MercoPress. South Atlantic News Agency

IMF approves Argentina's program, but?.

After two long months of tough negotiations, the Executive Board of the International Monetary Fund approved this Saturday the three years 12,5 billion US dollars agreement reached with Argentina. The board meeting was presided by First Deputy Managing Director Anne Krueger and extended for over three hours

The approval comes hours before Argentina presents this Monday in Dubai, during the annual Assembly of the IMF and World Bank its debt restructuring program for private creditors estimated in 100 billion US dollars of which 76 billion in sovereign bonds. The IMF approval also enables Argentina to reschedule payments with other multilateral credit organizations totalling 21,6 billion US dollars.

However Anne Krueger as spokesperson for the Executive Board indicated that the IMF "looks forward to continued progress being made in normalizing relations with creditors. Early conclusion of a sustainable restructuring agreement, which would pave the way for Argentina to return to capital markets, is fundamental to the success of the program,"

The three-year, SDR 8.98 billion (about US$12.55 billion) Stand-By Credit Arrangement for Argentina succeeds the arrangement that expired on August 31, 2003. In addition, the Executive Board approved Argentina's request for an extension of repayment expectations to an obligations schedule in an aggregate amount equivalent to SDR 1.74 billion (about US$2.43 billion).

Following the 24-member Executive Board's discussion of Argentina, which took place in Dubai, United Arab Emirates, ahead of the 2003 joint World Bank-IMF Annual Meetings, Anne Krueger, First Deputy Managing Director and Chair of the Board, said:

"The IMF Executive Board has approved the Argentine authorities' requests in the context of a medium-term economic program that seeks to restore sustained growth and improve poverty and equity indicators in Argentina.

"Over the past year and, since January, in the context of the transitional arrangement with the Fund, Argentina made a welcome start in restoring a measure of economic stability, with growth and confidence recovering, unemployment declining, and inflation being held under firm control. Notwithstanding this progress, many key challenges still face Argentina, and these are addressed in the new medium-term program.

"Argentina's new medium-term economic program has three fundamental elements. First, a medium-term fiscal framework to meet growth, employment, and social equity objectives, while providing a sound basis for normalizing relations with all creditors and ensuring debt sustainability. Second, a strategy to assure the strength of the banking system and facilitate the increase in bank lending that is essential to support the recovery. Third, institutional reforms to facilitate corporate debt restructuring, address issues of the utility companies, and fundamentally improve the investment climate. These actions are carefully sequenced within the program to promote greater ownership.

"The fiscal framework is at the core of the program. It targets a consolidated primary surplus of 3 percent of GDP in 2004, based on firm control over expenditures at the federal and provincial levels, and improvements in tax administration. The authorities have committed to primary surpluses in subsequent years that ensure a sustainable fiscal position over the medium term. Toward this end, the authorities have recognized the importance of undertaking further tax reform, while also securing early consensus on reforming intergovernmental relations. These actions are to be carried to a decisive stage in 2004.

"Regarding the financial program, the medium-term program seeks to entrench broad price stability, while implementing a comprehensive banking restructuring strategy. Toward this end, the monetary program is designed to anchor inflation expectations in the single digit range, helped by further institutional reforms. Thus, the authorities intend to study proposals for enhancing the central bank's independence, and to move to an inflation-targeting framework by end-2004. The banking strategy contains commitments to bring the regulatory and supervisory framework to international standards, to fostering the restructuring and recapitalization of public and private banks, and to implement compensating measures to offset the impact of official sector actions on banks' balance sheets.

"The authorities have committed to move ahead on several important fronts in the new program. The reform strategy includes commitments to put in place conditions that would foster corporate debt restructuring, which is also a key condition for renewed financial intermediation, develop a new regulatory framework for the utility companies, and take other actions that are crucial for legal predictability in Argentina.

"The Fund recognizes that a number of risks are associated with the proposed program, including those arising from the fact that key elements of fiscal and banking reforms that are crucial to sustainability will only be formulated at a later stage. Decisive policy actions by the Argentine authorities, along with strong policy ownership, will be crucial to minimize these risks.

"Finally, the authorities have continued to work toward restructuring sovereign debt. The Fund looks forward to continued progress being made in normalizing relations with creditors. Early conclusion of a sustainable restructuring agreement, which would pave the way for Argentina to return to capital markets, is fundamental to the success of the program," Ms. Krueger stated.

Program summary:

The Argentine authorities have prepared a three-year economic program aimed at establishing sustained growth, reducing widespread poverty and addressing a number of vulnerabilities-including from a massive debt overhang in the public and private sectors, an undercapitalized banking system stressed by crisis, and a weakened investment environment.

Gross inflation: GDP growth is targeted to reach 5.5 percent in 2003 and stay at around 4 percent in 2004-06. Core inflation is expected to be maintained in single digits.

Fiscal policy will aim to raise the consolidated primary surplus from 2½ percent of GDP in 2003 to 3 percent in 2004. Beyond 2004, the authorities have committed to primary surpluses at levels sufficient to cover net payments on performing debt and obligations that may result under a debt restructuring agreement.

Structural fiscal reforms are envisaged to underpin the programmed fiscal consolidation and facilitate the phasing out of tax distortions. The reforms are sequenced to give time to build consensus. The authorities have committed to submit tax reform and intergovernmental reform legislation to Congress during 2004, with a view to their being introduced in the context of the 2005 budget.

Monetary policy will continue to aim at entrenching low inflation expectations, with base money growth driven mainly by the accumulation of international reserves. The authorities are considering moving to an inflation targeting regime by end-2004, and implementing supportive reforms aimed at increasing the autonomy of the central bank.

Banking reforms: The program aims at strengthening the soundness of the overall system and putting public banks on a sound financial footing. By end-2003, the authorities plan to eliminate temporary forbearance on the classification and provisioning of private loans and compensate banks for asymmetric pesoization and asymmetric indexation. As regards losses experienced by banks because of the legal injunctions (amparos), the authorities have committed to assess their impact and to identify measures to strengthen the system by end of 2003.

Debt restructuring: The authorities have also committed to advance negotiations with external creditors that is consistent with medium-term sustainability. They aim to conclude negotiations by mid-2004.

Utility companies, the authorities aim to obtain congressional approval by end-2003 of new legislation that delegates powers to the executive branch to renegotiate public concessions and effect interim tariff increases.

Predictable legal framework: the authorities will commit review the effectiveness of the insolvency system with a view to putting in place a legal and regulatory framework conducive to progress in private corporate debt restructuring.