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Guatemala has backed down from its disruptive stance in the Cafta negotiations, of offering to free 75% of US exports immediately. At a summit held last week in Guatemala city, it agreed to harmonise its offer with that of the rest of Central America.

RULING PRD RISKS SPLIT OVER MEJIA'S REELECTION BID 

The ruling Partido Revolucionario Democrático (PRD) is navigating very close to breaking-point over President Hipólito Mejí­a's wish to stand for reelection. Ironically, it looks very much like taking this risk for nothing, as the frontrunner in the opinion polls, former President Leonel Fernández of the Partido de la Liberación Dominicana (PLD), has gained a lead which will be hard to overtake. 

A survey conducted by Gallup-Omnimedia and published in the newspaper Diario Libre on 18 July shows Fernández attracting 51% of voter preferences -enough to get himself elected outright in the first round. 

Eduardo Estrella, candidate of the Partido Reformista Social Cristiano (PRSC, for many years the 'party of government'), comes next with a mere 12.7%. His position as secondrunner largely reflects the fact that the PRD has not yet nominated its candidate, so the survey shows the preferences attracted by each and every one of the aspirants: 

* Hipólito Mejí­a: 8.7% 
* Milagros Ortiz Bosch: 7.7% 
* Rafael Suberví­ Bonilla: 5.7% 
* Hatuey Decamps: 2.7% 

There are actually five more contenders for the PRD nominations, but not one of these attracts even 1% support. 

This line-up could conceivably change after the PRD has made up its mind; this is what Mejí­a is banking on -together with what he expects will be a positive association of his image with the forthcoming Pan-American Games. 

The survey does not look too encouraging on this prospect. A clear majority of respondents (55.6%) say they will not vote for Mejí­a if he is the PRD candidate. The rejection rate for Fernández is 15.3%; for Estrella, 13.7%. 

Undecided PRD. Seven of the PRD aspirants (not including Mejí­a) got together last week to consider the various options that have been put forward to settle the nomination issue by a special mediation committee. The three strongest options are: a plebiscite, an independent survey of party members, and primary elections. They did not reach a consensus. 

The Proyecto Presidencial Hipólito (PPH, the organisation campaigning for Mejí­a's reelection) has already stated publicly that it would prefer primaries. 

This is a brave stance. According to an earlier Gallup-Omnimedia poll, 62.5% of PRD members feel that Mejí­a should abandon his reelection bid; 45.8% believe that if he were nominated, he would not win. 

The PPH has invested a lot in its attempt to secure a second term for Mejí­a. In 1994, as a reaction to the apparently interminable reelections of Joaquí­n Balaguer, the constitution was amended to ban consecutive reelection -with the wholehearted support of the PRD. In 2002, though, with Mejí­a in the presidency, the kernel of the PPH successfully pushed for the lifting of that ban.

Conspiring against Mejí­a's popularity are not only the domestic policy consequences of the impending deal with the IMF (WR-03-27), but also the President's high-handed dismissal of criticism about his decision to send Dominican troops to Iraq. 

He has been reminded by the lower chamber's armed forces committee that he needs congressional approval for this. His response was that this was a decision 'taken long ago' (by him), and that in any case the vote in congress would endorse it. 

Misgivings have peaked after news last week of the second Dominican fatality in Iraq: a medic serving in the US military killed in a clash with the Iraqi resistance (the first was a US Marine killed in action in April). 

Scheduled to depart is the 'Quisqueya' task force, composed of 165 army troops, 39 from the navy, 44 from the air force and two policemen.

Once again the Dominican Republic is in the grip of a worsening power shortage. Last week one of the power utilities, Edeeste, said that it had to take two power stations out of production because it had run out of gas to power them. These two jointly produced 210MW. With their withdrawal, 12 power stations have been idled, mostly because of lack of fuel. 

The country is already running an electricity deficit of 300MW a day: earlier in the week the country was producing about 1,200MW but demand was running at around 1,500MW. 

