Shortly after hosting IMF managing director Horst Köhler last month, President Néstor Kirchner proclaimed that the era of Fund dictates was over. This has not deterred the IMF from telling Kirchner what it thinks he must do.
The prescription came in the 'Article IV Consultation' -the first to be conducted on Argentina since 2000- which was released on 25 July. It was couched in the usual IMF circumlocutions, but with some assistance from a well placed source in Washington we have been able to cull from the official document the 'guided paraphrase' that follows.
The prescription. Argentina will need to address five major challenges:
Giving reassurances about legal certainty and the political consensus for reforms.
Establishing a robust fiscal framework encompassing the provinces.
Continued progress in resolving the monetary overhang and restoring confidence in the banking system.
Undertaking structural reforms to further liberalise the economy and increase trade openness.
Restructuring debt and reestablishing orderly relations with creditors.
What follows are the IMF's formulas for dealing with each.
Giving reassurances about legal certainty and the political consensus for reforms. 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. The emphasis was on the Argentine government working 'expeditiously' to eliminate the persisting uncertainties about the enforcement of creditors' contractual rights.
The government must also quickly address market concerns about 'the continuity of economic policies following the political transition.'
Establishing a robust fiscal framework encompassing the provinces. Restoration of fiscal solvency as a sine qua non of a sustainable economic programme. This will require a fundamental break with the past affecting both the federal government and the provinces.
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 ensure fiscal discipline and responsibility at all levels of government.
In the short run, the government should seek early ratification by provincial legislatures of the bilateral agreements underpinning 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.
Also essential for monetary and fiscal discipline is that provinces end the issuance of all new quasi-monies.
Argentina's revenue effort is below several other countries in the region. The government must plan the needed tax reforms without further delay and build consensus for them. Continued efforts are needed to eliminate the remaining 'competitiveness plans' [which involve special tax treatment]. Also the government must reinstate the recently cut VAT rates to their previous levels at the end of the 60-day reduction period.
Continued progress in resolving the monetary overhang and restoring confidence in the banking system. Some directors remain worried about risks associated with potentially significant monetary 'leakages' related to the amparos and the reprogrammed time deposits to be released in 2003. Others see this risk as rather low, given the experience thus far and the relatively robust demand for money.
They all seem to agree that the pending ruling by the supreme court on the constitutionality of the peso-isation of bank deposits is adding to uncertainties. This issue should be resolved in a manner that does not undermine establishing a credible monetary anchor.
The government should 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.
Also, the government should reaffirm its commitment to safeguarding and strengthening central bank independence. A useful step would be early approval of legislation that would protect public officials carrying out their duties in the bank resolution process.
Undertaking structural reforms to further liberalise the economy and increase trade openness. The greater stability in the economy provides the opportunity to liberalise the exchange controls imposed in 2002 at the height of the crisis, and to initiate reforms necessary to revive investment and growth. The government should take early further steps to liberalise the restrictive compulsory export surrender requirement, which would help rebuild confidence.
There is a need for a renewed emphasis on trade liberalisation and diversification, given Argentina's relatively low level of trade integration. The government should 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.
The situation regarding utility pricing could be putting a large burden on price adjustments in 2003. It is regrettable 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. There is urgent need for 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.
Restructuring debt and reestablishing orderly relations with creditors. Argentina's public debt must be restructured in a manner that will help normalise relations with private creditors and begin the process of attracting capital flows back into the country. The government should 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.
The government should eliminate its arrears with the World Bank as soon as possible; this will clear the way for implementation of the WB's programme of social support under the heads-of-household programme. The government should remain current on their obligations to the international financial institutions.
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. Consequently, the Argentine government should work closely with the international community and strengthen its efforts to reach a cooperative solution with private creditors to secure financing and achieve fiscal and external sustainability over the medium term.
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