to help restore viability.
  - Urged to work closely with the World Bank to develop a balanced regulatory framework to accelerate renegotiation of concessions, attract private investment, protect low income households, and allow utilities to restructure debts.
- Debt negotiations and restructuring approach:
  - Authorities’ willingness to negotiate with private creditors is key to collaborative comprehensive restructuring.
  - Inclusion of a minimum participation threshold for completion of the exchange offer recommended.
  - Staff recommends completion of the second review and financing assurances review; supports modification of structural criterion relating to bank compensation and waiver for temporary nonobservance of nonaccumulation of arrears.

### Banking system financial condition (Box summaries)
- Overall assessment:
  - Banking system stabilized by end-2003; system expected to record positive operating returns during 2004.
  - Liquid assets about 14 percent of total assets.
  - Deposits grew by 21 percent in 2003 and a further 3½ percent in first two months of 2004, largely sight deposits.
  - Credit expansion to consumer sector showing signs of recovery.
- Profitability:
  - Average monthly losses declined from Arg$670 million in first half of 2003 to Arg$180 million during second half.
  - In December 2003, banking system as whole recorded monthly profits of Arg$410 million.
- Asymmetric pesoization and indexation:
  - Banks claimed compensation for Arg$33 billion; central bank verified claims for about Arg$28½ billion; banks to write off the difference in 2004.
  - Fiscal cost of compensation for asymmetric indexation estimated about Arg$1.6 billion (initial estimate Arg$2.8 billion).
- Net worth implications:
  - Adjusted net worth declines from Arg$23.1 billion (12.2 percent of assets) to Arg$20.1 billion (10.7 percent of assets).
  - Immediate write-off of amparos would imply further decline to Arg$13.9 billion (7.4 percent of assets).

### Utilities and concession renegotiation (Box highlights)
- Joint WB/IMF mission preliminary findings (visit: Buenos Aires, February 2004):
  - Renegotiations shifting to long-term comprehensive contracts; change in focus slowed renegotiations and introduced uncertainties over private sector role.
  - As of early-March, 48 out of 62 concessions remain to be renegotiated.
  - Authorities hope to finalize agreements with an additional 39 concessions by end-June 2004, and remaining concessions by end-2004.
  - Most concessionaires running a cash-operating surplus, but renegotiation delays have limited investment and hampered restructuring of nonperforming debts.
  - Number of ICSID cases increased to 27.
- Tariff adjustment impacts:
  - Announced utility tariff increases important for unregulated electricity and gas producers but do not improve finances of the 22 regulated concessions responsible for energy transport and distribution.
- Key recommendations to expedite renegotiation:
  - Finalize reports on compliance with contractual obligations.
  - Establish detailed week-by-week negotiation timetables.
  - Clarify regulatory impacts of proposed renegotiation.
  - Revise proposed regulatory legislation consistent with renegotiated contracts and supportive of private sector participation while protecting low-income households.

### Multilateral relations, lending, and IMF program actions
- Consolidated public debt (Table 11 highlights):
  - Multilaterals: 32.4 31.4 31.8 32.9 (2001–04, end period, US$ billions)
  - IMF: 14.0 14.3 15.5 16.2
  - World Bank: 9.7 8.5 7.5 7.9
  - IADB: 8.7 8.4 8.8 8.8
  - Bilateral: 4.5 4.9 6.5 6.6
  - Private creditors: 42.3 98.4 134.2 145.9
- IDB disbursements for 2003 totaled US$2.658 billion:
  - US$1.9 billion for emergency loans.
  - US$490 million for policy-based loans.
  - US$268 million for investment loans.
  - Net loan flow positive US$320 million; net cash flow negative US$305 million.
- World Bank portfolio:
  - Total current Bank portfolio: 32 loans totaling US$4.6 billion in commitments.
  - Provincial Maternal-Child Health Sector Adjustment Loan: US$750 million, signed October 31, 2003; upon effectiveness November 6, 2003, US$450 million of first tranche disbursed.
- IMF Actions:
  - Executive Board completed second review of Argentina's three-year SDR 8.98 billion Stand-By Arrangement (approved September 20, 2003).
  - Completion entitles Argentina to disbursement equivalent to SDR 2.1 billion (about US$3.1 billion).
  - Board approved modification of a structural performance criterion and a waiver for nonobservance of a performance criterion.
  - Acting Managing Director Anne Krueger highlighted rapid recovery, improvements in employment and poverty indicators, progress in banking and utilities sector reforms, and need for disciplined macroeconomic policies.

### Key timelines and proposed performance criteria (March–December 2004)
- End-March 2004:
  - Agreement on principles for intergovernmental reform and fiscal responsibility legislation — Pending.
  - Federal-provincial bilateral agreements ratified by provincial legislatures representing at least 100 percent of 2002 consolidated provincial deficit — Observed.
  - Finalize compensation to banks for asymmetric pesoization and indexation — Proposed to be reset to end-June 2004.
- End-May 2004:
  - Submit intergovernmental reform and fiscal responsibility legislation to Congress.
- End-June 2004:
  - Finalize bank compensation (proposed reset).
  - Complete selection of accounting and consulting firms to begin strategic review of two largest public banks.
  - BCRA to begin providing Fund with annual financial statements in accordance with IFRS, commencing with end-December 2003 financial year (structural benchmark).
- End-August 2004:
  - Federal and provincial legislatures to ratify intergovernmental reform and fiscal responsibility legislation.
- End-September 2004:
  - Submit to Congress the 2005 budget consistent with program targets for 2005.
  - Submit tax reform legislation to Congress consistent with earlier commitments.
- End-December 2004:
  - Finalize time-bound action plan for strengthening the two public banks.

*Source: IMF staff report and related documents (text provided).*

### 1. Current and Proposed Structural Performance Criteria:

### _cr04195 - 1. Current and Proposed Structural Performance Criteria:

### Recent developments and policy implementation
- Real GDP is estimated to have risen by 8.4 percent in 2003, driven by strong private consumption and investment.
- Unemployment fell by about 2 percentage points to 14.5 percent in the final quarter of 2003.
- Consumer price inflation slowed to 2.3 percent year-on-year in February 2004; wholesale and construction price inflation has begun to pick up.
- External trade: exports at record levels but imports surging; current account remains in substantial—though narrowing—surplus.
- Capital flight appears to have moderated; private external arrears continue to accumulate but at a slower pace.
- Monetary developments:
  - Interest rates on 30-day time deposits declined to about 2½ percent in February 2004, from almost 4 percent at end-2003.
  - The peso trades narrowly at around 2.9 per U.S. dollar.
  - Gross international reserves have risen by US$1 billion since end-2003 to US$15 billion (before the March 9 Fund repurchase).
  - The central bank intensified foreign exchange purchases in Q1 2004, resulting in a higher path of base money than programmed despite increased sterilization efforts.
  - All Arg$7¾ billion of quasi-monies issued during the crisis have been taken out of circulation.
- Banking system:
  - Final quarter of 2003: average monthly profits of Arg$38 million, after losses averaging Arg$548 million per month in the year to September.
  - Improvement driven by decline in deposit rates, lower administrative costs, and reduced need for provisions; private (mainly sight) deposits continue to rise.
- Fiscal:
  - Consolidated primary surplus in 2003 was 3 percent of GDP—½ percent above target—largely due to higher-than-expected income and foreign trade tax revenues and better provincial outcomes.
  - VAT refund arrears to exporters eliminated ahead of end-March structural benchmark.
  - By early March 2004, 7 provinces (representing 113 percent of the 2002 deficit) had ratified their bilateral agreements out of 12 provinces that had signed agreements with the federal government.
- Public debt restructuring: authorities selected three international investment banks and three domestic banks to assist in the debt exchange offer; terms of engagement expected to be made public on March 15 (prior action for Board consideration of the second review).
- Creditor engagement: Global Committee of Argentina Bondholders (GCAB) established on January 12, 2004; government invited GCAB and other creditor groups to Buenos Aires for negotiations.
- Utility tariffs: announced increases for large industrial and commercial electricity and natural gas users of between 10–35 percent; liquid gas for passenger transport also to be raised. Electricity increase expected shortly and retroactive from February 1, 2004; gas increase expected by end–May after public hearings. Estimated impact on inflation about one-half of a percentage point in 2004.
- Labor legislation: Congress approved laws reversing aspects of 2000 labor reforms—likely to discourage temporary contracts by reducing the employment test period, allow more centralized collective bargaining, and limit tax incentives for employment to small and medium-sized enterprises.

### Macroeconomic framework and projections
- Update to reflect robust recovery; staff and authorities projections:
  - Real GDP growth: 2003 Estimate 8.4; Original 4.0; Revised 5.5.
  - Inflation (e.o.p.): 2003 3.7; Original 10.5; Program band 7–11 (authorities expect inflation to remain at the lower end of the band).
  - Current account balance, percent of GDP: 2003 5.9; Original 5.0; Revised 4.8.
  - Gross international reserves, billions US$: 2003 14.1; Original 15.7; Revised 16.2.
- Staff view: with sustained policies, a higher reserves target could be feasible given sizable reserve buildup so far in 2004; external projections to be reassessed at next review due to uncertainties (notably unresolved sovereign debt).
- Program inflation band maintained at 7–11 percent; authorities expect inflation to rise from current low levels but contained within lower end of band; staff recommends monetary policy focus on lowering core inflation and avoiding second-round effects from utility tariff increases.