The problem is that the generating companies are not prepared to buy gas to provide electricity for which they are not getting paid. The generating companies say that the distribution companies have racked up large debts (of around US$150m) with them. The distribution companies claim that they are not being paid by their customers, most notably the government (which owes them US$20m). 

The result of all this is that great tracts of the country are now being blacked out: some places, especially poorer areas, are not getting any electricity for nine hours at a stretch. These blackouts have already led to demonstrations and confrontations with the police. 

The electricity companies say that the devaluation has squeezed them hard: they have to pay dollars for fuel but are earning pesos. They are pushing for the government to sanction an increase in electricity prices (which have been pegged since February) of at least 40% to put them back on an even keel. The electricity companies say that they had budgeted on an exchange rate of RD$24.7 for the year: already the rate is down to RD$35. 

What is worrying is that the financial problem could mean that the new US$400m, 300MW gas-powered AES Andrés plant, which is due to start in September, may be delayed. The plant is now in its final phase of testing, but the operator, AES, is unlikely to commission it if it will run at a loss. 

As to the underlying financial crisis besetting the government, it is far from clear when the IMF will come to the rescue (WR-03-24).

The government of President Jean-Bertrand Aristide has made an unexpected effort to bridge its differences with the multilateral financial institutions in an attempt to unfreeze much-needed international loans. It paid US$32m in arrears to the Inter-American Development Bank (IDB) -nearly wiping out its foreign reserves in the process.  

The payment of the arrears should pave the way for a US$50m IDB budget support loan, ratified by Haiti's legislature last month.  

The multilaterals suspended a total of US$500m of loans to Haiti in the wake of the disputed legislative elections of 2000.  

The disbursement of four frozen IDB loans amounting to some US$146m could begin after the payment of the arrears and the government's vaguely credible steps towards holding free and fair legislative elections later this year.  

In May, Haiti struck a deal with the IMF to cut spending and implement currency stabilisation measures. Haiti is obliged to come up with a plan to cut deficit spending from 5.2% to 2.7%.  

It also has to reduce inflation from 13% to 10%, and to control spending in public sector companies. The IMF will come up with between US$100 and US$150m if Haiti keeps to its side of the bargain over the course of the fiscal year.  

The government resorted to desperation tactics earlier this year, after recording nil growth in 2002, when Aristide demanded that France repay billions of dollars that Haiti handed over after its independence in 1838. Haiti began to pay 90m gold francs in the nineteenth century, which, Aristide calculated, was worth about US$21.7bn at current world prices, equivalent to about six times Haiti's current GDP. France, unsurprisingly, dismissed the demand.

Exchange rates
Local currency per US$1
COUNTRY	CURRENCY	Year ago	Previous	Current
		19.07.02	11.07.03	18.07.03
Argentina	peso	3.55	2.78	2.83
Barbados	dollar	2.00	2.00	2.00
Belize	dollar	2.00	2.00	2.00
Bolivia	boliviano	7.21	7.70	7.70
Brazil	real	2.87	2.89	2.88
Chile	peso	694.00	707.00	705.00
Colombia	peso	2,539.24	2,855.86	2,888.88
Costa Rica	colón	361.96	400.02	400.95
Cuba	peso	1.00	1.00	1.00
Dominican Rep.	peso	17.93	35.21	34.71
Ecuador	dollar	1.00	1.00	1.00
El Salvador	colón	8.75	8.75	8.75
Grenada	EC dollar	2.70	2.70	2.70
Guatemala	quetzal	7.85	7.92	7.93
Guyana	dollar	180.50	180.50	180.50
Haiti	gourde	29.50	--	--
Honduras	lempira	16.55	17.56	17.58
Jamaica	dollar	48.25	--	--
Mexico	nuevo peso	9.75	10.50	10.45
Nicaragua	córdoba oro	--	15.28	15.30
Panama	balboa	1.00	1.00	1.00
Paraguay	guaraní­	6,800.00	6,050.00	6,000.00
Peru	nuevo sol	3.54	3.48	3.48
Suriname	guilder	2,178.50	--	--
Trinidad & Tobago	dollar	6.09	--	--
Uruguay	nuevo peso	25.00	27.75	27.65
Venezuela	bolí­var	1,295.25	1,600.00	1,600.00
Sources: EFE; Bank of America.

