Argentina: Request for Stand-By Arrangement

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

Abstract

In recent years, the IMF has released a growing number of reports and other documents covering economic and financial developments and trends in member countries. Each report, prepared by a staff team after discussions with government officials, is published at the option of the member country.

I. INTRODUCTION1

1. The Argentine authorities have prepared a short-term economic program to provide a policy framework for the political transition. They have requested that it be supported by a Stand-By Arrangement (SBA) in the credit tranches from the Fund in an amount of SDR 2.17 billion, which is sufficient to cover obligations (including expected charges) falling due during the period January-August 2003. In addition, they have requested that all repurchase expectations arising during the period of the proposed arrangement be extended. The economic program focuses on core fiscal, monetary, and banking policies for the first half of 2003. The authorities also expect to make progress in preparation of tax and intergovernmental relations reforms, enhancing application of the insolvency law, reviewing the financial situation of privatized utilities, and collaborating with foreign creditors.2 Fund support would unlock essential social sector lending from the World Bank and the Inter-American Development Bank (IDB), allow Argentina to clear arrears to the World Bank and the IDB, and to meet debt service payments falling due to the international financial institutions (IFIs). During the period of the proposed arrangement, the exposure of the IFIs to Argentina would increase by about US$1.3 billion, largely reflecting the financing of interest payments and charges.

2. It is the expectation that the transitional program will be succeeded by a multi-year Fund arrangement with the new government—to anchor IFI support for a more comprehensive economic program that is needed for Argentina to recover from the present crisis. The political calendar anticipates presidential elections in April, with a new government expected to take office in late May. There are clear risks even to the short-term transitional program from the forthcoming political events. These risks were discussed in the staff report for the Article IV consultation (EBS/02/214, 12/17/2002) and are reviewed again briefly in this paper.

II. Policies for the Transitional Program

A. Macroeconomic Framework

3.The proposed macroeconomic framework follows closely the 2003 outlook discussed in the staff report for the Article IV consultation. The authorities expect growth to resume during 2003 and inflation to be held below 35 percent (Table 12 and Text Table A). The large external current account surplus is projected to decline somewhat, mainly reflecting a recovery in imports, and gross reserves are projected to remain unchanged at about US$10½ billion by the end of the arrangement.

Table 1.

Argentina: Selected Economic and Financial Indicators

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Sources: Ministry of Economy; and Fund staff estimates.

Average interest rate on 30- to 60-day time deposits in national currency. The rate is weighted by deposit amounts.

In months of imports of goods and nonfactor services

Table 2.

Argentina: Summary Balance of Payments, 1999-2002

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Sources: Ministry of Economy; and Fund staff estimates.

Includes errors and omissions.

Includes arrear accumulation on private sector debt.

As percentage of exports of goods and nonfactor services.

In months of imports of goods and nonfactor services.

Text Table A.

Macroeconomic Framework, 2002-03

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Year-on-year percent change.

4.Achieving the macroeconomic objectives will depend upon a number of factors. Monetary and fiscal policies lie at the core of the program but will need to be supported by consistency and coherence in other policies—especially a banking strategy—and much improved legal certainty. The success of the program will depend upon maintaining fiscal discipline and containing future shocks and capital outflows. Starting a sustainable recovery will need new credit flows and a gradual return of confidence, which could be delayed until there is a stronger political consensus for orderly reforms. Estimates of private Argentine capital abroad range well over US$100 billion and suggest the kind of support for the economy that could materialize with confidence in the policy framework.

B. Monetary and Fiscal Policies under the Program

5.The monetary program is centered around maintaining the adjusted monetary base broadly at its end-December 2002 level through mid-2003 (Text Table B and Table 3).3 Base money rose quite rapidly in the final quarter of 2002, only partly for seasonal reasons. The authorities’ program builds in a further rise during the first quarter of 2003 reflecting the fiscal gap (and its front-loaded phasing), with a very small reduction starting in April. The authorities believe that it would be difficult to flatten the trajectory of base money given the large sterilization effort already needed to reach their target, which would involve a significant increase in the stock of central bank bonds during the program. In the staffs view, a more conservative monetary program is recommended. In particular, it will be important to reabsorb the seasonal increase in base money that occurred at the end of the year.