### Fiscal policy, revenue overperformance, and structural measures
- Consolidated revenues expected to overperform by about 2 percent of GDP in 2004, reflecting stronger recovery and efforts to reduce tax evasion.
- Authorities’ stance: maintain consolidated primary surplus target of 3 percent of GDP for 2004, and use additional revenues to cut taxes and make room for spending increases.
- Text Table B: Projected Allocation of the Revenue Overperformance (In Billions of Arg$ / In Percent of 2004 GDP)
  - Projected revenue overperformance: 8.8 / 2.1
  - A. Federal government: 3.7 / 0.9
    - Tax Measures (incl. FTT reductions): 1.8 / 0.4
    - Increased spending 1/: 2.0 / 0.5
  - B. Provinces (increased spending) 2/: 4.6 / 1.1
  - C. Higher nominal primary balance: 0.5 / 0.1
  - 1/ Minimum pensions, reduction in arrears, and discretionary transfers to provinces for the homogenization of social security systems.
  - 2/ Including for capital and social spending.
- Staff recommendations and conditionalities:
  - Reduce significantly the financial transactions tax (FTT) as quickly as possible to lessen distortions to financial intermediation and strengthen the banking system; authorities plan to begin reducing the FTT from mid-2004 in line with program commitments.
  - Consider temporary, targeted tax incentives for new investment; staff prefers incentives be temporary and aimed at new investment.
  - Monitor closely the quality of increased provincial expenditures under revenue-sharing and prioritize well-targeted social programs.
- Structural fiscal reforms in progress:
  - Intergovernmental fiscal reforms: new fiscal responsibility and coparticipation laws drafted; reform blueprint to be discussed with governors to secure formal agreement on main elements by end-March 2004 (structural performance criterion); legislation expected submitted to Congress by end-May 2004 and ratification by federal and provincial legislatures by end-August 2004.
  - Additional structural measures through Q3 2004:
    - Tax administration reforms: package by end-March 2004 to strengthen provincial tax administration and increase compliance on customs and social security obligations; measures include unified corporate register using a single taxpayer identification number and harmonized procedures for prosecuting customs evasion with general tax evasion.
    - Tax policy measures: reduction of FTT from mid-2004; details to be decided at next program review.
    - Pension reform: preparatory technical work ongoing; authorities intend to complete initial stage of intergovernmental reform before initiating pension reform, likely delaying submission of pension reform legislation until H2 2004.
    - Expenditure management: authorities will request Fund technical assistance to strengthen provincial expenditure management systems and launch an integrated financial management information system in two pilot provinces.

### Monetary policy and central bank reforms
- Monetary policy aim: target inflation at lower end of program band.
- Authorities view recent base money pickup as anchored in stronger money demand; see room for easing base money targets in H2 2004; agreed to wait until third review to revise program targets (including international reserves).
- Central bank institutional framework:
  - Preliminary recommendations on reforms to the central bank charter expected finalized by end-March 2004 and issued for comment; legislative amendments to be prepared by end-September 2004.
  - Updated safeguards assessment: progress in reducing operational risks; plans to strengthen internal audit and financial reporting. Assessment recommended publication of audited annual financial statements based on IFRS; authorities agreed to provide end-2003 financial statements in accordance with IFRS to Fund staff.

### Banking system policies and supervision
- Policy focus shifting to strengthening individual banks via business plans and tightened prudential requirements.
- Authorities committed to:
  - Submission of three-year business plans by all banks due by end-March 2004.
  - Agreement with all banks on strategies to ensure viability of operations by June 2004.
- Supervision measures:
  - Financial reporting obligations fully reinstated.
  - Capital adequacy regime reintroduced in January 2004 requiring gradual buildup of capital against exposure to the public sector and interest rate risk.
  - Central bank to undertake an intensive program of full-fledged on-site inspections for all banks during the remainder of 2004.
- Bank compensation and verification issues:
  - Slippage in finalizing bank compensation due to technical and administrative delays; authorities requested resetting end-March 2004 performance criterion to end-June 2004.
  - Asymmetric pesoization: central bank verification found banks overestimated compensation by about Arg$4½ billion; banks to write off that amount and take ownership of bonds (held in escrow) to cover verified compensation of Arg$28¼ billion by end-June 2004.
  - Asymmetric indexation compensation will be delayed to Q2 2004 because of delays in implementing regulations and verification complexity; estimated compensation Arg$1½–2 billion out of an approved ceiling of Arg$2.8 billion.

*IMF staff report excerpt: "1. Current and Proposed Structural Performance Criteria: March 2003–December 2004."*

### 21.      Following recent delays, a timetable for the strategic review of the two largest

### 21.      Following recent delays, a timetable for the strategic review of the two largest public banks has been agreed.

### Strategic review of public banks
- New bids were launched on February 27, 2004 on agreed terms of reference for the selection of the financial advisors to conduct due diligence and strategic reviews of Banco Nacion and Banco Provincia.
- Performance criteria proposed:
  - Selection of the advisors: end-June 2004.
  - Preparation of time-bound action plans for strengthening the banks: end-December 2004.
- Meanwhile, all public banks continue to participate in diagnostic exercises conducted by the central bank, including submission of annual and multiyear business plans.
- Note: The selection of advisors was originally an end-April 2004 structural benchmark; delays reflected procurement difficulties.

### Corporate restructuring and utility reforms
- Private corporate debt restructuring progress:
  - About 27 percent of the debt of the companies surveyed (accounting for over US$29 billion, or about 60 percent of Argentina’s estimated total private corporate debt) identified to be in need of restructuring have completed negotiations with their creditors.
  - In a number of cases, restructurings are being completed under the pre-packaged bankruptcy procedure.
  - A working group reviewing the legal framework for corporate debt restructuring concluded that the current insolvency system is being adequately supportive of restructurings.
- Utilities and concessions:
  - Financial situation for some utility companies is improving; renegotiation of concessions has been uneven.
  - Interim agreements on utility tariffs and other revenue-enhancing measures reached in most transport concessions, including ports and airports where tariffs have been partially redollarized.
  - Announced adjustments in electricity and gas tariffs charged to large commercial users will primarily help nonregulated utility companies; tariff increases for regulatory companies have yet to be initiated.
  - Joint Bank-Fund mission found renegotiations hampered by uncertainty over broader regulatory changes; World Bank raised concerns over draft regulatory legislation.
  - Authorities agreed to delay submission to Congress of new regulatory framework legislation to the second half of 2004.

### Debt restructuring strategy and creditor engagement
- Authorities’ framework for a collaborative debt restructuring (March 10, 2004 LOI):
  - (i) Appoint and retain investment banks throughout the restructuring process to assist in preparations and help market the debt exchange offer.
  - (ii) Engage in meaningful and constructive negotiations with all representative creditor groups.
  - (iii) Formulate the offer to result in a sustainable debt for Argentina and attain broad support from creditors.
- Process and timetable for engaging creditors:
  - On March 9, 2004, the authorities invited 21 representatives of creditors, including the GCAB, to hold separate discussions in Buenos Aires during March 24–April 16, 2004.
  - By mid-April 2004, they will seek to reach agreement with creditors on a follow-up process and timetable for negotiations.
- Offer timing and design:
  - Authorities will decide features and timing of the exchange offer following additional discussions with investment banks and negotiation with creditors.
  - Authorities expect the exchange offer would not be launched before June 2004 and expect to launch not later than August 2004.
  - Authorities will finalize, with assistance of their banks, an appropriate minimum participation threshold for the eventual debt offer to obtain broadly supported restructuring.
- Paris Club:
  - Authorities expected to write formally to the Paris Club Secretariat by mid-March 2004 indicating their request for the scope and type of treatment being sought on their bilateral debt.

### Program monitoring and conditionality
- Review of quantitative and structural performance criteria for the second review:
  - All quantitative and structural performance criteria for the second review were observed, except for the continuous criterion on the nonaccumulation of arrears to multilateral and bilateral creditors.
  - The breach occurred following a short delay in completing part of a Fund repurchase; staff reports a waiver for this breach on the basis that it was temporary.
  - The end-December 2003 ceiling on the federal debt was met by a margin of Arg$2 billion.
  - End-December 2003 indicative targets on the consolidated public sector debt and on the primary surplus for provincial governments were also observed.
  - Two structural benchmarks were implemented with minor delays: reporting of provincial financing data within 55 days of end-December 2003 and preparation of a report on Insolvency Law reform by end-January 2004.
- New program conditionality through the third quarter of 2004:
  - (i) End-September 2004 indicative targets on the federal government debt and the BCRA’s net international reserves and net domestic assets proposed to be converted to performance criteria.
  - (ii) End-September 2004 floor for the federal primary surplus proposed to be converted to a performance criterion and revised upward slightly, in line with higher-than-programmed nominal GDP.
  - Performance criterion on finalizing bank compensation for asymmetric pesoization and indexation proposed to be reset to end-June 2004 from end-March 2004.
  - Additional structural performance criteria and benchmarks proposed to monitor reforms of intergovernmental relations, strengthening of tax administration, strategic review of the two largest public banks, and implementation of multi-year business plans by all banks.