Inflation in the region
Country	Source	April	May	June	Last 12m	Jan-Dec 2002
Argentina	Indec	0.10	-0.40	-0.10	10.20	41.00
Bolivia	INE	0.32	0.02	0.20	3.23	2.45
Brazil	FGV	0.41	-0.67	-0.70	26.94	26.41
Chile	INE	-0.10	-0.40	0.00	3.60	2.80
Colombia	Dane	1.05	0.49	-0.05	7.21	6.99
Costa Rica	DGEC	0.96	0.52	0.67	10.21	9.68
Ecuador	Inec	0.97	0.17	-0.21	7.61	9.36
El Salvador	Min.Ec.	0.00	-0.10	-0.10	1.60	2.80
Guatemala	BCG	0.45	0.25	0.22	5.24	6.33
Honduras	BCH	0.50	0.10	0.30	8.00	8.10
Mexico	Bco.Mx.	0.17	-0.32	0.08	4.27	5.70
Paraguay	BCP	1.20	-1.20	-1.50	15.70	14.60
Peru	INE	-0.05	-0.05	-0.47	2.17	1.52
Uruguay	DGEC	0.95	0.37	0.16	24.64	25.94
Venezuela	BCV	1.70	2.30	1.40	34.20	31.20
US	DOL	0.20	0.20	--	2.10	1.60
Previous: WR-03-27

The stockmarket in figures
Market	Index	11.07.03	18.07.03	Variation (%)
Buenos Aires	Merval	710.50	743.24	4.61
São Paulo	Bovespa	13320.58	13794.26	3.56
Santiago	IPSA	1256.70	1248.75	-0.63
Bogotá	IGBC	2250.67	2182.36	-3.04
San José	BCT	12193.80	12185.55	-0.07
Quito & Guayaquil	Interinvest	75.17	71.49	-4.90
Mexico	BMV	7083.82	7030.76	-0.75
Lima	ISVBL	1840.41	1819.06	-1.16
Caracas	BC	14699.24	15024.55	2.21
Source: Daily market reports.

Negotiations with the AUC were meant to be run parallel to talks with the ELN. The collapse of that second track could have serious consequences for Uribe's overall strategy. 

The government of President Alvaro Uribe has reached a demobilisation agreement with the largest paramilitary organisation, the Autodefensas Unidas de Colombia (AUC). For all the spin coming out of Bogotá and Washington, what this signals is that Uribe has had to take a risky departure from his original strategy. This strategy foresaw the progressive 'removal of players' from the field, which is what is being emphasised now. The purpose of that approach was to ensure that the endgame would be confined only to dealing with the largest guerrilla force, the Fuerzas Armadas Revolucionarias de Colombia (Farc). 

But the original strategy also envisaged parallel peace negotiations with the AUC and the second-largest of the guerrilla organisations, the Ejército de Liberación Nacional (ELN). This was deemed necessary to convey an impression of symmetry, since dealing only with the AUC - infamous worldwide for its savagery and widely deemed an informal ally of the military - would suggest a bias which many abroad would find objectionable.
And this was not just a matter of looking good abroad: it was essential to secure the financial assistance needed to make the 'reinsertion' of thousands of fighters a credible proposition. [Another less known symmetry would have been present: for some time - since before Uribe's arrival on the scene - the military had concentrated mainly on fighting the Farc in the south, leaving it up to the paramilitaries to fight the ELN in the north.] 

