INTERNATIONAL MONETARY FUND INDEPENDENT EVALUATION OFFICE REPORT ON THE EVALUATION OF THE ROLE OF THE IMF IN ARGENTINA, 1991–20011 June 30, 2004 1 This report was prepared by a team headed by Shinji Takagi and including Benjamin Cohen, Isabelle Mateos y Lago, Misa Takebe and Ricardo Martin, and was approved by Montek S. Ahluwalia, Director of the Independent Evaluation Office (IEO). The report has benefited from contributions from Nouriel Roubini and Miguel Broda. The final judgments are the responsibility of the IEO alone. Research assistance and logistical support from Nicolas Arregui is gratefully acknowledged. report.DOC July 28, 2004 (9:38 AM) - 2 - Contents Page Abbreviations and Acronyms ....................................................................................................5 Executive Summary...................................................................................................................6 I. Introduction.....................................................................................................................13 A. Overview of Economic Developments, 1991–2001 ..............................................16 B. Factors Contributing to the Crisis..........................................................................21 II. Surveillance and Program Design, 1991–2000...............................................................27 A. Exchange Rate Policy ............................................................................................27 B. Fiscal Policy...........................................................................................................37 C. Structural Reforms in Macro-critical Areas...........................................................47 D. The Manner of Engagement with Argentina .........................................................61 III. Crisis Management, 2000–01 .........................................................................................63 A. Second Review and Augmentation, January 2001 ................................................63 B. Completion of Third Review, May 2001...............................................................75 C. Fourth Review and Augmentation, September 2001.............................................83 D. Noncompletion of Fifth Review, December 2001.................................................93 E. The Decision-Making Process ...............................................................................97 IV. Lessons from the Argentine Crisis................................................................................105 A. Major Findings.....................................................................................................105 B. Lessons for the IMF.............................................................................................115 C. Recommendations................................................................................................120 Boxes 1-1 The IMF and Argentina, 1991–2001 ..............................................................................14 1-2 Was the Convertibility Regime Viable? .........................................................................25 1-3 The Politics of the Convertibility Regime ......................................................................26 2-1 Economic Characteristics of Hard Peg Economies ........................................................28 2-2 Measuring the Equilibrium Real Exchange Rate............................................................37 3-1 Framework and Implementation of Private Sector Involvement....................................70 3-2 Financial Instruments Used During the Crisis................................................................89 3-3 Measures Announced or Taken during 2001 without Prior Consultation with the IMF.........................................................................................100 4-1 How and When Could an Alternative Approach Have Been Attempted?.................................................................................................................113 4-2 Experience with Catalytic Finance ...............................................................................118 - 3 - Figures 1-1 Inflation, 1992–2002....................................................................................................18 1-2 Capital Flows, 1991–2002 ...........................................................................................18 1-3 Real Quarterly GDP Growth, 1988–2002....................................................................20 1-4 Interest Rate Spreads Over U.S. Treasuries.................................................................22 2-1 Monthly Real Effective Exchange Rate, January 1991–March 2002..........................29 2-2 Trade and Current Account Balances, 1991–2001 ......................................................29 2-3 Comparison of Fiscal Targets and Actuals ..................................................................39 2-4 Projected Overall Fiscal Balances and their Outturns, 1991–2001 .............................41 2-5 Public Sector Debt Targets and Actuals ......................................................................44 2-6 Public Sector Debt and General Government Overall Balances, 1991–2001 .............46 2-7 Real GDP Growth and Unemployment, 1992–2000 ...................................................52 3-1 IMF and Private Sector (Consensus) Forecasts for Key Program Variables, 2001-02 .....................................................................................74 3-2 Bank Deposits, January 3, 2000—December 31, 2001 ...............................................76 3-3 Evolution of Fiscal Deficit Targets and Outcomes, 2000-01 ......................................78 3-4 International Reserves, January 3, 2000—December 31, 2001...................................84 Tables 1-1 Key Economic Indicators, 1991–2002.........................................................................17 3-1 Program Projections and Targets for 2001 ..................................................................67 3-2 Fiscal Performance Under the Stand-By Arrangement in 2001 ..................................77 Appendices I. The IMF’s Financing Arrangements with Argentina, 1991–2002.............................126 II. Argentina and the IMF Prior to 1991.........................................................................127 III. A Retrospective on Argentina’s Fiscal Policy, 1991–2001.......................................130 IV. Selected Program Conditionality, 1991–2001 ...........................................................134 V. Economic Characteristics of Major Emerging Market Economies ...........................138 VI. Debt Sustainability Analysis......................................................................................140 VII. A Preliminary Analysis of the 2001 Mega-Swap ......................................................146 VIII. Financial Instruments Used by Argentina During the Crisis.....................................150 IX. Timeline of Selected Events, 1991–2002 ..................................................................154 X. List of Interviewees....................................................................................................161 Appendix Figures A5-1 General Government Fiscal Balance in Crisis Countries ..........................................139 A6-1 External Debt Sustainability ......................................................................................142 A6-2 Public Debt Sustainability..........................................................................................143 A7-1 Exchange Options......................................................................................................146 - 4 - Appendix Tables A3-1 Public Sector Balance, 1961–2000 ............................................................................130 A3-2 Consolidated Public Sector, 1992–2001....................................................................130 A3-3 Adjusted Fiscal Balance, 1992–2001.........................................................................131 A3-4 Social Security Balance, 1992–2001 .........................................................................132 A3-5 Federal and Provincial Fiscal Accounts, 1992–2001.................................................133 A5-1 Indicators of Economic Structure in Selected Emerging Market Economies .................................................................................138 A7-1 An Overview of the Mega-Swap ...............................................................................148 A7-2 Details of Old and New Bonds ..................................................................................149 Bibliography ........................................................................................................................164 - 5 - Abbreviations and Acronyms EFF Extended Fund Facility (IMF) FAD Fiscal Affairs Department (IMF) FIN Finance Department (IMF) G7 Group of Seven G10 Group of Ten ICM International Capital Markets Department (IMF) IDB Inter-American Development Bank IEO Independent Evaluation Office (IMF) IFI International Financial Institution IMF International Monetary Fund IMFC International Monetary and Financial Committee (IMF) LIBOR London Interbank Offered Rate LOI Letter of Intent (IMF) MAE Monetary and Exchange Affairs Department (IMF)2 MERCOSUR Mercado Común del Sur NDA Net Domestic Assets NFPS Nonfinancial