Journal Issue

Argentina: Staff Report for the 2017 Article IV Consultation

International Monetary Fund. Western Hemisphere Dept.
Published Date:
December 2017
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The Pitfalls of Fiscal Gradualism

1. Argentina has been engaged in a systemic transformation of its economy. The removal of foreign exchange controls, modernization of monetary policy, resolution of the dispute with bond holders and return to international capital markets, and the realignment of utility tariffs have corrected the most urgent macroeconomic imbalances. Institutions have been rebuilt and strengthened, and notable progress made in restoring integrity, transparency, and efficiency at all levels of government. These efforts have yielded significant budgetary savings and laid the foundation for stronger private sector investment in the years to come.

2. These, and other policy changes, have resulted in a steady recovery from the recession that began in mid-2015. Initially driven by a growth in public investment) and exports, the recovery is consolidating with GDP growing at an annualized pace of 2¾ percent in Q2, driven by an acceleration in private consumption and investment (Figure 1). Still, the pace of the recovery has been relatively slow compared to recent cycles, and output remains below potential. Following a contraction in early 2016, job creation has accelerated, with about 225 thousand jobs created in the twelve months to August. About 60 percent of them, however, are low income, self-employed jobs. Labor force participation has recovered somewhat, keeping unemployment at around 9 percent, but female labor force participation is low and labor market informality is stable at about 30 percent. Poverty has fallen somewhat, but remains high at around 28 percent.

Last 3 Recession Cycles

(Trough = 100, quarterly)

Sources: INDEC, Ministry of Labor, Haver Analytics, and Fund staff calculations.

1/ Salaried employment for 2009.

3. However, tensions are emerging.

  • Inflation has fallen but remains stubbornly high. After peaking at 47 percent in July last year, annual inflation slowed to 23 percent by October 2017, as the impact of the large exchange rate depreciation and tariff adjustments in 2016 dissipated (Figure 2). Despite a negative output gap, headline inflation hovered close to 1.8 percent per month since the end of last year, above the central bank’s targeted path. This has partly reflected an ongoing increase in utility tariffs (to unwind the significant subsidies built up over many years) as well as high inflation expectations (which have crept up since May). The central bank (BCRA) has responded by raising the ex-ante real policy interest rate to around 11 percent as of November.

  • The current account deficit has grown. Import growth accelerated in 2017, fueled by the exit from recession and a strong peso. A growing trade deficit and a steady decline in the service and income balances have increased the current account deficit to 3½ percent of GDP (on a 12-month basis) in Q2. This higher current account deficit has been financed mostly by debt inflows as both public and private sectors have re-leveraged.

Figure 1.Argentina: An Economy in Recovery

Sources: Instituto Nacional de Estadística y Censos (INDEC), Banco Central de la República Argentina (BCRA), Ministerio del Trabajo, and Fund staff calculations.

1/ Construction Activity Index (Grupo Construya).

2/ Data for 2017Q3 are computed as a three-month moving average through August.

Figure 2.Argentina: Inflation Remains Stubbornly High

Sources: Instituto Nacional de Estadística y Censos (INDEC), Banco Central de la República Argentina (BCRA), provincial statistical offices, private analysts, Haver Analytics, and Fund staff calculations.

Inflation Targets and Expectations

(Percent, y/y; expectations as of 10/31/2017)

Source: BCRA.

Current Account and Overall Fiscal Balances

(Percent of GDP)

Sources: BCRA, INDEC, Ministerio de Hacienda, and Fund staff calculations and estimates.

4. These developments are the direct side-effects of imbalances in the policy mix. The primary federal fiscal deficit has remained broadly unchanged in 2017. However, adjusting for the tax amnesty and the economic cycle, the structural primary federal deficit fell by ¼ percent of potential GDP in 2017 (Figure 3). At the provincial level, the primary deficit has been broadly constant this year. The fiscal deficit has been financed partly by foreign and domestic borrowing (largely through U.S. dollar or dollar-linked instruments), and partly by the central bank (albeit at a lesser level than under the previous administration). Higher interest payments have led the overall general government deficit to increase from 6 percent of GDP in 2015 to 7 percent of GDP in 2017. The high deficit and sizeable gross financing needs mean Argentina’s fiscal space is limited.

5. The gradualist fiscal strategy adopted by the authorities smoothed the impact of the needed consolidation on activity and jobs but comes with negative side effects, including:

  • Public debt. There has been a significant increase in public debt, and a high level of dollarization in both federal and provincial government liabilities. Domestic financing of the public sector has grown at a brisk pace, which may have crowded out private investment (although credit to the private sector has also accelerated over the past few months). Finally, the rapid pace of external borrowing has created a large external financing need in the coming years.

  • Inflation. The high fiscal deficit continues to be partly financed by the central bank (through advances and profit transfers amounting to 1½ percent of GDP in 2017), which has complicated the central bank’s task in bringing down inflation. The monetary impact of fiscal financing and reserve purchases has been sterilized, which has resulted in a large increase of the stock of short-term BCRA liabilities (currently at about 125 percent of the monetary base). In addition to risks of large quasi-fiscal costs, the perceived risk that this large stock could be inflated away in the future may have undermined the credibility of the disinflation effort.

  • External imbalances. The increase in foreign financing (mainly from public borrowing and, to a lesser extent, a re-leveraging of the corporate sector) and low global risk premia have resulted in upward pressure on the real exchange rate. As a result, staff judge the currency to be 10 to 25 percent overvalued. This has left the external position in 2017 moderately weaker than the level consistent with medium-term fundamentals and desirable policies (see Annex I). Further, these same forces have acted as a headwind to both FDI and domestically-funded private investment, and have worsened the net international investment position (increases in private and public debt liabilities have been only partially offset by higher central bank reserves).

Stock of Federal Debt Toward the Private Sector

(Percent of GDP)

Sources: Ministerio de Hacienda and Fund staff calculations.

Figure 3.Argentina: Addressing Fiscal Imbalances

Sources: Ministerio de Hacienda, and Fund staff calculations.

1/ Includes discretionary transfers to provinces, and excludes floating.

2/ Excludes revenues from the tax amnesty in 2016 and 2017.

3/ Percent of GDP.

4/ Percent of potential GDP.

Net Internationa l Investment Position

(Billions of U.S. dollars)

Source: INDEC.

Exchange Rate Assessment Tools
Level 2017‘Norms’REER Gap (Percent)
EBA – exchange rate, Index105.695.210.4
EBA – current account, % GDP−4.3−2.626.2
ES approach – current account, % GDP−4.3−2.923.5
Source: Fund staff estimates.Note: Based on a elasticity of current account to REER of −0.06.
Source: Fund staff estimates.Note: Based on a elasticity of current account to REER of −0.06.

Outlook and Risks

6. Over the near-term, GDP growth is expected to accelerate, inflation inertia will slowly subside, and the fiscal deficit will gradually fall. Private consumption is expected to strengthen in 2018–19 as real wages recover from the decline in 2016. The federal primary fiscal deficit is expected to fall by 2 percent of GDP by 2019 and remain relatively stable thereafter, which will stabilize the federal debt at a little above 50 percent of GDP (see Public Debt Sustainability Analysis). Provinces are projected to lower their primary deficit, as they become constrained by the spending caps in the new Fiscal Responsibility Law (sent to Congress in October). This consolidation will weigh against growth in the next two years, holding it to around 2½ percent Despite this fiscal adjustment, the imbalance in the policy mix, sizable foreign borrowing, and a continued real appreciation of the currency are likely to cause the current account deficit to deteriorate further, exceeding 4½ percent of GDP by 2022 (Annex I). As wage negotiations continue to become more forward-looking, inflation expectations should move lower, creating space for an eventual reduction in policy rates (of around 700 basis points by end-2018). High real interest rates will act as a headwind to growth but should facilitate a decline in inflation to 16½ percent by end-2018 and to single digits by 2021.

7. There are important external and domestic downside risks facing Argentina (see RAM).

  • External financing. Despite lower primary fiscal deficits, the relatively small domestic financial system means that the external financing needs of the federal government will remain high well into the medium-term (Annex II). As such, any tightening in external global financial conditions could prove disruptive. In the worst case, external financing constraints could force a stronger fiscal consolidation and lead to lower private investment, triggering a renewed recession.

  • Currency overvaluation. Continued strength in the real exchange rate could be an obstacle to a pick-up of investment, depressing growth and job creation. A more problematic risk would be if markets perceive the currency as being significantly out of line with medium-term fundamentals. This could trigger a sudden, sharp adjustment of the nominal exchange rate that would complicate efforts at disinflation and, given the dollarization of public liabilities, lead to a step increase in the public debt-to-GDP ratio.

  • Inflation inertia. Greater-than-expected inertia in both inflation and inflation expectations could necessitate a tighter monetary policy stance (i.e. higher real interest rates and a more appreciated peso) to bring inflation down to single digits. This would eat into future growth prospects.

  • Upside risks. Growth could rebound at a faster pace than projected if the strengthened mandate of the governing coalition (after the October 2017 mid-term elections) facilitates an acceleration of structural reforms.

8. Authorities’ view. The authorities had a more optimistic view on the GDP growth outlook. They stressed that most recent data point to a very strong third quarter, and that both private consumption and investment will continue at a strong pace in the future. On investment, they pointed to the extremely good prospects in construction (as the mortgage boom will stimulate an upgrade of the stock of housing supply) and in energy and transportation sectors (where PPP projects are expected to begin soon). Spending on public works is expected to flatten out, but its impact on growth will be much higher than in the past, thanks to improved governance and greater efficiency. Finally, the tax reform and labor and product market reforms are expected to generate a productivity shock that will boost potential growth. The authorities did not regard the exchange rate to be overvalued, and saw the exchange rate and external position as being consistent with Argentina’s improving fundamentals. They saw near-term prospects for inflation likely to be influenced by upcoming increases in tariffs. However, favorable base effects, together with tight monetary policy and moderate wage increases will contribute to lower inflation by end-2018.

A Smaller Public Sector and a Better Policy Mix

A. Fiscal Policies

9. General government spending is projected to remain high despite the planned fiscal adjustment by the federal and provincial governments. The expected reduction in the federal spending over the next two years would imply a decline in federal primary deficit of around 2 percent of GDP. The bulk of these savings come from lower energy and transportation subsidies. Even so, general government primary spending will still be high by regional standards and heavily concentrated in wages, pensions and social transfers. Such a high level of spending is fundamentally unsustainable, precludes a reduction of Argentina’s high and distortionary tax burden, and acts as an important impediment to investment, competitiveness, job creation, and growth.

General Government Expenditure, 2019

(Percent of GDP)

Source: Fund staff estimates.

10. A frontloaded reduction in general government spending—that targets an elimination of the primary deficit by 2019—would allow a more balanced policy mix and create space for a reduction of the tax burden. Primary current spending accelerated over the last decade (rising 14½ percentage points of GDP between 2006 and 2017). Key measures that can be taken to rationalize spending include:

  • Reducing public employment. About two thirds of the 4½ percent of GDP increase in the wage bill between 2006 and 2017 reflects greater employment at the provincial level. As a result, in 2017, Argentina’s public sector employment absorbs 2½ percent more of the labor force than the EM average. Assuming an attrition rate of 4 percent per year, a policy to replace only half of those employees that are exiting could reduce the wage bill from 12½ percent of GDP in 2017 to about 9 percent in 2027 (i.e., close to 2006 levels). A more frontloaded reduction strategy, based on hiring freeze over the next two years, would reduce the wage bill by 1 percent of GDP by 2019.

  • Addressing pension imbalances. There is a need to restore the long-run sustainability of the pension system (see 2016 Article IV). To protect the elderly poor, the government should provide a means-tested, non-contributory, social transfer that is financed by general revenues. This would be complemented with a contributory pension scheme, financed from payroll taxes, but without the existing structure of special regimes and exemption (Box 1). More immediate savings could be achieved by indexing the existing defined contribution benefits to forward inflation. Together with increasing the statutory retirement age for women from 60 to 65 years, this would reduce federal pension spending by 2 percent of GDP. If similar measures were adopted by provinces, general government spending could fall an additional ½ percent of GDP by 2027.

