Public Information Notice: IMF Concludes Article IV Consultation with Argentina

October 3, 2000

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On September 15, 2000, the Executive Board concluded the Article IV consultation with Argentina.1


The Argentine economy suffered a severe recession in 1999, reflecting the combined effect of tighter financing conditions, a downturn in trading partner demand, a sharp terms of trade loss, and election-related uncertainties. As a result, and despite evidence of some pick up toward the end of the year real GDP declined by about 3 percent. A slow recovery set in during the first half of 2000, when real GDP was about 0.8 percent higher than in the same period of the previous year, owing mainly to a strengthening of export performance. In nominal terms, GDP in the first semester grew by 1.9 percent. The rate of unemployment increased from 14.5 percent in May 1999 to 15.4 percent in the May 2000 survey. Consumer prices fell by 0.9 percent in the 12 months through July 2000, while wholesale prices rose by 4.1 percent over the same period, reflecting the recovery of oil and other commodity prices (see attached Table).

The external current account deficit narrowed to 4.4 percent of GDP in 1999 (from 4.8 percent in 1998), mainly reflecting a sharp contraction of imports due to the recession, and is projected to decline further to 3.6 percent of GDP in 2000. More than half of the external account deficit was financed by net foreign direct investment. Total external debt (public and private) rose to US$147 billion at end-1999 (equivalent to about 51 percent of GDP). The trade balance shifted to a surplus of US$896 million in the first half of 2000, from a deficit of US$397 million in the same period of 1999, as a result of strengthened competitiveness, a gradual recovery in the terms of trade, and a slow (around 2 percent) growth of imports. Exports increased in value terms by 14 percent mainly reflecting increases in oil, mining, and manufacturing products, and were sustained by the continued strength of demand in the United States, and the recovery in Latin America and Asia.

The public finances deteriorated in 1999, reflecting the impact of the recession on tax revenue, a weakening of tax compliance, a growing interest bill, and spending overruns at both the federal and the provincial government level, particularly in the fourth quarter. As a result, the consolidated public sector deficit doubled to 4.1 percent of GDP, of which 2½ percentage points reflected the deficit in the federal government. Also reflecting the drop in nominal GDP, the public sector debt increased to over 47 percent of GDP, up from 41 percent in 1998. In December 1999, the government announced an economic program designed to comply with the Fiscal Responsibility Law approved by the Argentine Congress in September 1999, and aimed at reaching fiscal balance by 2003. The program included a sizable tax package, with increases in the personal income and wealth taxes and in excises, and a broadening of the base of the VAT; a bill to strengthen tax enforcement; a tax amnesty; and a cut in noninterest expenditures equivalent to almost 1 percent of GDP. Further measures, including nominal wage reduction in the public sector, were taken to ensure compliance with the overall deficit ceiling under the Fiscal Responsibility Law. These measures (as well as some one-off revenues) helped the authorities meet the program target for the federal deficit through mid-year, despite significantly lower tax revenues and higher interest payments than originally projected.

The banking system has weathered well the recession, and the soundness and strong prudential defenses that characterize the Argentine banking system under the currency board arrangement have been maintained. In the first seven months of 2000, private sector deposits in the financial sector increased by more than 7 percent and foreign lines of credit were maintained. Gross foreign exchange reserves by end August amounted to some US$32 billion, of which about US$25 billion are held by the BCRA. However, and despite a significant decline in domestic interest rates, and the continued growth of deposits, bank lending remains sluggish, reflecting a cautious attitude of both banks and borrowers. Credit to the private sector declined by more than 2 percent since the beginning of the year, reflecting also the effect of tax measures included in the January package, which drove some credit operations offshore. Nonperforming loans in the banking system increased from 11.5 percent of risk assets in December 1999 to 12.5 percent in May 2000, but net of provisions, declined from 4.7 percent to 4.1 percent over the same period. Banks continue to hold liquid reserves in foreign exchange equivalent to 21 percent of total deposits (or 30 percent if a contingent repo facility with foreign banks is included), and the capital adequacy ratio (Basel criteria) exceeds 20 percent of risk assets.

The authorities have made further progress in the structural reform area. Among the most significant measures taken during this year was the final approval of the labor market reform in May. The reform is expected to have a significant positive impact on competitiveness and employment over time, particularly in the case of new firms for which the more flexible legal framework applies immediately in full. In June the government issued a decree opening to competition the system of health maintenance organizations, effective January 1, 2001. Since the beginning of the year, the government has also been implementing a program to restructure the health system for retirees (PAMI) that involves the payment of arrears, the renegotiations of contracts with providers, and measures to cut costs, while improving the quality of services provided to retirees. PAMI will be incorporated into the federal budget in 2001, and is expected by then to be in a position to cover all its (nonfinancial) expenses. A comprehensive law to strengthen tax enforcement and reduce evasion is in the final approval stage in Congress. Finally, Congress passed a bill enhancing administrative autonomy and transparency of the Banco de la Nación. The legislation also includes provisions to strengthen safeguards for the bank’s assets.

A three-year Stand-by arrangement with the IMF was approved on March 10, 2000, for a total of SDR 5.4 billion (255 percent of quota). This arrangement is in support of the authorities’ program of further fiscal consolidation and a deepening of structural reforms. The authorities consider the arrangement as precautionary.