That second pillar of the initial strategy has been all but abandoned. The main reason is the battering the ELN has taken at the hands of the AUC, which has reduced its strength, possibly to little more than 2,000, and greatly diminished its territorial influence. This was made manifest when the AUC was able to mobilise the support of the local population to resist the Pastrana government's plan to grant the ELN a demilitarised zone similar to that of the Farc. On the one hand this has made it militarily less important for the government to devote a huge negotiating effort to the ELN. On the other, within an ELN aware that it lacks the strength to back many of its demands, moves are afoot to seek survival through a strategic alliance with the Farc, however unequal such a partnership might be. There have already been instances of Farc and ELN 'fronts' conducting joint operations at local level. 

With Colombian NGOs and rights activists decrying the deal with the AUC as 'based on impunity', reservations already held by international donors will be strengthened, rendering unlikely the substantial flow of assistance required to find jobs for 8,000-or-so demobilised paracos. Colombia, severely constrained by a fiscal deficit it can barely contain, does not have the wherewithal to do this on its own. This does not necessarily mean that the agreed demobilisation will not go ahead. It might mean, though, that the post-demobilisation scenario will differ considerably from the plan. The profitability of the drugs trade, with which the paracos have a close association, will exert a great pull, perhaps encouraging the emergence of many small drug-related gangs in place of the large ones now in the process of being formally disbanded. This would represent a new threat, at a time when a number of members of the military have been voicing doubts about the army's ability to take the place of the eventually demobilised paramilitaries in facing down the guerrillas in several parts of the country.

A delegation of the Frente Farabundo Martí­ para la Liberación Nacional (FMLN) has travelled to Washington to meet officials at the US State Department and international financial organisations -hoping to set US minds at rest over the possibility of the party winning the presidential elections next March, something they just might achieve this time round (WR-03-21). 

The delegation is determined to show that the FMLN is both a viable political force and nothing to be afraid of. 

Dan Fisk, US assistant secretary of state for western hemisphere affairs, recently signalled that the US would not be happy with a victory by the former guerrillas. He said that there were still some doubts about the FMLN's democratic credentials as it still carried some significant baggage. The US is particularly concerned about policies such as ending dollarisation and revising the laws which permit the privatisation of public services. 

The US was also unhappy about statements the FMLN made about the events of 11 September 2001: the FMLN said the attacks on the World Trade Centre were the result of US foreign policy.

Andrés Manuel López Obrador, the mayor of Mexico city and the most likely presidential candidate in 2006, appears to have become fed up with the speculation. He announced last week that he was prepared to sign a written declaration that he would not run in 2006. The only condition was that the declaration should be drawn up by Carlos Salinas, the disgraced former President, Roberto Madrazo, the current leader of the Partido Revolucionario Institucional (PRI), which is the biggest party in congress, and Diego Fernández de Cevallos, a prominent member of the ruling Partido Acción Nacional (PAN). 

The letter López Obrador wants them to draw up, apparently, will not commit them to giving up their aspirations for 2006. López Obrador claimed that he just wants to get rid of the speculation and focus on his work in Mexico city. 

López Obrador's dramatic gesture of surrendering his 2006 ambitions has startled political commentators as well as ordinary people. Websites ask whether people believe López Obrador is serious.

Prime Minister Patrick Manning's ruling People's National Movement (PNM) has achieved a decisive victory in the local government elections, nine months after winning the general elections. The PNM claims that this was the first time that one of the two main political parties successfully crossed traditional racial political barriers. 

The PNM won nine of the 14 municipal corporations, the opposition United National Congress (UNC) 4, with a tie in Rio Claro/Mayaro. This was a big improvement for the PNM on the previous local government elections, in 1999, which resulted in the parties taking seven municipalities apiece. 

Of the 126 electoral districts, the PNM won 83 and the UNC 43. The PNM also won an historic three districts in the UNC heartland borough of Chaguanas. 

The unprecedented swing of UNC voters to the PNM has mounted pressure on UNC leader Basdeo Panday to step down. Panday's image has been tarnished by corruption charges. 

