Public Information Notice: IMF Concludes Article IV Consultation with Argentina

March 11, 1999

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 March 3, 1999, the Executive Board concluded the 1998 Article IV consultation with Argentina1.


After strong economic growth in 1997 and the first half of 1998, GDP growth declined sharply in the second half of 1998 as the effects of global market turbulence took their toll on Argentina and led to higher interest rates which depressed domestic demand. Real GDP growth for 1998 as a whole is likely to have been around 4 percent, with investment falling particularly sharply in the second half of the year after a 26 percent rise in 1997. There was a modest improvement in the employment situation in 1998, with the unemployment rate falling from 13.6 percent to 12.4 percent between October 1997 and October 1998. Consumer price inflation was 0.7 percent in 1998, and wholesale prices declined by nearly 7 percent.

The fiscal situation improved markedly over the past two years, reflecting the strength of economic activity as well as tight expenditure control. The deficit of the federal government declined from 2.2 percent of GDP in 1996 to 1.1 percent of GDP in 1998. Federal government revenues remained constant as a share of GDP, with sluggish growth in VAT receipts and lower social security revenues offset by increased income tax payments and by higher nontax revenues. Expenditures declined as a share of GDP, with tight controls on wages and private transfers more than offsetting a raise in interest payments. Preliminary estimates do not show decline in the combined deficit of provincial governments, which remained at around 0.5 percent of GDP. The overall public sector deficit fell from 3.3 percent of GDP in 1996 to an estimated 1.8 percent of GDP in 1998.

The banking system as a whole has weathered the turmoil in international markets well. Although there have been some pressures on a few, relatively small banks, total deposits in the banking system have continued to grow despite the Russian and Brazilian financial crises, albeit at a slower rate. Domestic interest rates rose substantially in the aftermath of the Russian crisis. They slowly declined in the latter months of 1998 before rising again in January 1999 as a result of the difficult situation in Brazil. Central bank gross reserves climbed by nearly US$3½ billion in 1998, reaching US$26.2 billion by year-end, while commercial banks held some US$5.5 billion in liquid assets abroad to bring total reserves to nearly US$32 billion.

The external current account deficit widened from 3.7 percent of GDP in 1997 to an estimated 4.4 percent of GDP in 1998, mainly reflecting a sharp deterioration in the terms of trade and a worsening in the factor services account. Real merchandise exports rose by 9 percent, but prices fell by 10½ percent, generating a drop in export values of 2 percent. Import volume rose by 8½ percent, while prices fell by 5 percent. Together, these trends produced a widening in the trade deficit from US$4.1 billion in 1997 to US$5.6 billion in 1998. Net interest payments abroad increased by some US$800 million in 1998, reflecting higher international interest rates and higher external indebtedness, while profit remittances abroad rose by an estimated US$500 million. Despite the fallout from the international financial crises, net capital inflows rose during 1998 to about US$19 billion. Foreign direct investment remained buoyant at around US$3½ billion, while public sector external borrowing remained strong. Private sector external borrowing, however, slowed down significantly in the second half of 1998 when many Argentine enterprises experienced constraints in access to external financing.

The authorities made further progress in structural reforms in 1998. Among the most significant measures taken during the year was a tax reform passed in December which broadened the base of the income and value added taxes, imposed a minimum corporate income tax based on gross assets, and limited the deductibility of interest payments under the income tax. Steps were also taken to strengthen budgetary procedures, tax administration, and the management of the social security system. The authorities completed the privatization of the operations of major airports, and in January 1999 sold the first tranche of shares in the National Mortgage Bank (BHN) as well as most of the government’s remaining stake in the petroleum company YPF. Progress continues to be made in improving the legislative and regulatory framework of the banking system. A labor market reform approved in September 1998 produced a significant reduction in dismissal costs and eliminated most types of flexible temporary contracts, but left unaddressed the need to introduce flexibility in the collective bargaining process.

A three-year Extended arrangement with the IMF was approved on February 4, 1998 (see Press Release 98/1), for a total of SDR 2,080 million. This arrangement is in support of the authorities’ program of further fiscal consolidation and a deepening of structural reforms. The authorities have indicated that they do not intend to draw on this arrangement and are treating itas "precautionary". Under the first year of the program (1998), the public sector deficit was reduced, and an ambitious agenda of structural reforms was undertaken, as described above. During the second year of the program in 1999, the authorities intend to continue their fiscal consolidation efforts and to implement further structural reform initiatives, including the privatization of the National Mortgage Bank, the leasing of telecommunications frequencies, and make progress in the conversion of Banco de la Nación into a public company. Further steps will be taken to improve fiscal management and transparency, including the expected enactment of a Fiscal Responsibility Law and the implementation of efficiency measures of public spending. In the financial sector, the Central Bank will take additional steps to improve banking supervision and risk assessment of financial institutions. The program also includes provisions for improvements in health care, poverty alleviation, education, the judicial system, and the quality and timeliness of statistical information.

Executive Board Assessment

Executive Directors welcomed the strong investment-led growth, the decline in the unemployment rate, and the continued absence of inflationary pressures achieved in Argentina in the last three years. They commended the authorities for their prudent economic management, which had helped the economy withstand the recent turmoil affecting emerging market countries, and welcomed the progress made in a number of structural areas. Directors observed that all performance criteria under the 1998 program had been met, except for a small deviation in respect of the fourth quarter target for the fiscal deficit, which was largely due to adverse external developments.

