Argentina and the IMF
Turkey and the IMF
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Argentina: Remaining Economic Challenges|
Anne O. Krueger
Acting Managing Director
International Monetary Fund
American Enterprise Institute
Washington, D.C., March 31, 2004
Good afternoon. I'm delighted to be here and to participate in this important seminar. The AEI has a record of focusing on the principal issues of the day, and Desmond Lachman showed great perspicacity in putting this afternoon's discussions together. I am only sorry that it was impossible for me to be here for the first session.
Desmond has also shown himself to be a master of timing, of course. This is an apt moment to take stock of the challenges still facing Argentina. As you know, the IMF has just completed the second review of Argentina's Fund-supported program, and a new letter of intent was published only last week. I want to use this opportunity today to outline briefly what we in the Fund see as the principal economic challenges facing Argentina, and to say something about how we think we can help Argentina respond to those challenges.
Anyone who has followed events in Argentina since 2001 will know that the relationship between the IMF and the Argentine government has not always been an easy one. But disagreements between national authorities and the Fund are hardly novel, as the history books clearly show. Headline writers love to exploit differences of view, often in imaginative ways, and press reports are often as exaggerated as those of Mark Twain's death.
I start from the premise that we all—the Argentine government, the IMF, and the international community as a whole—share the same broad objectives. We all want to see what is still one of Latin America's richest economies enjoy sustainable and rapid growth, so raising living standards and reducing poverty.
The country's macroeconomic performance over the past year or more has been good, surpassing all expectations. On all the main economic indicators—GDP growth, the fiscal surplus, inflation—Argentina is currently doing better than any of us dared hope. Growth exceeded 8% last year and should be around 6% this, while inflation remains subdued, at around 2.5 - 3%.
This is unequivocally good news, as far as it goes. But this is only the start. Despite the recent rapid growth in real GDP, we have to remember that the cumulative decline in output between 1999 and 2002 was around 20%. Much of what we are seeing so far is part of the recovery to pre-crisis levels of activity. But for Argentina, what matters most is the medium and longer term outlook. To make significant progress in reducing unemployment and poverty, Argentina needs to see sustained expansion over the longer term. New investment will soon be essential for longer-term job creation, and to ease bottlenecks as capacity utilization reaches a high level.
So buoyant economic performance in the current context is an opportunity to resolve longer-term problems. I think Argentina accepts that this should not be used to justify postponing difficult decisions.
New investment will come partly from domestic savings, of course: but new inflows of foreign capital will also be needed. These will only come once Argentina has regained access to the international capital markets. None of this will happen unless potential investors are convinced that Argentina's economic policies make it an attractive prospect over the longer term.
They will not make that judgment until Argentina has reached agreement on a debt restructuring with its creditors. Fiscal and monetary performance has, as I said, exceeded expectations thus far. But Argentina has been servicing virtually none of the sovereign debt it owes to the private sector. Once a restructuring deal is agreed, there will clearly be pressure to raise the primary surplus in future years in order to ensure the sustainability of the macroeconomic strategy. Argentina's intentions on this issue have been clearly set out in the two Letters of Intent.
Achieving sustainable growth
One thing that continues to cloud the picture is the assumption that we're talking about a zero-sum game. Many emerging market governments have expressed concern that too high a primary surplus can undermine recovery and the efforts to reduce poverty. I believe these fears are misplaced. Prudent and sustainable fiscal polices do not hinder poverty reduction. Nor do they slow growth.
The economic evidence is overwhelming—a stable macroeconomic framework, including a primary surplus consistent with debt service obligations, is an essential prerequisite for sustained, rapid growth; and this in turn is the best way of reducing poverty.
Look at the experience of Turkey after its crisis of 2001. The economy contracted by 9.5% that year, and inflation came close to 70%. Public debt was nearly 100% of GNP. The government responded by adopting a series of ambitious reforms aimed at achieving macroeconomic stability and creating the framework for sustainable growth.
Those reforms included a challenging primary surplus target. The primary surplus in 2003 was 6.2 percent of GNP—close to the 6.5 percent target Turkey continues to set for itself and more than double that of Argentina. The debt burden—always lower than Argentina's—has fallen sharply. Yet the high primary surplus can hardly be said to have hindered growth, which continues to surpass expectations. The Turkish economy grew by 7.8% in 2002, by almost 6% in 2003 according to figures out today; and the economy is expected to achieve 5% annual growth this year and into 2005. Inflation has fallen dramatically: it is projected to be down to 12% this year, and 8% next.
Brazil, too, has already reaped considerable benefits from its government's determination to stick to a clearly-stated macroeconomic strategy. In 2002, it was able, with Fund support, to weather a crisis of confidence, sparked off by concern about the outcome of the presidential election. Its primary surplus target is 4.25% through 2006; last year the outturn was slightly above target. Risk premia have fallen dramatically. In 2002 they peaked at around 2400 points: they are currently around 550 points. The central bank has been able to reduce interest rates several times. Overnight rates are now below their pre-crisis levels. Growth resumed in the final quarter of last year and there are encouraging signs that it is accelerating this year.
