Redesigning Argentina's Economic Landscape

IMF Blog, November 21, 2016

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Redesigning Argentina's Economic Landscape

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• Authors: Roberto Cardarelli
• Published: November 21, 2016

International capital markets / Context and assessment

• Author: Roberto Cardarelli
• Date: November 21, 2016
• The IMF returned to Argentina in September 2016 for the first economic assessment since 2006 (Article IV consultation).
• The IMF found Argentine authorities engaged in an ambitious transition to a more stable and sustainable economy to minimize the risk of future extreme fluctuations.

Background: Argentina's economic landscape prior to the transition

• Argentina has experienced extreme economic swings, including the crisis "the one in 2001," which "for its severity can be compared to the U.S. Great Depression."
• State of the economy by December 2015 (just after the elections that marked Mauricio Macri's surprise victory):
  • Very low foreign exchange reserves.
  • A severely overvalued exchange rate.
  • A high fiscal deficit largely financed with monetary transfers from the central bank.
  • One of the highest inflation rates in the world.
  • Rising trade and current account deficits.
  • An extensive network of trade barriers and foreign exchange restrictions.
  • The lowest investment rate in Latin America.
  • No access to international capital markets following the decade-long litigation with the hold-out creditors.
  • Pervasive government intervention had severely weakened institutions and undermined the credibility of economic and social indicators produced by the national statistical agency.

Progress through the first year of the new administration

• Achievements cited by the IMF after the government's first year:
  • Complete dismantling of foreign exchange controls.
  • Adoption of inflation targeting with a freely floating exchange rate.
  • Initial steps in bringing utility tariffs closer to international prices.
  • Successful return to international capital markets after the quick settlement of the decade-long dispute with holdout creditors.
  • Good progress in improving the governance environment.
  • Complete overhaul of the national statistical agency, leading to dissemination of new and credible official statistics and "the removal of the IMF’s Declaration of Censure in early November."
• Fiscal approach:
  • Federal authorities chose a cautious approach to lower the fiscal deficit, largely based on a very gradual reduction of energy subsidies.
  • The cautious approach also reflected the weakening economy, which "has been contracting since the last quarter of 2015."

IMF's policy priorities and main recommendations to complete the transition

• The IMF’s assessment focused on key policy priorities with three main recommendations:

1) Fiscal rebalancing and public finance

• "Progress in reducing the fiscal deficit should continue, at a pace consistent with the need to minimize the impact on the most vulnerable, and be based on reallocating spending and rationalizing the tax system."
• A more frontloaded fiscal adjustment would:
• Lower interest rates.
• Ease pressures on the currency.
• Reduce the risk associated with an excessive reliance on external financing.
• Justification for gradual adjustment:
• A set of economic, social, and political constraints justifies a gradual reduction of the fiscal deficit.
• Specific fiscal directions:
• Reduce government current spending, which increased "so much during the last decade," to:
• Boost public investment in infrastructure.
• Reduce taxes on firms and households.
• Introduce a medium-term fiscal framework to help establish credibility of the fiscal rebalancing.

2) Disinflation strategy and monetary framework

• "The pace of disinflation should remain sensitive to its short-term economic costs."
• Objective: bringing inflation to "a single digit" is essential to strengthen long-term growth and reduce poverty.
• Trade-off: the tight monetary policy stance needed to build the central bank’s anti-inflation reputation is likely to have short-term output costs.
• Recommended institutional change:
• Modify the central bank’s charter, narrowing its mandate to price stability and excluding the possibility of financing the fiscal deficit.

3) Supply-side reforms to rebuild growth foundations

• Reforms needed include:
• Improving the quality of infrastructure.
• Removing remaining trade barriers.
• Reformulating the regulations for utilities.
• Enhancing market efficiency and competition in key private sector industries (including energy).
• Making further progress in the government’s ambitious anti-corruption plan.

Outlook and implementation challenges

• Advancing in all recommended areas "will require time, persistence, and political skills."
• Completing the transition that began at the end of 2015 offers the prospect of "a new economic landscape in Argentina, one that can generate significant improvements in the living standards of its population."

Source: Redesigning Argentina's Economic Landscape, Roberto Cardarelli, November 21, 2016 (IMF blog).

Content in this bundle

• Redesenhar o cenário econômico argentino; Roberto Cardarelli; 21 de novembro de 2016
  • Redesenhar o cenário econômico argentino; Roberto Cardarelli; 21 de novembro de 2016 (Markdown version)
  • Redesenhar o cenário econômico argentino; Roberto Cardarelli; 21 de novembro de 2016 (PDF)

References

• economic assessment
• Declaration of Censure