At the same time, Directors emphasized the new challenges to economic management arising from recent events in Brazil. They welcomed the calm response of financial markets to these events, but cautioned that the impact of these developments on foreign trade and economic activity in Argentina could be significant. In this context, Directors stressed the importance of reaffirming the policy framework envisaged in the 1999 program, and endorsed the early review of this program that would provide an opportunity to discuss the policy options that might be appropriate to deal with a possibly more adverse external environment.

Directors commented that the negative effects on the public finances of a slower pace of economic activity may require a flexibilization of the fiscal component of the program. However, stressing the need to preserve the integrity of the program, most Directors cautioned against relaxing the agreed limits on noninterest expenditure of the federal government, and urged the authorities to strike an appropriate balance between relying on automatic fiscal stabilizers, which would help offset the output costs of the external shock, and preserving credibility in an environment of increasing financing constraints, including on the external side.

Directors welcomed the implementation of the tax reform and encouraged the authorities to continue with efforts to improve tax administration, which would help cushion the effect on the public finances of a slowdown in economic activity. They noted that efforts under way at the federal level to increase the cost-effectiveness of budget outlays would also help toward this end. A number of Directors stressed the importance of preventing a deterioration in the finances of the provincial administrations. They also emphasized the need to make rapid and significant progress in the reform of intergovernmental fiscal relations, with a view toincreasing the revenue raising responsibility of the provinces, and streamlining the current overly complex revenue sharing system.

Directors welcomed the progress made in strengthening the banking system and improving the efficiency of domestic financial intermediation. They noted that the consolidation of the banking system since 1995, the strengthening of the banks’ liquid reserve position, and improvements in the quality of banking sector assets have been key determinants of the continuing growth of private sector deposits and of the resilience shown by the system in the present—more adverse—circumstances. Directors noted the authorities’ actions to modernize supervisory practices and increase transparency in the financial system through the collection and dissemination of information on financial system operations, including further efforts on derivative transactions and off-balance sheet positions.

Directors noted the substantial progress made by Argentina in recent years in structural reforms, particularly in privatization, deregulation, pension reform, and more recently in regard to tax policy and administration, and the reforms in the financial sector. They welcomed the authorities’ intention to continue structural reforms in key areas of the economy and society, including further initiatives in the financial and social security areas, and in the reform of intergovernmental fiscal relations. Directors, however, expressed concern about the limited progress implied by the labor market reform approved in September 1998, and encouraged the authorities to rekindle the reform process in this area, so as to help strengthen competitiveness and reduce unemployment in the medium term.

Directors noted that the external current account deficit rose further in 1998, reflecting strong growth in the first half of the year. Adverse terms of trade effects played an important role in this regard, but nevertheless, with a sharp drop in the value of the Brazilian real, Argentina is likely to face another year with significant pressures on the external current account. This places renewed emphasis on the need to continue improving competitiveness, and to maintain the prudent management of the external debt. In this context, Directors welcomed the boost to competitiveness that would result from a lowering of payroll taxes permitted by the recently approved tax reform, and stressed the need for further progress in increasing the flexibility of labor markets in order to help enhance productivity and foster export growth. At the same time, they noted that steps will continue to be taken to increase domestic saving through further medium-term fiscal consolidation and financial deepening to reduce Argentina’s vulnerability to adverse changes in the international capital markets. Directors welcomed the efforts under way to redirect trade to other markets and the authorities’ commitment to a liberal trade system. They urged them to continue to resist protectionist pressures from domestic industries, which would ultimately hinder the competitiveness of Argentine producers.

Directors observed that the currency convertibility plan has served Argentina well, and continues to be an adequate framework for stable growth. They took note of the intention of the authorities to consider a number of options revolving around the full dollarization of their economy as a way to reduce the currency risk premium over the medium term, and indicated the importance of fully exploring all the benefits and costs of such an approach.

Directors noted that Argentina subscribes to the SDDS, and welcomed the progress made in improving the quality and timeliness of statistical information.

Argentina: Selected Economic Indicators

1994 1995 1996 1997 1998

Real economy (change in percent)
Real GDP 8.0 -4.0 4.8 8.6 4.3
Domestic demand 9.4 -7.9 6.6 11.5 4.6
CPI (end of period) 3.9 1.6 0.0 0.3 0.5
Unemployment rate (average, in percent) 11.5 17.5 17.2 14.2 12.9
Gross national savings (percent of GDP) 16.3 16.5 15.5 16.3 15.7
Gross national investment (percent of GDP) 20.0 18.0 17.7 20.0 20.1
Public finance (percent of GDP)
Central government balance -0.5 -1.4 -2.2 -1.4 -1.1
Overall public sector balance -1.1 -2.8 -2.9 -1.9 -1.5
Public debt 31.1 35.9 37.4 36.2 37.1
Money and interest rates
Net domestic credit (change in percent) 19.1 5.7 9.8 17.4 7.8
Private sector deposits (change in percent) 19.7 -3.1 22.2 26.9 12.2
Interest rates (average, in percent per annum)
90-day peso time deposits 8.8 13.1 7.3 7.0 7.6
30-day peso prime rate 10.1 17.8 10.5 9.1 10.6
Balance of Payments (in millions of US$)
Trade balance -5,750 1,039 188 -4,058 -5,582
Exports (f.o.b.) 15,841 21,162 24,043 26,392 25,855
Imports (c.i.f.) -21,591 -20,123 -23,855 -30,450 -31,437
Current account -10,341 -4,184 -5,570 -11,347 -13,990
As percent of GDP -3.7 -1.5 -1.9 -3.5 -4.1
External debt (percent of GDP) 24.7 24.4 25.9 26.0 27.3

Sources: Central Reserve Bank of Argentina, National Institute of Statistics, FIEL; and IMF staff estimates.

1Under 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 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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