World Bank Document

RETUJRN TO R E S T R I C T E D REPORTS DESK WITHIN Report No.W.H. 82a ONE WEEK F:R 4- .r~~~~~~~~~~~~~~~~~~~~~~~~~~~~~, Public Disclosure Authorized This report was prepared for use within the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Public Disclosure Authorized RECENT ECONONIC DEVELOPMENTS IN ARGENTINA February 25, 1959 Public Disclosure Authorized Public Disclosure Authorized Department of Operations Western Hemisphere CURRENCY EQUIVALENTS Currency Unit - Peso (symbol m$n) Par Value - None Free Floating, Rate (around) - U.S. $1 - 70 Pesos TABLE OF CONTENTS Page BASIC DATA i SUMMARY AND CONCLIJSIONS ii I. THE EMERGENCE OF AN ECONOMIC CRISIS 1 II. THE ECONOMIC RECOVERY PROGRAM OF THE GOVERNMENT 3 A. Electric Power 3 B. Fuels 3 C. Stabilization Program III. BALANCE OF PAYMENTS PROSPECTS 9 A. Immediate Prospects 9 B. Longer-run Prospects 10 IV. FOREIGN DEBT 13 Annex Tables 1 to l: Map BASIC DATA AREA: 1,079,965 square miles POPULATION: 20,255,600 (June 1958) Rate in last 4 years: 2F% yearly GNP: (at constant In 1957 1950 prices) Pesos 70.7 billion Per capita: Pesos 3,558 (about U.S.$ 400) BUDGET: (estimated billion pesos) 1958 1959 Expenditures 77.5 74.0 Income 53.5 67.0 Deficit 24.0 7.0 TRADE: (U.S.4 millior) 1953 1954 1955 1956 1957 Exports 1099.4 1027.0 928.6 943.8 975.o Imports 795.1 979.0 1172.4 1127.6 1310.0 /304.3 448.0 -243.8 -183.8 -335.0 Jan.-Sept. 1957 1958 Exports 738.2 720.9 Imports 967.8 917.9 -229.6 -217.9 INTERNAL PUBLIC DEBT: 1953 1954 1955 1956 1957 (end of year) (billion pesos) 33.7 41.3 51.4 63.7 72.3 MONEY SUPPLY: (billion pesos) 37.7 43.8 51.6 60.2 67.6 COST OF LIVING: 1956 )957 Oct.1958 (1943 = 100) 773.8 965.1 1414.4 EXTERNAL PUBLIC DEBT: Dec.31,1956 Oct.30,1958 (million U.S.$ equivalent) 686 1267 - ii - SUNNARY AND CONCLUSIONS 1. In the latter half of 1958 the economic situation of Argentina deteriorated rapidly. The Government, under the threat of a virtual exhaustion of exchange reserves, is now taking courageous steps to stop inflation and bring the balance of payments under control. The stabilization program is a comprehensive and logical set of anti-inflationary and exchange measures consisting in the reduction of the fiscal deficit, contraction of private credits, limitation of wage increases and the crea- tion of a new unified and more realistic exchange rate. The prospects for effective implementation of the program are supported by the Argen- tine stabilization credits (the "Package Deal"t) made available by IIF and other institutions. They amount to a total of U.S.$ 345 million of which U.S.$ 188 million will be available in 1959. 2. These fiscal, monetary and exchange measures were accompanied by important decisions taken to remedy the power and fuel shortage of the country. The difficulties which arose from the expropriation of the foreign power companies were eliminated and an entirely new policy was introduced in the field of petroleum production. So-called "production contracts" were concluded with foreign private companies and prospects are now favorable for greatly reducing if not eliminating the need for irmporting petroleum products. 3. In the immediate future Argentina's exports will not be sufficient to maintain import levels and debt service. The deficit will be paid partly from the package deal and partly from the equivalent of suppliers' and long-term credits already contracted. Assuming that the stabilization policy is successful, dependence on emergency external financing should be eliminated in the early sixties primarily as the result of increased exports and increased domestic production of fuels. 4. Argentina's total foreign indebtedness increased from U.S.$ 686 million equivalent on December 31, 1956 to U.S. 1,612 million equivalent at the end of 1958, this latter amount including U.S.) 345 million contracted under the package deal. A large part of the increase repre- sents the equivalent of short and medium-term suppliers' credits to be used in the exploration and transportation of oil and the production of power. In the near future Argentina may contract some additional foreign loans to finance part of the petroleum program and the rehabilita- tion of the railroads. Service on existing contractual debt will increase to U.S.$ 237 million in 1960, about 23% of yearly exports. Thereafter it will gradually decline. The debt service will be a heavy burden on the economy. New short and even medium-term credits should be severely limited for the time being and external finance for increasing the productive capacity of the country should be obtained on a long-term basis with long grace periods. 