Text Table B.

Monetary Program

(In billions of Arg$)

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Program target, before net inflows from IFIs; evaluated at the program accounting rate of US$1-3.85 Arg$ and SDR l=US$1.32408.

Table 3.

Argentina: Summary Operations of the Financial System, 1998-2003 1/

(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 IFI resources. For 2003, foreign currency items are valued at the program accounting rate of ArgS3.85 per U.S. dollar.

For 2003, excludes on-lending of IMF disbursements. For 2002, reflects use of a special SRF deposit at the central bank and data discontinuity/reclassification related to the end of the convertibility.

Does not include quasi-monies (equivalent to Arg$7,500 million at end-December 2002).

For September 2001.

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

6. The rationale for developing a monetary-based anchor was discussed in the staff report for the 2002 Article IV consultation. The authorities are encouraged by the recent stability—and rise—of overall bank deposits and believe that a sufficiently firm anchor already prevails to underpin the monetary program. Operationally, they will seek to control the monetary base by acting on net domestic assets of the central bank and limiting sales of foreign exchange reserves for intervention—within the framework of a continued flexible exchange rate policy. Given the difficulties in predicting money demand and assessing the monetary overhang, particularly during a period of political transition, the monetary program would be reviewed regularly.

7. However, as discussed in the recent Article IV report, there are still a number of concerns regarding the credibility of the monetary anchor. The risks of future deposit withdrawals remain high from court injunctions (amparos) and the reprogrammed time deposits to be released in 2003. There are also uncertainties arising from the decision that the supreme court will take regarding the constitutionality of the pesoization. In addition, slippages in the fiscal framework may lead to pressures for monetization, and a strong central bank role will be essential. The authorities have discussed with staff contingency measures in the event that new shocks threaten deposit stability. They will be monitoring closely the liquidity situation of banks—among other indicators of pressures on banks.

8. The fiscal program is centered around securing a consolidated cash primary surplus of about 2½ percent of GDP in 2003 (compared with an estimated balanced outcome for 2002).4 In passing the budget, Congress approved removal of an expenditure contingency, as well as additional spending cuts. However, they also introduced some new spending initiatives, not all of which were vetoed by the President.5 In addition, some revenue measures proposed by the government were not approved by Congress—specifically the conversion of the fuel tax to an ad valorem basis and the elimination of the income tax exemption on export rebates. These measures will be discussed again by Congress in February 2003. In February, the Congress will also continue discussions regarding the three remaining competitiveness plans. The authorities have now committed to the elimination of all competitiveness plans by end-March 2003. Congressional approval of these measures is necessary for the primary surplus target to be reached and for the fiscal gap to be consistent with the monetary program. The fiscal gap is being covered by central bank credit to government (Table 5)

Table 4.

Argentina: Consolidated Public Sector Operations, 1998-2003

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Sources: Ministry of Economy; and Fund staff estimates.

Includes transfers of central bank profits.

In 2002-03, excludes interest due on unrestructured debt (phase two).

Reflects the indexation of government bonds and interest capitalization associated with the phase one debt exchange in 2001.

Includes bonds issued to banks in connection with banking crisis, and the reinstatement of wage and pension cuts implemented in July 2001.

Table 5.

Argentina: Projected Fiscal Financing Gap, January-August 2003 1/

(In billions of U.S. dollars)

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Sources: Ministry of Economy; and Fund staff estimates.

Assumes that the need for additional resources related to phase two debt will be met through the accumulation of arrears on this debt.

Including to clear accumulated arrears. Total debt service to the World Bank and IDB, of US$2.2 billion and US$2.0 billion, respectively, also includes payments of obligations of the central bank

Includes repurchase expectations amounting to about US$3.7 billion, which are assumed to be converted to an obligations basis.

