By Taos Turner

BUENOS AIRES -- Argentina's economy will grow about 3% annually over the next five years, the International Monetary Fund said Thursday after formally reviewing the country for the first time in a decade.

Argentina severed ties with the IMF in 2006, accusing it of meddling in domestic affairs and trying to dictate economic policy. Néstor Kirchner, then Argentina's populist president, settled a nearly $10 billion debt with the IMF that year and then refused to cooperate with it.

The standoff continued until last December, when Argentina's new business-friendly president, Mauricio Macri, overturned an unusual mix of unorthodox economic policies that fueled double-digit inflation and led to Argentina's international financial isolation.

"Important progress has been made already in 2016," the IMF said in a statement, lauding Mr. Macri's market-oriented economic policies.

Mr. Macri's agenda, which included eliminating currency controls, cutting taxes and ending Argentina's default, avoided an economic crisis and put Argentina on the path to more stable and sustainable growth, the fund said.

Still, the IMF cautioned that "reversing the legacy of severe macroeconomic imbalances, pervasive microeconomic distortions, and a weakened institutional framework will take time."

Given the dramatic policy changes underfoot in Argentina, the IMF said Argentina's "outlook is subject to greater-than-normal uncertainty."

Setting the economy up for near-term growth required policies that hurt GDP this year, the fund said.

After shrinking 1.8% in 2016, the economy will expand 2.7% next year and continue to grow by about 3% or more through 2019, the IMFforecast.

The IMF said Argentina's plan to cut its fiscal deficit to 4.8% of GDP this year and 4.2% in 2017 is "appropriate" given Mr. Macri's desire to boost growth while expanding social programs for the poor.

The pace of deficit reduction could be hastened if GDP grows faster, the IMF said. A recovery of neighboring Brazil's economy next year could also bolster Argentina, economists say.

Most analysts forecast a return to growth next year and say GDP could expand by about 3%. Consumer spending, which has declined every month this year, will rise in December when the government gives out $1.6 billion in bonuses to retirees, Ecolatina, an economic research firm, said Thursday.

The IMF, which in 2013 threatened to sanction Argentina for allegedly publishing fake inflation and economic growth data, said the government is now publishing "improved and credible statistics."

Annual inflation will end the year at 39.4% before decelerating to 20.5% next year, the IMF said. The rate will fall gradually until hitting 9.4% in 2021.

Argentina's 2017 budget paints a rosier picture, though, with the economy growing 3.5% next year and inflation falling to between 12% and 17%.

Meanwhile, Argentine manufacturers say the exchange rate is too strong. At roughly 15 pesos to the U.S. dollar, it is harder for Argentine products to compete abroad. Economists caution that expected investment cash inflows into Argentina could further strengthen the peso next year, putting added pressure on agricultural exporters and manufacturers.

In what was a largely positive review, the IMF called on Argentina to further improve its business climate, boost private-sector competition and protect the poor from the fallout of policy overhauls.

"Measures to gradually improve the quality of infrastructure, lower trade barriers, and develop local capital markets would also help," the IMF said.

Write to Taos Turner at taos.turner@wsj.com

(END) Dow Jones Newswires

November 10, 2016 20:27 ET (01:27 GMT)

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