New Economy Minister tasked with keeping IMF on board

22nd August 2019

By Federico Poore

New Economy Minister tasked with keeping IMF on board

President Mauricio Macri changed his economy minister four months before the end of his term and in the midst of severe market turmoil.

Macri is under increasing pressure from the provinces and the IMF. The tax cut and spending boost announced immediately after his defeat at the voting booth opened two new fronts for the national administration, as the cash for the reforms would come from the governors’ pockets and through a potential increase in the federal budget deficit.

A team of International Monetary Fund (IMF) experts is expected in Argentina soon to complete its fifth review and decide whether to approve the latest disbursement of its massive $56 billion loan with the country, although no date has yet been announced following reports that the latest developments would delay their arrival.

</p> <p>On Saturday, mere days after the ruling coalition suffered <a href="">a crushing defeat in the primary election</a>, Economy Minister Nicolás Dujovne, the man who led the bailout talks between Argentina and the IMF last year, stepped down from his post, saying in a <a href="">letter</a> that the country needs “significant renewal in the economic area.” His resignation was made known as Fitch Ratings and S&amp;P Global downgraded Argentina&#8217;s debt further into junk territory, citing a severe tightening of financial restrictions and deterioration in the macro environment.</p> <p>Dujovne enjoyed a trusting relationship with the IMF’s Roberto Cardarelli, the mission chief for Argentina, and his departure places a big question mark over the future of the program, which accounts for <a href="">over 60 percent of total IMF loans outstanding</a>.</p> <h2><strong>Lacunza’s challenges</strong></h2> <p>To replace Dujovne, Macri appointed Hernán Lacunza, who was acting as economy minister for the Buenos Aires province. Between 2005 and 2010, Lacunza served as chief economist and general manager of the Argentine Central Bank (BCRA) under Martín Redrado’s administration. Lacunza has also worked with the president in the past as he was the head of the state-owned Banco Ciudad during the last two years of Macri’s tenure as mayor of Buenos Aires City.</p> <p>“The president gave me a clear mandate: to guarantee the stability of the exchange rate,” Lacunza <a href="">said on Tuesday</a> during his first message as Economy minister. He reaffirmed the government’s monetary policy based on the control of monetary aggregates and the reduction of the budget deficit.</p> <p>However, analysts that were generally supportive of Macri are worried that some of the desperate measures announced by Macri after his shocking defeat at the polls with the hope of improving his numbers before the October general elections may be at odds with the IMF support program.</p> <p>“Macri is increasing government spending and abandoning the zero-deficit goal to avoid social upheaval&#8230; but the idea of ‘putting more money in people’s pockets’ is ridiculous,” <a href="">said</a> political analyst Marcos Novaro, a member of the Center for the Opening and Development of Latin America (CADAL).</p> <p>The “relief package” announced last week includes a 20-percent increase in the income tax floor (now paid only by employees with a monthly paycheck of more than USD 870), the elimination of the value added tax (known as IVA) for basic products and the reinforcement of social security programs to protect those more vulnerable to the effects of mounting inflation, that could reach <a href="">56 percent by the end of this year</a>.</p> <h2><strong>Governors up in arms</strong></h2> <p>So where will the money come from?</p> <p>Lacunza <a href="">said</a> the measures will be self-financing through “greater tax collection between August and December” because of the steep devaluation and the ensuing inflation. There is also <a href="">a dramatic cut of public works projects</a>: according to economist Mara Ruiz Malec, the government foresees a nominal increase in budget for this area of six percent, contrasted with 50+ percent inflation. As a consequence, Lacunza stressed that the government will not jeopardize the country’s fiscal targets of reaching a fiscal deficit of 0.3 percent of gross domestic product (GDP).</p> <p>Not everyone agrees.</p> <p>“We already knew the zero-deficit program was impossible, but the IMF deal allowed for a margin of error of 0.5 percent and my estimates are now closer to a fiscal deficit of 1 percent of GDP,” economist Julio Piekarz, a former Central Bank director, <a href="">told</a> <em>La Nación</em>. “The key here is how to pay for this.”