  • Rationalizing social assistance spending. Social protection in Argentina relies on multiple programs offered both at national and provincial levels by several different institutions. Integrating and coordinating the provision of services (for example, by introducing a unique social registry, see OECD 2017) could reduce duplication, improve targeting, and lower administrative costs.1 Indexing benefits to future inflation could reduce spending on social programs by around ½ percent of GDP by 2027.

  • Reducing other current spending. Recent plans to better coordinate goods and services purchases across all levels of public administration, including by making better use of information technology, are likely to generate cost savings. There is scope to cut spending on goods and services and provincial transfers to municipalities as well as lower federal transfers to public enterprises. Bringing back this expenditure to 2006 levels (of about 5 percent of GDP) would require savings of 2½ percent of GDP. A more frontloaded reduction (that implies reducing this expenditure by about 4 percent in real terms over the next two years) would allow savings of about 1½ percent of GDP by 2019.

Change in General Government Primary Spending, 2006–17

(Percent of GDP)

Source: Fund staff calculations.

General Government Wage Bill and Contributions to the Increase Since 2006

(Percent of GDP)

Sources: MECON, ASAP, and Fund staff calculations.

Box 1.A Two-Pillar Pension System for Argentina

Argentina’s pension system is actuarially unbalanced reflecting population aging, high replacement rates, low retirement age for women, and an indexation formula that increases benefits above inflation (see 2016 Selected Issue Papers). In addition, the system has only a weak link between contributions and benefits: those who contribute for less than 30 years receive a basic pension equivalent of 80 percent of the minimum contributory pension, while those who contributed 30 years are entitled at least to minimum contributory pension, even if they contributed very small amounts. The current system acts as a disincentive to work in the formal sector, as contributions are closer to a “pure tax”, and presents significant horizontal inequities.

A two-pillar option. A more efficient, equitable, and sustainable pension system could be based instead on:

A safety-net benefit, extended to elderly of age 65 and above, funded by general revenues, and means tested. For example, the benefit could start from the basic pension (which is 25 percent of average wage) but be phased out for retirees with income (capital, rental and labor income) that is more than 70 percent of the average wage. Such a scheme would provide a safety net for elderly individuals currently in the bottom three deciles of the wage distribution. Means-testing could also be designed to consider wealth as well as income.

A mandatory contribution-based pension system, with contribution rates set at 10 percent for both employers and employees (see Chapter 1 of the Selected Issues Paper) and a retirement age of 65 for all. There are a few options that could include:

  • a) A Notional Defined Contribution (NDC) pay-as-you-go system. Social security contributions (excluding those that cover health insurance and obras sociales) would be recorded in a notional account, which grows based on an index that could be linked to nominal GDP growth (as in Italy), or per capita wage growth (as in Sweden). At retirement, beneficiaries would receive an actuarially balanced annuity from the proceeds contained in their notional account. There could be a cap on both contributions and the size of the notional account.

  • b) A mandatory fully-funded defined contribution system. Social security contributions would accumulate in an individual saving accounts, managed by a private fund chosen by the worker. At retirement, the full amount saved can be drawn on tax-free or converted into a fixed, or variable, annuity (as in Australia, Chile, and Mexico).

Steady-state cost. We approximate the budgetary cost of a safety-net benefit and a NDC plan as follows:

Safety-net Based on the current basic pension, the first pillar could cost around 1.5 percent of GDP.

NDC plan: A 20 percent contribution rate would yield around 4.8 percent of GDP in notional contributions. Assuming that the notional accounts grow with an index linked to nominal GDP growth, adjusting for current number of contributors, drawing on the United Nations’ demographic projections, using the distribution of wages in the Household Survey, and assuming the contribution densities estimated in Apella (2010)1 pension spending under the NDC system is estimated at about 4.3 percent of GDP. In steady state, the new system would cost 2 percent of GDP less than the current (2018) pension system.

Total Savings (percent of GDP)
Net cost of current system3.1
Total pension spending (2018)10.1
Contributions (2018)7.0
Net cost of two-pillar system1.0
Safety-net benefit1.5
Contributions to NDC4.8
Total net saving2.1
1/ Apella, I., 2010, Historias Laborales y Frequencia de Contribuciones a la Seguridad Social en Argentina, Asociacion Argentina de Economia Politica, November.

11. It will be important that the proposed shift in the policy mix is accompanied by measures to mitigate the effects on lower income households. With one third of the Argentina’s population in poverty, it is essential to mitigate the impact on the poorest from the needed fiscal adjustment. While much of the improvement in poverty outturns will come from more sustained and stronger growth and the creation of good quality jobs, the simultaneous adoption of a few policy measures will help:

  • A subsidized tariff to protect the poor from the planned elimination of subsidies (the tarifa social introduced last year by the authorities, which reduces the cost of gas, water, electricity and transportation for the most vulnerable segments of the Argentine population).

  • Protecting the basic pension in real terms. It is notable that, at 7½ percent, the poverty rate for elderly is much lower than for the whole population (as a result of the significant increases in pensions over the last several years).

  • Reducing payroll taxes and expanding the coverage of personal income taxes since currently only the top 10 percent of the income distribution pays the personal income tax (see Chapter 1 of the Selected Issue Papers).

  • Phasing out family allowances more rapidly (so that they are fully eliminated at the average wage, as opposed to 1.5 times the average wage as in the current system).

  • Introducing a cash transfer to those in the bottom decile of the income distribution (equivalent to about 50 percent of the current minimum wage) (see Chapter 1 of the Selected Issues Paper).

  • Lowering inflation, since the inflation tax is extremely regressive.

Poverty Rate


Sources: SEDLAC (CEDLAS and The World Bank), INDEC, and country authorities.

1/ Mexico (2014); 2/ Argentina (2017Q2), Brazil (2015), and Chile (2015).

Incidence of Selected Taxes over Labor Income

(Percent, relative to gross wage with inflation at 23 percent)

Source: BCRA.

12. Staff simulations suggest that the proposed fiscal path would lower real interest rates, reduce the external financing requirement, and lessen appreciation pressures on the peso (Figure 4). The pace of disinflation would be the same—as the economic costs of a tighter fiscal policy stance would be balanced by lower real interest rates and a less appreciated real exchange rate—and the debt-to-GDP would be placed firmly on a downward path.

Figure 4.Argentina: Baseline and Illustrative Scenario 1/

Source: IMF staff estimates.

1/ The Frontloaded spending and tax cuts scenario includes freezing public sector hiring in 2018-19; indexing social transfers and pensions to targeted inflation; lower spending on goods and services, transfers to provinces, and state-owned enterprises; phasing out (over a three-year period) the financial transaction tax and the provincial gross turnover tax (to be replaced by a sale tax and higher property taxes); reducing the corporate income tax rate to 28 percent; and a reform of labor income taxation as discussed in Box 3.

13. The new Fiscal Pact with provinces encourages fiscal discipline and addresses some long-standing distortions. Provinces are responsible for about 40 percent of general government spending and, like the federal government, their footprint has increased markedly in the past several years. As a first step, the proposed Fiscal Responsibility Law will help provide a framework to contain spending, as the bill caps the growth of current primary spending in real terms (although with a few exemptions), contains provincial hiring to population growth, prohibits an increase in spending during the last six months of government, and includes a commitment to not raising the tax burden and to create countercyclical fiscal funds. The new Fiscal Pact with provinces, signed in mid-November, also commits provinces to gradually (over a 5-year period) reduce the rate of the gross turnover tax, a highly distortionary cascading tax, eventually eliminating it for a few sectors; settles the conflict between the federal government and provinces related to the sharing of income tax revenues, eliminating contingent liabilities for the federal government that the authorities estimate to be in the order of US$40 billion; and commits provinces to extend the Fiscal Responsibility Law to municipalities.

14. The institutional framework for fiscal policy needs further strengthening, including by:

  • Enforcement of the Fiscal Responsibility Law. To be effective, the law needs stronger enforcement mechanisms. The proposed framework relies on preventing provinces from issuing debt and imposing cuts in discretionary transfers in the case of non-compliance. One possibility would be to automatically exclude provinces in violation of the law from receiving discretionary transfers from the federal government. The law should also define more clearly what types of provincial spending are subject to caps, and the exemptions to the spending limits embedded in the law should be narrowed.

  • Introducing a medium-term debt target. The Fiscal Responsibility Law should have a clear medium-term fiscal anchor, which could be a debt-to-GDP ratio for the federal government and a debt-to-total revenue ratio for provinces. There should be a direct link between the chosen anchor and the operational targets of the FRL, limited and transparent escape clauses from targets, and a requirement that the escape clause lead only to temporary deviations from the medium-term debt path (i.e., that deficit overruns should be recouped over time).

  • Budget framework. The federal government could usefully provide budget forecasts for the next three years (as mandated by the current budgeting law), including details on the policies that are expected to achieve the chosen medium-term goals. Budget documents should include an analysis of fiscal risks, which will prove particularly useful if the government achieves its goals of increasing the use of PPP projects and reforming public pensions.

  • An operationally independent Congressional Budget Office. This new office was created at end-2016 to analyze and evaluate the fiscal impact of proposed legislation. It will be important to ensure the office is autonomous, adequately staffed, and has full operational independence—including over its budget—to protect the office’s assessments from political influence.

15. Authorities’ view. The authorities noted that rationalizing spending is a key policy objective but it will need to proceed at a measured pace. They emphasized that, net of one-off revenue, the primary deficit of the general government—including provinces—is about to decline by 1.5 percent of GDP in 2017, and that primary expenditure has decreased by about 2 percent of GDP since 2015, with taxes being cut by an equivalent amount. Improved transparency and better procurement processes have resulted in cost savings and more efficient spending on public works. Federal employment fell by 4 percent in 2017, but there is space to gradually rationalize the wage bill further, especially in provinces. Efficiency gains will be pursued at all levels of administration through an analysis of the optimal allocation of resources, and cost savings are expected from having ANSES administer the payment of all social programs. Also, the authorities are planning to send a bill to Congress to change the indexation formula for pensions and social transfers linking them to inflation only, making them more sustainable and ensuring stable real income to the recipients. A more comprehensive reform of the pension system will be proposed in 2019. While mindful of the budget constraint, the authorities noted that about 60 percent of general government expenditure is in wages and social transfers, which prevents a fast adjustment of the fiscal deficit. A more realistic and sustainable scenario is one where primary spending is kept flat in real terms, in line with the proposed new Fiscal Responsibility Law. If growth can be sustained at 3½ percent, this will reduce general government expenditure from about 40 percent of GDP in 2017 to 32 percent by 2023, which would fund a reduction of the tax burden (of about 3 percent of GDP) and bring the primary deficit to zero.

B. Monetary and Exchange Rate Policy

16. Reducing inflation remains a key priority for the government and doing so will require a continued restrictive monetary stance. Even though real ex-ante short-term interest rates are high (Figure 5), the pace of disinflation is relatively slow due to lingering de-facto inertia in wage formation, a weak monetary transmission mechanism, and second round effects from the tariff adjustment. A faster pace of disinflation would impose a significant cost on growth and employment, and would be not advisable. However, as discussed above, once a larger reduction in the fiscal deficit has begun, this would facilitate a faster reduction in real interest rates, mitigating the growth impact of the fiscal consolidation while maintaining inflation on a steady (albeit slower-than-targeted) downward path. A faster pace of fiscal consolidation would also allow the BCRA to eliminate monetary financing of the fiscal deficit. Once this happens, the institutional structure should be changed to prohibit future central bank financing of the government. This would help strengthen the credibility of the BCRA’s inflation targeting framework and lower inflation expectations.

Figure 5.Argentina: The Monetary Policy Stance Has Tightened

Sources: Banco Central de la República Argentina (BCRA) and IMF staff calculations.

