Report Nº: 84905/03/2020
IMF staff who visited the country expressed their view that the Argentinean public sector has an inherent propensity to overspend. Accepting this weakness with resignation condemns the country to stagnation. Without access to credit, the entire fiscal deficit will have to be financed with inflationary monetization.
The government welcomed the statement by the International Monetary Fund (IMF) staff who visited Argentina that public debt is unpayable. Many media outlets even took this statement as support by the IMF to the possibility of applying debt cuts in the renegotiation with private creditors.
The document states, “… IMF staff now assesses Argentina’s debt to be unsustainable. Specifically, staff is of the view that the primary surplus that would be needed to reduce public debt and gross financing needs to levels consistent with manageable rollover risk and satisfactory potential growth is not economically nor politically feasible. Accordingly, a definitive debt operation—yielding a meaningful contribution from private creditors—is required to help restore debt sustainability.”
What are the fundamentals and implications behind the IMF’s claim? Data published by the Ministry of Economy on the long-term fiscal performance of the federal and provincial governments can help shed some light. According to this source, it is observed that:
These data show that in the last 4 decades of the last century, fiscal deficits accumulated at the order of 2 times the GDP. At the beginning of this century, public finances showed a modest surplus. However, it would vanish if the lack of pensions indexation was accounted for (part of this expenditure was later made explicit with the “historical reparation”). Moreover, it occurred in the context of a sharp decline of the real value of public expenditure caused by the 2002 mega-devaluation, historically high international prices, and the default of the public debt. Once the crisis was overcome, the fiscal deficit quickly reappeared. More grave is that it was another decade of fiscal imbalances with a record tax burden.
Given this overwhelming evidence, the IMF staff’s statement is not an endorsement but an act of frustration. Since more than half a century, during which there were military and democratic governments of very different orientations, the common factor has been to spend systematically above the public revenues, it shows that the fiscal deficit is a “Policy of
State”. There is a consensus among much of the society that the State can keep spending more than its revenues and any action to balance the public finances implies unacceptable social costs. This is what the IMF staff –with an ironic dose of euphemism– called “the political unfeasibility” of balancing the State.
Argentina’s public sector spends more than its revenues by design. A very illustrative testimony, but not the only one, is the pension system. The rules promise special regimes that allow early retirement with higher benefits, pensions are distributed freely and indiscriminately through moratoria, duplication of benefits accumulating retirement and survivor pension is massive, and no rules for demographic adjustment is allowed. As the situation becomes unsustainable, inflation is called upon to correct the inconsistencies reducing the pensions’ real value. That is why the energies of the pension debate are always focused on the pensions’ indexation formula.
The most important thing the IMF said is that Argentina has no political capacity to organize its public sector. It was, it is, and it will continue to be in deficit. Therefore is not a country worthy of credit. Under these conditions, only inflationary financing of the fiscal deficit is possible, which guarantees the persistence of Argentina’s economic decline.
