LatinFocus Argentina Economic Briefing

The government has succeeded in complying with two key conditions imposed by the IMF to begin negotiations for a new aid package: the passage of a new co-participation agreement with the provinces and the adoption of fiscal adjustment to the 2002 budget. Nevertheless, important barriers for further IMF aid remain. Meanwhile, continued uncertainty has prompted the currency to depreciate further, which is threatening to ignite inflationary expectations.

Government signs new co-participation pact with provinces
On 27 February, the Duhalde administration completed its negotiations with the provinces and signed a new co-participation pact. The most important components of the co-participation accord include:

- Commitment to deficit reduction. Provincial governors agreed to cut fiscal deficits by 60% this year compared to 2001, when the imbalance was approximately US$ 5 billion. The cutback was below the government’s original 80% proposal, which had emerged from initial conversations with the IMF in early February but nevertheless constitutes a success given that earlier governments always failed to curtail the provincial governments’ fiscal profligacy.

- Elimination of minimum payment to provinces. The government is no longer required to transfer a minimum of US$ 1.4 billion a month to the provinces as mandated by the 1999 fiscal pact.

- Provinces entitled to share of bank debit tax. The government has agreed to share 30% of the tax revenues generated from the recently inaugurated bank debit tax with provincial governments.

- Funds tied to tax collection. The funds transferred to the provinces will be in direct proportion to the levels of tax collection achieved.

- Conversion of US$ denominated debt. Provincial debt obligations denominated in US$ will be converted to pesos at an exchange rate of 1.40 pesos to the US$.

- Debt restructuring. Provincial debt will be refinanced by the federal state over 16 years, with a three year grace period and at a 4% interest rate. The government will be entitled to withhold 20% of the co-participation revenues destined to the provinces to help service the debt.

The provincial agreement is considered key to the government’s efforts to advance the restarted negotiations with the International Monetary Fund (IMF). The IMF continues to insist that the government will have to present a comprehensive economic programme before negotiations over a new aid package can progress. As a crucial element of the programme, the IMF wants a proposal from the government that specifically addresses how the officials will cut back the fiscal deficit, which last year was well above the US$ 6.5 billion agreed to with the Fund. Argentina is hoping to garner support for a multilateral support package of up to US$ 25 billion from the IMF and other lenders to clean up its public finances and recapitalize the financial system battered by devaluation and massive capital flight. Furthermore, the IMF agreement is a necessary requirement imposed by other multilateral lending institutions, such as the World Bank and Inter-American Development Bank, as a condition to giving new loans to Argentina.

Revised budget approved by legislature
On 5 March, the Senate approved the 2002 budget, following the Chamber of Deputies’ passage on 1 March. The budget is seen as the second key element of the government’s short-term economic policy agenda that will provide the basis for resuming negotiations with the IMF. The administration’s budget assumes that inflation this year will reach 15%, that the gross domestic product (GDP) will decline by 4.9% and that the fiscal deficit will reach 3.0 billion pesos (1.0% of GDP), which is down from 8.8 billion pesos (3.0% of GDP) in 2001. Government spending is budgeted to be cut in nominal terms by 14.6% to 42 billion pesos (US$ 19.1 billion) and outlays will be financed by 39 billion pesos in current revenues (i.e. taxes, social security contributions, etc.) and the balance with a domestic bond issue. Revenues are expected to receive a boost from a 20% tax on oil exports and a new 10% tax on grain exports. The government foresees that the savings generated from the debt moratorium and the 13% salary and pensions cut for state employees will free up sufficient resources to finance public spending and to meet the fiscal deficit target. Consensus Forecast participants expect the government to overshoot this year’s fiscal deficit, as even lower economic activity will undermine tax revenues. Recent data about tax collection from the Economy Ministry corroborate this more pessimistic attitude. In February, the tax take dropped 20.3% over the same month last year. The February figure brought annual tax revenues down 10.9% compared to the same period last year, down further from the 9.3% decline registered in January. Thus, participants expect the fiscal deficit target to be overshot.

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