Argentina - Recent economic developments and prospects

RESTRICTED Report No. WH-191a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION RECENT ECONOMIC DEVELOPMENTS AND PROSPECTS OF ARGENTINA May 23, 1969 Western Hemisphere Department  CURRENCY EQUIVALENTS U. S. $1 = 350 pesos 1 peso (M$N) - U. S. $0. 00284 1 billion pesos U.S. $2, 850, 000  TABIE OF CONTETS Page Nio. BASIC DATA SUMMARY AUr CONCLUSIONS i -v A. 1968 Developments 1 B. The 1969 Economic Program 5 Objectives 5 Wage and Price Policy 6 Monetary and Credit Policy 7 Fiscal Policy 8 Public Investment 9 Financing Plan 11 Balance of Payments 12 C. The longer-Term Outlook 13 Incomes Policy 13 Agriculture 14 Industry 15 Public Sector Investment and Financing 1i External Capital Requirements and Creditworthiness 23 STATISTICAL APPENDIX NTAP This Report is based on the findings of a mission to Argentina in January-February 1969, composed of Messrs. P. J. Glaessner (Chief) and R. S. Dosik.  BASIC DATA Area: 2.8 million km2- (1.1 million sq. miles) Fouulation (1968): 23,617,000 Growth Rate (1950/51-1967/68) 1.7 percent Gross Dbmestic Product (1968): I$N 6,0b9.0 billion ($17.3 billion) Real Growth Rate (1950/51-1967/68) 2.5 percent Per Capita GDP $732 Origins of Gross Domestic Product (1967): Percent of GDP Industry 31% Agriculture 16% Commerce 15% Transport and Communication 6% Ependiture on Gross Domestic Product (1968): Percent of GDP Gross Fixed Investment 19; 5% Private Consumption 68; 6% Public Gonsumption 10.6% Current Account Balance 1.3% Cost of Iiving: Annual Average Year-end to Year-end Percent Change Percent Change 1965 28-5% 33.2% 1966 31.8% 22;0% 1967 29-3% 27;4% 1968 16.2% 9.6% Mbney Supply iON, End of Period Percent Change 1965 498 26.1% 1966 672 3b.9% 1967 872 30;0% 1968 1,105 26.7%  National Public Sector Finances: Percent of GDP 1966 1967 1968 National Government Current Revenue 10.2 13.8 13.3 Current Expenditure 10.0 10.3 10.1 Total Public Revenue (incl. Social Security) 16.2 20.1 18.5 Public Saving -0.5 3.7 4.1 Public Investment 14.0 4.8 5.1 Balance of Payments ($ million): 1965 1966 1967 1968 Exports 1,493 1,593 1,465 1,365 Imports -1,198 -1 1214 -1 o96 -1 3135 Trade Balance 295 469 369 230 Invisibles -111 -216 -189 -224 Current Account Balance 184 253 180 6 Foreign Exchange Reserves ($ million): December 1966 167 1965 Assets, Central Bank 231 759 805 Net Position, Incl. Treasury Liabilities -154 279 428 Public Foreign Debt (Junoc 3QL 68) $ million Outstanding as reported by IBRD (excluLding undisbursed) 1,718.3 Debt Service Ratio 29%  SUMNIIAY AND CONCLUSIONS 1. Last yearts Economic Report (TAf-182a, July 1968) reviewed the success achieved by the Argentine Government in carrying out its stabiliza- tion program during 1967, discussed the 1968 program, stressing the increased emphasis given the achievement of more rapid growth and analyzed in con- siderable depth longer-term structural problems of the various sectors of the economy. The present report focuses on 1968 performance and the shape of the 1969 program. It also reviews and updates information on the longer- term outloolk for public sector savings and investment, agricultural and industrial policy and the balance of payments. The significance of the efforts being made by the Argentine Government to consolidate price stabiliza- tion and achieve a steady, self-sustaining rate of growth and the relatively favorable prospects for the success of these efforts, should be viewred against the background of slow, uneven growth, chronic inflation, industrial develop- ment through import substitution at virtually any cost and failure to take full advantage of its rich agricultural resource base, characteristic of Argentine developments during the post World War II period. 2. During 1968 the Government achieved virtually all of the objectives of its economic program. There was a sharp decline in the rate of price increase. The cost of living increase was held to less than 10 percent compared with 27 percent in 1967, and wholesale prices rose by only 4 per- cent. GDP grew by almost 5 percent, following two years of stagnation, despite a relatively poor agricultural year. Industrial expansion gathered momentum, sparked by a construction boom reflecting the increase in public investment. Private investment started to increase. Unemployment declined. Foreign exchange reserves continued to growr in spite of lower than expected exports; this increase reflected a moderate rise in the inflow of long-term capital, including increased project financing by international financial institutions; the placement of $75 million in Government bonds abroad; a substantial repatriation of Argentine funds and the inflow of short-term foreign capital as confidence in the success of the stabilization program became more twidespread both at home and abroad. 