Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Argentina
IMF News, June 30, 2005
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- Published: June 30, 2005
Background and recent macroeconomic developments
- Article IV consultation concluded on June 20, 2005.
- Argentina's economy rebounded strongly from the financial crisis in late 2001:
- Real GDP grew close to 9 percent in both 2003 and 2004.
- Real output level returned to the peak achieved prior to the crisis.
- Demand and external developments:
- Private consumption and investment rebounded from early 2003.
- Export receipts increased—initially reflecting higher commodity prices—and imports remain below pre-crisis levels.
- International reserves recovered; bank deposit and external payments restrictions were progressively dismantled.
- Inflation and wages:
- Inflation spiked in 2002, then remained moderate: 3¾ percent in 2003 and 6 percent in 2004.
- Currency depreciated almost 300 percent.
- Real wages recovered only slowly; real exchange rate remains somewhat depreciated.
- First part of 2005:
- Growth continued in Q1 2005 at 8 percent year-on-year.
- Consumer prices rose by 5.2 percent during the first five months of 2005; 12-month inflation reached 8.6 percent.
- International reserves rose to over US$22 billion.
Fiscal performance
- Consolidated primary surplus:
- 3.0 percent of GDP in 2003.
- 5.1 percent of GDP in 2004.
- Revenues and expenditures:
- Total revenues rose from 23 percent of GDP in 2002 to 29 percent of GDP in 2004.
- Distortive taxes (export and financial transactions taxes) account for close to 20 percent of total revenues.
- Social and capital spending accelerated toward end-2004, with end-year expenditures exceeding original budget targets by considerable margins.
- 2005 budget and outturn:
- Approved 2005 budget aims for a consolidated primary surplus of 3.8 percent of GDP on a cash basis.
- During the first five months of 2005, the federal government achieved a primary surplus of 1.9 percent of annual GDP.
- Executive Directors’ fiscal guidance:
- Urged tightening of fiscal policy to contain inflation as the output gap closes.
- Recommended measures to achieve a higher primary surplus—preferably closer to the 2004 level—if revenues are higher than expected.
- Emphasized need to maintain tight expenditure for the rest of 2005 to avoid a budgetary financing gap.
- Advocated strengthening the institutional fiscal framework, including the Fiscal Responsibility Law, more binding constraints on provincial spending and borrowing, better coordination across levels of government, increased budgetary transparency, and consistent accounting standards at the provincial level.
- Called for phasing-out of distortionary taxes on exports and financial transactions, with some Directors emphasizing revenue neutrality and preservation of central government shares.
Social indicators and labor market
- Poverty and unemployment (selected datapoints):
- Population below poverty line: 29.7 (2000), 35.4 (2001), 53.0 (2002), 47.8 (2003), 44.3 (2004).
- Population below extreme poverty line: 7.5 (2000), 12.2 (2001), 24.8 (2002), 20.5 (2003), 17.0 (2004).
- Unemployment rate: 14.7 (2000), 18.3 (2001), 20.8 (2002), 14.5 (2003), 12.1 (2004).
- Trends:
- Headline unemployment fell to about 13 percent in March 2005 from 17.8 percent in December 2002.
- An additional 4.1 percent of the labor force is employed under emergency social assistance programs.
- Share of population living in extreme poverty fell to 17 percent in June 2004 (from 24.8 percent two years earlier).
- Share below the poverty line declined from a peak of 58 percent to 44 percent in June 2004.
Monetary policy and financial system
- Monetary policy actions in 2005:
- Since January 2005, central bank increased policy interest rates on three occasions by a total of 125 basis points, bringing the repo rate to 3.75 percent.
- Interest rates paid on short-term Lebacs increased steadily.
- Renewed foreign exchange interventions since April contributed to an acceleration in base money.
- Executive Directors’ monetary guidance:
- Welcomed recent efforts to raise interest rates but recommended additional tightening.
- Recommended bringing base money to the lower end of the authorities' target range, possibly requiring reduced foreign exchange intervention and a further rise in interest rates.
- Several Directors cautioned against using monetary policy to pursue exchange rate stability; recommended clarifying commitment to price stability as the prime objective and ensuring central bank operational autonomy.
- Most Directors called for greater nominal exchange rate flexibility and transparency in foreign exchange intervention policy.
