IMF Should Push for Deeper Reforms in Argentina

The International Monetary Fund has officially approved Argentina’s request for $50 billion in support to stabilize its currency and pay its obligations. In exchange, Argentina has agreed to balance the primary budget (the budget excluding interest payments) by 2020 and give more independence to its central bank.

However, Argentina’s debt payment record is poor, and the political environment makes it difficult for the President to enact major reforms. The IMF must make sure Argentina actually balances the budget, including interest payments, and improves the rule of law before other installments of the loan are disbursed to guarantee lower inflation and a faster recovery.

Stagflation, chronic unemployment, and default are common problems in Argentina, a country whose government defaulted eight times since independence, including twice in this century. Moreover, Argentina has an inflation of 76 percent and an unemployment rate of about 7 percent.

Since the Kirchners took power in 2003, Argentina drastically changed. Their government implemented currency controls, taxes on exports and imports, higher taxes on corporations, nationalization of some sectors, and overly-generous social programs financed by the central bank. Consequently, public spending grew from 28.5 percent of GDP in 2003 to 47.1 percent in 2015. Additionally, the public workforce more than doubled to 35 percent of all employees by the end of the Kirchners’ term, driven by regional government hiring. While the Kirchners hailed their governing period from 2003 to 2015 as one of high economic growth, GDP figures do not match reality. Argentina’s productivity remained stagnant, and inflation steadily increased from 10 percent in 2003 to 40 percent in 2014. Argentina was headed for a disaster similar to Venezuela’s by implementing every policy the socialist dictatorship had already applied.

However, unlike Venezuela where there are no free elections, in 2015 Argentinians were able to elect as President Mauricio Macri, a self-declared free-market reformer. Macri removed currency controls and proposed lower taxes, fewer regulations, and a balanced budget to control inflation. However, Argentina remains one of the least free economies in the world, and inflation is still high despite Macri’s two years in office.

Although the regulatory and tax environments have improved by lifting currency controls, eliminating export duties, and lowering the corporate tax rate, taxes remain high by regional standards, regulations are excessively burdensome, and courts do not reliably enforce property rights. Most important, spending has not been cut enough to balance the budget, with the central bank’s printing press at full speed keeping inflation high.

Macri’s gradual reforms have drastically lowered his approval rating since his base does not see enough change, and other Argentinians do not see results in their paychecks, diminishing his chances of reelection next year.

To achieve a balanced primary budget, Argentina has lowered spending through pension reform, decreased energy subsidies, and reduced the public workforce through attrition. However, the IMF plan would reduce public spending to pre-Kirchners levels only if implemented through 2034. Moreover, even with the primary budget balanced, interest payments keep the government borrowing.

In order to balance the budget including interest payments, lower taxes, and slow price increases, Macri should deepen the planned reforms and focus on making Argentina more competitive. The pension reform was a positive step, but Macri should push to transition Argentina to a fully-funded savings system similar to Chile’s to assure sustainability of government finances and greater returns for retirees. Moreover, the government should reduce energy subsidies further, so customers bear the full burden of electricity and gas prices by 2020 rather than 90 percent as planned. Additionally, Argentina should limit transfers to provinces since they employ most public workers and reduce regulations that restrain private investment, similar to neighbors such as Uruguay and Chile.

These measures would allow the central bank to stop financing the government, leading to lower inflation and greater purchasing power for Argentinians. More important, lower spending would allow the government to decrease taxes, attracting more foreign investment and contributing to stabilize the peso. Macri is willing to achieve this goal, but his plans are not ambitious enough. If the IMF can do something, it is to push Argentina even further in the right direction. 

Daniel Di Martino is a contributor to Economics 21. Follow him on Twitter @DanielDiMartino

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