CNN Newsroom: Global View

home *** CD-ROM | disk | FTP | other *** search

/ CNN Newsroom: Global View / CNN Newsroom: Global View.iso / sam / arg / arg.ec3 < prev next >

Wrap

Text File | 1994-05-02 | 14KB | 281 lines

<text> <title> Argentina: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Argentina </hdr> <body> 1. General Policy Framework After decades of instability that culminated in two bouts of hyperinflation in 1989-90, Argentina, under the administration of President Menem, has undertaken a wide-ranging reform program. Shortly after Menem took office in July 1989, during an acute economic crisis, the Congress passed two laws that cut the government's fiscal deficit and began the process of deregulation and privatization. In April 1991 the Congress passed the Convertibility Law, which introduced an exchange rate tightly linked to the U.S. dollar, and placed even greater emphasis on fiscal discipline. In October 1991, Menem signed a decree to remove the vestiges of the statist controls that have inhibited the Argentine economy, although implementation of this decree will take time. These four laws, and many other less dramatic actions, have succeeded in bringing inflation down to below two percent per month. A deficit in the fiscal current account is due to continued deficits run by state enterprises (which are to be privatized) and to on-going deficits in the social security system. These deficits are financed through a combination of the sale of state assets through privatization, borrowings from international financial institutions and limited sales of sovereign bonds on the Eurobond market. The central government itself is running a slight surplus in its cash flow, due to the fact that it is not fully servicing its external debt to commercial banks. Under the Convertibility Law, the government can only issue local currency that is fully backed by international reserves. Thus, the central bank controls the money supply by either buying or selling dollars. 2. Exchange Rate Mechanisms Under the Convertibility Law, the central bank is required to sell dollars on demand at the exchange rate of 10,000 australes per one U.S. dollar. It has also chosen to buy dollars at the bottom of a one percent intervention range, thereby ensuring that the exchange rate never drops below 9,900 australes per one U.S. dollar. With the large inflow of foreign exchange from abroad attracted by the high return on financial instruments denominated in australes and the normal remonetization of the domestic economy following hyper-inflationary periods, the market lately has tended to trade at the bottom of this range. The fixed exchange rate and the differential in rates of inflation between Argentina and its trading partners, including the United States, has tended to make imports increasingly competitive in the domestic market. 3. Structural Policies Argentina is still in the early phase of what will likely be a long and difficult process of structural reform. The problem of "Argentine costs", those unique costs that have made Argentine goods uncompetitive in the face of international competition, is being addressed but has not been eliminated. This process of reform will likely tend to encourage imports from the United States and elsewhere, as companies invest in capital goods to remain competitive and consume larger amounts of inputs to meet rising demand both at home and abroad. Companies should also import more finished goods to satisfy rising effective demand at home. Few prices remain in Argentina that are not set by market forces. Present trends, if continued, will be for the government to provide fewer subsidies and to lift controls, leaving increasingly fewer regulated prices; controls will likely remain, however, on prices where market imperfections exist (such as natural monopolies). The government is forced by prevalent evasion and inefficient tax administration to focus principally on taxes that are easily collected. Thus, it has come increasingly to rely on the value-added tax and other taxes on consumption, as well as import tariffs for revenue. It recently eliminated the last export tax, in part to make up for the appreciation pressures resulting from the inflation differentials. 4. Debt Management Policies During the 1980s the federal government assumed the medium- and long-term external debt obligations of the private sector. Presently, 92 percent of the total debt is the responsibility of the public sector. The government has serviced its debt with the international financial institutions and has managed its obligations to official creditors through partial payments and four Paris Club reschedulings. It has, however, not fully serviced its commercial bank debt which has consequently generated some $7-8 billion in arrears. A Brady Plan-type restructuring of this commercial bank debt, involving both the arrears and some $25 billion in principal outstanding at end-1991, could occur in 1992. The International Monetary Fund approved a stand-by arrangement in July 1991. Argentina has begun negotiations for a three year Extended Funding Facility shortly. The World Bank has several policy-based loan programs approved and is disbursing against them. 5. Significant Barriers to U.S. Exports Barriers to U.S. Exports: Overall, the government has taken significant steps to open the economy to imports during the last year. Import licensing requirements have been removed. Most goods entering Argentina are taxed at one of three rates. A tariff of 22 percent is applied to most finished products, intermediate products are taxed at 13 percent, and raw materials enter at the rate of 5 percent. The average tariff has fallen from 22 percent early in 1991 to the current level of 11 percent. The government is moving toward the removal of quantitative limits on imports. Imports of electronics goods face a price reference system, which is run by Argentine customs. While the system was designed to counter the practice of underinvoicing, it can also be used to value goods at an artificially high level. There is also a discriminatory tariff on the import of Spanish language books printed in non-Spanish speaking countries, although legislation has been introduced to remedy this situation. Barriers to U.S. Services: While there are plans to open the insurance sector, currently 60 percent of reinsurance must still be placed with the national reinsurance company. The insurance registry for new firms is closed, because the government determined the market was "saturated." Marine insurance for exports and imports is reserved for Argentine companies. U.S. airlines must pay high fees for poor ground handling services provided by a government designated monopoly at Argentine airports. All public works projects must be insured by the government-owned insurance company. While U.S. banks are well represented in the local market and operate on the basis of national treatment, the establishment of a new bank is not a transparent process, leaving open the possibility of discrimination. Goods imported by the government or receiving special tariff exemptions had to be shipped on Argentine-flagged ships (or U.S. flag ships in our bilateral trade) until President Menem's omnibus deregulation decree of November 1, 1991. This decree and subsequent measures appear to have eliminated these cargo reserve requirements and are opening trucking and port services to private, competitive providers. Argentina's postal service (ENCOTEL) requires applicants for a domestic courier service license to make substantial investments. In addition ENCOTEL charges a high fee on outbound international courier shipments, although it did eliminate the fee on inbound shipments. Investment Barriers: The Argentine government has few restrictions on foreign investors, since the restrictions were reduced in 1989. Foreign investors enjoy national treatment in all sectors except air transportation, shipbuilding, nuclear energy, fishing, and establishme