There is little indication at this stage to know how the talks are progressing. Although Buenos Aires is persistently positive about its prospects, noises emanating from the IMF suggest that the deal, to restructure US$6.5bn of obligations to the lender, is far from done.
Mixed messages
The IMF is not prepared to go easy on Argentina. Far from it, in fact; rumours emerged last month suggesting that there exists an inner circle of the lender's management, which includes first deputy managing director Anne Krueger and managing director Horst Köhler himself, which is determined that Argentina gets as rough a ride as possible.
How much truth there is in such conspiracy theories is debatable, appealing though they might be to a national media aware that many in Argentina house a deep-seated distrust of the IMF and blame the lender for its current predicament. But given that Argentina's was the world's largest-ever debt default, it would come as something of a surprise if the multilateral did not make some fairly stringent demands of Buenos Aires over the course of the negotiations.
On 25 July the IMF released its 'Article IV Consultation' for Argentina. Its demands were five fold. It called for Argentina to give reassurances about legal certainty and the political consensus for reforms; to establish a robust fiscal framework encompassing the provinces; to continue in its attempts to resolve the monetary overhang and restore confidence in the banking system; to undertake structural reforms to further liberalise the economy and increase trade openness; and to restructure debt and reestablish orderly relations with creditors.
This is a long way from the 'end of dictates' rule outlined by Argentina's President Néstor Kirchner. Such measures as those outlined by Article IV will place a heavy burden on Buenos Aires. Improving tax revenues from Argentina's provinces is a colossal task in itself, while any steps to remove taxation on foreign imports into the country will deny the government crucial revenues. This duty earned US$4.7bn for the government during the first half of 2003, and, together with a tax on the current account, was worth 21% of total government revenues for this period.
Friends in high places
Such wide-ranging reforms are the last thing Kirchner wants to have to deal with as he attempts to bring the economy back from the brink of last year's near meltdown. And there is no guarantee Argentina could survive the enforcement of such austerity.
For although the economy is recovering well this year, growing 6.1% in the first five months of the year and on course to be the region's top performer in 2003, according to a 7 August report by the Economic Commission for Latin America and the Caribbean (Eclac), there are signs that the revival is already slowing down. Industrial production slowed month-on-month throughout the second quarter, while domestic spending and external trade are still week.
The fact that 54.7% of the population was still, as of May, living beneath the poverty line and 26.3% did not have access to basic food and hygiene requirements, is profoundly worrying, as is a real unemployment rate of around 20% of the economically active population. That these figures were marginally below the levels seen in October last year should not be the source of great comfort.
It is, though, the very frailty of Argentina's economy which puts it in a stronger position with the IMF than otherwise might be the case. For everybody, it seems, wants Argentina to overcome its economic difficulties as quickly as possible. This was the message to emerge not only from Kirchner's trip to Europe last month, but also, and more importantly, from his meeting with US President George W Bush in the White House on 23 July.
Bush told the Argentine president to keep up the good work, which, as far as Kirchner was concerned, represented an endorsement of his current policy of trying to restore growth, employment, and production first, and worrying about painful structural reform second. According to sources in Buenos Aires, Bush even told Kirchner to 'fight for every last cent from the IMF' and offered Argentina his government's full support in negotiations.
Although the White House subsequently played down the suggestions that it would intervene on Argentina's behalf, Buenos Aires has been in close consultation with Washington since IMF talks began. Economy minister Roberto Lavagna travelled to the US twice in as many weeks, saying at the end of his meeting with US Treasury Secretary John Snow on 7 August that a first draft of the proposed deal would be ready within the next week.
Towards a compromise
Argentina is, therefore, not as powerless before the IMF as might have been thought, given that Buenos Aires will have to pay back US$2.9bn to the lender if a rollover deal is not signed by 9 September. Indeed, Buenos Aires is helped by the fact that it has achieved all the macroeconomic targets set by the IMF as part of the current deal, which expires at the end of August. True, the multilateral had to issue a waiver for structural reforms not yet completed, but in terms of its primary fiscal deficit for the first half of the year, Argentina was well on course.
What Argentina should gain as a result of the US backing, and as a result of the progress made this year, is credibility. And with credibility comes time. Buenos Aires knows that it has to comply with many of the demands outlined by Article IV; what it wants is as much time and flexibility as possible to introduce the measures when it sees fit.
This was apparent when interior minister Aníbal Fernández said that Buenos Aires was willing to carry out the IMF demands because they are 'indispensable - and for no other reason'. Fernández recognised the need for 'a project allowing sustainable growth of the economy in the medium term, and a change in the tax system', a restructuring of the financial sector, and the approval of a new legal framework for the 'eventual' adjustment of public utility rates [which have been frozen since January 2002].
The emphasis on 'eventual' was a sign that the government does not intend to be rushed. Prime minister Alberto Fernández made this more explicit: the reforms the IMF wants to see 'will be carried out in the timeframe that Argentine society permits'.
This, then, would be the compromise preferred by all parties. Kirchner will comply with the majority of the IMF's demands, but he will have three years, or almost the whole of his first term in office to do so.
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