Statement by Jose Antonio Costa, Senior Advisor to Executive Director for Argentina

Argentina’s First Review Under the Stand-By Arrangement and a Request for Waiver of Nonobservance and Applicability of Performance Criteria are reviewed. Favorable conditions allowed a further strengthening of the external position, though external arrears continued to increase. Congress has approved all the components of the government’s anti-tax evasion package, including the tightening of rules on invoicing by commodity exporters, providing tax tribunals in Buenos Aires with federal jurisdiction, and introducing new penalties to reduce tax evasion.


Argentina’s First Review Under the Stand-By Arrangement and a Request for Waiver of Nonobservance and Applicability of Performance Criteria are reviewed. Favorable conditions allowed a further strengthening of the external position, though external arrears continued to increase. Congress has approved all the components of the government’s anti-tax evasion package, including the tightening of rules on invoicing by commodity exporters, providing tax tribunals in Buenos Aires with federal jurisdiction, and introducing new penalties to reduce tax evasion.

  1. Argentina is facing complex challenges in dealing with its worst crisis in more than a century, linked to a large extent to the rigidities and inconsistencies of the economic policies followed during the 90s. As a result of these, 50 percent of the population is now living in poverty and many are without gainful employment, particularly a great number of youngsters which are also out of school. My authorities are focused in solving these challenges aiming at a broad social inclusion through a sustained process of equitable, non-inflationary growth and improved educational and health services. At the same time, they aim at maintaining a harmonious, predictable and mutually beneficial engagement with the international community.

  2. My authorities appreciate the efforts of the management and staff and of the Directors that took a direct interest in the negotiations to bring the first review of the present Stand-By program to the consideration of the Board, with the expectation of a successful conclusion last December. It goes without saying that they would have preferred a more rapid resolution of this review, considering the close connection between the advance of the Stand-By program and that of the debt restructuring process and also of the timely financing of the economic program. The fact that macroeconomic targets of the program continue to be met with considerable margins, and that substantial progress is being achieved in the structural front, support my authorities’ expectation that future reviews of the program should go smoother than this one.

  3. Rather than repeating the information of the Letter of Intent, where a review of compliance with program conditionality, particularly in the structural area, is presented, and of the Staff Report, which offers all the relevant analytical and quantitative information, this buff will be limited to highlight some of the arguments underlying the thrust of my authorities’ policies.

  4. The strength of the economic recovery in Argentina has surprised many, including within the Fund. What in the beginning of the upturn, back in the second half of 2002, was erroneously characterized by some as an “Indian summer”, has become a firm and entrenched growth trend that is now in its sixth quarter of positive strong growth.

  5. Many explanations are offered, linking the extraordinary performance of the economy, with an estimated GDP growth of at least 7.8 percent during 2003, to exogenous factors, unrelated to the policy decisions taken by the authorities. The favorable external climate is usually one of them. Although my authorities are cognizant of the importance of external factors, they question the view that attaches almost all the relevance to them. In fact, positive terms of trade and low interest rates were there for other countries to take advantage of and not many performed as Argentina did. In addition, we should not forget that the slowdown in Brazil represented a serious negative and equivalent external shock to the Argentine economy during 2003.

  6. Some attribute Argentina’s growth performance to the fact that it is not paying its debt obligations when in fact almost 50 percent of its debt has already been restructured and is performing. The view that negatively correlates debt service to growth prospects is at odds with the more conventional one that debt default impairs investment and growth. Although my authorities share this latter view and are keen to normalize relations with external creditors, they are also aware of the fact that debt service burdens may negatively impact on growth prospects and should be avoided, a principle that has been sustained in the Monterrey Declaration this month.

  7. Another explanation that focuses on exogenous factors is the one relying on the large output gap. It is worth noting that some of those who now hold this view are the same who previously held the “chaos” and later the “Indian summer” one. They state that notwithstanding the sharp rebound in growth, GDP level is considerably below those preceding the crisis and that it is merely catching up with past performance helped by a large output gap and pent-up consumer demand. The argument continues stating that once capacity levels are reached, bottlenecks will appear leading to a slowdown in growth and even to inflationary pressures. This argument does not in fact represent much of an explanation since excess capacity was there also during the four years of recession. For the economy to start moving again you need something more than just excess capacity and even more so considering the magnitude of the rebound and the seriousness of the disruption in Argentina’s social fabric that had to be overcome.

