Argentina: Second Review Under the Stand-By Arrangement and Request for Augmentation

The review focuses on fiscal consolidation and on structural reforms to improve productivity and competitiveness in the economy. The continuing recession hindered the implementation of the fiscal program for 2000. The authorities fully recognize the importance of reassuring domestic and foreign investors about their commitment to medium-term fiscal attainability. The authorities have responded to the adverse developments by strengthening the growth orientation of their economic program, through measures aimed at promoting a recovery of investment and an accelerated implementation of structural reforms.


The review focuses on fiscal consolidation and on structural reforms to improve productivity and competitiveness in the economy. The continuing recession hindered the implementation of the fiscal program for 2000. The authorities fully recognize the importance of reassuring domestic and foreign investors about their commitment to medium-term fiscal attainability. The authorities have responded to the adverse developments by strengthening the growth orientation of their economic program, through measures aimed at promoting a recovery of investment and an accelerated implementation of structural reforms.

I. Introduction

1. A staff mission1 visited Buenos Aires during November 26-December 12, 2000 to conduct discussions on the second review under the current three-year Stand-By Arrangement and on a revised economic program in support of which the authorities request the augmentation of the Stand-By Arrangement. The Stand-By Arrangement was approved on March 10, 2000 in the amount of SDR 5.4 billion (255 percent of quota), and the authorities now request its augmentation to SDR 10.6 billion (500 percent of quota), of which SDR 2.1 billion (100 percent of quota) would be provided under the Supplemental Reserve Facility (SRF). At end-December 2000, Argentina’s outstanding use of Fund credit was SDR 3.88 billion (183 percent of quota). Given scheduled repurchases, full utilization of the augmented arrangement would raise outstanding use of Fund resources to SDR 11.32 billion, or 534.6 percent of quota by end-February 2003. The authorities have provided the documentation necessary under the transitional procedures for safeguards assessments. The first review under the Stand-By Arrangement was concluded by the Executive Board on September 15, 2000.

II. Recent Developments

2. As discussed in the Staff Report on the first review under the Stand-By Arrangement (EBS/00/191), the government made substantial efforts to implement the program it had announced in December 1999, at the outset of its tenure. The program centered on fiscal consolidation and on structural reforms to improve productivity and competitiveness in the economy. Important strides were made in the structural reform area with, inter alia, the approval of the labor reform, the strengthening of the legal framework for tax administration and enforcement, and the announcement and preparation of reforms in the health system and of measures to promote competition and deregulation in domestic markets. In a number of cases, however, the full effect of these reforms was delayed as either legislative approval was subject to protracted discussions, or the required implementing regulations took longer than expected to be put in place. In the fiscal area, spending restraint allowed the authorities to observe the corresponding ceiling in the program; however, revenue shortfalls associated with a lower than expected level of economic activity required a modification of the program ceilings for end-September on the public sector’s deficit and debt. All end-September quantitative performance criteria were observed (Table 1).

Table 1.

Argentina: Performance Under the Program January-September 2000

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As defined in the Technical Memorandum of Understanding (EBS/00/20).

3. A major disappointment in the economic performance during the first three quarters of the year was the failure of economic activity to recover from the recession affecting it since mid-1998 (Table 2). After a short-lived pick up in the last quarter of 1999, the economy stagnated in 2000 reflecting in part the impact of the fiscal tightening on domestic demand, but mainly a drop in business and consumer confidence and the progressive hardening of financing conditions in international markets, which resulted in rising borrowing costs and reduced market access for Argentine private and official borrowers alike. By the time of the first review of the program, there had been some indications that a recovery of domestic demand was in the offing, allowing the expectation of a firming of economic activity in the latter part of the year. This expectation, however, was soon dashed by a combination of a more cautious attitude of international investors toward emerging markets, growing concerns about the country’s weak growth performance, and a domestic political crisis that reflected tensions inside the ruling coalition and raised questions about governability. All together, these developments created concerns about the country’s ability to service its debt, and resulted in the virtual closure of external markets to new issues of Argentine debt. This led to a sharp (over 300 basis points) increase in spreads on Argentine bonds, as well as in domestic interest rates, from September to mid-November 2000 (Figure 1). Spreads have declined since, but still remain over 100 basis points above their level in the summer.

Table 2.

Argentina: National Income and Prices (1997-2005)

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Sources: National Institute of Statistics; and Fund staff estimates.

For 2000, January-October

Figure 1.
Figure 1.

Argentina Selected Financial Indicators

Citation: IMF Staff Country Reports 2001, 026; 10.5089/9781451801286.002.A001

Sources: Argentine authorities; J.P. Morgan; and Fund staff estimates.1/ Data refer to a monthly weighted average stripped spread of major international bonds to U.S. Treasury bonds.

4. Following a downward revision of the outcome for the first half of the year, real GDP is estimated to have been only 0.2 percent higher in January-September 2000 than in the corresponding period of 1999. The crisis in the last quarter of the year is likely to have pushed growth for the year as a whole down to zero, or even to a slightly negative number. The continued stagnation of output prevented any significant reduction of the unemployment rate, which in October 2000 stood at 14.7 percent, slightly down—on account of seasonal factors—from the 15.4 percent registered in May. At the same time, however, domestic relative prices continued to adjust in a favorable direction. While consumer prices declined by 0.7 percent in the year ending November 2000, wholesale prices, (which mostly represent prices of tradable goods), rose by 4.8 percent, or 2.5 percent when the effect of energy prices is excluded, pointing to an improvement in competitiveness (Figure 2).

Figure 2.
Figure 2.