### Staff appraisal — key findings and recommendations
- Macroeconomic policy and recovery:
  - Continued cautious macroeconomic policies have been key to keeping the recovery on track with low inflation.
  - Fiscal performance in 2003: authorities markedly stepped up tax collections and maintained spending discipline, far exceeding their original primary surplus target.
  - Monetary policy: restrained, enabling reduced interest rates, a stable peso, and a further accumulation of reserves.
  - Recommendation: Continuation of disciplined macroeconomic policies to ensure durability of the recovery and set Argentina on a sustainable path of medium term growth and poverty reduction.
- Fiscal policy guidance:
  - Strong budgetary performance provides an opportunity to lock in ambitious fiscal consolidation and move ahead with debt negotiations.
  - Staff suggests considering increasing government savings and early significant reduction in the financial transactions tax to strengthen the banking system.
  - Monitor provincial spending to ensure additional resources are used efficiently for well-targeted social and public investment programs.
  - An upward trend in the primary surplus will be required over the medium term to ensure fiscal sustainability.
- Monetary and inflation risks:
  - Monetary policy needs to account for narrowing output gap and anticipated utility tariff increases, which could raise inflation expectations.
  - Program target band: 7–11 percent; monetary policy should be set carefully to maintain low inflation expectations.
  - At the next review, assessment of potential easing of the program path for base money and adopting a more ambitious target for international reserves will be made.
- Banking system and supervision:
  - Financial conditions in the banking system are improving, but central bank supervision is needed due to continuing weaknesses in balance sheets.
  - Banking system gradually returning to overall profitability, but many banks remain vulnerable to interest rate increases and rebuilding adequate capital will take time.
  - Reintroduction of a capital adequacy regime in January noted as an important milestone.
  - Staff regrets repeated delays in pending bank compensation and due diligence and strategic reviews of the two main public banks; hopes authorities will complete bank compensation and implement the newly agreed schedule.
- Corporate debt and bankruptcy law:
  - Private corporate debt restructuring is essential to restart credit flows and support growth; substantial progress supports reliance on a market-based framework.
  - Recommendation: Continue to resist pressures for any amendments to the bankruptcy law that would weaken creditors’ rights.
- Utilities:
  - Authorities urged to follow tariff adjustments for regulated concessionaires to help restore viability.
  - Authorities urged to work closely with the World Bank to develop a balanced regulatory framework to accelerate renegotiation of concessions, attract private investment, protect low income households, and allow utilities to restructure their debts.
- Debt negotiations and restructuring approach:
  - Authorities’ willingness to negotiate with private creditors is key to reaching a collaborative comprehensive restructuring.
  - Inclusion of a minimum participation threshold for completion of the exchange offer recommended to avoid a piecemeal approach.
  - Staff recommends completion of the second review under the program and of the financing assurances review, supports modification of the structural performance criterion relating to bank compensation and a waiver for temporary nonobservance of the continuous performance criterion on nonaccumulation of arrears to bilateral and multilateral creditors.

### Box 1 — Current and Proposed Structural Performance Criteria (March 2003–December 2004)
- I. Current Performance Criteria
  - Continuous performance criteria:
    - Nonaccumulation of arrears to bilateral and multilateral creditors.  Not observed
    - No new tax amnesties (MEFP ¶29).  Observed
    - No statute or other legal instrument will be adopted that provides a means for any involuntary suspension or other restraint of creditors rights (MEFP ¶50). Observed
  - End-March 2004:
    - The federal government and a critical mass of provincial governors to reach agreement on the principles for intergovernmental reform and fiscal responsibility legislation (MEFP ¶31)  Pending
    - Federal-provincial bilateral agreements shall become effective through their ratification by the provincial legislatures representing at least 100 percent of 2002 consolidated provincial deficit (MEFP ¶17).  Observed
    - Finalize the compensation to banks for losses associated with asymmetric pesoization and indexation (MEFP ¶12).  Proposed to be reset to end-June 2004
- II. Proposed Performance Criteria
  - End-May 2004:
    - Submit intergovernmental reform and fiscal responsibility legislation to Congress (MEFP ¶31)
  - End-June 2004:
    - Finalize the compensation to banks for losses associated with asymmetric pesoization and indexation (MEFP ¶12)  Proposed to be reset from end-March 2004
    - Complete selection of accounting and consulting firms to begin the strategic review of the two largest public banks (MEFP ¶38)
  - End-August 2004:
    - Federal and provincial legislatures to ratify the intergovernmental reform and fiscal responsibility legislation (MEFP ¶31)
  - End-September 2004:
    - Submit to Congress the 2005 budget consistent with the program targets for 2005 (MEFP ¶8)
    - Submit tax reform legislation to Congress consistent with earlier commitments (MEFP ¶28)
  - End-December 2004:
    - Finalize a time-bound action plan for strengthening the two public banks (MEFP ¶38)

*IMF staff report (text provided).*

### Box 2. Current and Proposed Structural Benchmarks:

### Box 2. Current and Proposed Structural Benchmarks: March 2003–December 2004

### I. Current Structural Benchmarks
- Continuous structural benchmarks
  - Provide Fund staff with monthly information on provincial government financing with a delay of less than 55 days
  - December data reported with a one-day delay
- End-January 2004
  - Report of working group on Insolvency Law reform (MEFP ¶48) 1/ — Report submitted on February 25, 2004
- End-March 2004
  - Working group charged with the design of reforms of the central bank charter to publish report containing its key findings and recommendations (MEFP ¶34). — Pending
  - Launch of second tax administration reform focusing on improving customs administration and social security collections (MEFP ¶29). — Pending
  - Elimination of arrears on VAT refunds to exporters (MEFP ¶13). — Arrears eliminated by end-November 2003

### II. Proposed Structural Benchmarks (end-June 2004)
- BCRA to reach agreement on mutually acceptable business plans with all banks (MEFP ¶42 and January 9, 2004 LOI, p.3)
- BCRA to begin providing the Fund with annual financial statements in accordance with International Financial Reporting Standards, commencing with the end-December 2003 financial year (MEFP ¶54)

*1/ Refers to the MEFP dated September 10, 2003.*

### Box 3. An Update on the Financial Condition of the Banking System
- Overall assessment
  - The financial condition of the banking system had stabilized by end-2003 and the system as a whole is expected to record positive operating returns during 2004
  - Banks remain very liquid (liquid assets are about 14 percent of total assets)
  - Deposits continue to grow (by 21 percent in 2003 and a further 3½ percent in the first two months of 2004), although growth is largely restricted to sight deposits
  - Credit expansion to the consumer sector is showing signs of recovery
- Profitability
  - Average monthly losses declined from Arg$670 million in the first half of 2003 to Arg$180 million during the second half
  - In December 2003, the banking system as a whole recorded monthly profits of Arg$410 million; the improvement taking place mainly in private banks
- Asymmetric pesoization
  - Banks claimed compensation for Arg$33 billion, which they had already recorded as an asset in their balance sheets
  - Following on-site audits, the central bank verified claims for about Arg$28½ billion, and the banks will have to write off the difference from the balance sheets in the course of 2004
  - The foreign, domestic, and public banks account for about Arg$2 billion, Arg$1.4 billion and Arg$1.2 billion of the lost claims, respectively
  - Compensation payments—in the form of government bonds (Boden 07 and Boden 12 bonds)—were placed in advance in escrow accounts, and the banks will now assume ownership of them
- Asymmetric indexation
  - Fiscal cost of compensation for the asymmetric indexation of loans is now estimated to be about Arg$1.6 billion compared to the initial estimate of Arg$2.8 billion that was approved by the Congress
- Net worth implications
  - Adjusting balance sheets for the elimination of the overestimation of compensation for asymmetric pesoization and the compensation for asymmetric indexation, net worth of the banks declines from Arg$23.1 billion (12.2 percent of assets) to Arg$20.1 billion (10.7 percent of assets)
  - An immediate write-off of amparos would imply a further decline in net worth to Arg$13.9 billion (7.4 percent of assets)