17. Sustained FX reserve accumulation should be deferred until the disinflation process is more fully entrenched. The BCRA intends to increase FX reserves from about 8¾ to 15 percent of GDP over the next few years, to bring Argentina’s reserve coverage closer to other countries in the region. If this target was achieved by end-2019, this will take FX reserves to 165 percent of the IMF’s reserve adequacy metric (from the current 115 percent). Increasing FX reserves is a necessary objective for a country traditionally exposed to bouts of external volatility like Argentina. There is also merit to BCRA’s intention to use limited FX intervention to prevent disorderly market conditions and smooth excessively rapid movements in the exchange rate. However, a sustained increase in FX reserves—either through market purchases or absorbing the FX proceeds of government external borrowing—may weaken the nominal exchange rate and slow the decline in inflation. As such, at this point, the BCRA should prioritize its inflation objectives, with reserve accumulation goals subordinated to achieving a more entrenched path for disinflation.

FX Reserves, October 2017 1/

(Percent of GDP)

Source: Fund staff calculations.

Note: 1/ Data for GDP refer to 2016Q3–2017Q2.

18. Authorities’ view. The authorities stressed that they remain committed to maintaining a tight monetary policy stance in order to achieve their inflation targets. In their diagnosis, the loosening of the policy stance in the first quarter of 2017 proved to be premature, leading to high inflation and a rise in inflation expectations. The effects of the subsequent monetary tightening may take time to materialize, especially given excess liquidity in the financial system after the inflows from the tax amnesty. Tariff adjustments continue posing headwinds to disinflation. The BCRA does not have a specific timeline to achieve the stated FX reserves target of 15 percent of GDP and will continue to build reserves in a balanced way. The authorities emphasized that disinflation remains the primary objective. As reserve rise, the BCRA may eventually start selling some of the foreign exchange obtained from external public debt issuances (the BCRA acts as the financial agent for the government). The BCRA remains committed to a flexible exchange rate regime.

The Urgency of Supply–Side Reforms

19. Achieving a stronger, sustained, and equitable growth path will hinge on boosting private investment and raising productivity growth. Decades of frequent crises and recurrent government interventions in the economy have resulted in significant macroeconomic volatility, a premium for policy risk, and low levels of both investment and potential growth. Argentina’s capital-labor and capital-output ratios are well below the EM median, and the infrastructure gap is particularly severe (especially in the transportation and energy sectors). Argentina also has to contend with declining labor force participation (due to demographics) and a particularly low participation rate for women and the young. Finally, average labor productivity growth since 1980 has been close to zero (versus an EM average of 2½ percent).

Capital Deepening

Sources: Penn World Table, WEO, and Fund staff calculations.

20. There is significant space to undertake supply side reforms to strengthen private investment and productivity. Business conditions have improved under the new government but a better tax system and more effective labor and product market regulations are urgently needed. If tax, labor and product market (including trade) reforms were implemented that close half the gap with the EM average in each area, potential growth could be increased by 1½ percent (Box 2). Productivity boosting supply-side reforms would also reduce currency overvaluation and help mitigate inflationary pressures.

Female and Male Labor Force Participation Rate, 2014


Source: World Bank WDI.

A. A Less Distortionary Tax System

21. Taxes in Argentina are high and distortionary. Taxation of labor income in Argentina is one of the highest in Latin America and close to the OECD average. The tax wedge on labor income (defined as the difference between the gross wage and take-home pay) arises mostly from social security contributions, given that the personal income tax covers only the top 10 percent of the income distribution (due to a minimum threshold that is twice the average wage). Lowering the tax wedge on labor would help strengthen incentives to work and discourage informal employment, particularly for low-income workers and second earners. The corporate tax is high (the statutory rate is 35 percent compared to an average for the region of 28 percent). The financial transaction tax (levied on checking and saving accounts) and the gross turnover tax (a cascading provincial sales tax)—which together account for 5½ percent of GDP in revenues—are both highly distortionary. There is a complex system of VAT exemptions and deductions, and Argentina has low property taxes compared with other countries in the region.

Box 2.Impact of Structural Reforms in Argentina: A Supply-Side Approach1

The long-term potential impact of structural reforms on Argentina’s growth is estimated using a supply-side framework. Following Égert and Gal (2016)2, we assess the role of reforms (denoted z in the equation below) in boosting GDP per capita through their impact on capital accumulation, labor utilization, and an estimated measure of technical efficiency. The sample contains 32 EMs (including seven Latin American economies) and 27 advanced economies with data ranging from 1980 to 2016.

The paper finds that structural reforms can have a significant impact on long-term GDP growth through all three supply-side channels. The largest effect of structural reforms generally comes through the productivity/efficiency channel. Regulatory changes that promote competition and ease labor market regulations matter the most. Pro-competition regulation together with lower tax rates on income and payroll appears to improve labor utilization. Lower costs of starting a business and trade tariffs are especially important for capital accumulation.

Structural reforms could have substantial effects on Argentina’s long-term GDP growth. Policies to promote capital and labor utilization offer the largest payoffs, given the size of the gaps accumulated in both areas. Reducing trade tariffs and payroll taxes to close half the gap with countries on the frontier could add about 0.1 percentage points to real GDP growth per year, while an ambitious reform effort to improve Argentina’s business regulatory environment could boost real GDP growth by about 1 percent per year. While there is large uncertainty around these estimates, OECD (2017)3 finds that if Argentina were to implement a wide range of structural reform to converge to the OECD average over a ten-year period, the annual growth rate could increase by 1½ percent.

Structural Reforms and GDP Impact

Source: IMF staff estimates.

For each policy variable, the chart shows Argentina’s distance from the frontier and the estimated increase in annual growth rate of real GDP if half of the distance is closed in twenty years.

1 See Lusinyan L., 2017, Assessing the Impact of Structural Reforms through a Supply-side Framework: The Case of Argentina, Chapter 2 of the Selected Issues Paper.2 Égert, B., and P. Gal, 2016, The Quantification of Structural Reforms in OECD Countries: A New Framework, OECD ECO/WKP(2016).3 OECD, 2017, OECD Economic Surveys: Argentina 2017: Multi-dimensional Economic Survey, OECD Publishing, Paris.

Total Tax Wedge, 2013

(Percent of labor cost)

Sources: Organization for Economic Cooperation and Development, and Fund staff calculations.

22. The authorities have proposed a tax reform to address many of these issues. A bill was sent to Congress in November that improves Argentina’s tax system along several dimensions and phases in a series of changes over a five-year horizon:

  • Reducing the tax burden on investment. The reform reduces the statutory corporate tax rate from 35 to 25 percent for reinvested earnings and accelerates the reimbursement of VAT on investment. Combined with a proposal to revalue the value of assets in line with past inflation, the reform would reduce the tax burden on capital closer to the regional average.

  • Lowering the marginal tax rate on labor income for low and middle-income earners. The reform transitions over the next five years to a system that exempts employers from paying social security contributions on the first 12,000 pesos of the monthly wage, introduces a single contribution rate of 19.5 percent for all employers, and removes the existing income cap on employee contributions. The tax wedge on labor income would decline, on average, from 27 to 19 percent.

  • Reducing cascading taxes. The reform allows the full deductibility of the financial transaction tax from income taxes. The new fiscal pact with provinces envisages (within five years) reducing the gross turnover tax. The City and the Province of Buenos Aires have already announced their intention to reduce the rate of the turnover tax and increase property taxes to help cover part of the revenue losses.

  • Taxing capital income and carbon. The reform introduces a tax on financial income above a certain threshold (Argentina is one of few countries in the region without any tax on financial income earned by individuals), a tax on capital gains from the sale of real estate properties, and a carbon tax.

Staff estimate that the revenue loss from the government’s reform, after five years, will be about 3¾ percent of GDP (1½ percent from the reduction of the gross turnover tax and 2¼ percent from the other measures). Caution is warranted in relying on uncertain growth effects to offset the revenue losses from the tax reform.

23. The authorities’ proposed tax reform is a good step forward to overhaul Argentina’s inefficient tax system. The proposal gradually lowers the effective tax rate on labor income for low-income workers, increases the progressivity of the system, and reduces the disincentive to formal employment. However, the reform could go even further and lower the payroll tax rate while expanding the coverage of the personal income tax to bring at least the top quintile of the income distribution into the tax system (Box 3). The gradual reduction of the statutory tax rate for reinvested corporate earnings should help support investment, but more generous depreciation allowances (or even expensing of new investments) and more generous provisions for carrying forward losses would further reduce the effective tax on capital. The deductibility of the financial transaction tax will help lessen distortions that hold back financial deepening and financial inclusion, but a full elimination of the tax would be preferable. Eliminating the gross turnover tax will support investment, growth, and job creation.

24. Authorities’ view. The authorities estimate that, excluding the change in the gross turnover tax, the tax reform will have an overall direct cost of 1.5 percent of GDP by 2022. However, they also estimate that it will boost GDP growth by 0.5 percent per year, and that the additional revenues from stronger economic activity will help reduce the overall cost to just 0.3 percent of GDP for the federal government (whereas provinces would benefit by an aggregate 0.6 percent of GDP). The gradual elimination of the gross turnover tax at the provincial level is estimated to cost 1.5 percent of GDP in 5 years. The authorities were confident that the spending caps included in the proposed Fiscal Responsibility Law will give provinces enough space to absorb the revenue losses and eliminate the fiscal deficit in the next few years.

B. A More Flexible Labor Market

25. Argentina has relatively rigid labor market institutions and regulations. OECD indicators suggest Argentina has more inflexible labor market regulations than both Latin America and OECD averages. The main shortcomings include high termination costs, complex procedures for collective dismissals, and restrictive conditions for temporary employment (including for part-time work and apprenticeships). Collective bargaining is also an issue—it takes place at the sectoral level and covers about 70 percent of workers (even though only 30 percent of workers are unionized). Pressures to modernize Argentina’s labor market institutions have increased given recent reforms in Brazil (Argentina’s principal trading partner) which will lower its unit labor costs.

Employment Protection Legislation Index, 2014 1/

Sources: OECD Employment Protection Database and Fund staff calculations.

1/ 2013 for CHL and MEX.

Unit Labor Cost

(Current U.S. dollars; 2009=100)

Sources: INDEC, BCRA, BCB, and Fund staff estimates.

Box 3.Reducing Argentina’s Tax Wedge1

Estimating the tax wedge. Using the Household Survey, the social security contribution rate average 21 percent of the gross wage for employers and 15 percent for employees (which includes 6 and 3 percent respectively for contributions to obras sociales). However, there is a lot of heterogeneity, with numerous variations across sectors and regions. Since only high wage workers pay personal income taxes, the system means that (i) labor is effectively taxed at the flat rate of 45 percent of the gross wage for most of the working population, and (ii) taxes average 27 percent of the cost of labor. The net cost of formalizing a labor relation is close to 20 percent of the gross wage for a second earner, and is close to 23 percent for workers in the first decile of the wage distribution.

A reform proposal. A package of measures would reduce disincentives to work, lower informality, and increase competitiveness:

• Lowering social security contribution rates for both the employees and the employers to 10 percent of the gross wage (with an additional 9 percent combined rate for obras sociales);

• Eliminating all sectoral and location-based discounts to social contributions;

• Increasing the coverage of the PIT to the top two deciles of the income distribution, by lowering deductions for non-taxable income;

• Phasing out family allowances at the average wage (instead of at 1.5 times the average wage); and

• Providing income transfers of about fifty percent of the minimum wage (salario minimo vital y movil) to all workers in the bottom 10 percent of the wage distribution.

Effects. The proposed reform would lower the average tax wedge by 9 percentage points and bring it to zero for the bottom decile of wage-earners. The net cost of formalizing labor relations would fall by 13 percentage points for low wage earners and by 8 percentage points for second earners. The average payroll tax rate for employers would fall by 6 percentage points. The reform would have a net cost of 0.3 percent of GDP, would increase formal employment by 3.4 percent, and raise long-term output by 1.2 percent. A dynamic costing, incorporating supply-side effect to growth, finds the reform to be broadly revenue neutral.