Manning said that the PNM would reward the former UNC supporters whose backing propelled the PNM to victory. He said that the result showed there was now inter-racial solidarity in the country: 'I believe that it was the first time that a political party in Trinidad & Tobago has been able to cross the ethnic divide entirely on its own efforts and not by way of coalition arrangements.'

'Subcomandante Marcos', the leader of Mexico's Zapatista rebels, has reappeared announcing a major shift in the strategy of his movement, just shy of 10 years old, which entails adopting 'resistance' as its chief form of struggle and waiting no longer for the government and congress to revise the indigenous rights legislation. The 30 'autonomous municipalities' in the Zapatista area of influence in the southern state of Chiapas will put into effect the system of government envisaged in the San Andrés Larraí­nzar Agreements of 1996, signed by the Zapatistas and the government but later, in the Zapatista view, bowdlerised by the legislators. 

The Zapatista municipalities, he said, will set up an 'autonomous regional palace' as their overall government. 

'The EZLN,' said Marcos, 'has decided to suspend completely any contact with Mexico political parties, and the Zapatista towns have ratified the adoption of resistance as their main form of struggle.' 

Marcos also announced the imminent closure, on 9 August, of the Aguascalientes cultural centres set up as meeting-places with the outside world. He said contact would be severed with NGOs, because their dominant attitude was one of 'assistentialism' -not of political support, which is what the indigenous communities needed. [He later toned this down, recognising the positive contributions some NGOs had made.] 

A prominent point in Marcos's recent string of communiqués is that the EZLN is aware of an increase in paramilitary activity in its area of influence, and will not sit by in the event of attack. 

Writer and indigenist Carlos Montemayor says this is an oblique warning to the government, 'because the Mexican army and the Chiapas judicial police have been strengthening, training, arming and supplying munitions to the paramilitary groups [...] formed by Indians docile towards the structures of power.' 

According to Marcos, in the new setup the EZLN, the military arm of the Zapatista movement, will become separate from the 'autonomous municipalities'. Anyone holding office in the new governments will have to resign their positions in the EZLN. 

'If the EZLN is now being asked by the autonomous [municipalities] to perform as their mouthpiece it is because they have moved on to a higher stage of organisation, and it is not up to individual municipalities to make this known.

RIOS MONTT CANDIDACY SAGA COMES FULL CIRCLE 

Further twists in the judicial saga of retired General Efraí­n Rí­os Montt's candidacy triggered two days of rioting by mobs of his followers, which took a toll in the higher echelons of the police, claimed three (accidental) victims -and left the general's candidacy just as undefined as before. 

As we reported last week, the constitutional court (CC) granted Rí­os Montt an injunction ordering the electoral tribunal (TSE) to register him as a presidential candidate. 

Before this could happen, though, the left of centre Unión Nacional de la Esperanza (UNE) filed with the supreme court an injunction of its own, to block the TSE from carrying out what the UNE deemed an illegal order. 

The CSJ granted a temporary injunction, but this was countered by a string of three recursos de ocurso (petitions against official disobeying injunctions) filed with the CC. This forced the CSJ to hand over the whole dossier to the CC. 

The FRG riots. Two steps earlier, before the CC had ruled in his favour and it looked as if he was to be denied the opportunity to run for the third consecutive time, Rí­os Montt warned publicly, 'This could create violence because we are outside the law; when one is outside the law one is violent.' 

When the file went back to the CC, the general's party, the Frente Republicano Guatemalteco (FRG), decided to influence the outcome with a measure of direct action. From all parts of the country, using government vehicles, it ferried into Guatemala city a mob of about 10,000, many of them members of the street gangs known as maras, or former members of the PACs, the 'self-defence patrols' set up by the military to aid their counter-insurgency effort. 