*Prepared by Ceyla Pazarbasioglu and Jorge Cayazzo (both MFD).*

### Box 4. Federal Tax Revenue Overperformance
- 2003 developments
  - Federal tax revenues jumped by 42 percent (3.1 percentage points of GDP)
  - Overperformance relative to the program was Arg$2.9 billion or 0.8 percent of GDP
  - Contributing factors to the overperformance:
    - Higher-than-programmed economic activity, which explains over 40 percent of the overperformance
    - Higher-than-anticipated tax buoyancy, especially of the income and trade taxes, in part reflecting new tax administration measures
    - One-off factors related to recording revenues collected in quasi-monies (patacones and lecops), explaining about ¼ of the overperformance
- 2004 outlook
  - Federal tax revenues are projected to remain buoyant, exceeding the original program projections by Arg$7.9 billion (2 percent of GDP)
  - Drivers of the 2004 overperformance projection:
    - Revisions to the macroeconomic framework, which provide for higher growth in major tax bases (consumption, trade)
    - Higher tax buoyancy, reflected in the higher-than-anticipated 2003 tax receipts and the strong tax performance in the first months of 2004
    - Higher-than-projected corporate profits in 2003; the recently published 2003 corporate income statements suggest record profits, particularly of oil producers and commodity exporters
- Table highlights (contributions to revenue growth, in percent)
  - Total tax revenues: 10.6 (2002), 42.0 (2003), 24.0 (2004 Proj.)
  - Traditional taxes, of which: -1.0 (2002), 25.7 (2003), 18.1 (2004 Proj.)
  - Income tax: -2.5 (2002), 11.1 (2003), 7.1 (2004 Proj.)
  - VAT: -0.2 (2002), 10.8 (2003), 8.7 (2004 Proj.)
  - Extraordinary taxes: 14.5 (2002), 9.9 (2003), 2.5 (2004 Proj.)
  - Financial transaction tax: 4.0 (2002), 2.0 (2003), 1.5 (2004 Proj.)
  - Export tax: 10.4 (2002), 7.9 (2003), 1.0 (2004 Proj.)
  - Other taxes: -2.9 (2002), 6.3 (2003), 3.4 (2004 Proj.)
- Federal Tax Overperformance (estimates, in Arg$bn)
  - Overall overperformance: 2.9 (2003), 7.7 (2004)
  - Revised macro-framework: 1.3 (2003), 1.9 (2004)
  - Higher tax buoyancy in 2003: 0.8 (2003), 4.0 (2004)
  - Delayed registration of revenues: 0.8 (2003), ...
  - Recovery in corporate profits: ... (2003), 1.8 (2004)

*The analysis is based on a different revenue classification than presented in the summary federal government operations (see Table 8).*

### Box 5. Status of Proposals to Reform of Intergovernmental Relations
- Progress and objectives
  - Authorities are close to reaching agreement with provincial governors on main elements of intergovernmental reform, including: (i) fiscal responsibility to increase control over provincial borrowing; and (ii) a blueprint for simplifying tax revenue-sharing arrangements, improving incentives to raise own revenues, and ensuring a more equitable distribution of transfers among provinces
- Proposed fiscal responsibility legislation would:
  - Establish deficit ceilings and debt limits (equal to 25 percent of revenues) for the provinces
  - Subject provincial borrowing to federal government authorization (for the portion exceeding the debt limits, though authorization will always be required in the case of foreign currency debt)
  - Establish incentives and financial penalties for noncompliance with these limits and procedures
- Proposed revenue-sharing reforms
  - The revenue-sharing base would be the total of taxes currently “coparticipated,” with a simple formula for allocating resources between the federal and provincial governments
  - The shared tax base will exclude trade taxes (including the export tax) and 70 percent of the financial transactions tax, which will continue to accrue to the federal government
  - Distribution of the shared tax base: 60 percent to the federal government and 40 percent to the provincial governments
    - The increased share going to the federal government would be compensated for financing the operations of the pay-as-you-go component of the pension system
  - Revenue sharing would remain fixed up to the 2004 nominal allocation, beyond which:
    - A fixed nominal amount (still to be determined) would be transferred to a fund for federal spending on infrastructure and social spending in the poorer areas of the country—ten northern provinces and the metropolitan areas of Buenos Aires, Cordoba and Rosario
    - Remaining revenues would be distributed according to the 60-to-40 proportions specified above, but with 10 percent of the additional allocation to the provinces being distributed according to economic efficiency criteria (provinces rewarded for relative improvements in own-tax collections, achieving targeted primary surpluses, and reducing their debt)
  - A fiscal federal institution would be created to make decisions with respect to future intergovernmental relations

*The September 10, 2003, MEFP envisaged an intergovernmental reform that focused on: “the tax revenue sharing arrangements, the introduction of binding debt and deficit ceilings for provincial governments, reforms aimed at strengthening provincial revenue capabilities, and the creation of a fiscal federalism agency capable of guiding provincial future intergovernmental relations (MEFP ¶31).”*

### Box 6. Utility Reform: Findings of the Joint WB/IMF Mission

### Box 6. Utility Reform: Findings of the Joint WB/IMF Mission

### Preliminary findings of the joint World Bank–Fund team (visit: Buenos Aires, February 2004)
- The focus of the renegotiations has changed from agreeing interim adjustments to contracts to agreeing on long-term comprehensive contracts.
- The authorities wish to:
  - (i) introduce a new regulatory framework to strengthen the role of government in the utilities sector; and
  - (ii) ensure that the tariff structure includes a “social price” component for most utilities and explicit subsidies in the case of transport.
- The change in focus has slowed the renegotiation and introduced uncertainties about the future role of the private sector in utilities concessions.
- As of early-March, 48 out of 62 concessions remain to be renegotiated.
- In October 2003, 13 inter-urban road contracts were allowed to expire, and new concessions were awarded under a new model of operation and management with government playing a prominent role in investment decisions.
- The authorities hope to finalize agreements with an additional 39 concessions by end-June 2004, and with the remaining concessions (telecommunications, passenger railways) by end-2004.
- Most concessionaires are now running a cash-operating surplus—reflecting the appreciation of the peso, and to a lesser extent the recovery in demand—but delays and uncertainties in the renegotiation have:
  - limited investment; and
  - hampered the utilities’ efforts to restructure their nonperforming debts (an increasing share of which is owned by vulture funds).
- The number of cases before the International Center for the Settlement of Investment Disputes (ICSID) has increased to 27.
- The announced utility tariff increases represent an important step towards restoring the viability of unregulated electricity and gas producers.
  - The measure, however, does not improve the finances of the 22 regulated concessions responsible for energy transport and distribution.
- A series of clearance procedures is required to give legal status to the agreements reached between the executive and concessionaires, including:
  - public hearings;
  - reviews by control entities; and
  - congressional ratification.

### Argentina — Status of Concession Renegotiation, March 2004 (selected items)
- Regulated concessions: Number of Contracts: 62; Foreign Debt (US$ billion): 10.5.
- Energy (concessions with majority of foreign shareholders): Number of Contracts: 22; Foreign Debt (US$ billion): 4.0.
  - Electricity (transport and distribution): 11 contracts; Foreign Debt (US$ billion): 1.4; Tariffs Adjusted/ Revenues Enhanced: √
  - Gas (transport and distribution): 11 contracts; Foreign Debt (US$ billion): 2.7; Tariffs Adjusted/ Revenues Enhanced: √
- Water: 1 contract; Foreign Debt (US$ billion): 0.7; Tariffs Adjusted/ Revenues Enhanced: √
- Telecommunications (commitment to finalize renegotiations for telecom and passenger railways by end-December 2004): 2 contracts; Foreign Debt (US$ billion): 5.0.
  - Debt restructuring agreement reached with one of the telecommunication companies (roughly US$1.8 billion).
- Transport: 37 contracts; Foreign Debt (US$ billion): 0.8.
  - Urban access roads: 4 contracts; Foreign Debt (US$ billion): 0.7; Tariffs Adjusted/ Revenues Enhanced: √
  - Inter-urban roads: 15 contracts; Tariffs Adjusted/ Revenues Enhanced: √ √
  - Freight railways: 5 contracts; Tariffs Adjusted/ Revenues Enhanced: √ √
  - Passenger railways (commitment as above): 6 contracts; Tariffs Adjusted/ Revenues Enhanced: √ √
  - Ports: 4 contracts; Tariffs Adjusted/ Revenues Enhanced: √ √
  - Airports: 1 contract; Foreign Debt (US$ billion): 0.2; Tariffs Adjusted/ Revenues Enhanced: √ √
  - River toll: 1 contract; Tariffs Adjusted/ Revenues Enhanced: √ √
  - Bus terminal: 1 contract; Tariffs Adjusted/ Revenues Enhanced: √

(Notes in source: 1/ Concessions with majority of foreign shareholders. 2/ Commitment to finalize renegotiations for telecom and passenger railways by end-December 2004. All other concessions by end-June 2004. 3/ Debt restructuring agreement reached with one of the telecommunication companies (roughly US$1.8 billion).)

### Clearance procedures required
- Public hearings.
- Reviews by control entities.
- Congressional ratification.

### Concessionaire financial and legal environment
- Most concessionaires: running a cash-operating surplus (factors: appreciation of the peso; recovery in demand).
- Constraints:
  - Delays and uncertainties in renegotiation have limited investment.
  - Renegotiation delays hamper restructuring of nonperforming debts; increasing share owned by vulture funds.
  - ICSID cases: 27.

### Tariff adjustment impacts
- Announced utility tariff increases:
  - Important for restoring viability of unregulated electricity and gas producers.
  - Do not improve finances of the 22 regulated concessions responsible for energy transport and distribution.

### Key recommendation of the mission (to expedite renegotiation)
- Finalize the reports on whether the utility companies have complied with their contractual obligations.
- Establish detailed week-by-week negotiation timetables.
- Clarify with concessionaires the regulatory impacts of the proposed renegotiation.
- Revise the proposed regulatory legislation in a manner consistent with the renegotiated contracts, and supportive of private sector participation, while seeking to protect low-income households.

