Recent Macroeconomic Developments
In 1992 the authorities continued to adjust the economy, extending the recent good economic performance. GDP grew by 8.7 percent, and industrial production grew in the 12 percent range for the second year in a row. Employment rose by about 10 percent and investment expanded briskly in 1992, rising from 12.5 percent to 14.5 percent of GDP. The increased investment was financed by external savings, with gross national sav- ings declining moderately to 9.3 percent of GDP. Public savings rose by about 2 percentage points of GDP, while private savings fell. Fiscal performance has improved notably in the last two years. The overall balance moved into surplus in 1992 for the first time in decades with an operational primary surplus of 2.0 percent of GDP. Tax revenues increased from 13.5 percent of GDP in 1989 to nearly 24 percent between in 1992. In the same period, public expenditures fell as a percent of GDP. Capital spending and non-privatization receipts both declined slightly. The fiscal surplus also was improved by the drop in dollar interest rate, which cut accrued interest obligations by 1.3 percent of GDP. However, interest obligations still exceeded the operational primary surplus slightly in 1992. Inflation continues to decelerate. The annualized inflation rate in the last quarter of 1992 was about 9 percent, compared to over 20 percent a year earlier. Nonetheless, inflation still exceeds international rates, which is necessary to sustain the fixed exchange rate regime . During 1992 capital inflows, jointly with the economic expansion, contributed to an 84 percent increase in imports; exports rose by 1 percent. As a result, the current account deficit for 1992 reached 5.2 percent of GDP, up from 2 percent a year ago. Capital inflows of $12.0 billion, mostly private, more than offset the current account deficit, allowing a $3.4 billion accumulation of reserves. After signs of slowdown in economic activity during January and February 1993, industrial production recovered in March and April, with the first quarter of 1993 marking the eleventh consecutive month of economic expansion. Capital inflows recovered in the first quarter of 1993, further strengthening the level of international reserves. The monthly inflation rate between January and March 1993 averaged 0.7 percent, about the same as the last quarter of 1992.
Medium-Term Prospects
The government projects real growth averaging 6.5 percent over 1992-95. Over this period its fiscal program for aims at generating a primary surplus sufficient to finance interest obligations, thus eliminating the need for the inflation tax. This involves efforts to raise the primary balance from about $3.3 billion in 1991 to about $4. 1 billion in 1995. The success of this program will largely depend on medium-term reforms to improve the structural underpinnings of public finance, such as social security legislation, labor reforms, and the evolution of the fiscal relationships with the provinces, given the increasing decentralization of power and responsibilities from the center to provincial governments . This scenario is attainable if the government continues to improve its fiscal position, and if private markets generate a smooth transition to a sustainable balance of payments and growth path. There are significant risks to this program. The probability of adverse events affecting the convertible peso declines, however, as the government progresses on reforms that improve the fundamentals of public finance. Past reforms in the public sector anchor stabilization and are unlikely to be reversed during any financial turbulence. Also, reserves are the highest in a decade and cover the monetary base (although not the deposit base), which would deter a speculative attack on the peso. Even if problems give rise to pressure to alter the policy framework, in all likelihood any emerging policy regime would of necessity focus on maintaining fiscal balance and policies conducive to private investment. Over the last few years Argentina has enacted serious and difficult structural reforms with considerable public support. The lack of alternatives to fiscal discipline and price stability, and memories of the hyperinflation of 1989/90, have made stability politically popular. These facts are powerful ballast that is likely to keep the ship of structural adjustment headed in the same direction, even in a financial storm.