## cr18219 — Argentina: Request for Stand‑By Arrangement (IMF staff report excerpts) ## Source details **Canonical URL:** [cr18219 — Argentina: Request for Stand‑By Arrangement (IMF staff report excerpts)](https://www.imf.org/-/media/files/publications/cr/2018/cr18219.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2018/cr18219.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2018/cr18219.pdf.json) --- ### Board decision and IMF access - Arrangement amount: SDR 35,379 million (equivalent to US$35.379 billion, or about 1,110 percent of Argentina’s quota). - Immediate purchase available upon approval: US$15 billion (equivalent to SDR 10,614 billion, or 333 percent of Argentina’s quota). - Use of immediate purchase: One half (US$7.5 billion) to be used for budget support. - Remaining IMF financial support: US$35 billion to be made available over the duration of the arrangement, subject to quarterly reviews by the Executive Board. - Authorities’ intent: draw on the first tranche and subsequently treat the remainder of the arrangement as precautionary. - Phasing: 36‑month Stand‑By Arrangement; 30 percent of access (333 percent of quota or SDR 10,613.71 million) available upon approval (with equal phasing thereafter). - Domestic counterpart of first‑tranche Fund resources for budgetary purposes: SDR 5,306.855 million. ### Program objectives and pillars - Program goals: - restore market confidence; - put public debt on a firm downward trajectory; - reduce inflation; - foster growth and job creation; - reduce poverty. - Fiscal anchor: federal government primary balance by 2020. - Fiscal adjustment target: secure a primary deficit of 1.3 percent of GDP in 2019. - Central bank policy: - strengthen central bank independence; - end direct and indirect central bank financing of the government; - adopt credible disinflation path to bring inflation to single digits by end‑2021. - Exchange rate policy: commitment to a floating, market‑determined exchange rate; limit FX intervention to periods of significant volatility and market dysfunction; rebuild reserve buffers. - Social emphasis: maintain social spending; provide room for greater spending on social safety net if social conditions deteriorate; prioritize well‑designed support programs for the most vulnerable and gender equity measures. ### Protections for vulnerable groups and gender equity - Social safety net measures: - redesign overlapping assistance programs to close gaps in coverage; - pre‑identified, high‑quality, means‑tested social assistance projects can be accommodated if needed. - Gender equity measures: - eliminate the second‑earner tax penalty; - provide working families with assistance with childcare. - Spending commitment: - the level of social spending will be protected under the program; - additional spending on prioritized projects can be accommodated (adjustor: spending on the universal child allowance program can be increased by up to 0.2 percent of GDP or AR$30 billion per calendar year if conditions worsen). ### Recent economic developments and triggers of market pressure - Triggers (April–mid‑2018): - severe drought reducing agricultural production and export revenue; - increase in world energy prices; - tightening global financial conditions (U.S. dollar appreciation and higher U.S. interest rates). - Manifestations: - pressure on the Argentine peso; - market anxiety about roll‑over of short‑term central bank paper (LEBACs); - increase in Argentina’s sovereign risk premium. - Authorities’ near‑term actions preceding IMF request: - significantly increased short‑term interest rates (cumulative increases over one week reached 1,275 bps, bringing 7‑day repo mid‑point from 27¼ percent to 40 percent); - tightened fiscal policy; - sold foreign exchange (e.g., central bank sold US$4.7 billion into the market in April, including US$1.5 billion on April 25). ### Monetary framework and central bank reforms - BCRA commitments: - provide institutional and operational independence and autonomy; - adopt credible disinflation path to reach single‑digit inflation by end‑2021; - ensure central bank has a healthy balance sheet and full financial autonomy. - Vulnerability reduction: diminish Central Bank’s exposure to short‑term peso denominated debt (LEBACs). - BCRA balance‑sheet objectives and targets: - plan to reduce BCRA’s net claim on the government by at least US$10 billion by end‑March 2019, and by US$25 billion by end‑May 2021; - reduce stock of LEBACs from current 10 percent of GDP to about 3.5 percent of GDP by end‑May 2021. - BCRA charter reforms (structural benchmark): submit draft new BCRA charter to Congress by end‑March 2019 to reinforce price stability mandate, prohibit new central bank financing of government, establish Executive Board competence, improve accountability and transparency, and formalize capital/profit rules. ### Macroeconomic projections (selected indicators; exact source values preserved) - GDP at constant prices (annual percentage change): 2015: 2.7; 2016: -1.8; 2017: 2.9; 2018: 0.4; 2019: 1.5; 2020: 2.5; 2021: 3.1; 2022: 3.1; 2023: 3.2. - CPI inflation (eop, y/y % change): 2017: 24.8; 2018: 27.0; 2019: 17.0; 2020: 13.0; 2021: 9.0; 2022: 5.0; 2023: 5.0. - Nominal GDP (bn Argentine pesos): 2015: 5,955; 2016: 8,189; 2017: 10,558; 2018: 13,240; 2019: 16,068; 2020: 18,746; 2021: 21,227; 2022: 23,191; 2023: 25,135. - Primary balance (percent of GDP): 2015: -4.4; 2016: -4.7; 2017: -4.2; 2018: -2.8; 2019: -1.3; 2020: 0.2; 2021: 0.8; 2022: 1.2; 2023: 1.3. - Federal government primary balance (percent of GDP): 2015: -3.8; 2016: -4.2; 2017: -3.8; 2018: -2.7; 2019: -1.3; 2020: 0.0; 2021: 0.5; 2022: 0.9; 2023: 1.2. - Overall balance (percent of GDP): 2015: -5.8; 2016: -6.4; 2017: -6.5; 2018: -5.1; 2019: -3.8; 2020: -2.9; 2021: -2.7; 2022: -2.6; 2023: -2.4. - Total public debt (federal, percent of GDP): 2015: 55.1; 2016: 53.3; 2017: 57.1; 2018: 64.5; 2019: 60.9; 2020: 57.4; 2021: 55.8; 2022: 54.1; 2023: 53.0. - Gross international reserves (bn US$): 2015: 25.6; 2016: 39.3; 2017: 55.1; 2018: 65.4; 2019: 69.0; 2020: 79.7; 2021: 88.4; 2022: 96.0; 2023: 103.8. - Net international reserves (bn US$), memorandum: 2015: -1.5; 2016: 10.3; 2017: 27.9; 2018: 29.7; 2019: 33.4; 2020: 44.0; 2021: 54.6; 2022: 69.8; 2023: 83.2. - Total external debt (percent of GDP): 2015: 27.9; 2016: 34.2; 2017: 37.0; 2018: 51.3; 2019: 52.6; 2020: 52.0; 2021: 50.8; 2022: 50.0; 2023: 49.2. - Current account balance (percent of GDP): 2015: -2.7; 2016: -2.7; 2017: -4.8; 2018: -3.6; 2019: -3.2; 2020: -2.7; 2021: -2.2; 2022: -2.1; 2023: -2.1. ### Fiscal consolidation, identified measures, and institutional improvements - Identified fiscal measures (cumulative percent of GDP relative to 2017): - Total identified measures: 2018 = 1.7; 2019 = 4.2. - Selected items (2018 / 2019): reductions in inefficient energy and transportation subsidies 0.3 / 0.7; reductions in discretionary capital and current transfers to provinces 0.5 / 1.2; reductions in capital spending of federal government 0.3 / 0.6; sale of land and amortization of pension fund assets 0.2 / 0.6. - Additional commitments: - Maintain average export tax rate on soy products at 25.5 percent. - Rationalize goods and services spending with a 15 percent cut in real terms in 2018 and continuation in 2019. - Cap nominal growth of public sector wages (including non‑wage benefits and payments) to an average of 8 percent during June 2018–June 2019 (agreement with unions signed). - Cut transfers to state‑owned enterprises by a total of 15 percent by 2019. - Fiscal framework improvements (structural benchmarks and actions): - Introduce a Medium‑Term Fiscal Framework (MTFF) — structural benchmark end‑October 2018. - Publish a new mid‑year fiscal report by June 2019. - Provide adequate resources to the CBO (structural benchmark end‑December 2018). - Strengthen FCFR monitoring and publish tax‑expenditure statements and fiscal risk analyses for the 2020 budget. ### Social protection safeguards (quantified floors and program coverage) - Program floor on federal government spending on social assistance (quarterly performance criterion): equivalent to 1.3 percent of GDP (or AR$177 billion) in 2018 and at a level that safeguards program coverage for 2019–20 while allowing benefits to rise according to indexation. - Priority social programs (selected figures preserved): - Asignaciónes Familiares — Number of Beneficiaries (million): 4.0 4.2 4.4; Total spending (AR$ bn): 57.1 81.8 102.7; Total spending (in percent of GDP): 0.7 0.8 0.8. - Asignación Universal para Proteccion Social — Number of Beneficiaries (million): 3.9 3.9 4.1; Total spending (AR$ bn): 50.5 60.1 74.8; Total spending (in percent of GDP): 0.6 0.6 0.6. - Coverage as percent of number of persons in poverty: 46.7 55.5 (memorandum). - Adjustor: spending on the universal child allowance program can be increased by up to 0.2 percent of GDP (or AR$30 billion) per calendar year if conditions worsen; cap AR$13,500 million in 2018 noted in TMU. ### Growth outlook and external position - Growth: - Growth expected to be around 1½ percent in 2019. - Growth to improve into 2020 and rise above potential to around 3 percent beginning to close the output gap. - External position and reserves: - Current account deficit projected to contract to 2¼ percent of GDP by 2021. - Gross reserves forecast around US$88 billion by end‑2021. - Under program, gross reserves reach 115 percent of the ARA metric by end‑2021 and peak at 121 percent of the ARA metric in 2023. ### Adverse scenario — key assumptions and impacts - Adverse scenario assumptions: - Lower rollover rates on Argentine public debt by residents and nonresidents (e.g., International law debt rollover: Residents 95 / 85; Nonresidents 90 / 75). - More depreciated real and nominal exchange rates; higher nominal and real interest rates; deeper recession in 2018 and protracted recovery. - Need to find an additional 1 percent of GDP in measures to keep primary deficit targets. - Full amount of the SBA is drawn and used for budget support. - Adverse scenario outcomes (selected): - Growth: 2018: -1.3; 2019: 0.0; 2020: 1.0. - CPI inflation (eop): 2018: 31.7; 2019: 20.8. - Federal primary balance (percent of GDP): 2018: -2.0; 2019: -0.9. - Federal debt (percent of GDP, DSA): 2018: 68.6; 2019: 65.4. - Gross international reserves (US$ bns): 2018: 54.3; 2019: 53.6. - Under the adverse scenario: federal debt would be 4 percent of GDP higher than in the baseline by end‑2021; an additional US$35 billion in external financing needs would be met by drawing the full SBA. ### Access, phasing, and schedule of reviews and purchases - Access level and composition: - Access proposed at about US$50 billion (1,110 percent of quota, SDR 35.379 billion, or 8 percent of GDP). - Under an adverse scenario, proposed access would be sufficient to keep gross reserves from falling below 74 percent of the ARA metric. - Phasing: - 30 percent of access (SDR 10,613.71) made available upon approval (goal: bring gross reserves to ~100 percent of ARA metric by end‑2018). - Remaining access made available in equal disbursements upon completion of quarterly reviews (first review considered by Board in September 2018, based on end‑June performance criteria). - Schedule of reviews and purchases (selected): - Available on or after June 20, 2018: SDR 10,613.71 (333% Quota) — Approval. - September 15, 2018: SDR 2,063.78 (65% Quota) — First Review. - Subsequent quarterly reviews each SDR 2,063.78 (65% Quota) through June 1, 2021: final cumulative SDR 35,379 (1110% Quota). - Domestic counterpart and budget support: - One‑half of domestic counterpart of first tranche (SDR 5,306.855 million) to be used as budget support. - Budget support (US$7.5 billion) split across FX financing for reduction of domestic‑law FX federal liabilities, repayment of official loans, service of international‑law debt, and peso financing to cover primary deficit and pesos debt service. ### Quantitative performance criteria and monitoring (selected figures) - Primary balance of the federal government (floor), cumulative flows (AR$ bn unless otherwise stated): - end‑Jun: -148.0; end‑Sep: -256.0; end‑Dec: -362.5; end‑Mar: -32.0; end‑Jun (2019): -100.0. - Social assistance spending (floor, cumulative AR$ mn): end‑Jun: 87.7; end‑Sep: 131.1; end‑Dec: 177.5; end‑Mar: 60.0; end‑Jun (2019): 112.6. - Change in net international reserves (floor) (US$ bn, measured vs June 4 stock): end‑Jun: 5.5; end‑Sep: 5.5; end‑Dec: 5.5; end‑Mar: 5.5; end‑Jun (2019): 7.5. - Change in stock of non‑deliverable FX forwards (ceiling) (US$ bn): end‑Jun: 1.0; end‑Sep: 0.0; end‑Dec: -0.5; end‑Mar: -1.0; end‑Jun (2019): -1.5. - Change in central bank credit to government (ceiling, AR$ bn measured vs end‑May 2018 value of 2,204.4): end‑Jun: 0.0; end‑Sep: -78.0; end‑Dec: -156.0; end‑Mar: -234.0; end‑Jun (2019): -312.0. - Central bank financing of the government (continuous performance criterion): 0.0 at end‑periods reported. - Inflation consultation clause (y/y percent) — center targets preserved for review dates: end‑Jun center 27; end‑Mar center 24; end‑Jun (2019) center 22 (bands and inner/outer limits defined in TMU). ### Capacity to repay, Fund exposure, and safeguards - Capacity to repay: - Baseline (only first tranche drawn): capacity to repay assessed as good; reserves remain adequate. - Adverse (all tranches drawn): capacity to repay assessed as adequate; Fund exposure in certain debt‑service metrics at higher end compared with other exceptional access cases. - If all purchases made as scheduled, projected payments to the Fund would peak in 2023 at SDR 11 billion, or 18 percent of official reserves when gross reserves ~US$90 billion. - Fund exposure and liquidity impact: - Proposed arrangement would reduce the Fund’s liquidity by 16.0 percent (impact on one‑year Forward Commitment Capacity). - After the first purchase, Argentina’s GRA credit outstanding would be SDR 10,613.7 (333 percent of quota), representing 22.1 percent of total GRA credit outstanding. - Peak Fund exposure metrics if all purchases made as scheduled: outstanding use rising to 1,110 percent of quota in June 2021; Fund charges and surcharges and projected debt service presented in TMU tables. - Safeguards and monitoring: - A safeguards assessment of the BCRA will be completed prior to the first review. - Extensive reporting and monitoring requirements (daily, weekly, monthly, quarterly) specified in the TMU. ### Principal risks and mitigants - Principal inherent risks: - Pace at which market confidence can be restored; risk of abrupt tightening of global financial conditions; large foreign currency debt share; political capacity to implement adjustment. - Terms‑of‑trade shocks (e.g., fall in soy prices); regional economic weakening; rapid capital inflows risking REER appreciation. - Mitigating factors: - Argentina’s efforts to strengthen institutions, improve governance, and increase transparency. - Commitment to protect social spending and to strengthen central bank independence and monetary framework. *Source: IMF staff report—Argentina: Request for Stand‑By Arrangement (cr18219).