CLAI Commentary

A series of occasional commentaries on important
policy issues affecting
Latin America and the Caribbean.

December 5, 2002

Argentina and the IMF:
An Adversarial Relationship

By Dr. James Ferrer, Jr. and Eduardo Segatore1

      Argentina is experiencing the worst economic crisis in its history. The country faces increasing social marginalization, emigration (in a country built by immigrants), rising crime rates and hunger, even though Argentina exports large quantities of agricultural products. The situation is especially tragic because Argentina was one of the richest countries in the world during the early twentieth century. Now, its social, economic and political systems have virtually collapsed and its per capita income has deteriorated sharply. The Argentine government has been seeking financial relief from the International Monetary Fund for almost a year. However, an agreement does not seem forthcoming any time soon.

      Argentina and the IMF have had a long and troublesome relationship. Finance Minister Lavagna admits that of the nineteen agreements they have signed since 1956, Argentina completed its commitments in only four! The experience of the 1990’s was fairly typical. Between 1992 and 1999 Argentina signed six agreements with the IMF; it did not fulfill its targets for any one of them. During the early part of the decade, Argentina surpassed substantially the targets for overall economic growth, but failed to meet the inflation targets. For instance, in 1992 the Argentine government promised that inflation would not exceed 7 percent, but the rate ended the year at 17.5 percent. The IMF may have overlooked this failure because the Menem administration was delivering on its promises to liberalize the economy and to privatize state-owned firms.

      When the “Tequila Crisis” hit Argentina in 1995, the country signed another agreement with the IMF. By that time, the economic reforms of the Menem administration were well underway and many observers described Argentina as a model-country. The Convertibility Plan had helped to end inflation, but unfortunately did not ease the fiscal deficit problem that the country had had since the middle of the twentieth century. While Argentina continued to grow at an impressive pace, annual fiscal deficits greatly exceeded target projections. For example, in the 1995 agreement, the administration promised it would reach a primary surplus of $2 billion. However, the federal government produced a primary surplus of only $310 million. Furthermore, that same year, the primary balance of the provincial governments reached a deficit of almost $3 billion. Taking into account interest payments, but not revenue from privatizations, the country’s public sector in 1995 actually produced a deficit of $8.5 billion, or 3 percent of GDP. This trend continued throughout the period, the total public sector deficit reaching $8.6 billion in 1996, $6 billion in 1997 and $6.3 billion in 1998. These deficits occured despite the GDP growth in the period, which was 4.2 percent in 1996, 8.1 percent in 1997 and 3.9 percent in 1998. Since the Argentine economy entered into recession during 1998, neither the GDP growth nor the budget targets were achieved during 1999-2001.

      The current negotiations with the Duhalde administration have been the longest in IMF history. When discussions began in late January, the IMF stated that the three main obstacles to an agreement were the Economic Subversion law, Argentina’s Bankruptcy law, and the lack of a coordinated economic policy framework encompassing both the provinces and the federal government. The Duhalde government managed to abrogate the two laws and to sign a fourteen-point understanding with the most powerful provinces. Among the fourteen points, one addressed the importance of maintaining a good relationship with the multilateral credit agencies. However, a new problem impeded the negotiations. The Argentine courts began issuing orders to “re-dollarize” bank accounts that the government earlier had changed from dollar- to peso-denominated accounts. The court orders not only threatened to generate a potentially disastrous hole in the Argentine financial system, they demonstrated to the world (and specifically to the IMF) that Argentina had no coordinated economic policy framework. Namely, the society was too badly divided to sustain an effective economic policy. The lack of a national political consensus became even more evident in October and November when internal strife within the Justicialist Party, between the duhaldistas and menemistas, generated doubts about the date of the upcoming presidential elections.

      Argentina’s main problem has been its lack of political will and of domestic consensus. When the Menem administration signed agreements with the IMF during the growth years of the 1990’s, it did not deliver on its promises to undertake major tax reform and to achieve fiscal stability, both of which were difficult political issues. When the federal government improved its own fiscal performance, the provinces continued their undisciplined spending. During the current negotiations, President Duhalde has tried to reach a political consensus, but he has not even been able to achieve agreement within his own party.

      The IMF and the Argentine government assert that their negotiations continue, but no agreement seems imminent. The IMF, having had its image damaged by so many past-unfulfilled agreements and by the country’s collapse, is reluctant to sign an accord that will not be implemented due to a lack of domestic political support. For its part, Argentina has stated it will not sign an agreement that it knows it cannot fulfill. Thus, the two parties appear to be at an impasse. In truth, no agreement should be concluded until Argentina has a national political consensus that will support an effective economic program. A premature agreement would merely augment the country’s foreign debt, without providing an offsetting benefit, and would further undermine the IMF’s reputation. Neither Argentina nor the IMF should accept such an unsatisfactory, short-term option.

1 The views expressed in this article are the authors’ and do not necessarily reflect the views of the Center for Latin American Issues or The George Washington University