The Argentina-IMF pact has no long-term solutions for its debt
Finally, after a long standoff, Argentina reached a preliminary agreement with the International Monetary Fund – the lender of last resort for indebted countries – aimed at preventing the country from defaulting on its external debt for the 10th time in the story.
But the deal is a band-aid. This will not pull Argentina out of its periodic financial crises.
The January 28 preliminary agreement calls for short-term economic measures, the most painful of which will not come into force until 2024, once the next government is in power. It includes vague promises that Argentina will cut public spending, cut some energy subsidies and crack down on tax evasion.
But that doesn’t solve the structural problems that made Argentina an economic basket case for many decades.
It doesn’t address the country’s anti-business laws and foreign exchange controls that scare away investment; or its lack of free trade agreements with some of the world’s largest economies; or its ridiculously strict labor regulations that prevent companies from hiring more workers.
And even his short-term economic goals are in doubt, as the powerful left wing of populist President Alberto Fernandez’s Peronist Party openly opposes the deal.
Alejandro Werner, who until last year was the IMF’s top official in charge of Western Hemisphere countries, told me the preliminary deal was “weak.”
“The announcements that have been made so far paint a lean economic program,” Werner said. “From a structural point of view, it does not contain a set of measures that could increase Argentina’s economic competitiveness and pave the way for long-term growth.”
The preliminary agreement – in fact, a memorandum of understanding between IMF staff and the Fernandez government that has not yet been approved by the IMF’s senior authorities – allows Argentina to avoid an impending crisis, does not if only by postponing it.
Argentina has faced a payment of $700 million on its $44.5 billion debt to the IMF, due on January 18.
In the short term, the agreement allows both parties to save face. Fernandez managed to avoid major free-market reforms that are anathema to his centre-left base, while preventing an impending default. The IMF saved face by avoiding a default by its biggest debtor, which would have left a big hole in its balance sheet.
“The IMF faced the dilemma of supporting an economic program it really didn’t fully believe in, or insisting on a program that Argentina would never implement,” Werner told me. “He opted for the best possible program that this government would agree to sign.”
As Washington Post correspondent Anthony Faiola rightly put it in a January 31 article, “Argentina is dependent on debt and the IMF its dealer.” He added: “But if Argentina are a victim, it’s because of self-inflicted injuries.”
Indeed, Argentina was once one of the richest countries in the world, but has been living beyond its means since the late President Juan Domingo Peron came to power in 1946. Many Europeans, including my parents , moved to Argentina in the last century because – much like the United States or Australia – it was widely seen at the time as the country of the future.
But Argentina has been spending ever since – and it’s getting worse.
When world commodity prices rise and Argentina’s grain exports soar, the country deludes itself into believing that the good times will last forever. And when world commodity prices crash and no commercial banks lend it money, Argentina takes out huge loans from the IMF, which it later, absurdly, blames for its economic woes.
Fernandez’s Peronist party has long claimed that IMF loans are a major cause of Argentina’s problems. In reality, it is the opposite: the IMF loans to Argentina are the result of its economic difficulties.
Meanwhile, Argentina continues to depend on commodity prices, instead of using its human talent to create new knowledge-based industries that are far more lucrative today.
The latest Argentina-IMF agreement is good news in the sense that it will prevent immediate default, hyperinflation and a greater increase in poverty. But will he push Argentina to undertake the structural reforms it needs to attract investors, grow and reduce poverty? Definitely not.
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