* ### 35.379 billion, or about 1,110 percent of Argentina’s quota in the IMF). ### ARGENTINA: REQUEST FOR STAND-BY ARRANGEMENT ### Board decision and IMF access - Arrangement amount: SDR 35,379 million (equivalent to US$35.379 billion, or about 1,110 percent of Argentina’s quota). - Immediate purchase available upon approval: US$15 billion (equivalent to SDR 10,614 billion, or 333 percent of Argentina’s quota). - Use of immediate purchase: One half (US$7.5 billion) to be used for budget support. - Remaining IMF financial support: US$35 billion to be made available over the duration of the arrangement, subject to quarterly reviews by the Executive Board. - Authorities’ intent: draw on the first tranche and subsequently treat the remainder of the arrangement as precautionary. - Phasing: 36-month Stand-By Arrangement; 30 percent of access (333 percent of quota or SDR 10,613.71 million) available upon approval (with equal phasing thereafter). - Domestic counterpart of first-tranche Fund resources for budgetary purposes: SDR 5,306.855 million. ### Program objectives and pillars - Program goals: restore market confidence, put public debt on a firm downward trajectory, reduce inflation, foster growth and job creation, and reduce poverty. - Fiscal anchor: federal government primary balance by 2020. - Fiscal adjustment target: secure a primary deficit of 1.3 percent of GDP in 2019. - Central bank policy: strengthen central bank independence; end direct and indirect central bank financing of the government; adopt credible disinflation path to bring inflation to single digits by end-2021. - Exchange rate policy: commitment to a floating, market-determined exchange rate; limit FX intervention to periods of significant volatility and market dysfunction; rebuild reserve buffers. - Social emphasis: maintain social spending; provide room for greater spending on social safety net if social conditions deteriorate; prioritize well-designed support programs for the most vulnerable and gender equity measures. ### Protections for vulnerable groups and gender equity - Social safety net measures: redesign overlapping assistance programs to close gaps in coverage; pre-identified, high-quality, means-tested social assistance projects can be accommodated if needed. - Gender equity measures: eliminate the second-earner tax penalty; provide working families with assistance with childcare. - Spending commitment: the level of social spending will be protected under the program; additional spending on prioritized projects can be accommodated to continue reducing poverty rates even if growth is slower-than-expected. ### Recent economic developments and risks - Triggers of April market pressure: severe drought reducing agricultural production and export revenue; increase in world energy prices; tightening global financial conditions via appreciation of the U.S. dollar and upward shift in U.S. interest rates. - Manifestations: pressure on the Argentine peso; market anxiety about roll-over of short-term central bank paper; increase in Argentina’s sovereign risk premium. - Authorities’ near-term actions preceding IMF request: significantly increased short-term interest rates, tightened fiscal policy, and sold foreign exchange. ### Monetary framework and central bank reforms - Central bank commitments: provide institutional and operational independence and autonomy; adopt credible disinflation path to reach single-digit inflation by end-2021; plans to ensure central bank has a healthy balance sheet and full financial autonomy. - Vulnerability reduction: steps to diminish Central Bank’s exposure to short-term peso denominated debt (LEBACs). ### Macroeconomic projections (selected indicators, exact values preserved) - GDP at constant prices (annual percentage change): 2015: 2.7; 2016: -1.8; 2017: 2.9; 2018: 0.4; 2019: 1.5; 2020: 2.5; 2021: 3.1; 2022: 3.1; 2023: 3.2. - CPI inflation (eop, y/y % change): 2017: 24.8; 2018: 27.0; 2019: 17.0; 2020: 13.0; 2021: 9.0; 2022: 5.0; 2023: 5.0. - Nominal GDP (bn Argentine pesos): 2015: 5,955; 2016: 8,189; 2017: 10,558; 2018: 13,240; 2019: 16,068; 2020: 18,746; 2021: 21,227; 2022: 23,191; 2023: 25,135. - Primary balance (percent of GDP): 2015: -4.4; 2016: -4.7; 2017: -4.2; 2018: -2.8; 2019: -1.3; 2020: 0.2; 2021: 0.8; 2022: 1.2; 2023: 1.3. - Federal government primary balance (percent of GDP): 2015: -3.8; 2016: -4.2; 2017: -3.8; 2018: -2.7; 2019: -1.3; 2020: 0.0; 2021: 0.5; 2022: 0.9; 2023: 1.2. - Overall balance (percent of GDP): 2015: -5.8; 2016: -6.4; 2017: -6.5; 2018: -5.1; 2019: -3.8; 2020: -2.9; 2021: -2.7; 2022: -2.6; 2023: -2.4. - Total public debt (federal, percent of GDP): 2015: 55.1; 2016: 53.3; 2017: 57.1; 2018: 64.5; 2019: 60.9; 2020: 57.4; 2021: 55.8; 2022: 54.1; 2023: 53.0. - Gross international reserves (bn US$): 2015: 25.6; 2016: 39.3; 2017: 55.1; 2018: 65.4; 2019: 69.0; 2020: 79.7; 2021: 88.4; 2022: 96.0; 2023: 103.8. - Net international reserves (bn US$), memorandum: 2015: -1.5; 2016: 10.3; 2017: 27.9; 2018: 29.7; 2019: 33.4; 2020: 44.0; 2021: 54.6; 2022: 69.8; 2023: 83.2. - Total external debt (percent of GDP): 2015: 27.9; 2016: 34.2; 2017: 37.0; 2018: 51.3; 2019: 52.6; 2020: 52.0; 2021: 50.8; 2022: 50.0; 2023: 49.2. - Current account balance (percent of GDP): 2015: -2.7; 2016: -2.7; 2017: -4.8; 2018: -3.6; 2019: -3.2; 2020: -2.7; 2021: -2.2; 2022: -2.1; 2023: -2.1. ### Program modalities, conditionality, and staff engagement - Arrangement duration: 36 months. - Legal character: intention to treat remainder as precautionary does not change legal character; member may present that it faces an actual BOP need and request a purchase under the SBA if conditions met. - Reviews and monitoring: remaining support made available subject to quarterly reviews by the Executive Board. - Mission and approval: mission met May 18 to June 7, 2018; executive summary dated June 13, 2018. - Staff and approval: Approved by Nigel Chalk (WHD) and Daria Zakharova (SPR); mission team members listed in document. *Source: IMF staff report—Argentina: Request for Stand-By Arrangement (cr18219).* ### 18. External Debt Sustainability Framework, 2013–23 ____________________________________________ 49 ### 18. External Debt Sustainability Framework, 2013–23 ### Economic and political context - President Macri took office in December 2015 facing pervasive macroeconomic imbalances, microeconomic distortions, and a debilitated institutional framework. - Key pre-existing conditions and outcomes: - One in three Argentines were living below the official poverty line when President Macri took office. - International reserves were virtually depleted at end-2015 (gross reserves US$25.6 billion). - By end-2017, gross reserves were about US$55 billion; net of short-term external liabilities, reserves rose from −US$1.5 million to almost US$28 billion. - About 70 percent of the federal debt stock was denominated in U.S. dollars or other foreign currencies as of March 2018. - Since January 2016, the federal government issued US$56 billion in external debt and provinces issued a further US$13 billion. - Projected gross external financing needs for the remainder of 2018 were about US$94 billion. - Policy actions taken since December 2015: - Unified the exchange rate and removed FX controls; allowed currency to be market-determined. - Put in place an inflation targeting framework for monetary policy. - Settled outstanding FX forward contracts and rebuilt international reserves. - Began realigning utility prices and eliminating inefficient electricity and fossil fuel subsidies. - Cut government spending and reduced the most distortive taxes. - Reached a debt exchange with foreign creditors to reopen international capital markets. - Restored credibility to official statistics with IMF assistance via a rebuild of the statistics agency. - Economic trajectory: - Unwinding distortions caused a recession in the first year of the administration; economy recovered in 2017 with strong investment and consumption and acceleration in job creation. - The 2017 Article IV Consultation judged the peso to have been 10–25 percent overvalued relative to medium-term fundamentals and desirable policies. - Inflation and disinflation challenges: - Second-round effects from utility tariff normalization, insufficient fiscal retrenchment, strong nominal wage growth, and backward indexation produced significant inflation inertia. - The central bank’s planned path of disinflation was disrupted. ### Market volatility - Triggering events and dynamics (late 2017–mid 2018): - December 28, 2017: government reset 2018 inflation target midpoint from a 10±2 percent band to a point estimate of 15 percent. - January 9 and January 23, 2018: central bank lowered policy rate by 75 bps and then another 75 bps. - Resulting jump in inflation expectations to 22 percent for end-2018 and a rapid depreciation of the peso by about 15 percent from December to February 2018. - Utility price increases in first half of 2018 caused inflation to stall at around 25 percent over several months. - Global financial tightening: U.S. dollar strengthened and U.S. Treasury yield curve shifted up; reduced appetite for Argentine international bonds, especially after the federal government placed US$9 billion in debt on January 4, 2018. - A domestic drought during November–March reduced soy and corn yields; estimates suggest the crop will be 20–30 percent lower than the previous harvest. - Investing in short-term BCRA paper (LEBACs) became a crowded carry trade; substantial non-bank investor holdings and frequent rollovers increased vulnerability. - Key market responses and policy measures in April–May 2018: - Central bank sold US$4.7 billion into the market to facilitate exits from peso assets; on April 25 sold US$1.5 billion in one day. - April policy actions: raised interest rates by 300 bps on April 27 and further 300 bps on May 3; cumulative increases culminated in a further 675 bps on May 4. - Cumulative increase over one week reached 1,275 bps, bringing the mid-point 7-day repo rate from 27¼ percent to 40 percent. - May 4 package of measures included: - Widening of the corridor around the policy rate. - Reduction in ceiling on domestic banks’ net FX long positions from 30 to 10 percent of their net equity or liquidity. - Decrease in the 2018 federal government primary deficit target from 3.2 to 2.7 percent of GDP (no change to 2019 target of 2.2 percent of GDP). - Government indicated the 2018 primary deficit reduction would lower financing needs by US$3 billion (did not net out higher interest bill effects). - May 8: President Macri announced discussions with the IMF about a high access arrangement. - Market developments in mid-May 2018: - May 11: currency depreciated a further 2.7 percent; central bank sold US$1.2 billion; interest rates on 35-day central bank paper rose to 49 percent. - May 14: peso lost a further 7 percent. - Average spreads on foreign currency bonds rose by around 120 bps from mid-April to mid-May. - Fitch lowered Argentina’s rating outlook from positive to stable. - May 16: government rolled over US$28 billion in maturing short-term BCRA paper at a 40 percent annual rate on one-month paper. - Central bank offered up to US$5 billion in foreign exchange at 25 pesos per U.S. dollar, calming markets; exchange rate stabilized around AR$25 per U.S. dollar, one-month central bank liabilities yielded close to 40 percent. - June 7: announcement of a staff-level agreement on an exceptional