  8. In addition, to affirm that the strong growth dynamics will go on only until capacity is reached is equivalent to say that no new investment will reinforce existing capacity. The latter, in turn is attributed to the frailties of the domestic financial system and the lack of external financing in the context of a delayed debt restructuring. Leaving aside for a moment my authorities’ commitment to address diligently these two important issues, the fact is that investment is already revamping with important recent announcements of investment plans from both domestic and international companies. This questions the often-heard view that a sustained growth dynamic in Argentina is not achievable without previously solving a list of problems such as the two just mentioned. The solution to these issues will come hand in hand with sustainable growth, which is the overarching objective of the present arrangement with the Fund.

  9. My authorities welcome the staff’s acknowledgment that responsible macroeconomic management predicated on strict control of expenditures, improved tax administration and prudent monetary policy as well as the speedy market-based handling of the deposits freeze, the elimination of the quasi-monies and the maintenance of an appropriate level of the exchange rate have been important factors that supported the recovery. We should also highlight the positive impact of the greatly improved financial relations between the federal government and the provinces after the 2001 crisis, as confirmed by the excellent compliance with the bilateral agreements—so called “orderly financing programs”—during 2003. So far 11 provinces, accounting for more than 100 percent of the 2002 deficit, have already signed agreements for the present year, thus opening the way to fully meet these performance criteria on time, once the ratification process is completed.

  10. Notwithstanding the key role played by the factors just listed, my authorities also want to emphasize other critical aspects that are favorably impacting, and will continue to do so, on confidence and investment decisions in Argentina. In particular, as repeatedly stressed here in the Fund and elsewhere, good governance, transparency and the rule of law are considered to be key determinants of a friendly investment climate. In this regard, the new administration of President Kirchner has made of these principles its overriding concern and critical decisions have already been taken in areas such as security, justice and tax evasion.

  11. On the question of the restructuring of the non-performing debt, my authorities have stated from mid-2002 that only in the context of a medium-term program with the Fund negotiations with private creditors could be addressed in a credible way. This approach was not refuted by anyone at that time. Immediately after such a program was agreed, almost two years after the declaration of default, a general proposal was presented in Dubai and a speedy process of consultations was initiated, creditor consultative groups were created and a process to select regional manager banks to help Argentina with the transaction is about to be completed.

  12. My authorities show no hesitation in adhering to the lending into arrears policy as their willingness to share information and to engage creditors in many forums confirms. Of course, the issue has now turned into the acceptability of the proposal on the part of creditors since the broad elements of the proposal, that are already known, are questioned by some. On this point, it is important not to confuse willingness to pay, on which there should be no doubt, with capacity to pay which is naturally open to discussion, particularly considering the overriding need to address the social consequences of the crisis, to ensure sustained growth and in particular to avoid creating the conditions that would undoubtedly lead to future debt restructurings. Linking payments to future growth could offer a way, in fact the most relevant way, to solve disagreements regarding payment capacity. We should not forget that the debt overhang was consistently built up throughout the 1990s, without much concern of market participants and Institutions at the time this was taking place.

  13. Another element that should be kept in mind, which has been extensively discussed in the recent newspaper article written by Minister Lavagna, distributed to Directors on January 15, is that Argentina has been cut-off from private and official financing. The latter in net terms, but only after substantial net repurchases were made by Argentina at the most critical time of the crisis. My authorities do not expect to increase their payment capacity with net resources from the IFIs, but they are not in a position to repeat in the near future net repurchases to the IFIs either, as it is implicitly acknowledged by the financing structure of the several programs in place. A group of Directors has made the observation that linking repurchases to approval of reviews is not acceptable. In this regard my authorities fully ratify the principle that approval of reviews should be linked to compliance with conditionality, and not be made liable to unnecessary delays.

  14. Payment capacity is linked to the level of primary surplus, GDP growth, interest rates and the real exchange rate. Primary surplus as a percentage of GDP has taken, however, an unwarranted importance since, for other things equal, payment capacity is critically determined by GDP growth. Hence, it is not only a matter of excessive payments undermining growth prospects but, and more importantly, that low growth directly undermines payment capacity.

  15. The fiscal effort Argentina is making, and is willing to continuously make, should not be viewed as low or insufficient. The level of primary surplus committed by Argentina largely surpasses its past fiscal performance. In fact, there is no recent memory of Argentina producing a primary surplus this large not even in one year, and much less so in a successive number of years. My authorities want to emphasize the fact that debt restructurings that are insufficient to recover solvency can only lead to future debt crisis, and should therefore be avoided.

  16. As to the critical importance of GDP growth to determine payment capacity, there is the intention, as announced in Dubai, of offering bonds linking future payments to the evolution of GDP thus allowing creditors to participate in the benefits of the expected continued strength of growth in Argentina. Finally, on the assumed path of the exchange rate looking forward, my authorities are determined to avoid the distorted relationship of relative prices of tradeables and non-tradeables that prevailed during the Convertibility years. This should also be taken into account at the moment of formulating debt sustainability assessments.

