2. • 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.
3. • 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
4. • 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%
6. • 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.
7. • 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.
8. • 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.
9. • 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.