Their targets were the premises of the CC and the Centro Empresarial, a business centre in the capital where some 300 people were held hostage for 10 hours -and journalists everywhere. Shots were fired, but fortunately missed their mark, though there were several incidents of clubbings. FRG youth leader Juan Pablo Rí­os (the general's grandson) led a contingent into the affluent quarter of La Cañada, to strike fear into 'the oligarchs'. 

A TV journalist died of a heart attack fleeing the mob. On the other side, two FRG followers were killed and 20 injured when the truck bringing them from Baja Verapaz overturned. 

At the end of the first day, President Alfonso Portillo ordered the army into the streets to restore order. The police kept out of the way until well into the second day, when the rioting was winding down. The military did not materialise. 

...and back again. The presence of the mob must have affected the CC, but not in the manner intended: in a 3:2 vote it rejected the ocursos and handed the whole matter back to the CSJ, which must now decide if it makes its temporary injunction definitive. Either way, the UNE or the FRG will be able to appeal to the CC. In that case, the outcome is not foreordained: the titular judges will have to pick two alternates to form a seven-strong panel, and this could upset the political balance Rí­os Montt relies on. 

With the judicial outcome still in the air, interior minister Adolfo Reyes dismissed police chief Raúl Manchamé for having kept his force of the streets, and initiated proceedings against another three high-ranking officers. 

The defence minister, General Robí­n Macloni, and the army chief of staff, General Enrique Rí­os Sosa (the would-be candidate's son) were summoned to congress to explain why the army hadn't intervened. Macloni said the police hadn't requested assistance; Rí­os -to everyone's astonishment- claimed that the army had gone out on the streets. 

Perhaps the most ironic sideline: a poll showed Rí­os Montt running a poor third in voter preferences, with only 11.4%, to the 45.3% attracted by frontrunner Oscar Berger.

The IMF has warned that the fiscal weakness of the Bahamas has constrained the government's scope for policy manoeuvre at a time when the country remains vulnerable to developments in the US and to growing competition from other tourist destinations and offshore financial centres. This came as part of the IMF board's assessment of the recent 'Article IV Consultation', made public on 23 July. 

The Fund notes that since 2001 economic growth in the Bahamas has slowed, and the fiscal position has weakened, under the impact of the global economic slowdown and the lingering security concerns. 

While the economy is expected to strengthen gradually in 2003 and 2004, it says, the vulnerability remains. 

The IMF recommends focusing economic policy on raising international reserves, regaining room for fiscal manoeuvre, and diversifying the economic base to maintain confidence and reduce economic vulnerabilities. It also emphasises the importance of structural reforms to improve competitiveness over the medium term. 

Directors stressed the need to consolidate the fiscal position in order to reduce the debt-to-GDP ratio and ensure fiscal sustainability, although there was support for allowing the full play of automatic stabilisers in view of the sluggish economic growth. 

While the IMF board considered that the fixed exchange-rate peg to the US dollar has served the Bahamas well, and welcomed the strong commitment of the authorities to the peg, it noted the real effective appreciation of the currency over the last two years, and stressed that maintenance of the peg would require sound fiscal, wage, and structural policies to protect external competitiveness. 

It also encouraged action to reverse the recent decline in the tax ratio, calling for tax reform to broaden the tax base and eliminate distortions in the tax system. Improvements in revenue administration, it said, should be given high priority.

The Caribbean tourism industry is showing signs of recovery, according to the Barbados-based Caribbean Tourism Organisation (CTO). 

It reports that stay-over arrivals in the region increased by an estimated 7% during the 2003 winter season, compared to the same period last year, while cruise ship passengers were up 5%. 

CTO secretary-general Jean Holder says, 'The weakened US dollar has made the region's tourist prices more attractive for Europeans and Canadians while making trans-Atlantic travel more expensive for Americans, encouraging more Americans to consider the Caribbean as an alternative.' Another contributory factor was the recent Caribbean cricket tours of Australia and Sri Lanka, which attracted scores of fans from abroad. 

The Caribbean recorded arrival increases of about 21% from Canada, 7% from the US, and 6% from Europe in the 2003 winter season. 