Including interest and amortization of phase one debt, bank compensation bonds, bonds issued in the deposit-bond exchange, tax payments with defaulted bonds, judicial sentences, and other debt-creating expenditures recorded below the line.

To be financed by credit from the central bank.

9. Provincial adjustment is being achieved through spending controls and administrative reforms. Provincial adjustment in 2003 is to be underpinned by the bilateral agreements for 2003 that are planned to be ratified by provincial legislatures by mid-May 2003. The staff places the highest importance on early approval and ratification of these bilateral agreements.

10. Federal government debt is projected to rise by Arg$105 billion (21 percent of GDP) in the first half of 2003. Only a part of this increase is accounted for by fiscal operations during the period. The main components of the increase are: (i) the assumption of provincial government debt in mid-2002 and other debt recognition (Arg$41 billion); (ii) government support for the financial system, including bonds to compensate for the balance sheet impact of amparos and asymmetric pesoization and indexation (Arg$17 billion), and the exchange of government bonds for bank deposits (Arg$7 billion); (iii) the effect of inflation on indexed debt (Arg$27 billion); and (iv) the accumulation of interest arrears (Arg$10 billion).

11. Against the background of the April presidential elections, risks to the fiscal outlook arise from a number of sources:

  • Congress may not approve the revenue measures (US$100 million) needed to achieve the fiscal target, which would almost double the fiscal financing gap (to US$200 million) and the need for central bank financing.

  • It may be difficult to accommodate the new congressional spending initiatives that were not vetoed (US$180 million) given that other spending programs are already very compressed.

  • Pressures for wage increases and tax forbearance will need to be resisted.

  • The potential remains for further slippage in provincial finances, particularly if the bilateral agreements are not ratified on schedule or implemented.

  • Meeting policy conditionally to ensure the scheduled flow of IFI disbursements is a risk to the financing of the program.

C. External Financing

12. The financing of the program is designed to give breathing room until a more comprehensive program with greater political consensus can be developed. Thus, the IMF, the World Bank, and the IDB have committed to raising their financing flows and avoiding the need for Argentina to make net payments during the program period—as long as the policy program is implemented (Tables 6,Table 7 and Table 8). The authorities intend, during this transitional period, to accumulate arrears on phase two debt, but have committed to strengthen the collaborative approach towards restructuring debt held by private creditors. They have initiated contacts with various creditor groups and are in the process of hiring a financial advisor.

Table 6.

Argentina: Projected Net Obligations to the IMF, January-August 2003 1/

(In millions of U.S. dollars) 2/

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Source: IMF staff estimates and projections.

Repurchase expectations of US$3.673 billion are assumed to be converted to an obligations basis.

SDR amounts converted to US$ at SDR1 =USD 1.32408.

Table 7.

Argentina: Projected Net Debt Service to the World Bank, January-August 2003 1/

(In millions of U.S. dollars)

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Source: World Bank staff estimates and projections.

Includes the clearance of arrears accumulated in 2002, estimated to be US$774 million.

Includes preliminary estimate of interest on new disbursements.

Table 8.

Argentina: Projected Net Debt Service to the Inter-American Development Bank, January-August 2003 1/

(In millions of U.S. dollars)

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Source: Inter-American Development Bank staff estimates and projections.

Includes the clearance of arrears accumulated in 2002 estimated to be US$771.5 million.

Includes preliminary estimate of interest on new disbursements.

13. The external financing need for the period January-August 2003, after assuming the accumulation of arrears on phase two debt, is estimated at US$11.6 billion (including to clear arrears to the World Bank and IDB) (Table 9). The authorities are seeking to meet this financing need through new disbursements from the IFIs of US$7.3 billion, and US$3.7 billion of extensions of repurchase expectations to the Fund, for a total of about US$ 11 billion,6 broadly equivalent to amounts falling due to them (including interest charges), and a requested rescheduling of all 2002 arrears and amounts falling due to Paris Club creditors (US$0.7 billion). Regarding the Paris Club, an initial meeting to discuss the authorities’ request for debt rescheduling was held on January 15. World Bank and IDB lending will be primarily in social sectors. The authorities have committed to clearing promptly arrears to the World Bank and the IDB. The program incorporates financing assurances reviews, together with the three planned program reviews, so that any deviations in financing can be quickly identified and corrective actions taken.