Executive Board Assessment

Executive Directors welcomed the authorities’ strong ownership of, and demonstrated commitment to, their economic program, and the significant progress made so far in improving the fiscal position at both the federal and the provincial level, despite cyclically adverse conditions, and in implementing structural reforms. The structural reforms that have been put in place in 2000, especially the labor reform and the reform of the union-run health system, will help modernize labor relations, enhance the scope for employment creation, and improve productivity and competitiveness in the economy.

Directors noted that the economic recovery from the 1998-99 recession had been weaker than expected earlier in the year and that unemployment was relatively high. This had been a source of frustration to the authorities, as well as to the Argentine population, and had contributed to increased market concerns about Argentina’s ability to sustain its adjustment effort. While recognizing these concerns, Directors concurred with the authorities’ view that, within the framework of the convertibility regime, the resumption of sustainable growth depended crucially on credible further progress in fiscal consolidation and structural reform. In particular, Directors considered that a firm adherence to the requirements of the fiscal responsibility law, with its attendant reduction in the public debt-to-GDP ratio, would buttress confidence in international markets and ease financing conditions. This, in turn, would set the basis for a sustained recovery of activity, with declining unemployment and price stability.

Particularly in light of the need to bolster market confidence in the fiscal outlook, Directors welcomed the presentation of a 2001 budget in line with the requirements of the fiscal responsibility law. They also urged the authorities to base the 2001 revenue projections on achievable growth assumptions. Directors recognized that achievement of progressively higher primary surpluses in the next few years would call for difficult policy choices on the spending side, as well as strengthened efforts to improve tax administration and enforcement and the management of public expenditures, and to increase efficiency in the delivery of public services. Directors also encouraged the authorities to make every effort to secure early approval of the proposed reform of the social security system.

Given the high degree of decentralization of public spending, Directors stressed the importance of intensifying efforts to promote a sustained improvement in the provinces’ finances. They welcomed the fiscal programs negotiated by the federal government with nine highly indebted provinces, but noted the urgent need to reduce the deficits of the larger provinces as well. Noting that the authorities would need to utilize all the means at their disposal to control recourse by provinces to new borrowing, Directors welcomed the recent implementation of a system to better monitor external and bank financing to the provinces. They were encouraged by the agreement recently reached with the Province of Buenos Aires, in which the latter had committed to achieving fiscal balance by 2003. Directors expressed the hope that early agreement would also be reached on a sound reform of the revenue-sharing system.

Directors noted that the convertibility regime, together with a strong financial system, had served Argentina well in weathering the major external shocks that had affected it in recent years. They also noted the strong support of the population for the regime, its demonstrated success in anchoring inflation expectations, and the high degree of de facto dollarization in the economy, as well as the fact that the economy was once again giving proof of its ability to adjust to the recent external shocks through a decline in domestic costs, nontradable goods’ prices, and domestic absorption. Directors considered that, with an improved competitive position, both the current account and the public sector deficits on a declining path, and important structural reforms enacted or under way, the Argentine economy was now in a good underlying position to resume sustainable growth.

Directors stressed the importance of maintaining the firm prudential policies that have strengthened the soundness of the financial system in recent years. They noted that the continuing consolidation of the banking system, together with the strengthening of the banks’ capital and liquid reserve position, had been a key determinant of the continuing growth of private sector deposits and of the resilience shown by the system in the present more adverse circumstances. Directors welcomed the authorities request for a Financial Sector Assessment Program (FSAP) to be carried out in the first half of next year.

Directors encouraged the authorities to maintain a transparent system of market incentives and welcomed their efforts to promote competition in domestic markets. In this context, they noted with interest the authorities’ initiatives to assist small businesses and to seek greater participation of the private sector in the development and operation of basic infrastructure. Directors welcomed the authorities’ commitment to continue abiding by WTO rulings and to resist protectionist pressures.

Argentina: Selected Economic Indicators

  1997 1998 1999 20001

Real economy (change in percent)      
  Real GDP 8.1 3.9 -3.1 1.7
  Domestic demand 9.7 3.8 -4.3 1.2
  CPI (end of period) 0.3 0.7 -1.8 0.4
  Unemployment rate (average, in percent) 13.1 14.3 14.2 15.0
  Gross national savings (percent of GDP) 15.3 15.1 14.8 14.0
  Gross national investment (percent of
19.4 19.9 19.2 17.8
Public finance (percent of GDP)      
  Central government balance -1.6 -1.3 -2.5 -1.8
  Overall public sector balance -2.1 -2.1 -4.1 -2.8
  Public debt 38.9 41.4 47.3 49.4
Money and interest rates      
  Private sector deposits (change in percent) 27.0 15.8 2.8 8.0
  Credit to private sector (change in percent) 19.1 13.0 -2.1 -1.6
  Interest rates (average, percent per annum)        
      30-59 days peso time deposits 7.0 7.6 8.1 ...
      30-day peso prime rate 9.3 10.6 11.04 ...
Balance of Payments (in billions of US$)      
  Trade balance -4.0 -5.0 -2.2 0.6
      Exports (f.o.b.) 26.4 26.4 23.3 27.1
      Imports (c.i.f.) 30.5 31.4 25.5 26.5
  Current account -12.0 -14.3 -12.3 -10.3
      As a percent of GDP -4.1 -4.8 -4.4 -3.6
  External Debt (percent of GDP) 42.6 47.1 51.1 52.9

Sources: Ministry of Economy; Central Bank of Argentina; and Fund staff estimates.

1/ Staff projections.

1 Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. In this PIN, the main features of the Board’s discussion are described.


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