Most people know Argentina as the land of tango, Malbec, and some of the greatest soccer players of all times. But Argentina is also famous for being home to some of the most diverse and extreme landscapes of the world—from subtropical rainforests and Iguazu Falls in the north to the glaciers of Perito Moreno in the south, and from the lowest site in South America (Laguna del Carbón) to the highest elevation in the Americas (Aconcagua mountain).
Argentina’s economy, much as its landscape, has tended to experience extreme swings. There have been a number of economic and financial crises over the years, including the one in 2001, which for its severity can be compared to the U.S. Great Depression.
As the IMF returned to Argentina in September 2016 for the first economic assessment since 2006 (known as the Article IV consultation), it found its authorities engaged in an ambitious transition to a more stable and sustainable economy, one that could minimize the risk of future extreme fluctuations of the country’s economic landscape.
In the right direction
To understand the complexity of the transition, it may be useful to go back to December 2015, just after the elections that marked a surprise victory for the coalition led by Mauricio Macri.
By then, Argentina had very low foreign exchange reserves, a severely overvalued exchange rate, a high fiscal deficit largely financed with monetary transfers from the central bank, one of the highest inflation rates in the world, rising trade and current account deficits, an extensive network of trade barriers and foreign exchange restrictions, the lowest investment rate in Latin America, and no access to international capital markets following the decade-long litigation with the hold-out creditors. Pervasive government intervention had severely weakened the country’s institutions and undermined the credibility of economic and social indicators produced by the national statistical agency.
The new administration had little choice but to begin unraveling the numerous imbalances and distortions. After the government’s first year, much has been achieved: the complete dismantling of foreign exchange controls, the adoption of inflation targeting with a freely floating exchange rate, the first steps in bringing utility tariffs closer to international prices, a successful return to international capital markets after the quick settlement of the decade-long dispute with holdout creditors, and good progress in improving the governance environment.
These measures included a complete overhaul of the national statistical agency, which led to the dissemination of new and credible official statistics (and, as a result, the removal of the IMF’s Declaration of Censure in early November). On the other hand, the federal authorities chose a cautious approach to lower the fiscal deficit, largely based on a very gradual reduction of energy subsidies, also reflecting the weakening economy (which has been contracting since the last quarter of 2015).
Completing the transition
While Argentina’s progress achieved so far is impressive, much remains to be done to complete the transition to a more stable economic environment and restore robust, sustained, and equitable growth, while protecting the poor from the unavoidable costs of the adjustment.
The IMF’s economic assessment of Argentina focused on the key policy priorities to continue along this path and has three main recommendations:
- Progress in reducing the fiscal deficit should continue, at a pace consistent with the need to minimize the impact on the most vulnerable, and be based on reallocating spending and rationalizing the tax system. Although a more frontloaded fiscal adjustment would lower interest rates, ease pressures on the currency, and reduce the risk associated with an excessive reliance on external financing, a set of economic, social, and political constraints justifies a gradual reduction of the fiscal deficit. In particular, reducing government current spending, which increased so much during the last decade, should boost public investment in infrastructure and reduce taxes on firms and households. Introducing a medium-term fiscal framework would help establish the credibility of the needed fiscal rebalancing.
- The pace of disinflation should remain sensitive to its short-term economic costs. Bringing inflation to a single digit is essential to strengthen long-term growth and reduce poverty, but the tight monetary policy stance needed to build the central bank’s anti-inflation reputation is likely to have short-term output costs. To reduce these costs, the report recommends modifying the central bank’s charter, narrowing its mandate to price stability, and excluding the possibility of financing the fiscal deficit.
- Rebuilding the foundations of growth will require ambitious supply side reforms. This includes improving the quality of infrastructure, removing remaining trade barriers, reformulating the regulations for utilities, enhancing market efficiency and competition in key private sector industries (including energy), and making further progress in the government’s ambitious anti-corruption plan.
Advancing in all these areas will require time, persistence, and political skills. But completing the transition that began at the end of 2015 holds promise for a new economic landscape in Argentina, one that can generate significant improvements in the living standards of its population.