Argentina Selected Economic Indicators

Citation: IMF Staff Country Reports 2001, 026; 10.5089/9781451801286.002.A001

Sources: Argentine authorities; and Fund staff estimates.

5. The gradual recovery of competitiveness, after the adverse shocks experienced in 1999, particularly the depreciation of the Brazilian real and the strength of the U.S. dollar (Figure 3), contributed to an improved external trade performance, with the trade balance shifting from a deficit of US$1.6 billion in the first ten months of 1999 to a surplus of US$0.9 billion in the corresponding period of 2000. Much of this result reflected the stagnation of domestic demand and a strong gain in the terms of trade, particularly in regard to energy prices, but the performance of exports of industrial origin also played a major role (Box 1). The latter, which represent some 30 percent of total exports, grew by 12 percent in volume terms during January-October 2000, reflecting to an important extent the coming on stream of investments, inter alia, in the chemical, paper, and basic metal sectors. In contrast, the overall growth in the volume of exports—2.7 percent in January-October 2000 over the corresponding period in 1999—presents a much more subdued picture, which is largely determined by production-cycle problems in the energy sector (where volume dropped by over 5 percent) and by the effect of trade barriers on certain agro-industrial exports (mainly vegetable oils). The improved external trade performance was partly offset by a deterioration of the deficit in the factor services account, mainly on account of higher net interest payments abroad. On the whole, the current account deficit is now projected to decline significantly, to the equivalent of 3.4 percent of GDP in 2000, from 4.4 percent of GDP in 1999.

Figure 3.
Figure 3.

Argentina: Real Effective Exchange Rates (REER),1/ and Terms of Trade


Citation: IMF Staff Country Reports 2001, 026; 10.5089/9781451801286.002.A001

Sources: Ministry of Economy; IBGE; IMF Information Notice System; and Fund staff estimates.1/ A rise in the real effective exchange rate index indicates real appreciation.2/ Real effective exchange rate vis-à-vis selected developed countries and Brazil.

Argentina’s Export Performance, 1993-2000

  • Argentina’s exports exhibited an average growth rate of 10.6 percent in real terms during the period 1993-2000. This strong performance mostly reflected the dynamism of manufactured exports, which grew by 15.2 percent on average in real terms over the same period.

  • As a result, the ratio of exports to GDP increased from 5.6 percent in 1993 to an estimated 9.2 percent in 2000. Such a ratio, however, remains low relative to that in other emerging market economies.

  • Similarly, Argentina’s share in trading partner’s imports (in value terms) was about 36 percent higher in the 12 month period ending June 2000. than in 1993. This significant gain mainly reflects a greater penetration of Latin American (mainly Mercosur) markets.

  • The volume of exports declined by 0.6 percent in 1999, mainly due to a fall of manufactured exports on account of the demand contraction and the adjustment in relative prices that took place during the first semester in Brazil, Argentina’s main trading partner.

  • Exports volumes have recovered from their contraction in the first half of 1999, reflecting mainly renewed growth of manufactured exports, which increased by 12 percent in volume yoy in the period January - October 2000.


Argentina: Export Performance, 1993-2000

Indices, 1993 = 100

Citation: IMF Staff Country Reports 2001, 026; 10.5089/9781451801286.002.A001

1/ Share of Argentine exports to partner countries’ imports, based on DOT statistics Data not available for Canada and Mexico.

6. The continuing recession hindered the implementation of the fiscal program for 2000 (Tables 3 to 5). Despite a firm control on federal noninterest spending, including significant cost cutting measures around mid-year that allowed to lower the program ceilings on such spending for the second half of the year by Arg$300 million, the federal deficit is now expected to end the year at Arg$6.9 billion2 (2.4 percent of GDP), or some 0.7 percent of GDP higher than in the original program approved in March. This would represent an only small decline from 1999, both in current pesos and in percent of GDP. This disappointing performance is largely the result of weak revenue collection: overall tax revenues, including social security contributions, rose by only 3 percent through November 2000, compared with 8.7 percent expected initially in the program on the strength of the sizable package of tax measures and the tax amnesty introduced at the start of the year. Low tax revenues are explained mostly by the recession, but problems in tax administration—with deficiencies in tax compliance aggravated by the recession—are likely to have played a role too. It is expected that Argentina will have observed the target for noninterest expenditure for end-December, but not those for the deficit or the debt of the federal government and of the consolidated public sector. The authorities had requested the corresponding modifications in the program, but given the change in the calendar of purchases prompted by the requested augmentation of the arrangement, all end-December targets were made indicative.

Table 3.

Argentina: Consolidated Public Sector Operations 1996-2001

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Sources: Ministry of Economy; and Fund staff estimates.

Data for 1995-96 are adjusted to present federal revenue and expenditure on familiy benefits on a gross basis.

Includes central bank (BCRA) result.

Includes pension payments.

Table 4.

Argentina: Federal Government Operations 1996-2001

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Sources: Ministry of Economy, and Fund staff estimates.

Data for 1995-96 are adjusted to present revenue and expenditure on familiy benefit on a gross basis.

Includes central bank (BCRA) result.

Operating surplus of public enterprises and capital revenue (other than privatization receipts).

As defined in the 2000 fiscal pact; the remaining transfers reflect earmarked taxes and other specified transfers not included in the general revenue-sharing arrangements.

Table 5.

Argentina: Provincial Governments Operations 1996-2001 1/

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Sources: Ministry of Economy, and Fund staff estimates.

Includes the municipality of the city of Buenos Aires (MCBA).

Includes pension payments.