3. The economic "tour de force" of combining a sharp reduction of price inflation and continued balance of payments stability with economic recovery was achieved by sharply limiting access by the public sector to Central Bank credit and successfully maintaining the wage freeze and price agreements instituted in IXarch 1967. Cost inflation was thus curbed without significantly reducing real wages while liquidity and private sector credit expanded. This expansion had little effect on prices given the large under- employment of industrial plant. b. Public sector savings and investments rose by about 17 percent in real terms from their 1967 levels. Savings reached only about 85 per- cent of the planned level, due mainly to the fact that Central Government revenues declined slightly in real terms, compared with 1967. This was due to a sharp drop in foreign trade tax collections and to the failure of sales tax coUections to come close to revenue estimates; the latter  - ii - reflected the fact that tax administration did not improve as much as had been hoped. On the other hand, substantial progress was made in reducing the size and increasing the productivity of the public sector's labor force - particularly of the State enterprises. 5. IPublic investnent performance was uneven. Highway investment more than doubled, achieving its ambitious 1968 target, and there were si zeable increases in investments in the petroleun, power and conmunications sectors as iTell as in education and the water and sewferage systems. In these sectors project preparation improved and multi-year investnent plans are beginning to emerge. Yost State enterprises and decentralized agencies (other than the TNational Highway Departmen't) fell short of their 1968 targets, but generally by not more than about 15 percent. Provincial and municipal authorities sharply increased their investments, primarily in highway construction. No progress was made in 1968 in developing a nflti-year over- all public sector investment and financing program. 6. Export incentives, were maintained at a satisfactory level. Non- traditional exports reached the highest level in the last decade. Export taxes on most agricultural exports were reduced to moderate levels - 6 per- cent for wheat and 8 percent for nost other cereal crops. Traditional ex:ports in the fDrrn of chilled sides of beef are being replaced by special chilled and frozen cuts, cooked and frozen beef and other types of processed meats. As a result, export markets are becoming much more diversified both by type of export and geographically, and higher prices per ton are being obtained. 7. The Government's 1296 economic program aspires to an even higher rate of economic growrth than in 1968 (an increase of at least 6 percent in the GDP), further progress towards price stability (a rise in the cost of living of about 5 percent and near stability in wholesale prices) and a further sntstantial increase in net foreign exchange reserves. This con- solization of the advances towards stabilization and renewed growrth made during 1967 and 2968 is to be achieved by again liadti-ng rage increases so as to avcid a cost push (but ii-zhout reducing real wages)3 prudent monetary ?olicy; an across-the-board reduction in import duties; further stepping *ap of public sector savings and investxent and increased olaceraent of 3oven2L.ent 3bligatiors at home ard abroad. 8. An auspicious start has been made in carryirg out the 1969 program through the adoption. of an incomes policy in January by which basic wage increases are being limited to B percent, a rate which the private industrial sector seems able and wlilling to absorb without increasing prices substantially as evidenced by the fact that industrial-prices increased by only about 1 percent during the first quarter of 1969. In the public sector, basic wages are also being raised by 8 percent, but most State enterprises and many sectors of the public administration are to absorb the extra cost by stepping up their rationalization efforts. In addition the budget prcvides for special,  - iii - selective salary adjustments for teachers, judges, the armed forces and central administration personnel as part of a 5-year program, put into effect in March, to restore a more reasonable salary structure and to bring public sector wages gradually more into line with remuneration in the private sector. At the end of 1968 a mmmber of tax reform measures were undertaken, of which the most significant is the establishment of a tax on agricultural land (net of improvements) which will replace some of the revenue foregone by the Goverrment in reducing export taxes, lay the basis for agriculture to bear a fairer share of the tax burden-and is likely to lead to more intensive use of land and greater efficiency in agricultural and livestock production. 