There is clearly much to be learned from the experience of Brazil, Turkey, and other countries, though there are still those who remains dubious about the benefits of an ambitious fiscal strategy. In Argentina's case, detailed figures for the future years of the program have yet to be discussed, though, as I say, the government's publicly-declared intentions are clear.
The commitments in the Letters of Intent are integral to the debt restructuring process. The government is pledged to engage in constructive negotiations with its creditors. Argentina's debt obligations are particularly complex. It is as important to ensure that the restructuring is successful as it is to do it as fast as possible. But I think the Argentine government recognizes the need for substantive progress in this area as much as anyone. Creditors want the restructuring completed so that they can move on. Argentina is in a similar position. Without a satisfactory outcome, new investment flows will not be forthcoming. That could have serious implications for future growth performance.
A stable macro framework, consistency in economic policy and a satisfactory debt restructuring are all vital ingredients for success. But even these are not enough. Argentina needs to press ahead urgently with structural reforms, too. If these are not addressed the prospects for a sustainable growth path are bleak.
Identifying what reforms are needed is, alas, far easier than implementing them. Perhaps the most obvious is a need to place the relationship between the centre—the federal government—and the provinces on a more sustainable footing. To this end, the one-year agreements anchoring fiscal adjustment at the level of the provinces are being replaced by longer-term arrangements. Better incentives are being introduced to encourage greater fiscal responsibility at the provincial level, both on the revenue collection side as well as on the spending side of the balance sheet. Rebalancing this relationship will be a major challenge for the Argentine government.
So, given the present political situation, will successfully resolving the problems of the energy sector. It is already becoming apparent that supply constraints pose a real risk to the economy's future growth prospects. A reliable, plentiful flow of energy is essential for any modern economy. That requires a pricing structure that takes account of the needs of consumers—and in particular avoids penalizing the very poorest users—but at the same time generates sufficient revenues for suppliers to undertake the necessary investment.
This is clearly not the case in Argentina. The pesoization of utility contracts following the 2001 devaluation, combined with the regulator's refusal to allow the utility companies to adjust their tariff structure, has sharply curtailed new investment. There has been some modest movement in the right direction: the utility companies were recently permitted to raise tariffs for some large industrial users. But this by itself is not sufficient. If the problem is not confronted now, there is a risk of further and more serious supply interruptions which will inevitably undermine growth projections.
The financial sector also suffered in the wake of the devaluation. Before the crisis, Argentina's banks were regarded as some of the soundest in Latin America. But the debt default, the asymmetric pesoization and indexation of bank balance sheets in the aftermath of the crisis badly damaged the profitability of, and confidence in, the banks. There are clear signs that both are beginning to recover. But sound banks and a well-functioning financial sector are vital ingredients of economic success. The Argentine government is working to strengthen the country's financial sector, which should eventually provide a much better cushion against future shocks.
It is also important to restore public confidence in Argentina's institutions. After the traumatic economic and social shocks of 2001 and 2002, this was badly shaken. Some judicial decisions and some of the wrangling in Congress have undermined public trust. Yet without a strong legal framework and an equally strong judiciary, progress on other fronts will inevitably be limited.
Labor market reform is also long overdue. A more flexible environment is essential if jobs are to be created on a large enough scale to tackle the country's high unemployment rate. Experience in industrial and developing countries alike has consistently shown that removing labor market rigidities is the only way to effect a lasting reduction in unemployment.
The list of structural reforms is daunting. Given the scope of Argentina's economic collapse, it could hardly be anything else. But in its economic program, the Argentine government has clearly accepted much of this analysis—I refer you, yet again, to the Letter of Intent signed last September and that published last week. The government has committed itself to implementing wide-ranging structural reforms.
And I believe the government also recognizes that the payoff from individual reforms rises sharply when these are carried out in conjunction with others. The whole is far greater than the sum of the parts.
The IMF's role in all of this is a supportive one. One of our primary tasks is crisis prevention. Every crisis is a setback, of course. But we also look on them as providing the opportunity to improve our crisis prevention work. Recent experience has taught all of us—the international financial community in its widest sense—that broad-based economic reform is critical in developing a sound macroeconomic framework for growth and poverty reduction.
Many IMF members are beginning to reap the benefits of such reforms. They aren't easy to introduce because there will always be opposition, often fierce and often from those who see their own sectoral interests at risk. Implementing what amounts to a demanding recovery program takes political leadership and courage. Sticking with it is equally challenging. But as we have seen time and again, consistency in economic policy is important. It brings credibility—and, in turn, investment flows and lower borrowing costs.
Argentina has embarked on a reform program, aimed at restoring economic stability and delivering long-term sustainable growth. As I said at the outset, we in the international financial community want the program to succeed every bit as much as the Argentines do themselves.
I would, in all candor, be happier if the government had felt able to do more, in order to reduce the program's vulnerability to shocks. I would, too, feel more confident about the outcome if Argentina showed greater conviction in the program to which it is committed.
Perhaps in this context, though, enthusiasm is less important than 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.
IMF EXTERNAL RELATIONS DEPARTMENT