Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with Argentina
IMF News, August 9, 2006
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- Published: August 9, 2006
Background
- PIN No. 06/93; Executive Board concluded the Article IV consultation with Argentina on July 28, 2006.
- Post-2002 recovery: after three years of around 9 percent growth, real GDP surpassed its 1998 peak by some 6 percent, led by strong investment and consumption.
- Contributing factors: favorable terms of trade, significant reduction in the debt burden following the 2005 debt restructuring, and a competitive currency.
- Inflation trend: inflation rose steadily, ending 2005 at 12.3 percent.
Economic performance and external sector
- GDP and demand:
- Real GDP growth: three years of around 9 percent growth; GDP at constant prices: -4.4 (2001), -10.9 (2002), 8.8 (2003), 9.0 (2004), 9.2 (2005).
- Domestic demand (contribution to growth): -6.5 (2001), -16.9 (2002), 10.4 (2003), 11.1 (2004), 9.4 (2005).
- Net exports (contribution to growth): 2.1 (2001), 6.0 (2002), -1.5 (2003), -2.1 (2004), -0.2 (2005).
- External sector transformation:
- Early repurchase of entire stock of Fund credit in January 2006.
- Net private capital flows turned positive in 2005 for the first time since 1999.
- Trade and reserves:
- Trade balance (U.S. dollars, billions): 6.2 (2001), 16.7 (2002), 16.1 (2003), 11.3 (2004), [2005 value appears in table as blank].
- Exports, f.o.b. (U.S. dollars, billions): 26.5 (2001), 25.7 (2002), 29.9 (2003), 34.6 (2004), 40.0 (2005).
- Imports, c.i.f. (U.S. dollars, billions): 20.3 (2001), 13.9 (2002), 22.4 (2003), 28.7 (2004), [2005 value blank].
- Gross international reserves (U.S. dollars, billions): 14.9 (2001), 10.5 (2002), 14.1 (2003), 19.6 (2004), 28.1 (2005).
- Reserves around US$1 billion accumulated per month so far this year; reserves now stand at US$26 billion (having recouped most of January's early repurchase of amounts outstanding to the Fund).
- Price and wage dynamics:
- Measured inflation fell to 11 percent at end-June 2006; core inflation running at 12¼ percent; end-2007 inflation expectations around 12 percent.
- Short-term interest rates remain negative in real terms; interest rates have risen gradually as bank lending recovered.
- Formal private sector real wages rising rapidly; informal sector real wages remain depressed.
Fiscal position and public spending
- Post-crisis fiscal adjustment historically unprecedented.
- 2005 consolidated government overall cash surplus: 2½ percent of GDP.
- Primary surplus erosion: primary surplus fell to 4½ percent of GDP in 2005 from 5 percent in 2004.
- Non-interest spending rose by 11 percent in real terms in 2005, providing further demand stimulus.
- Provincial primary spending rose around 19 percent in real terms in 2005; provinces moved into primary deficit in the second half of 2005 despite recording a small overall surplus for the year.
- Public sector capital spending: growing at a real rate of over 70 percent in the 12 months to May (2006).
- Substantial increases in subsidies and discretionary transfers to provinces continue.
Banking, monetary policy, and regulatory environment
- Exchange rate: remained stable amid sustained central bank intervention.
- Banking system health improved: gains in asset quality and profitability, aided by negative real interest rates and stable regulatory environment.
- Central bank approach: maintaining a stable regulatory framework while gradually phasing out regulatory forbearance; Executive Board recommended continued adherence to this approach.
- Authorities intend to participate in the Financial Sector Assessment Program in 2007.
Social indicators and programs
- Poverty and social outcomes:
- Poverty rate declined to 34 percent by end-2005 from a peak of 57 percent in 2002.
- Extreme poverty more than halved to 12 percent by end-2005.
- Improvements in secondary school enrollment and completion rates, formal health insurance coverage, and infant mortality rate.
- Social policy: Heads of Household Program provided cash transfers to the unemployed.
- Labor market: remains highly segmented with a widening gap between formal and informal sector wages.