7. The fiscal position of the provinces also strengthened during 2000, but by less than was initially expected. Preliminary information indicates that the consolidated deficit of the provinces will decline to about Arg$3.4 billion (1.2 percent of GDP), compared with 1.6 percent of GDP recorded in 1999, and 1 percent envisaged in the program. With roughly unchanged revenues from 1999, the adjustment will reflect mainly a reduction in spending, particularly in the 10 relatively small but highly indebted provinces that entered into agreements with the national government, under which they committed to adjust their finances in exchange for assistance in restructuring their debts. Progress in fiscal consolidation was also made by some of the larger provinces; with the exception, however, of the province of Buenos Aires, which is projected to account for 57 percent of the combined provincial deficit in 2000 (up from 46 percent in 1999). Buenos Aires was one of the few provinces that enjoyed access to international financial markets through the first half of 2000, but this access was also curtailed in the latter part of the year, highlighting the need for a significant fiscal adjustment.

8. The continued stagnation of economic activity dampened private sector demand for credit from the banking system,3 and eroded further the quality of bank portfolios. Nonperforming loans rose from 11.5 percent of risk assets at end 1999 to 12.7 percent in September 2000,4 requiring banks to increase their provisioning. Net of provisions, nonperforming loans remained unchanged at 4.4 percent of risk assets. The banking system remains highly capitalized, with the capital adequacy ratio (Basel criteria) amounting to 20.2 percent, and maintains comfortable levels of liquidity. Liquid reserves in foreign exchange are equivalent to about 20 percent of total deposits, a coverage that rises above 28 percent if a contingent repo facility with foreign banks is included. The resilience of the banking system was demonstrated again in recent months. Deposits, which through end-September had grown by more than 7 percent from their end-1999 position, experienced an only limited decline in subsequent months, before stabilizing in recent weeks at a level still some 5 percent above that at the beginning of the year (Table 6). To accommodate the decline in deposits and also meet liquidity needs in a few more exposed banks the central bank allowed a temporary relaxation of liquidity requirements during November. These requirements were restored to their customary level in December.

Table 6.

Argentina: Summary Operations of the Financial System

(In millions of pesos, end of period)

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Sources: Central Bank of the Republic of Argentina; and Fund staff estimates.

Includes net use of Fund resources.

For 2000, September.

For 2000, November.

Excludes unrecoverable loans that have been charged-off from assets on balance sheet.

9. The external financing prospects for the rest of 2000 changed drastically from the third quarter on. Notwithstanding the fact that some three-fourths of the external current account deficit is being covered by foreign direct investment (FDI), the tightening of external financing conditions, which required the drawing of the amounts accumulated under the precautionary Stand-By Arrangement, is projected to result in a loss of net international reserves of some US$2 billion for the year as a whole. During the recent crisis, gross international reserves, including the bank’s liquidity requirements held abroad, declined by some US$4 billion, to about US$29 billion at their lowest point at end-November, reflecting also the decline in deposits and the temporary relaxation of liquidity requirements.5 With the subsequent stabilization of conditions and the tightening of these requirements, reserves picked up again and are projected to end the year at around US$32.5 billion, nearly 40 percent of M3 or one and a half times the country’s short-term debt.

III. The Strengthened Policy Framework

A. Overview

10. As indicated in the authorities’ Memorandum of Economic Policies (MEP) (EBS/00/278 of December 21, 2000), the Argentine government is responding to the worse-than-expected economic performance in 2000 by strengthening its policy framework, and accelerating its structural reform efforts. Specifically, it has announced, and began to implement, a series of policy initiatives aimed at promoting a sustained recovery of domestic demand and output, including measures to stimulate investment and to enhance the productivity and competitiveness of the economy. An important component of this strategy is the decision to accept in the short run a moderate increase in the fiscal deficit, compared with the initial budget proposal for 2001, to avoid a strong contractionary fiscal impact on the economy. At the same time, however, the authorities fully recognize the importance of reassuring domestic and foreign investors about their commitment to medium-term fiscal sustainability, a necessary condition for a lasting decline of the risk premium on Argentine debt and of domestic interest rates, and thus for a resumption of sustained economic growth. For this purpose, they have taken a number of important new policy initiatives—notably, the recent federal pact with the provinces and the reform of the social security—which aim to support the fiscal consolidation targets stipulated for the next few years by the revised fiscal responsibility law, in particular the attainment of budget balance at both the federal and the provincial levels of government by, at the latest, 2005. The main elements of this strategy and their expected impact on the domestic and external performance of the economy over the short to medium term, are outlined in the following sections.

B. A Growth-Oriented Economic Strategy

11. The Argentine economy grew by over 4.5 percent a year on average during the nineties, following the introduction of the convertibility regime, albeit with significant year-to-year fluctuations, mainly related to changes in the international environment. Domestic investment was a main motor of growth, rising as a share of GDP by nearly 6 percentage points—to just under 20 percent of GDP—between 1990 and 1998, before declining to around 18 percent of GDP in 1999, in response to the external shocks mentioned above.

12. The authorities are convinced that a lasting recovery of domestic demand and output needs once again to be spearheaded by investment, and have therefore concentrated their efforts on promoting a sustained recovery of the latter through a range of new policy initiatives, as well as by accelerating the implementation of ongoing structural reform efforts. The new policy measures include steps to eliminate, or at least reduce, fiscal impediments to investment, inter alia: (i) the phased elimination, between January 1, 2001 and July 1, 2002;of the existing 15 percent tax on interest paid by enterprises,6 (ii) a modification of the VAT allowing credits against this tax for new investments to be charged against other taxes or collected in cash after one year; (iii) the extension to 10 years of the period allowed to enterprises for deducting losses from the taxable base of the minimum corporate income tax; and (iv) allowing a partial deductibility of interest paid on new mortgage loans from the base of the income tax. This latter measure aims specifically at stimulating investment in housing (Box 2).

