Press Release No. 04/57

Press Release: IMF Executive Board Completes Second Review of Argentina's Stand-By Arrangement

March 22, 2004

The Executive Board of the International Monetary Fund (IMF) today completed the second review of Argentina's performance under a three-year SDR 8.98 billion (about US$13.3 billion) Stand-By Arrangement that was approved on September 20, 2003 (see Press Release No. 03/160). Completion of the review will entitle Argentina to a disbursement equivalent to SDR 2.1 billion (about US$3.1 billion).

In completing the review, the Executive Board approved the modification of a structural performance criterion and a waiver for the nonobservance of a performance criterion.

Following the Executive Board's discussion of Argentina, Anne Krueger, Acting Managing Director and Chair, stated:

"Argentina's economy continues to recover rapidly, facilitating steady improvements in employment and poverty indicators. Progress is also being made in implementing reforms in key structural areas such as the banking system and the utilities sector. The authorities have indicated their willingness to negotiate with their private creditors with the aim of reaching an early comprehensive and sustainable sovereign debt restructuring.

"Disciplined macroeconomic policies have contributed to lifting consumer and investor confidence and have supported rapid economic growth. Monetary policy has kept inflation low and allowed interest rates to decline, while international reserves have recovered further in recent months. Looking ahead, the authorities recognize that monetary policy will need to take into account the narrowing output gap that could affect inflation expectations.

"Fiscal performance in 2003 was better than envisaged as a result of strengthened tax collections and restrained spending at the federal and provincial levels. These favorable trends are continuing in 2004 and afford considerable flexibility to the government to increase fiscal savings over the medium term as committed in their Letter of Intent, while also reducing distortive taxes and strengthening support of well-targeted social and capital projects.

"A number of important structural fiscal reforms are to be implemented in the coming months to strengthen the macroeconomic policy framework and address systemic weaknesses in the public finances. In particular, the federal government is working closely with provincial governors to secure an early political consensus on reforms to place intergovernmental financial relations on a permanent sound footing. These reforms aim to simplify the tax revenue-sharing arrangements, enhance incentives to raise own revenues, and introduce binding debt and deficit limits for provincial governments. Additional steps are to be taken to improve tax compliance for customs duties and social security contributions.

"In the banking area, there are welcome signs of return to overall profitability, and measures are being implemented steadily to reduce outstanding weaknesses in bank balance sheets, including by enhancing supervisory control through on-site inspections and the submission of banks' business plans. However, the authorities need to expedite the pending compensation payments to banks and to carry forward the agreed timetable for the strategic review and financial diagnostic of the two largest public banks.

"Some progress has been made with utility sector reform-including by initiating electricity and gas tariff increases for large users-but additional efforts are needed to improve the financial position of some of the regulated concessionaires. An important priority in this area is to develop a balanced regulatory framework that will facilitate the process of renegotiation of concessions of public services and encourage new private investment in the sector, while protecting lower income groups from tariff increases.

"The authorities' commitment to reach a collaborative agreement with their private creditors on a sovereign debt restructuring is welcome. The main elements of the authorities' framework include: (i) appointing investment banks throughout the restructuring process to assist in preparations and help market the debt exchange offer; (ii) engaging in constructive negotiations with all representative creditor groups; and (iii) formulating an offer that will result in a sustainable debt for Argentina and attain broad support from creditors. The authorities have already implemented elements of this agreed debt restructuring strategy: three international and three domestic investment banks were appointed and the terms of their engagement were disclosed; and 25 representative creditor groups were invited to hold separate discussions in Buenos Aires during March 24-April 16, 2004. The groups invited include the Global Committee for Argentine Bondholders, domestic institutional and retail holders such as the Asociacion de Ahorristas de la Republica Argentina, and European retail bondholder organizations such as the Comitato Investitori di Titoli Argentini. The authorities will endeavor to avoid a piecemeal approach to the debt restructuring and intend to finalize, with the assistance of their investment banks, an appropriate minimum participation threshold necessary for a broadly-supported restructuring.

"Consistent implementation of this debt restructuring framework will be essential for the continued support of the international community. In particular, the authorities' intention to discuss with creditors all aspects of the debt exchange offer, including how best to take into account proposals received from creditors, is crucial. The authorities are encouraged to work diligently to design a debt exchange offer that attains the highest possible creditor participation, reduces the risk of protracted litigation, and restores debt sustainability," Ms. Krueger said.