MercoPress. South Atlantic News Agency

IMF-Argentina controversy over fiscal policy

Argentine government sources and private economists rejected the International Monetary Fund's proposal for larger primary surpluses to face foreign debt payments and supported the Argentine Central Bank policy of targeting a “competitive” exchange rate.

Cabinet Chief Alberto Fernandez said that the IMF request doesn't "seem reasonable", arguing that Argentina needs a "mature relation with multilateral credit organizations to keep advancing with a sustained development program to address the many needs of the country".

IMF is demanding from Argentina a 4,5% primary budget surplus but President Kirchner's administration is only willing to accept 3%. Furthermore they would like to see the Argentine economy pegged to inflation targets (as in Brazil, Uruguay and Chile) instead of a "competitive" exchange rate which favours exports and keeps the US dollar virtually fixed in 2,87/2,90 pesos.

"If all the surplus in a country with 40% of its population living in poverty, is earmarked for foreign commitments, we'll only delay infrastructure investments needed to keep growing and help people out of such a difficult situation", said Mr. Fernandez. Argentine Central Bank president Martin Redrado said that the IMF request stems from a baseless argument since "all the US dollars we're purchasing in the local money market are sterilized with bonds and notes which absorb the surplus pesos".

Following the recent approval by the IMF of a report on the Argentine economy, both sides supposedly are ready to negotiate a new stand by agreement. However next October Argentina is holding mid term elections which President Kirchner has described as a referendum on his administration, and it's doubtful Finance Minister Roberto Lavagna will sit to consider "unacceptable" IMF proposals.

But Argentina also faces important financial commitments in the second half of 2005 totalling 7,6 billion US dollars, of which 5,8 billion capital and 1,8 billion interests.

"Argentina can still live and face its commitments without an IMF agreement", argues the last report from Swiss bank UBS, one of the three which advised Argentina on the restructuring of its massive defaulted debt. In support of the Kirchner administration policy, Argentine economist Mario Blejer former IMF and currently working for the Bank of England forecasted that Argentina "should not have many problems with obtaining external financing", and "I don't think it's necessary to agree on a higher primary surplus". As to the excess of US dollars in the Argentine market, Mr. Blejer said they come from savings, "from the mattresses" not necessarily from the country's trade surplus.

"The current Central Bank policy is adequate", emphasized Mr. Blejer adding that in most countries, foreign exchange policies are fixed by governments, and "the current approach could prove to be seasonal". Aldo Ferrer another well known Argentine economist said that it was necessary to de-dramatize the IMF negotiations, which are not conditioned to the mid term elections, "since the basics and macroeconomic data remain solid".

"IMF is insisting with traditional criteria regarding fiscal and exchange policies and suggesting the peso appreciates against the US dollar is not appropriate".