BOP CRISIS ARGENTINA: 2001

A SNAPSHOT OF THE CRISIS (1998-2002)

• Real gross domestic product (GDP) fell 28% from peak (1998) to trough (2002).

• Argentina’s currency, the peso, equal to US$1 since April 1991, was devalued in January 2002 and depreciated to nearly 4 per dollar.

• Inflation, low or negative during 1990s, reached 41% in 2002.

• Unemployment, excluding people working in emergency Govt relief programs, rose from 12.4% in 1998 to 18.3% in 2001 and 23.6% in 2002.

• The poverty rate rose from 25.9% in 1998 to 38.3% in 2001 and 57.5% in 2002.

• In real terms, wages fell 23.7% in 2002.

WHY AND HOW THE CRISIS OCCURED

• External forces provoked a recession. East-Asian Currency crisis 1997-

98 Russian Crisis of August 1998 Brazil Currency crisis Aug-Oct

1998

• The January 2000 tax increase killed a budding economic recovery.

New Govt increased tax rates Reduced confidence Discouraged growth of private

sector

• More blunders in tax and monetary policy made matters worse in 2001.

Resignation of ministers Two more packages of tax

increases Switched the exchange rate to a

combination of Dollar and Euro Special exchange rate for exports Debt Trap

WHY AND HOW THE CRISIS OCCURED

• Contamination of private sector in late 2001 & 2002. Freeze of bank deposits was

announced on 1st December 2001 Business and individuals could

not use their deposits to pay anybody except other depositors at the same bank

Economy plunged into depression

• On January 1, 2002, Eduardo Duhalde, the newly elected president introduced a few stabilization measures but economy shrank further to 10.9% in 2002 following 5.5% decline in 2001.

• Exporters had difficulty obtaining credit because of the deposit freeze. Exports fell by 4.5%

ARGENTINA GDP TREND: 1991-2005

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

-15.0%

-10.0%

-5.0%

0.0%

5.0%

10.0%

15.0%12.7% 11.9%

5.9% 5.8%

-2.8%

5.5%

8.1%

3.9%

-3.4%

-0.8%

-4.4%

-10.9%

8.8% 9.0% 9.2%

EVOLUTION OF ARGENTINA GDP 1991-2005

ROAD TO RECOVERY• Eduardo Dulhade, who became President on 1st January 2002,

devalued Peso to 1.4 per Dollar.

• Pesofication: converted dollar deposits and loans into Pesos.

• Since December 2002, the measures undertaken by the new Govt started bringing in the rewards.

• Devalued Peso made exports cheap and competitive abroad and discouraged imports.

• The high price of soy in the international market produced massive amounts of foreign currency.

• The Govt encouraged import substitution and accessible credit for businesses, improved tax collection and allocated large sums for social welfare.

ROAD TO RECOVERY• The value of Peso rose to 3 per Dollar. Agricultural exports

grew and tourism returned. Central bank began rebuilding its dollar reserves.

• By December 2005, the Forex reserves reached to $28bn which also risked inflation.

CRITICISM OF IMF• IMF supported tax increases to balance Argentina’s Govt

budget, thus raising the burden of taxation and discouraging economic growth.

• IMF officials reportedly favored devaluing the Peso which proved to be highly disruptive , because they thought it was overvalued.

• They discouraged consideration of replacing the Peso with Dollar as the official currency on the erroneous grounds that it was technically infeasible.

• By mid 2001, it had become apparent that the policies that Argentina was trying were proving to be unsuccessful. But despite this, IMF approved $8bn increase in lending.

CRITICISM OF IMF• In 1998, the US Govt approved increase in contribution on

grounds that IMF would charge interest of 3% above ordinary rate for lending but they violated the conditions.

• On 5th September 2002, IMF allowed Argentina to delay repayment of about $2.8bn in loans for one year.

• On 14th November 2002, Argentina defaulted on a loan from World Bank, Inter American Development Bank and threatened to default to the IMF as well.

• On pressure from other member countries of IMF, it had to renew loans to $6.8bn which meant that Argentina would not have to pay any old loans.

THANK YOU

ANURAG GUPTA

AKSHAY SHARMA