IMF Staff Completes 2017 Article IV Mission to Argentina

IMF News, November 10, 2017

Source details

IMF team led by Mr. Roberto Cardarelli visited Buenos Aires from October 31 to November 10, 2017 to conduct discussions for the 2017 Article IV consultations.
Statement issued at the conclusion of the visit conveys preliminary findings of IMF staff; views expressed are those of IMF staff and do not necessarily represent the views of the IMF’s Executive Board.
Authorities’ reform efforts have yielded significant efficiency gains and laid the foundation for stronger private sector investment in the years to come.

Recovery from recession that began in mid-2015 is steady.
Growth forecasts:
- Growth is forecast to be 2¾ percent for this year.
- Growth is forecast to be 2½ in 2018.
Inflation:
- Inflation remains stubbornly high and is expected to gradually decline.
External and external-financing positions:
- Stronger domestic demand has led to a greater current account deficit.
- High general government deficit has led to a rapid rise in foreign currency borrowing, pushing up gross external financing needs.
- Significant foreign inflows and slower-than-targeted decline in inflation have contributed to upward pressure on the real exchange rate.
These factors pose vulnerabilities to the medium-term outlook.

Authorities committed to continue reducing public expenditure to cut the tax burden and achieve fiscal deficit targets.
Federal and provincial fiscal adjustment plans:
- Federal authorities have announced a 2 percent of GDP reduction of the primary federal deficit in the next two years, based on a reduction of economic subsidies and other measures.
- Provinces are committed to reduce their deficit by about ¾ percent of GDP.
Policy implications of further fiscal adjustment:
- A larger fiscal rebalancing would allow for lower real interest rates.
- It would reduce upward pressures on the peso.
- It would facilitate a faster elimination of monetary financing of the fiscal deficit and better anchor inflation expectations.
- It would reduce vulnerabilities to a sudden tightening of external financing conditions.

Authorities’ proposed tax reform characterized as a good step forward to overhaul Argentina’s inefficient tax system.
Specific features and expected effects:
- Gradually reduces the effective tax rate on labor income for low-income workers.
- Increases the progressivity of the system.
- Incentivizes formal employment.
- Expanding the coverage of the personal income tax would allow to lower social security contributions.
- Gradual reduction of the statutory tax rate for reinvested corporate income is welcome and should help support investment.
- Phase-out of the financial transaction tax will remove a distortion that holds back financial deepening and financial inclusion.
- Incentivizing provinces to eliminate the gross turnover tax will support investment, growth and job creation.

Authorities have taken measures to reduce red tape and administrative costs associated with trade and setting up firms.
Remaining reform scope:
- Remove barriers to trade, investment and firm entry.
- Address anti-competitive business practices.
Labor market considerations:
- Creating quality jobs for all Argentines identified as the most effective and sustainable way to reduce poverty, raise output, increase productivity, and provide opportunities.
- A reform of labor market institutions would help reduce informality, address gender discrimination, and ensure the benefits from higher growth are shared more equally.
- Allowing for more flexible work arrangements and active labor market policies can help increase the employability of all workers.

Accelerate the pace of reforms to reduce vulnerabilities to the medium-term outlook and foster strong, sustained and equitable growth.
Continue reducing public expenditure to cut the tax burden and meet fiscal targets.
Consider larger fiscal rebalancing to:
- Lower real interest rates.
- Reduce upward pressures on the peso.
- Facilitate elimination of monetary financing of the fiscal deficit.
- Better anchor inflation expectations.
- Reduce vulnerabilities to sudden tightening of external financing conditions.
Advance the proposed tax reform to improve progressivity, formal employment, investment incentives, and financial deepening.
Pursue further supply-side reforms to lower barriers to trade, investment and firm entry, address anti-competitive practices, and reform labor market institutions.

Press Release No. 17/431 — November 10, 2017.