access Stand-By Arrangement; sovereign spreads fell, EMBI fell from 479 bps to 474 bps, one-year CDS fell by 10 bps (to 178 bps), stock index rose by 4 percent. - June 12: following removal of FX offer, BCRA sold around US$700 million in spot markets and US$300 million in non-deliverable futures. ### A more accelerated fiscal path - Program fiscal objectives: - Anchor: achieve federal government primary balance by 2020. - Targeted primary deficits: 2.7 percent of GDP in 2018 and 1.3 percent of GDP in 2019. - Context: primary deficit outturn of 2017 was 3.8 percent of GDP. - Debt-to-GDP path: staff projects debt-to-GDP falling from about 65 percent of GDP at end-2018 to below 56 percent of GDP by end-2021 under the program’s path. - Treasury committed to these federal primary balance targets on June 7; staff considers completion of this action a prior action. - Program monitoring and benchmarks: - Quarterly performance criterion on the primary deficit of the federal government. - Indicative target on the primary balance of the general government to ensure provincial convergence. - Submission to Congress of a 2019 budget consistent with the program as an end-October 2018 structural benchmark. - Identified fiscal measures for 2018–19 (summary of measures and cumulative percent of GDP relative to 2017): - Delaying implementation of tax reform: 2018 = 0.0; 2019 = 0.3 - Export tax on soy products: 2018 = 0.0; 2019 = 0.1 - Reductions in inefficient energy and transportation subsidies: 2018 = 0.3; 2019 = 0.7 - Savings on goods and services spending: 2018 = 0.1; 2019 = 0.2 - Real wage and employment reduction for public employees: 2018 = 0.2; 2019 = 0.3 - Cutting transfers to state owned enterprises: 2018 = 0.1; 2019 = 0.1 - Reductions in discretionary capital and current transfers to provinces: 2018 = 0.5; 2019 = 1.2 - Reductions in capital spending of the federal government: 2018 = 0.3; 2019 = 0.6 - Scale back tax expenditures linked to the corporate income tax: 2018 = 0.0; 2019 = 0.1 - Sale of land and amortization of pension fund assets: 2018 = 0.2; 2019 = 0.6 - Total identified measures: 2018 = 1.7; 2019 = 4.2 - Additional measures and institutional strengthening: - Maintain average export tax rate on soy products at 25.5 percent. - Rationalize goods and services spending with a 15 percent cut in real terms in 2018 and continuation in 2019. - Reduce wage bill via attrition of non-priority public employees in 2018 and a hiring freeze in federal administration for 2019 and 2020 (excluding universities). - Cap nominal growth of public sector wages (including non-wage benefits and payments) to an average of 8 percent during June 2018–June 2019 (agreement with unions signed). - Cut transfers to state-owned enterprises by a total of 15 percent by 2019, combined with efforts to strengthen their financial position. - Reduce discretionary transfers to provinces by 1.2 percent of GDP by 2019, offset by cuts in provincial spending on wages and goods and services, while preserving provincial social assistance programs. - Reduce capital spending by 0.6 percent of GDP by 2019 with expectation that PPP projects protect overall public infrastructure outlays. - Scale back tax expenditures linked to corporate income tax. - Sell land and amortize pension fund assets to partially finance payment of past pension claims (technical accounting treatment to be examined by FAD and STA specialists). - Contingent measures: authorities identified a further 0.2 percent of GDP in contingent measures (largely reductions in capital spending) to be drawn on if GDP growth is weaker-than-expected or other risks materialize. - Fiscal framework improvements: - Introduce a Medium-Term Fiscal Framework (MTFF) with medium-term objectives for the primary balance and transparent indication of the impact of new measures (structural benchmark for end-October 2018). - Publish a new mid-year fiscal report by June 2019 with updated outturns and a revised MTFF. - Provide adequate resources and staffing to the newly created CBO (Oficina de Presupuesto del Congreso) to evaluate forecasts, cost policies, and assess fiscal plans (structural benchmark for end-December 2018). - Provide adequate resources to the Federal Council of Fiscal Responsibility (FCFR) to monitor and evaluate fiscal performance of federal and provincial governments; comprehensive examination of FCFR design features planned. - Budget documents to continue showing a statement quantifying size and type of tax expenditures. - Develop a fiscal risk analysis framework for inclusion in the 2020 budget documents: fiscal risks scenario analysis, long-term fiscal sustainability analysis for federal and general government, and analysis of contingent liabilities (including PPPs, state enterprises, and unfunded pension obligations). - Strengthen revenue administration through: (i) comprehensive taxpayer compliance program with AFIP; (ii) modernizing and integrating AFIP ICT and data management; (iii) improving single taxpayer account functioning; (iv) improving administration of the small taxpayers’ (monotributo) regime; and support to provinces to modernize tax administration. ### Protections for the most vulnerable - The identified reductions in provincial spending are designed to preserve social assistance and other poverty alleviation programs executed at the provincial level. - If economic and fiscal outturns are stronger-than-expected, authorities would consider a more front-loaded elimination of distortive taxes in line with the pace outlined in the late-2017 tax reform; fiscal position and policy implications would be assessed at each program review. *International Monetary Fund — Argentina (excerpt)* ### 15. The authorities are keen to minimize the effects of the adjustment on the most ### 15. The authorities are keen to minimize the effects of the adjustment on the most vulnerable ### Social protection safeguards and contingency measures - Program floor on federal government spending on social assistance (a quarterly performance criterion) equivalent to 1.3 percent of GDP (or AR$177 billion) in 2018 and at a level that safeguards program coverage for 2019–20 while allowing benefits to rise according to the existing indexation formula. - Focus on programs that cover children through the existing social safety net: the universal child allowance program (Asignación Universal por Hijo, AUH) and the allowance for pregnant mothers (Asignación por Embarazo, AUE). Together these comprise Asignación Universal para Protección Social. - Floor will protect social spending on contributory family allowances (including allowances to monotributistas which are included under the budgetary program named Asignaciones Familiares). - Adjustor to the primary deficit to prioritize additional spending on pre-specified, high-impact social assistance programs: spending on the universal child allowance program can be increased by up to 0.2 percent of GDP (or AR$30 billion) per calendar year if conditions worsen (insufficient benefits or higher enrollment). ### Table 1 — Priority Social Protection Programs (selected figures preserved) - Programs to which floor on social assistance spending applies - Number of Beneficiaries (million): 7.8 8.1 8.5 - Total spending (AR$ bn): 107.6 141.9 177.5 - Total spending (in percent of GDP): 1.3 1.3 1.3 - Coverage of those families in first or second decile, in percent: ... 66.5 ... - Asignaciónes Familiares - Number of Beneficiaries (million): 4.0 4.2 4.4 - Total spending (AR$ bn): 57.1 81.8 102.7 - Total spending (in percent of GDP): 0.7 0.8 0.8 - Coverage of those families in first or second decile, in percent: ... 24.0 ... - Asignación Universal para Proteccion Social - Number of Beneficiaries (million): 3.9 3.9 4.1 - Total spending (AR$ bn): 50.5 60.1 74.8 - Total spending (in percent of GDP): 0.6 0.6 0.6 - Coverage of those families in first or second decile, in percent: ... 42.5 ... - Coverage as percent of number of persons in poverty: 46.7 55.5 - Memorandum Items - Total number of people in poverty (million): 8.3 7.1 ... ### Additional social protection actions - Work with the World Bank and IDB to identify measures to protect households and individuals that have no children. - Work with the provinces to integrate social services to those in poverty to reduce duplication, improve targeting and lower administrative costs. - Following a comprehensive review, revise the social tariffs system to better protect the bottom four deciles of the income distribution. ### Supporting gender equity - Context and objectives - 39 percent of women work in the informal sector (versus 34 percent of men). - There is a 24 percent wage gap between women and men. - Intended measures - Eliminate the second-earner penalty in the current tax system. - Continue investing in publicly-funded infrastructure for childcare and early childhood education. - Introduce legislation to equalize maternity and paternity leave. - Introduce legislation requiring listed companies to publish data annually on the gender balance on their Board and among their managerial positions. - Introduce legislation that will increase penalties on perpetrators of gender-based or domestic violence and provide support networks for victims. ### Monetary framework underpinning the program - Objective: strengthen credibility of the inflation targeting (IT) framework, build institutional strength of the central bank, reduce fiscal pressure, and ensure a freely floating exchange rate. - Monetary policy aim: achieve single-digit inflation by end-2021 within a flexible exchange rate regime. - Program conditionality: an inflation consultation clause centered on the authorities’ inflation targets. Breach of the inner inflation band triggers consultation with staff; breach of the outer band triggers consultation with the Executive Board before eligibility for further purchases. Same clause applies if net domestic assets of the central bank exceed program thresholds. ### Inflation Targets and Consultation Bands (y/y, in percent) - Dec-2018 | Dec-2019 | Dec-2020 | Dec-2021 - Outer Band - Upper Limit: 32 21 16 11 - Inner Band - Upper Limit: 29 19 15 10 - Midpoint: 27 1 7 13 9 - Inner Band - Lower Limit: 25 15 11 8 - Outer Band - Lower Limit: 22 13 10 7 (Note: table entries preserved exactly as presented.) ### Central bank policy commitments and actions - BCRA committed to not loosen monetary policy until clear signs of decline in both end-2019 inflation expectations and realized year-on-year inflation outcomes. - Government actions already taken (prior actions): - Ministry of Finance memorandum ending all new direct or indirect central bank net financing of the government; program includes a continuous performance criterion on providing no new central bank net financing to the government, including through distribution of unrealized gains derived from currency depreciation. - BCRA published communication formally adopting the new inflation targets. - Plan to reduce BCRA’s net claim on the government by at least US$10 billion by end-March 2019, and by US$25 billion by end-May 2021. Repayment of government liabilities held by the central bank will be used to drain peso liquidity. - By end-September 2019, BCRA will limit counterparties for sale of LEBACs, open market operations, and repos to local banks. - By end-May 2021, central bank expected to have reduced stock of LEBACs from the current 10 percent of GDP to about 3.5 percent of GDP. - Government intends to establish a senior-level, debt management coordinating committee between Treasury-Finance-BCRA to meet weekly (end-September 2018 structural benchmark). ### Central bank recapitalization and exchange rate policy - Government will inject necessary amount of peso-denominated, interest-bearing marketable securities onto the central bank’s balance sheet to achieve an adequate level of capital by end-December 2019 (following an independent assessment). - Agreement to be formalized in planned revisions to the BCRA charter: distributable central bank profits (excluding unrealized gains) will be remitted each year to the Treasury while central bank capital exceeds the adequate level; if capital declines below that level, BCRA may retain distributable profits. - Exchange rate policy: floating exchange rate with foreign currency sales restricted to countering periods of clear market dysfunction; exchange rate allowed to fully adjust to prevailing market conditions. - NIR floor and related targets: - Floor on change in net international reserves (measured relative to June 4 stock) of +US$5.5 billion by end-June 2018 and remaining at that level for the remainder of 2018. - Upon approval of the arrangement, NIR will rise by US$7.5 billion as a result of the IMF’s direct budget support. - NIR floor would rise to +US$7.5 billion by June 2019 and to +US$28 billion by June 2021. - Adjustor: allow use of up to US$7.5 billion in budget support to either extinguish foreign currency obligations of the federal government or to sell to the market in a pre-announced central bank auction. - Ceilings and consultations on FX instruments: - Quarterly ceiling on the stock of non-deliverable forwards (NDF): reduce from US$2.3 billion on June 4, 2018 to US$1 billion by end-June 2019. - BCRA will initiate a consultation with staff if