Domestic and external factors combined to bring about the loss of confidence in Argentina that triggered the debt default and the crisis. Restoring confidence in legal certainty has been a major challenge for Argentina. The fiscal program is centered on maintaining tight control over primary spending and rebuilding the tax administration. A key outstanding issue is to close the estimated fiscal and external financing gap. The fiscal effort required to sustain the public finances in the medium term will require the adoption of major structural reforms.


Domestic and external factors combined to bring about the loss of confidence in Argentina that triggered the debt default and the crisis. Restoring confidence in legal certainty has been a major challenge for Argentina. The fiscal program is centered on maintaining tight control over primary spending and rebuilding the tax administration. A key outstanding issue is to close the estimated fiscal and external financing gap. The fiscal effort required to sustain the public finances in the medium term will require the adoption of major structural reforms.

On January 8, 2003, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Argentina.1


Since the last Article IV consultation, which was concluded in September 2000, far-reaching developments in Argentina have transformed its economic situation and prospects. A complex set of factors resulted in the massive loss of domestic and foreign confidence that forced Argentina’s sovereign default in late 2001, and the abandonment of its decade-long currency board arrangement in early 2002.

At the macroeconomic level, the currency board arrangement was not adequately supported by the rest of the policy framework. Inflexibilities in many sectors of the economy could not compensate for the real appreciation experienced during the 1990s partly reflecting the strong U.S. dollar and the depreciation of the Brazilian real after 1999. In particular, fiscal policy grew progressively inconsistent with the demands of the currency board regime and a sizable public debt was built up during the second half of the 1990s. On the external front, reduced appetite of foreign investors for emerging market debt caused a sharp slowdown of capital inflows to Argentina, leading to a sudden and significant increase in the marginal cost of borrowing that weakened the prospects for economic growth and debt rollovers.

Origins of the Crisis

The role of fiscal policy was central to the crisis. Persistent cash deficits and “off-budget” debt-creating expenditures added to a mainly dollar-denominated public debt. Even in the years of high growth following the reforms of the early 1990s, the fiscal effort was insufficient to produce adequate primary surpluses. These fiscal problems were the product of vested interests, and resistance to fiscal reforms in the provinces. The sustainability of the higher public debt ratio depended on maintaining healthy growth, strengthening the fiscal primary balance, and ensuring access to international capital. In the event, none of these conditions came to apply.

The prolonged recession that preceded the crisis reflected both falling confidence and a lack of flexibility in the economy that was incompatible with the currency peg. The steady real appreciation of the peso could not be accommodated in an orderly fashion given structural rigidities in the labor market and fiscal policy. Eventually, the brunt of the adjustment fell on domestic prices and employment, placing the economy on a deflationary path and making it difficult to get the political support to re-orient economic policies.

High dollarization of the economy meant that any exit from the convertibility plan was bound to be very costly and disruptive. As a consequence, successive governments have shown a high degree of reluctance to consider an orderly transition to another exchange rate regime. Not only was fiscal solvency tied to the currency peg, but also that of the financial system. Banks were heavily exposed to losses from a government default and to credit risk in the event of a devaluation, as a result of making U.S. dollar-denominated loans to clients whose earnings were denominated mainly in pesos. At a more general level, the dominance of the nontradable sector and narrow export base were fundamentally at odds with a liberalized capital account, and a high reliance on dollar-denominated borrowing.

Developments in 2001–02

In 2001, the economy entered the third consecutive year of negative growth. After a cumulative decline of 4¼ percent in 1999–2000, real GDP fell by 4½ percent in 2001, and prices continued to decline. In the first nine months of 2002 real GDP is estimated to have fallen by 13 percent (reflecting large declines in consumption and investment), although economic activity appears to have stabilized since then. By October 2002, the unemployment rate is estimated to have risen to about 23 percent and there was a large increase in the number of people living in poverty. The price deflation of earlier years was reversed in 2002 following the sharp depreciation of the peso. Monthly inflation peaked in April at 10½ percent, and slowed sharply from mid-2002.