*Box 6. Utility Reform: Findings of the Joint WB/IMF Mission (from source content).*

### 1. Multilaterals32.431.131.832.9

### 1. Multilaterals32.431.131.832.9

### Consolidated public debt (Table 11: 2001-04, In US$ billions, end period)
- Multilaterals: 32.4 31.4 31.8 32.9
  - IMF: 14.0 14.3 15.5 16.2
  - World Bank: 9.7 8.5 7.5 7.9
  - IADB: 8.7 8.4 8.8 8.8
- Bilateral: 4.5 4.9 6.5 6.6
- B. Private creditors: 42.3 98.4 134.2 145.9

- I. Performing debt: 42.3 37.0 39.0 43.9
  - a. Banks (Bodens), compensation for: 0.0 8.9 8.3 9.1
  - Asymmetric pesoization: 0.00 0.0 5.9 6.2
  - Foreign exchange exposure (Cobertura bonds): 0.02 4.2 4.2 4.4
  - Asymmetric indexation: 0.00 0.0 0.0 0.5
  - b. Depositors (Bodens): 0.0 5.3 6.1 7.5
  - Exchange of deposits for bonds: 0.0... 6.1 6.2
  - Compensation associated with deposit liberalization: 0.0... 0.0 1.3
  - c. Civil servants (compensation for 2001 13 percent wage cut): 0.00 0.00 0.9 1.0
  - d. Phase 1 debt 2/: 42.3 22.8 23.8 26.3

- II. Nonperforming (Phase 2) debt 3/...: 61.4 95.2 102.0
  - C. BCRA (Quasi-monies bonds): 0.00 0.0 2.4 2.8
  - D. Other: 65.4 2.9 3.7 4.0
    - Treasury bills, bonds and other short-term instruments: 61.8 0.0 0.0 0.0
    - Central bank short-term financing: 0.0 1.1 2.5 2.9
    - Banks and other: 3.6 1.8 1.1 1.2
- II. Provincial governments (net of intergovernmental debt): 23.3 15.6 7.1 7.4

Memorandum items:
- Nonperforming debt 4/...: 92.8 106.3 113.5
- Performing debt: 167.8 60.1 79.3 86.2
- Multilaterals 5/: 32.4 14.3 31.8 32.9
- Private creditors, BCRA, and other: 135.4 38.4 143.9 49.5
- Of which: Bodens: 0.0 14.2 17.6 20.4

Notes (as in source):
- 1/ Assumes no restructuring of Phase 2 debt.
- 2/ Includes provincial debt assumed by the federal government.
- 3/ Includes the effect of converting pesoized Phase 2 bonds to their original U.S. dollar values.
- 4/ Includes the sum of non-performing Phase 2 debt, bilateral, bank and other debt, and assumes half of provincial debt is nonperforming.
- 5/ Reflects arrears to multilateral development banks at end 2002.

*Sources: Argentine authorities; and staff projections.*

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### Indicators of real activity (Figure 1)
- Real GDP: latest 12-month increase of 8.4 percent.
- Industrial production: up by 12.2 percent in the year to January (Index Dec-2000 = 100).
- Construction: Index shows up 28.3 percent year-on-year (statement: "up 28.3% year-on-year,...").
- Imports of Capital Goods: rebound driving capital-goods imports (12-m percent change on 3-m moving average).
- Exports of Agricultural Products: positive 12-m percent changes on 3-m moving average; high commodity prices benefiting exports.
- Real tax revenues: rising sharply with higher domestic demand.

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### Confidence indicators (Figure 2)
- Consensus forecasts for Real GDP Growth (annual percent change): forecasters expect 6.2 percent growth in 2004.
- Consumer Confidence Index (CCI): CCI 12-month % change shown (index series Jan-02 to Jan-04); "consumer confidence continues to strengthen."
- Private Bank Deposits: level in Arg$ billions (series Jan-02 to Sep-03); "confidence in the banking system is returning."
- President's Job Approval Rating: series across administrations; "approval ratings remain very high."
- Employment Index and Monthly Hours Worked: Greater Buenos Aires, Jan 2002 = 100; "Rising labor demand is increasing employment."
- Business Confidence Index (BCI): 12-month % change series; "Business confidence continues to trend upward."

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### Recent financial indicators (Figure 3)
- Government performing debt prices: Boden 2008 (peso denominated) and Boden 2012 (dollar denominated) prices are up (series Apr-03 to Feb-04).
- Peso/US$ exchange rate: Arg$/US$ series with stability noted; real effective exchange rate (Jan-03=100) shown.
- Interest rates: 30-day Interbank rate and Interest on 90-day Lebacs show sharply lower interest rates.
- Yield curve: significantly flatter; central bank paper yields across maturities (1 month, 2 month, 3 month, 6 month, 1 year) displayed.
- Inflation: CPI, 12-month percent change and WPI, 12-month percent change depict "Inflation is very low..."
- Stock market: Merval Index (US$ terms) near record highs; pre-crisis peak: August 1997=866.

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### Fund relations (Annex I) — membership and financial position (as of January 31, 2004)
- Membership status: Joined September 20, 1956, Article VIII.
- Quota: 2,117.10 (SDRs) — 100.00 percent of quota.
- Fund holdings of currency: 12,804.21 — 604.80 percent of quota.
- Reserve position in Fund: 0.06 — 0.00 percent of quota.

SDR Department:
- Net cumulative allocation: 318.37 — 100.00 percent of allocation.
- Holdings: 919.08 and 288.68 (figures shown in table).

Outstanding Purchases and Loans (SDRs):
- Extended Fund arrangements: 469.67 — 22.18 percent of quota.
- Stand-By Arrangements: 10,217.50 — 482.62 percent of quota.

Latest financial arrangements (SDR Millions; Type / Approval Date / Expiration Date / Amount Approved / Amount Drawn):
- Stand-By 09/20/03 09/19/06 Amount Approved 8,981.00 Amount Drawn 2,071.00
- Stand-By 01/24/03 08/31/03 Amount Approved 2,174.50 Amount Drawn 2,174.50
- Stand-By 03/10/00 01/23/03 Amount Approved 16,936.80 Amount Drawn 9,756.31
  - Of which: SRF 01/12/01 01/11/02 Amount Approved 6,086.66 Amount Drawn 5,874.95

Projected Obligations to the Fund (Under the Repurchase Expectation Assumptions; SDR millions):
- Forthcoming Principal and Charges/interest by year:
  - 2004: Principal 4,397.76 Charges/interest 277.21 Total 4,674.98
  - 2005: Principal 2,794.69 Charges/interest 124.49 Total 2,919.18
  - 2006: Principal 2,113.97 Charges/interest 61.55 Total 2,175.52
  - 2007: Principal 1,350.61 Charges/interest 17.87 Total 1,368.48
  - 2008: Principal 30.13 Charges/interest 0.19 Total 30.31

Safeguards assessments:
- BCRA subject to safeguards assessment under current Stand-By Arrangement; on-site assessment performed in December 2003; follow-up on recommendations from September 05, 2002 assessment.
- Priority recommendations: (i) publication of audited annual financial statements based on IFRS commencing with year ending December 31, 2003; (ii) extension of strengthened control procedures to ensure all monetary data reported to the Fund reflect the TMU.
- Authorities committed to provide financial statements based on IFRS by June 30, 2004 and to extend internal control procedures for data verification and reporting on a quarterly basis beginning end-March 2003.

Nonfinancial relations:
- Exchange rate history and regime changes: currency board (March 27, 1991 peg), peso substitution (January 1, 1992), abandonment of currency board and adoption of dual exchange rate (January 7, 2002 official Arg$1.4 per U.S. dollar for most trade), and move to floating regime (February 11, 2002).
- Article VIII restrictions: all removed except (i) restriction from freezing of deposits pursuant to the corralón (approved until earlier of March 2004 or conclusion of next Article IV consultation), and (ii) restriction from limitations on ability of financial institutions to make moderate loan amortization payments.
- Last Article IV consultation: concluded January 8, 2003.
- Argentina has accepted the Fourth Amendment to the Articles of Agreement.

Technical assistance, 2002–03 (missions and purposes — selected items and timing):
- FAD Tax Administration January 2002
- LEG Insolvency Law and Other Legal Issues March 2002; April 2002; November 2002
- MFD Bank Restructuring March–September 2002 (multiple missions)
- FAD Public Expenditure Management September 2002
- FAD Customs Administration November 2002
- MFD Development of Banking Model November 2002
- FAD Tax Policy February 2003
- FAD Intergovernmental Relations April 2003
- MFD Banking Strategy October 2003; February 2004

Resident representatives:
- Mr. John Dodsworth: senior resident representative in Buenos Aires since July 2003.
- Mr. Luis Cubeddu: resident representative since September 2002.

