By Gino Brunswijck
Cross-posted at Eurodad.
Against a backdrop of public protests, on 25 October the Argentinian government approved the 2019 budget including US$10 billion worth of cuts in essential areas such as education and public works. The next day, the Executive Board of the International Monetary Fund (IMF) completed the first review of a loan agreement paving the way for the disbursement of a tranche of US$5.7 billion to the debt-stricken country. At the same time, the Board gave the green light to increase Argentina’s bailout loan to US$56.3 billion. However, this loan comes with a significant price tag.
The higher the bailout, the greater the austerity
The IMF review calls for stronger and faster fiscal consolidation in Argentina. The budgetary targets for the short and medium term were tightened compared to the initial agreement. Initially, the IMF allowed Argentina to maintain a 1.3 per cent deficit for 2019. Following the first review, the Fund is now demanding a zero deficit, which must be turned into a surplus above one per cent from 2020.
A range of budget cuts and increased taxation will seal the deal, while the insurance policy is provided by new structural conditionalities that promise to lock in these fiscal targets for the foreseeable future. For instance, the Argentinian government was required to present a budget in line with the zero deficit target to Congress to secure the next tranche of the IMF bailout loan. Unsurprisingly, one new conditionality gave Congress a November deadline for approving this budget – which it did last Thursday, representing a clear restriction on the parliament’s budgetary rights.
To satisfy the terms of the agreement, Argentina also has to pursue a restrictive monetary policy, complemented by keeping interest rates above 60 per cent as long as inflation is high. The bottom line is that Argentina will get more funding in exchange for more belt-tightening measures.
Debt crisis still unresolved
In an earlier blog, Eurodad highlighted the need to tackle the underlying cause of Argentina’s financial crisis – the rapid build-up of debt. Rather than more lending the country would benefit from sustainable debt restructuring to overcome its protracted payment difficulties.
The IMF’s June predictions on Argentinian debt levels have proven to be overly optimistic –eventually the debt-to-GDP ratio was 16 percentage points of GDP higher than projected due to higher-than-anticipated depreciation of the peso and lower growth. Nevertheless, IMF staff consider Argentina’s debt as sustainable – adding cryptically: ‘but not with a high probability’.
Once again, the new scenario makes an ambitious projection, with debt levels falling below 60 per cent of GDP by 2023 owing to stronger fiscal consolidation and returned market confidence. Despite this new wave of austerity measures, the IMF expects economic growth to pick up magically by 2020.
These conditions put the burden of adjustments entirely on the shoulders of Argentina’s population, who will suffer the impact of the cuts. On the other hand, Argentina’s private creditors – who have lent irresponsibly (just last year Argentina’s first issue of a century bond was oversubscribed as the yield of almost 8 per cent attracted greedy investors) – are being let off the hook. So far there is no foreseen debt restructuring with private sector involvement.
The social cost of the crisis
In the meantime the current economic crisis has come with huge social costs to Argentina – with both unemployment and poverty rates increasing in early 2018. They stand respectively at 9.5 per cent and over 27 per cent. Nevertheless the IMF continues to view social and health spending through a narrow fiscal lens and to advocate for targeted social programmes, which have often failed to reach people in need. Even though this first review foresees increases in selected social programmes, they may seem little more than meagre handouts for people who have lost their jobs or have seen their purchasing power evaporate.
The UN Independent Expert on Debt and Human Rights recently reported that austerity tends to hit women disproportionately hard. Independent researchers from Argentina reached a similar conclusion and argue that current policies are not enough to overcome the 27 per cent pay gap between men and women nor to alleviate female poverty. While the IMF programme foresees a 12 per cent expansion of public childcare facilities – the flagship measure to reduce gender inequality – this stands in stark contrast to the 19 per cent overall decrease in spending for gender-focused programmes in the 2019 austerity budget. In addition, the 2018 budget for reproductive health development was only used for one quarter due to fiscal pressures.
Finding a more sustainable solution
The IMF adjustment programme is continuing down the road of austerity policies that risk stifling economic activity and compromising the government’s ability to provide essential services. What is more, the bailout loan only serves to postpone a more sustainable solution to the lingering debt crisis, which is the underlying cause of Argentina’s financial woes.
Even though the adjustment programme attempts to account for the social impacts of the economic crisis and fiscal adjustment, it appears that, in practice, ordinary Argentinians – and in particular women – continue to bear the brunt of the crisis. Argentina would do much better to free up additional fiscal space for development and social protection by restructuring its costly external debt, now rather than later.