The public finances deteriorated sharply in 2001, at both the federal and provincial level, with the overall cash deficit of the consolidated public sector increasing by 2¾ percent of GDP to 6¼ percent of GDP. The position improved in 2002, owing mainly to the implementation of a revised revenue-sharing agreement with the provinces and tight control over spending. The cash fiscal position, however, conceals the extent of the underlying deterioration in the public finances, as there were large debt-creating expenditures, such as bond issuance in connection with the banking crisis, and the capitalization of interest payments. A comprehensive measure would bring the augmented primary and overall deficits of the consolidated public sector in 2002 to 11¼ percent and 25¼ percent of GDP, respectively. The public debt-to-GDP ratio is estimated to have risen to 119 percent by June 2002.

Financing difficulties and the collapse of economic activity shifted the external current account from a deficit of about US$4.5 billion in 2001 to a surplus of about US$9 billion in 2002. The adjustment was driven by a sharp contraction in imports, while exports were flat. Private net capital outflows in 2001–02 are estimated at about US$38 billion, while gross international reserves fell by US$20 billion to about US$10 billion. In 2002, external payments arrears reached about US$8.25 billion, including to multilateral and bilateral creditors.

Executive Board Assessment

Executive Directors regretted that, since the last Article IV consultation in September 2000, Argentina has faced an acute economic and social crisis. Argentina’s situation has been fundamentally transformed, with the economy contracting and the poverty and unemployment situation deteriorating. A complex set of economic, institutional, and political factors has led to a massive loss of confidence, default on the foreign debt, and abandonment of the decade-long currency board arrangement. Against this background, Directors expressed their conviction that Argentina will need to formulate and implement—with support of the international community—a strongly-owned program of stabilization and wide-ranging reforms to resolve deep-seated institutional, macro-economic and financial problems, restore confidence, and rebuild economic growth and financial sustainability. They expressed the hope that a transitional program, that could build a bridge to such a comprehensive program, could be agreed at an early date. In particular, Directors hoped that the transitional program will include credible commitments in the area of fiscal and monetary policies, actions to strengthen the banking system, and measures to strengthen Argentina’s cooperation with the international community and dialogue with the private sector, in ways that will facilitate a workable transition to a comprehensive program.

Directors had a wide-ranging discussion of the crisis that engulfed Argentina at the end of 2001. They were of the view that Argentina’s currency board arrangement was ultimately undermined by its lack of support from the domestic policy framework and by unfavorable external circumstances. In particular, a deteriorating fiscal performance (including off-budget expenditures, persistent provincial deficits, and revenue mismatch in the pension reform) resulted in rising public debt, while structural rigidities, including in the labor market, prevented adjustment to an appreciating real exchange rate. Argentina’s vulnerability to external shocks was further compounded by the small size and relatively undiversified structure of its export sector relative to the increasing openness of its capital account and reliance on external financing. Some Directors also drew the conclusion that, while the currency board may initially have served Argentina well, it had not been an adequate exchange rate regime choice given the fiscal choices made in Argentina and unfavorable external developments.

More broadly, Directors underscored the critical importance of addressing vulnerabilities before they become severe, and the important role that Fund surveillance and conditionality have to play in focusing early and sufficiently on sustainability issues. They considered that timely action to correct vulnerabilities, which in the case of Argentina would likely have included an orderly exit from the currency board arrangement, might very well have prevented a crisis that—in the absence of strong domestic ownership of policies crucial for sustainability—became inevitable. Some Directors also noted that the Argentina crisis highlights the importance of properly integrating external factors, including regional dimensions, into Fund surveillance. The Executive Board will have further opportunities to come back to these issues in the broader context of the ongoing effort to strengthen surveillance and focus conditionality.

Turning to the authorities’ initial response to the crisis, Directors regretted the time it had taken to develop a consistent policy response that would have enabled Argentina to move toward a Fund-supported program during 2002. Initial failure to build a strong political consensus toward resolving the crisis in an orderly and equitable way—admittedly a difficult task given the severity of the situation—had contributed to policy reversals that greatly added to the social cost of the crisis. In particular, Directors noted that early government actions during 2002—such as the decisions to convert banks’ foreign currency denominated assets and liabilities into pesos at asymmetric exchange rates, and amendments to the insolvency law that tilted the balance sharply against creditors—had exacerbated the economic situation and impeded recovery.