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### Relations with the World Bank Group (Annex II)
- Total current Bank portfolio: 32 loans totaling US$4.6 billion in commitments.
  - 28 investment project loans totaling US$3.1 billion (US$1.0 billion undisbursed).
  - 4 adjustment operations totaling US$1.5 billion (US$526 million undisbursed).
- Provincial Maternal-Child Health Sector Adjustment Loan: US$750 million, signed October 31, 2003; upon effectiveness declared November 6, 2003, US$450 million of first tranche disbursed.
- Current level of exposure of the Bank in Argentina: US$7.5 billion.

Bank response to crisis:
- Re-allocated US$270 million from existing projects to emergency social programs (nutrition, health, education).
- Heads of Household loan: US$600 million approved January 2003, benefiting about two million households.
- Economic and Social Transition Loan: US$500 million approved May 2003, supported redemption of quasi-monies issued by provinces.

Health Sector Reform:
- On October 28, 2003 Bank approved US$750 million loan to support Government’s Health Sector Reform Program (Maternal and Child Health Insurance Program); loan to be disbursed in three tranches over approximately one year.

Portfolio performance and disbursements:
- About half of investment portfolio rated unsatisfactory for implementation progress.
- Disbursements in last quarter of calendar year 2003 reached US$618 million:
  - US$352 million correspond to Heads of Household Program.
  - US$98 million to reallocations supporting social emergency.
- Adjustment portfolio: four loans with US$526 million undisbursed.
- Last tranches of Córdoba, Santa Fe and Catamarca PRLs totaling US$226 million expected to be disbursed during first semester of calendar year 2004.
- Two remaining tranches of the Provincial Maternal-Child Health Sector Adjustment Loan expected to be disbursed during calendar year 2004.

Planned Bank actions:
- New Country Assistance Strategy expected to be presented early in calendar year 2004, together with a structural adjustment loan to support economic recovery.

Financial relations with the World Bank (as of February 23, 2004; in millions of U.S. dollars):
- IBRD Operations:
  - Fully disbursed loans: 14,429.6 commitments, 14,429.6 disbursements, 0.0 undisbursed.
  - Loans in process of disbursement: 4,588.5 commitments, 3,017.3 disbursements, 1,571.3 undisbursed.
  - Investment operations totals by sector (selected):
    - Agriculture and rural development: 246.5 commitments, 108.5 disbursements, 138.0 undisbursed.
    - Social sector: 1,155.3 commitments, 790.7 disbursements, 364.6 undisbursed.
    - Finance, infrastructure, and natural resources: 1,192.0 commitments, 772.9 disbursements, 419.1 undisbursed.
  - Adjustment operations: 1,453.0 commitments, 927.0 disbursements, 526.00 undisbursed.
  - Total loans: 19,018.1 commitments, 17,446.9 disbursements, 1,571.3 undisbursed.
- IFC Operations (as of January 31, 2004):
  - Held: Loans 530.7, Equity 169.1, Quasi 164.4, Participation 747.4
  - Disbursed: Loans 524.7, Equity 110.3, Quasi 164.4, Participation 747.4

IBRD Loan Transactions (Actuals, calendar year disbursements and debt service payments by year):
- Disbursements: 1998 2,030.6; 1999 1,572.9; 2000 1,018.8; 2001 1,328.8; 2002 424.5; 2003 1,962.9
- Debt service payments: 1998 350.2; 1999 445.0; 2000 538.1; 2001 675.5; 2002 1,352.8; 2003 2,968.1
- Net transfers: 1998 1,680.4; 1999 1,127.9; 2000 480.7; 2001 653.3; 2002 -928.3; 2003 -1,005.2

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### Relations with the Inter-American Development Bank (Annex III)
- Bank adjustments in 2002–2003 to respond to new economic, social, and political context:
  - Tightened supervision of portfolio given harsher fiscal constraints.
  - Reformulated social and productive sector portfolios to respond to government priorities and improve portfolio performance.
  - March 2002: board authorization to redirect US$694.2 million from low-performing operations to support Social Emergency Plan (food, medicines, education) — positive results in physical and disbursement targets.
  - November 2003: Board approved reformulation redirecting US$296 million toward programs supporting small and microenterprises and small rural producers.
- Early 2003 reformulations:
  - Financial Sector Program second tranche: US$243 million, split and fully disbursed by end of 2003.
  - Sector Program to Support the Federal Pact for Growth and Fiscal Discipline second tranche: US$246.7 million, split and fully disbursed by end of 2003.

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*Prepared from _cr04195 - 1. Multilaterals32.431.131.832.9 (source PDF).*

### 3. As of December 31, 2003 IDB disbursements for the year totaled US$2.658 billion, of

### _cr04195 - 3. As of December 31, 2003 IDB disbursements for the year totaled US$2.658 billion, of

### IDB disbursements and net flows (2003)
- IDB disbursements for the year totaled US$2.658 billion.
  - US$1.9 billion were for emergency loans.
  - US$490 million for policy-based loans.
  - US$268 million for investment loans.
- Net loan flow of resources to the country was positive in US$320 million.
- Net cash flow was negative in US$305 million.

### Lending program and country strategy (2004–08 planning and 2003 operations)
- Two emergency loans for US$1.9 billion were approved under the Transition Program and three-year stand-by agreement; these loans have been fully disbursed.
- Two direct investment loans to the provinces of Salta and Río Negro were approved in 2003 for a total of US$86 million to support productive sectors.
- Dialogue missions, internal workshops, sector-specific studies, and a consultation workshop with government, private sector and civil society were conducted (consultation workshop in February 2004).
- Several workshops planned in the first semester of 2004 on Competitiveness, Governance and Social Development.
- Country strategy planned for approval in the first semester of 2004.

### Macroeconomic framework and performance (2003–2004 outlook)
- Real GDP estimated to have increased by 8.4 percent in 2003.
- Growth outlook for 2004 revised upward to about 5½ percent.
- Twelve-month inflation fell below 3 percent in January 2004.
- Quasi-monies have been removed from circulation.
- Expectation of a modest and transitory increase in inflation due to adjustments in relative prices, recovery in retail margins, and lagged impact of higher commodity prices.
- Strong trade surplus expected to continue despite a steep rise in imports of capital goods and intermediate inputs.

### Monetary and fiscal policies (targets and outcomes)
- All monetary targets for end-December 2003 were met with large margins.
- Central bank NDA substantially below program ceiling due to record sales of central bank bonds (lebacs).
- If trends of modest exchange rate appreciation, reserve accumulation, rapidly growing bank deposits, falling interest rates, and subdued inflation continue, easing of the base money target may be warranted at the third review.
- End-December fiscal and debt targets were met by wide margins.
- Primary surplus of the consolidated public sector in 2003 was about 3 percent of GDP, ½ percentage point above the target.
- Tax revenues expected to remain above program levels in 2004, enabling the targeted primary surplus of 3 percent of GDP and allowing for a reduction in the financial transactions tax by July 2004.
- 2004 bilateral agreements signed by 12 provincial governors and ratified by sufficient provincial legislatures to meet the related structural performance criterion well ahead of the end-March 2004 deadline.
- Government committed to targeted increases in capital and social spending.

### Structural fiscal reforms (timing and objectives)
- Formal agreement with provincial governors on fiscal responsibility and intergovernmental reform legislation expected by end-March 2004 (structural performance criterion).
- Legislation to be submitted to Congress by end-May 2004, with ratification by federal and provincial legislatures expected by end-August 2004 (both structural performance criteria).
- Work initiated on planned tax policy reform; legislation to be submitted to Congress by end-September 2004 and to be discussed at the third review (structural performance criteria).
- Legislation to strengthen tax compliance covering customs duties and social security contributions to be submitted by end-March 2004 (structural benchmark).
- Draft proposal on social security reform expected to be made public by June 2004; reform legislation to be submitted in the second half of 2004.

### Banking strategy (measures, timelines, and benchmarks)
- Progress in finalizing bank compensation payments; compensation verification complex and payments will spill over to the second quarter; request to reset the structural performance criterion from end-March 2004 to end-June 2004.
- Capital adequacy regime reintroduced in January 2004; banks required to build capital cushions and subject to intensified supervision and corrective actions if non-compliant.
- Central bank requested all banks to submit multi-year business plans by end-March 2004; agreement on mutually acceptable multi-year business plans by end-June 2004 (structural benchmark).
- Bids launched on February 27, 2004 for financial advisors for due diligence and strategic reviews of Banco de la Nación and Banco de la Provincia de Buenos Aires; selection of advisors expected by end-June 2004 (structural performance criterion).
  - Strategic review completion expected by end-September 2004 for Banco de la Provincia de Buenos Aires and end-November 2004 for Banco de la Nación.
  - Time-bound action plans for strengthening these banks to be finalized by end-December 2004 (structural performance criterion).
- Working group designing central bank reforms to issue report by end-March 2004 (structural benchmark); authorities to finalize recommendations by September 2004.
- By end-June 2004 the central bank will begin providing financial statements to the Fund in accordance with International Financial Reporting Standards, commencing with the end-December 2003 financial year (structural benchmark).
- Beginning in March 2004 the central bank’s externally appointed controller (the Síndico) will verify and report to the Fund that monetary data used for program monitoring have been prepared in accordance with the Technical Memorandum of Understanding.

