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Argentina: the IMF returns to the fray

Argentina: the IMF returns to the fray

Time for economic truth-telling 

by David Smith

Fri 1 May 2015

Quite rare in a G20 country perhaps, but the International Monetary Fund is set to become a critical variable in a tempestuous election campaign that could decide whether Argentina persists in defying economic logic – or whether the country accepts the economic medicine deemed necessary to return to stability and growth.

In its report 'Economic Perspectives, the Americas', the IMF’s regional team chooses words carefully, but the intent is clear. In the words of one veteran Latin American economist at the Fund: ‘The leadership, from Madame Lagarde on down, feels it is high time for truth-telling, and reality check, with the Argentine government.’

So the headlines from Washington are stark. Argentina needs to devalue, has to cut spending, must curb inflation, and has to confront the growing fiscal deficit. And the kicker lies in a future hope expressed by Fund leaders: that there will be ‘favourable expectations for investors after the elections’ for a new president in October this year.

Statistically, the IMF expects an economic contraction of 0.3% this year, and anaemic growth of 0.1% in 2016. The organisation, despite the government’s attempts to say otherwise, records inflation running at almost 24%, and the fiscal deficit rising to 1.7% of GDP this year.

‘What’s required are tighter macroeconomic policies, a weaker exchange rate (that is to say, devaluation) and fewer microeconomic distortions, in order to return the country to stability and growth.’

Inevitably, given the stormy history between the Fund and the Argentine government, run by the Kirchner family since 2003, the official response in Buenos Aires mixes sound with fury.

Anibal Fernandez, chief of staff to President Cristina Fernandez de Kirchner and her lead spokesperson, expressed contempt, backed by a deaf ear to the IMF’s suggestions. ‘The IMF returns with its familiar agenda, telling us to make a profound adjustment in the economy, and then to devalue our peso – which we have no intention of doing, no intention whatsoever.’

What lies ahead is an election campaign where an anointed successor of the Kirchners, most likely the governor of Buenos Aires province, Daniel Scioli, will face off against an opposition led by Buenos Aires city mayor Mauricio Macri – a politician who comes from the business community, and who insists Argentina has to return to the world of open markets, fiscal responsibility and flexible exchange rates. Macri’s party just won primary elections in the capital by a huge margin.

No wonder, then, that the president wants to make the IMF a major bogeyman in this campaign. To quote her spin doctor, Anibal Fernandez: ‘Do you picture Macri ever saying No to the IMF, as we have?’

Early days yet, and the full impact of the IMF intervention is yet to be felt, but the stage is set for truth-telling on the economy to be the number one issue, something the government would have preferred to avoid, given inflation, rising unemployment (one-third of the country’s industrial capacity is idle), the growing lack of consumer confidence, and poverty far more widespread than anyone wants to admit.

In mid-April, the president sent her economic team to the Spring meetings in Washington, to sound out the IMF on a loan. When the response was decidedly lukewarm, she opted to make a government bond issue offering an extraordinary 8.9% return, in dollars (twice the average of others in Latin America).There has been no shortage of takers, the bonds generating $3bn, despite Argentina’s chequered history of default. As a result, the country’s reserves now stand at a two-year high.

‘But the price will be paid by the next government,’ according to a member of the IMF’s Latin America team. ‘And that’s the issue here, kicking the problems down the road for others to face.’

David Smith, former United Nations Director in Argentina, is an adviser to OMFIF.

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