ECONOMY-ARGENTINA: IMF Deal a Close Victory

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Sep 11 2003 (IPS) - The agreement Argentina reached with the IMF to refinance its foreign debt was applauded Thursday by leaders from across the country’s political spectrum. But the deal demands a fiscal surplus that will put President Néstor Kirchner’s economic growth plan to the test.

Kirchner said the agreement reached late Wednesday is "an important step, but not a panacea," given that the country is 145 billion dollars in debt, or the equivalent of "150 percent of Argentina’s gross domestic product (GDP)", with 95 billion dollars in defaulted debt to private creditors.

Nevertheless, the deal represents a golden opportunity for gradually rebuilding the country, which is already beginning to see economic reactivation after suffering its worst crisis ever, he said.

When Argentina failed to pay a 2.9-billion-dollar debt that came due Tuesday, the president announced a "near agreement" with the International Monetary Fund to refinance 21 billion dollars owed to various multilateral lending institutions over the next three years. Argentina moved Thursday to pay the sum it was to have paid on Tuesday.

Kirchner acknowledged the backing of the United States as crucial for finalising the IMF deal. "Having the support of a country like the United States is fundamental," he said, referring to the intervention in the talks Tuesday by U.S. Treasury Secretary John Snow, who demanded a quick resolution.

The firm stance Buenos Aires maintained during three months of tough negotiations and the favourable results were applauded, to varying degrees, by opposition parties of the left and the right, and by economists from across the ideological spectrum.

Economist Ricardo López Murphy, former finance minister and leader of the right-leaning opposition, said the default of the 2.9 billion dollars Tuesday was "bad news", but that Wednesday’s agreement is good for the country.

The daily Ambito Financiero said in its editorial pages that the president "negotiated very well." That recognition came one day after the newspaper came down hard against his decision to default.

Kirchner decided to put off the interest payment, refusing to dip into the Central Bank reserves without an IMF agreement in hand. His hardline stance was supported on the streets, where the movement of unemployed workers have kept up the cry, "Don’t pay the debt with the hunger of the people."

But on Thursday the president ordered the 2.9 billion dollars to be paid with those reserves.

Lawmaker Elisa Carrió, of the centre-left opposition and head of the Party for a Republic of Equals, said she supported the president’s decision when he resolved not to pay the debt with the country’s monetary reserves.

But the IMF deal – which does not call for any fresh funds – commits Argentina to achieving a fiscal surplus of three percent of GDP for 2004, much higher than the average of 0.6 percent annually it recorded in the 1990s.

And some consider it very high, given Kirchner’s ambitious plans for development.

The president took office May 25 proclaiming the need for policies to reactivate the domestic market, and to reduce unemployment – which stands at 18 percent – and tackle poverty – which claims half of the population of 37 million.

"We are not going to pay the foreign debt with the hunger of the Argentine people," he said in his inaugural address, adding that the debt obligations would be met "if there is economic growth."

Martín Hourest, an economist with one of the country’s biggest labour unions, CTA, called into doubt the president’s ability to make good on his promises, saying the fiscal surplus goal would be a big obstacle.

"Nearly all of the growth predicted for 2004 is going to be channelled towards paying the debt," Hourest said in an IPS interview.

He pointed out that the government sees the three percent surplus goal an achievement, compared to the 4.5 percent the IMF had demanded, and compared to the percentages pledged by other highly indebted countries, like Brazil and Turkey.

But that three percent implies that next year there will be no salary hikes for public employees or increases in pensions, that unemployment benefits will not be expanded, and that public works will fall to new lows.

"The aim of growth based on the domestic market, which was announced in May, is going to be left pending if workers do not recover their purchasing power and nearly all of the GDP growth is shifted towards paying foreign debt commitments," said the economist.

The agreement reached Wednesday entails refinancing debt with the IMF, World Bank, Inter-American Development Bank, and with the Paris Club of lenders, which come due over the next three years.

But unlike the deals traditionally made with the IMF, it does not involve further disbursements that would drive up the debt.

The new accord – expected to be signed by the IMF board at its annual meeting Sep. 19-20 in Dubai – does not include the Fund’s demands that Argentina increase its frozen public utility rates and that it further compensate banks for losses incurred during the 2002 financial crisis, beyond what Congress has already authorised.

In exchange, Buenos Aires agreed to modify the mechanism for paying the debt maturities. Until now, Argentina deposited the amount due on deadline, and that sum was automatically redisbursed as credit.

Under the new accord, a yet to be determined period will separate the two transactions.

Although the agreement does not lay out explicit demands, the text proposes a gradual increase in public utility rates in the context of a renegotiation of contracts with the companies providing the formerly state-run services.

It also mentions the wait for a court decision on reinstating funds for the financial system and the reduction of agricultural export taxes beginning in 2005.

Kirchner stressed that before authorising utility rate hikes he wants to know whether the companies have complied with their obligations for investing in and expanding services, agreed when the services were privatised.

And he said that 22 of these contracts – already reviewed – do not need to charge consumers any more than they are currently.

The IMF had pressed Argentina to set higher targets for fiscal surplus in 2005 and 2006, but the Kirchner administration was able to avoid penning numbers, saying it would depend on how the economy performs.

In other words, the two sides will have to sit back down for negotiations at the end of 2004.

For now, with Argentina’s payment Thursday of the 2.9 billion dollars, hopes are that the waiting period for the redisbursement will be brief.