The smooth and peaceful installation Of President Megawati Sukarnoputri in late July 2001 has diffused the political tensions and strains that derailed the 21-month presidency of Abdurrahman Wahid, although the multitude of priority issues and fractious political environment make the task of advancing reform and reviving strong growth enormous. The surprise acquittal of Prime Minister Thaksin by the Constitutional Court in early August clears the political uncertainty, but has elicited only a tepid market response while considerable impediments to growth remain. The program strengthens fiscal discipline and gives the central bank additional room to support the real. Dollarization has provided the economy with an anchor of stability, but continued inflation is undermining competitiveness.
Interest rates remain high.
Output growth is expected to rebound in 2001 fueled by oil investment, but the reform pace is likely to slow ahead of next year's presidential and congressional elections. Following an unsustainable pace of falling bank deposits and international reserves, Argentina must now implement the Zero-Fiscal Deficit Plan and secure more visible international support to begin restoring investor confidence and renewing growth. The recent expansionary fiscal trend is a source of concern and will complicate domestic liquidity management. A strong rebound in domestic spending accelerated output growth in early 2001. The central bank is likely to continue intervening and raise interest rates to limit the peso depreciation and pass-through to inflation.