ECONOMY-ARGENTINA: Survival of Gov’t in IMF Hands, Hints Minister

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Mar 6 2002 (IPS) - The future of the Argentine government depends in large part on the results of the evaluation that the International Monetary Fund (IMF) began Wednesday, key to the aid that President Eduardo Duhalde has been requesting in order to reverse the economic, political and cultural crises that have the country steeped in gloom.

The mission, headed by economist Anoop Singh, an Indian national and director of the IMF’s Special Operations Department, will be in Argentina nearly two weeks to gather information needed for talks on an agreement that would entail monetary aid.

The IMF’s hesitant attitude towards the Argentine case stands in contrast to the urgency of the problems confronting the Duhalde administration.

The president assures that the government could get by without the help of the multilateral agency, but that the costs would be difficult to bear.

However, Economy Minister Jorge Remes Lenicov has suggested that without foreign financial support not only would the economic programme collapse, but so could the government itself.

The minister told a group of Brazilian business leaders Wednesday that an accord with the IMF is “essential” and that “it must not be delayed too long.”

“An agreement is indispensable because Argentina must reinsert itself in the world, and it is fundamental to re-establish confidence to obtain national and international credit,” he said.

Argentina’s recession is already four years old and tax revenues continue on the downslide, while companies go bankrupt and more workers join the ranks of the unemployed. Prices have risen more than expected in recent weeks, and poverty has expanded to encompass more than 15 million of the country’s 38 million people.

Duhalde took office Jan 1, named to the presidency by Congress, and is to finish out the term – until December 2003 – of former president Fernando de la Rúa, who resigned Dec 20. Observers inside and outside the government alike have commented that if international financial aid is not obtained, early elections should be called.

In the last two months, the Duhalde administration has liberalised the currency market and was able to convince the provinces to cut public spending and Congress to pass an austere budget, just as the IMF asked, but the multilateral agency is still hesitant to make any new payouts.

A statement from Remes Lenicov suggests the government has no alternative plans if the aid does not arrive: “Plan B? Yes, we have a Plan B – we’ll go home,” he responded to a question during a press conference.

The IMF’s recently created Special Operations Department, under Singh, could mark a turning point for the modes and the timeframe in which the Fund assists emerging economies confronted with major financial problems.

In the wake of the Mexican devaluation of 1994, the IMF applied generous policies of financial bailouts in the crises of Southeast Asia (1997), Brazil and Russia (1998) and Turkey (2000), always with positive results for the economic recovery of the country involved.

But that approach seems to have failed in the case of Argentina.

“It does not make sense to loan more money to Argentina at this time,” Anne Krueger, First Deputy Managing Director of the IMF, said Feb 25, when Singh was tapped to head the new department.

According to some experts, the IMF is making its aid conditional on the deeper and definitive fiscal adjustments that successive Argentine governments have always promised but never delivered.

Others attribute the Fund’s reticence to the stance of the U.S. government, which, upon realising that the Argentine crisis was not having a “domino effect” in the region, withdrew support for a bailout.

U.S. Treasury Secretary Paul O’Neill has expressed his resistance to offering new financial support to Argentina without first seeing a sustainable plan, and the chairman of the U.S. Federal Reserve Bank, Alan Greenspan, indicated he was unconcerned because the crisis had not spread to other Latin American economies.

Duhalde adopted measures aimed at obtaining support from an IMF that is increasingly demanding and reluctant to help Argentina, particularly since it has tried on at least three occasions to do so in the last three years, and each time proved unsuccessful.

What the Argentine government seeks is the release of the remaining funds of a loan that was agreed during the De la Rúa administration, but halted pending new negotiations. Meanwhile, loans from other international agencies and from foreign governments are also subject to the principal agreement with the IMF.

On Jan 1, Duhalde announced a currency devaluation plan and the dismantling of the “convertibility” regime that for 11 years had pegged the Argentine peso on par to the dollar. The IMF had been calling for devaluation since the final months of the De la Rúa government, when it first halted the loan disbursements.

Duhalde had expected to maintain a fixed exchange rate for six months, but in February opened up the currency market on IMF advice. Since then, the exchange on the dollar has jumped to 2.15 pesos.

But the terms of assistance were not restricted to monetary policy. The IMF, as well as the governments of the United States and the European Union demanded “a sustainable plan” for economic reactivation, which included a tight budget for this year and an agreement with the provinces to reduce spending.

Remes Lenicov announced measures aimed at jump-starting production. Then, the government signed a fiscal agreement with the provincial governors on new standards for distributing public revenues, and on Tuesday the national Congress approved the budget.

The budget is based on a fiscal deficit of 3.0 billion dollars – a third of the 2001 deficit -, inflation of 15 percent, and a decline in gross domestic product (GDP) of 4.9 percent, calculations the lawmakers considered unrealistic, but they approved the bill under pressure from the government given the IMF mission’s imminent arrival.

Parliamentarians from the governing party and from the opposition alike insist that inflation, which reached 5.5 percent in January and February, will be much higher than the forecast, that the fiscal deficit will deepen due to the decline in tax revenues, and that the GDP will shrink more than the government predicts.

They also pointed out that the budget does not reflect the costs of changing the dollar debts of companies and individuals into pesos. The State will likely have to assume more than 15 billion dollars of that burden.

Nevertheless, minister Remes Lenicov believes that, with all the effort made and measures implemented, the IMF should have signed an assistance agreement “some time ago.”

His sentiment has been seconded by presidents Fernando Henrique Cardoso, of Brazil, and Ricardo Lagos, of Chile, who led a campaign targeting multilateral financial institutions and creditor governments to free up funds for the struggling Argentina.