CONFIDENTIAL
7
IV Report. The policy slippages earlier in the year have, however, effectively
beet
gnored by the Fund, and the proposed SBA now looks very weak. Prior to the
discussion on the SBA, the Fund Board on 10 July authorised disbursement of the CFF
(approved in principle in February). Since the CFF was originally approved,
Argentina has made repurchases of previous CFFs which enabled the new CFF to be
increased to SDR 518 mn (from SDR 389 mn), but still well below the estimated
shortfall in export revenues.
16 Recent economic developments in Argentina are not reassuring. Latest export
figures show a 4.8% fall in Q1 compared with Q1 1986; with imports rising 30.2% in
the same period, the trade surplus fell by 60% to $242 mn. Moreover, inflation
continues to run well above target: the effectiveness of the price controls
introduced in February appears to have been rather limited, and inflation was 103%
in the year to May and 111% in the year to June, when the CPI reportedly rose by
8%; this trend will have to be reversed if Argentina is to meet its inflation
target (now revised to 90% from 40%) for the year as a whole. Although the
official exchange rate was devalued by over 9% in June, the discount on the parallel
rate remains over 25%.
17
Venezuela's progress towards signature of the commercial bank MYRA (agreed in
principle in February) has been slow: the Venezuelans are procrastinating on some
aspects of the documentation for the amended agreement, and the banks have agreed to
postpone signature of the MYRA from end-August to October. Should the agreement be
signed by October the new interest rate margin of 7/8% will apply retrospectively
from April; if the agreement is not signed by then, the new margin will only apply
from the date of signature. The Venezuelans have so far been unsuccessful in
Chase and Morgan Guaranty have been asked to make
obtaining voluntary finance:
soundings in the market, but have had no positive signals. Furthermore, the
Japanese government has prohibited Venezuela from issuing yen-denominated bonds
until it regains its triple-A status. Continued failure to obtain voluntary funds
would increase political pressure on the government to re-open the MYRA to seek
better terms (including a reduced spread) in line with the recent agreement for
Argentina.
18
An IMF Article IV mission which visited Venezuela in June for one of the
twice-yearly assessments under the enhanced surveillance arrangement has indicated
some concern. It remains unlikely, however, that the government will adopt
IMF-type policies as it remains committed to expansionary demand management.
Inflation, which was 20.3% in the year to May, is expected to increase considerably
in H2 as there are early indications that the 120-day price freeze on essential