Table 9.

Argentina: External Financing Requirements, 1998-2003

(In millions of U.S. dollars)

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Sources: BCRA; and. Fund staff estimates.

Includes the need to clear the arrears with the IDB and the World Bank of US$772 million and US$774 million, respectively.

Includes errors and omissions.

For 2002 and 2003, includes mostly interbank credit and restructured debt.

Excludes debt by bilateral official lenders.

Includes debt assumed rescheduled by bilateral official lenders.

D. Exchange Controls

14. The authorities have begun to dismantle some of the exchange restrictions and controls introduced during 2002. Specifically, effective January 16, 2003, Article VIII restrictions have been eliminated in the following areas:

  • The prior authorization requirement for external transfers related to interest payments, profit remittances, and dividend payments. In addition, the government is prepared to provide foreign exchange for payments of reinsurance premiums for all transactions that are shown to be legitimate.

  • The prior authorization requirement for foreign exchange sales to nonresidents.

15. All Article VIII restrictions have now been removed other than: (i) the restriction arising from the freeze on time deposits (the corralón); and (ii) the restriction arising from the prior approval (which operates as a de facto prohibition) required on moderate loan amortization payments. The authorities have indicated that they will develop a proposal to modify the latter restriction at the time of the first review of the program. The ceiling on the export receipts surrender requirement to the central bank has been raised to US$1 million.

E. Other Policies

16. As described in the MEP, the authorities plan to complement core monetary and fiscal policies with the following structural measures:

  • Implementation of an initial strategy to restructure the banking system. The authorities are committed to: (i) institutional and legal reforms to strengthen the framework for bank resolution; (ii) revisions to prudential regulations;(iii) preliminary steps toward a reform of public banks; (iv) steps to enhance the autonomy of the central bank; and (v) strengthened bank diagnostics and bank resolution.

  • Preparing draft legislation on some of the structural measures needed to strengthen the fiscal position over the medium term. This includes tax reform aimed at broadening the tax base, and the reform of intergovernmental relations to encourage fiscal discipline in the provinces.

  • Avoidance of new restrictions on creditor rights. In this area, the authorities are committed to ensuring that there would be no new involuntary restraints on creditor rights, thereby allowing the insolvency law to be fully effective.

17. The expectation is that the structural policies in the transitional program will be made more comprehensive within a successor program. The full range of policies needed in these essential areas were presented in the staff papers for the recently concluded Article IV consultation. In particular, the successor government will need to accord priority to: (i) expanding the initial banking strategy to give greater assurances that financial intermediation would be restored; (ii) further liberalizing foreign exchange controls, especially the export receipts surrender requirement; (iii) vigorously promoting corporate restructuring, especially by developing and implementing an effective framework for out-of-court workouts, crucial also for restoring the health of the banking system; (iv) addressing the pricing and regulatory problems of the utility companies;7 (v) restructuring public debt to put the public finances on a sustainable basis; and (vi) ensuring legal certainty to rebuild investor confidence.

III. Access and Capacity to Repay the Fund

18. Access and phasing: Access of SDR 2.17 billion (154 percent of quota on an annual basis) has been requested. Approval will require use of the exceptional circumstances provision under the Fund’s access policy. The requested access equals obligations (including charges) falling due during the period January-August 2003. Thus, Fund exposure would increase during this period by about SDR 393 million (or 19 percent of quota) to SDR 10.94 billion (or 517 percent of quota). It is proposed that all repurchase expectations, which amount to SDR 2.8 billion during the period January to August 2003, be converted to an obligations basis.8 The phasing of purchases (Table 10) closely mirrors the schedule of obligations falling due. During the remaining period of 2003, US$3.2 billion would fall due to the Fund, and an additional US$2.2 billion to the World Bank and the IDB.

Table 10.