- A few Directors cautioned against the use of capital controls to resist upward pressures on the exchange rate.
- Banking sector:
- Progress welcomed in implementing the 2003 recovery strategy.
- Banking system remains vulnerable and undercapitalized relative to international standards.
- Issues pending: compensation for policy-induced losses and judicial clarification of losses from amparos.
- Directors stressed strict application of prudential standards, regulatory phase-in of market valuation of government bonds, limits to bank exposure to the public sector, incentives for early recapitalization, and clarification of the role of public banks.
External sector, reserves, and debt restructuring
- Trade and reserves:
- Strong trade balance and significant reduction in private capital outflows facilitated a sharp rise in international reserves to over US$22 billion (first part of 2005).
- Debt exchange and debt metrics:
- Global debt exchange offer launched January 2005, closed February 25, 2005 with 76 percent participation.
- As a result of restructuring, Argentina's debt burden declined to 72 percent of GDP (from 147 percent of GDP in 2002).
- Approximately US$20 billion in principal in default remained outstanding.
- Settlement of the debt exchange completed on June 2 due to delay from legal action by some nonparticipating creditors.
- Executive Directors’ guidance on debt:
- Viewed the debt exchange as an important step toward normalizing relations with creditors.
- Urged development of a forward-looking strategy to resolve remaining arrears to private creditors consistent with the Fund's Lending into Arrears policy.
- Noted need to normalize relations with bilateral official creditors through a Paris Club agreement and to maintain regularized relations with the European Investment Bank (EIB).
- Most Directors considered appropriate that authorities have flexibility to draw on international reserves to finance significant near-term debt service, including repurchases to the Fund; some Directors questioned this use of reserves.
- Emphasized that use of reserves should not impair financial soundness or autonomy of the central bank.
- EIB arrears:
- Arrears to the European Investment Bank arose in 2003 and caused nonobservance of continuous performance criteria under the January 2003 and September 2003 standby arrangements.
- Misreporting of these arrears gave rise to five noncomplying purchases and breaches of Article VIII, Section 5.
- On December 10, 2004 Argentina cleared these arrears to the EIB.
- Executive Board granted waivers of the nonobservances and agreed no further remedial action was warranted with respect to the breaches of Article VIII, Section 5.
Executive Board assessment: findings and policy recommendations
- Overall assessment:
- Argentina is emerging from a difficult period and has made a strong recovery from the 2001 financial crisis.
- Current growth momentum and accompanying political stability provide a critical window to undertake policies to ensure long-lasting and equitable growth.
- Key recommended policy actions:
- Continue responsible macroeconomic policies, particularly to guard against inflation.
- Undertake structural reforms to boost factor productivity and raise potential growth above its historic rate.
- Strengthen the financial system and revive intermediation.
- Normalize relations with creditors.
- Ensure equitable sharing of growth benefits and protect vulnerable groups.
- Specific fiscal recommendations:
- Tighten fiscal policy in 2005 relative to 2004 as the output gap closes and inflationary pressures mount.
- Put in place measures to ensure achievement of a higher primary surplus, preferably closer to the 2004 level.
- Maintain tight expenditure to avoid a second-half 2005 financing gap.
- Strengthen institutional fiscal framework, federal-provincial coordination, and revenue-sharing arrangements.
- Specific monetary and exchange rate recommendations:
- Additional monetary tightening desirable; reduce base money through lower FX intervention and higher interest rates if necessary.
- Clarify commitment to price stability as the prime monetary objective; ensure central bank autonomy.
- Allow greater nominal exchange rate flexibility; ensure transparency of FX intervention policy.
- Structural and sectoral recommendations:
- Steadfast implementation of structural reforms committed under the stand-by arrangement; emphasize ownership and careful sequencing.
- Strengthen banking sector recapitalization incentives and apply prudential standards strictly.
- Resolve outstanding issues in regulated utilities sector via collaborative long-term agreements to ensure appropriate returns and investment, and update the regulatory framework to provide certainty and investment incentives.
- Debt sustainability:
- Debt sustainability requires steadfast implementation of fiscal and structural policies.
- Only under a proactive reform scenario, including high and sustained fiscal effort, would debt-to-GDP return to more comfortable levels over the medium term and allow an early exit from use of Fund resources.
