Al-Ahram Weekly On-line 23 - 29 November 2000 Issue No.509
Published in Cairo by AL-AHRAM established in 1875

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Back in the trenches

By Hisham El-Naggar

An International Monetary Fund mission is due in Argentina shortly to negotiate yet another package -- one that will purportedly make crisis-ridden Argentina crisis-proof. The deal with the IMF is to be the cornerstone of a programme that will have the "moral and financial" support of the World Bank, the Inter-American Development Bank and the United States Treasury. The quid pro quo? Just a few more reforms that the IMF has long been saying would do the country a world of good.

By now, Argentines are conditioned to feel a bit jittery when they hear the word "reform." And they have been hearing it quite a lot lately, as orthodox economists (are there any other kind?) have been insisting that this is the only way out of an excruciatingly slow recovery from a seemingly never-ending recession.

Current Argentinian President Fernando de la Rua started off with high hopes. As head of a progressive alliance that includes the left-leaning Frepaso Party, De la Rua was poised to make a clean break with the corrupt practices that thrived under his predecessor, Carlos Saul Menem. Part of the bargain was to jump-start the economy, which had trailed badly during Menem's last year in office. To De la Rua's credit, he has made strenuous efforts to keep his promise. Unfortunately, the recipe his economic team seems to favour is awfully similar to Menem's: budget cuts, higher taxes and leave it to the markets to pull the country out of the recession.

The markets, in turn, have interpreted the government's policies as being "anti-growth." At a time when most of the world -- including a number of Latin American countries -- looks promising, why bother with a country with an expected growth of less than one per cent? It did not take much for the country to fall into a vicious circle of economic meltdown: lacklustre prospects scare away foreign investors, and less foreign investment means balance of payment problems. By law, Argentina must uphold a fixed exchange parity of one peso to the dollar. Balance of payment trouble thus means rushing off to the IMF for help. And the IMF is willing, provided the country retrenches some more.

And so the depressing cycle reaffirms itself. To top it all, De la Rua has to worry about a political crisis which seemed to materialise out of thin air. Though unsubstantiated, rumours that the opposition Peronist party were paid off to vote for a previous package of economic reforms have hurt the image of all parties concerned. Carlos ("Chacho") Alvarez, vice president and leader of the Frepaso Party, resigned from his post in disgust. Strong criticism from Alvarez has since prompted the president's prominent adviser and personal friend to resign his post as head of Internal Security, Argentina's equivalent of the FBI.

This is how most people view the situation now: De la Rua uncomfortably occupies centre-stage, while a profusion of outsiders -- the former vice president, former Presidents Raul Alfonsin and Menem and a few hangers-on -- feel free to criticise the government. Anxious to retake the initiative, De la Rua opted for what he called a "confidence shock" and announced more reforms last week. Future pensions will be cut. The retirement age for women will gradually be raised. The provinces, notorious for unwieldy deficits, will find the aid they have learned to expect from the federal government frozen for five years.

In return, the government has succeeded in lining up credit facilities totaling $17.5 billion. Impressive indeed, but the deal has not been finalised yet; there is this little detail of getting the provincial governments -- many of them in the hands of the opposition -- to agree to a fiscal discipline pact. And Argentine consumers, whose confidence is crucial to relaunch economic growth, could very well prove reticent as all this seems a case of déjà-vu: foot the bill now, grow later.

This particular package, however, is not to be scoffed at. The very fact that Argentina was able to get support from international financial organisations -- not to mention the US Treasury, in spite of excitement in Washington about a very different ongoing crisis -- is no small achievement. The projected cuts, however painful, have been in the cards for some time; they are, in fact, very similar to the ones Italy had to swallow. There are also a few sweeteners. Interest on mortgages will, in the case of new property, be tax-deductible -- a measure expected to boost the ailing construction sector. The government will continue to distribute funds for social assistance, and the proposed budget for 2001 does not, for a change, call for tax increases.

So will the government pull it off? The mood in Buenos Aires seemed iffy, as two powerful unions called for a general strike next week and the opposition balked at signing the desired fiscal discipline agreement. But as Al-Ahram Weekly went to press, opposition leaders seemed to be relenting. Local banks -- many of them foreign-owned -- did not hesitate to voice approval and themselves contributed nearly half the pledged credit line. Most people think De la Rua has shown genuine leadership, and will very likely be rewarded by international investors.

Argentines may moan about the pound of flesh the IMF is demanding of them, but De la Rua has actually stood up to the IMF, which, if it had its way, would never have settled for less than two pounds, or three or four. The fact is, the IMF needs Argentina at least as much as Argentina needs the IMF. In dealing with bankers -- and the IMF is a banker as far as Central Banks are concerned -- the relevant maxim is: you owe them a few bucks, you have a problem; you owe them a lot of bucks, they have a problem. And it seems clear that the IMF, and much of the international financial system behind it, have come around to the realisation that Argentina's problems are their problems too.

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