5. If the stabilization program is successful, increasing exports and import substitution should enable the country to service a reasonable amount of new debts, gradually reducing its dependence on emergency foreign financing. Success or failure of the stabilization program will - iii - depend to a considerable extent on whether the Gavernment is able to hold wage increases within reasonable limits. The wage problem will be very difficult and there is a risk that the whole program will founder on this issue. Reassurance may be drawn, however, from the decisiveness which the Government has displayed in adopting the stabilization program, and from the fact that the external assistance has been made conditional on the effective implementation of the program. It is to be hoped that inflation will be slowed down sufficiently to permit the play of market forces once more to bring about more balanced growth. RECENT ECONOMIIC DEVELOPIvENTS IN ARGENTINA 1. Despite its rich agricultural resources in cereals and livestock, the rate of Argentina's economic growth has slowed down considerably in the postwar period. While in the years from 1945-1957 GNP rose by a little over 40 per cent, population increased by 33 per cent so that the 1957 output per person was only slightly above that of 1945. Actually, per capita output has fluctuated at a Ps. 3,550 level (1950 prices) for the past three years which is well below the 1948 peak of Ps. 3,936 (Table 2). Argentina's poo:r economic performance over the last twelve years can be primarily attrlbuted to the stagnation, if not deteriora- tion, of her agriculture, largely as a result of poor governmental policies in this respect. I. TIE EMERGENCE OF AN ECCNOHIC CRISIS 2. Since the presentation of our first report on the economy of Argentina (WJH-60a of August 30, 1957), inflation has continued unchecked and has reached, particularly in the last months of 1958, most serious proportions. In the period January-October 1958, cost of living increased by 33 per cent and it is likely that in the last two months of the year the rate of increase accelerated. 3. The rise in prices was fostered by rapid increases in wage payments and a growing deficit in Government finances. The newly elected Frondizi Government in Play 1958 decreed that industrial workers should receive an increase in wages which, taking into account increases previously granted, would raise their wages 60 per cent over the level ruling in February 1956. This increase was intensified by new collec- tive bargaining contracts (some of them still in negotiation), which added another 20-30 per cent to wage costs. Government salaries have increased by about 40 per cent. 4. In addition to the increase in direct wage payments, the Govern- ment had introduced legislation to increase substantially pensions paid from the social security funds, thus eliminating their current surpluses. Since the current surplus in these funds had provided the Government with non-inflationary financing equal to one-third of tax receipts, this increased the need to reduce budgetary deficits. 5. Fiscal year (1/) 1958 ended with a deficit of Ps. 24 billion (Table 3). As a consequence of heavy Central Bank financing of Govern- ment deficits, as well as rapid expansion of corimercial bank credits to the private sector, money supply increased in January-September 1958 by 19 per cent, from 67 to 80 billion pesos (Table 6). 1/ Fiscal 1957 ended on October 30, 1957. Since that date the fiscal year is being calculated from November 1 to October 30. 6. Under the impact of domestic inflation balance of payments difficulties continued, despite the tightening of a variety of control measures and a rapid loss in the effective foreign exchange value of the peso. Both exports and imports have fallen slightly in comparison with the previous year and the trade deficit for the first nine months of the year remained at over U.S.$ 200 million, about 25 per cent of total export receipts (Table 9). Net reserves of the Central Bank were reduced sharply from $257 million in January 1958 to $7h million on December 15, 1958. 7. The exchange system, formally revised in August 1958, provided for a complicated multiple exchange rate system applicable to exports through a mixing of free and official rates. In addition, special surcharges were imposed on some exports and from time to time the "aforos" were altered. On the import side a mixing system was also employed. Access to the official market for exchange for imports was sharply reduced as the exchange losses continued in 1958. The resulting increase in the demand for exchange on the free market accelerated the depreciation of the free market rate in the latter part of 1958.

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