13. In addition, the government has been pressing through congress passage of the proposed “Infrastructures law,” which aims at mobilizing private sector financing for the construction of needed infrastructure through a build-and-lease mechanism, whereby a specially constituted fund will provide private enterprises a guarantee of future lease payments on selected infrastructure projects. This fund is expected to begin operations in 2001, with first lease payments likely to begin in 2002. To further support activity in the depressed construction sector, and ease certain infrastructure bottlenecks, the government included in the revised budget for 2001 about Arg$200 million for additional investment in public works.

14. Given, however, the existing budgetary constraints, the authorities recognize that the main impulse to private investment has to come from an improved business outlook, increased profitability, and greater flexibility in product and factor markets. For these purposes, emphasis is being placed on: deregulation and the promotion of competition in the economy, especially in key sectors such as telecommunications and energy; the rapid renegotiation of expiring contracts with privatized enterprises, especially in utilities and transport sectors, to define the “rules of the game” in a medium-term horizon; and the finalization of the regulation of still pending aspects of the labor market reform legislation approved by congress in May 2000. As indicated in the authorities’ MEP, the new telecommunications regime was enacted in November 2000; new contracts have been negotiated in recent months in the petroleum, gas, mining, water, electricity, and railways sectors; and the last implementing regulations for the labor market reform—including the politically sensitive ones for collective bargaining—were issued in early December. Further steps—including the issuance of implementing regulations for the law on protection of competition, and a new regulatory framework for the ports system—are planned in the near future.

15. The World Bank and the Inter-American Development Bank are supporting the government’s structural reform efforts by expanding their presence in Argentina, and helping the government address constraints that impede productivity growth and social development (Table 7). Specifically, the World Bank is supporting the reform of the state, in particular of the Tax and the Social Security agencies; is assisting with the liberalization of health insurance; is working with the provinces to strengthen their fiscal position; and is supporting the public employment program. The IDB in turn is focusing its activities on the support of the federal pact with the provinces; on education, particularly basic general education; on the reform of the capital market; and on the infrastructure and deregulation initiatives mentioned above.

Table 7.

Argentina: Contributions of the Inter-American Development Bank and The World Bank to the Financial Support Package

(In millions of U.S. dollars)

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Source: Ministry of Economy.

Includes financing for the provinces.

Tax Measures

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16. The authorities are confident that, in conjunction with a less adverse external environment—including a soft landing in the U.S. economy, some decline in international interest rates, and some improvement in non-oil commodity prices, as well as strengthened confidence in Argentina’s ability to meet its financing needs—the policy initiatives outlined above will bring about a gradual recovery in demand and output, beginning in the first quarter of 2001, and strengthening progressively in the course of the year, to growth over 4 percent by the fourth quarter. The quantitative framework of the program assumes an average rate of GDP growth around 2½ percent in 2001, with domestic demand rising by about 2¼ percent, and the real foreign balance making a modest (about 0.2 percent) positive contribution to GDP growth. Investment is projected to rise by nearly 5 percent in 2001, following a cumulative decline of 16.6 percent in 1999–2000.

17. The pickup in output is expected to be reflected in a gradual recovery of employment in the course of 2001. The unemployment rate may not show a pronounced decline, however, especially if—as it is likely—the upturn in employment leads to an increase in participation rates as well. Reflecting the still large output gap, and the labor market slack, as well as some further decline in unit labor costs, consumer prices are likely to remain flat. The GDP deflator may show, however, a modest increase, in reflection of the expected further improvement of the terms of trade.

C. Fiscal Policy and Prospects

The federal budget for 2001

18. In shaping fiscal policy for next year, the authorities faced a difficult trade-off between avoiding a significant contractionary fiscal impulse, on the one hand, and securing a reduction of the federal deficit from its still relatively high level in 2000. The initial budget proposal for 2001, formulated during the summer when there were tentative signs of a recovery in domestic demand, focused on the objective of fiscal consolidation, with the federal deficit targeted to decline from the then expected Arg$5.3 billion (1.8 percent of GDP) in 2000 to Arg$4.1 billion (1.4 percent of GDP) in 2001, in line with the requirements of the fiscal responsibility law enacted in August 1999. This decline of the deficit was predicated on assumed rates of growth of nominal GDP of over 2 percent and over 4 percent in 2000 and 2001, respectively. As it became increasingly apparent, however, that activity was stalling again in the third quarter of 2000, and the tightening of financing constraints was further adversely affecting the short-term prospects for growth, the authorities recognized that the proposed fiscal deficit target for 2001 could not be met without further revenue or expenditure measures which would impart a substantial fiscal contraction to the economy. They decided, therefore, to present a revised budget for 2001 allowing for an only modest decline of the deficit, to Arg$6.5 billion (2.2 percent of projected GDP), extending at the same time to 2005 the horizon for eliminating the deficit, through a revision of the relevant provisions of the fiscal responsibility law.

19. The revised 2001 budget—approved by congress on December 14, 2000, and supplemented by a number of line-item vetoes by the President—envisages a broad stabilization of the federal tax ratio (at around 18 percent of GDP, including social security contributions), as the revenue impact of the tax cuts referred to above, as well as of other tax reducing measures, is expected to be largely offset by bringing forward the payment of VAT deferrals, by the full year effect of some of the tax measures taken in 2000, and by steps to accelerate collection of overdue taxes. Nontax revenue is expected to be boosted, in particular, by the planned leasing of airwaves for third generation telecommunications equipment.