1 See Dudine P., Fenochietto R., Malta V., and Mendes Tavares M., 2017, How to Reduce Argentina’s Tax Wedge, Chapter 1 of the Selected Issues Paper.

26. A comprehensive reform of labor market institutions is needed. The authorities are already working—within sector-specific wage agreements—to create more flexible working conditions, reduce absenteeism, and provide more on-the-job training. Beyond this, legislative changes should focus on: (i) streamlining dismissal procedures and reducing uncertainty regarding lay-off costs (ii) lowering the level of required severance payments; (iii) simplifying collective dismissal procedures; (iv) facilitating the use of temporary contracts (including apprenticeships) and part-time work arrangements; (v) limiting the extension of coverage of collective bargaining agreements beyond the direct signatories; and (vi) offer a wider use of opt-out clauses from collective bargaining (rather than the current presumption that the agreement would cover all firms in a particular sector independently on the degree of unionization). In addition, the current level of the minimum wage is likely to be an incentive to work in the informal sector (it is currently 45 percent of the median wage and covers about one third of the labor force, and about half of informal workers). Indexing the minimum wage to targeted inflation would allow for a better balance between encouraging workers to enter the formal labor force while still protecting the poor.

27. Lower taxation of labor income and better labor market institutions will help lessen informality and increase female labor force participation. In 2016, informal employment accounted for between 30 and 40 percent of workers (see Chapter 3 of the Selected Issues Paper). Informality in Argentina disproportionately affects the undereducated and the young (both of which are at the bottom of the income distribution) and women (creating a gender bias in the labor market). Lower taxes and greater labor market flexibility can help reduce informality and, in doing so, reduce poverty and increase female labor force participation (Box 4). Changes in labor taxation should particularly focus on eliminating the tax wedge for second earners, removing an important obstacle for women’s participation in formal labor markets. Easing restrictions on temporary employment would facilitate access to labor markets, particularly for young and female workers. There is also significant scope to improve active labor market policies, especially training, job search assistance, and education programs (perhaps as a condition for receiving existing cash transfers).

Informality Rate

(Share of workers in informal jobs) 1/

Citation: 2017, 409; 10.5089/9781484335741.002.A001

Sources: SEDLAC and World Bank WDI.

1/ Salaried workers in a small firm, a non-professional self-employed, or a zero-income worker. 2016 for ARG, BRZ, CHL, COL, MEX; 2014 for PER and URY.

2/ Unregistered and/or small-scale private firms (street vendors, taxi drivers and home-base workers are considered as firms). Agricultural, and related activities and volunteer services are excluded. Last observation per country (2009–15).

28. Authorities’ view. The authorities said that they were considering a series of changes that would reduce informality and foster job creation. These include a “labor amnesty”, that exempts firms that formalize unregistered workers from paying fines and past obligations to the social security administration. In order to reduce the risk of litigation related to dismissal of workers, the penalties that can be added to severance payments ((for any violation of labor contracts) would be reduced and directed to the social security system, rather than the employees. The authorities are also considering introducing sectoral severance funds, to which firms could choose to participate in order to guarantee the immediate availability of funds for severance payments. Other changes under consideration include the introduction of apprentiship contracts that can last up to one year (the current maximum is three months); greater flexibility for workers with children under the age of four; longer paternity leave; and an extended unemployment insurance for cases of productive restructuring. A bill with these measures was sent to Congress in mid-November.

Box 4.Gender Bias in Argentina’s Labor Market1

Argentina’ labor market is characterized by gender inequality along three main dimensions:

Low female labor force participation rate. Female labor force participation rate is lower than most other Latin American countries, and the gap between male and female participation has been unchanged since the early 2000s.

Women are more likely to work in the informal sector. According to the Household Survey, in 2017, 39 percent of the women in the labor force work in the informal sector (versus 34 percent for men). Informal jobs are characterized by lower earnings, poor employment conditions, lack of protection, compulsory overtime or extra shifts, lay-offs without notice or compensation, unsafe working conditions and the absence of social benefits, such as health insurance, sick pay, and maternity leave. The Household Survey shows that hourly pre-tax wages are on average 50 percent lower in the informal sector than in the formal sector, which represents one of the largest gaps among emerging economies (OECD, 2015c).

A high wage gender gap. The overall gender wage gap is 24 percent in Argentina. This gap can reflect different working conditions and job characteristics between genders. However, after controlling for a series of observable individual and job characteristics (such as age, education, sectors, location, and occupation), a 14 percent wage gender gap remains. For workers in the informal sector, the wage gender gap is much higher at 27.5 percent (after incorporating the same set of controls).

To analyze the impact of reforms on economic growth, income inequality, and female labor force participation, staff use a dynamic general equilibrium model with heterogeneous agents. The policies considered are (i) a reduction of the tax wedge on labor income as proposed by staff (Box 3) (ii) measures that reduce wage discrimination against women, and (iii) a subsidy to childcare to low- and mid-income formal female workers, to encourage participation. The results suggest that all these measures would increase female labor force participation in the formal sector and boost long-term GDP (by 12 percent and 1 percent, respectively, in the case of a lower tax wedge).

1 See L Kolovich, V. Malta, M. Mendes Tavares, 2017, Gender Bias in Argentina’s Labor Market, Chapter 4 of the Selected Issues Paper.

C. Better Product Market Regulations

29. There is a need to reduce barriers to trade and foreign investment. Argentina continues to maintain significant barriers to trade (in the form of both tariff and non-tariff barriers) and to foreign investment (including through the discriminatory treatment of foreign suppliers in various sectors). Import tariffs are nearly three times higher than the EM average (and around seven times greater if non-tariff measures are added). Although import licensing has been simplified and made less discretionary, about 1,600 products remain subject to import licenses. Argentina’s membership in Mercosur constrains its ability to unilaterally lower tariffs but, even within those constraints, there is still scope to: (i) reduce the average level and dispersion of import tariffs; (ii) further scale back non-automatic import licensing requirements to cover a minimum of goods (for national security or public safety reasons); and (iii) work within Mercosur to negotiate a broader reduction in barriers to trade.

30. Reforms should remove entry barriers and product market regulations that restrict competition and investment. Argentina underperforms most of its peers in nearly all dimensions of product market regulation. Recent assessments from the OECD (2017) and the World Bank (forthcoming) identify significant constraints to competition from various forms of state controls, including through regulatory protection of state-owned enterprises and private sector incumbents as well as residual forms of price controls.2 These constraints should be quickly phased out, and barriers that limit market entry should be eliminated. Passage of the draft Competition Law (in Congress since last year) would improve the framework and give more autonomy and powers to the Competition Authority.

Restrictiveness of Product Market Regulations 1/

(Index from 0=least restrictive to 6=most restrictive)

Source: OECD Product Market Regulation Database.

Note: 1/ Data are for 2013 or last available year; data for Argentina are preliminary and refer to 2016.

31. Authorities’ view. The authorities consider reducing red tape and fostering competition essential to increase productivity. They noted that a few measures should bear fruit soon, including the Entrepreneurship Law (that allows firm to be set up in only one day), and a one-stop mechanism that should reduce administrative requirements on imports and exports (Ventana Unica de Comercio Exterior). A Secretariat of Productive Simplification will be created, and further measures will be taken to digitalize public administration and make various authorizations automatic, including through a “single window” concept. Noting that Argentina has trade agreements with only 9 percent of the world GDP (against Chile’s 90 percent), the authorities emphasize the importance of integrating the economy in global value chains and advancing on EU-Mercosur trade agreement. They see the economic recovery as an opportunity to gradually (unilaterally within Mercosur) reduce trade tariffs and non-automatic import licenses. The authorities said they are focusing on cartel investigation, especially in public procurement, and are confident the Competition Law will be approved soon.

D. A Stronger and More Inclusive Financial Sector

32. A deeper, more developed system of financial intermediation would support capital formation, growth, and financial inclusion. Argentina’s financial system is small, with the size of bank credit to the private sector and level of stock market capitalization well below other Latin American countries. Policies are needed to better intermediate savings to productive investments including by developing bond and equity finance markets. One positive step would be to pass the Capital Markets Law (sent to Congress last year), which would modernize the capital market regulatory framework, improve corporate governance, widen the supply of financial assets, and promote the development of domestic institutional investors. There is also a large potential to increase financial inclusion by extending banking services to a greater share of the population (less than 50 percent of the population has access to a bank account—a much lower percentage than in other Latin American countries).

Financial Development

(Percent of GDP, 2015)

Source: Global Financial Development Database.

1/ Argentina (2016).

33. As the domestic financial system expands, there will need to be careful attention to ensuring systemic financial stability risks are contained. In 2017, credit growth has accelerated sharply, reflecting inflows into the domestic financial system from the 2016 tax amnesty (almost 20 percent of GDP) and policy measures to develop the financial system (including the introduction of an inflation-indexed accounting unit for credit contracts that has supported development of the market for mortgages). With inflation falling, banks are planning to further expand credit volumes to maintain their margins and returns on capital, necessitating an expansion in their deposit base. The banking sector is well capitalized and liquid, but vigilance will be needed to ensure that asset quality remains high as credit grows. Progress has been made on a few 2013 FSAP recommendations—including achieving full compliance with Basel III standards—but it would be important to continue strengthening financial supervision framework and tools.3 Stress testing procedures should be improved, with the BCRA better reconciling bottom-up and top-down stress tests. Data collection and analysis should be enhanced (particularly on real estate transactions, cross-border activities, and non-bank financial institutions), and the coordination across sectoral regulators and ministries needs to be strengthened, under the leadership of the BCRA.

Real Private Credit Growth

(Percent, y/y)

Source: BCRA.

1/ Credit to corporates.

34. Authorities’ view. The authorities consider financial deepening and inclusion a key policy objective. They are confident that the new Capital Market Law will be approved by end- 2017. Credit growth is expected to continue next year but to slow in the future, as excess liquidity wanes (the subsidized credit line to small and medium enterprises will be phased out next year, in line with FSAP recommendations). Banks have tight loan-to-value and debt-to-income ratios, and are lending mainly to their own existing clients and for the purchase of first homes. Moreover, although mortgages are growing rapidly, mortgage-to-GDP ratio remains well below historical peaks. The establishment of a financial inclusion committee at the inter-ministerial level will give impetus to policies that foster access to banking and financial services. The committee will look at experiences of other countries which have significantly increased access to the banking system. A positive role is expected to be played by public banks (that have stepped up the provision of micro credits) and the introduction of a new financial instrument (Obligación Negociable Simple Garantizada) that should make it easier for small and medium enterprises to access capital markets.

E. Fighting Corruption

35. The authorities should continue strengthening the anti-corruption regime, focusing on its effective implementation and institutional framework. Important progress has been made since 2016 in this area, including on strengthening the legal framework, improving accountability and transparency standards for public procurement, and empowering anti-corruption and anti-money laundering institutions (Box 5). Going forward, fighting corruption and strengthening governance will require that the new laws and standards are effectively enforced, particularly by strengthening prosecutorial and judicial proceedings. The Anti-Corruption Office (ACO) needs to be given autonomy and financial independence. In addition, it would be important to further improve the financial disclosure regime (to include information about ultimate beneficial owner and assets held abroad, and increase information sharing from the judicial and legislative branches) and to approve the asset recovery law that is currently in Congress.

36. Authorities’ view. The authorities stressed that fighting corruption, increasing transparency, and strengthening integrity are high priorities. To this end, they continue working on several fronts, including on: (i) a new public integrity law, which will give autonomy and power to the ACO; (ii) a roadmap to preempt collusion and corruption, including through a high-level hotline for the newly launched PPP program; (iii) strengthening corporate governance in about 40 state-owned enterprises, with the first guidelines expected to be presented in February 2018; (iv) a whistle-blower legislation; and (v) reforming the financial disclosure regime. The authorities attributed low level of implementation of the new laws (including of the Law of the Repentant) to the need for better training of prosecutors and judges, better enforcement protocols, and a reform of the Penal Code.

