macro-stabilization, by restoring fiscal sus- tainability, halting deficit monetization, re- ARGENTINA Key conditions and ducing inflation, rebuilding the Central Bank foreign reserves, and helping regain challenges access to capital markets. Beyond the ur- gent need to stabilize the economy, Ar- Table 1 2021 Argentina’s economy has recovered faster gentina would benefit from a shift to a Population, million 45.8 than previously expected. Following a medium-to-long term perspective in order GDP, current US$ billion 480.6 3-year recession and almost a decade of to reverse the downward tendency of its GDP per capita, current US$ 10496.1 stagnation, GDP was already above pre- potential output and adopt reforms that a 1.6 International poverty rate ($1.9) covid levels by end-2021, although still 4 could deliver more sustainable and equi- a 5.8 percent below its previous cyclical peak at- table growth. Reforms to boost export per- Lower middle-income poverty rate ($3.2) a 18.2 tained in the last quarter of 2017. Higher formance, raise skills and compensate for Upper middle-income poverty rate ($5.5) Gini index a 42.3 commodity prices and trading partners’ lack of progress in education outcomes School enrollment, primary (% gross) b 109.5 growth, notably Brazil, combined with owing to COVID, as well as improving la- b 76.7 public investment and acquisition of good bor market matching should be prioritized Life expectancy at birth, years and services, are behind the robust recov- along with macro-stabilization to ensure Total GHG Emissions (mtCO2e) 435.0 ery in growth. strong and sustained growth beyond a Source: WDI, Macro Poverty Outlook, and official data. Macroeconomic imbalances have widened. cyclical recovery. a/ Most recent value (2020), 2011 PPPs. b/ Most recent WDI value (2019). The fiscal deficit remains sizeable and has been completely monetized by the Central Bank, in the absence of access to interna- Bolstered by favorable external condi- tional markets and a shallow domestic Recent developments market. This has pushed up inflation, tions, Argentina’s economy recovered which combined with tight currency con- Economic activity gained pace rapidly and from the COVID-19 crisis at a fast pace, trols, has added pressure to the gap be- reached pre-pandemic levels by Q3-2021. reaching pre-pandemic activity levels by tween the official and parallel exchange Investment and exports have been the end-2021. Growth is poised to continue, rates and dragged down reserves. The main drivers of the recovery. Investment Central Bank net reserve assets are at his- was propelled by agricultural machinery driven by private consumption and in- torically low levels (less than a third of and equipment, as well as residential con- vestment. High inflation, tight FX con- monthly merchandise imports), while in- struction, a means to store value given trols will inhibit strong growth in the flation is running at more than 50 percent high inflation and low levels of activity medium term. Implementing a sound annual rate (with core inflation even high- during 2020. Industrial exports benefited macro-stabilization plan to restore fiscal er), eroding purchasing power and hurting from strong growth in Brazil and high those with low incomes disproportionally. commodity prices also supported a small sustainability, reduce inflation and sup- High inflation acts as a counteracting force current account surplus. port FX reserves accumulation will set to improvements in the labor market, lim- Labor markets indicators remain weak. Al- the basis for broad-based growth, robust iting poverty reduction. though the employment rate reached its job creation and poverty alleviation. The IMF program provides Argentina a pre-pandemic level in 2021, job creation time-window of 3 to 4 years to achieve has mainly occurred among informal FIGURE 1 Argentina / Net international reserves and FIGURE 2 Argentina / Actual and projected poverty rates exchange rate premium and real private consumption per capita US$bn Percent Poverty rate (%) Real private consumption per capita (constant LCU) 50 130 30 14000 45 110 12000 40 25 35 90 10000 20 30 8000 70 25 15 50 6000 20 10 15 30 4000 10 5 2000 10 5 0 0 0 -10 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2011 2013 2015 2017 2019 2021 International poverty rate Lower middle-income pov. rate Net reserves (lhs) Alternative FX Premium (rhs) Upper middle-income pov. rate Real priv. cons. pc Source: World Bank staff calculations based on Central Bank data. Source: World Bank. Notes: see Table 2. MPO 1 Apr 22 salaried, self-employed job segments and extremely low levels by early-2022, on the medium-term, strong investment will re- public sector employees. Underemploy- eve of an agreement with the IMF. main inhibited by a still high inflationary ment remains high, at 12.2 percent in environment, controls to imports, prices 2021Q3, contrasting with 10.8 percent in and capital movements, as well as limited the previous cyclical peak. fiscal space. The economic recovery had a differentiat- Outlook The recent surge in commodity prices can ed