  17. Regarding Argentina’s growth prospects, Annex III of the September staff paper, EBS/03/130 Supp. 1, considers the 4 percent growth a year for Argentina assumed in the medium-term macroeconomic framework, optimistic. This conclusion is reached on the basis of the much lower average growth observed during the 1968–2001 period, 2 percent. This conclusion could be questioned if we consider that Argentina has not yet been able to tap all of its growth potential. There have been important lessons that have been learned during that period which cannot help but unleash this potential in the future. In the first place, democratic institutions are firmly consolidated. Last December, 20 years of uninterrupted democratic process was reached. Most noteworthy has been the strength of the democratic institutions during the 2001 crisis and the smooth political transition observed in May 2003 when President Kirchner took office and confirmed the continuity of the present economic team that has led the recovery since mid 2002.

  18. In the second place, reliance on inflationary financing of the budget is no more an alternative. The crisis unleashed in December 2001 has served, in turn, to warn against unbridled debt financing of the budget and the principle of fiscal discipline is now overwhelmingly accepted. The 2001 crisis has also taught the important lesson that sustainable growth can only be achieved when accompanied by social equity and good governance which have come to Argentina to stay. Finally, relying mainly on exchange rate strategies as a way to stabilize the economy have also been abandoned for good in the case of Argentina.

  19. The banking strategy that my authorities have consistently implemented since 2002 of giving banks time to restore their profitability and capital is showing its strength. Deposits continue to grow, credit has started to move up again, nonperforming loans have started to decline, and losses are in a clear declining trend. In addition, important progress in the restructuring of banks’ external debt and new capital injections have taken place during the past year. All of this augurs well for the future soundness of the system. It should be highlighted, in particular, that the financial losses of the system are beginning to be reverted. November 2003 became the first month, after two years, in which the financial system showed profits in the aggregate. This is attributed to both an increase in lending activity and to the reduction in non- performing loans. The likelihood of consolidating this trend is high considering the liquidity available in the banks and the high pent up demand for credit both at the personal and companies levels. An upward trend of loans to the private sector is already ensuing. Particularly strong has been the growth of personal credits and a similar recovery is expected of credit to enterprises in the coming months to finance projected businesses expansions. It is also worth noting the reappearance of mortgage credits in domestic currency at fixed interest rates of around 12 percent per annum.

  20. After having compensated banks for asymmetric pesoization, a presidential decree has already been issued implementing the compensation to banks for asymmetric indexation of banks’ assets and liabilities, indexed by nominal wages and consumer prices respectively. Regarding this particular compensation, it is worth noting that, in the first place, it only represents a tenth of the compensation for asymmetric pesoization which is already largely completed. Second, although banks will only be able to dispose of the compensating bonds pari-passu with new lending and refinancing, this will not represent in fact a major restriction since the cut-off date to start measuring new credit will be February 2002. Third, not only new loans will be counted but also refinancing operations of existing credits. Lastly, even if a particular bank is still lagging in terms of new lending and refinancing it will still be entailed to receive interest payments for the compensating bonds allocated to it.

  21. On the mortgage refinancing law recently approved and the need to request a waiver for the embedded restraint in creditor rights, it is important to clarify that such law addresses the mortgage loans that fell in default during the crisis and that were granted to sole-family home debtors valued Arg $ 100.000 or less. Taking advantage of this system will be voluntary for creditors that are financial institutions but it will be obligatory in the reduced number of cases in which creditors are not financial institutions. Thus, the extent of the restraint in nonbank creditor rights will be quite limited and will not impinge on their rights to recover, to a large extent, the value of their financial assets. This has been conceived as an equitable solution to a serious social problem caused by the crisis.

  22. The program commitment to obtain by end-march 2004 an agreement toward the reform of the financial relations between the federal government and the provinces, to be followed, later in the year, by a submission of a revised coparticipation law and a fiscal responsibility law to congress and subsequent approval by the federal and provincial legislatures has received a renewed momentum as of late. The cycle of provincial and legislative elections, completed by end-2003, afforded the federal government considerable political support to advance with this undertaking. The new legislation aims at introducing distribution criteria that will consider not only economic and social condition in different provinces but also those related with fiscal responsibility.

  23. To conclude, my authorities are committed to build a competitive market economy with social justice, where transparent and consistent government policies set the basis for market participants to assume balanced risk in productive investments that ensure sustainable medium-term growth of output and employment. This is the most effective way to counter poverty and to consolidate social and political stability.

Argentina: First Review Under the Stand-By Arrangement and Request for Waiver of Nonobservance and Applicability of Performance Criteria
Author: International Monetary Fund