IMF Executive Board Concludes Article IV Consultation with Argentina

Upon taking office in December last year, Argentina's new government faced pervasive macroeconomic imbalances, microeconomic distortions, and a weakened institutional framework. These encompassed unsustainably high consumption levels, historically low levels of investment, and large fiscal deficits financed by money creation, which led to high inflation. Distortions at the micro level included an extensive network of administrative controls (for example, trade barriers, foreign exchange restrictions, and price controls) and a business environment that eroded competitiveness and undermined medium-term growth. There was also an important weakening of the institutional framework for economic policymaking, perhaps most evident in the loss of credibility of the national statistics agency.

Abstract

Upon taking office in December last year, Argentina's new government faced pervasive macroeconomic imbalances, microeconomic distortions, and a weakened institutional framework. These encompassed unsustainably high consumption levels, historically low levels of investment, and large fiscal deficits financed by money creation, which led to high inflation. Distortions at the micro level included an extensive network of administrative controls (for example, trade barriers, foreign exchange restrictions, and price controls) and a business environment that eroded competitiveness and undermined medium-term growth. There was also an important weakening of the institutional framework for economic policymaking, perhaps most evident in the loss of credibility of the national statistics agency.

IMF Executive Board Concludes Article IV Consultation with Argentina

On November 9, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Argentina.1

Upon taking office in December last year, Argentina’s new government faced pervasive macroeconomic imbalances, microeconomic distortions, and a weakened institutional framework. Confronted with this difficult situation, the authorities began an ambitious and much needed transition toward a better economic policy. Important progress has been made already in 2016. The peso is now market determined and exchange controls have been essentially eliminated. The increase in utility tariffs has brought prices more in line with underlying costs. The settlement with creditors has allowed a return to international capital markets by both the private and public sector. Medium-term fiscal and inflation targets have been announced in conjunction with a transition toward a modern system of inflation targeting. Finally, the national statistics agency is being rebuilt, allowing for the publication of improved and credible statistics.

The reversal of the serious imbalances and distortions inherited from the previous administration, while necessary to lay the foundation for robust future growth, unavoidably had an adverse near-term impact on the Argentine economy. However, the current recession had begun even before the new administration took office and the alternative of continuing with the unsustainable policy framework of the past administration was simply not tenable, as it would have eventually led to a repeat of Argentina’s history of crisis, contraction, and social distress. The economy is expected to rebound from a -1.8 percent recession in 2016 to a 2.7 percent growth in 2017, and to grow at a close to 3 percent pace over the medium term. A modest headwind from the planned fiscal rebalancing should be offset by a pickup in private consumption (as inflation continues to fall), an improving external environment, and a rebound of private investment. With strong policy action and dramatic changes underway in the Argentine economy, the outlook is subject to greater than normal uncertainty.

Against this background, the central focus of the Article IV Consultation was on the best way to restore sustained and equitable growth, boost job creation, and protect the poor from the costs of restoring macroeconomic stability

The government has been clear in its commitment to bring inflation to single digit levels by 2019, and has maintained real interest rates broadly constant in positive territory while lowering the policy rate since Spring this year as forward looking indicators of inflation began to fall. A tight control of spending growth in the first few months of the year is expected to allow the federal government to meet the primary fiscal deficit objective for 2016 (4.8 percent of GDP), despite injecting some fiscal stimulus in the second half of the year. The 2017 Budget envisages a modest reduction of the primary federal fiscal deficit for next year, to 4.2 percent of GDP, mainly on account of further cuts of energy subsidies. Over the last few months, progress on structural reforms has occurred in the areas of governance, anti-corruption, competition policies, and financial market infrastructure, but supply-side bottlenecks remain that might impede a faster rebound of private investment and productivity.

Executive Board Assessment

Executive Directors strongly welcomed Argentina’s resumption of the Article IV consultation and underscored the importance of close engagement between the authorities and staff going forward.

Directors commended the ambitious reforms taken by the new administration to ensure a more stable and sustainable economic policy framework. They cautioned that reversing the legacy of severe macroeconomic imbalances, pervasive microeconomic distortions, and a weakened institutional framework will take time, but noted that important progress has been achieved by the authorities. While the measures taken have had a negative short-term impact on economic activity, the Argentinian economy is expected to rebound in 2017. Directors encouraged the authorities to remain steadfast in their reform efforts and reach out to stakeholders to secure broad support.

Directors stressed that continuing to lower the fiscal deficit is an important part of the adjustment. They noted that the pace and composition of rebalancing should be sensitive to its impact on growth, jobs, and the most vulnerable segments of the population, while maintaining clear medium-term objectives. In this context, Directors broadly saw the gradual reduction of the fiscal deficit envisaged by the authorities to be appropriate. At the same time, some Directors considered that the pace of deficit reduction could be accelerated if economic activity was stronger than expected, including to facilitate the reduction of inflation.

Directors emphasized the importance of institutional reforms to improve the efficiency and credibility of the fiscal framework. These reforms include introducing a simple and transparent medium-term fiscal policy plan; rationalizing government spending, including the wage bill; removing poorly targeted and distortionary energy subsidies; and restoring financial sustainability to the pension system. Directors also noted the need to make the tax system more progressive over time to reduce the tax burden and make the system more efficient. They also highlighted the importance of addressing issues related to fiscal federalism.

Directors commended the authorities’ efforts to bring down inflation to single digits. They broadly agreed that the pace at which inflation is reduced should remain attuned to its economic costs and distributional impact. Directors emphasized that building credibility in the monetary framework—in particular, establishing a clear price stability mandate for the central bank and securing its operational independence, and eliminating monetary financing of the deficit—will lessen the economic and social costs of disinflation.

Directors called for an ambitious agenda of supply-side reforms to improve the business climate and achieve strong, sustained and equitable growth. They noted that priorities include promoting competition, putting in place a better regulatory framework for energy and utilities, fully realigning utility tariffs toward cost recovery, and instituting a transfer scheme to protect the poor. Measures to gradually improve the quality of infrastructure, lower trade barriers, and develop local capital markets would also help. Directors welcomed recent progress to fight corruption, scale back government involvement in private industries, and create a better governance framework.

Argentina: Selected Economic and Financial Indicators

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Sources: Ministerio de Hacienda y Finanzas Públicas, Banco Central de la República Argentina (BCRA), and Fund staff estimates.

The primary balance excludes profit transfers from the central bank of Argentina. Interest expenditure is net of property income from the social security fund.

Average of LEBAC rates of all maturities.

1

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. The last Article IV Consultation with Argentina took place about 10 years ago, in July 2006.