Argentina: Schedule of Purchases Under the Stand-By Arrangement, January-August 2003

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Total access on an annual basis is 154 percent of quota.

19. Capacity to repay the Fund. In the staffs view, the transitional program contains insufficient steps to give confidence to restoring medium-term sustainability and, thus, does not provide a basis for an assessment that Argentina would have the capacity to service its obligations to the Fund (or to comprehensively restructure the debt to private creditors).9 Enhancing Argentina’s capacity to repay the Fund will depend critically on having in place a successor arrangement in support of a sufficiently comprehensive economic program. Meanwhile, the authorities have committed to remain current to the Fund under the program and have requested that disbursements under the arrangement be held in Argentina’s SDR account solely for the purpose of the timely honoring of the obligations of Argentina to the Fund. In addition, reserve coverage of debt service to the Fund would remain relatively high (Table 11).

Table 11.

Argentina: Indicators of Capacity to Repay the Fund, 2003-07 1/

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Source: Fund staff estimates.

The repurchase schedule is assumed on an obligations basis from September 2003 onward. Future charges were calculated assuming an SDR interest rate of 1.91 percent-its value at end-December 2002.

20. A recent safeguards assessment of the Central Bank of Argentina concluded that: (i) substantial risks may exist in the system of internal controls; (ii) a more robust financial reporting framework should be developed; and (iii) central bank operational independence from government interference needs strengthening. Recommendations included two priority measures, one on the publication of the 2001 financial statements, and the other on the strengthening of the controls over the reporting of program data, including verification by the independent central bank controller (sindico). The central bank has recently informed staff that these recommendations have been implemented. Other measures include the adoption of International Accounting Standards (IAS) and elimination of the transfer of unrealized central bank profits to the government. Staff will continue monitoring the implementation of the recommended measures.

IV. Program Monitoring

21. Three program reviews are envisaged, including financing assurance reviews. As specified in Table 12 and in the attached Technical Memorandum of Understanding (TMU), performance criteria have been established for January 31, 2003 and March 31, 2003 for central bank net domestic assets and net international reserves, the primary balance of the federal government, the stock of federal government debt, and the stock of debt of the consolidated public sector. Indicative targets in all of these areas have been set for the test dates through June 2003 and, at the first program review, they will be reviewed and converted into performance criteria for May 31, 2003 and June 30, 2003. In addition, there are indicative targets for the overall cash balance of the federal government, the overall balance of the provincial governments, and the adjusted monetary base (adjusted to include quasi-monies). Continuous performance criteria have been established for: (i) the nonaccumulation of arrears to bilateral and multilateral creditors; (ii) the nonissuance of quasi-monies by provincial governments that have signed the bilateral agreements; and (iii) that no statute or other legal instrument will be adopted that provides a means for any involuntary suspension of creditor rights.

Table 12.

Argentina: Quantitative Performance Criteria and Indicative Targets, January-June 2003 1/

(In millions of Argentine pesos, unless otherwise noted)

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As defined in the Technical Memorandum of Understanding.

Indicative targets throughout the program period.

22. Structural performance criteria have been established on the: (i) congressional approval of the revenue measures needed to reach the primary surplus target; (ii) elimination of remaining competitiveness plans; (iii) signature of the 2003 bilateral agreements by the governors of provinces representing a combined total of at least 80 percent of the 2002 consolidated provincial deficit; (iv) revisions to the bank supervisory and prudential framework; and (v) the announcement of a transitional minimum capital adequacy ratio (Box 1). Structural benchmarks have been established on: (i) the provision to Fund staff of information on provincial government financing with a delay of less than 55 days; (ii) the appointment of an external advisor on public debt restructuring; (iii) the launching of the bidding process for the due diligence and strategic review of the public banks; (iv) the preparation of draft legislation for structural fiscal measures; (v) congressional approval of amendments to the financial institutions law; and (vi) ratification by provincial legislature of the 2003 bilateral agreements.

