Over the past year, Argentina has made a welcome start in restoring a measure of economic stability, IMF First Deputy Managing Director Anne Krueger noted at the conclusion of the Executive Board session. Growth and confidence are recovering, unemployment is declining, and inflation is being held under firm control. Nevertheless, many key challenges still face Argentina, she said, which the new medium-term IMF-supported program is designed to address.
The program seeks to build on the country’s recent success in stabilizing the economy and both improve growth rates and extend the benefits of a healthier economy to the entire society. To do this, the program will pursue reforms in three main areas:
• A medium-term fiscal framework to meet growth, employment, and social equity objectives while providing a sound basis for normalizing relations with all creditors and ensuring debt sustainability.
• A strategy to assure the strength of the banking system and facilitate the increase in bank lending that is essential to support the recovery.
• Institutional reforms to facilitate corporate debt restructuring, address issues of the utility companies, and fundamentally improve the investment climate.
Reforms are carefully sequenced to allow time for policymakers to build consensus. Within these three areas, the program has set the following objectives:
Growthandinflation: GDP growth is targeted to reach 5.5 percent in 2003 and stay at around 4 percent in 2004-06. Core inflation is expected to be maintained in single digits.
Fiscalpolicy: The chief aim will be to raise the consolidated primary surplus from 2½ percent of GDP in 2003 to 3 percent in 2004. Beyond 2004, the authorities have committed to primary surpluses at levels sufficient to cover net payments on performing debt and obligations that may result under a debt restructuring agreement, while taking into account growth, employment, and social equity objectives.
Structuralfiscalreforms: A number of steps are envisaged to underpin the fiscal consolidation and facilitate the phasing out of tax distortions. The authorities have committed to submit tax reform and intergovernmental reform legislation during 2004, with a view to their being introduced in the context of the 2005 budget.
Monetarypolicy: The authorities will continue to aim at entrenching low inflation expectations, with base money growth driven mainly by the accumulation of international reserves. Also under consideration are a move to an inflation targeting regime by end-2004 and reforms aimed at increasing further the autonomy of the central bank.
Bankingreforms: One of the chief objectives of the program is to strengthen the soundness of the overall system and put public banks on a sound financial footing. By end-2003, the authorities plan to eliminate temporary rules on the prudential treatment of lending to the private sector, and to complete compensation payments to banks for losses associated with the asymmetric pesoization and indexation of their balance sheets. The authorities have also committed to closely monitor the strength of the banking system. In this regard, by mid-December 2003, they will assess the impact of the losses arising from judicial decisions (amparos) and identify measures that may be needed to assure the strength of the system.
Debtrestructuring: The authorities have committed to a comprehensive and orderly restructuring of public debt that is consistent with eliminating financing gaps and achieving medium-term sustain-ability. Toward this end, the authorities are to continue negotiations with external creditors with a view to completing the restructuring of public debt in 2004.
Utilitycompanies: The program envisages early congressional approval of legislation that delegates powers to the executive branch to renegotiate the contracts of the privatized utility companies and gives the executive the power to implement interim tariff increases.
Predictablelegalframework: The authorities intend to review the country’s insolvency system and to put in place a legal and regulatory framework conducive to progress on private corporate debt restructuring.
Containing the risks
Krueger acknowledged that a number of risks are associated with the proposed program, including those arising from the fact that key elements of fiscal and banking reforms that are crucial to sustain-ability will not be formulated until a later stage. “Decisive policy actions by the Argentine authorities, along with strong policy ownership, will be crucial to minimize these risks,” she said. And early conclusion of a sustainable debt restructuring agreement, which would pave the way for Argentina to return to capital markets, is fundamental to the success of the program. Anoop Singh, Director of the IMF’s Western Hemisphere Department, seconded this view in his opening remarks at a September 21 press conference. He welcomed the current recovery in Argentina but cautioned that “much will depend on firm implementation, including a successful debt operation.”