Directors were nevertheless encouraged by signs of a return to economic stability in the second half of 2002. Following a sharp decline in real GDP, economic activity has stabilized in recent months; inflation has slowed sharply from its April peak; the external position shows some signs of improvement; and the banking system as well as market indicators have been relatively stable. Directors welcomed the fiscal spending restraint that has contributed to achieving this stability, but cautioned that it also reflects controls on foreign exchange transactions and on utility prices. They were concerned that, with fiscal and banking solvency still to be assured, and indications of repressed inflation, stability is still fragile, and needs to be put on a firm footing.

Directors considered that, in building an enduring recovery, reversing rapidly rising poverty trends, and achieving external and fiscal sustainability, Argentina will need to address five major challenges in the context of a sustained medium-term restructuring effort. These are, first, giving reassurances about legal certainty and the political consensus for reforms; second, establishing a robust fiscal framework encompassing the provinces; third, continued progress in resolving the monetary overhang and restoring confidence in the banking system; fourth, undertaking structural reforms to further liberalize the economy and increase trade openness; and fifth, restructuring debt and reestablishing orderly relations with creditors. While a credible program of core measures, including strong fiscal and monetary performance, can facilitate the transition period to a new government, Directors stressed that only full implementation of a comprehensive program, based on strong domestic ownership, can achieve lasting results. In this context, some Directors called for a broad-based public debate to forge the political, economic, and social consensus that will be needed to support the required reforms.

Directors underscored the urgency of restoring legal certainty in Argentina—as a precondition to reviving new credit flows, investment, and growth. They noted that, even after the reversal of earlier measures, creditors continue to face uncertainties about the enforcement of their contractual rights, and urged the authorities to work expeditiously toward improving the investment environment. Directors hoped that market concerns about the continuity of economic policies following the political transition could be quickly addressed, and looked forward to continued actions in the institutional sphere to improve governance and secure the respect for the rule of law.

Directors viewed the restoration of fiscal solvency as a sine qua non of a sustainable economic program, and noted that this task will require a fundamental break with the past involving several dimensions affecting both the federal government and the provinces. In the short run, both levels of government will inevitably need to rely on tight control over primary spending, and Directors saw expenditure restraint as key to achieving the targeted consolidated primary surplus of 2.5 percent of GDP in 2003 and closing the financing gap without monetization. At the same time, it will be important to ensure that social safety net programs are adequately funded and become fully operational.

Going forward, Directors agreed that rebuilding tax administration and a culture of compliance will be essential to raising revenues and attaining the higher primary surpluses that will help sustain the public finances in the medium term. In this context, some Directors noted that Argentina’s revenue effort is below several other countries in the region. Directors urged the authorities to plan the needed tax reforms without further delay and build consensus for them, and welcomed recent legislation eliminating the ability of the executive to grant tax amnesties as a key step toward a comprehensive reform of the tax system. They also called for continued efforts to eliminate remaining Competitiveness Plans, and looked forward to the re-instatement of the recently cut VAT rates to their previous levels at the end of the 60-day reduction period.

Directors were strongly of the view that provincial governments need to be firmly anchored in the adjustment effort in order to achieve fiscal sustainability. Work should begin as soon as possible toward a comprehensive reform of intergovernmental relations that would draw upon the lessons from Argentina’s poor fiscal performance in the 1990s, and that would be supported by an incentive structure that ensures fiscal discipline and responsibility at all levels of government. In the short run, Directors urged the authorities to seek early ratification by provincial legislatures of the bilateral agreements that would underpin the 2003 fiscal targets for the provinces, and to make additional efforts to improve the transparency, quality, and timeliness of the data reported on the provincial finances to ensure effective monitoring. They also saw as essential for monetary and fiscal discipline that provinces end the issuance of all new quasi monies.

Turning to monetary control issues, Directors considered the consolidation of a credible monetary anchor as crucial to maintaining macroeconomic stability. They commended the central bank’s efforts in building its instruments of monetary control, but a number of Directors cautioned about the risks associated with potentially significant leakages related to the amparos and the reprogrammed time deposits to be released in 2003. Some other Directors, however, saw this risk as rather low, given the experience thus far and the relatively robust demand for money. Directors welcomed the recent stability and rise of bank deposits and expressed the hope that a credible short-term economic program would reinforce this stabilizing trend. They noted, however, that the pending ruling by the Supreme Court on the constitutionality of the pesoization of bank deposits is adding to uncertainties, and underscored the importance of resolving this issue in a manner that does not undermine establishing a credible monetary anchor.