its net foreign exchange sales in spot and forward markets are excessive. - BCRA to publish, by end-September 2018, a regulation to introduce a foreign exchange auction to intervene in the spot and forward markets. ### BCRA charter and governance reforms (structural benchmark) - Government will submit a draft of a new BCRA charter to Congress by end-March 2019 (structural benchmark). Proposed legislative elements include: - Reinforce price stability as the key objective of the BCRA. - Prohibit all new, direct or indirect central bank financing of the Government. - Entrust competence for monetary policy formulation to the new Executive Board, including authority to set, in consultation with the Ministry of Finance, the inflation targets for three years ahead. - Strengthen avenues of BCRA accountability with Congress and the Argentine people (including an accountability mechanism for when inflation deviates from the BCRA’s inflation objective by a pre-set amount). - Provide for well-defined, and limited, grounds and procedures for dismissal of the Governor, Vice-Governor, Board of Directors, and Executive Board members. - Improve transparency by restoring international accounting standards for the Central Bank’s balance sheet. - Clarify the legal status of the BCRA’s official foreign reserves (to serve only to implement exchange rate and monetary policies). - Establish in the charter the adequate level of capital for the BCRA, the process for automatic recapitalization, profit sharing and retention rule, and the retention of unrealized gains and losses. - Strengthen central bank governance arrangements to support autonomy. - Administration indicated commitment to treat the central bank as operationally independent, with monetary policy decisions to be taken by the Monetary Policy Council. ### Banking system assessment and contingency planning - Current position: - Bank credit amounts to only 16 percent of GDP. - Regulatory capital was 15 percent of risk-weighted assets at March 2018, with 90 percent of that amount in the form of tier-1 capital. - Liquid assets cover over 45 percent of short-term liabilities. - Largely limited exposure to the sovereign, especially for private banks. - Important data gaps: real estate transactions, cross-border activities, and non-bank financial institutions. - Risks and program actions: - Nonperforming loans stood at 1.9 percent of the loan portfolio in March 2018 and were fully provisioned. - Program will include MCM experts in the first review mission to assess preparedness to handle strains in the banking system and develop a contingent strategy for significant liquidity strains (e.g., deposit outflows) or weakening of balance sheets from a substantial rise in bad loans. - Capital flow management measure (C F M) used: - BCRA lowered the limit on net long foreign exchange positions from a monthly average balance of 30 percent to a daily balance of 10 percent of banks’ previous month’s net equity during intense peso depreciation and BOP pressures; measure considered consistent with the Fund’s institutional view on capital flows and supportive of macroeconomic policy adjustment. ### Macroeconomic framework and risks - Expected slowdown in 2018 due to market disruptions and expected fiscal contraction. - Implied fiscal multipliers underpinning the program (one-year horizon): - 0.8 on average for changes to spending (at constant prices). - 0.6 for changes to tax revenues. - Countervailing forces: - Significant real peso depreciation expected to improve competitiveness and support external adjustment. - Strong recovery in the agriculture sector—typical in Argentina following a drought—expected to contribute to growth in the second half of the year. - Gradual restoration of market confidence expected to reverse drag on activity. - Inflation dynamics: - Slowdown will put downward pressure on core inflation, mitigating upward pressure from currency depreciation and the planned faster pace of realigning utility tariffs with international prices (particularly given higher world energy prices and a weaker peso). *Source: IMF country document content unit cr18219 (PDF chapter).* ### 31. Steady implementation of policies should, however, spur a growth acceleration into ### cr18219 - 31. Steady implementation of policies should, however, spur a growth acceleration into ### Growth outlook and drivers - Growth is expected to be around 1½ percent in 2019. - Growth will continue to improve into 2020 with growth eventually rising above potential, to around 3 percent, beginning the process of closing the output gap. - The rebalancing of the policy mix will facilitate a broader re-composition of demand from the public to the private sector with consumption and investment being the primary drivers in 2019–20. - Further progress in addressing corruption would strengthen the business climate and build public support for reforms. - As the government’s commitment to the objectives of the program become entrenched, market confidence should be restored, leading to a progressive reduction in short-term interest rates and a modest rebound in the peso. ### External position, reserves, and current account - A lower primary deficit of the federal government and a weaker peso will facilitate a contraction of the current account deficit to 2¼ percent of GDP by 2021. - A return of capital inflows, lower government interest payments, and disbursements from the Fund will allow for gradual reserve accumulation. - Gross reserves are forecast to reach around US$88 billion (or 115 percent of the ARA metric) by end-2021. - Under the program gross reserves reach 115 percent of the ARA metric by end-2021 and peak at 121 percent of the ARA metric in 2023. - The level of reserves is intended to provide insurance against vulnerabilities from a high degree of dollarization, elevated external debt levels, vulnerability to tightening global financial conditions, and sizable gross financing needs. ### Public debt, fiscal adjustment, and financing needs - Debt is expected to peak at end-2018 and fall steadily thereafter. - After peaking this year at 65 percent of GDP, debt would fall under the planned fiscal consolidation to below 56 percent of GDP by the last year of the program. - The fiscal adjustment, economic recovery, and lower real interest rates will work to place the public debt-to-GDP ratio on a steady downward trajectory from 2019 onwards. - Gross fiscal financing needs remain elevated for much of the program period but are not projected to breach the 15 percent of GDP risk threshold in the baseline throughout the medium term. - The DSA covers only federal government debt; provincial debt is only 6 percent of GDP and most provinces are running close to a balanced budget. - Contingent liabilities include potential needs to recapitalize the central bank (not yet built into the DSA), loss-making publicly-owned corporations, and unfunded pensions. - Mitigants: high share of federal government debt held by other public-sector entities; relatively long maturity of dollar-denominated debt issued on international markets (only about one-fifth of the government’s US$-denominated debt held outside the Argentine public sector will mature by end-2020). ### Risks to debt sustainability and macro outlook - Important near-term risks: - The size of the gross fiscal financing needs under a stressed scenario. - The large share of foreign currency debt and large external financing needs, making debt dynamics susceptible to a sustained weakening of the real exchange rate. - The proposed fiscal consolidation is ambitious (in the top 13 percent of the distribution of consolidations achieved by program countries). - Staff assesses that, under the baseline of the program, federal debt is sustainable, but not with a high probability. ### Program assumptions, use of Fund resources, and modalities - The macroeconomic framework assumes Argentina draws the first tranche upon approval of the SBA and treats the remainder of the arrangement as precautionary. - The drawing of the first tranche will help bolster market confidence and add to gross reserves. - One-half of the domestic counterpart of Fund resources in the first tranche will be used for direct budget support. It will be deposited at the Treasury’s account at the BCRA and subsequently withdrawn, as needed, to pay for budget outlays. - Monetary targets in the program will be adjusted at the pace at which this budget financing is drawn down. - The authorities have indicated their intention to treat the remaining drawings under the arrangement as precautionary. - Program modalities: the authorities requested a 36-month Stand-By Arrangement with a final test date of end-March 2021. ### Scenario analysis and adverse outcome features - Program baseline vs adverse scenario highlights (selected assumptions and outcomes): - A scenario with fiscal multipliers about twice those in the baseline implies: - Growth of -0.8 percent in 2018 and 1 percent in 2019. - Nominal exchange rate 5 percent weaker at end-2018 and 6 percent weaker at end-2019. - Nominal policy rates rise by 4½ percent at end-2018 containing inflation to the top of the outer inflation consultation band. - An additional ¼ of fiscal measures would need to be identified to maintain a primary deficit-GDP at program target in 2018. - Argentina would have to draw access under the arrangement until end-2019 and rely on some portion of the domestic counterpart of Fund resources for budgetary purposes. - Gross reserves accumulation would reach 83 percent of the ARA metric by end-2019. - Adverse scenario assumptions (Box 1 and text): - Lower rollover rates on Argentine public debt by both residents and nonresidents (assumed values summarized below). - A more depreciated path for the real and nominal exchange rate. - A higher path for nominal and real interest rates calibrated to hold inflation at the top of the inflation target band. - A recession in 2018 and a more protracted recovery into 2020; lower potential growth. - Need to find an additional 1 percent of GDP in measures to keep the primary deficit from rising above 2 percent of GDP in 2019 and 1 percent of GDP in 2020. - A full loss in US$-denominated deposits (around US$7 billion) together with about a 2 percent loss in peso deposits. - Rollover rates on external debt of the private sector falls from 100 percent to 90 percent. - FDI drops by 45 percent (to the 25th percentile of historical experience). - Assumed rollover rates (percent) — Program Baseline vs Adverse Scenario: - International law debt: Residents 95 / 85; Nonresidents 90 / 75 - Domestic law debt — Government (foreign currency): Residents 95 / 85; Nonresidents 90 / 75 - Domestic law debt — Government (peso): Residents 95 / 85; Nonresidents 90 / 75 - Domestic law debt — BCRA (peso): Residents 100 / 90; Nonresidents 75 / 75 - Under the adverse scenario: - Federal debt would be 4 percent of GDP higher than in the baseline by end-2021. - There would be an additional US$35 billion in external financing needs which would be met by Argentina drawing the full amount of access under the Stand-By Arrangement. - Even with these drawings, the reserve path would be lower than in the baseline. ### Key macroeconomic indicators — Program Baseline and Adverse Scenario (selected rows from Table 2; Percent unless otherwise indicated) - Program Baseline (2017–2023): - GDP Growth: 2.9 (2017), 0.4 (2018), 1.5 (2019), 2.5 (2020), 3.1 (2021), 3.1 (2022), 3.2 (2023) - CPI inflation (eop): 24.8 (2017), 27.0 (2018), 17.0 (2019), 13.0 (2020), 9.0 (2021), 5.0 (2022), 5.0 (2023) - Federal primary balance (percent of GDP): -3.8 (2017), -2.7 (2018), -1.3 (2019), 0.0 (2020), 0.5 (2021), 0.9 (2022), 1.2 (2023) - Federal debt (percent of GDP, DSA): 57.1 (2017), 64.5 (2018), 60.9 (2019), 57.4 (2020), 55.8 (2021), 54.1 (2022), 53.0 (2023) - Gross international reserves (US$ bns): 55.1 (2017), 65.4 (2018), 69.0 (2019), 79.7 (2020), 88.4 (2021), 96.0 (2022), 103.8 (2023) - (share of ARA metric): 92% (2017), 100% (2018), 101% (2019), 110% (2020), 115% (2021), 119% (2022), 121% (2023) - Nominal policy rate (eop): 28.8 (2017), 37.2 (2018), 22.5 (2019), 15.8 (2020), 11.0 (2021), 10.0 (2022), 9.7 (2023) - Change in REER (y/y, eop; "+"=appreciation): 5.4 (2017), -18.1 (2018), 3.9 (2019), 0.7 (2020), 0.1 (2021), 0.0 (2022), 0.0 (2023) - Current Account (percent of GDP): -4.8 (2017), -3.6 (2018), -3.2 (2019), -2.7 (2020), -2.2 (2021), -2.1 (2022), -2.1 (2023) - Adverse Scenario (2017–2023): - GDP Growth: 2.9 (2017), -1.3 (2018), 0.0 (2019), 1.0 (2020), 1.2 (2021), 1.7 (2022), 2.3 (2023) - CPI inflation (eop): 24.8 (2017), 31.7 (2018), 20.8 (2019), 15.0 (2020), 10.0 (2021), 9.0 (2022), 5.0 (2023) - Federal primary balance (percent of GDP): -3.8 (2017), -2.0 (2018), -0.9 (2019), -0.2 (2020), -0.1 (2021), 0.2 (2022), 0.4 (2023) - Federal debt (percent of GDP, DSA): 56.8 (2017), 68.6 (2018), 65.4 (2019), 60.0 (2020), 59.8 (2021), 59.0 (2022), 57.9 (2023) - Gross international reserves (US$ bns): 55.1 (2017), 54.3 (2018), 53.6 (2019), 54.2 (2020), 57.1 (2021), 73.7 (2022), 89.7 (2023) - (share of ARA metric): 92% (2017), 84% (2018), 79% (2019), 75% (2020), 74% (2021), 89% (2022), 101% (2023) - Nominal policy rate (eop): 28.8 (2017), 43.0 (2018), 26.8 (2019), 16.5 (2020), 15.3 (2021), 10.8 (2022), 10.3 (2023) - Change in REER (y/y, eop; "+"=appreciation): 5.4 (2017), -24.0 (2018), 2.2 (2019), 0.0 (2020), 0.0 (2021), 0.0 (2022), 0.0 (2023) - Current Account (percent of GDP): -4.8 (2017), -3.0 (2018), -1.2 (2019), -1.0 (2020), -0.5 (2021), -0.3 (2022), -0.2 (2023) *Source: IMF staff estimates and projections as presented in the chapter.