ECONOMY-ARGENTINA: The World Bank is Confident

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Aug 13 2001 (IPS) - Argentina will be able to stave off a debt default if the economy resumes growth, if the government is successful in getting the fiscal deficit under control, and if savings sent abroad are brought back home, said the World Bank’s representative in Buenos Aires, Myrna Alexander.

“If Argentina is able to control its deficit, the World Bank believes there will be no risk of default, because the country’s level of debt is not high in relation to its gross domestic product,” Alexander said in an exclusive interview with IPS.

“The problem is the vulnerability of the local economy due to its heavy dependence on external financing. That permeability initially became evident when the Mexican peso crashed, and later when external financial crises like those of Russia and Brazil broke out,” she added.

Argentina is experiencing a severe crisis entailing a multiplicity of factors: a 130 billion dollar foreign debt, an economy that has been at a virtual standstill for over three years, a growing fiscal imbalance, a fall in revenues and consumption, soaring unemployment, and bristling social unrest.

Although a number of economists have expressed confidence in the government’s latest package of measures aimed at eliminating the fiscal deficit at the cost of cutting salaries and pensions, a growing number of sectors of the economy have put up stiff resistance to the austerity measures.

Business associations, public and private sector trade unions and the Catholic church have lashed out at the government of Fernando de la Rúa’s decision to slash public spending at a time when poverty, unemployment and social inequality are on the rise.

Meanwhile, multilateral financial entities and the governments of industrialised countries, as well as those of neighbouring countries and Argentina’s partners in the Mercosur (Southern Common Market) trade bloc, have all expressed their backing in the past few weeks for the De la Rúa administration’s “zero-deficit” plan.

“The golden rule in today’s world is zero-deficit or surplus. Things are no longer like they were in the 1990s, when investors accepted a deficit of up to three percent” of GDP, said Alexander.

“Argentina should have achieved zero-deficit in 1996, when it had one of the world’s highest rates of economic growth, but it missed its chance,” she added.

The Argentine economy is heavily dollarised, in the public as well as the private sector, in the world of credit and in terms of debt, the World Bank official pointed out.

The vulnerability of the system is aggravated by the relatively small size of the national financial sector, because many Argentines prefer to take their savings abroad, she said.

The 80 billion dollars held in bank accounts in Argentina dropped to 72 billion in the past few weeks due to account- holders’ fears of a devaluation or suspension of payments.

“But Argentines who lack confidence in their economy are estimated to hold more than 90 million dollars abroad,” said Alexander.

Proportionally to the size of the economy, Argentina’s internal savings rate is half that of Chile and one-third that of South Korea, said the World Bank official.

She also pointed out that while the public sector absorbed the scarce financing available, companies in the country were suffering the effects of the lack of credit and high interest rates, which kept the productive sector from jumpstarting economic growth.

The World Bank plans to help strengthen the national financial sector in order to boost the capacity for internal savings and support the efforts to eliminate the fiscal deficit, confident that investors’ perception of risk will diminish sufficiently to pave the way for an economic resurgence.

Late last week, reports on the negotiations between Argentine officials and the International Monetary Fund (IMF) successfully curbed the flight of savings deposits abroad, the Central Bank announced Friday.

The Central Bank’s foreign reserves, in the meantime, have plunged from almost 22.7 billion dollars in early July to around 17.1 billion, the government reported last week. The reserves have fallen close to the monetary base, estimated at 14 billion dollars.

Argentina’s monetary system is based on the 1991 “convertibility law” that set up a currency board arrangement under which the Central Bank was not allowed to print money that was not backed by gold or foreign currency reserves, and which pegged the peso at parity with the dollar.

The Argentine government has pledged to keep in place the currency board system, which enabled inflation to be tamed in the 1990s.

International press reports and Latin American presidents have pointed to the repercussions that an Argentine collapse would have on the global economy, especially due to the blow it would deal to the credibility of the economic reforms applied throughout Latin America in the 1990s.

Britain’s Financial Times and the Washington Post in the United States warned of the danger of the emergence of a current of thought opposed to the Washington Consensus, the name given to the set of inflation-fighting, privatising policies pushed in the developing world by multilateral lending institutions and industrialised countries in the 1990s.

The Financial Times spoke of a possible intervention by the U.S. government to prevent the spread of scepticism over the recommendations given by the World Bank, the IMF and developed countries to nations in the grip of financial crises.

That was the interpreted aim of the lightning visit this month to Buenos Aires by U.S. Undersecretary of the Treasury for International Economic Affairs John Taylor, to determine whether additional emergency aid would be made available to Argentina, chiefly to shore up reserves and check capital flight.

Brazilian President Fernando Henrique Cardoso also referred to the danger involved in letting Argentina fall. “It did everything it was asked. Now is it going to be punished for that?” asked the leader of Latin America’s largest economy.

But Alexander said that if a new bail-out went through, the objective would not be to preserve the current economic model or to prevent an erosion of the consensus on the need for austerity measures. Rather, she stressed, “the world and the multilateral institutions have a commitment to improving people’s lives, and to keeping the Argentines from falling into crisis.”

She said that while the case of Argentina had demonstrated the benefits of some policies, like privatisations and integration in the Mercosur, “second-generation” reforms that would have prevented a crisis like today’s were left pending in 1996.

Alexander was referring to reforms of the public administration aimed at achieving greater efficiency and transparency in tax collection and the pensions system, and at improving services in the fields of health, education, justice and security.

Argentina’s current crisis has been brewing for several years, with the accumulation of a fiscal deficit that became increasingly apparent as the country plunged into what has become a three-year recession. And more recently, grave financing difficulties began to appear.

The De la Rúa administration thus launched its “zero-deficit” plan, consisting of spending only what is collected in taxes each month and meeting the country’s debt payments, and entailing a major cut in the wages of public employees and pensions.

But the plan, loudly resisted by trade unions and a new movement of unemployed workers who have staged nationwide protests and roadblocks, was described by Alexander as “the most important and novel element observed by the World Bank in Argentina’s new economic policies aimed at tackling the crisis.”