debt agreement signed on April 7,
1993, reduced $28 billion in commercial bank debt by
approximately 37 percent, and eliminated interest arrears. This
debt deal is expected to improve Argentina's creditworthiness.
The agreement formalized arrears in a 12-year uncollateralized
bond at LIBOR plus 13/16 with a 3-year grace period, after a
$700 million downpayment. Existing debt was exchanged for
collateralized par bonds with a fixed interest rate, or
collateralized discount bonds at 65 percent of face value paying
LIBOR. The new collateralized bonds will have a 12-month rolling
interest guarantee. For most of the last decade, the government
has paid only about half the legally mandated pensions owed
social security recipients. Arrearages were not recorded in the
fiscal accounts, but are estimated to be as high as $7 to 10
billion. To stop the accumulation of arrears, the government
modified coparticipation in tax revenues in favor of the social
securiry system in August 1992. Since then, the social security
system has run a small operating surplus. The government also
accumulated arrears in 1990 with suppliers through formal
suspension of payment on goods and services already provided,
and the health funds have arrears with their service providers
that will also result in new debt. Finally, the government, as
part of its income tax reform, suspended poorly designed loss
carry forward deductions for the corporate income tax, and
agreed to issue compensatory bonds. To settle these claims,
Congress authorized the government to issue consolidation bonds.
The service of this debt will be capitalized until 1997, but
payments on the order of $3 billion will be required in the last
years of the decade. The federal government's share of the
proceeds of the privatization of the state oil company is
earmarked for repurchasing some of the consolidation bonds.
Social Security Reform
The government has moved towards replacing a failed public
pension system. In mid-1992 it submitted a law introducing a
combined state/private system: the state would supply a uniform
basic pension financed on a pay as you go basis while the
private sector would supply pension funds. Membership in both
schemes would be mandatory. The lower house of the Argentine
Congress passed the law-with significant modifications--in May
1993. The government expects the legislative process to be
completed before the end of the year, allowing a new system to
be established in mid-1994.
Trade, Deregulation and Financial Reforms
In 1991 the government accelerated and largely completed a trade
liberalization program that began in laIe 1986, but had suffered
temporary reversals in 1989. Virtually all export taxes and
quantitative restrictionsexcept for automobiles--were
eliminated. The maximum ad valorem tariff was reduced from 115
to 35 percent. The deterioration in the trade balance in 1992,
a consequence of massive capital inflows motivated government to
use commercial policy to achieve effective devaluation within
the fixed exchange rate regime. Exporter rebates were raised
from 8 to 13 percent. On the import side, the tariff band was
narrowed to O to 20 percent. The government also increased a
flat tariff surcharge, called a statistical tax, from 3 percent
to 10 percent on a temporary basis. This led to an effective
depreciation of about 5 percent. In May 1993 the government
eliminated both tariffs and the statistical tax on capital goods
imports, but in July it provided protection to some paper and
textile products through temporary import quotas and tariff
surcharges. A major domestic deregulation decree in October 1991
ended a series of market-impeding rules, dissolved several
regulatory bodies, and unified pension and health insurance
payments to reduce evasion. Subsequent decrees have deregulated
pharmaceutical impons and ports. The industrial promotion
program and subsidies to Tierra del Fuego were markedly reduced
in November 1992. The publicly-owned housing and development
banks, long subject to political influence and dependent on
government financial support, are undergoing major
restructuring. Branches of the National Development Bank and the
National Housing Bank have been closed since March 1990 and
their staffs have been reduced by almost 75 percent. The
government is liquidating the development bank and closing the
housing bank's retail functions. It has established a second
tier bank to be managed, and ultimately owned, by the private
sector to mobilize financing for its investment needs. In
response to a short-lived run on the peso in mid-November 1992
the authorities strengthened their commitments to the fixed
exchange rate regime by permitting reserve requirements to be
met either in foreign or domestic currency, and equalizing
reserve requirements on foreign and domestic
currency-denominated checking accounts in domestic transactions.
In February 1993 these measures were complemented by lowering
reserve requirements and further deregulating commercial bank
lending to the private sector. Term deposits under 30 days were
eliminated to increase the average maturity of deposits in the
domestic financial system and reduce the risks of a run on the
banks. Finally, since April 1993, bank compliance with reserve
requirements is based on a four-week moving average, which
should reduce the volatility of short-term interest rates .
Over the last six months Argentina has taken meas- ures to
reduce interest rates and stimulate investment. In October 1992
it imposed a 2 percent per month ceiling on loans made by public
banks, a measure also aimed at stimulating restructuring of
these banks. In March 1993 it began auctioning subsidy credits
to banks, with the winner of the subsidy being the bank that
offers to charge the lowest rates to final medium- and
small-scale industrial borrowers. In May 1993 the authorities
an- nounced the extension of the Banco de Nacion's credit
lines-the largest official bank--and a reduction in its lending
rates from 1.8 percent to 1.6 percent per month. They also
declared that the bank's credit policy will be oriented toward
export-oriented activities as well as agriculture, industry,
mining, and tourism.
Recent Macroeconomic Developments
In 1992 the authorities continued to adjust the economy,
extending the recent good economic performance. GDP grew by 8.7
percent, and industrial production grew in the 12 percent range
for the second year in a row. Employment rose by about 10
percent and investment expanded briskly in 1992, rising from
12.5 percent to 14.5 percent of GDP. The increased investment
was financed by external savings, with gross national sav- ings
declining moderately to 9.3 percent of GDP. Public savings rose
by about 2 percentage points of GDP, while private savings
fell. Fiscal performance has improved notably in the last two
years. The overall balance moved into surplus in 1992 for the
first time in decades with an operational primary surplus of 2.0
percent of GDP. Tax revenues increased from 13.5 percent of GDP
p