</p> <p>Governors from the provinces have also complained, adding more political trouble to the mix. Provincial leaders grouped under the Federal Investment Council (CFI) <a href="">signed a letter on Wednesday</a> where they criticized the fact that the package of measures was not consulted beforehand and argued their districts will bear more than half of its fiscal burden, as a significant part of the provinces’ income comes from the value added tax that Macri said he was cutting.</p> <p>“We find it positive that the national government decided to apply relief measures for some sectors, but it cannot do that through unconstitutional means, taking away resources that belong to the provinces,” the document said. The Macri administration “cannot pass any reforms to the value added tax nor the income tax nor oil royalties through an emergency decree,” La Pampa Governor Carlos Verna told reporters before meeting with provincial leaders from Santa Fe, San Juan, Río Negro and Salta, among others.</p> <p>Lacunza, for his part, insisted that protecting the lower- and middle-classes from the effect of mounting inflation is a task that must be carried by all jurisdictions. “We all need to make efforts, do the math and make corrections for this relief package to happen,” he told <em>Radio Mitre.</em></p> <p>Neuquén and Río Negro, two districts heavily dependent on oil and gas production, have already taken it to the courts, demanding that <a href="">an order from the federal government to freeze gasoline prices for 90 days</a> be suspended. This week, the Supreme Court <a href="">requested</a> the opinion of the Attorney General’s Office. The legal battle has only begun.</p> <h2><strong>IMF mission coming “soon”</strong></h2> <p><a href="">According to <em>The Economist</em></a>, getting rid of the economy minister “who had been slashing the budget as demanded” and resorting to “the kind of measures typically associated with his Peronist opponents” goes directly against the IMF agreement.</p> <p>All eyes are now on the Fund’s upcoming review of the Argentine economy. The review will decide on the disbursement of the last tranche worth US$5.4 billion of the IMF&#8217;s US$56 billion loan program signed in 2018.</p> <p>Although up to now all tranches have been paid on schedule, there were some reasons to fear things might be changing. In the days after the election, the IMF remained conspicuously silent as Macri scrapped the taxes and increased handouts.</p> <p>This contrasted with previous periods of market turmoil, in which IMF spokesman Gerry Rice would take to the microphones and fully support each and every “effort” made by the country as soon as the new measures were announced. It was only a week after Macri’s primary defeat that the institution led by Acting Managing Director David Lipton issued <a href="">a cold statement</a>.</p> <p>“We are closely following recent developments in Argentina and are in ongoing dialogue with the authorities as they work on their policy plans to address the difficult situation that the country is facing,” read the piece. A delegation was expected to travel to Buenos Aires “soon,” with no details on the actual date.</p> <p>Lacunza, for this part, said he spoke with IMF officials by phone shortly after being appointed.</p> <p>“Lacunza has enough cognitive flexibility and emotional cool-off to bring a breath of fresh air to the government,” <em>La Nación</em>’s top political analyst Claudio Jacquelin <a href="">wrote</a> on Monday. “While he’s not a vehement figure, he has a firm and calm way of saying things, which can be very valuable at this point. His main job is to explain, to be heard and to be trustworthy on what he says.”</p> <p>Benjamin Gedan, a senior adviser to the Wilson Center&#8217;s Latin American Program, <a href="">agreed</a> that Lacunza has a fine reputation, but said that the official is facing an impossible mission. “Unless his ties with opposition figures really allow him to have a coordinated communication with the (economic) team of Alberto Fernández, it will be extremely hard to ease down investors’ minds,” Gedan said.</p> <p>

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Federico Poore

Federico Poore is a political and economic journalist from Buenos Aires. He served as editor of the Buenos Aires Herald and co-authored El poder del juego: El gran negocio de la política argentina, a comprehensive investigation into the business of casinos and bingo halls.