### Legal framework for private corporate restructuring
- Reports completed on the corporate insolvency framework and the financial condition of the corporate sector.
- Substantial progress reported in restructuring corporate debt within the existing insolvency framework.
- Authorities studying modalities for wider distribution of these reports for comment.

### Utility sector reform (tariffs, concessions, regulatory framework)
- Key steps taken: (i) initiating tariff increases for key sectors; (ii) renegotiation of key concessions; (iii) updating utility sector financial condition information.
- Tariff increases announced in mid-February 2004 for electricity and natural gas at the industry level and for liquid gas used in passenger transport:
  - Increases will be in the range of 10–35 percent.
  - Electricity increases implemented retroactively to February 2004.
  - Gas increases to become effective by May 2004 after public hearings.
- Energy Secretariat authorized to negotiate specific adjustments bilaterally with gas producers.
- Of 62 concessions, 13 inter-urban road concessions were allowed to expire and re-awarded; renegotiation of an additional 39 concessions expected by end-June 2004, and all others by end-2004.
- Renegotiated contracts to be subject to public hearings, review by control entities, and final ratification by Congress.
- Joint World Bank-IMF fact-finding mission invited in February 2004 to update utilities assessment; recommendations to inform the renegotiation process.
- Legislation to implement the new regulatory framework to be submitted to Congress during the second half of 2004; framework to be consistent with renegotiated concessions, supportive of private sector participation, and protective of low-income consumers.

### Program financing assurances and sovereign debt restructuring strategy
- Main elements of approach to reach a collaborative agreement with creditors:
  - Appoint banks to assist in preparations and market the exchange offer.
  - Hold additional meetings and engage constructively with all representative creditor groups, including GCAB, AARA, CITA, and other domestic and European retail organizations.
  - Formulate an offer to result in a sustainable debt and attain broad creditor support.
- Six banks recently selected: three foreign investment banks for marketing in foreign jurisdictions and three Argentine banks for the non-institutional domestic portion; appointment to be given legal status by presidential decree before March 15, 2004.
  - Banks hired for nine months or until an exchange launch (whichever is earlier).
- 21 creditor groups invited to meet in Buenos Aires between March 24 and April 16 (invitation process initiated).
- By mid-April 2004 authorities will seek to reach agreement on a follow-up process and timetable for negotiations with creditor groups.
- Intention to discuss all aspects of the debt exchange offer with creditors, maintain intercreditor equity, and avoid piecemeal restructuring; aim to finalize an appropriate minimum participation threshold with banks’ assistance.
- Anticipated timing for launch of the offer: not earlier than June 2004 and not later than August 2004.
- Program relies on the World Bank and IDB maintaining their exposure to Argentina to protect international reserves; authorities will work closely with multilateral development banks to align disbursements with the program.
- Intend to write to the Paris Club secretariat by mid-March 2004 to indicate the scope and type of treatment being sought.

*Source: Buenos Aires correspondence and annexes, March 2004.*

### 8. Comitato per la Tutela dei Risparmiatori Italiani Portatori di Titoli Obbligazionari

### 8. Comitato per la Tutela dei Risparmiatori Italiani Portatori di Titoli Obbligazionari della Republica Argentina

### Addendum to the Technical Memorandum of Understanding — Overview
- All elements of the Technical Memorandum of Understandings (EBS/03/130, Attachment II) issued on September 12, 2003 remain in force, except for the revisions noted in the addendum.

### I. Quantitative Program Targets (Revisions and New End-September Performance Criteria)
- End-September performance criteria are added for: (i) the cumulative primary balance of the federal government; (ii) the federal government debt stock; (iii) the stock of net international reserves of the central bank; and (iv) the stock of net domestic assets of the central bank.

- Performance Criteria / Indicative targets (End-Sep. / End-Dec.)
  - Fiscal targets
    - 1 Cumulative primary balance of the federal government (floor) 8,020 / 10,240
    - 2 Cumulative overall cash balance of the federal government (indicative target) 3,450 / 4,370
    - 3 Federal government debt stock (ceiling, in billions of pesos) 1/ 560 / 570
    - 4 Stock of federal government arrears (indicative target) 3,970 / 4,660
    - 5 Cumulative primary balance of the provincial governments (indicative target) 2,290 / 2,540
    - 6 Consolidated public sector debt stock (indicative target, in billions of pesos) 584 / 594
  - Monetary targets
    - 7 Stock of net international reserves of the central bank (in millions of U.S. dollars) (floor) 1/ -3,300 / -2,400
    - 8 Stock of augmented monetary base (indicative target) 2/ 49,625 / 53,805
    - 9 Stock of augmented net domestic assets of the central bank (ceiling) 59,195 / 60,765
    - 10 Consultation mechanism on projected end-2004 inflation (indicative target)
      - Upper limit (in percent) 11.0...
      - Lower limit (in percent) 7.0...

- Accounting exchange rates (applied for 1/):
  - Arg$/US$=2.9, US$/SDR=1.3875, Euro/US$=0.869, CAD$/US$=1.347, CHF/US$=1.351, JPY/US$=119.78, GBP/US$=0.604, Gold (U.S.$ per ounce)=371.0.
- Note: 2/ Includes quasi-monies in circulation.

### II. Other Revisions to the Program
- Debt ceiling adjustor added to the federal government debt performance criterion:
  - Adjustment text: “g. Upward (downward) by the difference in the value of the "Argentine peso-denominated bond" maturing on September 19, 2008 calculated at the program exchange rate and the value of the bond calculated at the exchange rate specified in the original contract arising from the embedded option in the contract. This adjustment includes the valuation of interest arrears and interest payments on this bond.”
- Modification to continuous structural benchmark on below-the-line reporting:
  - Revised timing: “The Secretaria de Hacienda and the BCRA will provide data from below-the-line on the financing flows of the provinces no later than 55 days after the end of the test date, or the following business day, if the 55th day falls on a Saturday, Sunday, or on a public holiday in Argentina.”
  - The required content of the information remains unchanged.

### Recent Developments (Staff Report update as of March 22, 2004)
- Macroeconomic performance and activity
  - Real GDP growth in 2003 revised to 8.7 percent (from 8.4 percent).
  - Industrial production in February 2004 increased by 0.9 percent (14.1 percent year-on-year); capacity utilization ~70 percent.
  - Cumulative primary surplus of the federal government through February 2004 was Arg$2.5 billion (0.6 percent of GDP), significantly above the end-March 2004 performance criterion.

### Policy Implementation — Key Actions and Measures
- Public debt restructuring
  - On March 17, 2004, authorities:
    - Issued a presidential decree authorizing appointment of six banks—three international and three domestic—to assist with debt restructuring.
    - Published the letter of engagement setting out the banks' tasks.
    - Invited an additional four creditor groups to Buenos Aires, bringing the total of groups invited to 25.
  - Decree notes fee structure broadly in line with previous sovereign restructurings and includes a “success fee” if participation exceeds two-thirds of restructured debt.
  - Banks' tasks include gathering market intelligence, communicating with investors, structuring new securities, and managing the debt exchange; engagements may be terminated by authorities or the banks.
- Paris Club
  - On March 15, 2004, authorities informed the Paris Club Secretariat they were ready to negotiate restructuring of official bilateral debt and would specify the scope/type of treatment once negotiations commence.
- Banking strategy and regulatory actions
  - March 10: All banks requested to submit multiyear business plans by end-March 2004.
  - March 12: Regulation issued to implement compensation for asymmetric indexation; banks must submit by end-April 2004 detailed information on loans linked to the wage index.
  - Central bank expects to credit escrow accounts with compensation owed to all banks by June 2004 (proposed reset structural performance criterion).
- Fiscal policy measures
  - March 10 decrees to raise cigarette-related excises and surcharges, effective April 1, 2004; establish floor on tax collections from tobacco companies requiring gradual cigarette price increases estimated at 20–30 percent over the next two years.
  - Projected revenue yield: equivalent to 0.1 percent of GDP in 2004 and 0.3 percent in 2005.
  - Projected inflation impact: about 0.3 percentage point over the next 12 months.
- Exchange measures
  - Fund approval of the Article VIII exchange restriction related to the corralón expired on March 19, 2004. Staff will recommend further approval of this restriction, scheduled to be eliminated in 2005, in the March 2004 Report on Delayed Completion of Article IV Consultations and Extension of Approval of Exchange Measures.

### IMF Executive Board Decision and Statements (Press Release No. 04/57, March 22, 2004)
- Executive Board completed second review of Argentina's three-year SDR 8.98 billion Stand-By Arrangement (approved September 20, 2003).
- Completion entitles Argentina to a disbursement equivalent to SDR 2.1 billion (about US$3.1 billion).
- In completing the review, the Board approved modification of a structural performance criterion and a waiver for nonobservance of a performance criterion.
- Acting Managing Director Anne Krueger highlighted:
  - Rapid recovery of Argentina’s economy, improvements in employment and poverty indicators.
  - Progress in banking and utilities sector reforms.
  - Authorities’ willingness to negotiate comprehensive sovereign debt restructuring, including appointment of investment banks and engagement with 25 representative creditor groups during March 24–April 16, 2004.
  - Need for disciplined macroeconomic policies, attention to narrowing output gap and inflation expectations, expediting compensation payments to banks, and advancing strategic review and financial diagnostics of two largest public banks.
  - Fiscal reforms to simplify tax revenue-sharing, enhance provincial revenue incentives, and introduce binding debt and deficit limits for provincial governments; additional measures to improve customs and social security contribution compliance.
  - Importance of designing a broadly-supported debt exchange offer to maximize creditor participation, reduce litigation risk, and restore debt sustainability.