* ### 43. Access and Phasing. Access is proposed to be set at about US$50 billion (1,110 percent ### Access and Phasing ### Access level and composition - Access is proposed to be set at about US$50 billion (1,110 percent of quota, SDR 35.379 billion, or 8 percent of GDP). - Under an adverse scenario, the proposed level of access would be sufficient to keep gross reserves from falling below 74 percent of the ARA metric. ### Phasing and disbursement schedule - Thirty percent of access (or SDR 10,613.71 million) would be made available upon approval of the arrangement with the goal of bringing gross reserves to about 100 percent of the ARA metric by end-2018. - The remaining access will be made available in equal disbursements upon completion of quarterly reviews of the program. - The first review would be considered by the Board in September 2018, based on end-June performance criteria. - The program assumes that the first tranche is drawn upon approval of the arrangement, but the authorities will treat the arrangement as precautionary thereafter. ### Domestic counterpart and budget support - One-half of the domestic counterpart of the first tranche (SDR 5,306.855 million) would be made available to be used as budget support. - For amounts used as direct budget support, the resources would be deposited at the Treasury’s account at the BCRA and then withdrawn, as needed, to finance the budget. - The amount of budget support (US$7.5 billion) would be split between: - FX financing for the net reduction in the stock of domestic-law FX federal liabilities held by the private sector (US$7 billion of such debt matures between June and end-September); - Repayment of official loans (US$0.6 billion); - Service of international-law debt (US$1.7 billion); - Peso financing to cover the primary deficit and any needed debt amortization and interest in pesos. ### External Financing Requirements and Sources (Access Scenario) - The document presents Argentina: External Financing Requirements and Sources in Access Scenario (In billions of U.S. dollars) for 2018–2021 with detailed line items. - Key aggregated figures and gaps (as reported): - Gap (USD billions): 5.8, 11.6, 8.9, 8.7 - Percent of quota: 128%, 254%, 196%, 190% - Representative line items (selected exact values preserved): - Gross external financing requirements: 96.8, 139.7, 131.8-7.9, 124.5, 110.0-14.4, 113.0, 97.2-15.8, 112.3, 94.6-17.8 - Current account deficit: 30.8, 19.9, 15.9-3.9, 18.6, 6.0-12.6, 16.7, 5.2-11.5, 14.6, 3.0-11.7 - Accumulation of international reserves: 15.7, 3.4-0.8-4.1, 3.6-0.7-4.3, 10.6, 0.6-10.1, 15.7, 3.0-12.8 - Available external financing: 96.8, 139.7, 126.0 13.7, 124.5, 98.4 26.0, 113.0, 88.3 24.8, 112.3, 85.9 26.4 - Net FDI inflows: 10.7, 4.9, 2.8 2.1, 5.2, 2.8 2.4, 5.5, 3.0 2.5, 7.7, 4.2 3.5 - Financing through Bonds and Loans (total): 114.9, 103.4 11.5, 89.2 67.1, 22.1 69.6 49.2, 20.4 56.1 39.7 16.3 - Sources: Argentinian authorities and IMF staff estimates. ### Capacity to Repay - Under the baseline macro scenario, where only one tranche is drawn, Argentina’s capacity to repay is assessed as good and reserves would remain adequate. - Under the adverse scenario, where all tranches are drawn, Argentina’s capacity to repay the Fund is assessed as adequate, although the Fund’s exposure in terms of certain debt service metrics is at the higher end compared with other exceptional access cases. - If all purchases were made as scheduled, Argentina’s projected payments obligations to the Fund would peak in 2023 at SDR 11 billion, or 18 percent of official reserves at a time when gross reserves are projected to be about US$90 billion. - Public debt in the adverse scenario is expected to be sustainable but not with a high probability and to fall as a share of GDP through the course of the program. - International reserves in the adverse scenario would remain adequate (albeit at lower levels than in the baseline). ### Risks to the Program - Principal inherent risks (enumerated): - Pace at which market confidence can be restored, especially if associated with an abrupt tightening of global financial conditions; if markets view the Fund program as an opportunity to exit Argentine assets, outcomes would include significant real depreciation, much higher real interest rates, and lower growth rates, increasing risks to debt sustainability. - Risks from a shift in Argentina’s terms of trade (for example from a fall in global soy prices), disruptions from changes in trading partners’ tariff policy, or weakening of regional neighbors’ economies. - A rapid return of investor confidence could lead to significant capital inflows and, with still high inflation, result in an appreciation of the real exchange rate that prevents the REER from returning to program-assumed levels consistent with medium-term fundamentals. - Risks arising from the authorities’ political capacity and commitment to undertake needed adjustment; political pressure and social divisions could impede implementation and threaten program outcomes. - Mitigating factors: - Argentina’s efforts to strengthen institutions, improve governance, and increase transparency provide assurances. - A successful IMF-supported program is likely to reduce perceived sovereign and balance of payments risks, reflected in lower spreads and more open access to global capital markets. ### Conditionality, Financing Assurances, and Safeguards - Conditionality and monitoring: - Program performance will be monitored by quarterly reviews. - The first review scheduled for Board consideration in September 2018 based on end-June 2018 targets. - Quantitative and structural conditionality will be based on Table 2 and 3 of the authorities’ Memorandum of Economic and Financial Policies. - Financing assurances: - The program is fully financed, given firm commitments for financing for the first 12 months and good prospects for full financing thereafter, based on a comprehensive assessment of gross external and fiscal financing needs and realistic market issuance assumptions. - The World Bank has provided assurances for new support equivalent to US$1.75 billion in the next 12 months. - The Interamerican Development Bank has provided assurances for new budget support of US$0.6 billion during the same period. - These amounts have been incorporated into the baseline under the program. - Safeguards assessment: - A safeguards assessment of the BCRA will be completed prior to the first review of the program. - The assessment will review the process of compiling monetary program data, including compliance with the Technical Memorandum of Understanding under the program. ### Financial Transactions Plan (FTP) Implications - The disbursement of SDR 10,613.7 million under the emergency financing mechanism represents the largest single purchase under any Fund arrangement. - Timely execution of this disbursement, possibly under shortened timelines, will rely on the international and cooperative nature of Fund financing through its creditor members under the Financial Transaction Plan (FTP). - Staff will issue an amended FTP for the May–October 2018 period in parallel with Executive Board consideration of Argentina’s SBA, augmenting the quota resources that may be used in transfers during the plan period. The amended FTP would become effective upon approval of Argentina’s SBA. ### Arrears and Lending-into-Arrears - Outstanding arrears to private creditors remain unresolved: a total of around US$1.3 billion in principal or US$3 billion including accrued interest (overall residual untendered principal reported elsewhere as approximately US$1.2 billion as of end-December 2017). - Since December 2015 the administration has sought to settle outstanding claims; Congress passed a Debt Authorization Law in March 2016 allowing negotiation and settlement with certain debt holders. - The Ministry of Finance has designed a debt restructuring and cancellation program and information campaigns to reach untendered debt holders; settlement terms match those offered in 2016. - Litigation by non-responding bondholders continues in several jurisdictions. - Staff's view: based on the authorities’ actions, they are making good faith efforts as required under the Fund’s Lending into Arrears policy. - Limited outstanding arrears to official bilateral creditors: approximately US$30 million claimed by the French export credit agency related to a late-1970s gas pipeline; parties are in arbitration in the International Chamber of Commerce International Court of Arbitration. ### Exceptional Access Criteria (Assessment Summary) - Criterion 1: - Argentina is experiencing exceptional balance of payments pressures on the capital account due to tightening global financial conditions and a shift away from peso assets, creating a need for Fund financing that cannot be met within normal limits. - Criterion 2: - A rigorous analysis indicates debt is sustainable but not with a high probability; in the baseline (partial draw) federal government debt and gross financing needs are projected to remain below risk thresholds (70 and 15 percent, respectively), but risks remain due to large foreign currency debt share and rollover needs. - Staff assesses debt as sustainable but not with a high probability under both baseline and adverse scenarios. - Notable safeguards and mitigating features include: - Long maturities of privately-held foreign currency-denominated debt: of the outstanding stock of federal government’s foreign currency debt held outside the public sector ($156 billion), only about one-fifth is expected to mature by end-2020. - Continued access to domestic and foreign financial markets, which allows smoothing of adjustment and supports higher growth if fiscal targets are met. - Criterion 3: - Argentina maintains access to private capital markets on a scale enabling it to meet obligations falling due to the Fund, evidenced by recent peso- and US$-denominated bond placements in domestic markets and the rollover of 100 percent of the central bank’s paper that came due on May 16. - Global and domestic factors have tightened external financing conditions and average yields on Argentina’s external bonds have risen. - Criterion 4: - Staff judges the policy program provides a reasonably strong prospect of success based on the Macri administration’s prior delivery of policy priorities and institutional capacity. - Political challenges exist given the governing coalition’s minority in both houses of Congress and divided social and political views on IMF support; broad societal ownership and congressional support will be essential. ### Staff Appraisal (Key Conclusions) - Argentina faces significant balance of payments pressure due to domestic policy choices, unforeseen supply-side shocks, and shifts in international capital markets. - Authorities have responded with appropriate fiscal and monetary policies and acted swiftly. - Capital outflows have stabilized and currency pressures have waned, but the situation remains fragile and vulnerable to further external shocks to terms of trade or financial market access. - The program rests on strong ownership of a policy plan tailored to Argentina’s circumstances, centered on: - An ambitious fiscal adjustment over the arrangement, largely designed to contain federal expenditures and realign outlays with revenue capacity. - Steps to reinforce credibility of inflation targets and to construct an institutional framework for monetary policy that creates a well-managed, independent and financially autonomous central bank. *Source: cr18219.