V. StaffAppraisal

23. The Argentine authorities hope that, by maintaining macroeconomic stability during the election period, the transitional program will provide a bridge to the successor government that is expected to take office in late May. The transitional program is viewed by the authorities as a first step to the comprehensive program required to restore fiscal and external viability to Argentina. By maintaining macroeconomic stability during the election period, the authorities hope that this would create the conditions that would allow the successor government to adopt a comprehensive program.

24.The transitional program is focused on monetary and fiscal policies, and initial steps for banking reform during the first half of 2003. The monetary program tries to restrain monetary growth so as not to exacerbate the problem of the monetary overhang that results from the frozen time deposits. In the staffs view, any increase in the monetary base over end-December should be strictly limited until there is greater evidence that the overhang has been addressed. In addition, as pointed out in the staff report for the 2002 Article IV consultation, there are a number of risks that could overwhelm the monetary program—and against which the central bank does not have commensurate instruments. The authorities have committed to consult the Fund on the corrective measures that would be taken were these risks to materialize and result in large deposit outflows. It is not clear, however, that there would be sufficient time and instruments to manage these risks effectively.

25.The fiscal program is based on maintaining tight control over primary spending and on the absence of any net new financing from the IFIs. Implementing the fiscal program will be a considerable challenge to the authorities and the expenditure cuts will be difficult to sustain. Risks arise from a number of sources and, were they to materialize, would result in the monetization of the deficit which could quickly overwhelm the monetary program. Risks are highest from the behavior of the provinces, new congressional spending initiatives, and wage pressures—all of which are more difficult to control during an election period. However, there are also considerable risks to achieving the revenue targets of the program; congressional approval of needed revenue measures has still to be secured and there are difficulties in quickly rebuilding a culture of tax compliance. The larger augmented fiscal deficit—compared with the estimates provided in the staff report for the 2002 Article IV consultation—only adds to the challenge of achieving fiscal sustainability that will be faced by the successor government. The staff’s present assessment is that addressing this challenge will require augmented primary surpluses in the range of 4—5 percent of GDP over the medium term.

26. The authorities’ program addresses some of the policies in other areas that were presented in the staff report for the 2002 Article IV consultation. However, a sustainable program will need to include more comprehensive reforms with stronger assurances of implementation, such as further liberalizing foreign exchange and pricing controls (on the privatized utilities), expanding the banking strategy and implementing the reform of the public banks, undertaking structural fiscal reforms aimed at raising the primary surplus to 4—5 percent of GDP over the medium term, making concrete progress on debt restructuring, and rebuilding legal certainty in Argentina. Unless progress is made in all of these areas in the coming months, there would be a very large burden on the successor government.

27. In the banking system, initial work to assess the solvency of the system has yet to begin. The steps that would restore some measure of central bank autonomy have also not yet been taken. In a full-fledged program, maintaining an even-handed and transparent approach to bank restructuring—and moving ahead with public bank reforms—would be essential.

28. The staff places the highest importance on clear steps to reassure investors of legal certainty. For virtually all of 2002, there have been a number of extreme restrictions on creditor actions, including limitations on foreclosure and other enforcement proceedings. A balanced set of incentives that would apply to creditors and debtors has yet to take hold. Without appropriate incentives for voluntary debt workouts, debt restructuring and credit flows will not develop, and growth will remain absent—further burdening the poor.

29. The authorities have begun to make contacts with private creditors and their efforts provide the basis for the initial determination of compliance with the “good faith” criterion under the Fund’s policy for lending into arrears. However, these efforts need to be intensified. Preparations for negotiations with creditors are as yet little advanced and a number of creditors continue to complain about the adequacy of the dialogue. The program incorporates further steps to enhance collaboration with creditors and develop the procedural aspects for restructuring.

30. The staff stresses the importance of adhering closely to the policies in the transitional program. These initial steps should be developed into a fully sustainable program as soon as possible. A greater political consensus is needed in Argentina for this purpose. Meanwhile, the relief on payments to the IFIs that is afforded by the transitional program should help maintain stability. Close monitoring and collaboration with the staff will be essential to keep the transitional program on course.