20. In line with the undertakings in the federal pact mentioned above, primary spending is to be kept unchanged at the same nominal level as in 2000. Given the expected small increase in transfers to the provinces, primary spending excluding these transfers is expected to show a further decline. Expenditures on selected social and public employment programs, as well as the above-mentioned public works, will be shielded from the cutback, and in fact additional budgetary allocations (equivalent to around 0.2 percent of GDP) will be provided to them. The interest burden is expected to continue to rise (by the equivalent of around ½ percentage point of GDP), to nearly 4 percent of GDP, reflecting the increase in both the level of the federal debt and the marginal cost of new borrowing.

21. To ease the government financing constraint in 2001 and subsequent years, the authorities have arranged a financial support package of US$39.7 billion from official and private sources. The package includes US$13.7 billion from the augmented Stand-by Arrangement (as requested); US$5 billion in new loan commitments from the IDB and the World Bank; and US$1 billion in a loan from Spain. In addition, the package includes US$20 billion of financing from the private sector The involvement of the private sector relies on a market-based, voluntary approach that is intended to complement Argentina’s objective of accessing international capital markets as soon as confidence returns. The private sector package includes an agreement with the 12 financial institutions that are market makers in Argentina to roll over maturing bonds, and purchase new public issues (at market prices), of US$10 billion (including US$5 billion in treasury bills maturing in 2001); understandings with private pension funds and other institutional investors on the purchase of new public issues of US$3 billion (which are consistent with existing limits on the sectoral composition of pension funds’ portfolios); and liability management operations of US$7 billion (Box 3).

Liability Management Operations

Argentina intends to continue making use of liability management operations to fill its financing requirements in coming years.1 The objective in using these operations will be to obtain cash relief and improve the profile of the public debt by refinancing or exchanging obligations with short-and medium-term maturities for obligations with Longer maturities, while possibly generating debt reduction and fiscal benefits. The liability management operations will consist essentially of swaps of certain obligations falling due in 2001-05 for new obligations with maturities ranging from 2 to 30 years. The costs of the swaps will be determined by market forces. As the cost of undertaking such swaps may not differ from the cost of placing new debt, Argentina will maintain some flexibility on how best to proceed in filling its financing requirements as circumstances change.

The liability management operations being considered at this time would total at least US$7 billion in 2001-05. Argentina has received proposals for such operations from nine investment banks that could be classified broadly in three categories: (i) a swap of US$1 billion of Eurobonds; (ii) a swap of US$3 billion of U.S. dollar-denominated obligations; and (iii) a swap of US$3 billion of coupons falling due from 2002 onwards on obligations held by Argentine institutional investors. In 2001, the liability management operations are expected to amount to about US$2.5 billion. Argentina could, if market conditions so allow, increase the size of the operations. These operations could include a swap of U.S. dollar-denominated domestic obligations falling due in 2001 for a bond with similar characteristics that would mature in 2003. There could also be an exchange of U.S. dollar and Eurobond obligations falling due in 2001 for bonds with maturity ranging from 4 years to 30 years.

1 Since mid-1997, Argentina has undertaken four operations ranging in size from US$2.5 billion to US$3.9 billion.

22. Despite the modest decline in the deficit, the gross financing requirements of the federal government are expected to continue rising in 2001, to US$21.8 billion, from US$19.8 billion in 2000, reflecting increased amortizations of medium- and long-term debt (Table 8). The rollover of the short-term federal debt—currently standing at around US$5 billion—will add further to these requirements. About 45 percent of the financing needs (US$9.7 billion) is expected to be met by private creditors through liability management operations (US$2.5 billion) and placements of new bonds and treasury bills in domestic and international markets, including US$2.6 billion with local pension funds. While the contribution of the private sector in 2001 will be less than in previous years, it is expected to increase significantly in 2002 and beyond. The share of the federal government debt held by private creditors, projected at 75 percent in 2001, would increase to about 90 percent in 2006, while that of official creditors declines accordingly.

Table 8.

Argentina: Financing Requirements and Sources of the Federal Government

(In billions of U.S. dollars)

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Sources: Argentine Ministry of Finance: and Fund staff estimates And projections.

Excludes loans by multilateral institutions to the provinces, guaranteed by the federal government.

Includes savings from debt exchange operations.

The provinces’ finances

23. The authorities recognize the importance of securing a sustained further improvement in the provinces’ finances in 2001 and beyond. For this purpose, the government successfully sought a new agreement with the provinces covering the period through 2005 (the federal pact). Box 4 presents an overview of the main features of this pact, which stipulates in particular, the containment of federal transfers to the provinces at a level below that entailed by the normal working of the revenue-sharing regime, and the maintenance of primary spending by the provinces in deficit at a level no higher than in 2000. The pact also commits the provinces to introducing own fiscal responsibility laws; working toward the harmonization of provincial taxes, and the elimination of distortions created by such taxes; and improving the quality and timeliness of their fiscal accounts.

The Fiscal Pact

On November 20, 2000 the federal government reached agreement with provincial governors on a fiscal pact for the next five years. This pact was enacted as law by congress in December.

The main elements of the pact are:

  • Revenue-sharing transfers covered by the pact (about 90 percent of the total) are fixed at Arg$1.364 billion per month in 2001 and 2002. Thereafter, these transfers will increase to Arg$1.4 billion in 2003 Arg$1.44 billion in 2004, and Arg$1.48 -billion in 2005.

  • Provinces with a budget deficit commit to freeze primary expenditure until budget balance is reached. A province can request authorization from the federal government to exceed this expenditure limit during extreme circumstances that could compromise the provision of education, health and security services.

  • The provincial governors commit to send to their legislatures fiscal responsibility laws in line with the federal government’s one, which requires budget balance to be reached by 2005. The 2001 budget law defines the linear path provincial deficits should follow.

