BUENOS AIRES, Argentina — Argentina's government, struggling to turn around a four-year recession that has put the country on the verge of social chaos, said Sunday the economy could contract even more this year after a painful currency devaluation.
Only two days after the biggest street demonstrations yet by an angry middle class and unemployed Argentines protesting the new government, Deputy Economy Minister Jorge Todesca said gross domestic product (GDP) could fall 5 percent this year.
"When we came into government, at first we forecast a 2.6 percent fall in GDP . . . we've changed that . . . taking us to a 5 percent contraction. The budget will be based on this forecast," Todesca told local radio.
Foreign Minister Carlos Ruckauf warned the country was caught between public demands for an end to bank deposit freezes and recession, as well as pressure from the International Monetary Fund to cut spending and endemic government budget deficits.
"We are on a knife edge — we know we have to reach an agreement with the monetary fund to save our country's accounts but, at the same time, we cannot go against the interests of the people," Ruckauf told the Corriere della Sera newspaper in an interview.
"Argentina told the IMF many lies, but now we will reveal all the stark truth. We are ready for decisive measures," Ruckauf added.
President Eduardo Duhalde, a member of the Peronist Party and the fifth president in just over a month, is cobbling together a 2002 budget plan that will include drastic spending cuts that are needed to win crucial International monetary Fund aid.
Only 26 days into the job, Duhalde has not yet said where the spending ax will fall or how the government will help the economy. Ruckauf said measures would include cutting provincial spending and reducing the value added tax from 21 percent to 15 percent.
The IMF has taken a tougher stance with a country that over the last year won pledges of $20 billion in IMF aid but failed to meet the agreed upon macroeconomic targets. The IMF has said that Argentina must show a credible plan if it expects to receive any more cash.
After suspending payments on its $141 billion foreign debt, Argentina's government is unable to raise any credit on foreign markets, so IMF aid is the only source of outside help.
"The common inability of Argentina to fulfill its promises has exhausted the patience of U.S. authorities," political analyst Fernando Laborda wrote in La Nacion newspaper.
But South American governments such as Brazil and Chile are pressing for international help for Argentina, mindful the impact the crisis could have on their economies.
A study published Sunday by the Fundacion Capital think-tank said that Argentina's troubles could impact its major trade partners such as regional powerhouse Brazil by reducing investor confidence in South America.
The 30 percent devaluation of the peso currency had put banks — already suffering from drastic banking curbs that have frozen most savings accounts — on the brink of collapse.
The government policy of a dual exchange rate — an official rate of 1.40 pesos per dollar for foreign trade and a parallel floating rate for cash deals — has been criticized by the IMF as unworkable, straining relations with Argentina.
Argentines, already seeing their dollar savings fall at least 20 percent due to the curbs, have protested daily, culminating last Friday as tens of thousands of demonstrators took to the streets across the country.
Unemployed groups, who have increasingly blocked major highways over the last year to demand government help, plan on Monday to rally outside the presidential palace to call for one million more jobs.
Unpopular bank restrictions last month triggered the worst civil unrest Argentina has seen in a decade, when rioting and looting brought down former President Fernando de la Rua and left 27 people dead.
Ruckauf said that the government could lift the banks' unpopular restrictions by mid-year.
"As a general indication we will move to the free-floating dollar in the next three months, and by July we will completely lift the partial block on bank withdrawals," he added.
Ruckauf is due to meet President Bush, Italian Prime Minister Silvio Berlusconi and Spain's Jose Maria Aznar next week to rally support for Argentina's cause.