### Statements by Argentine Authorities (Alternate Executive Director Hector Torres, March 22, 2004)
- Argentina reaffirms adherence to preferred creditor status of IFIs; cited almost US $7 billion in negative transfers to IFIs since January 2002 and a March 9 payment using approximately 20 percent of Argentina’s reserves.
- Economic outlook and social conditions
  - Authorities report sustained growth momentum and improved investor and consumer confidence.
  - Consumer confidence index (Torcuato Di Tella University) reached a historically high record level in February.
  - Banking system showing signs of renewed strength; compensation measures for asymmetric pesoisation and ongoing compensation for asymmetric indexation.
  - Authorities adjusted upward 2004 growth projection to 5 ½ percent.
  - Buenos Aires Stock Market Index, Merval, has risen from ~700 to ~1250 (in peso terms).
  - Labor market: Q4 2003 unemployment 14.1 percent, ~2 percentage points lower than Q3 2003 and ~10 percentage points lower than Q2 2002; participation rate increased; “Plan Jefes y Jefas de Hogar” accounts for around 4 percent of employment.
- Fiscal and monetary program targets have been met with wide margins; revenues strengthened by economic recovery, fiscal austerity, and improved fiscal administration targeting tax evasion. Further measures to improve customs and social security compliance are planned.
- Authorities stress need for persistent fiscal efforts to address social consequences of crisis (noting >50 percent of population under poverty line and >25 percent under extreme poverty line at crisis peak).

*Source: _cr04195 - 8. Comitato per la Tutela dei Risparmiatori Italiani Portatori di Titoli Obbligazionari (IMF staff report and related documents), March 22, 2004.*

### 8.   The fiscal austerity combined with improved tax collection has set the right

### _cr04195 - 8.   The fiscal austerity combined with improved tax collection has set the right

### Fiscal reforms and taxation
- Fiscal austerity combined with improved tax collection "has set the right conditions for addressing the structural fiscal reforms expected in the program."
- Immediate and planned measures:
  - Reduction of the distortionary financial transaction tax by July 2004.
  - A more comprehensive tax reform legislation to be submitted to Congress by end-September 2004, along with the 2005 budget.
- Intergovernmental revenue-sharing law:
  - Main elements of a new law have been formulated to encourage budgetary discipline in provincial governments, simplify a system described as "plagued with numerous and disconnected schemes and regulations," improve transparency, and achieve a more equitable distribution of revenues among provinces.

### Monetary policy and inflation
- All monetary targets were met with large margins.
- Despite continued accumulation of international reserves, low interest rates, and removal of all quasi-monies from circulation, twelve-month consumer price inflation "remains subdue and fell to 2.3 percent in February."
- Contrast noted with a modest increase foreseen in the September 2003 agreement; "Inflation in 2004 has, consequently, been adjusted downward."
- Wholesale price inflation has begun to pick up, attributed largely to strength in commodity prices (in particular soybean and oil) determined in international markets.
- Monetary implications:
  - Banks deposits are growing steadily.
  - Demand for Central Bank paper Lebacs is increasing.
  - The combination of strong demand for money and very low inflation "could justify a relaxation of the monetary base for the upcoming reviews."

### Banking sector performance and stability
- Key indicators and developments:
  - Total deposits grew 19 percent in real terms during 2003.
  - Profitability showed a clear reversal of trend, with the last quarter of 2003 showing positive results.
  - Credit to the private sector has increased, notably for consumer loans.
  - Non-performing loans continue to decline, with clear improvements in the consumer portfolio.
  - Reduction in charges for non-performing loans is expected to support profitability.
  - Important reduction in administrative expenditures will contribute to consolidating improved profitability.
- Regulatory and capitalization developments:
  - Reintroduction in January of the capital adequacy regime was safely absorbed by most banks.
  - Most banks already have capital adequacy ratios above the required minimums, aided by capital buildups during 2003 through debt capitalizations and debt cancellations with public bonds.
  - This "downplays the impact of the lower compensation that some of them will receive" (referenced in Box 3 of the report) due to a more accurate assessment of asymmetric pesoisation and indexation.

### Public banks: advisory process and timelines
- Due diligence and strategic reviews for Banco de la Nacion and Banco de la Provincia de Buenos Aires:
  - Bids to select financial advisors were involuntarily delayed; selection postponed to end-June 2004.
  - Completion of action plans for strengthening these major public banks is now expected by end-December 2004, implying only a small delay relative to the program-approved timetable of September last year.

### Corporate debt restructuring and insolvency framework
- Restructuring progress and principles:
  - Authorities view the restructuring of private corporate debt as demonstrating that the existing insolvency framework is sufficiently flexible for complex cases.
  - The position that "no public funds would be used to bail out the corporate sector" has not impeded mutually satisfactory debt restructuring solutions.
  - Authorities emphasize they will accept debt restructuring commitments only "within its reach to honor" and will act in "good faith" and with due diligence.
- Legal and ethical reference:
  - Cites French civil law and German law supporting the notion that a "careless promisor" (making promises unlikely to be fulfilled) acts with "lack of diligence" or in bad faith.

### Utility sector reform
- Operational and tariff developments:
  - Despite delays in price adjustments, most utility companies are showing positive operational balances.
  - Upward tariff adjustments have begun, with electricity and gas tariffs for large size non-residential consumers increased by between 10-35 percent.
- Institutional process:
  - A joint Bank-Fund fact-finding mission issued preliminary conclusions, initiating a renewed dialogue with authorities to facilitate utility-sector reform and timely renegotiation of concessions.
  - Emphasis on ensuring consistency of new concessions with the regulatory framework under discussion and balancing companies’ profit goals with social aspects of service provision.

### Investment, non-performing debt, and growth
- Investment signals:
  - The premise that investment will not resume without solving non-performing debt is questioned by strong growth in imports of machinery and equipment, indicating investment is already flowing into the economy.
- Debt sustainability stance:
  - Successful restructuring of non-performing debt would underpin sustainable growth; authorities are committed to seek agreements with private creditors in good faith.
  - Authorities assert they will not assume commitments that cannot be honored over the medium-term, warning that excessive debt service could jeopardize economic and social recovery.
  - Proposal to create partnerships with private creditors willing to link actual payments to the GDP growth rate.

### Social imperatives and fiscal space
- Poverty and social objectives:
  - "Over 50 percent of Argentina’s population is living in poverty, out of which 50 percent endures extreme poverty."
  - Authorities commit to address both sovereign and social debt, respecting undertakings in the LOI of September 10, 2003.
- Policy approach:
  - Strategy centers on consolidating sustained growth through responsible macroeconomic and structural policies, strengthening governance, the rule of law, political democracy, and social stability.
  - Calls for larger primary surpluses should be evaluated responsibly given the additional economic and social hardships; primary surpluses are "only one aspect of the payment capacity equation."
  - Emphasis that "only achieving sustained growth would allow to maximize payment capacity over the medium term."
  - Assertion that "Argentina can only count on its own resources to restructure non-performing debt. Every payment will come out from one single pocket."

### Debt restructuring process and creditor negotiations
- Syndicate and kick-off meetings:
  - Per the LOI, on March 15 President Kirchner signed the decree designating the syndicate of international and domestic banks to help define the basic features of a proposal for a bond exchange offer.
  - Kick-off meetings with the six designated investment banks were scheduled for March 22 and 23.
  - A long list of constructive bilateral negotiations with representative creditor groups was expected to follow in the coming weeks.
- Process principles and scope:
  - The restructuring process will be bilateral between Argentina’s authorities and creditor representatives; "External interference will not be helpful to the process."
  - Authorities expressed frustration that paper EBS/04/38 Supplement 1 mentioned only one creditor group; they state no representative creditor group will be excluded.
  - Confidence expressed that the Fund "will keep clear from getting involved in the negotiations between creditor groups and Argentina."
- Paris Club:
  - Authorities indicated readiness to hold negotiations with Paris Club creditors at any time; negotiations had not yet started because some Paris Club members requested additional time.

### Closing commitment and strategy
- Authorities are "fully committed to a successful implementation of the present Stand-By arrangement with the Fund," viewing it as providing the macroeconomic and structural framework to advance debt restructuring and reforms in banking and utilities.
- Reforms and sustained growth are presented as necessary conditions to address widespread social needs.
- Presidential statement quoted: the strategy should build "a serious capitalism... where monopolies and concentration are avoided... and where consumers as well as investors are protected."

*Source: IMF document _cr04195 (PDF chapter/section) — excerpt provided in prompt.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2004/_cr04195.pdf_