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Introductory Remarks on the Role of the IMF Mission in Argentina
Anoop Singh, Director for Special Operations, IMF
Press Briefing, Buenos Aires, April 10, 2002
I greatly welcome this opportunity to meet with representatives of the media today. It provides the occasion to explain our assessment of the present situation in Argentina, present our views on the kind of overall economic program that is needed for Argentina to emerge from its current difficulties, and to tell you how we are working with the authorities toward the early adoption of such a program.
Let me, first, emphasize our clear recognition that Argentina is facing a very difficult economic and social situation. In trying to understand the full extent of the current difficulties, our mission has talked to a very wide section of the community—ranging from the private sector, the academic community, the Church, trade unions, and nongovernmental organizations—and we have listened very closely to what they have told us on the fundamental causes of the current crisis. We have also consulted with a number of academic experts overseas. Needless to say, at the same time, we have been working in very close cooperation with the federal government, and we have also met with key provincial leaders.
I give you this detailed background on what we have been doing these past few weeks to emphasize that the IMF is fully committed to helping Argentina find its way out of this crisis and to return to sustained growth. Of course, it is the government, working closely with the Argentine people, that must develop the consensus for—and implement—the kind of economic reforms that are needed at this time. Our role is to help in this process as much as we can with advice—the sharing of the experience of other crisis situations—technical assistance and, once the full program has been put together, with financial support. I should add that such an agreement with the Fund is key to unlock the wider international support that will be needed for the program, and I will have more to say on this point a little later.
Many of the persons with whom we have met impressed upon us that the severity of the current crisis reflects a deep loss of confidence of the Argentine people in their own institutions. Dealing with this situation, therefore, requires a program that is strong—and comprehensive—enough to regain this confidence.
Confidence must, first and foremost, be rebuilt within Argentina—most importantly perhaps in the banking system but, also, in other economic institutions. This is the central challenge. At the same time, we need to rebuild the confidence of the international community—the official community and the private sector—so that new resources can become available to Argentina and help minimize as much as possible the costs of dealing with the current crisis. It would be very difficult, and certainly much more burdensome on the domestic population, to attempt to resolve the present situation without the strong support of the international community. A program supported by the IMF is an essential condition to this end.
We see four major planks for a comprehensive economic program that could begin to rebuild confidence. I will talk briefly about some of the main issues involved in these core areas.
- Perhaps most important is fiscal policy. In our view, failures in fiscal policy constitute the root cause of the current crisis. Simply put, the structure of the public finances in Argentina—by that I mean the provincial governments as well as the federal government—has raised spending to a level that can no longer be financed in an orderly way. Inflationary financing from the central bank or other forms of disorderly financing—such as the issuance of provincial bills or debt default—are not sustainable alternatives. We have to do everything we can to prevent the present situation leading to high inflation. Certainly, this will be the result if the government cannot restrict its spending to the financing sources available. The present government shares this view and is working very hard to finalize a fiscal program that will avoid such an outcome.
- At the same time, given the severity of the crisis, and its impact on the poor, we have agreed with the government that every effort must be made to strengthen the social safety net for the poor. This will be essential to protect the poor as much as possible during the interim period before growth can resume. The World Bank and the IDB are taking the lead in developing specific programs.
- For the overall fiscal effort to succeed, there is no doubt that it needs to involve the provinces as well. The recent pact was a first step in this direction and now we are awaiting follow-up agreements with each province to ensure that the pact is fully implemented. Full implementation means meeting the deficit target of the pact, that is to reduce the deficit of the provinces by 60 percent with respect to 2001. It also means effectively terminating the practice by provinces of issuing paper that circulates as a money substitute—a practice that has complicated economic management, raised the threat of inflation, and undermined confidence in the public finances.
- A second plank of a comprehensive economic program is a strong monetary policy that seeks to avoid high inflation. The experience from other countries clearly suggests that, to fulfill this task, the central bank must strictly limit the growth of its own credit and establish benchmark interest rates that will provide depositors with a positive return after taking account of current inflation. The central bank is making progress toward this end, but it cannot succeed in the task unless the government's deficit is restricted in the way I have outlined above. In other words, now that the peso is floating, it is monetary policy that has to provide the anchor. A more permanent anchor will be a full fledged inflation-targeting regime—such as that adopted by other countries, including Brazil after its own difficulties in 1999—and the central bank is working to establish the conditions to move towards such a regime.
- The third plank has to be a strategy to restore confidence in the banking system. Without a well functioning banking system it will be very difficult to revive growth in Argentina. We have heard across the community the resentment against the Corralito. A sound macroeconomic policy framework based on the elements summarized above should allow confidence to return, thereby creating the conditions to lift progressively the restrictions on deposits in an orderly way. Another related problem is to recapitalize adequately the banking system—which has been subject to large losses from its holdings of government debt, as well as from the asymmetric conversion of foreign assets and liabilities into pesos. The government has initiated the process of adopting a clear strategy to address these difficulties by proposing to use its own resources—through the issuance of a compensation bond—to recapitalize banks. The next step is to create appropriate incentives to attract fresh resources from the private shareholders—domestic and foreign.
- Developing incentives that would restore the confidence of foreign investors, encourage corporate restructuring, and resolve the difficulties faced by the privatized utilities is the fourth major plank of the program. We have listened to the views of international investors and we have also looked carefully at the experiences of other countries in dealing with their external creditors and in finding a collaborative solution to economic crises. These discussions and experiences have left us with no doubt that the international community—private creditors and markets—needs to be part of the solution to revive investment and growth in Argentina.
- In this context, one key requirement is that Argentina needs to have an internationally recognized framework for the insolvency process. The current law does not provide such a framework and the international community could not be expected to support Argentina without the early adoption of a framework that provides an appropriate balance between creditor and debtor interests. The government is fully aware of this need and is working with the Congress toward amending the current law. At the same time, it will be crucial to assure private investors—both domestic and foreign—that they will be treated fairly in the resolution process for their claims on Argentina which are now in default. This is a fundamental premise of all sovereign debt restructuring and, without the faithful application of this principle, it would be very difficult to gain the confidence and support of the foreign investor community. Other legal reforms that inhibit engagement by the international community should also be undertaken as soon as possible, such as of the economic subversion law.
These are the major areas that will be part of an overall economic program to emerge from the current crisis in Argentina and to lay the basis for growth. We have been working very closely with the government to develop the specific elements in these and other areas. We hope to make much more progress during this round of discussions. After this visit, we will return to Washington and explore the international financing that might be available for the program. Meanwhile, the government will need to finalize its program in all of the above areas.
With good progress, we will return to try and finalize a program that could be supported by the international community. I should add that the other international financial institutions—the World Bank and the Inter-American Development Bank—are also working very closely with us and with the government. In this way, we are hoping to make as speedy progress as possible. I don't want to give you a firm time table at this point for the finalization of the program, but I hope I have outlined the process that is involved, the seriousness of our joint efforts, the main areas of our focus, and our firm resolve to complete the process as soon as possible.
IMF EXTERNAL RELATIONS DEPARTMENT