  • In 2001, the federal government commits to increase budgetary resources for workfare and nutrition programs, and to transfer to provinces the administration of Arg$225 million for these programs. From 2002 onwards, the provinces will be in charge of the administration of 30 percent of budgetary resources for these programs.

Other elements of the pact are:

  • All parties commit to start, during 2001, congressional discussion of a new revenue sharing law as required by the 1994 constitution. If such law were approved before 2005, it would replace this pact.

  • The provinces obtained additional flexibility by being allowed to freely allocate 50 percent of the transfers covered by the pact that otherwise are earmarked by law.

  • The federal government commits to continue its financial support program for highly indebted provinces.

  • The provinces undertake to work toward the harmonization of provincial taxes (especially the gross sales and the stamp taxes), and the elimination of distortions inherent in these taxes.

  • The provinces commit to improve the quality and timelines of their fiscal accounts.

24. The consolidated deficit of the provinces is expected to decline from the equivalent of 1.2 percent of GDP in 2000 to under 1 percent of GDP in 2001, with further linear reductions targeted for subsequent years, to zero by 2005. Of particular importance to the success of the provincial fiscal consolidation program will be the behavior of the province of Buenos Aires. This province’s budget for 2001 envisages a decline in its deficit to the equivalent of 0.5 percent of national GDP, and is likely to require significant efforts to contain payroll spending, which increased sharply in recent years. Given its substantial gross financing requirements (projected at over US$2 billion in 2001), and recent downgradings of its debt by major rating agencies, Buenos Aires is likely to face increasingly strong market discipline in the period ahead.

25. The government is continuing its debt restructuring program (in combination with fiscal adjustment programs) for the ten more indebted provinces, which is expected to be extended to a couple of other provinces in the course of 2001. The authorities are also working with the World Bank and the IDB in promoting fiscal discipline in the provinces (including the larger ones) that receive sectoral loans from these institutions.

The consolidated public sector finances and debt dynamics

26. Reflecting projected developments at the federal and provincial levels, the overall deficit of the consolidated public sector is projected to decline by the equivalent of about 0.5 percent in 2001, to around 3.1 percent of GDP. The primary surplus is expected to rise by the equivalent of over 1 percent of GDP, to 1½ percent of GDP. Given the significant, and still modestly rising, output gap,7 this primary balance would likely impart some contractionary impulse to the economy, albeit a much smaller one than in 2000.

27. The scope for a more neutral fiscal stance is obviously constrained by the high and still rising level of the public debt relative to GDP. Table 9, based on relatively prudent assumptions regarding GDP growth and the development of interest rates and the exchange rate of the U.S. dollar vis-à-vis other major currencies, suggest that the public sector debt would continue to rise in relation to GDP in 2001 (partly reflecting the recognition of Arg$2.1 in past liabilities and other debt-creating flows8), and would rise modestly further in 2002, before beginning a steady decline from 2003 onwards, but would still remain by 2005 significantly above the level at the beginning of this decade. The analysis in Box 5 also highlights the sensitivity of the debt dynamics to the underlying assumptions, particularly regarding the real rate of GDP growth.

Table 9.

Argentina: Consolidated Public Sector Debt Dynamics

(In millions of U.S. dollars, unless otherwise indicated)

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Sources: Ministry of Economy, and Fund staff estimates.

Includes one-off gains made in debt management operations.

Includes quasi fiscal surplus not transferred to the treasury, capitalized interest, and valuation adjustments; in 2001, includes also Arg$400 million for payments due to judicial rulings on ANSES and Arg$800 million foe consolidation of INDER past obligations. In the projection perod the quasifiscal surplus is projected at Arg$300 million per annum.

Consolidated Public Sector Debt—Sensitivity Analysis

One of the key objectives of the economic program is to put the consolidated public sector debt on a sustainable path. Under program assumptions this is achieved after 2002 when, after having peaked at about 53 percent, the ratio of public sector debt to GDP starts to decline. This is the result of the ambitious fiscal consolidation targets in the program, which are in line with the fiscal convertibility law and the fiscal pact between the federal and provincial governments. Achieving these fiscal targets entails a significant reduction of primary expenditure in percent of GDP.

The program is based on real GDP growth rates of 2.5 percent, 3.8 percent and 4.3 percent in 2001, 2002, and 2003-05, respectively. It also assumes that the marginal interest rate in the bond market declines by 50 b.p. per year, and exchange rates follow the latest WEO projections. The lower growth scenario assumes rates of growth 1 percentage point lower in 2002-05. The higher interest rate scenario assumes that interest rates do not decline over time; while the more depreciated U.S. dollar scenario assumes 5 percent more depreciation vis-à-vis the other currencies in the period 2002-05. In all scenarios primary expenditure is maintained in nominal terms as in the program (baseline) scenario.


Argentina: Consolidated Public Debt Dynamics-Sensitivity Analysis

(In percent of GDP)

Citation: IMF Staff Country Reports 2001, 026; 10.5089/9781451801286.002.A001

The sensitivity analysis shows that the debt dynamics are particularly sensitive to GDP growth; to a smaller extent to a depreciation of the U.S. dollar (mainly due to the valuation adjustment of the stock); and show little sensitivity to variations in the marginal interest rate. The latter is a consequence of the relatively high average maturity of Argentina debt.

Structural fiscal reforms

To buttress its commitment to medium-term fiscal sustainability, the government is strengthening and accelerating structural fiscal reforms. The MEP outlines these efforts in the areas of tax administration (see also Box 6), the reform of the public administration, the pension system (Box 7), and the health system (Box 8). A number of these reforms will be supported by the World Bank and the IDB through sectoral loans.