9. Some aspects of the 1969 economic program will require particularly careful handling by the Government, if speeding up of the rate of economic growth is to be combined wTith further progress in achieving price stability: (i) the increase in public sector fixed investment, originally budgeted, would have raised such-investment by 26 percent in real terms over the level achieved in 1968. This seems over-ambitious at a time when many industries are much closer to making full use of their capacity than a year ago, when private investment seems to be increasing markedly and when there are indications of construction cost increases; (ii) the planned public sector savings level - a real increase of 18 percent - can only be achieved if tax collections come up to revenue estimates which will require a substantial improvement in tax administration and a further increase in fuel taxes. Moreover, current expenditures will have to continue to be severely contained and further substantial progress will have to be made in reducing the State Railroad deficit; (iii) even if the public sector savings target were achieved, the gap between public sector savings and budgeted investments would increase substantially, which would require not only an increase from 27 to ho billion pesos in domestic Government bonds sales, which is not likely to be difficult, but also the placement of $150 million of bonds abroad, which may only be partially possible on terms fully compatible wJith Argentina's need to improve the structure of its foreign debt. 10. Developments during the first four months of 1969 have been re- assuring with respect to the above aspects of the program. Public sector invostment is expanding at a iower rate than originally budgeted. This is partly due to a review by the Government of some invest- ment programs, such as highways and water and sewerage facilities, which have tended to rise very rapidly and partly to the fact that, like in 1968, some entities will fall short of their investment targets. The projected level of public sector savings, on the other hand, is likely to be achieved. Actual revenue collections have thus far exceeded estimates, reflecting in part a real improvement in tax administration. Current expenditures have been held within budgeted levels. In early May gasoline taxes earmarked for highway construction and railroad passenger fares were increased substantially.- A 20 billion peso internal Government bond issue has been oversubscribed.  - iv - 11. The export outlook for 1969 appears more promising than in 1963, reflecting removal of the United Kingdom's sanitary embargo on most meat inports from Argentina, the recovery of corn production and exports, and a continued increase in the level of "non-traditional" exports. But, there is also every indication that irrorts will rise significantly and that heavy net outflows of interest and other service payments will continue. Thus, like in 1968, the current account surplus in the balance of payments may be reduced to a relatively small figure. HowYever, there are strong i-ndications of a substantial rise in direct foreign investments, disburse- ments of long-term loans should increase markedly and the Government has placed a first bond issue of $25 nillion abroad. With the inflow of short and medium-term funds apparently continuing, a substantial-further rise in foreign exchange reserves has taken place in recent months. 12. From the longer-term point of view, maintenance of an incomes policy designed to prevent the re-emergence of a wage-price spiral by encouraging the negotiation of wage agreements in which increases bear a reasonable-relationship to the growth in productivity is of the first importance. To irplement such a policy successfully, after free collective bargaining is reestablished at the end of 1969, will only be possible if agricultural and industrial output expand considerably more rapidly than in the past. 13. Wiqth respect to agriculture, the Government, by reducing export taxes to relatively modest levels and enacting a national land tax, has laid the basis for a ruch stabler set of policies than in the recent past. To prevent a significant deterioration in the terms of trade between agriculture and the rest of the economy resulting from the decline of livestock prices to a level substantially lower than in the middle 1960s and sone weakness in international grain prices, the Government intends to bring dowm the prices of agricultural inputs by reducing the tariffs applied to imported farm requisites, lowering the level of protection of domestic industry producing such inputs and revieawing the requirement that virtually all components of farm machinery have to be produced domestically. 1l. Argentine industry seems to be adapting relatively well to the new, non-inflationary environment, even thcugh the adaptation is not pain- less. While sone old established firns have gone bankrupt, most corporations are attempting to increase both the scale and efficiency of operations through reduction of inventories to permanently lower levels; selective reequipment, reduction in staff, mergers and reorganizations. What is needed nowz is a well-conceived, longer-term industrial policy, worked out by the Governnent in close coordination wfith the private sector, designed to make Argentine industry more competitive internationally by systematically reducing the "e