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Negotiations with the IMF continue to
proceed at a snail’s pace, as the election-sensitive legislature blocks
government efforts to advance on economic policy demands made by the
multilateral institution. In the meantime, the economy remains
depressed, as businesses and consumers suffer from banking restrictions,
tight credit and a deteriorating currency. |
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Government submits letter of intent to IMF but
progress patchy
On 16 August, the government sent its letter of intent to the
International Monetary Fund (IMF). Argentina is desperate to close
negotiations with the IMF in order to access essential multilateral
funds needed to bolster the shaken financial system, to finance
outstanding loans with multilateral lenders and to restart the economy.
According to the letter, the government expects the gross domestic
product (GDP) to contract 11% this year but to rebound 3% next year.
Inflation is seen to reach 64% by the end of the year and the currency
to close at 3.55 pesos to the US$.
The government has also announced the fiscal target it proposes in its
negotiations with the IMF. Authorities strive for a 2.5 billion peso
(US$ 688 million) primary surplus, which represents approximately 0.7%
of GDP. Even though all of the specifics of the letter were not
published, the government allegedly provided a plan on how to ease the
current freeze of bank deposits, which the IMF considers a key factor in
the current negotiating deadlock. On 26 August, the IMF responded to the
government’s letter, stating that even though fiscal balances are
showing signs of stabilization, the official plan to strengthen the
financial system falls short of expectations. Moreover, an increasingly
rebellious Congress threatens the formation of a policy consensus needed
to progress on the economic front. On 22 August, legislators decided to
extend legal provisions to ban mortgage foreclosures and to continue to
force banks to index loans to inflation through November. On 5
September, the IMF agreed to roll over a US$ 2.78 billion September loan
instalment – the third such roll-over this year - to provide temporary
relief. Nevertheless, the Fund contends that a host of issues,
particularly a transparent monetary policy for the Central Bank and
effective plan to ease banking restrictions remain outstanding.
Financial system and exchange rate controls
stem currency slide for now
The government has successfully managed to stem the bleeding of
international reserves through a combination of continued financial
controls but also via the tightening of exchange rate controls. On 3
September, monetary authorities tightened exchange rate controls by
requiring exporters to liquidate all earnings from overseas transactions
that exceed US$ 200,000 (US$ 500,000 previously) through the Central
Bank. Furthermore, proceeds from loans and sales of securities are
required to remain in the country for at least 90 days and foreign
exchange houses are forbidden to hold more than US$ 1.5 million in
foreign currency daily at closing, with any excess required to be held
at the Central Bank. In August, international reserves actually
increased for the first time since April, from US$ 8.9 billion in July
to US$ 9.1 billion last month. Furthermore, the currency appreciated in
August for the second consecutive month, strengthening by 2.9% in
nominal terms over July and closing at 3.63 pesos to the US$. The August
appreciation followed a 1.9% strengthening in July. In the first week of
September, the currency continued to strengthen, appreciating by an
additional 0.4% to close at 3.61 pesos to the US$ on 6 September.
The likelihood that the current economic stalemate will persist,
particularly given the proximity of elections, is high and as a result,
currency pressures are unlikely to abate notably this year. In fact,
participants anticipate the peso to continue its weakening trend through
the end of the year, albeit at a more moderate pace than expected last
month. The peso is anticipated to experience additional weakening
in 2003 but at a much more moderate rate.
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