Report Nº: 76014/06/2018


The agreement with the IMF stipulates that the national Treasury will not be able to receive financing from the Central Bank anymore. This requires accelerating the reduction in public spending. To this end, a more comprehensive restructuring of the public spending must be addressed, including the social spending. The government reached an agreement with the […]

The government reached an agreement with the International Monetary Fund (IMF) to access a loan for up to US $ 50 billion over the next 3 years. Among the conditions of the loan, the reorganization of the Central Bank stands out. Thus, the National Treasury must return to the Central Bank the fund that the latter provided to finance the fiscal deficit and the Central Bank is prohibited from lending again to the Treasure in the future. The underlying idea is to give independence to the Central Bank so that it can concentrate on preserving the value of the money as it happens in well-organized countries.

For this to be feasible, public finances must be ordered. Once the possibility of money printing has been canceled, the fiscal deficit should be covered entirely with new debt. But indebtedness has limits. On the one hand, it depends on the confidence of investors and increases the total deficit due to interest payments. On the other hand, the debt taken abroad tends to appreciate the exchange rate and, if the debt is taken in the local market, it brings interest rate increases. In both cases it negatively affects the level of activity.

According to the Ministry of Treasure, public finances trends are as follow:

  • In 2016, the total deficit was 5.8% of GDP, composed by 4.2% of the GDP of primary deficit and 1.6% of interest payments.
  • In 2017, the total deficit rose to 6.0% of GDP, given that although the primary deficit fell to 3.8% of GDP, interest payments rose to 2.2% of GDP.
  • By 2020 it was agreed with the IMF to eliminate the primary deficit but interest payments will increase to 2.3% of GDP.

These data show the inconsistency of the gradualism in reducing the fiscal deficit. As the savings in primary expenditure of the State were modest, they ended up being surpassed by the increase in interest payments due to a higher debt. This is what happened in 2017 and the first months of the current year, generating the turbulence that forced the government to go to the IMF. Now interest payments will remain at high levels for the coming years.

With this fiscal precariousness, committing to reorganizing and giving independence to the Central Bank has many risks. Without the alternative of covering imbalances with money printing, the restructuring of the public sector must be accelerated; otherwise, the growth of the debt will provoke more instability. Both because the growth in interest destabilizes public finances and because the economy will be hit by rising interest rates and exchange rate appreciation. The fallacy that gradualism avoids social costs is thus demonstrated.

The main weakness of the agreement with the IMF is the generic form in which the most decisive issue is presented: the reduction of primary expenditure. Although it is stated superficially, a positive aspect is the revision of national programs that overlap with provincial and municipal functions. Eliminating the co-management of services by sub-national governments can help to reduce bureaucratic expenses and public squandering. Conversely, to continue assuming that it is not necessary to review the social programs executed by the federal government calls into question the viability of the plan. There are many excesses of bureaucracy, waste, inequalities and corruption in the social security system and in welfare expenditure to be revised.

The main risk of the agreement with the IMF is that it places too much emphasis on the Central Bank restructuring rather than on public finances ordering. If the political or operational restrictions prevent accelerating the reduction of public spending, what will be accelerated is the accumulation of public debt, which can be much more harmful than the high inflation generated by covering the fiscal deficit with money printing.


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