Tax Administration1

Tax evasion and elusion have been important problems in Argentina. In 1996, with a view to solving these problems, the government merged the responsibilities for the administration of customs, tax and social security contributions under one agency (AFIP). Progress has been made since then in coordinating tax and customs operations, improving revenue accounting and tax collection enforcement activities, and modernizing information technology systems. However, further progress is still needed.

The challenges in improving tax collections in Argentina extend beyond internal problems of AFIP. The continued use of tax moratoria and payment facilitation schemes raises doubts about the government’s commitment to enforce tax laws on a consistent basis. The frequent and significant changes to tax laws have created uncertainty about the requirement of those laws for both tax officials and taxpayers. For many years, it has also been difficult for AFIP to obtain judicial support for the timely hearing of tax disputes, enforcement of collection of tax debts, and prosecution of tax fraud cases. Bank secrecy requirements have also been identified as a possible factor contributing to problems in the collection of tax debts.

Some internal issues in AFIP itself also need to be addressed. It is necessary to develop a national audit plan and coordinate its implementation with provincial tax administrations. The audit coverage of taxpayers’ liabilities needs to be significantly increased from the current low levels of about 0.7 percent of the taxpayer population. Collection operations need to be improved. Information technology (IT) strategies need to be developed. Regarding customs administration, considerable resources invested in systems and procedures over the last years have not yet resulted in enhanced management control.

In the context of the program, the authorities have indicated their intention to accelerate the implementation of the recently approved anti-evasion law, including the full entry into operations of the new Tax Frauds Tribunal; to a schew amnesties or other payment facilitation arrangements for overdue taxes; to design and implement a national audit plan, aimed at expanding coverage of desk audits to 100,000 taxpayers; and to improve internal controls and supervision in AFIP to increase efficiency and minimize opportunities for corruption.

1 Based on the reports of two recent FAD technical assistance mission in tax and customs administration.

Proposal to Reform the Pension System

The government had submitted to Congress a draft bill to reform both the pay-as-you-go (PAYG) and the capitalization components of Argentina’s pension system. In view of a lack of congressional support, the government has recently enacted the reform by decree. The following are some of the main elements of the reform.

The reform to the publicly managed PAYG component aims at better targeting the distributive element of the system, while improving its finances over the medium term. Currently, the system provides a flat benefit of Arg$200 per month to individuals retiring with at least 30 years of contributions. The government projects the cost of this benefit (known as PBU) to rise over time as more people retire, notwithstanding a relative reduction in the coverage of this benefit resulting from the movement of workers between formal and informal jobs (while in the latter workers do not build up their contributive histories). Over the medium term, pressures are likely to mount to provide some support to the growing number of elderly people with limited or no right to pension benefits. The bill sent to congress by the government seeks to preempt this possibility by introducing a “universal benefit” of $100 a month payable to individuals of age 70 and over with no other means of support, regardless of their contributive histories. The government estimates that the cost of this benefit will be more than offset by savings from replacing the PBU with a graduated supplementary benefit (SB). The SB would change inversely with a person’s other pension income–vanishing for those whose other pension benefits add up to more than Arg$800 a month—and would be accompanied by a guarantee that income from all pension sources would not be less than $300 a month. Future revisions of the benefits of the public system would be linked to the evolution of an average wage index, but would not be automatic, being instead subject to the availability of budgetary resources. The reform also includes incentives for women to postpone retirement until age 65 (the statutory retirement age for women is 60 years).

The reform also aims at increasing competition in the privately run fully–funded component of the system. In particular, the Superintendency of Pension Fund Administrators (SAFJP) will be allowed to present complaints before antitrust tribunals against pension fund managers engaging in anti–competitive behavior. Furthermore and to promote price competition, individuals who do not expressly choose a particular pension fund will be assigned to the one charging the lowest fees (at present, these individuals are randomly assigned among all pension funds). The reform would also give the SAFJP authority to modify the limits on the investments of the pension funds in different securities.

The reform proposes new rules for the issue of life annuities under the capitalization regime by mandating the use of a unified life table for men and women and strengthening the supervision of insurance companies. The reform would also modify the administration of certain disability pensions. At present, the social security administration (ANSES) pays for a fraction of the necessary capital to purchase an annuity for most participants in the capitalization regime who become disabled. Under the reform, ANSES would instead make direct monthly payments to the beneficiary.

Reform of the Mandatory Health Insurance System

The current system of mandatory health care for salaried employees is built around institutions known as obras sociales (OS), most of which are run by trade unions. The system is financed with employer and employee contributions: 5 and 3 percent of gross wages, respectively. The bulk of these contributions (90 percent) is paid to the employee’s OS, while the rest finances a supervisory agency and a redistribute mechanism, the Redistributive Solidarity Fund (FSR). The system has a number of well recognized problems: generally poor service, facilitated by the lack of competition among OS given the automatic affiliation of workers to the OS managed by their trade union; variability in the quality of service and financial viability of different OS, since each one is a closed pay-as-you-go scheme for the labor force of a specific industry; and indulgence of mismanagement through the use of the FSR to assist financially troubled OS.

Two presidential decrees, issued on June 6 and December 3, 2000, introduced important modifications to the system of mandatory health insurance scheduled to take effect in 2001. The central element of the reform is the opening to private companies of the market for the services financed with mandatory health insurance contributions. Starting in 2001, alt workers1 will be able to obtain their mandatory health insurance from any existing OS or from any private entity offering such services under the authorization and supervision of the Superintendency of Health Insurance (SSS, the new supervisory agency). The decrees provide for the prosecution of employers and providers attempting to distort or hinder the free exercise of the workers’ right to choose providers. Ail providers registered with the SSS will be required to accept all applicants and to offer them at least the basic package of medical services determined by the SSS.