regional impact on household incomes dampen growth and deteriorate the trade and poverty incidence under the national GDP is projected to grow by 3.6 percent and fiscal balances, hindering also foreign poverty line. In Greater Buenos Aires, the in 2022, given the strong 2021-Q4 carry reserve accumulation. The increase in the nation’s most populous region, and in over effect. The implementation of the value of agricultural exports can be com- Patagonia, poverty declined in the first se- Extended Fund Facility, agreed with the pletely offset by higher oil and gas im- mester of 2021, although it increased in all IMF, is expected to contribute to a more ports, or even exceed it, as Argentina re- other regions. The northeast and north- stable environment for growth by avoid- mains a net importer of energy. The hike west regions continue to register the high- ing a default, setting a path for fiscal in energy prices can put pressure on fiscal est levels of poverty. consolidation and eliminating deficit accounts via higher energy subsidies and The withdrawal of the emergency support monetization. However, beyond the car- maintaining the EFF fiscal targets may lead spending has been the largest contributor ry over effect, growth is expected to to a reallocation of spending. to the reduction of the fiscal deficit in 2021, be modest in 2022, as a more con- Downside risks remain high. A prolonged supported in part by extraordinary rev- tractionary fiscal and monetary policy war in Ukraine could lead to a deteriora- enues from a one-time wealth tax and the takes hold and growth in trade partners tion in the terms of trade for a net energy windfall revenue from the increase in com- slows. In 2022, the poverty rate is pro- importer such as Argentina, and lower ex- modities prices. As the economy recov- jected at 16.3 percent of the population ports as trade partners are also hit, ham- ered, the government was able to remove under the international poverty line of pering progress in fiscal consolidation. As most of this spending, but despite price $5.5 per day. The possibilities for faster with most nations, an intensification of the controls, tariff freezes, and a real appreci- poverty reduction in the medium term Covid-19 pandemic cannot be ruled out, ation of the Peso, its entire monetization will depend on the dynamism of job and more adverse climatic conditions, par- fueled inflation. The debt-to-GDP ratio de- creation, especially private formal jobs, ticularly extended drought impacting agri- clined in 2021 as a consequence of a large and the evolution of inflation. culture productivity and hydrology in real appreciation. Growth is expected to moderate over the both the Upper Parana River basin and via Despite the boom in commodity prices and forecast horizon. Substantial increases in the glacial melt that feeds hydroelectric SDR allocation, Central Bank net reserves the investment rate over several years are output is expected to limit the substitution are on a declining trend, as a result of high- needed to boost productivity and real in- of imports of energy and will continue to er debt repayments (to IMF and other IFIs) comes and promote the transition towards tilt the risks of sustainable economic and interventions on FX markets, reaching a low carbon economy. In the short- and growth to the downside. TABLE 2 Argentina / Macro poverty outlook indicators (annual percent change unless indicated otherwise) 2019 2020 2021e 2022f 2023f 2024f Real GDP growth, at constant market prices -2.0 -9.9 10.3 3.6 2.5 2.5 Private Consumption -7.3 -13.8 10.2 3.4 2.6 2.5 Government Consumption -1.2 -3.3 7.0 2.4 1.4 1.1 Gross Fixed Capital Investment -16.1 -12.7 32.5 5.9 4.7 5.0 Exports, Goods and Services 9.1 -17.3 9.0 5.2 5.0 4.9 Imports, Goods and Services -19.0 -17.9 21.5 5.3 4.9 4.8 Real GDP growth, at constant factor prices -1.7 -9.9 10.3 3.6 2.5 2.5 Agriculture 21.3 -7.1 0.0 1.9 2.2 2.1 Industry -4.8 -9.4 14.5 3.0 2.5 2.3 Services -3.1 -10.6 10.1 4.1 2.6 2.7 Current Account Balance (% of GDP) -0.8 0.8 1.2 0.7 0.6 -0.1 Net Foreign Direct Investment (% of GDP) 1.1 0.7 0.9 1.0 1.1 1.2 a Fiscal Balance (% of GDP) -4.7 -8.1 -4.9 -4.6 -4.0 -3.2 a Debt (% of GDP) 98.5 106.4 89.1 84.6 82.8 80.1 a Primary Balance (% of GDP) -0.5 -5.6 -3.0 -2.5 -1.8 -0.9 b,c International poverty rate ($1.9 in 2011 PPP) 1.3 1.6 1.3 1.3 1.3 1.2 b,c Lower middle-income poverty rate ($3.2 in 2011 PPP) 4.8 5.8 5.2 4.8 4.6 4.4 b,c Upper middle-income poverty rate ($5.5 in 2011 PPP) 14.5 18.2 16.3 16.0 15.5 15.0 GHG emissions growth (mtCO2e) 6.3 -3.4 7.1 2.8 2.4 2.5 Energy related GHG emissions (% of total) 41.3 40.8 42.2 42.4 42.5 42.5 Source: World Bank, Poverty & Equity and Macroeconomics, Trade & Investment Global Practices. Emissions data sourced from CAIT and OECD. a/ Fiscal data refer to the general government. b/ Calculations based on SEDLAC harmonization, using 2020-EPHC-S2.Actual data: 2020. Nowcast: 2021. Forecasts are from 2022 to 2024. c/ Projection using neutral distribution (2020) with pass-through = 0.7 based on private consumption per capita in constant LCU. MPO 2 Apr 22