MercoPress. South Atlantic News Agency

Koehler cautions Argentina

Even when Mr. Horst Köhler, Managing Director of the International Monetary Fund (IMF), confirmed he is recommending to the IMF's 24-member Executive Board approval of transitional financial support for Argentina, Mr. Koehler also pointed out the “exceptional risks” involved in the transitional program 2003 and which relate to “the fragility of the macroeconomic policy framework and the political challenges to implementation”.

In a carefully worded statement Mr. Koehler says that on transmitting to the Executive Board the Argentine authorities' letter of intent and memorandum of economic policies, which is included in the IMF staff report for the transitional program in 2003, "it is important that the Board weigh these risks carefully, and their implications for Argentina, the region, and for the Fund itself". Mr. Koehler's statement reads as follows:

"The Article IV discussion on January 8 demonstrated the complexity of the situation in Argentina as we ? staffs, management and the authorities ? have strived to secure a policy framework that achieves durable macroeconomic stability, supports the resumption of growth, and improves the investment climate. The appraisal in the Article IV consultation report is candid in stressing that difficulties in securing a political consensus in Argentina have been a core problem impeding progress toward a program. That said, we all take note that, in recent months, the economic situation has somewhat stabilized, though it remains fragile.

"The government has now developed a series of policy commitments that could, if implemented consistently and credibly, build a bridge to a comprehensive program to be negotiated with a new government after the elections. These policies provide the basis for a transitional program that will seek to preserve macroeconomic stability through the course of the upcoming elections and reduce the risk of policy reversals. Equally important, this program will also provide a framework for the multilateral development banks to support social programs in Argentina, which are key to protect the vulnerable groups from the adverse effects of the crisis.

"But even a transitional program involves exceptional risks to the Fund which are outlined with appropriate care and depth in the staff report. They relate to the fragility of the macroeconomic policy framework and the political challenges to implementation. In considering this request, it is important that the Board weigh these risks carefully, and their implications for Argentina, the region, and for the Fund itself.

"I have decided to recommend the approval of this arrangement as a demonstration of a good faith effort of the international community in favour of the people of Argentina. I would also like to assure the Argentine people that the Fund will do its part to make this program succeed. The key to a durable solution to the present difficulties lies, of course, in the actions that Argentina takes. I hope that our contribution will catalyze a cohesive effort on the part of the Argentine authorities, the provinces, legislators and civil society to fully implement this transitional program."

After almost a year of sometimes frustrating discussions, Argentina and the IMF finally reached a transitory financial aid agreement last Friday January 17, that will extend until next August, giving the coming elected president who takes office May 25 to prepare for the second round of talks and to find a way out for Argentina's credit isolation since it defaulted in December 2001

. Lavagna enthusiastic

Argentina's Economy Minister Roberto Lavagna who finally managed to resume a vital credit line with the International Monetary Fund, --albeit "transitory" and includes no fresh funds--, believes the agreement will boost the positive signals of the country's economy and help leave behind four years of recession.

Mr. Lavagna in an interview with La Nación, defined the IMF agreement as "realistic", and downplayed IMF Managing Director Mr. Koehler's doubts about Argentina's capability to respond to the targets set out in the letter of intent.

"The agreement puts us back in the world and moderates the political turbulences of the political process", said Mr. Lavagna recalling that when he took the job as Economy Minister many critics forecasted that the Argentine peso would collapse and the country would become out of control with hyperinflation.

Mr. Lavagna predicted that with the IMF agreement the Argentine economy will expand this year closer to 3,5% than 3% as stated in the letter of intent.

"Primary data from the fourth quarter is showing a strong recovery, confirming three consecutive quarters of growth, something that did not happen since 1998, that is why our 2003 forecast has increased from 3 to 3,5%".

Regarding monetary policy and inflation, two particularly controversial issues with the IMF, Mr. Lavagna said the Central Bank will keep intervening in the exchange market "when needed", and "we will appeal to all resources possible to ensure that prices of the basic basket of foodstuff remains unchanged".

"The budget anticipates a 22% inflation in 2003, but in the last four months we've had an annualized inflation below 10%, so we think we can keep in that range even when we have to adjust utility rates. Besides since April we've had a primary budget surplus".

Mr. Lavagna also pointed out that restrictions in the exchange market have virtually disappeared and rather to the contrary, "exporters are selling their US dollars in the local market and we still have ahead a bounty crop ahead of us. This means the market is stable and there's confidence in the recovery of the economy".

According to the letter of intent agreed with the IMF, Argentina is expected to grow between 2 and 3%; keep inflation below 35% and have a sustained primary budget surplus equivalent to 2,5% of GDP.

IMF rescheduled 6,6 billion US dollars due in the coming eight months.

"The IMF agreement reinforces the recovery trend, the fall in unemployment and gives us stability particularly in a moment of political turbulences previous to an electoral process".