As part of the reform, the fraction of the contributions from the better paid workers that goes to the FSR will be increased. The resources of the FSR will be used to subsidize the provision of the basic services package to the families of workers with the lowest wages by guaranteeing that providers receive a minimum monthly contribution per beneficiary,2 to finance the coverage of high-cost, high-complexity and low-frequency illnesses outside the basic package; and to constitute a liquidity reserve to help providers facing financial disequilibria due to contribution arrears.

1 With the exception of the employees of the armed forces.2 Beneficiaries include contributing employees and their eligible dependents.

D. Financial Policies

28. The authorities noted that the temporary forbearance with respect to the observance by banks of the minimum liquidity requirements in November 2000 had led many banks to increase their net asset position abroad, in the expectation that this relaxation was going to be permanent, and had contributed to the significant decline in gross international reserves during that month.9 Thus, the announcement that henceforth, these requirements would again be firmly enforced was likely an important factor behind both the recovery of reserves during the month of December, and the increase in the interbank call rate during the first half of the same month, as the banks that had faced liquidity shortfalls in November, resorted to the interbank market to reconstitute it. The interbank rate has declined again in the second half of the month, suggesting a return to more normal liquidity conditions in the banking system. For 2001, the program allows a modest scope for liquidity support to the banks by the central bank and thereby prevent excessive volatility in the market. As in previous years, and consistent with the Convertibility Law, the net domestic assets (NDA) of the central bank have room to rise by up to Arg$400 million, excluding scheduled repurchases from the Fund.

29. The monetary program for 2001 conservatively projects a lower increase in bank liabilities to the private sector relative to GDP than has been customary in the last several years. Given the expected decline in net foreign assets of the banking system, and further increase in net domestic credit to the public sector, bank credit to the private sector is expected to recover only moderately (by about 6 percent) from the depressed level of 2000.

30. The program also envisages a continuation of the authorities’ efforts to further strengthen bank supervision, and the regulatory framework to facilitate bank resolution. As indicated in previous reports, the staff analysis suggests that the banking system remains strong and generally well capitalized, although profitability has been reduced in the last couple of years by the recession-induced increase in nonperforming loans and therefore in provisions. This analysis will be deepened in the forthcoming FSAP, scheduled to begin early in 2001. In this context, an initial review of the regulatory framework for corporate bankruptcy suggests a need to improve procedures for out-of-court resolution of corporate distress cases.

31. The authorities also see as a priority the need to promote a rapid and healthy development of the domestic capital market, and, for this purpose, plan to send to congress in the first quarter of 2001 a bill on best practices in the financial sector, strengthening corporate governance, transparency requirements, and protection of minority shareholder’s rights, as well as a bill to modernize the regulatory framework for the insurance sector.

E. External Policies and Prospects

32. The program is predicated on the maintenance of the convertibility regime which the vast majority of the Argentine people continues to regard as the main anchor for price and financial stability. The staff analysis suggests that:

  • as indicated above, the competitive position has gradually improved over the last year, and can be expected to continue to do so in the short to medium term, reflecting the maintenance of domestic inflation rates significantly lower than the average in Argentina’s trade partners, further significant gains in productivity as a result of investment and the structural reform efforts outlined in Section A above; and a likely, at least partial, reversal of the appreciation of the U.S. dollar in recent years; and

  • even abstracting from productivity gains and in the absence of a substantial depreciation of the U.S. dollar, the trade surplus should continue to rise in the years ahead, in the likely event that the recovery of domestic demand and imports remains a moderate one (Table 10). The staff’s central medium-term scenario for the balance of payments, based on average historical elasticities and the projected path of domestic real GDP and world trade growth, suggests that—barring renewed terms of trade or interest rates shocks—the current account deficit would also decline slightly to levels (between 2¾ and 3 percent of GDP) which could likely be financed in large part by net FDI. This would facilitate a gradual decline of the external debt and debt service in relation to GDP and especially to exports, albeit to levels which remain relatively high in an international perspective (Tables 11 to 14). Assuming full disbursement of the amounts available under the program, the debt service to the Fund would peak in 2006 in absolute value, but in 2002 in relation to exports (absorbing over 12.5 percent of the latter). Figure 4 presents graphically the results of some sensitivity analysis of the baseline scenario; it shows that both the current account deficit and the external debt and debt service are especially sensitive to changes in the rates of growth of domestic output and world demand, compared with the baseline assumption. Because of the relatively long maturity structure of the external debt (in particular its public component) and the prevalence of fixed rate liabilities in this debt, increases in interest rates have a limited direct adverse impact on the current account on the debt. In fact, as has been the case in recent years, their dampening effects on domestic activity, and consequently on imports, may more than offset their direct impact on the external interest bill.

Table 10.

Argentina: Medium Term Balance of Payments, 2000-06

(In billions of U.S dollars, unless otherwise indicated)

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Sources: Ministry of Economy; and Fund staff estimates.

Includes commercial and bilateral loans

In 2000, excludes the effect of the sales of shares of Banco Rio (i e. US$340 million in FDI inflows and in portfolio investment outflows)

In 1999, excludes the effect of the sale of YPF shares in the hands of the Argentine private sector to Repsol (i.e., US$10.838 billion in FDL inflows and in portfolio investment outflows) In 2000, excludes the effect of the sales of shares of Astra. Telefonica and YPF (i.e. US$J 833 million).

Includes deposit reflows and counterpart of interest earnings held abroad.

Includes errors and omissions