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Author`s name Michael Simpson

Economic Challenges for the New Argentina

Unemployment, foreign debt, inequality and financial restructuring are some of the outstanding issues the new authorities will have to face to definitely pull Argentina out of its hole
With the continuity of Roberto Lavagna at the head of the Ministry of the Economy, few changes are expected to be underway at the incoming administration. Moreover, Nestor Kirchner's new Government has already announced that its intention is to continue the policies introduced by Lavagna one year ago.

However, Argentina's major challenge from now on is to consolidate its macroeconomic stability and economic recovery after five years of recession and turmoil. Otherwise, the new authorities will be in a precarious position to face the enormous challenges the current scenario presents.

The first item on Lavagna's agenda is to fight the now-endemic unemployment crisis. The latest figures posted by local authorities read that around half of Argentina's population is either unemployed or underemployed. In order to change this alarming situation, Argentina has to grow by 5% annually for the next five years, analysts say. According to the last reports issued by the Ministry of the Economy, Argentina will grow this year by up to 4.5%, an adequate ground, they say, for a future take-off.

Argentina's GDP growth came thanks to the 200% currency devaluation and good international commodities prices. However, the unfinished financial restructuring could block the provisional reaction of industrial indicators, as the high rates of interest on capital - around 15% - makes it almost impossible to get loans from banks. So, the task is to drop down the prize of money to encourage productive activities.

Another crucial factor for Kirchner's success and the consolidation of the country's democracy is the worrying inequality of income distribution. Inequality of distribution of income is directly connected to increasing of poverty and indigence. Today, 60% of Argentineans live below the poverty line and 16% fear malnutrition. Kirchner's Government will push forward a new tax law to change the current regressive system and replace it with fewer taxes over consumption - Argentina's VAT rate is 21% - and more pressure on the financial businesses. 

Last but not least, foreign debt obligations will play a decisive role in Argentina's future development. After the transitional deal sealed with the IMF in mid-January, Argentina will face in September debt payments of up to $3 billion. According to sources high in the Ministry of the Economy, Roberto Lavagna will try to obtain a new roll-over agreement with the IMF; Argentina wants more time to negotiate further cuts on the defaulted debt with private creditors. The International Monetary Fund, in turn, made it known recently that it is reluctant to negotiate a new delay on debt payments. By the way, Argentina is afraid that, if it pays, it would hurt the badly needed economic growth.

Good news for Kirchner: according to the latest opinion surveys, his Government enjoys, at the very beginning, 60% support from the population. However, Argentina's recent history shows that it is not possible to relay on such figures, as they could suddenly evaporate - it is a society suspicious of everything that comes from the world of politics.