ECONOMY-ARGENTINA: Fiscal Pact Paves Way for IMF Stand-by Arrangement

By Marcela Valente Reprint | | Print |

Marcela Valente

BUENOS AIRES, Nov 21 2000 (IPS) - The Argentine government was successful Monday in getting the provinces run by the opposition Justicialista (Peronist) Party to freeze spending levels for five years — essential to freeing up IMF financial backing needed to stave off a suspension of payments next year.

But many saw the agreement reached with the provincial governments as a Pyrrhic victory for President Fernando de la Rúa, because it entails a commitment to limit spending in exchange for access to fresh credit from the IMF (International Monetary Fund) and other bodies and, hence, further indebtedness.

The teachers’ union, which plans to hold protests this week, categorically rejected the fiscal pact with the provinces, which sets a cap on spending in public education, health, justice and security, all of which are in critical condition.

Critics point out that the pact entails no measures designed to give the economy a boost, despite the fact that the economy is practically at a standstill, after last year’s 3.4 percent contraction of Gross Domestic Product (GDP).

The agreement is merely an emergency measure aimed at preventing a meltdown along the lines of Mexico’s 1994-1995 crisis or Russia’s troubles in 1998.

The IMF was demanding the signing of a fiscal pact entailing adjustment measures as a condition for a stand-by loan of around 20 billion dollars, which would enable Argentina to meet its debt servicing obligations.

The stand-by arrangement, the precise amount of which is not yet known, will be comprised of funds from the IMF, the World Bank, the Inter-American Development Bank, Spain and Italy.

The fiscal pact signed Monday amounted to a response to a long- standing IMF demand that the provinces cut expenditure — a condition that the national government has consistently rejected on the argument that the provinces are autonomous when it comes to deciding to boost outlay.

While the national government increased spending by eight percent from 1994 to 1998, the provinces did so by 20 percent — an increase considered unacceptable by foreign creditors, despite the severe social crisis caused by soaring unemployment, which stands at 15.4 percent today.

Now that an agreement has been reached, the Economy Ministry is awaiting legislative approval of the 2001 budget, while it continues to try to muster a political consensus on social security reforms that would reduce the pensions of retirees.

De la Rúa is aware that next year he will have to meet payments of more than 20 billion dollars, in debt servicing and due to the fiscal imbalance, while in the last issue of bonds, the cost of the financing aimed at cancelling part of that debt had risen sharply.

The cost of financing gradually grew as investors, bankers and the business community realized that the expected growth was simply not arriving, in an environment made tense by the political crisis over a vote-buying scandal in the Senate and the resignation of vice-president Carlos Alvarez in October.

On Tuesday, the Economy Ministry will put 550 million dollars in share issues up for bid, and the interest rate is expected to be lower than the 16 percent obtained two weeks ago, because the financial markets now have guarantees that there will be backing for Argentina’s share issues.

“This is great news for the country,” said presidential spokesman Ricardo Ostuni, who said the stand-by arrangement would keep the country from sinking next year, and would enable it to weather any contingency. He also underlined that the credit package would not be used for current expenditure.

After a week of often heated negotiations, 13 of the 14 Peronist governors signed the fiscal pact that will free up the stand-by agreement. Only the governor of the southern province of Santa Cruz, Néstor Kirchner, refused to accept the conditions and to initial the accord.

The rest of the governors, of the centre-left ruling Alliance or provincially-based parties, had already signed the pact last Friday, but without an additional clause introduced by the Peronists Monday to ensure that in case of emergencies they would be able to negotiate an additional fund for health or education.

The governor of the province of Cordoba, José Manuel de la Sota, a Peronist, said that although they had accepted the final text of the fiscal agreement, they were not pleased with it. “We can never be satisfied if we have to adjust spending this way. But we had to make our contribution, given the grave crisis in the markets,” he stated.

However, De la Sota stressed the success of the Peronist governors’ bid for inclusion in the agreement of a commitment by the Economy Ministry to study special requests for spending in sensitive areas like health, education and security.

Leaders of the teachers’ union protested loudly against the signing of the fiscal pact which, they complained, set a limit on spending in public education which by law must be increased to meet the demands of a constantly growing student population.

“We express our most categorical rejection,” said the secretary of the teachers’ union, Marta Maffei, who charged that the agreement was “a death sentence” for public education, which attends millions of children in this country of 37 million, many of whom go to school just to receive their only solid meal of the day.

The leaders of the teachers’ union reiterated their plans to call a 36-hour general strike on Thursday by the country’s three central trade unions, to protest the government’s economic policies, which according to Maffei “are leaning further and further to the right.”