MercoPress. South Atlantic News Agency

IMF again warns Argentina about protectionist and foreign currency exchange policies

Werner revealed that the IMF is “in dialogue with Argentine officials as well monitoring their work”

The International Monetary Fund Director for the Western Hemisphere, Alejandro Werner, warned on Monday about the “negative effect” that the existence of two foreign currency exchange markets and protectionist policies bring to Argentina.

“Based on our studies, the IMF believes that commercial restrictions plus having a dual exchange market generate inefficiency in any economy. This will definitely affect negatively Argentina’s economy’s performance”, said Werner during the release of the Regional Economic Outlook for the Western Hemisphere.

Likewise, Werner revealed that the Fund is “in dialogue with Argentine officials as well monitoring their work” in order to elaborate a new inflation and reliable inflation index.

”We hope they can solve their problems with the old index”.

According to the government’s official INDEC statistics agency, Argentina’s inflation last year was 10.8 %, while most private consulting agencies agreed it averaged 25.6%.

Growth in Latin America and the Caribbean is set to pick up from 3% in 2012 to 3.5% in 2013, supported by stronger external demand, favourable financing conditions, and the effects of earlier policy easing in some countries, the IMF said.

Likewise, the IMF said that external risks to the near-term outlook have receded. Policy actions in the Euro area and the United States have removed immediate threats to global growth and financial stability, the report said.

According to the report, medium-term risks for Latin America remain tilted to the downside. The key risk is a reversal of the favourable tailwinds of easy financing conditions and strong commodity prices that have prevailed since 2010.

The region would be particularly affected if a sharp slowdown in China or other key economies triggers a drop in commodity prices. Another risk is that lack of progress in addressing the medium-term fiscal challenges in key advanced economies leads to a sharp increase in sovereign and corporate risk premiums, with negative impact on global growth.

Domestically, the risk of a deterioration of external and financial sector balance sheets has increased in some countries, the report said.

For Argentina, the report indicates one of the lowest projected growths, only above Venezuela. According to the IMF, and based on the data provided by the Argentine government, Argentine will grow 2.8% this year, and 3.5% for 2014. Meanwhile, Argentina external current account balance has been projected at -0.1%of GDP for 2013 and -0.5% for 2014.

Likewise, Argentina’s inflation has been projected at 10.1% for both 2013 and 2014, the second highest in the region after Venezuela’s projected inflation of 28% and 27.3%.

However, since the stats for the report were from INDEC, the IMF reiterated it has issued a declaration of censure and called on Argentina to adopt remedial measures to address the quality of the official GDP and CPI-GBA data as alternative data sources have shown significantly lower real growth than the official data since 2008, and higher inflation rates than the official data since 2007.

In this context, the IMF is also using alternative estimates of GDP growth for the surveillance of macroeconomic developments in Argentina.

In another passage, the report remarks that Venezuela and, to a lesser extent, Argentina would need to strengthen their current fiscal position considerably; otherwise they may have to undertake sizable (pro-cyclical) fiscal consolidation in the face of adverse shocks, including moderate ones. This reflects both their sensitivity to external conditions and a relatively weaker initial fiscal position.

Current account balances have weakened in recent years, and asset prices are on the rise. Credit growth has moderated, but remains high in a number of countries.

The report reaffirmed its earlier message that countries in the region should take advantage of the current favourable economic conditions to build a strong foundation for sustained growth in the future. Policy priorities include building stronger fiscal buffers, improving policy frameworks, and pressing ahead with structural reforms to increase productivity and potential growth.

Growth in the financially-integrated economies in 2013 is projected at about 4¼ percent. For these countries, the IMF pointed out that the key policy priorities are to strengthen public finances and protect financial sector stability. Stronger public balance sheets would help ease pressure on capacity constraints and arrest the widening of current account deficits.

Growth in the other commodity exporters is expected to increase to 4.6% in 2013, from 3.3% in 2012. However, in the large energy exporters (Bolivia, Ecuador, and Venezuela), growth is projected to moderate. The IMF said these countries would benefit from saving a much larger share of their commodity revenues.

Average growth in Central America is expected to remain close to potential in 2013. Looking ahead, the report said that gradual tightening of fiscal policy in these countries would be necessary to reduce fiscal and external imbalances and ensure debt sustainability.

In much of the Caribbean, high debt and weak competitiveness will continue to constrain growth. These economies are projected to grow by about 1¼ percent in 2013 (from ½ percent in 2012), as external demand strengthens gradually. The key challenge for these countries remain broadly unchanged—reducing high public debt, containing external imbalances, and reducing financial sector vulnerabilities.

The May 2013 Regional Economic Outlook features three analytical chapters dealing with the challenges of sustaining growth and strengthening balance sheets. Specifically, the chapters assess the region’s growth potential, the impact of changes in external conditions on public and external debt dynamics, and the use of the windfall from the recent terms-of-trade boom.