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Wednesday, 30 January, 2002, 23:11 GMT
IMF tells Argentina to cut spending
Street protest in Buenos Aires
Angry street protests remind the government that it has little room for manoeuvre
The International Monetary Fund (IMF) has returned to Argentina to discuss the framework of a new financial aid package for cash-starved government in Buenos Aires.

The IMF officials are expected to urge the government to make spending cuts a cornerstone of its economic recovery plan.

Free government spending drove the country deep into debt, forced it to default on its payments and devalue its currency, and pushed the economy into free-fall.

Because of the default the IMF is now the only lender still prepared to give the government in Buenos Aires any money. In their negotiations fund officials are expected to outline tough conditions for any aid package.

The IMF's Claudio Loser met with Economy Minister Jorge Remes Lenicov in the economy ministry. Police were guarding each stairwell amid fears that protestors could try to disrupt the talks.

Conditions for aid

Earlier this week, Horst Koehler, managing director of the IMF, had urged Argentine authorities to develop a comprehensive and coherent economic strategy.

Demonstrator holding a cross
"No more hunger and misery in Argentina", the demonstrator demands
The IMF wants President Eduardo Duhalde to present a "sustainable" plan to cut budget deficits, i.e. reduce government spending.

The fund also wants the country to scrap the current dual-exchange rate system - with a fixed rate to the dollar for exporters, and a floating exchange rate for domestic transactions. The fund believes this to be unworkable.

Legislation currently going through parliament that would introduce controls on bank withdrawals should also be scrapped, the fund believes.

Another hot issue are international money transfers. Many Argentine politicians want to cap such transfers, but this could trigger a $30bn wave of corporate defaults on debt owed to foreign creditors.

Finally, the IMF wants Argentina to outline a plan to restructure the government's foreign debt load, which currently is in limbo.

Little leeway

President Duhalde is expected to announce details of his reform programme this Saturday, but he has precious little leeway for dramatic change.

The recession that has besieged Argentina for four years has brought down a succession of presidents and provoked violent social unrest.

Demonstrators are still taking to the streets, demanding improvements to their situation.

The deputy economy minister, Jorge Todesca, meanwhile, admitted that the economy could shrink by as much as 5% in 2002, which in turn will hit government income from taxes.

The IMF's recipe to cut government spending does not go down well with the protestors.

"Stuff the IMF" is a slogan now popular in the streets.

"[President Eduardo Duhalde] will have to choose between the policies of... President George W Bush and the Argentine people," said Luis D'Elia, a leader of the Argentine Workers' Association.

Mired in debt

Argentina is mired in debts amounting to $141bn, on which it has already defaulted.

Last year the IMF offered to help with a $20bn aid package, only to see the country fail to meet its end of the agreements made. This has made fund officials - and the US government - wary to untie purse-strings yet again..

For now the fund has agreed to let Buenos Aires postpone nearly $1bn in repayments which were due on 17 January.

But so far the IMF is unimpressed with the devaluation policy at the heart of President Duhalde's economic plan.

And the weakening of the banking sector - now mainly foreign-owned after the IMF-sponsored sell-off - means international investors are ready to walk away from Argentina.

See also:

29 Jan 02 | Business
Argentina seeks US backing
27 Jan 02 | Americas
Argentine president pleads for calm
21 Jan 02 | Americas
Argentines angry at peso conversion
17 Jan 02 | Business
Argentina receives debt lifeline
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