31. Thus, the staff welcomes the development of a transitional program as a first step toward a sustainable and fully comprehensive program that is needed by Argentina. The staff recommends extension of the repurchase expectations arising during the period of the proposed Stand-By Arrangement.

Continuous and Structural Performance Criteria and Structural Benchmarks 1/

I. Performance Criteria

Continuous performance criteria

  • Nonaccumulation of arrears to bilateral and multilateral creditors (paragraph I8 of the MEP);

  • Nonissuance of quasi-monies by provincial governments that have signed the bilateral agreements (paragraph 11 of the MEP);

  • No statute or other legal instrument will be adopted that provides a means for any involuntary suspension of creditors’ rights (paragraph 30 of the MEP).

March 14,2003

  • Conversion of the fuel tax to an ad-valorem tax and elimination of the income tax exemption on export rebates (paragraph 7 of the MEP);

  • Revisions to banking regulations to strengthen the bank supervisory and prudential framework (paragraph 29 of the MEP).

  • Signature of the 2003 bilateral agreements by governors of provinces representing a combined total of at least 80 percent of the 2002 consolidated provincial deficit (paragraph 12 of the MEP);

March 31, 2003

  • Elimination of the remaining competitiveness plans (paragraph 7 of the MEP);

May 15, 2003

  • Announce a transitional minimum capital adequacy ratio (paragraph 29 of the MEP).

II. Structural Benchmarks

Continuous

  • Provide Fund staff with monthly information on provincial government financing with a delay of less than 55 days (paragraph 13 of the MEP).

February 28, 2003

  • Launch the bidding process for due diligence and strategic review of the public banks (paragraph 29 of the MEP).

March 14, 2003

  • Appointment of an external advisor on public debt restructuring (paragraph 27 of the MEP);

May 15, 2003

  • Ratification by provincial legislatures of the 2003 bilateral agreements (paragraph 12 of the MEP);

  • Preparation of draft legislation for structural fiscal measures (paragraph 24 of the MEP);

  • Congressional approval of amendments to the financial institutions law (paragraph 29 of the MEP);

1/ Structural performance criteria and benchmarks for the third review will be set in the course of the first and second reviews.

ANNEX I Argentina—Fund Relations

(As of December 31, 2002)

I. Membership Status: Joined September 20, 1956, Article VIII

A. Financial Relations

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Financial Arrangements:

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VI. Projected Obligations to the Fund: (Under the Repurchase Expectation Assumptions) (SDR millions; based on existing use of resources and present holdings of SDRs):

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VII. Safeguards Assessments: Under the Fund’s safeguards assessment policy, the Central Bank of Argentina (CBA) is subject to an assessment with respect to the proposed stand-by arrangement. A safeguards assessment of the CBA was completed on September 05, 2002. The assessment concluded that: (i) substantial risks might exist in the system of internal controls, (ii) a more robust financial reporting framework should be developed, and (iii) the central bank’s operational independence from government interference needs strengthening. Staff recommendations included a prior publication of the 2001 financial statement and the strengthening of controls over the reporting of program data. The central bank has recently informed staff that these recommendations have been implemented. Other measures include the adoption of international accounting standards (IAS) and elimination of the transfers of unrealized bank profits to the government. Staff will continue monitoring the implementation of the recommended measures.

B. Nonflnancial Relations

VIII. Exchange Rate: On March 27, 1991 a law was passed guaranteeing the full convertibility of the austral under a currency board arrangement and pegging the austral at A10,000 per U.S. dollar. On January 1,1992 the peso was substituted for the austral at a rate of 1 peso per 10,000 australes. On January 7, 2002 the currency board arrangement was abandoned in favor of a dual exchange rate regime with an official rate of Arg$1.4 per U.S. dollar for most trade, trade finance, and public sector transactions; remaining transactions were at a market floating rate. On February 11, 2002 the dual exchange rate regime was abolished and substituted by a managed floating regime with no pre-announced rate of the exchange rate.

