Argentina deserves US, IMF support on rough road to recovery

Argentina deserves US, IMF support on rough road to recovery
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Argentina faces a new economic storm in the midst of extraordinary efforts to restructure its economy and to move against ingrained corruption.

Argentina itself must take and implement the hard decisions to succeed on both fronts, but it deserves strong support from its international partners, including the International Monetary Fund (IMF), the United States and the investment community, as it strives to achieve these laudable goals.

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On Monday, Argentine President Mauricio Macri and his finance minister announced plans to slash government spending, cut government ministries and introduce an extraordinary tax on exports for two years to generate savings and income.

They set goals to achieve a primary fiscal balance in 2019 and a surplus in 2020. The moves aim at stabilizing the peso, after a loss of market confidence pushed it to historic lows against the dollar.

With these austerity measures in hand, Argentina's finance minister will travel to Washington for meetings with the IMF this week, seeking agreement for a more rapid disbursement from Argentina’s $50 billion IMF line of credit to help calm worries over the government’s ability to meet its debt obligations.

Argentina must roll over about $50 billion in debt through 2019. In June, the IMF and Argentina agreed on the largest Stand-by Arrangement ever from the fund, after market worries sent the peso falling and interest rates soaring.

President Macri faces domestic turmoil from unions and the “Peronist” opposition, complaining about inflation, cuts to transit and electricity subsidies and the decision to seek help from the IMF. Macri pledges to continue his market-oriented reforms despite the opposition, while continuing support for vulnerable social sectors as he pursues austerity.

The government has been working diligently to implement the fiscal and structural reforms encouraged by the IMF and others to overcome the effects of economic mismanagement by its populist predecessors.

The government has been fairly criticized for being too gradualist in initial reform efforts. The gradualism increased Argentina’s vulnerability to rising U.S. interest rates and market jitters about emerging markets too dependent on short-term debt financing.

President Macri also “scored another own goal” recently when a statement aimed at reassuring markets actually spooked them. In addition, Argentina suffers from the effects of a terrible drought on its vital agricultural sector and the economic and political turmoil in neighboring Brazil.

Many Argentines are also very critical of turning to the IMF for help, still blaming it for Argentina’s catastrophic crisis in the early 2000s.

Macri and his team know the cost of reassuring markets is near-term recession. The government now projects the economy to decline 2.4 percent and inflation to reach 42 percent this year.

Argentina’s next presidential and national elections are in October 2019, making Macri’s commitment to austerity potentially very costly when voters head to the polls. He is banking that they will accept the need for belt-tightening reform and that the economy will respond well by later next year.

Stunningly, as Argentina’s government strives to solidify economic reforms, it has an unexpected historic opportunity to root out systemic corruption.

Still-unfolding revelations of massive kickbacks made to the last two presidents and others from 2003-15 are now making clear what was long suspected: crony capitalism, payments to politicians and a weak judicial system have been crippling Argentina’s democracy.

Serious corruption involving the public and private sectors has long been rumored and occasionally revealed, but it has rarely been successfully prosecuted, in part because of a slow, weak system of prosecutors and judges and in part because corruption was tolerated. That is now changing.

Brazil’s massive “car wash” scandals sent shock waves to Argentina, and on his election, President Macri initiated important reforms by law and executive order to facilitate anti-corruption efforts.

Corruption investigations were launched against members of the previous Argentine government, including former President Cristina Fernandez de Kirchner (CFK) and her vice president. However, CFK remains a powerful and popular opposition leader in the Senate and is a likely presidential candidate in 2019.

In early August, however, the atmosphere changed when the respected La Nacion newspaper published revelations from the “notebooks” of a chauffeur for a senior government official under CFK.

They track the delivery of illegal payments from private businesspersons to top government officials, including CFK and her deceased predecessor and husband, Nestor Kirchner.

Authorities arrested a number of business leaders and officials. Several have given collaborating testimony to prosecutors regarding illegal payments in exchange for leniency, made possible by a new “Repentance Law” passed by Congress in 2016.

One of the leading prosecutors indicates a total of $160 million was delivered in cash payments between 2005 and 2015. Other media reports suggest that the Kirchners may have illicitly accumulated much more and hidden it abroad.

In the last 10 days, authorities searched Christina de Kirchner’s residences and increased the reward for information leading to the recovery of stolen money.

More revelations are expected, but the test will be whether Argentina’s notoriously slow and cumbersome judicial system can manage the corruption cases against CFK and others in a way viewed as credible, just and efficient.

Some worry that the involvement of key Argentine business leaders will negatively affect the economy. CFK argues that the investigations are politically motivated and aimed at distracting attention from the government’s economic mismanagement. 

President Macri argues that the investigations and judicial process should proceed in a fair and open manner, although he acknowledges the short-term impact on market confidence. He and his government will be tested as elections approach and the economic situation deteriorates.

From a political perspective, Macri stands to benefit if the investigations continue to reveal past corruption by CFK and her cohorts.

An equitable and transparent judicial process can encourage Argentines to soldier on through difficult economic times by highlighting the corrupt practices that undergirded the last three presidential terms.  

However, managing both the economic storm and the corruption cases will require a virtuoso performance by Macri and his team. Argentina will host the summit of the Group of 20 (G20) major economic powers this fall.

Argentina’s government can use all the moral and practical support it can get now from its partners, including the IMF, the U.S., the other G20 members and international investors, to help the country to stay on a path to meaningful economic, political and institutional transformation that can strengthen its democracy and economy.

Earl Anthony Wayne is a public policy fellow at the Wilson Center, former U.S. ambassador to Argentina and former assistant secretary of State for economic and business affairs.