Executive Board assessment — findings
- Welcomed strong performance: declines in unemployment and poverty, banking system recovery, strong external sector, recuperation of international reserves.
- Cautioned that inflationary pressures have emerged.
- Most Directors viewed current inflation as stemming from aggregate demand growth not met by supply response rather than a temporary post-crisis relative price adjustment.
- Noted erosion of the fiscal position; monetary policy, while tightening, remained accommodative.
- Administrative measures to dampen inflation provide only temporary benefits; most Directors advised dismantling such measures as soon as possible.
- Structural reforms progress limited; the combined Ex Post Assessment and Ex Post Evaluation found:
- Macroeconomic performance under the two 2003 Stand-By Arrangements was strong.
- All procedural requirements of the Fund's policy on exceptional access were met.
- Progress on structural reforms to address long-term vulnerabilities was limited, due largely to a lack of ownership and implementation capacity.
- Access under the 2003 Stand-By Arrangements was insufficiently linked to balance of payments need and may have hampered the Fund's signaling regarding exceptional access.
- Lack of a medium-term fiscal and balance of payments framework complicated application of the Fund's Lending Into Arrears policy.
Executive Board assessment — policy recommendations
- Bring all available policy instruments to bear to achieve a soft landing with sustainable growth and low inflation.
- Specific policy actions most Directors considered appropriate:
- Reign in the rapid growth in primary expenditure to strengthen fiscal policy.
- Bring the term structure of real interest rates into positive territory.
- Allow for greater upward flexibility in the exchange rate.
- Avoid delay in policy response to prevent significantly higher economic costs of reducing inflation and vulnerability to shocks.
- Avoid overreliance on a single instrument while avoiding adjustment in others to prevent unbalanced and infeasible tightening.
- Dismantle price repression measures (regulated prices, selective price agreements, export restraints) as soon as possible to avoid exacerbating capacity constraints and undermining the business climate.
- Implement structural measures to increase competitiveness and encourage investment, notably in regulated industries.
- Consider alternatives to financial transactions and export taxes, review the fiscal responsibility regime, and allow relative prices in utilities and energy to adjust to unwind implicit cross-subsidies.
- Seek a consensual solution to remaining government arrears to both official and private sector creditors.
- Articulate a full medium-term macroeconomic framework to allow clearer application of the Fund's lending into arrears policy and to guide program design.
Key statistics from Table 1 (selected)
- GDP at constant prices (annual % changes): -4.4 (2001), -10.9 (2002), 8.8 (2003), 9.0 (2004), 9.2 (2005).
- Consumer prices (average): -1.1 (2001), 25.9 (2002), 13.4 (2003), 4.4 (2004), 9.6 (2005).
- Consumer prices (end-of-period): 41.0 (2001), 3.7 (2002), 6.1 (2003), 12.3 (2004), [2005 value blank].
- Population below poverty line (percent): 35.4 (2001), 53.0 (2002), 47.8 (2003), 40.2 (2004), 33.8 (2005).
- Population below extreme poverty line (percent): 12.2 (2001), 24.8 (2002), 20.5 (2003), 15.0 (2004), 12.0 (2005 reported in text).
- Unemployment rate: 20.7 (2001), 14.5 (2002), 12.1 (2003), 10.1 (2004), [2005 value blank].
- Exports, f.o.b. (U.S. dollars, billions): 26.5 (2001), 25.7 (2002), 29.9 (2003), 34.6 (2004), 40.0 (2005).
- Gross international reserves (U.S. dollars, billions): 14.9 (2001), 10.5 (2002), 14.1 (2003), 19.6 (2004), 28.1 (2005).
- Total debt (year-end, percent of GDP): 63.1 (2001), 181.2 (2002), 144.6 (2003), 132.0 (2004), 89.3 (2005).
- Outstanding use of Fund resources (percent of quota at end-of-period): 525.3 (2001), 498.2 (2002), 493.4 (2003), 428.9 (2004), 314.4 (2005).
- Nominal GDP (in billions of Arg $): 268.7 (2001), 312.6 (2002), 375.9 (2003), 447.6 (2004), 531.9 (2005).
Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation with Argentina, August 9, 2006.