Box 5.Anti-Corruption and Integrity Policies in Argentina

Argentina is perceived as a country with relatively high levels of corruption, inefficient public administration, and high degree of favoritism in decisions of government officials (Global Competitiveness Index, WEF).

Over the past two years, efforts to strengthen integrity and transparency and fight corruption in Argentina included:

• Passage of the Law of the Repentant (Ley del Arrepentido), which expands plea bargaining in corruption cases, and the Law on Access to Public Information (Ley de Acceso a la Informatión Pública) aimed at promoting transparency.

• Passage of the Corporate Liability Bill (Ley de Responsabilidad Penal de las Personas Jurtdicas) making corporates liable for corruption crimes, including bribery of local public officials (in line with the OECD Anti-Bribery Convention).

• Sending a bill to Congress to facilitate the recovery of assets in cases of corruption.

• The government adopted regulations aimed at preventing conflicts of interest, establishing an obligation to disclose any relationships with high-level government officials or with officials responsible for procurement or authorization, and regulating gifts policy.

• The ACO has set up an ethics office (Unidad de Ética y Transparencia de la Oficina Anticorrupción) in the National Roads Directorate (Directión National de Vialidad), which has been looking into corruption cases, leading to administrative sanctions and dismissals.

• The ACO has been given the authority to investigate potential activities of politically exposed persons that have been linked to illicit enrichment and/or proceeds of money laundering.

• New procurement standards have included electronic procurement, formalization of procedures for costing out projects, and transparent processes to renegotiate debts to suppliers. OECD guidelines on corporate governance for state-owned enterprises were adopted to promote transparency and accountability during the procurement process. The authorities estimate that improvements in procurement have saved approximately US$1.9 billion for the year ended 2016, and year-to-date savings for 2017 are US$1.5 billion.

Corruption Perception Index in G20, 2016

(Index, from 0=worst to 100=best)

Source: Transparency International.

Staff Appraisal

37. Argentina’s economy is recovering. Investment has accelerated while a brisk rise in real wages and credit growth has supported consumption. Stronger domestic demand has moved the trade balance from surplus to deficit and increased the current account deficit. The large general government deficit has led to a rapid rise in foreign currency borrowing and raised future gross external financing needs. A slower-than-targeted decline in inflation and significant foreign inflows have put upward pressure on the real exchange rate leaving the peso overvalued by 10–25 percent and the external position moderately weaker than the level implied by medium-term fundamentals and desirable policies.

38. There are important imbalances in the policy mix. Lower energy subsidies and one-off revenues from the tax amnesty have allowed personal income taxes and export taxes to be reduced. However, the high primary deficit and rising interest costs have led to a larger fiscal deficit, increasing public debt. In addition, part of the federal fiscal financing needs continues to be met by central bank monetary transfers, potentially weakening the credibility of the central bank’s inflation targeting framework. With little support from fiscal policy, the central bank has had to maintain relatively high real interest rates and, even then, inflation has exceeded the targeted path of disinflation. In sum, the current policy mix has contributed to an overvalued currency, a slow pace of disinflation, higher public debt, and vulnerabilities associated with growing gross external financing needs.

39. A front-loaded reduction in public spending and a lower fiscal deficit would reduce external vulnerabilities, build credibility, and help anchor inflation expectations. The authorities’ consolidation plan goes in the right direction but a larger, and more frontloaded fiscal adjustment—one that reduces the federal primary deficit by 3–4 percent of GDP by 2019—would allow for lower interest rates; reduce upward pressures on the peso; facilitate a faster elimination of monetary financing of the fiscal deficit; better anchor inflation expectations; create a more sustainable path for the public debt; and reduce vulnerabilities to a sudden tightening of external financing conditions. To be clear: what is needed is a recalibration in the policy mix, with a greater reliance on fiscal tools, not an overall tightening in policy.

40. Lower government spending is essential. Spending reductions should focus on areas where expenditure has increased very rapidly over the past several years, notably wages, pensions, and social transfer. With one third of the population living below the poverty threshold, it would be important to mitigate the impact of the fiscal rebalancing on the poor. While the new Fiscal Pact with provinces encourages fiscal discipline at subnational level, further strengthening the institutional framework for fiscal policy will lessen the economic costs associated with realigning the fiscal position. The authorities’ commitment to improve integrity and transparency and fight corruption should be commended, and has already resulted in important efficiency gains and budgetary cost savings.

41. The authorities’ proposed tax reform is a good step forward to overhaul Argentina’s inefficient tax system. However, more could be done to shift the tax burden away from labor and eliminate distortionary taxes. Caution is warranted in relying on unpredictable growth effects to offset the revenue losses from tax reform. Instead, lower public spending will be needed to cover the cost of the tax reform while still lowering the deficit.

42. Boosting productivity and growth will require removing trade and investment barriers and continue developing local capital markets. The authorities should be commended for removing FX controls and trade restrictions that severely limited Argentina’s integration into the global economy, and for recent initiatives to reduce red tape. Nevertheless, a more accelerated reduction in import tariffs and the elimination of most import licenses is warranted. Changes are also needed to boost domestic competition, including removing barriers to trade, investment, and firm entry as well as addressing anti-competitive business practices. There is a pressing need to continue developing the financial system and increase financial inclusion while strengthening oversight and protecting financial stability.

43. Institutional changes are needed to reduce informality, address gender discrimination, and ensure the benefits from higher growth are shared more equally. Creating quality jobs for all Argentinean is the most effective and sustainable way to reduce poverty, raise output, increase productivity, and provide opportunities. Argentina’s labor market is far from being inclusive. Women, the less-educated, and the young participate in the labor force at lower rates and are more likely to work in the informal sector. Lowering the marginal tax rate on labor income—particularly for lower-income workers, as in the authorities’ proposed tax reform, and for second earners—would encourage formality and reduce gender-bias. Allowing for more flexible work arrangements and providing childcare support would also facilitate access to employment for working families. Finally, active labor market policies, such as training and job search assistance, can help increase the employability of all workers, particularly if they are designed to support women, the young, and lower-income workers.

44. Staff proposes that the next Article IV consultation takes place on the standard 12-month cycle.

Table 1.Risk Assessment Matrix 1/
Source of RisksRelative LikelihoodExpected ImpactPolicy Response
Downside Risks
Tighter and more volatile global financial conditionsHighHigh
Premature normalization of monetary policy conditions could spur a reassessment of global risk leading to an increase of sovereign and corporate risk premia, portfolio rebalancing, and lower capital flows to EMs. This would limit availability of funding of Argentina’s fiscal needs through external bond issuances and repatriation of funds by non-bank domestic private sector. Domestic financial sector’s funding could increase, but given its small size it would not be able to meet the gross financing needs of the federal and provincial government.Tighter global financial conditions and limited capital inflows would require a more accelerated reduction of the fiscal deficit.
Higher and more persistent inflationMediumMedium
Upward pressures on inflation emerge because of higher wage growth and/or higher persistence in inflation and/or stronger second round effects from increase in tariffs. The currency could become more overvalued, and expectations of a future depreciation might increase, which would fuel inflation expectation sand lower the demand for the peso.Facing a wage-price spiral and the risk of a run on the peso, the central bank should react by increasing interest rates. A faster reduction of the fiscal deficit may also be needed to immediately reduce inflationary pressures.
A sudden depreciation of the currencyMediumHigh
Continued appreciation of the currency leads to a worsening of the current peso misalignment, a deterioration of the external position, and renewed bouts of balance of payments pressures. A sharp devaluation of the currency realigns the currency and alleviates the pressures, leading to a jump in inflation and an immediate contraction of economic activity with high social costs, as household’s purchasing power is reduced. High FX exposure of the public sector can lead to a greater public sector debt and financing difficulties.The central bank would need to increase interest rates to defend the peso, while fiscal policy could be tightened (taking measures to protect the most vulnerable segments of society, for example, though a faster elimination of energy subsidies, reducing the most regressive forms of tax expenditure, and expanding the PIT base, using the resources to fund means-tested transfers).
Significant China slowdownLow (in the short run)Medium
Weaker activity in China would impact Argentina primarily through trade channels, including through a negative impact on the terms of trade, as commodity prices would fall. This would affect especially soy sector, as about 3/4 of Argentina’s soybean exports is destined to China. Staff estimates suggest that a 1 percentage point decrease in China’s growth would lower Argentina’s export growth by 0.4–0.7 percentage points. Slower growth in China would also affect Argentina indirectly, through its negative impact on the region, particularly on Brazil.• The depreciation of the peso would help the economy adjust to the terms of trade shock.

• If needed, monetary and fiscal policy stances could be relaxed (fiscal policy could be re-oriented to protect the most vulnerable segments of society).

• The authorities could accelerate structural reforms to increase export competitiveness and diversification.
Upside Risks
Stronger rebound of growth due to faster pace of reformsMediumHigh
An aggressive implementation of labor, tax and product market reforms could boost Argentina potential growth. Staff estimates show that tax, product, and labor market reforms that would allow Argentina to close half of its gap with the average of EMs in a 10-year time horizon would increase potential GDP growth by about VA percentage points.The authorities could take advantage of the stronger GDP path to accelerate the pace of reduction of the fiscal deficit.
Stronger recovery in BrazilMediumHigh
A stronger recovery of Brazil would have important positive spillover effects on Argentina’s economy. The Brazilian market is especially relevant for Argentine industrial exports. More than 45 percent of exports of industrial manufactures go to Brazil. Staff estimates suggest that a 1 percentage point increase in Brazils growth would boost Argentina’s export growth by 0.7 percentage points, and has a peak impact of % percent on Argentina’s growth.The authorities could take advantage of the stronger GDP path to accelerate the pace of reduction of the fiscal deficit and to implement supply-side reforms, especially those that entail short-term costs, like removing current protections to specific sectors of the economy.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent. “medium’’ a probability between 10 and 30 percent, and high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent. “medium’’ a probability between 10 and 30 percent, and high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

Table 2.Argentina: Selected Economic and Financial Indicators
National income, prices, and labor markets
GDP at constant prices1.52.6−
Domestic demand2.64.0−
Change in inventories and stat. disc. (contribution to growth)−0.6−
Nominal GDP (billions of Argentine pesos)2,6095,8548,05010,32612,73514,87716,98619,19921,617
Output gap (percent)1.2−2.1−1.5−1.6−1.4−1.2−1.0−0.7
CPI inflation (eop, y/y percent change)23.616.311.810.09.38.6
Unemployment rate (percent)
External sector
Exports f.o.b. (goods, billions of U.S. dollars)71.956.857.858.563.567.871.976.280.2
Imports f.o.b. (goods, billions of U.S. dollars)
Trade balance (goods, billions of U.S. dollars)11.8−0.44.5−4.8−5.3−6.4−7.6−8.6−8.9
Trade balance (goods)2.6−0.10.8−0.8−0.8−0.9−1.0−1.0−1.0
Terms of trade (percent change)1.6−4.06.1−4.7−1.0−0.6−0.7−0.8−0.3
Total external debt34.728.336.136.238.839.942.445.147.8
Savings-Investment balance
Gross domestic investment16.315.814.816.317.317.517.818.118.2
Gross national savings15.713.
Current account balance−0.5−2.7−2.7−4.3−4.4−4.4−4.5−4.6−4.7
Public sector 1/
Primary balance−1.9−4.7−4.8−4.7−3.7−2.5−1.9−1.9−1.7
of which : Federal government−3.4−4.1−4.3−4.2−3.2−2.2−2.0−1.9−1.8
memo : Structural federal primary balance 2/−1.4−4.7−4.5−4.3−2.8−1.9−1.8−1.7−1.7
Overall balance−2.9−5.9−6.5−6.9−6.0−5.0−4.5−4.9−5.2
of which : Federal government−2.4−5.2−5.9−6.3−5.5−4.7−4.5−4.9−5.3
Primary expenditure 3/34.940.540.439.537.736.535.935.635.5
Total public debt (federal)42.956.054.252.851.750.650.551.452.7
Money and credit
Monetary base (eop, y/y percent change)27.534.931.721.217.414.613.412.612.0
M2 (percent change)28.728.230.422.619.015.314.112.912.0
Credit to the private sector (eop, y/y percent change)28.935.731.239.422.817.415.414.413.2
Credit to the private sector real (eop, y/y percent change)
Interest rate (eop) 4/16.332.223.927.820.316.214.714.114.2
Real interest rate (eop) 4/
Memorandum items
Gross international reserves (billions of U.S. dollars)42.025.639.350.756.257.560.965.269.3
Exchange rate (eop, Arg$/US$)5.313.015.9
Change in REER (eop, percent change)8.45.3−
Sources: Ministerio de Hacienda y Finanzas Públicas, Banco Central de la República Argentina (BCRA), and Fund staff estimates.

