Argentina’s off-balance sheet liabilities was a reason for 2001 crisis

Argentina’s 2001 crisiswas a whitewash event and struck the economy when least expected it. (Infact, if you do Google search you get all crisis being associated with Argentina – debt, currency, financial etc with each research showing how bad policies were (at hindsight all looks pretty easy) ). I actually remember the severity of the crisis from FIFA World Cup-2001. In 2001, Argentina had number of greats playing (Batistuta, Veron, Ortega etc). I recall all saying they wanted to win the cup to bring some joys to its people who are suffering from severe crisis. That got me noticed and I tried to read on the crisis but was not able to make much out of it.

Anyways, coming to the main point. I came across this excellent speech from Anne O. Krueger of International Monetary Fund.  The issue is a note of reforms in emerging economies and the title says it all – “Meant Well, Tried Little, Failed Much”. 🙂 I have yet to come across a better way to sum up the problems of emerging economies. Again, in this crisis they look like loosing more than developed economies.

She points to Argentina’s reforms in 1990 and the crisis in 200s:

In the 1980s, the Argentine economy had contracted by about half a per cent a year, while inflation had soared. At its peak in the late 1980s, Argentine inflation exceeded 3,000 per cent—compared with a peak in Latin America as a whole of just under 500%.

The 1991 Convertibility Plan was seen as new dawn: the aim was to deliver high growth and low inflation, based on disciplined macroeconomic policies and market-oriented structural reform. Argentina wanted to escape from past inflationary failures: and it showed every sign, initially, of a readiness to take the difficult steps needed to deliver macroeconomic stability.

Central to the plan was its guarantee of peso convertibility with the dollar at parity. Having a fixed exchange rate system was seen as crucial for building up the anti-inflationary credibility that the government needed. A quasi-currency board was established in order to underpin the system and so reinforce the government’s commitment. As you know, a currency board requires the central bank to back the monetary base with foreign exchange reserves—in other words, it prevents the government, or the central bank, from printing money to finance public deficits. Almost at a stroke this eliminated one of the principal sources of government-induced inflation.

This is what is called as “meant well”. This led to growth and above all low inflation. However, what surfaced is tried little as initial euphoria died and the weaknesses materialised:

Fiscal control was undermined by off-budget expenditures; and it was too weak to prevent growing reliance on private capital flows to finance government borrowing. The estimated structural fiscal position went from rough balance in 1992-93 to a deficit of about 2.75% of GDP in 1998. But there was persistent off-budget spending, mainly as a result of court-ordered compensation payments after the social security reforms of the 1990s, and arrears to suppliers. This raised the government’s average new borrowing requirements to more than 3% of GDP a year over this period. In 1996, for example, when off-budget spending is included, the total deficit was 4% of GDP.

(emphasis is mine)


These figures show how vulnerable the public finances were to slow growth: because no fiscal cushion had been created when growth performance was strong. The problem was made worse by overoptimistic assessments of the economy’s growth potential. There were more temporary factors at play than were realized at the time. This, of course, meant that the authorities had less room for maneuver on the fiscal front than they believed.

Added to all this was the fact that the pace of structural reforms lost momentum in the mid-90s; indeed, some reforms were reversed. Perhaps the biggest weakness here was the labor market which has tended to be heavily regulated in Argentina. Individual workers have long enjoyed considerable protection, with high barriers to dismissal and the guarantee of generous fringe benefits.

Hmmm. I am sticking my neck out to say this but similar problems lie in India’s fiscal deficit. The difference is our policymakers are realising this problem and are working at it. In his Union Budget speech (2008-09), India’s Finance Minister said:

I acknowledge that significant liabilities of the Government on account of oil, food and fertilizer bonds are currently below the line. This accounting arrangement is consistent with past practice. Nevertheless, our fiscal and revenue deficits are understated to that extent. There is a need to bring these liabilities into our fiscal accounting. As a first step, I have shown these liabilities clearly in ‘Budget at a Glance’.

Moreover, every country differs and our various ratios may be much better than  Argentina in 2000’s.  For instance, our banking system should be much better  placed than Argentina. However, as we have seen in this crisis nothing can be taken for granted.

The high fiscal deficit and its off-balance sheet items has been known for a long-time. And the concerns have come from official government sources. The Prime Minister’s Economic Advisory Panel in its latest outlook raised this as the biggest concern. Shankar Acharya, a  noted senior economist, says despite reforms fiscal deficit continues to be a part of the reform agenda.

As far as off balance sheet items are concerned I tried to estimate, Indian Government’s off-balance sheet liabilities (it was quite a task let me tell you) and its impact on fiscal deficit. Here are the numbers:


Fiscal Deficit
(% of GDP)

Fiscal Deficit + off-balance sheet liabilities
(% of GDP)










Source: RBI, Union Budget 2008-09, CSO




In 2006-07, the fiscal deficit was almost 1% higher than projected and in other 2 the difference was around 0.4% of GDP.  In 2008-09, it is expected to be much higher and  PM’s advisory committee has also pointed the same. Let us wait for the final estimates in April 2009.

The high fiscal deficit as it is has been a problem. And now we have these  off-balance sheet items. This puts entire investment community into an uncertain zone as they start doubting the fiscal prudence reforms and leads to a much bigger problem later on. It should be a top agenda to set things right.

One Response to “Argentina’s off-balance sheet liabilities was a reason for 2001 crisis”

  1. search bonds by social security number | Digg hot tags Says:

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