February 1991 improved the
quality of revenue mobilization substan- tially because it
eliminated export taxes, reduced pro- gressively during 1990 and
early 1991, deducted higher taxes on financial transactions from
the income/asset tax, and removed several minor taxes. In
December 1992 subsidies to industrial promotion were
substantially cut by replacing self-monitored tax deductions
with a tax bond program. These efforts cumulatively produced
dramatic rises in tax collections from the third quarter of 1991
on. The increase in value added tax collection allowed the
government to eliminate inefficient taxes, such as the fuel tax
and the stamp tax, in November 1992, and several specific sales
taxes in May 1993. Federal employment decreased from 671,000 to
284,000, including 103,000 layoffs and 284,000 teachers and
health workers transferred to provincial payrolls. This effort
was based on a ministerial reorganization that focused federal
activities on core objectives, and improvements in the civil
service system through an improved salary structure and
efficiency measures. The government was able to increase average
salaries and partially restore salary differentials. The
government took several measures to strengthen budgeting
procedures and expenditure controls. By 1993 it had eliminated
105 of the 151 earmarked accounts extant in 1990, and reduced
the coverage of earmarked taxes. The September 1992 Law of
Public Financial Management will permit comprehensive budgeting,
effective internal expenditure control, and provide for new
external auditing The government has embarked on several
reforms to separate the central bank from the nonfinancial
public sector and establish it as an effective independent
monetary authority. The elimination of the central bank's
domestic short-term interest-bearing obligations by means of
their conversion into external treasury bonds in January 1990 in
effect was a first step toward recapitalizing the central bank.
The Law of Convertibility established a money-creation rule that
effectively limits monetary policy and central bank inflationary
financing of public sector deficits. Since early 1991 the
central bank has published financial statements that reveal its
balance sheet; since April 1991 it has published its reserve
position weekly so the public can monitor implementation of the
Law of Convertibility. In September 1992 a
new law strengthened the central bank's autonomy, and further
restricted its ability to extend credit to the government and
the banking system. This measure reinforces the convert- ibility
law, and paves the way for an independent, disciplined, monetary
authority. In addition, the cen- trai bank intends to complete
the process of removing functions ancillary to the functions of
a monetary authority by transferring legal authority for failed
institutions to the courts.
Public Enterprises
The government has carried out one of the most impressive
privatization programs in the Western Hemisphere. The objective
was to reduce the budgetary burden of the enterprises, make the
firms more competitive, and increase the volume and efficiency
of new investment. The privatization program began in earnest in
1990 and gained credibility with the sale of national
telecommunications company in November 1990. The program removed
politics from price setting in the formerly vast segment of the
economy covered by the state. The change in the institutional
organization of these sectors cut off public subsidies to
consumers and labor groups benefitting from high wages and
excess staffing, and transfers for investment. The program also
improved public finances: about $9 billion in capital receipts
helped close fiscal accounts in 1991 and 1992 and external debt
was reduced by $12 billion. Major privatizations included
television stations, the telephone company, Aerolineas
Argentinas, gas distribution and transmission, and the majority
of the national oil company. It granted road and railroad
concessions to the private sector, privatized long distance
cargo lines, and sharply reduced the railway's work force. The
government privatized other public enterprises, including
defense industries, the nation's largest distributor of
electricity, ports and maritime transport, reinsurance, and the
entire power sector. Future privatization plans include the
national airport system.
Fiscal Relationships with the Provinces
The government also sought to restructure fiscal relation ships
with the provinces. The Coparticipation Law of 1988, fixed the
share of federal revenues automatically transferred to the
provinces at 58 percent. In August 1992 a portion of tax
revenues was assigned to the social security system before
computing revenue sharing. At the same time, the resources
provincial governments could access were limited by
progressively terminating central bank lending to provincial
banks. The government also reduced extra-coparticipation
transfers through the budget. To offset aggregate increases in
resources as national tax collection improved, the government
also transferred expenditures to provincial administrations,
notably secondary education and hospitals, and to the social
security system in August 1992.
Debt Restructuring
The final step in dealing with the government's insolvency
involved restructuring its debt obligations. The government had
financed its deficit through borrowing from the financial
system, suspending payment to external creditors, and
accumulating arrears with pensioners and suppliers.
Restructuring each of these required major initiatives. Although
the government ended new rediscounts to the housing and
industrial banks, and liberal rediscounts to provincial banks in
1988, the central bank continued money emission to finance the
treasury and its own deficit. In late December 1989, faced with
rising central bank deficits and the renewed threat of
hyperinflation, the government took the drastic step of
converting domestic, short-term (mainly seven-day),
interest-bearing obligations of the central bank into $3.5
billion 10-year dollar-denominated treasury bonds. This
virtually eliminated the central bank's quasifiscal deficit and
the monetary emission necessary to finance it-at the cost of
penalizing savers and reducing already low confidence in the
financial system. In April 1988 the government suspended payment
on its external debt to commercial creditors. By 1992 it had
accumulated $8 billion in arrears as part of a $32 billion
medium-term commercial bank debt. Public external debt was $61
billion. The government re-initiated partial payments in June
1990, and established a consistent record of paying about 25
percent of interest due. At the same time, it allowed external
debt to be used in exchange for the sale of assets, which
reduced the debt stock by $7 billion. The progressive
improvement in fiscal fundamentals in 1990/91 allowed the
government to begin negotiations with commercial banks on a debt
reduction deal. An external debt