Key statistics (selected figures from Table 1)
- GDP at constant prices (annual percentage changes): -0.8 (2000), -4.4 (2001), -10.9 (2002), 8.8 (2003), 9.0 (2004).
- Domestic demand (contribution to growth): -1.1 (2000), -6.5 (2001), -16.9 (2002), 10.4 (2003), 11.0 (2004).
- Per capita GDP (U.S. dollars, thousands): 7.9 (2000), 7.4 (2001), 2.8 (2002), 3.4 (2003), 4.1 (2004).
- Consumer prices (average): -0.9 (2000), 25.9 (2001), 13.4 (2002), 4.4 (2003), (2004 value blank in table).
- Consumer prices (end-of-period): -0.7 (2000), 41.0 (2001), 3.7 (2002), 6.1 (2003), (2004 value blank in table).
- Population (millions): 35.9 (2000), 36.3 (2001), 36.6 (2002), 37.0 (2003), 37.4 (2004).
- Population below poverty line (percent): 29.7 (2000), 35.4 (2001), 53.0 (2002), 47.8 (2003), 44.3 (2004).
- Unemployment rate: 14.7 (2000), 18.3 (2001), 20.8 (2002), 14.5 (2003), 12.1 (2004).
- Trade balance (U.S. dollars, billions): 1.1 (2000), 6.2 (2001), 16.7 (2002), 15.7 (2003), (2004 value blank).
- Exports, f.o.b. (U.S. dollars, billions): 26.3 (2000), 26.5 (2001), 25.7 (2002), 29.6 (2003), 34.5 (2004).
- Imports, c.i.f. (U.S. dollars, billions): 25.3 (2000), 20.3 (2001), 13.8 (2002), 22.3 (2003), (2004 value blank).
- Export growth (U.S. dollar terms): 13.0 (2000), 0.8 (2001), -3.4 (2002), 15.3 (2003), 16.5 (2004).
- Import growth (U.S. dollar terms): -19.6 (2000), -55.8 (2001), 53.9 (2002), 61.3 (2003), (2004 value blank).
- Credit to the private sector (annual percentage changes): -3.8 (2000), -20.2 (2001), -12.8 (2002), -15.5 (2003), 15.4 (2004).
- Augmented base money (annual percentage changes): -8.8 (2000), -3.0 (2001), 152.9 (2002), 12.7 (2003), (2004 value blank).
- Augmented broad money (annual percentage changes): 3.2 (2000), -16.5 (2001), 24.7 (2002), 15.8 (2003), (2004 value blank).
- Consolidated public sector primary balance (percent of GDP): 0.4 (2000), -1.3 (2001), 0.6 (2002), 3.0 (2003), 5.1 (2004).
- Revenues (percent of GDP): 24.6 (2000), 23.7 (2001), 23.0 (2002), 28.9 (2003), (2004 value blank).
- Total debt (U.S. dollars billions, year-end): 145.1 (2000), 167.0 (2001), 152.6 (2002), 184.8 (2003), 201.4 (2004).
- Total debt (year-end, percent of GDP): 51.1 (2000), 62.2 (2001), 164.2 (2002), 144.5 (2003), 133.9 (2004).
- Gross domestic investment (percent of GDP): 16.2 (2000), 14.2 (2001), 12.0 (2002), 15.1 (2003), 19.1 (2004).
- Gross national savings (percent of GDP): 20.4 (2000), 20.9 (2001), 21.1 (2002), -2.1 (2003), -4.5 (2004).
- Current account balance (percent of GDP): 3.1 (2000), (2001 value blank), (2002 value blank), (2003 value blank), (2004 value blank).
- Outstanding use of Fund resources (in percent of quota at end-of-period): 183.2 (2000), 525.3 (2001), 498.2 (2002), 493.4 (2003), 428.9 (2004).
- Gross international reserves (U.S. dollars, billions): 26.9 (2000), 10.5 (2001), 14.1 (2002), 19.6 (2003), (2004 value blank).
- Reserves in months of imports of goods and services: 9.8 (2000), 6.5 (2001), 9.5 (2002), 9.1 (2003), (2004 value blank).
- Nominal GDP (in billions of Arg $): 284.2 (2000), 268.7 (2001), 312.6 (2002), 375.9 (2003), 447.3 (2004).
Public Information Notice: IMF Executive Board Concludes 2005 Article IV Consultation with Argentina, June 30, 2005.