BUENOS AIRES, ARGENTINA -- Argentina has made international headlines recently for its government’s announcement to pre-pay all of its outstanding debt with the International Monetary Fund (IMF). This move is more politically significant than economic. Some local economic analysts, in fact, express worry that the risk of this payment outweighs any possible benefits. There have already been some negative market responses to the announcement by Argentine President Nestor Kirchner that seem to justify their concern.

Argentina’s early repayment, which follows at the heals of similar action by the Brazilian government to pay off its IMF debt, also raises some questions regarding the role of the IMF in Latin America and other parts of the developing world. People are taking note that two of the IMF’s three largest debtors prefer to manage their economic affairs without the assistance of this international organization.

The Politics of Pre-payment

Since its infamous 141 billion dollar private debt default in 2001 and successive economic crisis, the Government of Argentina has devised macro-economic policies that have often been politically well received at home but that have roused and dumbfounded the international community. In keeping with this trend, President Kirchner unexpectedly announced on December 15 that his government promptly planned to pay off its outstanding debt to the IMF in full. This requires withdrawing over 1/3 of its Central Bank dollar reserves to pay the IMF its entire outstanding obligation amounting to about 9.8 billion dollars. The payment is scheduled for January 3, 2006.

People are taking note that two of the IMF’s three largest debtors prefer to manage their economic affairs without the assistance of this international organization.

Paying off the IMF is an extremely popular political move for President Kirchner. The international organization is by and large disliked and frequently blamed both by politicians and the Argentine public alike for the unsuccessful liberal economic policies that are viewed as having brought only crisis and increased poverty to the country. The IMF is perceived as serving the interests of the world’s richest countries, especially the United States that holds the majority of the decision-making power within the organization’s Board of Directors.

Argentina has been a member of the IMF since 1956 and will remain a member of the international organization along with 183 other countries. Now, however, the country will not have to submit to IMF loan conditionality as it will be no longer financially indebted to the international organization. IMF loan conditions often require implementation of unpopular orthodox fiscal and monetary policies. Paying off the IMF debt has been heralded by the Government of Argentina as ushering in a new era of autonomous economic decision-making that will save the country 10 billion dollars in interest payments in the next three years and help spur economic growth.

The Questionable Economics of Early Payment

Argentina’s relatively good financial position makes early IMF payment feasible. After the economic crash of 2001, Argentina was an insolvent and besieged economy. However, since that time, there have been world economic conditions that have favored the country’s economy, bolstering its foreign reserves and making such a large IMF payment possible. For example, the country has taken advantage of external factors such as higher commodity prices especially for soybeans and increased demand notably from China. Fortunately, economic indicators show that these positive externalities are expected to continue and will protect Argentina’s Central Bank from any real vulnerability. With Argentina’s economy robust and getting stronger, no one is predicting capital flight, widespread currency speculation or the cross-border movement of private funds that were seen in 2001/2002 and that would adversely affect national financial markets.

However, some analysts see the early payment as risky and unnecessary, outweighing potential political benefits. IMF loans are relatively cheap in comparison to other loan options on the international market and no one was pressuring Argentina to repay its entire debt, merely maintain its payments in a timely manner. The country has been operating relatively free from IMF policy pressures since December, 2001 when the international organization, frustrated with the lack of cooperation by the Government of Argentina, stopped loan payments and left the country to fend for itself in the midst of economic turmoil.

And even after paying off all of its debt with the IMF, Argentina remains a highly indebted country (see Chart 1.) Its IMF payment equals less than 9 percent of the country’s total 126 billion dollar debt. The Government of Argentina also plans to boost its foreign reserves with new loans from the Venezuelan and Spanish governments. In fact, Argentina has already sold 1.75 billion dollars in bonds to the Venezuelan government this year, making Venezuela the biggest buyer of Argentine debt since 2001. Argentina’s increasingly close relationship with the controversial Venezuelan government led by populist Hugo Chavez is not viewed favorably by the international investment community and could have a longer term negative impact on foreign investment in the country.