The primary balance excludes profit transfers from the central bank of Argentina. Interest expenditure is net of property income from the social security fund before 2016.

Percent of potential GDP.

Includes transfers to municipalities, but excludes municipal spending.

Average of all LEBAC maturities before 2017 and midpoint of the repo corridor starting in 2017; ex ante real rates.

Sources: Ministerio de Hacienda y Finanzas Públicas, Banco Central de la República Argentina (BCRA), and Fund staff estimates.

The primary balance excludes profit transfers from the central bank of Argentina. Interest expenditure is net of property income from the social security fund before 2016.

Percent of potential GDP.

Includes transfers to municipalities, but excludes municipal spending.

Average of all LEBAC maturities before 2017 and midpoint of the repo corridor starting in 2017; ex ante real rates.

Table 3.Argentina: Summary Balance of Payments, 2011–22
(Billions of U.S. dollars)
Current account−5.3−2.1−13.1−8.7−17.2−145−26.9−28.4−31.5−347−38.0−40.8
Trade balance in goods12.415.04.66.0−0.44.5−4.8−5.3−6.4−7.6−8.6−8.9
Exports f.o.b.
Primary products20.219.218.714.813.315.714.215.617.018.520.121.7
Manufactures of agricultural origin28.227.729.027.923.323.323.524.826.127.528.830.1
Manufactures of industrial origin28.126.422.620.818.016.719.121.222.724.025.426.5
Imports f.o.b.70.865.071.362.457.253.263.368.874.279.584.989.1
Capital goods (includes parts and accessories)27.625.126.923.723.422.426.529.231.934.537.239.3
Intermediate goods20.919.118.717.917.314.817.118.920.422.023.624.8
Consumer goods13.011.914.79.510.111.314.214.615.516.317.117.9
Fuels and lubricants9.28.911.
Trade balance in services−3.2−4.1−5.3−4.6−5.8−8.1−9.5−10.1−11.2−12.1−12.9−13.8
Primary income, net−15.1−13.8−13.2−11.6−12.1−12.1−13.6−14.1−15.0−16.1−17.5−19.2
Secondary income, net0.
Capital Account0.
Financial Account10.08.616.19.018.414926.428.431.234537.740.6
Foreign direct investment, net9.414.
Portfolio investment, net0.1−0.20.4−2.30.435.338.828.625.928.531.333.8
Derivatives, net2.42.90.0−−
Other investment, net−8.0−11.7−−7.7−6.3−0.7−2.3−2.8−4.3−6.7
Reserve assets6.13.311.8−1.24.9−14.3−10.8−5.4−1.3−3.4−4.4−4.1
Errors and Omissions0.0−0.7−3.1−0.7−1.4−
Overall balance4.75.8−0.1−
Current account−1.0−0.4−2.1−1.5−2.7−2.7−4.3−44−44−45−46−47
Trade balance in goods2.−0.10.8−0.8−0.8−0.9−1.0−1.0−1.0
Exports, f.o.b.15.813.812.412.
Imports f.o.b.−13.4−11.2−11.7−11.1−9.1−9.8−10.2−10.6−10.3−10.3−10.3−10.2
Trade balance in services−0.6−0.7−0.9−0.8−0.9−1.5−1.5−1.5−1.6−1.6−1.6−1.6
Primary income, net−2.9−2.4−2.2−2.1−1.9−2.2−2.2−2.2−2.1−2.1−2.1−2.2
Secondary income, net0.
Capital Account0.
Financial Account1.
Foreign direct investment, net1.
Portfolio investment, net0.00.00.1−
Derivatives, net0.
Other investment, net−1.5−2.0−−1.4−1.0−0.1−0.3−0.4−0.5−0.8
Reserve assets1.10.52.1−0.10.9−2.5−1.8−0.8−0.2−0.4−0.5−0.5
Memorandum items:
Exports volumes (percent change)2.3−5.8−3.7−7.8−1.76.6−
Imports volumes (percent change)21.6−6.03.5−
Gross international reserves (in billions of US$)46.443.330.631.425.639.350.756.257.560.965.269.3
(in months of imports of goods and services)
Terms of Trade (Index, 2000 = 100)555.2578.7541.0526.4505.4536.3511.3506.3503.1499.7495.8494.3
Real effective exchange rate (percent change)13.017.2−−
Sources: INDEC, Fund staff estimates and projections.
Sources: INDEC, Fund staff estimates and projections.
Table 4.Argentina: Consolidated Public Sector Operations, 2011–22 1/
(Billions of Argentine pesos)
Tax revenues485.2612.9792.11,074.21,429.91,952.82,430.72,926.23,410.03,891.14,367.74,913.3
Social security contributions167.8219.5287.8378.3529.5709.8913.11,113.81,308.61,490.61,684.91,897.1
Other revenues47.758.670.2110.4132.4209.0246.2295.0344.6393.4425.5479.1
Primary Expenditures 1/735.3936.41,238.51,723.12,368.93,255.54,078.64,807.55,429.36,104.56,837.27,663.6
Goods and services53.364.386.3120.3169.7205.8257.5295.7328.5361.6396.2431.4
Transfers to the private sector277.2356.0466.1663.0932.01,343.31,642.71,932.72,151.12,408.72,699.93,043.1
Of which: federal pensions147.1204.6272.1363.4535.7734.71,000.91,273.61,495.31,729.31,969.92,221.9
Capital spending77.783.2121.0171.6216.6280.1357.2388.6436.8512.8598.9674.3
Primary balance−34.6−45.4−88.3−160.2−277.1−383.9−488.5−472.5−366.1−329.3−359.1−374.1
Interest cash25.234.920.634.570.6136.7223.4297.0380.2439.7582.0752.9
Overall balance−59.8−80.3−108.9−194.7−347.7−520.6−712.0−769.5−746.3−769.1−941.1−1,126.9
(Percent of GDP unless otherwise indicated)
Tax revenues22.323.223.723.524.424.323.523.022.922.922.722.7
Social security contributions7.
Other revenues2.
Primary expenditures 1/33.735.537.037.640.540.439.537.736.535.935.635.5
Goods and services2.
Transfers to the private sector12.713.513.914.515.916.715.915.214.514.214.114.1
Of which: federal pensions6.
Capital spending3.
Primary balance−1.6−1.7−2.6−3.5−4.7−4.8−4.7−3.7−2.5−1.9−1.9−1.7
Interest cash1.
Overall balance−2.7−3.0−3.3−4.3−5.9−6.5−6.9−6.0−5.0−4.5−4.9−5.2
Structural primary balance (General Government) 2/−2.7−2.4−3.6−3.5−5.4−4.8−4.7−3.2−2.1−1.6−1.6−1.5
Structural primary balance (Federal) 2/−1.5−1.8−3.1−3.5−4.7−4.5−4.3−2.8−1.9−1.8−1.7−1.7
Structural primary balance (Provinces) 2/−1.1−0.6−0.50.0−0.8−0.3−0.4−0.4−
Sources: Ministerio de Economía y Finanzas Públicas and Fund staff calculations.

Include transfers to municipalities, but exclude municipal spending.

Percent of potential GDP.

Sources: Ministerio de Economía y Finanzas Públicas and Fund staff calculations.

Include transfers to municipalities, but exclude municipal spending.

Percent of potential GDP.

Table 5.Argentina: Federal Government Operations, 2015–22
(Billions of Argentine pesos)
Tax revenues1,115.21,528.31,872.22,264.02,621.62,974.03,350.33,767.8
Social security contributions419.4558.1717.8887.81,044.51,189.11,344.11,513.4
Nontax revenues60.394.6141.2174.2203.4232.3262.5295.6
Primary expenditures1,834.42,52453,160.33,732.44,195.74,737.75,329.65,976.1
Federal expenditures1,331.21,835.02,258.42,639.42,939.53,310.73,701.84,140.9
Goods and services78.991.8115.8137.1154.0170.4186.7203.3
Current transfers to private sector322.4511.0516.6513.6500.7519.3558.7628.3
Social assistance143.3219.9273.4337.1399.7460.9523.5588.7
Capital spending91.7117.8138.7142.0148.8184.0208.0234.1
Other current primary spending65.762.879.082.974.467.961.454.0
Transfers to provinces503.2689.5901.91,093.01,256.21,426.91,627.81,835.2
Primary balance−239.5−343.5−429.2−406.5−326.2−342.2−372.6−399.3
Interest cash (net ANSES)67.4131.3216.5289.8371.3429.4570.8740.1
Overall balance−306.9−4748−645.7−696.3−697.4−771.7−943.5−1,139.5
Memorandum items:
Capital spending, including capital transfers to provinces160.9182.0226.3252.8261.8306.3361.5407.1
Arrears and advances0.0−
Primary balance, accrual basis−239.5−310.5−445.2−406.5−326.2−342.2−372.6−399.3
Overall balance, accrual basis−306.9−441.8−661.7−696.3−697.4−771.7−943.5−1,139.5
Structural primary balance−269.0−371.7−452.4−368.0−288.7−306.3−337.1−370.5
(Percent of GDP)
Tax revenues19.
Social security contributions7.
Nontax revenues1.
Primary expenditures31.331.430.629.328.227.927.827.6
Federal expenditures22.722.821.920.719.819.519.319.2
Goods and services1.
Current transfers to private sector5.
Social assistance2.
Capital spending1.
Other current primary spending1.
Transfers to provinces8.
Primary balance−4.1−43−4.2−3.2−2.2−2.0−1.9−1.8
Interest cash (net ANSES)
Overall balance−5.2−5.9−6.3−5.5−4.7−4.5−49−5.3
Memorandum items:
Capital spending, including capital transfers to provinces2.
Arrears and advances0.0−
Primary balance, accrual basis−4.1−3.9−4.3−3.2−2.2−2.0−1.9−1.8
Overall balance, accrual basis−5.2−5.5−6.4−5.5−4.7−4.5−4.9−5.3
Structural primary balance 1/−4.7−4.5−4.3−2.8−1.9−1.8−1.7−1.7
Sources: Ministerio de Economía y Finanzas Públicas and Fund staff calculations.

Percent of potential GDP.

Sources: Ministerio de Economía y Finanzas Públicas and Fund staff calculations.

Percent of potential GDP.

