ARGENTINA: Kirchner Pays Off IMF

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Jan 3 2006 (IPS) - In early 2002, Argentina found itself in what looked like an endless abyss of recession, debt default, poverty and unemployment. Four years later, the economy is growing at a dizzying rate, and the government has paid off its entire debt to the International Monetary Fund (IMF).

The centre-left administration of President Néstor Kirchner repaid 9.57 billion dollars to the IMF Tuesday, drawing on Central Bank reserves that have accumulated since 2003, when the country began to recover from its dire crisis.

The payment reduced the country’s international reserves from 28 to 18.5 billion dollars. But the authorities say that the high level of economic growth and especially the increase in fiscal revenues û up 21 percent in 2005 from the previous year û will enable the state to recuperate what it shelled out Tuesday to the IMF by the end of the year.

The cancellation of the debt does not mean an automatic reduction in the total public debt, estimated at 126 billion dollars. The state borrowed the reserves from the Central Bank, in exchange for treasury bonds that it will pay off at a low interest rate over the next 10 years, and free of the conditions set by the IMF.

In Kirchner’s view, the move will bring the government greater independence in terms of economic policy, and free it from IMF prescriptions. As a privileged creditor, the IMF demanded the appreciation of the local currency against the dollar, higher interest rates to control inflation, hikes in utility rates, and a total restructuring of the foreign debt.

The decision to pay off Argentina’s debt to the IMF before it fell due over the next few years was announced by Kirchner on Dec. 15, two days after Brazil’s Finance Ministry made a similar announcement.

With this measure, Argentina took a second key step towards resolving the country’s tremendous debt burden. The first was the restructuring of the debt held by private creditors that the country defaulted on at the height of the economic, social and political crisis in late 2001, which followed four years of recession. The country’s offer of new bonds for the old, defaulted ones was accepted in early 2005 by 76 percent of creditors, even though the deal represented a 65 to 75 percent reduction in the value of the debt. The rest of the creditors kept their old bonds, holding out for a new offer that the government has not shown any sign of putting forth.

“Back in those days it seemed like it was all over,” remarked economist Federico Marongiu of the non-governmental Centre for the Implementation of Public Policies Promoting Equity and Growth (CIPPEC), recalling the year when economic activity shrank by more than 10 percent and a full 57.5 percent of the population of 37 million fell below the poverty line.

Today, Argentina’s gross domestic product has grown by a total of over 27 percent over the last three years, and unemployment has fallen from 24 percent of the economically active population in 2002 to 11.1 percent in 2005. The proportion of the population living in poverty has also decreased significantly, to 38.5 percent.

How did the country manage to resume economic growth, generate employment, reduce poverty and achieve enough of a fiscal surplus to pay off the IMF debt in such a short period of time? Marongiu admitted that the speed of Argentina’s economic recovery was surprising, but stressed that there are reasons that explain it.

“Devaluation is always followed by a period of sustained growth,” the economist commented to IPS. The Argentine peso had been pegged to the U.S. dollar for 10 years, but then plunged to less than 30 cents of a dollar as a result of the crisis.

Prices increased by an average of 43 percent in 2002, but then levelled off as a consequence of shrinking demand. Marongiu maintained that the depreciation of the national currency, high inflation and a new tax on agricultural exports (which have experienced a boom in recent years) all combined to boost both economic activity and state revenues.

This led to GDP growth of 8.8 percent in 2003, nine percent in 2004 and an estimated nine percent again in 2005. The Central Bank is forecasting more modest growth of six percent for 2006.

“The full payment of the debt is a good sign for a country that has emerged from such a profound crisis,” said Marongiu. “If the government maintains its fiscal discipline and adopts policies to actively promote investment, this recovery will continue over the coming years,” he concluded.