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The failure of Congress to go along on
economic legislation intended to stem the deposit drain from the banking
system and bolster the currency prompted the resignation of Jorge Remes
Lenicov. The new economy minister, Roberto Lavagna, is a seasoned
negotiator on the international stage but lacks the political leverage
with President Duhalde that Remes enjoyed and is not considered a strong
force within his party either. |
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Economy Minister resigns and is replaced by
pragmatist
On 23 April, Jorge Remes Lenicov resigned as economy minister after only
three months in office raising renewed concerns over the government’s
economic policy and internal cohesion. Remes decided to leave his post
as Congress rejected an emergency law that sought to convert some US$ 15
billion in bank deposits to government debt (Ley de Emergencia Pública y
Reforma del Regimen Cambiario, the so-called Ley Tapón de Depósitos).
The measure represented an effort to avert a collapse of the financial
system, which is plagued by withdrawals of an estimated 100 million
pesos daily. The acceleration of the withdrawals had been prompted by a
rising tide of federal court injunctions in favour of depositors that
forced financial institutions to release funds frozen under the
government imposed corralito and prompted the government to declare a
four day bank holiday.
Remes Lenicov was replaced by Roberto Lavagna, who became the sixth
Economy Minister in little over a year on 26 April. The new Peronist
economy minister has extensive public service experience but is best
known for his instrumental role as Secretary of Industry and Trade in
drawing up the Austral Plan under President Raúl Alfonsín’s
administration (1983-1989), which was intended to stabilize the economy
but resulted in hyperinflation. However, he was also responsible for the
successful negotiation to form the Mercosur (Mercado Común del Sur) and
more recently was the Argentine ambassador to the European Union and the
World Trade Organization. Lavagna is considered a pragmatist on economic
policies and an experienced negotiator, which will prove essential if he
hopes to reconcile populist political pressures at home with more
orthodox measures sought by the International Monetary Fund (IMF). The
new economy minister does not enjoy the political leverage that Remes
had with President Duhalde and is not considered a strong force within
his party either, which may serve to undermine any efforts to progress
on the fiscal front, a key element to obtain fresh multilateral funds
and to restore investor confidence. Lavagna will have to move quickly to
pull the economy free from recession, stabilize the peso and avert a
complete collapse of the banking system. Key measures that the
government now hopes to adopt under its new economy minister in
relatively short order include:
- Public finance sanitation.
Economic officials will have to secure the successful implementation of
the fiscal pact with the provinces, which seeks to reduce the overall
provincial fiscal deficit by 60% (from 5.8 billion pesos in 2001 to 2.3
billion pesos this year) and to limit new provincial bond issues. The
IMF may provide financing of up to US$ 2 billion to enable provinces to
meet their commitments. Next year, the government hopes to negotiate a
new federal revenue sharing scheme with the provinces. Furthermore,
authorities will seek to adopt a new, simplified fiscal programme that
fosters investment and improves tax collection by preventing evasion.
Key to the success of the provincial pact will be the province of Buenos
Aires, which will have to implement a 1.2 billion peso adjustment, as
provincial administrations with smaller imbalances are likely to be
quick to endorse the accord. In exchange for the adjustment the
government has promised to retire 57.1% of the consolidated provincial
debt stock of US$ 28 billion and to draw up a schedule of financing for
each province.
- Stabilization of currency to prevent
hyperinflation. Economic officials have reconfirmed the
intention to maintain the current dirty float with Central Bank
intervention, despite earlier statements by the Duhalde government that
the administration would seek to reintroduce a fixed exchange rate
regime. Successful stabilization of the currency remains key to
countering the current rise in inflationary expectations and to easing
the social time bomb resulting from the accelerating wage deterioration.
However, any attempts of the government to stabilise the currency by
interventions in the foreign exchange markets will only lead to a
further drain on international reserves. The only way to stabilise the
exchange rate is to restore confidence in the country’s economy.
- Financial system strengthening.
Authorities may attempt to launch a government bond programme (Bonex
Plan), which would seek to stem the deposit outflows by forcing
depositors to accept a mandatory 10-year bond in dollars in exchange for
deposits, which cannot be used to service debt and pay tax obligations.
The government may also provide depositors an optional 5-year bond for
current and savings accounts, which may be used for mortgage, personal
loan and tax payments.
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