Table 6.Argentina: Summary Operations of the Financial System, 2011–22(Billions of Argentine pesos, end of period, unless otherwise indicated)
I. Central Bank
Net foreign assets172.9193.0183.5219.0157.5430.2689.1867.9956.61,093.61,263.81,447.3
Net domestic assets50.0114.2193.7243.5466.4391.5306.5301.0383.2426.3447.5469.0
Credit to the public sector (net)191.5311.7472.2697.71,194.41,459.91,698.71,966.42,071.32,187.22,295.72,394.3
Credit to the financial sector (net)−93.6−122.0−154.1−279.6−401.7−589.4−615.4−818.0−912.2−999.6−1,084.6−1,149.6
Official capital and other items (net)−47.9−75.5−124.4−174.6−326.3−479.1−776.9−847.4−775.9−761.3−763.6−775.7
Monetary base222.9307.2377.2462.6623.9821.7995.61,168.91,339.91,519.91,711.31,916.3
Currency issued173.1237.0289.2358.8478.8594.6720.5845.9969.61,099.91,238.41,386.7
Bank deposits at the Central Bank49.970.288.0103.8145.1227.0275.1323.0370.2420.0472.9529.5
II. Consolidated Financial System
Net foreign assets168.3195.9182.5218.6155.9463.3685.2868.6962.01,103.91,279.31,468.5
Net domestic assets308.6439.7620.1815.31,330.71,580.01,895.72,246.12,663.23,049.03,449.63,866.7
Credit to the public sector (net)134.1227.5370.9571.51,110.21,361.51,608.21,817.81,898.21,993.12,097.62,225.7
Credit to the private sector305.3401.3526.7633.0858.31,124.61,569.71,927.32,263.52,612.02,988.73,383.3
Net capital, reserves, and other assets−130.7−189.1−277.5−389.2−637.8−906.1−1,282.2−1,499.0−1,498.5−1,556.1−1,636.7−1,742.3
Liabilities with the private sector477.1635.5802.31,033.71,484.72,042.82,580.93,114.73,625.14,152.84,728.95,347.1
Currency outside banks151.2209.9257.7315.8425.5527.6650.3763.6875.3992.81,117.91,251.8
Local currency deposits273.4386.3499.4653.8920.41,158.51,466.71,774.92,055.32,328.42,617.62,905.0
Foreign currency deposits52.439.245.164.1138.7356.6463.8576.2694.5831.5993.41,190.4
I. Central Bank (Percent of GDP)
Net foreign assets7.
Net domestic assets2.
Credit to the public sector (net)8.811.814.115.220.418.116.515.413.912.912.011.1
Credit to the private sector−4.3−4.6−4.6−6.1−6.9−7.3−6.0−6.4−6.1−5.9−5.6−5.3
Official capital and other items (net)−2.2−2.9−3.7−3.8−5.6−6.0−7.5−6.7−5.2−4.5−4.0−3.6
Monetary base10.211.611.310.110.710.
Currency issued7.
Bank deposits at the central bank2.
II. Consolidated Financial System (Percent of GDP)
Net foreign assets7.
Net domestic assets14.216.718.517.822.719.618.417.617.918.018.017.9
Credit to the public sector (net)6.28.611.112.519.016.915.614.312.811.710.910.3
Credit to the private sector14.015.215.713.814.714.
Net capital, reserves, and other assets−6.0−7.2−8.3−8.5−10.9−11.3−12.4−11.8−10.1−9.2−8.5−8.1
Liabilities with the private sector21.924.124.022.625.425.425.024.524.424.424.624.7
Currency outside banks6.
Local currency deposits12.514.614.914.315.714.414.213.913.813.713.613.4
Foreign currency deposits2.
Changes in monetary base (y/y, in AR$ billion)
Monetary base62.584.469.885.4161.3197.8173.9173.4171.0180.0191.4205.0
Foreign exchange purchases9.627.2−16.481.9−69.5209.1214.8103.428.073.6100.298.3
Public sector36.361.378.1128.1175.7151.2143.2140.0110.
Sterilization, net (-)16.2−5.67.2−121.4−2.4−176.6−181.2−70.032.926.341.281.6
Other items, net−2.2−1.50.9−3.157.514.0−
Memorandum items:
M2 1/366.1506.5637.0821.11,052.61,372.31,682.52,002.42,308.62,633.92,974.23,330.5
M2 (percent change) 1/29.938.325.828.928.230.422.619.015.314.112.912.0
Gross international reserves (US$ billions)46.443.330.631.425.639.350.756.257.560.965.269.3
Credit to the private sector (eop, y/y percent change)45.731.431.220.135.731.239.422.817.415.414.413.2
Credit to the private sector real (eop, y/y percent change)
Interest rate (eop) 2/14.113.816.428.532.223.927.820.316.214.714.114.2
Real interest rate (eop) 2/
Sources: Banco Central de la República Argentina (BCRA) and Fund staff estimates.

Currency in circulation outside banks plus peso-denominated deposits in checking and savings accounts.

Average of all LEBAC maturities before 2017 and midpoint of the repo corridor starting in 2017; ex ante real rates.

Sources: Banco Central de la República Argentina (BCRA) and Fund staff estimates.

Currency in circulation outside banks plus peso-denominated deposits in checking and savings accounts.

Average of all LEBAC maturities before 2017 and midpoint of the repo corridor starting in 2017; ex ante real rates.

Table 7.Argentina: External Debt, 2011–22
(Billions of U.S. dollars)
Total external debt (gross; includes holdouts)167.5168.0167.0170.4178.9196.7225.1252.9288.1328.1371.7418.8
Percent of GDP31.729.027.330.228.336.136.238.839.942.445.147.8
By maturity
Short-term (includes arrears)65.766.967.557.883.157.866.174.384.696.3109.1123.0
Of which: Public sector12.710.910.74.627.815.017.219.322.025.028.432.0
By type of creditor
Debt to official creditors30.428.126.538.446.050.351.055.961.768.375.884.4
Debt to banks8.
Debt to other private creditors128.2130.8132.1124.5126.7139.8166.6188.6216.9248.9283.5320.5
By type of debtor
Official debt103.8103.3103.0109.9113.2135.9160.3185.6213.5243.8277.8315.4
Bank debt5.
Non-financial private sector58.260.459.856.460.555.258.560.966.773.981.188.3
Sources: Instituto Nacional de Estadística y Censos (INDEC), Banco Central de la República Argentina (BCRA), and Fund staff estimates.
Sources: Instituto Nacional de Estadística y Censos (INDEC), Banco Central de la República Argentina (BCRA), and Fund staff estimates.
Table 8.Argentina: Public Debt, 2011–22
(Billions of Argentine pesos)
Gross federal debt8181,0271,3961,9963,2804,3665,4556,5827,5238,5839,86911,396
By currency:
In domestic currency3073995036661,2101,4011,8042,3332,6183,0063,5664,367
In foreign currency5116298931,3302,0702,9713,6514,2494,9055,5776,3027,029
By residency:
Held by external residents3093524716751,2101,4581,9712,4923,0763,6954,4375,335
Held by domestic residents5096759251,3212,0692,9083,4844,0904,4464,8885,4326,060
(Percent of GDP)
Gross federal debt37.538.941.743.656.054.252.851.750.650.551.452.7
By currency:
In domestic currency14.
In foreign currency23.423.826.729.035.436.935.433.433.032.832.832.5
By residency:
Held by external residents14.213.414.114.720.718.119.119.620.721.823.124.7
Held by domestic residents23.425.627.628.835.436.133.732.129.928.828.328.0
Sources: Ministerio de Economía y Finanzas Públicas and Fund staff estimates.
Sources: Ministerio de Economía y Finanzas Públicas and Fund staff estimates.
Table 9.Argentina: Financial Soundness Indicators, 2011–2017Q2(Percent, end of period)
Financial System
Capital Adequacy
Regulatory Capital to Risk-Weighted Assets13.614.713.316.716.5
Regulatory Tier 1 Capital to Risk-Weighted Assets12.513.712.415.215.1
As set Quality
Non-performing Loans Net of Provisions to Capital−4.3−3.1−3.5−2.9−3.2−2.5−2.4
Non-performing Loans to Total Gross Loans1.
Earnings and Profitability
Return on As sets2.
Return on Equity25.325.729.532.732.429.626.6
Liquid Assets to Total Assets (Liquid Asset Ratio)27.729.128.833.234.336.432.4
Liquid Assets to Short Term Liabilities43.
Net Open Position in Foreign Exchange to Capital42.543.271.421.821.919.516.2
Private Banks
Capital Adequacy
Regulatory Capital to Risk-Weighted Assets14.415.213.715.215.1
Regulatory Tier 1 Capital to Risk-Weighted Assets13.214.112.813.413.4
As set Quality
Non-performing Loans Net of Provisions to Capital−4.4−3.1−3.4−3.1−3.5−2.9−2.3
Non-performing Loans to Total Gross Loans1.
Earnings and Profitability
Return on As sets3.
Return on Equity25.626.429.
Public Banks
Capital Adequacy
Regulatory Capital to Risk-Weighted Assets12.113.612.319.419.3
Regulatory Tier 1 Capital to Risk-Weighted Assets11.012.711.618.618.5
As set Quality
Non-performing Loans Net of Provisions to Capital−4.3−3.6−4.3−3.2−2.9−2.4−3.0
Non-performing Loans to Total Gross Loans1.
Earnings and Profitability
Return on As sets2.
Return on Equity25.224.931.234.534.830.226.5
Sources: Banco Central de la República Argentina (BCRA) and IMF.
Sources: Banco Central de la República Argentina (BCRA) and IMF.
Annex I. External Sector Assessment

Argentina’s external position is vulnerable to a rapidly growing current account deficit and is moderately weaker than implied by medium-term fundamentals and desirable policies. The exchange rate is assessed to be overvalued. A disorderly correction of these growing external imbalances constitutes an important vulnerability that could jeopardize the sustainability of the ongoing economic recovery.

A. Current Account

1. The current account deficit deteriorated in 2017, driven by a worsening of the trade balance. Argentina has experienced a decline in the export share of GDP, which fell from over 24 percent of GDP in 2005 to 9 percent in 2015. 2016 saw a modest recovery in the trade balance, to 0.8 percent of GDP from −0.1 in 2015, as the cut in export taxes on agricultural products led to the sale of previously accumulated stocks, temporarily boosting exports. The terms of trade also improved last year, as the price of fuel imports declined significantly. However, starting from early 2017, the trade balance began deteriorating, mainly reflecting a surge of import volumes (of both consumer and capital goods) as domestic demand accelerated. The terms of trade have also worsened, due to a recovery in oil prices and falling soy prices. Moreover, service imports have continued to grow rapidly, as the removal of foreign exchange restrictions and the strong peso has encouraged overseas travel by Argentine residents. Dividend payments have been broadly flat, but interest payments have grown by over 40 percent over the previous four quarters, reflecting the increasing share of debt held by nonresidents. On a cumulative four quarter basis, the current account deficit reached 3.4 percent of GDP as of 2017Q2.

Export Share in GDP and Export Market Share

(Percent, 4-quarter m.a.)

Sources: Direction of Trade Statistics and IMF World Economic Outlook database.

Trade flows

(Billions of U.S. dollars)

Source: INDEC.

2. The current account deficit is expected to continue to increase, slowly drifting above 4½ percent of GDP by 2022. Stronger demand in major trading partners, notably Brazil, will boost exports but import volumes are expected to continue growing at faster rates, reflecting the gradual recovery of domestic demand. A continued strengthening of the peso will weigh on the current account as staff forecasts embed a further 8 percent rise in the real effective exchange rate by 2022. The terms of trade are also expected to steadily deteriorate largely a result of rising fuel prices. These forces, combined with a persistent drag from the services and income balances, will lead the current account deficit to reach 4.7 percent of GDP by 2022. From a saving and investment perspective, the modest rise in national saving—largely a result of a decline in the fiscal deficit—will be more than offset by the gradual rebound of private investment, reflecting improved business confidence and better access to finance (less crowding out from the public sector).

Current account

(Percent of GDP)

Source: INDEC and Fund staff estimates.

National Saving

(Percent of GDP)

Sources: INDEC and Fund staff estimates.

Domestic Investment

(Percent of GDP)

3. The 2017 cyclically-adjusted current account position is moderately weaker than the level implied by medium-term fundamentals and desirable policies. Using the approach based on the IMF’s External Balance Assessment (EBA) model suggests that the 2017 current account ‘norm’ for a country with Argentina’s characteristics should be a deficit of around 2½ percent of GDP, suggesting a gap of 1.7 percent with the 2017 predicted outturn. The overall fiscal balance in 2017 is judged to be 4 percent of GDP higher than its desirable medium-term level, accounting for the bulk of the gap between the actual current account and the estimated norm1 Despite the planned fiscal consolidation, this policy gap is expected to persist as Argentina’s major trading partners, notably Brazil, tightens fiscal policy at a faster pace than Argentina. The external stability (ES) approach suggests that the current account deficit in 2017 was 1.5 percent of GDP larger than that needed to stabilize the net international investment position (IIP) at Argentina’s estimated medium-term steady-state (see 2016 Article IV, Selected Issue Papers).