Tourism in the Dominican Republic was up 18% for the first six months of the year, with nearly 245,000 more arrivals that in the comparable period of 2002. 

The central bank estimates that tourism generated earning of US$1.61bn in January-June and that, if current trends continue, the total for the year as a whole will exceed US$3bn. 

Average hotel occupancy in January-June was 73.8%, a significant increase on the 64.1% recorded in the same period of 2002 (which was when the impact of the September 2001 attacks on the US was most acutely felt). 

These figures put the Dominican Republic in the lead as far as recovery of the Caribbean tourism sector is concerned. 

Among the factors contributing to the upturn, the central bank lists the sharp devaluation of the peso and the intense public relations effort carried out by the hoteliers' association and the tour operators. 

Punta Cana has remained the principal attraction, with its airport receiving 46.9% of all tourists arriving in the country.

President Vicente Fox was forced to admit that unemployment had become a 'serious' problem when June statistics showed the rate up to 3.17 in that month. This is the highest level in 18 months and more than one-and-a-half times the rate Fox encountered when he took office. 

If the figure looks small by comparison with other Latin American countries, it is because of the tight definition of unemployment in Mexico. To be classified as unemployed one must be over 12, looking for work, without having had even one hour of paid employment in the week of the survey. 

During his election campaign in 2000, Fox promised economic growth of 7% a year and the creation of more than 1m jobs in each of the six years of his presidency. 

Taking the official figures as reference, since Fox took office more than half a million people have become unemployed, taking the total to 1.3m. A better indication of the real situation is provided by the estimated 9.5m-strong informal or 'submerged' economy; 17.3% of the economically active population earning less than a living wage. 

After recognising the seriousness of the problem, Fox promised increase spending on training. The problem is, as the business sector pointed out, the amount of money the government is prepared to commit, M$100m (US$9.6m), is too little to make much of a difference. The business sector and opposition politicians want the government to come up with a more comprehensive, 'structural' response. They say that the M$100m will provide training for just 25,000 people. 

Officials say that the June figure is inflated by the end of the academic year and the cancellation of public works projects in five cities, and that they have been distorted by a surge in joblessness amongst women. 

The big problem has been feeble economic growth: this year will be the best of Fox's first three years, but it will probably be less than 2%. Fox's first year, 2001, was a recession (-0.3%) and last year was a disappointing 0.9%.

URBAN COUNTERPARTS ARE ALREADY BEING EVICTED 

An incendiary speech by a leader of the MST, the movement of landless peasants, may have provided the excuse for government action to disperse the organisation's biggest encampment, at the Pontal do Parapanema in the southwestern corner of São Paulo state. 

At the same time, a violent incident at a squat organised by the MST's urban counterpart, the Movimento dos Trabalhadores Sem Teto (MTST, Movement of Roofless Workers), has added fuel to the growing demands for government action. 

'War on landowners.' João Paulo Stédile, an MST leader closely associated in the public mind with this year's wave of land 'invasions', raised many hackles on 23 July when, addressing a gathering in Rio Grande do Sul, he said, 'We shall not rest until we have done away with the fazendeiros [and won] this war [...] There are now 23m people devoted to the peasant struggle. On the other side are only 27,000 fazendeiros. Are we going to lose with a thousand-to-one ratio? That's very difficult; all we need to do is to unite so that each thousand of us grabs one of them.' 

This prompted José Germano, secretary of public security in São Paulo state, to ask the public prosecutor if there were not grounds to charge Stédile with inciting violence, or at least public disorder. 'His statements,' said Germano, show a clear intention not to lead things to a good ending; they compromise the relationships between citizens and harm the cause of agrarian reform.' 

For some time the state government had been seeking a compelling motive to disperse the Pontal do Parapanema camp, where the MST has installed 3,900 families to await the distribution of land. It has already moved against another camp, at Chico Mendes de Rosana, by getting the state railway, which owns the land the squatters are on, to obtain an eviction order from a judge. 