Argentina’s announcement directly follows a similar yet expected pronouncement by the Brazilian government to make early payment of about 15.4 billion dollars to the IMF. Brazil’s anticipated early payment was publicly applauded by the international lender, but Argentina’s –despite public acceptance by the IMF - was met with skepticism. The markets also responded favorably to Brazil’s early payment plans. In contrast, the Argentine Peso and government backed stocks and bonds fell directly after President Kirchner went public with the early payment plan. There is concern that the country's decision to sever financial ties with the IMF will concentrate too much decision-making power in the executive branch and make the Argentine government less responsive to pressures to reform its economy. For example, the IMF has persistently counseled the Argentine government to curb inflation, which is currently on the rise in a country that has experienced mega and hyperinflation in the past. The IMF is seen as an international auditor and the markets reacted fearfully to the idea of its absence in Argentina.

Ironically, detaching from the IMF may put more pressure on the Government of Argentina to maintain conservative economic policy and to implement needed reform measures promoted by the IMF. Some of the pending reforms include a new revenue sharing agreement between the federal and provincial governments and the completion of a long-delayed renegotiation of privatized public services’ contracts. It also means no more blaming the IMF for all of Argentina’s woes. Moreover, the lower dollar reserves after repayment will require more orthodox fiscal policy in order to curb inflation and maintain economic stability. The markets will now have a bigger role in keeping a check on the government’s actions. The markets reacted favorably to Brazil’s early payment move because the country has a proven track record of conservative economic policy. They responded negatively to Argentina’s plan because it does not appear to be part of a broader economic strategy and because the international investment community does not trust that the Government of Argentina will keep a steady course.

The IMF’s Role Questioned

Beyond domestic political and economic implications, early payment by both Argentina and Brazil raises questions regarding the role of the IMF in Latin America and developing countries in general. The combined outstanding obligations of Argentina and Brazil equal 49 percent of debts owed to the international organization. In essence, the IMF is losing two of its top debtor nations – leaving Turkey, Indonesia and Russia in the top three slots (see Chart 2.) While the IMF may be happy to receive the checks, early payments from its top developing world clients could be trend setting. It should make the international community stop to reassess the purpose and value of this international organization in today’s political and economic climate.

With or without the IMF, it is in the Argentine people’s best interest that their government implements sound fiscal and monetary policies to continue to attract international and domestic investment and to maintain steady growth while curbing harmful inflation.

The IMF was created at the end of World War II along with the World Bank and what would eventually become the World Trade Organization. The international financial institution’s original purpose was to deal with global payments imbalances and exchange rate misalignments. Since then, the IMF has become more of a lender of last-resort for economically troubled developing world countries. However, its functions have been brought into question based on the one-size-fits-all neo-liberal policies it continues to push. These policies have been increasingly blamed for economic failure in developing countries. Moreover, the organization’s policy of “tough love” toward Argentina during its devastating crisis in 2001/02 showed the world the less charitable side of this international banking institution.

In December 2001, the IMF decided that the best medicine for Argentina’s economy was to leave the country to resolve its economic troubles on its own. Since then, Argentina has done just that and has experienced record growth in the last few years. Argentina’s annual GDP growth rate went from negative figures in 2001 and 2002 to 7.5 percent in 2003 and 6.5 percent in 2004. Such success has boosted Argentina’s confidence to go it alone. (However, it should be noted that part of the country’s recent economic success is owed to savings related to its inability and refusal to pay its outstanding private debt. Even after a 103 billion debt exchange early in 2005, this still amounts to 20 billion dollars in hold-outs from disgruntled bond-holders).

The country’s disillusionment with the IMF and its craving for autonomy are justified. However, within the current international economy, there are few countries with true economic decision-making autonomy. Market reactions tend to keep government action in check. It is in the Argentine people’s best interest that their government implements sound fiscal and monetary policies to continue to attract international and domestic investment and to maintain steady growth while curbing harmful inflation. Within this context, it remains to be seen if repayment was political genius or economic folly.




Janie Hulse is a Rotary World Peace Fellow working toward a PhD in International Relations at the Universidad del Salvador in Buenos Aires, Argentina. Ms. Hulse has a Masters degree in Politics of Development in Latin America from the London School of Economics (1998) and has worked extensively with and in the region in both the public and private sectors. Article published December 30, 2005.

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