As of January 16, 2003, Argentina maintains two exchange restrictions that are subject to the Fund’s jurisdiction under Article VIII, Section 2 (a): a restriction arising from the freeze on time deposits pursuant to the corralón, and a restriction arising from the prior approval requirement, which operates as a de facto prohibition, for moderate loan amortization payments.

IX. Last Article IV Consultation: The 2002 Article TV consultation was concluded by the Executive Board on January 8,2003 (EBS/02/214).

X. Fourth Amendment: Argentina has accepted the Fourth Amendment to the Articles of Agreement.

XI. Technical Assistance, 2002

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XII. Resident Representative: Mr. Terrier was senior resident representative in Buenos Aires during February 2000 to September 2002; Mr. Cubeddu has been the resident representative in Buenos Aires since September 2002.

ANNEX II Argentina: Relations with the World Bank Group1

1. Bank lending to Argentina as of November 30, 2002 totaled US$17.5 billion (net of cancellations). Thirty-seven loans totaling US$4.1 billion remain under execution, with US$1.8 billion undisbursed. The Bank’s assistance has been to focus on supporting government efforts to: (i) enhance social development, including poverty alleviation and human resource development; (ii) improve the performance and institutional capacity of sub-national governments to deliver key social and infrastructure services; and (iii) consolidate structural reforms, including reforms in public finances, labor markets and the financial sector to ensure successful implementation of the assistance program, and enhancing governance through institution building.

2. Out of the 37 ongoing loans, one is a Structural Adjustment Loan (SAL) for US$400 million—of which US$200 remain undisbursed—approved in August, 2001 as part of the joint IFI support to Argentina as the country began to slip deeper into the crisis at the end of 2000. In addition, 3 of the 37 ongoing loans are Provincial Reform Loans (PRLs) totaling US$703 million—of which US$421 remain undisbursed. These loans, approved between September, 2000 and July, 2001, are part of a continuing effort to assist selected provinces—in this case Catamarca, Córdoba, and Santa Fe—willing and able to undertake structural reforms in key social sectors (education, health, social protection), fiscal policies, and financial management. These operations complement the adjustment operations, addressing many of the same concerns such as social equity and systemic changes in health and education and on basic economic management. The remaining tranche releases for both the SAL and the PRLs are subject to a sound macroeconomic environment, as well as other specific conditionality in each case.

3. Following the worsening of the crisis in December 2001, the Bank responded to the social emergency by reallocating about US$250 million of the existing portfolio for health, education and social protection.

4. During November 2002, the Bank carried out a joint Portfolio Review with the Government of Argentina, aimed at assessing performance during CY02, identifying prospects for the coming year and actions needed to ensure that the Bank’s portfolio in Argentina contributes effectively to the country’s development objectives in the short and medium term. Among of the main conclusions of the Joint Portfolio Review is the fact that, subject to adequate budgetary allocations, potential disbursements out of the existing Bank’s portfolio in Argentina could range between US$500-600 million in CY03

5. On November 14, 2002 Argentina announced it would be making only a partial payment on its October 15 obligation to the World Bank. As of that date, no new loans can be presented to the Board of Directors, and Argentina looses its eligibility for reductions of interest charges falling due over the next six months. Out of a payment obligation of US$805 million, Argentina made a US$79.2 million interest payment. On November 29, 2002 Argentina became 45 days overdue in its debt service payments to the Bank, and as of that date no replenishments or initial deposits to special accounts can be made. Moreover, on December 9, 2002 the Bank will notify co-financiers, namely Japan Bank for International Cooperation (JBIC) and Inter-American Development Bank (IDB), on the impending suspension of disbursements. If Argentina is not current on all payments to the Bank by December 13, 2002, the Bank will suspend, effective December 14,2002, the borrower’s rights to make withdrawals on all effective and not fully disbursed loans.

6. Among the immediate consequences that the situation described above has involved is the postponement of the presentation to the Board of Directors of an investment loan for US$600 million to finance the Heads of Household Project, in support of the Government’s workfare program, originally scheduled for November 19, 2002.

Financial Relations with the World Bank

(In millions of U.S. dollars)

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Source: World Bank.

Includes repayment from third parties.