inflation tax. Second, the charter prohibited the central bank from guaranteeing bank deposits. Then provincial banks had to rely on depositor confidence to maintain liquidity. Both measures reduced the central bank's role as lender of last resort and hardened the financial budget constraint on provinces, limiting their ability to borrow (indirectly) from the central bank or from depositors. At first these constraints were not binding on provincial finances, because of the rapid growth of tax revenues. However, it proved to be important that the limits were entrenched in the midst of the post-convertibility boom, because they were firmly in place when the boom came to an end and pressure for deficit financing increased.

With peso convertibility, inflation (wholesale price index) slowed to 3 percent in 1992, 0 percent in 1993, and 6 percent in 1994. Due to strong collection efforts, reverse-Tanzi-Oliveira effects, and economic growth, tax revenues increased dramatically, especially from shared taxes. This was reflected at the provincial level, where revenue jumped over 25 percent in real terms between 1991 and 1992, and over a percentage point in GDP, which was itself recovering strongly. See table 4.

Table 4. Trends in Provincial Revenues and Expenditures in Argentina, 1991-97

||(|In percent|of GDP)|||||
|---|---|---|---|---|---|---|---|
|_Type of revenue_|_1991_|_1992_|_1993_|_1994_|_1995_|_1996_|_1997_|
|Current Revenues|8.19|9.62|9.59|9.45|9.34|9.39|9.52|
|Provincial taxes|2.59|3.25|3.41|3.42|3.27|3.27|3.21|
|Provincial nontax revenue|0.40|0.52|0.58|0.62|0.66|0.55|0.77|
|Nationaltransfers_(aportes)_|5.20|5.85|5.61|5.42|5.42|5.57|_5.55_|
|Current Expenditures|7.77|8.80|9.24|9.10|9.22|8.68|8.25|
|Capital Expenditures|1.21|1.07|1.28|1.40|1.52|1.58|1.55|
|Primary Surplus (deficit)|(1.34)|(0.65)|(1.30)|(1.34)|(1.61)|(0.20)|0.11|
|Overall Surplus (deficit)|(1.48)|(0.80)|(1.48)|_(1.55)_|(1.86)|(0.50)|(0.29)|

_Source:_ For 1991-94, World Bank 1996c; for 1996-97, Republic of Argentina, _Informne Economico regional_ Taking advantage of the provinces' rapid and unexpected increase in revenues, the federal government negotiated a series of fiscal agreements in 1992-94. Pacto Fiscal I (August 1992) diverted coparticipation funds to the national social security system, which was poorly funded and required large subsidies. Under the agreement, provinces allowed 15 percent of the total taxes subject to coparticipation to be diverted to finance the transition costs of national social security reform. To close the pact, the federal government guaranteed a floor of $8.7 billion annually in coparticipation payments, expressed in terms of fixed amounts of pesos per month. In expressing the guarantee in terns of pesos, the federal government bet that revenues would grow (and that transfers would exceed the guaranteed amount). Over the next three years, the government won the bet, and the provinces did not collect on their insurance. Although they did collect in 1995 and early 1996, the national executive paid a modest price in exchange for important structural reforms.

As additional quid pro quo, the government established a Fondo de Desequilibrio Fiscal for small poor provinces. Because political power of the small provinces is disproportionate to their population, due to their overrepresentation in both houses of congress, the fund bought political support at relatively low cost. Government also called in political chits from the delegation of Buenos Aires province, demanding support for the fiscal pact as reward for the recently enacted Fondo Conurbano.<sup>7</sup> Pacto Fiscal I was followed by the transfer of federal health and secondary school programs, including 284,000 federal employees, to the provinces. In return, the federal government guaranteed payment equal to its expenditures in each province in 1992 (totaling $1.31 8 billion). The payment was 16