Argentina's new economic policy: Interview with Roberto Cardarelli, IMF mission chief for Argentina.
Argentina’s economic plan aims to restore financial markets’ confidence and progressively lessen the strains on the country’s ability to pay its bills.
Argentina has put in place a new economic plan that is designed to put the country’s debt on a firm downward path, reduce inflation, and reinforce the independence of the central bank. The plan, backed by a $50 billion Stand-By Arrangement from the IMF, is expected to help restore market confidence in the country’s economy, the third largest in South America.
In the following interview, Roberto Cardarelli, IMF mission chief for Argentina, discusses the details of the economic plan.
Why did Argentina decide to come to the IMF?
Argentina decided to come to the IMF in mid-May, as a series of shocks combined with economic vulnerabilities led to a shift in market sentiment which resulted into severe pressures on the peso, a higher sovereign risk premium, and short-term liquidity risks. Investors began selling their assets in pesos and the government was having trouble paying its bills for the rest of the year.
What does the new economic plan seek to achieve?
Argentina’s economic plan aims to restore financial markets’ confidence and progressively lessen the strains on the country’s ability to pay its bills. To do so, the government has committed to an economic program that reduces borrowing, puts public debt on a firm downward path, and strengthens the credibility of the central bank’s inflation targeting framework.
At the same time, the plan intends to protect society’s most vulnerable from the inevitable negative effects that cuts in some kinds of spending will have on the economy. Ultimately, the objective of the program is to pave the way for stronger, more sustainable and equitable growth that can benefit all Argentineans.
One key objective is to lower the fiscal deficit. How will the government accomplish this?
Yes, the government’s goal is to achieve a primary balance—that is, a balance of revenue and spending at the federal level that does not include interest payments—by 2020.
This is one year earlier than originally announced by the government and it is based on measures that aim to reduce the federal government’s spending. These measures include, for example, further cuts in energy subsidies, a lower wage bill, and a reduction of transfers to both provinces and state-owned enterprises.
There are also a few tax measures—in particular, the suspension of tax cuts that had been previously announced—but they account for just a small part of the fiscal rebalancing.
How will the government protect social spending under the plan?
The government proposed a few measures that would help the most vulnerable.
First, the program establishes a minimum amount of federal government spending on a few well-targeted and highly effective social assistance programs, such as the conditional cash transfers that reach most of the poor and vulnerable.
Second, if the economy worsens, the government can increase spending by up to 0.2 percent of GDP (or AR$30 billion) per calendar year, if they think they have room in the budget.
Third, the government can decide to take measures to protect people who are insufficiently covered by the existing social safety net.
What will be the focus of monetary policy, and why is it important for the country to maintain a flexible exchange rate?
The government is committed to an inflation targeting regime with freely floating exchange rates. It also announced a few changes that would strengthen the credibility of the monetary policy framework. In particular, the central bank has adopted a new, more credible path of inflation targets (for example, the inflation target for end-2019 moved from 10 to 17 per cent).
The government also announced a series of measures that will reinforce the central bank’s independence, including the immediate stop of direct and indirect money transfers to the Treasury and the intention to send to Congress a new charter for the bank that would strengthen the autonomy of its operations.
We believe this plan has a good chance of gradually bringing down inflation. And it will allow the exchange rate to adjust based on investors’ confidence as well as act as a shock absorber, as its fluctuations will prevent external shocks from taking a large toll on economic activity.
The plan calls for Argentina’s central bank to be independent. Why?
One of the reasons investors lost confidence in Argentina’s economy is the perceived loss of central bank independence that occurred early in 2018, when the central bank cut interest rates. This happened at a time when inflation expectations were well above the new inflation targets, which the central bank had increased just a few weeks earlier. These decisions triggered a rapid depreciation of the peso, and called into doubt the central bank’s independence and its commitment to lower inflation. An essential part of the new plan is to guarantee the central bank’s financial and operational autonomy.
When do you expect Argentina’s economy to get back on track?
We think that after a solid first quarter, Argentina will experience negative growth in both the second and third quarter of 2018.
The country has been in a years-long drought that has hurt agricultural production, and the crisis over the last few weeks has hurt inflation and investors’ confidence.
We expect growth to stabilize in the last quarter of 2018. We anticipate the economy will begin a gradual recovery in 2019 and 2020, as confidence grows and the cost of capital falls, along with inflation, while exports pick up, thanks to solid growth in Argentina’s main trading partners (Brazil, the United States, and China).
How would you say Argentina is different today from 15 years ago? Has the IMF changed as well?
Yes, conditions are quite different for both of us. Argentina’s economy is less vulnerable than before the recession at the beginning of the 2000s. The exchange rate regime is a big change. It is now floating, not fixed, so it’s working as a shock absorber. Banks and the private sector also operate without money borrowed in foreign currency, so their balance sheets are not at risk from a depreciation of the peso. On top of these key dynamic changes, the government has launched a series of business-friendly measures that have helped the economy register solid growth in the last 7 quarters.
The IMF has changed as well. Our support for Argentina’s economic plan puts more emphasis on the need to strengthen the social safety net, and includes measures to increase women’s participation in the labor force. Doing so is not only a moral imperative, it’s also essential to ensure that any plan to stabilize the economy is accepted by everyone, which means it stands a stronger chance to succeed.