Directors discussed several other steps that would more fully restore depositor confidence, limit the fiscal costs of the crisis, and rebuild a sound banking system—all of which are necessary to promote domestic saving, investment, and growth. They urged the authorities to work in close cooperation with the Fund staff on bank resolution issues and in implementing an orderly strategy to identify and resolve weak banks according to consistent principles. Directors looked forward to early strong efforts to further strengthen confidence in the banking system, which will be key to ensuring lasting economic stability. They also encouraged the authorities to reaffirm their commitment to safeguarding and strengthening central bank independence, and looked forward to early approval of legislation that would protect public officials carrying out their duties in the bank resolution process. Directors welcomed the authorities’ efforts to strengthen the central bank’s system of internal controls, and encouraged them to stand ready to take further actions as needed in line with the Fund’s safeguards assessment.

On structural issues, Directors considered that the greater stability in the economy provides the opportunity to liberalize the exchange controls that had been imposed in 2002 at the height of the crisis, and to initiate wide-ranging reforms necessary to revive investment and growth. They welcomed, in this regard, the steps recently taken, including those announced immediately prior to the Board meeting, to remove most of the remaining Article VIII exchange restrictions and ease export surrender requirements. Directors looked forward to early further steps to liberalize the restrictive compulsory export surrender requirement which would help rebuild confidence.

Most Directors noted with concern that the situation regarding utility pricing could be putting a large burden on price adjustments in 2003, and regretted that the recently decreed tariff increases for gas and electricity companies, as well as the public hearings on tariff increases, have been halted by the courts. Directors underscored the urgency of an early joint IMF/World Bank diagnostic mission to assess the financial situation of the utility companies and develop an appropriate regulatory framework that will secure their financial and operational viability, while ensuring that the social impact of price adjustments is properly taken into account.

Among other structural reforms, Directors saw a need for a renewed emphasis on trade liberalization and diversification, given Argentina’s relatively low level of trade integration. They encouraged the authorities to further lower trade barriers, and seek improved market access for Argentina’s products in the context of regional and multilateral trade negotiations. In the short-term, efforts should focus on reducing administrative obstacles to exports, and, over time, phasing out export taxes.

Directors underscored that, in order to strengthen Argentina’s medium-term outlook, the authorities face the key challenge of restructuring Argentina’s public debt in a manner that will help normalize relations with private creditors and begin the process of attracting capital flows back into the country. They welcomed the authorities’ recent steps to initiate contacts with private creditors, and their intention to intensify this dialogue with the assistance of external debt restructuring advisors. Directors looked forward to continued progress, particularly with institutional investors, in this area, and urged the authorities to make all necessary efforts toward advancing a constructive dialogue with private creditors on a debt restructuring, consistent with the “good faith” criterion under the Fund’s policy for lending into arrears. While noting that significant net payments had been made by Argentina to the international financial institutions in 2002, Directors regretted Argentina’s decision to fall into arrears with the World Bank and urged the authorities to eliminate them as soon as possible. This will clear the way for implementation of the Bank’s program of social support under the Heads of Household program. Directors urged the authorities to remain current on their obligations to the international financial institutions.

Directors noted that, even with the maintenance of a substantial fiscal adjustment effort, Argentina’s medium-term debt outlook appears very difficult. Debt ratios will remain very high and financing needs very large, while prospects for regaining market access will likely improve only gradually. They urged the authorities to work closely with the international community and to strengthen their efforts to reach a cooperative solution with private creditors to secure financing and achieve fiscal and external sustainability over the medium term.

Public Information Notices (PINs) are issued, (i) at the request of a member country, following the conclusion of the Article IV consultation for countries seeking to make known the views of the IMF to the public. This action is intended to strengthen IMF surveillance over the economic policies of member countries by increasing the transparency of the IMF’s assessment of these policies; and (ii) following policy discussions in the Executive Board at the decision of the Board. The Staff Report for the 2002 Article IV Consultation with Argentina is also available.

Argentina: Selected Economic Indicators

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Sources: Ministry of Economy; and IMF staff estimates.

Average interest rate on 30- to 59-day time deposits in national currency. The rate is weighted by deposit amounts.

In months of imports of goods and nonfactor services.


Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities.