Abstract
The transitional program is broadly on track and quantitative program targets have been met, but structural reforms have been delayed. There are still risks to revenues and expenditures from possible judicial decisions, and the fiscal program may need to be adapted for changes in the macroeconomic framework. Monetary policy continues to face significant uncertainties, and priority needs to be given to providing a predictable regulatory framework for the banking system. Policy preparation can facilitate the transition to the new government.
I. Introduction
1. The following information on recent developments and policy implementation has become available since the circulation of the staff paper on the first review under the Stand-By Arrangement (EBS/03/32, March 10, 2003). There is no change in the staff appraisal.
II. Recent Developments
2. Recently released data generally confirm the trends presented in the staff paper:
Monthly inflation continues to be low. Consumer prices rose by 0.6 percent and wholesale prices 0.4 percent in February, bringing down the 12-month increases to 36.1 percent and 84.1 percent, respectively.
The trade balance continues to be in large surplus. The foreign trade surplus in January was US$1.3 billion compared to US$970 million in the same month of last year.
Market indicators remain broadly stable. In March the peso has traded in the range of Arg$3.12–3.22 per U.S. dollar; interest rates have remained stable, the central bank has made net purchases of US$53 million in the foreign exchange market; and gross international reserves remain at about US$10.3 billion. Private sector bank deposits have increased by about Arg$1.6 billion (2.6 percent) since end-January.
February tax revenues were below projections Tax revenues in February were Arg$126 million (2½ percent) below program projections, partly offsetting the higher collections of January. Receipts from VAT, trade taxes, and social security contributions were lower than expected, though income tax receipts continued to perform strongly.
3. On March 5, the supreme court ruled unconstitutional the pesoization of the deposits of a provincial government in a state bank The main points of the ruling are:
The ruling is specific to the case of San Luis province and does not have an automatic effect on other cases. Other depositors will need to file their own cases, but judges would likely follow the lead of the supreme court.
The ruling does not expressly require the redollarized deposit to be paid out immediately in cash, the implication being that a bond or an agreed payments schedule could be acceptable instruments of payment. The ruling places responsibility on the bank involved (in this case, Banco Nacion) to negotiate the payment modality.
The parties involved have been given 60 days to reach agreement on the modalities for repayment of the deposit. If agreement is not reached by then, the supreme court may decide the modalities for repayment upon request of one of the parties.
4. The authorities believe that the ruling will not affect the present stability of bank deposits and the exchange rate. They have indicated that the government will eventually need to compensate banks through the issuance of bonds covering the valuation loss on foreign exchange deposits arising from the difference between the current exchange rate and the Arg$1.4 per dollar plus price indexation (approximately Arg$2 per dollar) implicit in the deposits still within the corralón (the restriction on time deposits).
5. However, the ruling has added to uncertainties and some market turbulence may arise in the coming weeks. Much will depend upon further rulings.
Further court decisions favoring other depositors could well lead to problems within the banks. (The supreme court may rule in a case involving a private depositor within the next few days.)
An expected first implication is that the pace of court injunctions to release deposits (the amparos) will increase, which will further decapitalize banks and could lead to liquidity pressures.
The ruling also brings into question the constitutionality of the corralón.
There will likely be an increase in court cases dealing with the pesoization of loans and other bank assets. We understand that the ruling gives some implicit basis for banks to challenge the pesoization of loans in excess of US$100,000.
6. An important implication for the banks is that they could be directly responsible for full payment to depositors and would need to provision for additional government bonds in their balance sheet once they are compensated. The uncertainty for the banks already has been increased by the delay within the program of the action to specify a mechanism by which the banks would be compensated for losses from asymmetric indexation and amparos.1
7. Estimates of the fiscal cost arising from the supreme court ruling depend upon the assumption concerning the scope of the decision. If the deposits to be compensated are limited to those currently within the corralón (US$9 billion in original valuation), then the total cost would be about US$4 billion (about 3 percent of GDP).2
III. Policy Implementation
8. Progress has been made in the following areas:
The Congress approved legislation suspending the income tax exemption on export rebates until end-2003. At the same time, it is still deliberating the legislation converting the fuel tax to an ad-valorem tax (Box 1). In the attached letter, the authorities request a waiver of nonobservance for the relevant performance criterion. Staff supports the request given the authorities’ commitment to seek approval of the legislation at the earliest opportunity and their request to reset conversion of the fuel tax to an ad valorem tax as a performance criterion for the second review (Box 2).
Congress has also approved legislation giving the executive the authority to eliminate the remaining competitiveness plans; the executive procedures for the elimination are expected to be completed by end-March 2003, in line with the program.
By March 13, the governors of eight provinces representing a total of 81 percent of the combined deficit of provinces in deficit in 2002 had signed the 2003 bilateral agreements, thereby meeting the associated performance criterion.
The central bank has issued revised prudential regulations with respect to foreign exchange exposure. Revisions to the prudential regulations on the valuation of government bonds and the classification of bank loans, for which the authorities previously requested a waiver of nonobservance, are still pending.
The recent strengthening of the peso has facilitated a further liberalization of exchange controls, including: (i) an increase in the ceiling on monthly purchases of foreign exchange from US$150,000 to US$200,000, without prior authorization; (ii) an increase in the limit on amortization payments from US$300,000 per month per debtor to US$1 million; and (iii) the ceiling on debts in arrears on which amortization payments are allowed was raised from US$1 million to US$3 million.
Regarding the dialogue with creditors, the authorities have recently convened creditor meetings in New York and Tokyo, and several further meetings are scheduled, beginning in Paris next week.
9. The Congress has approved legislation that earmarks any excess revenues (above the budget) from the financial transaction tax to supplement teachers’ salaries. While this may be consistent with the fiscal targets of the transitional program, the earmarking is likely to reduce the flexibility of fiscal policy in future years.
10. Finally, the submission of legislation to Congress to amend the Financial Institutions Law to strengthen the bank resolution process, and to increase central bank autonomy, has been delayed. This action, originally envisaged to take place by March 14, 2003, is now expected by the authorities to be taken during the coming week.
Continuous and Structural Performance Criteria and Structural Benchmarks: Outcome for the First Review
| Status | |
|---|---|
| I. Performance Criteria | |
| Continuous performance criteria | |
|
Observed |
|
Observed |
|
Observed |
| March 14, 2003 | |
|
Waiver requested |
|
Waiver requested |
|
Observed |
| II. Structural Benchmarks | |
| March 14, 2003 | |
|
Observed |
|
Delayed |
| Status | |
|---|---|
| I. Performance Criteria | |
| Continuous performance criteria | |
|
Observed |
|
Observed |
|
Observed |
| March 14, 2003 | |
|
Waiver requested |
|
Waiver requested |
|
Observed |
| II. Structural Benchmarks | |
| March 14, 2003 | |
|
Observed |
|
Delayed |
Continuous and Structural Performance Criteria and Structural Benchmarks for the Second Review1
I. Performance Criteria
Continuous performance criteria
Nonaccumulation of arrears to bilateral and multilateral creditors.
Nonissuance of quasi-monies by provincial governments that have signed the bilateral agreements.
No statute or other legal instrument will be adopted that provides a means for any involuntary suspension of creditors’ rights.
March 31, 2003
Elimination of the remaining competitiveness plans.
May 15, 2003
Announce a transitional minimum capital adequacy ratio.
Revisions to banking regulations to strengthen the bank supervisory and prudential framework.
Conversion of the fuel tax to an ad valorem tax.
II. Structural Benchmarks
Continuous
Provide Fund staff with monthly information on provincial government financing with a delay of less than 55 days.
May 15, 2003
Ratification by provincial legislatures of the 2003 bilateral agreements.
Preparation of draft legislation for structural fiscal measures.
Congressional approval of amendments to the financial institutions law.
Launch the bidding process for due diligence and strategic review of the public banks.
ATTACHMENT I
Buenos Aires, Argentina
March 14, 2003
Mr. Horst Köhler
Managing Director
International Monetary Fund
Dear Mr. Köhler:
1. We write to you to inform you of further progress made with respect to our commitments under the present Stand-By Arrangement.
2. On March 12, 2003, Congress approved legislation suspending the income tax exemption on export rebates until end-2003. At the same time, Congress is still deliberating the conversion of the fuel tax to an ad valorem tax. We, therefore, request a waiver of the relevant performance criterion for the first review and request that the conversion of the fuel tax to an ad valorem tax be reset as performance criterion for the second review (May 15, 2003). Congress also approved legislation giving the executive the authority to eliminate the remaining competitiveness plans, the procedures for which will be completed by end-March 2003.
3. We have made further progress with respect to the performance criterion on revisions to prudential banking regulations, for which we have requested a waiver in our letter of March 3, 2003. On March 10, 2003, the central bank issued revisions to the regulations relating to foreign exchange exposure, one element of the performance criterion. We are confident that the other elements—revisions to the prudential regulations on the valuation of government bonds and the classification of bank loans—will be completed by end-March, 2003.
4. As of March 13, the governors of eight provinces representing a total of about 81 percent of the combined deficit of provinces in deficit in 2002 had signed the 2003 bilateral agreements, thereby meeting the associated performance criterion.
5. We have also continued to strengthen our dialogue with private creditors, recently convening creditor meetings in New York and Tokyo, and with several further meetings scheduled in the coming weeks.
| Sincerely yours, | |
| /s/ Dr. Roberto Lavagna Minister of Economy |
/s/ Lic. Alfonso Prat-Gay President of the Central Bank |
| Sincerely yours, | |
| /s/ Dr. Roberto Lavagna Minister of Economy |
/s/ Lic. Alfonso Prat-Gay President of the Central Bank |
This action is now expected by end-March 2003; a date for implementation has not been fixed.
The estimated cost of US$4 billion is calculated as the difference between: (i) total deposit liabilities originally denominated in U.S. dollars valued at the current exchange rate (Arg$31.4 billion); and (ii) the same liabilities valued at the pesoized rate of Arg$1.4 per U.S. dollar and indexed by inflation (Arg$19.6 billion).