Argentina: Remaining Economic Challenges, Address by Anne O. Krueger, Acting Managing Director, IMF
IMF News, March 31, 2004
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Bibliographic details
- Published: March 31, 2004
Introduction and context
- Occasion: American Enterprise Institute, Washington, D.C., March 31, 2004.
- IMF actions noted:
- The IMF has completed the second review of Argentina's Fund-supported program.
- A new Letter of Intent was published "only last week" (relative to March 31, 2004).
- Broad objective shared by the Argentine government, the IMF, and the international community: sustainable and rapid growth to raise living standards and reduce poverty.
Recent macroeconomic performance — findings
- Growth and inflation:
- "Growth exceeded 8% last year and should be around 6% this" (year following the 8% outturn).
- Inflation "remains subdued, at around 2.5 - 3%."
- Legacy of the crisis:
- "The cumulative decline in output between 1999 and 2002 was around 20%."
- Much of current expansion is recovery toward pre-crisis activity levels.
- Debt servicing:
- "Argentina has been servicing virtually none of the sovereign debt it owes to the private sector."
- Policy commitments:
- Argentina's intentions on raising primary surpluses are "clearly set out in the two Letters of Intent."
Growth, fiscal policy, and international precedents
- Core argument:
- A stable macroeconomic framework, including a primary surplus consistent with debt service obligations, is essential for sustained, rapid growth and poverty reduction.
- Turkey (post-2001 crisis) — cited evidence:
- Economy contracted "by 9.5%" in 2001.
- Inflation "came close to 70%."
- Public debt "was nearly 100% of GNP."
- Primary surplus in 2003 was "6.2 percent of GNP"—near the "6.5 percent target" Turkey set for itself.
- Growth: "The Turkish economy grew by 7.8% in 2002, by almost 6% in 2003" and "is expected to achieve 5% annual growth this year and into 2005."
- Inflation projections: "12% this year, and 8% next."
- Brazil — cited evidence:
- Primary surplus target "is 4.25% through 2006"; "last year the outturn was slightly above target."
- Risk premia: "peaked at around 2400 points" in 2002 and "are currently around 550 points."
- Overnight rates "are now below their pre-crisis levels."
- Growth "resumed in the final quarter of last year" with acceleration signs in the current year.
- Implication: Ambitious fiscal strategies in comparable countries did not hinder growth and helped restore confidence and investment.
Structural reform priorities
- Federal–provincial fiscal relations:
- Move from one-year provincial fiscal adjustment agreements to longer-term arrangements.
- Introduce better incentives for provincial fiscal responsibility on both revenue and spending sides.
- Energy sector:
- Supply constraints pose a "real risk" to future growth.
- Problems identified: pesoization of utility contracts after the 2001 devaluation and regulator refusal to allow tariff adjustments have "sharply curtailed new investment."
- Recent limited step: permission to raise tariffs for some large industrial users.
- Risk if unaddressed: "further and more serious supply interruptions" undermining growth.
- Financial sector:
- Post-crisis damage from default, asymmetric pesoization, and indexation of bank balance sheets hurt profitability and confidence.
- Signs of recovery are emerging; strengthening banks is essential to cushion future shocks.
- Institutional and judicial confidence:
- Public confidence in institutions and the judiciary was badly shaken after 2001–2002; restoring trust is necessary for broader reform progress.
- Labor market:
- "Labor market reform is also long overdue."
- A more flexible labor market is essential to create jobs at scale and reduce high unemployment; removing labor market rigidities is presented as the route to lasting unemployment reduction.
- Programming and complementarity:
- The government has committed to "wide-ranging structural reforms" in its Letters of Intent.
- The payoff from reforms "rises sharply when these are carried out in conjunction with others" — "the whole is far greater than the sum of the parts."
Policy recommendations and IMF role
- IMF role: supportive and focused on crisis prevention and improving crisis prevention tools.
- Key policy recommendations:
- Maintain a stable macroeconomic framework and consistency in economic policy to build credibility and attract investment flows and lower borrowing costs.
- Reach agreement on debt restructuring with private creditors to restore access to international capital markets and attract foreign capital.
- Ensure fiscal policy produces a primary surplus sufficient for sustainability and consistent with debt servicing commitments.
- Implement structural reforms urgently across federal–provincial fiscal relations, energy pricing and investment, financial sector strengthening, judicial and institutional restoration, and labor market flexibility.
- Political economy:
- Acknowledges reforms will face fierce opposition from vested interests; requires political leadership, courage, and sustained implementation.
- Assessment of Argentina's program:
- Argentina "has embarked on a reform program" aimed at restoring stability and delivering long-term sustainable growth.
- The speaker would be "happier if the government had felt able to do more" to reduce vulnerability to shocks, and "would... feel more confident" if Argentina showed greater conviction in the program.
- Emphasis on implementation: "If the government does sticks to its commitments on all aspects of policy reform, I believe Argentina has a better opportunity than for many years to achieve the economic stability essential for lasting success."
Source: Argentina: Remaining Economic Challenges, Address by Anne O. Krueger, Acting Managing Director, IMF (March 31, 2004).