Press Release No. 17/431

IMF Staff Completes 2017 Article IV Mission to Argentina

November 10, 2017

• Authorities reform efforts have yielded significant efficiency gains and laid the foundation for stronger private sector investment in the years to come.
• Accelerating the pace of reforms would help reduce vulnerabilities to mid-term outlook and foster strong, sustained and equitable growth.

An International Monetary Fund (IMF) team, led by Mr. Roberto Cardarelli, visited Buenos Aires from October 31 to November 10, 2017 to conduct discussions for the 2017 Article IV consultations. At the conclusion of this visit, Ms. Cardarelli issued the following statement:

“Argentina has been engaged in a systemic transformation of its economy. The removal of foreign exchange controls, modernization of monetary policy, resolution of the dispute with bond holders and return to international capital markets, and the realignment of utilities tariffs have corrected the most urgent macroeconomic imbalances. Institutions have been rebuilt and strengthened, and notable progress has been made in restoring integrity, transparency, and efficiency to all levels of government. New anti-corruption measures have been adopted and procurement processes and corporate governance have been improved. These efforts have yielded budgetary savings and laid the foundation for stronger private sector investment in the years to come.

“These, and other policy changes, have resulted in a steady recovery from the recession that began in mid-2015. Growth is forecast to be 2¾ percent for this year and 2½ in 2018. Inflation remains stubbornly high and it is expected to gradually decline. Stronger domestic demand has led to a greater current account deficit, while the high general government deficit has led to a rapid rise in foreign currency borrowing, pushing up gross external financing needs. The slower-than-targeted decline in inflation and significant foreign inflows have contributed to upward pressure on the real exchange rate. These factors pose vulnerabilities to the medium-term outlook.

“Accelerating the pace of reforms would help reduce these vulnerabilities. The government is committed to continue reducing public expenditure in order to cut the tax burden and achieve the fiscal deficit targets. The federal authorities have announced a 2 percent of GDP reduction of the primary federal deficit in the next two years, based on a reduction of economic subsidies and other measures, whereas provinces are committed to reduce their deficit by about ¾ percent of GDP. This fiscal plan goes in the right direction, although a larger fiscal rebalancing would allow for lower real interest rates; reduce upward pressures on the peso; facilitate a faster elimination of monetary financing of the fiscal deficit and better anchor inflation expectations; and reduce vulnerabilities to a sudden tightening of external financing conditions.

“The authorities’ proposed tax reform is a good step forward to overhaul Argentina’s inefficient tax system. The proposal gradually reduces the effective tax rate on labor income for low-income workers, increases the progressivity of the system, and incentivizes formal employment. Expanding the coverage of the personal income tax would allow to lower social security contributions. The gradual reduction of the statutory tax rate for reinvested corporate income is welcome and should help support investment. The phase-out of the financial transaction tax will remove a distortion that holds back financial deepening and financial inclusion. Incentivizing provinces to eliminate the gross turnover tax will also support investment, growth and job creation.

“Further progress on supply side reforms would help facilitate Strong, sustained, and equitable growth going forward. The authorities should be commended for measures to reduce the red tape and ongoing initiatives to significantly reduce administrative costs associated with trade and setting up firms. However, there remains scope to remove barriers to trade, investment and firm entry, and address anti-competitive business practices. Creating quality jobs for all Argentines is the most effective and sustainable way to reduce poverty, raise output, increase productivity, and provide opportunities. A reform of labor market institutions would help reduce informality, address gender discrimination, and ensure the benefits from higher growth are shared more equally. Allowing for more flexible work arrangements and active labor market policies can help increase the employability of all workers.”