I. Recent Developments

2. Recent data releases point to continued robust economic activity and strong fiscal performance.

• Real GDP growth in 2003 has been revised upwards to 8.7 percent (from 8.4 percent).

• Industrial production in February 2004 increased by 0.9 percent (14.1 percent year on-year) led by strong increases in the automobile, publishing, and agro-chemical sectors. Capacity utilization is now about 70 percent, with sectors such as textiles close to full capacity.

• The cumulative primary surplus of the federal government through February 2004 was Arg$2.5 billion (0.6 percent of GDP), significantly above the end-March 2004 performance criterion.

II. Policy Implementation

3. The following developments have taken place with respect to policy implementation:

• Public debt restructuring. On March 17, 2004, the authorities: (i) issued a presidential decree authorizing the appointment of six banks—three international and three domestic—to assist with the debt restructuring;¹ (ii) published the letter of engagement setting out the tasks of the banks; and (iii) invited an additional four creditor groups to Buenos Aires to begin negotiations on public debt restructuring (bringing the total of groups invited to 25).

  • The decree lays out the reasons for Argentina’s decision to hire the banks and explains the fee structure, which appears to be broadly in line with previous sovereign debt restructurings and includes a “success fee” in the event that participation in the exchange exceeds two-thirds of the debt to be restructured.

  • The tasks of the banks include providing advice on gathering market intelligence and communicating with investors, and assisting with the structuring of the new securities and managing the debt exchange. A condition of engagement is the authorities’ cooperation in the process of negotiating with creditors. The authorities or the international management banks may terminate the engagement at any time.

• Paris Club. On March 15, 2004, the authorities wrote to the Paris Club Secretariat indicating that they were ready to negotiate a restructuring of official bilateral debt and would specify the scope and type of treatment being sought once the Paris Club agreed to enter into negotiations.

• Banking strategy. The central bank has issued two regulations to implement the banking strategy under the program:

  • On March 10, all banks were requested to submit multiyear business plans by end-March 2004.

  • On March 12, a regulation was issued to implement the compensation for asymmetric indexation. The regulation requires that banks submit by end-April 2004 detailed information on loans linked to the wage index. The central bank expects to credit escrow accounts with the compensation owed to all banks by June 2004 (proposed reset structural performance criterion).

• Fiscal policy. On March 10, the government issued a series of decrees that will raise cigarette-related excises and surcharges, effective April 1, 2004. The decrees establish a floor on tax collections from tobacco companies which would require gradual increases in cigarette prices by an estimated 20–30 percent over the next two years. The revenue yield is projected to be equivalent to 0.1 percent of GDP in 2004 and 0.3 percent in 2005, and to add about 0.3 percentage point to inflation over the next 12 months.

4. Fund approval of the Article VIII exchange restriction related to the corralón expired on March 19, 2004. Staff will recommend further approval of this restriction, which is scheduled to be eliminated in 2005. The request for approval will be included in the March 2004 Report on Delayed Completion of Article IV Consultations and Extension of Approval of Exchange Measures.