Press Release: IMF Approves Extension, for Fourth Year, of EFF Credit to Argentina
IMF News, April 6, 1995
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- Published: April 6, 1995
IMF approval and financing details
- The IMF approved Argentina's request to extend to a fourth year the extended Fund facility (EFF) credit for Argentina.
- The amount of the EFF credit was increased by SDR 1,537.1 million (about $2,407 million), to a total of SDR 4,020.25 million (about $6,295 million).
- Together with the undrawn amount of SDR 278.05 million (about $435 million) under the third year of the EFF credit, a total of SDR 1,046.6 million (about $1,639 million) is immediately available to Argentina.
- The remaining SDR 768.55 million (about $1,203 million) will be disbursed in three equal, quarterly installments.
- The IMF had approved the three-year EFF of SDR 2,483.15 million (about $3,888 million) on March 31, 1992 in support of Argentina's medium-term economic and financial program.
Background and recent macroeconomic developments
- Under the Convertibility Plan adopted in March 1991, Argentina:
- pegged the peso to the U.S. dollar,
- allowed the U.S. dollar to be used for most transactions,
- eliminated indexation,
- prohibited the Central Bank from providing domestic credit beyond certain limits.
- Fiscal accounts were kept in approximate balance and extensive structural reforms were implemented in fiscal, monetary and trade areas, including opening up the economy to competition, deregulation and privatization.
- Real economic growth averaged more than 7 percent a year between 1991 and 1994, boosted by large capital inflows.
- Inflation dropped from very high levels to less than 4 percent in 1994.
- There was an increase in the external current account deficit, mainly financed by private capital inflows.
- The 1994 program, supported by the EFF, aimed at reducing inflation further and lowering the external current account deficit via stronger fiscal policy; however:
- economic growth was more robust than programmed,
- fiscal policy was weaker than expected due to a faster-than-programmed reduction in employer social security contributions and expenditure overruns, mainly in pensions.
- In early 1995, following the Mexican crisis, Argentina experienced large capital outflows that led to:
- a substantial decline in both the Central Bank's international reserves and its monetary liabilities between end-December 1994 and end-March 1995,
- a tightening of bank liquidity,
- a surge in interest rates,
- a sharp fall in asset prices,
- difficulties in parts of the banking system and declines in bank deposits.
- Authorities took measures in early March to reinforce public finances and to provide resources for restructuring the financial system by creating two Trust Funds to provide lender-of-last-resort facilities and sought large-scale international financial support, including the EFF extension.
The 1995 program: objectives and macroeconomic projections
- Objectives:
- restore liquidity in the financial sector,
- raise domestic savings,
- re-establish confidence in the Government's ability to defend the fixed exchange rate under the Convertibility Plan.
- Program assumptions and projections:
- economic growth slowdown to 2-3 percent,
- inflation of 3 1/2 percent,
- current account deficit projected to narrow to 2 percent of GDP.
- Fiscal and revenue measures to generate an overall surplus in the nonfinancial public sector amount to some 2 3/4 percentage points of GDP on a full-year basis and include:
- a temporary 3- percentage point increase in the value-added tax rate to 21 percent,
- varying increases in import duties,
- a broadening of the tax base,
- a reform of the wealth tax,
- a unification of employer social security contributions rates across sectors,
- improvements in tax administration.
- Expenditure cuts, mainly on current outlays, have also been made.
- The monetary program for 1995 foresees a reversal of the decline in bank deposits during the remainder of the year.
Structural policies and privatization
- Further steps are envisaged in privatization, labor market reform, and bankruptcy law to build on prior reforms.
- Privatization plans include outright sales or operating concessions for:
- a number of hydroelectric dams,
- nuclear power installations,
- petrochemical plants,
- these sales/concessions are estimated to raise $1 billion.
- Sales of shares in other enterprises are valued at some $1.4 billion.
- Legislation has recently been passed to enhance labor market flexibility to address unemployment and improve international competitiveness.
Assessment and policy implications (Challenge Ahead)
- The decisive measures taken by the authorities, shortly ahead of national elections, are presented as demonstrating full commitment to maintaining the Convertibility Plan.
- These measures are expected to be adequate to re-establish financial stability, restore confidence, and ensure the program's success.
- Argentina joined the IMF on September 20, 1956, and its quota is SDR 1,537.1 million (about $2,407 million).
- Argentina's outstanding use of IMF credit currently totals SDR 2,821 million (about $4,417 million).
Key statistics — Argentina: Selected Economic Indicators
- Real economic growth (percent change):
- 1991: 8.9
- 1992: 8.7
- 1993: 6.0
- 1994*: 7.1
- 1995**: 2.0–3.0
- Consumer prices (end of period):
- 1991: 84.0
- 1992: 17.5
- 1993: 7.4
- 1994*: 3.9
- 1995**: 3.6
- External current account balance (deficit –) (percent of GDP):
- 1991: –0.2
- 1992: –2.8
- 1993: –2.9
- 1994*: –3.7
- 1995**: –2.0
- Overall balance of the nonfinancial public sector, including privatization (deficit –) (percent of GDP):
- 1991: –0.8
- 1992: 0.7
- 1993: 2.1
- 1994*: 0.1
- 1995**: 1.5
- Gross official reserves (months of imports):
- 1991: 8.6
- 1992: 9.7
- 1993: 9.3
- 1994*: 9.1
*Preliminary. **Program.
Press Release No. 95/18 — IMF External Relations Department, April 6, 1995.