Tough talk in Brasí­lia. A hardening of attitudes was also evident in Brasí­lia. President Lula da Silva's chief of staff, Tarso Genro, announced, 'The government will not renounce its role as the political guarantor of governability and democratic stability.' He said the authorities would use force if necessary. 

An even more somber note was struck by trade & industry minister Luiz Fernando Furlan, who described the MST's actions as a 'power struggle' driven by that organisation's aim to become a broader political organisation. 

[This is a mild variant of another which was being circulated by a firm of security specialists, suggesting the possibility that the MST could strike an alliance with the drug-trafficking gangs that control many of the Rio shantytowns.] 

The roofless. Last week the São Paulo state government took direct action against about 1,000 MTST squatters who had moved into an empty hotel building in the state capital. Police were ordered to evict them; they left peacefully. 

A larger contingent, reportedly 3,500 strong, that had improvised a shantytown in a vacant lot owned by Volkswagen was still refusing to obey an eviction order at the weekend. The local MTST coordinator, João Batista Costa, warned that any attempt by the police to use force would be met with force. 

Many fear that the authorities will be quick to move against the urban squatters. 

PT congressman Ariel de Castro Alves, who is piloting a disarmament bill, says, 'This event will demand from the government tougher measures than the occupation of rural land.' Political scientist David Fleischer, of Brasí­lia university, concurs. He predicts that the police will evict the squatters by force, and that there may be injuries and even some fatalities. The reason: there are no funds for urban reform.

RECIPE COMES AFTER 'END OF DICTATES' PRONOUNCEMENT  

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.

No 'mea culpa' just yet 
When in Argentina, Köhler vaguely hinted that the IMF had handled the situation in that country somewhat less than adequately. In the assessment of the Article IV Consultation, the entire board went a little bit further: 

'Directors underscored the critical importance of addressing vulnerabilities before they become severe, and the important role that Fund surveillance and conditionality have to play in focusing early and sufficiently on sustainability issues. They considered that timely action to correct vulnerabilities, which in the case of Argentina would likely have included an orderly exit from the currency board arrangement, might very well have prevented a crisis that -in the absence of strong domestic ownership of policies crucial for sustainability- became inevitable.' They said they would come back to these issues later.

Copom, the monetary policy committee of the central bank, cut interest rates by 1.5 points on 23 July. This was in line with economists' expectations, but well below what industry had been hoping for. As if to underline the dire state of the economy, the unemployment figures, released at the same time, showed that the rate had hit a new record. Businessmen complain that the bank is being excessively timid, given that there was deflation of 0.18% in the first half of July and unemployment set a new record in June, of 13%. The cut, which brought the base Selic rate down to 24.5%, was the biggest since 1999. It was also significant that the decision to cut rates was unanimous. Last month Copom cut rates by 0.5%. Antônio Palocci, the finance minister, says he trusts that Copom will continue to cut rates steadily throughout the rest of the year. The central bank has been keeping interest rates high to squeeze inflation. The consensus forecast for 2004 is a rate of 6.55%, still a point above the government's target of 5.5%, but considerably better than the 10% that was earlier thought likely. Real interest rates (ie, discounting likely inflation) are now at 16.3%, down from 16.9% on Tuesday. Bradesco, the first bank to cut its lending rates, is now charging 2.6% a month (down from 2.9%) for a car loan and 5.9% a month for a personal loan. Trade unionists concur with businessmen in their criticism of Copom. Horácio Lafer Piva, the president of the influential São Paulo industrialists' federation, Fiesp, says that the decision means that the economy would continue to slow down. He says that only a 4-point cut could have stirred the economy. Other businessmen, in industries as diverse as textiles and carmaking, say that the token cut will mean that there will be no recovery in September or October. One beneficiary of the cut is the government. The cost of servicing its debt is likely to fall by R$5.2bn over the next 12 months.