B. Capital and Financial Accounts

4. Argentina’s growing current account deficit has been mainly funded by debt-creating portfolio flows, especially to the public sector. In 2016, gross bond issuance amounted to US$35 billion (5.7 percent of GDP), 60 percent issued by the federal government and a further 20 percent issued by the provinces. In 2017, the federal government issued a similar amount of external debt, and borrowing will remain elevated in coming years. Foreign direct investment (FDI) remains low, at only ¾ percent of GDP as of 2017: Q2 (cumulative over the last four quarters) compared to an average 1.5 percent of GDP during 2006–16. This possibly reflects a still-uncertain political climate and international investors’ desire to see sustained progress in advancing structural reforms. Meanwhile, net inflows from international financial institutions have largely been offset by the repayment of Paris Club loans.

Federal Fiscal Financing in International Markets

(Billions of U.S. dollars)

Sources: Ministry of Finance and Fund staff estimates.

5. Capital outflows by residents have continued in 2017, extending a trend that began with the lifting of capital flow management measures last year.2 The only exception to this trend was in end-2016 as residents repatriated assets during the tax amnesty. Dollar deposits also rose (to one quarter of all deposits) as exchange rate volatility increased. Non-resident inflows have gone largely into high-yield local currency debt (net non-resident inflows from January-September 2017 were US$7.4 billion).

Capital Outflows

(Billions of U .S. dollars)

Sources: BCRA and Fund staff calculations.

6. FDI and private sector debt issuance are expected to become larger sources of funding of the current account deficit over the medium term. Net public debt issuances remain significant under staff baseline, but the government is expected to become less reliant on international markets as the fiscal deficit declines and domestic markets deepen. Private debt issuance will steadily grow as investment picks up, and FDI is expected to gradually rebound (to 2 percent of GDP over the medium term). Outflows from Argentine residents are expected to persist, but should decline in importance as disinflation takes hold and confidence grows in peso assets as a store of wealth.

C. FX Intervention and Reserves

7. Large scale bond issuance by the government has allowed the central bank to rebuild international reserves. The current level (US$52 billion) is 115 percent of the Fund’s reserve adequacy metric although net reserves are substantially lower (largely due to the US$10.4 billion swap arrangement with the People Bank of China, which was renewed for a further three–year period in July 2017).

International Reserves

(Billions of U.S. dollars)

Sources: BCRA and Fund Staff calculations.

8. The authorities have announced a target level of reserves of 15 percent of GDP (US$93 billion at 2017 GDP). The BCRA began daily open market purchases of foreign exchange in US$100 million increments in May. However, this was suspended after 11 days due to a period of exchange rate volatility. As pressure on the currency grew in July and August, the authorities sold US$1.8 billion of reserves. Under current assumptions, reserves are projected to continue growing in coming years, reaching US$70 billion by 2022 (around 8 percent of GDP or 110 percent of the Fund’s reserve adequacy metric).

D. Real Exchange Rate

9. The real effective exchange rate (REER) has remained broadly stable in 2017. After depreciating about 40 percent between November 2015 and March 2016, following the removal of FX restrictions and the lifting of the peg, the REER steadily appreciated, as debt inflows stabilized the nominal exchange rate while the inflation differential with trading partners widened. Appreciation continued in early 2017, but was interrupted abruptly in June–July this year, when election-related uncertainty led to significant capital outflows (doubling in July the monthly average for 2017). As a result, the REER now stands at close to its January 2017 level, 20 percent more depreciated than at end-2015.

Exchange Rate Developments

Source: BCRA.

10. The REER is assessed to be overvalued within a range of 10–25 percent compared to the level implied by medium-term fundamentals and desirable policies. The IMF’s EBA exchange rate model shows that at the end of 2017 the REER is 10 percent more appreciated than the level implied by fundamentals. Applying an elasticity of −0.06 to the relationship between the CA and the REER implies that closing the 1.5 percent of GDP gap between the estimated CA norms and the 2017 projected CA outturn would require the REER to depreciate by around 25 percent.3 A longer term view of the REER and prices also suggests that the exchange rate may be somewhat overvalued. Compared to the 1997–2017 average (the longest time series available), the REER is around 20 percent higher. And compared to the price of a basket of identical goods in the United States, the peso is estimated to be between 5 to 20 percent overvalued.

Real Effective Exchange Rate

(Index, historical average=100)

Sources: BCRA and Fund staff estimates.

Exchange Rate Assessment Tools
Level 2017‘Norms’REER gap (percent)
EBA – exchange rate, Index105.695.210.4
EBA – current account, % GDP−4.3−2.626.2
ES approach – current account, % GDP−4.3−2.923.5
Source: Fund staff estimates.Note: Based on a elasticity of current account to REER of −0.06.
Source: Fund staff estimates.Note: Based on a elasticity of current account to REER of −0.06.

11. Going forward, the combination of external balance sheet expansion and productivity improvements is likely to drive further real appreciation. Staff’s baseline assumes continued modest appreciation of the REER over the next four years (by an average of 2 percent per year). This reflects the combination of continued large capital inflows that support the nominal exchange rate (especially as private companies and financial institutions gain greater access to international finance) and inflation that remains above that of trading partners. To mitigate the appreciation translating into even greater overvaluation will require significant effort on supply-side reforms to raise productivity. Staff analysis shows that countries that have gone through a similar external balance sheet expansion experienced an average REER appreciation of 3.2 percent per year. Moreover, countries that experienced significant and persistent TFP growth in the past fifty years (those in the top 75th percentile when considering average annual TFP growth for a period of at least three years) have experienced almost 2 percent real appreciation a year.

Events studies: REER

(Index, t=100)

Source: Fund staff estimates.

Note: 1/ Productivty booms: Penn World Tables TFP data is used to identify 67 positive productivity shocks, defined as those countries that experienced TFP growth in the top 75th percentile for three years. Balance sheet expansions. See Argentina: Selected Issues, October 2016, Medium Term Prospects for Argentina’s External Balance Sheet.

E. External Balance Sheet

12. The net IIP position continued to deteriorate in 2017. External liabilities rose sharply in 2016 and the first half of 2017, by almost 10 percentage points of GDP relative to the end of 2015, following significant external borrowing by the public sector and the depreciation of the exchange rate. However, the largely dollar denominated external asset position meant that the exchange rate shock had relatively small effects on the net position.

Net International Investment Position

(Percent of GDP)

Sources: INDEC and Fund staff calculations.

13. A reliance on debt poses balance sheet risks. Low levels of FDI and high public sector borrowing meant that only 25 percent of liabilities are in the form of equity (compared to a regional average of 40 percent). While the country’s overall IIP is currently stronger than in the build up to the 2001/02 crisis, a continued deterioration fueled by a heavy reliance on debt financing can raise balance sheet vulnerabilities, as the buffer provided by loss absorbing instruments is small. Furthermore, around a third of debt is in the form of short-term financing, mainly intra-company lending, trade credit, and borrowing by the public sector. This means that gross external financing needs are expected to be around 20 percent of GDP in 2018 and beyond (Annex Table 1). An unexpected tightening of global liquidity conditions could lead to significant rollover risks, particularly for the public sector. Similarly, a 30 percent real depreciation would lead external debt to reach 70 percent of GDP by 2022, posing rollover and solvency risks to the government and the private sector (Annex Figure 1).

Annex Table 1.Argentina: External Debt Sustainability Framework, 2012–22(Percent of GDP, unless otherwise indicated)
20122013201420152016201720182019202020212022Debt-stabilizing non-interest current account 6/
Baseline: External debt29.027.330.228.336.136.238.839.942.445.147.8−2.6
Change in external debt−2.8−1.72.9−
Identified external debt-creating flows (4+8+9)−4.9−0.93.3−
Current account deficit, excluding interest payments−
Deficit in balance of goods and services−5.1−3.0−3.4−2.0−3.2−1.6−1.6−1.6−1.6−1.6−1.7
Net non-debt creating capital inflows (negative)−2.4−1.5−0.6−1.8−0.5−0.9−0.9−1.2−1.6−1.8−2.0
Automatic debt dynamics 1/−2.2−0.93.0−−0.1−0.3−0.4−0.6
Contribution from nominal interest rate0.
Contribution from real GDP growth0.3−0.70.7−0.70.7−0.9−0.9−1.0−1.2−1.2−1.4
Contribution from price and exchange rate changes 2/−3.2−0.81.6−2.53.8
Residual, incl. change in gross foreign assets (2–3) 3/2.2−0.8−−2.40.0−
External debt-to-exports ratio (in percent)178.1186.4208.2255.5278.6307.7318.5335.5357.0379.0402.7
Gross external financing need (in billions of US dollars) 4/84.696.793.292.8117.3107.2119.8134.5152.1171.6192.1
in percent of GDP14.615.816.514.721.510-Year10-Year17.218.418.619.620.821.9
Scenario with key variables at their historical averages 5/36.232.630.228.326.825.5−3.3
Key Macroeconomic Assumptions Underlying BaselineHistorical AverageStandard Deviation
Nominal GDP (US dollars)579.7611.5563.6631.6544.7621.8651.8722.3775.1825.1877.4
Real GDP growth (in percent)−1.02.4−2.52.6−
GDP deflator in US dollars (change in percent)11.03.0−5.59.2−
Nominal external interest rate (in percent)
Growth of exports (US dollar terms, in percent)−3.4−5.0−8.7−
Growth of imports (US dollar terms, in percent)−8.19.6−12.4−8.4−6.97.725.
Current account balance, excluding interest payments0.3−1.5−0.8−2.1−−3.3−3.3−3.4−3.6−3.8−3.8
Net non-debt creating capital inflows2.
Source: Fund staff calculations and estimates.

Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Source: Fund staff calculations and estimates.

Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure 1.Argentina: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Source: Fund staff calculations and estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2018.

External Debt

(Billions of U.S. dollars)

Source: SDDS.

Short-term Debt by Sector

(Billions of U.S. dollars)

Source: INDEC.

14. Looking ahead, the net IIP position is expected to deteriorate as external liabilities increase. By 2022, continued public sector debt issuance, greater access to debt markets by the private sector, and a recovery in FDI will cause external liabilities to grow substantially. External assets will grow more modestly, driven primarily by reserve accumulation. By 2022, the net IIP position is expected to become negative and reach −6 percent of GDP.

OECD, 2017, OECD Economic Surveys: Argentina 2017: Multi-dimensional Economic Survey, OECD Publishing, Paris. Available via Internet at:

Licetti, M. and others (forthcoming) “Strengthening Argentina’s Integration in the Global Economy: Policy proposals for trade, investment and competition.” The World Bank Group.

Argentina was assessed by the BCBS Regulatory Consistency Assessment Program (RCAP) in 2016 and found to be overall compliant with the Basel III framework. In August 2017, FSB completed its peer review of Argentina’s macroprudential policy framework and the framework for crisis management and resolution, and concluded that while progress has been made in recent years, the institutional set-up for financial stability and resolution regime should be strengthened.

This is consistent with the simulation scenario presented in the Staff Report, where such an adjustment would balance the fiscal deficit and put the debt-to-GDP ratio on a clear downward trajectory.

The few remaining capital flow management measures on outflows (FX repatriation and surrender requirements on some exports and the requirement to sell FX on the local market) were removed this year (see Decree 897/2017 and BCRA Communication A 6150), in line with the IMF’s institutional view on capital flows.

This is based on an elasticity of imports and exports to the exchange rate of 0.29 and −0.20, respectively; and an import and export share of GDP of 13.5 and 12.2 percent, respectively. The elasticity with respect to the current account (-0.06) is fairly small compared to other countries, owing to the relatively low degree of trade openness of Argentina’s economy and the estimated low elasticity of exports to the exchange rate (see 2016 Selected Issues Paper).

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