* ### 56. The government has emphasized in its policy plans the critical need to maintain ### cr18219 - 56. The government has emphasized in its policy plans the critical need to maintain ### Social cohesion, inclusion, and gender - The government emphasizes the critical need to maintain social cohesion, move toward gender equality, and protect the most vulnerable. - The government’s commitment: IMF-supported programs with Argentina "can no longer be the case" to be associated with austerity, worsening poverty, and a decline in living standards; "The burden of the needed adjustment will be shared fairly across society." - Support measures: "Those that are most vulnerable will be assisted by well-designed government support programs." - Gender and labor force: The program is designed to "better realize the macroeconomic potential from women’s full participation in the labor force and in the productive economy; these gains are judged to be large." - Policy aim: "The authorities’ policy plans aim to fully capitalize on this economic potential and to ensure all Argentines are included in the country’s future prosperity." ### Structural measures and institutional strengthening - Structural measures to strengthen institutions and facilitate stronger growth include: - A range of fiscal measures to improve the budgetary process and to provide a medium-term anchor for fiscal policy and for expectations. - Redoubled efforts in tax administration. - Examination of options for strengthening the pension system. - Ensuring the financial system remains resilient to handle fallout from a slowing economy and higher real interest rates. ### IMF program support and objectives - IMF support: "The staff supports the authorities request for a 36-month Stand-By Arrangement." - Program objectives: address longstanding vulnerabilities; provide time to undertake realignment of policies; help ensure debt remains sustainable; ensure inflation comes down; increase growth and job creation alongside a path of declining poverty. - International support: "As such, their plans merit the support of the international community." ### Key economic and financial indicators (selected series as reported) - GDP at constant prices (Annual percentage changes): 1.5 2.7 -1.8 2.9 0.4 1.5 2.5 3.1 3.1 3.2 - Domestic demand (Annual percentage changes): 2.6 4.2 -1.3 6.3 -1.4 0.5 2.0 2.7 2.8 3.0 - Consumption (Annual percentage changes): 2.8 4.2 -0.8 3.3 -0.9 1.6 1.9 1.9 1.6 1.7 - Investment (Annual percentage changes): 1.6 3.5 -4.9 11.3 -1.2 -2.1 3.0 6.8 8.3 8.3 - Nominal GDP (billions of Argentine pesos): 2,609 5,955 8,189 10,558 13,240 16,068 18,746 21,227 23,191 25,135 - Output gap (percent): ...1.1-1.8-1.5-2.9-3.7-3.3-2.5-1.8-1.3 - CPI inflation (eop, y/y percent change): .........24.827.017.013.09.05.05.0 - GDP deflator (y/y percent change): ...26.640.125.324.919.613.89.95.95.1 - Unemployment rate (percent): 7.5...8.58.48.58.68.48.28.07.8 - External sector (billions of U.S. dollars): - Exports f.o.b. (goods): 71.9 56.8 57.9 58.4 66.4 71.6 75.3 80.1 84.9 89.6 - Imports f.o.b. (goods): 60.2 57.6 53.5 64.0 65.7 67.7 72.2 77.4 82.1 86.8 - Trade balance (goods, billions of U.S. dollars): 11.7-0.84.4-5.50.74.03.12.72.82.8 - Savings-Investment balance (percent of GDP): - Gross domestic investment: 16.3 15.6 14.6 14.8 15.1 14.8 14.9 15.5 16.4 17.2 - Gross national savings: 15.7 12.8 12.0 10.0 11.6 11.6 12.2 13.3 14.3 15.1 - Current account balance: -0.6-2.7-2.7-4.8-3.6-3.2-2.7-2.2-2.1-2.1 - Public sector (percent of GDP): - Primary balance: -1.9-4.4-4.7-4.2-2.8-1.30.20.81.21.3 - Overall balance: -2.9-5.8-6.4-6.5-5.1-3.8-2.9-2.7-2.6-2.4 - Revenues: 31.735.435.134.835.035.635.835.835.535.2 - Primary expenditure 3/: 35.039.839.839.037.836.935.634.934.334.0 - Total public debt (federal): 40.455.153.357.164.560.957.455.854.153.0 - Money and credit: - Monetary base (eop, y/y percent change): 27.534.931.721.825.921.318.014.514.213.8 - M2 (percent change): 28.728.230.425.822.525.318.614.514.213.8 - Credit to the private sector (eop, y/y percent change): 28.935.731.251.334.921.918.023.816.916.2 - Interest rate (eop): 16.332.223.928.837.222.515.811.010.09.7 - Memorandum items: - Gross international reserves (billions of U.S. dollars): 42.025.639.355.165.469.079.788.496.0 103.8 - Net international reserves, (billions of U.S. dollars): 5/...-1.510.327.929.733.444.054.669.883.2 ### Fiscal financing and external financing needs (selected summary) - IMF staff notes support for a 36-month Stand-By Arrangement to provide time to realign policies and secure financing. - Federal government gross financing needs and sources (US$mn, as of May 31, 2018): Total Needs and Total Sources time-series presented in the chapter showing quarter-by-quarter needs, rollovers, IFI support, deposit drawdowns, and gaps; aggregated program projection support is used to close financing gaps across 2018–21 (tables provide detailed quarterly flows). - External gross financing needs and sources (US$mn, as of May 31, 2018): Needs and Sources shown quarter-by-quarter for 2018–21, including Imports G&S, Debt Service, Amortizations, Exports G&S, FDI, IFIs, Private Sector Rollover and Issuances, and Reserve Drawdown; reported quarterly gaps show near-term financing needs addressed by program and market sources. *Source: IMF staff report (cr18219), excerpts and tables as provided in the chapter.* ### 3. Argentina: Schedul ### 3. Argentina: Schedule of Reviews and Purchases ### Schedule of Reviews and Purchases - Available on or after June 20, 2018: SDR 10,613.71 (333% Quota) — Approval of Arrangement. - September 15, 2018: SDR 2,063.78 (65% Quota) — First Review and end-June 2018 performance criteria. - December 15, 2018: SDR 2,063.78 (65% Quota) — Second Review and end-September 2018 performance criteria. - March 15, 2019: SDR 2,063.78 (65% Quota) — Third Review and end-December 2018 performance criteria. - June 15, 2019: SDR 2,063.78 (65% Quota) — Fourth Review and end-March 2019 performance criteria. - September 15, 2019: SDR 2,063.78 (65% Quota) — Fifth Review and end-June 2019 performance criteria. - December 15, 2019: SDR 2,063.78 (65% Quota) — Sixth Review and end-September 2019 performance criteria. - March 15, 2020: SDR 2,063.78 (65% Quota) — Seventh Review and end-December 2019 performance criteria. - June 15, 2020: SDR 2,063.78 (65% Quota) — Eigth Review and end-March 2020 performance criteria. - September 15, 2020: SDR 2,063.78 (65% Quota) — Ninth Review and end-June 2020 performance criteria. - December 15, 2020: SDR 2,063.78 (65% Quota) — Tenth Review and end-September 2020 performance criteria. - March 15, 2021: SDR 2,063.78 (65% Quota) — Eleventh Review and end-December 2020 performance criteria. - June 1, 2021: SDR 2,063.71 (65% Quota) — Twelfth Review and end-March 2021 performance criteria. - Total: SDR 35,379 (1110% Quota). - Note: Apart from periodic performance criteria, conditions also include continuous performance criteria. ### Quantitative Performance Criteria, Indicative Targets, and Consultation Clauses (selected) - Fiscal targets (end-period, in billions of Argentine pesos unless otherwise stated): - Primary balance of the federal government (floor), cumulative flows from January 1 through December 31: - end-Jun: -148.0 - end-Sep: -256.0 - end-Dec: -362.5 - end-Mar: -32.0 - end-Jun (2019): -100.0 - Federal government accumulation of external debt payment arrears (ceiling): 0.0 at each end-period reported. - Federal government accumulation of domestic arrears (ceiling), measured against Q4 2017 average of 45.6 billion pesos: - end-Jun: 8.2 - end-Sep: 14.9 - end-Dec: 21.6 - end-Mar: 27.1 - end-Jun (2019): 39.7 - Social assistance spending (floor): - end-Jun: 87.7 - end-Sep: 131.1 - end-Dec: 177.5 - end-Mar: 60.0 - end-Jun (2019): 112.6 - Indicative target: Primary balance of the general government (floor): - end-Jun: -163.0 - end-Sep: -272.0 - end-Dec: -382.4 - end-Mar: -40.0 - end-Jun (2019): -110.0 - Monetary targets and ceilings: - Change in net international reserves (floor) (in billions of U.S. dollars, measured against value on June 4, 2018): - end-Jun: 5.5 - end-Sep: 5.5 - end-Dec: 5.5 - end-Mar: 5.5 - end-Jun (2019): 7.5 - Change in stock of non-deliverable FX forwards (ceiling) (in billions of U.S. dollars measured against value on June 4, 2018): - end-Jun: 1.0 - end-Sep: 0.0 - end-Dec: -0.5 - end-Mar: -1.0 - end-Jun (2019): -1.5 - Change in central bank credit to government (ceiling), measured against end-May 2018 value of 2,204.4 billion pesos: - end-Jun: 0.0 - end-Sep: -78.0 - end-Dec: -156.0 - end-Mar: -234.0 - end-Jun (2019): -312.0 - Central bank financing of the government (continuous performance criterion): 0.0 at end-periods reported. - Inflation consultation clause (y-o-y percent) — outer band, inner band, center target, inner lower, outer lower: - end-Jun: Outer 32; Inner 29; Center 27; Inner 25; Outer 22 - end-Sep: Outer 32; Inner 29; Center 27; Inner 25; Outer 22 - end-Dec: Outer 32; Inner 29; Center 27; Inner 25; Outer 22 - end-Mar: Outer 28; Inner 26; Center 24; Inner 22; Outer 20 - end-Jun (2019): Outer 26; Inner 24; Center 22; Inner 20; Outer 18 - Change in net domestic assets of the central bank (ceiling), measured against end-May 2018 value of 432.9 billion pesos: - end-Jun: 15 - end-Sep: 64 - end-Dec: 166 - end-Mar: 173 - end-Jun (2019): 184 - Notes: Targets as defined in the Technical Memorandum of Understanding (TMU). Several targets subject to adjustors as defined in the TMU. ### Structural Program Conditionality (structural benchmarks and timing) - Publish a regulation to introduce a foreign exchange auction for BCRA intervention in the spot and forward markets. Timing: Jun-2018. Implementation status: Proposed. - Establish a senior-level debt management coordinating committee between Treasury-Finance-BCRA to meet weekly and coordinate sterilization and debt issuance plans. Timing: Sep-2018. Status: Proposed. - Present a 2019 budget to Congress with transparent medium-term objectives for the primary balance, consistent with program parameters; include elimination of article 27 of Law 11,672. Timing: Oct-2018. Status: Proposed. - Provide sufficient resources to the newly created CBO (Oficina de Presupuesto del Congreso) so it can evaluate macroeconomic and budgetary forecasts and monitor public finances. Timing: Dec-2018. Status: Proposed. - Submit to Congress a new charter for the central bank to ensure operational autonomy and strengthen BCRA’s monetary policy mandate. Timing: Mar-2019. Status: Proposed. - Limit the BCRA’s counterparties for sale of LEBACs, open market operations and repos to domestic banks. Timing: Sep-2019. Status: Proposed. - Recapitalize the central bank to ensure adequate capital as percent of the monetary base plus outstanding stock of LEBACs. Timing: Dec-2019. Status: Proposed. - Design a compliance improvement plan and risk mitigation strategies around taxpayer segments and core taxes. Timing: Jun-2019. Status: Proposed. ### Indicators of Fund Credit, 2018–26 — Baseline Scenario (selected figures, in millions of SDRs unless otherwise specified) - Prospective drawings (36 month SBA): 2018: 10,614; 2019–2026: 0 (ellipsis for later years). - (in percent of quota) 2018: 333; 2019–2026: 0. - Amortization 1/: 2018: 0.0; 2019: 0.0; 2020: 0.0; 2021: 2,653.4; 2022: 5,306.9; 2023: 2,653.4; 2024–2026: 0.0. - GRA charges and surcharges 1/: 2018: 106.9; 2019: 293.4; 2020: 293.5; 2021: 302.8; 2022: 159.7; 2023: 29.0; 2024–2026: 0.0 (formatting in source shows "0.00.0" for later years). - SDR charges and assessments 1/: 2018: 1.5; 2019: 2.1; 2020: 2.1; 2021: 2.1; 2022: 2.1; 2023: 2.1; 2024: 2.1; 2025: 2.1; 2026: 2.1. - Total debt service 1/: 2018: 161.5; 2019: 295.5; 2020: 295.6; 2021: 2,958.4; 2022: 5,468.7; 2023: 2,684.5; 2024–2026: 2.1 each year. - (in percent of exports of G&S): 2018: 0.3; 2019: 0.6; 2020: 0.6; 2021: 5.3; 2022: 9.3; 2023: 4.3; 2024–2026: 0.0. - (in percent of GDP): 2018: 0.0; 2019: 0.1; 2020: 0.1; 2021: 0.6; 2022: 1.1; 2023: 0.5; 2024–2026: 0.0. - Outstanding stock 1/: 2018: 10,613.7; 2019: 10,613.7; 2020: 10,613.7; 2021: 7,960.3; 2022: 2,653.4; 2023–2026: 0.0. - (in percent of quota): 2018–2020: 333.0; 2021: 249.7; 2022: 83.3; 2023–2026: 0.0. - (in percent of GDP): 2018: 2.7; 2019: 2.5; 2020: 2.3; 2021: 1.6; 2022: 0.5; 2023–2026: 0.0. - Memorandum items: - Exports of goods and services (US$ mn): 2018: 66,375; 2019: 71,478; 2020: 74,966; 2021: 79,695; 2022: 84,516; 2023: 89,228; 2024: 94,203; 2025: 99,455; 2026: 105,000. - Gross International Reserves (US$ mn): 2018: 65,419; 2019: 69,034; 2020: 79,678; 2021: 88,400; 2022: 96,031; 2023: 103,795; 2024: 111,658; 2025: 120,116; 2026: 129,215. - % of ARA metric: 2018: 100%; 2019: 101%; 2020: 110%; 2021: 115%; 2022: 119%; 2023: 121%; 2024: 123%; 2025: 125%; 2026: 127%. - Quota: 3,187.3 each year 2018–2026. ### Indicators of Fund Credit, 2018–26 — Adverse Scenario (selected figures) - Prospective drawings (36 month SBA): 2018: 14,741; 2019: 8,255; 2020: 8,255; 2021: 4,127. - (in percent of quota): 2018: 463; 2019: 259; 2020: 259; 2021: 129. - Amortization 1/: 2018–2020: 0.0; 2021: 2,911.4; 2022: 8,918.5; 2023: 10,134.6; 2024: 7,997.1; 2025: 4,643.5; 2026: 773.9. - GRA charges and surcharges 1/: 2018: 115.9; 2019: 530.9; 2020: 852.4; 2021: 1,263.3; 2022: 1,313.1; 2023: 835.7; 2024: 380.1; 2025: 82.6; 2026: 8.7. - GRA service charge 1/: 2018: 73.7; 2019: 41.3; 2020: 41.3; 2021: 20.6; 2022–2026: 0.0. - SDR charges and assessments 1/: 2018–2026: 1.5, 2.1, 2.1, 2.1, 2.1, 2.1, 2.1, 2.1, 2.1 respectively. - Total debt service 1/: 2018: 191.1; 2019: 574.3; 2020: 895.7; 2021: 4,197.4; 2022: 10,233.6; 2023: 10,972.4; 2024: 8,379.4; 2025: 4,728.2; 2026: 784.7. - (in percent of exports of G&S): 2018: 0.4; 2019: 1.1; 2020: 1.7; 2021: 7.6; 2022: 17.4; 2023: 17.7; 2024: 12.8; 2025: 6.9; 2026: 1.1. - (in percent of GDP): 2018: 0.1; 2019: 0.2; 2020: 0.2; 2021: 1.0; 2022: 2.4; 2023: 2.5; 2024: 1.8; 2025: 1.0; 2026: 0.2. - Outstanding stock 1/: 2018: 14,741.3; 2019: 22,996.4; 2020: 31,251.5; 2021: 32,467.6; 2022: 23,549.1; 2023: 13,414.5; 2024: 5,417.4; 2025: 773.9; 2026: 0.0. - (in percent of quota): 2018: 462.5; 2019: 721.5; 2020: 980.5; 2021: 1,018.7; 2022: 738.8; 2023: 420.9; 2024: 170.0; 2025: 24.3; 2026: 0.0. - (in percent of GDP): 2018: 4.0; 2019: 6.4; 2020: 8.3; 2021: 8.0; 2022: 5.6; 2023: 3.1; 2024: 1.2; 2025: 0.2; 2026: 0.0. - Memorandum items: - Exports of goods and services (US$ mn): 2018: 66,423; 2019: 71,993; 2020: 74,928; 2021: 79,148; 2022: 83,929; 2023: 88,590; 2024: 93,510; 2025: 98,703; 2026: 104,184. - Gross International Reserves (US$ mn): 2018: 54,277; 2019: 53,580; 2020: 54,158; 2021: 57,120; 2022: 73,683; 2023: 89,676; 2024: 97,346; 2025: 105,673; 2026: 114,712. - % of ARA metric: 2018: 84%; 2019: 79%; 2020: 75%; 2021: 74%; 2022: 89%; 2023: 101%; 2024: 103%; 2025: 105%; 2026: 107%. ### External Debt Sustainability Framework (selected projections and indicators) - Baseline external debt (percent of GDP): - 2013: 27.3 - 2014: 30.2 - 2015: 27.9 - 2016: 34.2 - 2017: 37.0 - 2018: 51.3 - 2019: 52.6 - 2020: 52.0 - 2021: 50.7 - 2022: 50.0 - 2023: 49.2 - Change in external debt (percent of GDP): - 2013: -1.7 - 2014: 2.9 - 2015: -2.4 - 2016: 6.4 - 2017: 2.7 - 2018: 14.3 - 2019: 1.3 - 2020: -0.7 - 2021: -1.2 - 2022: -0.8 - 2023: -0.8 - Identified external debt-creating flows (4+8+9) (percent of GDP): - 2013: -0.9 - 2014: 3.4 - 2015: -2.7 - 2016: 6.7 - 2017: -1.8 - 2018: 2.5 - 2019: 1.6 - 2020: 0.6 - 2021: -0.4 - 2022: -0.7 - 2023: -0.7 - Current account deficit, excluding interest payments (percent of GDP): - 2013: 1.5 - 2014: 0.9 - 2015: 2.2 - 2016: 1.8 - 2017: 3.6 - 2018: 2.7 - 2019–2023: values shown as 2.2, 2.1, 1.9, 1.4, 1.6 respectively in the source formatting. - Exports (percent of GDP): - 2013: 14.7 - 2014: 14.5 - 2015: 10.9 - 2016: 12.8 - 2017: 11.4 - 2018: 14.2 - 2019: 14.8 - 2020: 14.6 - 2021: 14.6 - 2022: 14.8 - 2023: 14.8 - Imports (percent of GDP): - 2013: 11.7 - 2014: 11.2 - 2015: 9.0 - 2016: 9.7 - 2017: 10.0 - 2018: 11.8 - 2019: 11.7 - 2020: 11.7 - 2021: 11.6 - 2022: 11.8 - 2023: 11.8 - Net non-debt creating capital inflows (negative) (percent of GDP): - 2013: -1.5 - 2014: -0.6 - 2015: -1.7 - 2016: -0.4 - 2017: -2.1 - 2018: -0.9 - 2019–2023: -0.9, -0.9, -1.2, -1.3, -1.3 respectively. - Automatic debt dynamics (percent of GDP): - 2013: -0.9 - 2014: 3.0 - 2015: -3.1 - 2016: 5.3 - 2017: -3.3 - 2018: 0.7 - 2019: 0.3 - 2020: -0.6 - 2021: -1.2 - 2022: -0.8 - 2023: -1.0 - Contribution from nominal interest rate (percent of GDP): - 2013: 0.6 - 2014: 0.7 - 2015: 0.6 - 2016: 0.9 - 2017: 1.2 - 2018: 0.9 - 2019: 1.0 - 2020: 0.6 - 2021: 0.3 - 2022: 0.7 - 2023: 0.5 - Contribution from real GDP growth (percent of GDP): - 2013: -0.7 - 2014: 0.7 - 2015: -0.7 - 2016: 0.6 - 2017: -0.9 - 2018: -0.2 - 2019: -0.7 - 2020: -1.2 - 2021: -1.5 - 2022: -1.5 - 2023: -1.5 - Contribution from price and exchange rate changes (percent of GDP): - 2013: -0.8 - 2014: 1.6 - 2015: -3.0 - 2016: 3.9 - 2017: -3.6 - 2018–2023: shown as ellipses for later years in the source. - Residual, incl. change in gross foreign assets (percent of GDP): - 2013: -0.8 - 2014: -0.4 - 2015: 0.3 - 2016: -0.3 - 2017: 4.5 - 2018: 11.8 - 2019: -0.3 - 2020: -1.2 - 2021: -0.8 - 2022: -0.1 - 2023: -0.1 - External debt-to-exports ratio (percent): - 2013: 186.4 - 2014: 208.2 - 2015: 255.5 - 2016: 268.1 - 2017: 324.6 - 2018: 360.2 - 2019: 355.6 - 2020: 355.0 - 2021: 348.4 - 2022: 338.2 - 2023: 331.5 - Gross external financing need (in billions of US dollars): - 2013: 85.8 - 2014: 82.6 - 2015: 81.7 - 2016: 104.5 - 2017: 96.8 - 2018: 139.7 - 2019: 124.6 - 2020: 113.8 - 2021: 112.5 - 2022: 138.3 - 2023: 143.3 - (in percent of GDP): 2013: 14.0; 2014: 14.7; 2015: 12.7; 2016: 18.9; 2017: 15.2; subsequent values listed as "10-Year 10-Year 25.1 21.6 18.4 16.9 19.9 19.5" in the source formatting. - Scenario with key variables at their historical averages 5/: - External debt percent of GDP path: 2018: 51.3; 2019: 47.7; 2020: 44.6; 2021: 42.0; 2022: 38.9; 2023: 36.4. - Debt-stabilizing non-interest current account (long-run) shown as -2.3 in the table header. ### Public Debt Sustainability Analysis — Key Findings and Baseline Scenario - Main assessment: - Debt vulnerabilities have become evident following the tightening of global monetary conditions and domestic policy changes. - Federal government debt is projected to rise to 65 percent in 2018 before gradually declining. - Under the program baseline, staff assesses debt to be sustainable but not with high probability. - In the adverse scenario, federal debt would be about 4 percent of GDP higher than in the baseline by end-2021. - US$50 billion of access under the program would be needed to ensure the program remains fully financed; in that scenario the DSA shows Argentina’s debt to be sustainable, albeit not with a high probability. - Background stock and recent developments: - At end-2017, gross federal government debt (including intra-public-sector debt) was AR$6,025 billion or 57 percent of GDP, an increase of 3.7 percent of GDP relative to end-2016. - Recent bond placements: three euro-denominated bonds totaling US$2.75 billion in November 2017; three dollar-denominated bonds totaling US$9 billion on January 4, 2018. - Two repo operations of US$1 billion each: end-March 2018 (HSBC) and end-April 2018 (Credit Suisse). - Exchange rate pressures in March–April 2018 followed upward revision of end-2017 inflation targets and a tax on capital gains for non-residents effective end-April 2018; sovereign spreads increased by about 120 basis points from mid-April to end-May. - Government shifted away from further international bond issuance in 2018, relying on domestic financing and IFIs/official bilateral support. - Currency composition and holders: - Nearly 70 percent of Argentina’s debt stock is denominated in or linked to a foreign currency, mainly the U.S. dollar. - Of peso-denominated debt, just under one-quarter is linked to inflation. - Federal debt held by other public sector entities: 48 percent of total stock at end-2017 (BCRA 29%; ANSES 11%; other public sector institutions 7%). - Remaining 52 percent held by private sector (domestic and external) and IFIs/official bilateral creditors (bond markets 29%; IFIs and official bilateral 9%; banks 6%; non-banks 9% as per the gross federal debt by creditor breakdown). - Provinces (Box 1) — risks and outlook: - Provincial total debt at end-2017 projected at AR$542 billion or 5.3 percent of GDP; about one-third held by the federal government. - Provincial overall fiscal deficit in 2017 projected at 0.8 percent of GDP. - External debt issuance by provinces in 2017: US$6.7 billion concentrated in Buenos Aires and Cordoba. - Risks: 60 percent of provincial debt denominated in foreign currency (range 0–90 percent across provinces); 20 percent depreciation in 2018 would increase provincial debt by 0.5 percentage points of GDP (to 6.1 percent of GDP). - Heterogeneity: debt-to-revenues ratios range from 1 to 70 percent across provinces; higher ratios concentrated in provinces with larger absolute debt stocks, posing contingent liability risks for the federal government. - Baseline scenario assumptions (summary): - Growth: 2018 growth expected to decelerate to 0.4 percent, rebound to 1.5 percent in 2019, accelerate to 3.2 percent by 2023. - Inflation: expected to continue eroding real value of long-maturity, peso-denominated debt. - Primary fiscal balance: fiscal consolidation assumed, with primary deficit turning into surplus beginning in 2021 under baseline. - Exchange rate: significant real peso depreciation in 2018 worsens debt dynamics but helps correct REER overvaluation as of end-2017. - Financing: continued rollover of intra-public sector financing assumed; statutory advances from BCRA assumed zero starting in 2018; no international bond issuances in 2018 (resumed in 2019); domestic creditors (non-banking sector) provide part of remaining financing. - Effective interest rate on total debt: expected to increase from 7.1 percent in 2018 to almost 8 percent in 2021. - Comparison to December 2017 Article IV DSA: - Gross financing needs and effective interest rates have dropped relative to the December 2017 DSA. - Reasons: interest rate assumptions fall in medium term under current baseline; larger and faster fiscal consolidation lowers early financing needs; current baseline assumes resolution of vulnerabilities identified in the Article IV consultation, generating a downward debt trajectory. *Source: IMF staff estimates and calculations as presented in the document.* ### Box 2. Adverse Scenario ### Box 2. Adverse Scenario ### Adverse scenario description - The Adverse Scenario (¶39 of the Staff Report) assumes a tightening of global financial conditions that leads to: - (i) lower rollover rates on Argentine debt by both residents and nonresidents; - (ii) more depreciated paths for the real and nominal exchange rates; - (iii) higher paths for nominal and real interest rates; - (iv) a deeper recession in 2018, a more protracted recovery into 2020 and lower potential growth; - (v) a need to find an additional 1 percent of GDP in measures to keep the primary deficit from rising above 2 percent of GDP in 2019 and 1 percent of GDP in 2020; and - (vi) the full amount of the SBA is drawn and used for budget support. ### DSA results and projections under the Adverse Scenario - Federal debt would be about 4 percent of GDP higher than in the baseline by end-2021. - Gross fiscal financing needs (GFN) would be more elevated throughout the projection period. - Effective interest rates are lower than in the baseline, despite sizably higher domestic interest payments due to higher reliance on short-term (ST) debt. - In this scenario, US$50 billion of access under the program would be needed to ensure the program remains fully financed and debt remains sustainable, but not with a high probability. ### Realism of the assumptions - Growth and inflation: - Baseline assumption: growth in 2018 will decelerate to 0.4 percent, rebound to 1.5 percent in 2019 and accelerate gradually to 3.2 percent by 2023. - The track record shows median forecast error for real GDP growth in the lowest quartile; median forecast error for inflation suggests somewhat pessimistic bias. - The program is robust to a stress-scenario in which growth rate would be lower in 2018 and 2019 by around 1 percent in each year than that in the program. - Primary deficit: - Track record shows the median forecast error for the primary balance has been on the optimistic side. - The projected fiscal adjustment is ambitious compared with the distribution of observed adjustments and places Argentina in the top 13 percent of the distribution of consolidations achieved by program countries. ### Shocks and Stress Tests — Solvency risks - Exchange rate shock: - Standard DSA stress test (50 percent real depreciation with 0.25 pass-through) shows debt could jump to 81 percent of GDP, above the high-risk threshold. - Growth shock: - Under the stress test a growth shock could raise debt to 70 percent of GDP. - Interest rate shock: - Given relatively long debt maturity profile, a shock to interest rates is not a major risk (note: the DSA concept of debt does not include BCRA debt, which is mostly short-term). - Primary balance / combined macro-fiscal risks: - If the primary balance were to remain unchanged at its 2018 level (–2.7 percent of GDP), debt would follow an upward trajectory, exceeding 70 percent of GDP by 2023. - A ‘combined macro-fiscal’ shock would cause debt to rise to nearly 103 percent of GDP, likely triggering a crisis. - The combined macro-fiscal shock involves: - (i) a one-standard deviation shock to growth, with the corresponding automatic stabilizers and lower inflation; - (ii) a 50 percent real depreciation, with 0.25 pass-through to inflation; and - (iii) 200bps shock to interest rates. ### Shocks and Stress Tests — Liquidity risks - A combined macro-fiscal shock will lead to GFN of 23 percent of GDP; in such a scenario, market access may be impossible, triggering the need for steep fiscal consolidation. - Liquidity risks are somewhat mitigated by the significant share of debt held by public sector entities: - The public sector holds around half of the federal debt stock, but the contribution of this debt to the medium-term GFN profile is relatively small. - Even if these principal payments are fully rolled over (as assumed), significant GFN remain. ### Overall assessment and risk factors - Baseline path: - Debt is expected to peak at end-2018 and fall steadily thereafter. - After peaking this year at 65 percent of GDP, debt would fall under the planned fiscal consolidation to about 56 percent of GDP by the end of 2021. - Gross financing needs remain elevated but are not projected to breach the 15 percent of GDP risk threshold in the baseline throughout the medium term. - Key near-term risks to debt sustainability: - The size of the gross financing needs under a stressed scenario; - The large (and potentially rising) share of foreign currency debt (which makes Argentina’s debt dynamics susceptible to a sustained correction in the real exchange rate); - The large external financing needs of the economy, which in past emerging market crises have been strong predictors of a debt crisis; - The proposed fiscal consolidation is ambitious relative to similar country situations (top 13 percent of consolidations achieved by program countries); - The DSA covers only federal government debt and could understate general government sustainability (most provinces running close to balanced budget; provincial debt at end-2017 projected around 6 percent of GDP); - Contingent liabilities from needing to recapitalize the central bank, loss-making publicly-owned corporations, and unfunded pensions. - Risk mitigants: - High share of federal government debt held by other public-sector entities. - Relatively long maturity of dollar-denominated debt issued on international markets: less than one-fifth of the government’s US$-denominated debt held outside the Argentine public sector will mature by end-2020. - Staff judgment: - Taking all considerations into account, under the baseline the federal debt is sustainable but not with a high probability. *Source: IMF staff.* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Request to the IMF and program summary - The Argentine government formally requests an IMF Stand-By Arrangement for a period of 36 months, in the amount of SDR 35,379 million (equivalent to around US$ 50 billion, or 1,110 percent of Argentina’s quota with the IMF). - The government plans to draw the first tranche (US$ 15 billion) upon approval of the arrangement, with half of that to be used as budget support and the remaining of the arrangement to be treated as precautionary. - The Letter of Intent affirms that the attached Memorandum of Economic and Financial Policies (MEFP) and a Technical Memorandum of Understanding set out the specific objectives and measures for the IMF arrangement. ### Program objectives and commitments - Objectives: - To fully restore market confidence through macroeconomic policies that lessen the federal government’s financing needs and put public debt on a firm downward path. - To strengthen the central bank’s institutional and inflation targeting framework by reinforcing its autonomy and setting a realistic path for inflation that seeks to bring down inflation to single digits by the end of 2021. - To lessen strains on the balance of payments by allowing the exchange rate to operate flexibly as a shock absorber, increasing international reserves, lowering the current account deficit, and reducing external financing needs. - To protect Argentina’s most vulnerable citizens from the burden of the needed policy recalibration. - Commitments: - Protect spending on social assistance and, if social conditions deteriorate, identify additional resources to increase funding of the most effective social assistance programs. - Use the program opportunity to address long-standing gender inequities and ensure equitable economic opportunities for women. - Consult with the IMF on adoption of additional measures and revisions to policies in the MEFP, in accordance with IMF policies. - Maintain close policy dialogue with IMF staff and provide requested data and information for program monitoring. - Consent to IMF publication of the letter, the MEFP, the Technical Memorandum of Understanding, and accompanying Executive Board documents. ### Context and rationale for IMF support - Recent shocks and vulnerabilities: - A severe drought led to a sharp decline in agricultural production and export revenue. - World energy prices increased. - Global financial conditions tightened, including an appreciation of the U.S. dollar and an upward shift in the U.S. yield curve. - These shocks interacted with pre-existing vulnerabilities from a policy path that implied significant fiscal and external financing requirements, manifesting as pressure on the currency, market anxiety about roll-over of short-term central bank paper, and an increase in sovereign risk premium. - The government views IMF assistance as needed to moderate the impact of increased international financial volatility and as a catalyst to deepen and accelerate economic reforms. ### A. Fiscal Policy — Medium-term fiscal goals - Core intention: accelerate reduction of the federal government’s primary deficit and reach fiscal equilibrium. - Specific target: bring the primary balance of the federal government to zero by 2020. - Public debt projection: gross public debt to GDP expected to fall from 2018 onwards, reaching 55.8 percent of GDP by end-2021. - Debt management commitments: lengthen maturities, optimize cost of liabilities, and increase the share of federal public debt denominated in pesos. - 2018 and 2019 fiscal trajectory: - 2018 fiscal target already announced: primary deficit of 2.7 percent of GDP. - Structural benchmark: submit to Congress by October 2018 a federal budget targeting a primary fiscal deficit of 1.3 percent of GDP in 2019. - Provincial finances: consolidated primary balance of the provinces expected to go from a deficit of 0.4 percent of GDP in 2017 to a surplus of 1/4 percent of GDP by the end of the Stand-By Arrangement. - Contingency stance: revenue forecasts in the budget will be conservative and include spending reserves to be drawn only in case of unexpected developments; government stands ready to identify additional fiscal measures if outcomes deviate from expectations. - If economic and fiscal outturns are more positive, the government would consider a more front-loaded elimination of distortive taxes consistent with the pace outlined in the tax reform adopted in late 2017. ### A. Fiscal Policy — Specific fiscal measures and performance to date - Recent fiscal performance: - From a consolidated primary spending of 42 percent of GDP in 2015 (up from 26 percent pre-2001-2002), primary expenditure was reduced during 2017 by almost 2 points of GDP. - In 2017 the federal government over-achieved its fiscal target by 0.4 percent of GDP with primary expenditures increasing slower than revenues for the first time since 2004. - Primary spending last year was reduced by 1.3 percent of GDP, a decrease not seen since 1991. - During the first 5 months of 2018 the federal primary deficit was reduced by 40 percent with revenues growing 5 percentage points faster than expenditures; primary spending contracted by 6 percent in real terms year-over-year. - Policy measures to support fiscal targets: - Reduce subsidies on energy and transport with the objective of increasing the proportion of production costs covered by consumer prices: - Gas: from around 80 percent in 2017 to 90 percent in 2020, on average. - Electricity: from almost 60 percent in 2017 to 90 percent in 2020, on average. - Maintain a social tariff component to protect those unable to afford higher tariffs and work towards eliminating regional differences. - Rationalize public sector employment through: - Sustained attrition of non-priority employees. - A commitment to freeze new hiring in the federal civil service for two years. - Permanently closing redundant positions. - Target for personnel spending: decline from 3.2 percent of GDP in 2017 to 2.7 percent of GDP by the end of the program. - Reduce other goods and services spending of the federal government by 15 percent in 2018, in real terms, relative to the 2017 outturn. *Source: Appendix I. Letter of Intent and Attachment I. Memorandum of Economic and Financial Policies (June 12, 2018).* ### 2019. Strict control over commitments will prevent accumulating arrears. ### 2019. Strict control over commitments will prevent accumulating arrears. ### Fiscal consolidation measures - Continue executing public infrastructure projects that are "key to foster the competitiveness of the country" and delay those "not deemed crucial." - Reduce transfers associated with the operating deficit of Government enterprises that are not related to public utility tariffs, from their current level of "0.1 percent of GDP in 2017" to "almost zero in 2021." - Continue working within the appropriate parliamentary Commission on improvements in the pension system under the "Ley de Reparación Histórica" to make it "financially sustainable and fairer for both current and future generations." - Extend the implementation period of some distortive tax reductions from the Tax reform adopted in late 2017 "as necessary to achieve our fiscal targets." - Reduce discretionary transfers to Provinces associated with expenditure responsibilities assigned by the Constitution while allowing automatic transfers from the Federal Government to the Provinces to "continue to increase through 2020." - Ensure reductions in spending "are designed to ensure that the incidence is not borne by social assistance or other poverty alleviation programs" executed at the provincial level. - Rely on the Fiscal Responsibility Law passed in late 2017 to: - Offset anticipated reduction in discretionary transfers with contemplated increases in automatic transfers to the provinces. - Establish that "primary spending cannot be increased in real terms." - Foresee "the aggregate fiscal position of the provinces will show a balanced primary budget in 2018 and a surplus by the end of the Stand-By Arrangement." - Continue rationalizing tax expenditure in the corporate income tax and "publish a complete accounting of all tax expenditures in the budget." - Amortize pension fund assets currently held by the government to help finance government payment of pensions, including those in the "Ley de Reparación Histórica." - Identify a further "0.2 percent of GDP in contingent expenditure cuts (largely on infrastructure)" to be drawn upon if federal tax collection is affected. ### Improving the fiscal framework - Annual budget commitments: - Provide "simple and transparent medium-term objectives for the primary balance" consistent with program parameters. - Include "realistic and prudent macroeconomic assumptions," a "statement of fiscal risks and of tax expenditures," and details on "key policy measures that will be undertaken to achieve the 2019 primary balance objective." - Contain classification of revenues and of current and capital spending consistent with modern fiscal reporting methodologies. - "Include in the budget law the elimination of Article 27 of Law 11,672." This is a structural benchmark for the program. - Introduce a new mid-year fiscal report, "starting in June 2019," with updated fiscal outturns and revised medium-term projections. - Ensure sufficient funding and capabilities for the Federal Council of Fiscal Responsibility (FCFR) and the Congress Budgetary Office (CBO, Oficina de Presupuesto del Congreso): - The CBO will periodically evaluate macroeconomic and budgetary forecasts, provide independent costing to Congress, and assess government fiscal plans. This is a structural benchmark. - The FCFR will monitor and evaluate fiscal performance of Federal and provincial governments, including compliance with the Fiscal Responsibility Law. - Develop a fiscal risk analysis framework to be included in the "2020 budget documents" that will contemplate: - Publication of a fiscal risk scenario analysis. - A long-term fiscal sustainability analysis (for federal and consolidated government). - An analysis of contingent liabilities (explicit and implicit), including those related to PPP project financing and unfunded pension obligations. - Strengthen revenue administration via the Tax Administration Agency (AFIP, Administración Federal de Ingresos Públicos) to improve compliance plans and risk mitigation strategies; this is a structural benchmark. ### Protecting Society’s Most Vulnerable - Core objectives: - Prioritize protection of children and young people, whose poverty levels are "substantially higher than those of any other group." - Channel protected social expenditure and safeguards through existing automatic, well-targeted cash transfer programs. - Maintain a floor on social assistance spending of "1.3 percent of GDP," safeguarding program coverage for "2019-20" and allowing benefits to rise according to the existing indexation formula. This is a performance criterion. - The floor will cover: - Asignación Universal por Hijo (AUH). - Asignación por Embarazo (AUE – pregnancy allowance). - Contributive Family Allowances (including allowances to "monotributistas"). - All above are under budgetary programs "Asignación Universal para Protección Social" and "Asignaciones familiares." - Provision for additional targeted spending if social conditions worsen: - Allow additional spending of "AR$13.5 billion in 2018" and "the equivalent of 0.2 percent of GDP" on the "Asignaciones Universales para Protección Social." - Revisions to social protection program design: - Work with IFIs to strengthen programs that protect households or singles with no children. - Continue working with provinces to integrate service provision, reduce duplication, improve targeting, and lower administrative costs. - Revise the social tariffs system to better target "in particular toward the bottom 4 deciles of the income distribution." ### Supporting Gender Equity - Policy actions to improve gender equity and labor outcomes for women: - Reform the current tax system to "reduce the disincentives for women to participate in the labor force." - Continue projects on equal pay and a more equal system of paternity and maternity leave (both in "Propuesta de Ley de Equidad de Género, submitted to Congress this year"). - Continue building infrastructure for childcare and early child education. - Require listed companies to publish annual data on gender balance on their Board and managerial positions. - Continue initiatives to fight gender-based and domestic violence and provide support networks (Plan Nacional de Acción para la Prevención, Atención y Erradicación de Violencia contra las Mujeres). ### Monetary Policy - Continue commitment to an inflation targeting framework to "reduce inflation" and build credibility through institutional strengthening and actions aligned with inflation objectives. - Commit to strengthen the institutional framework for monetary policy and reinforce the BCRA’s autonomy. ### Reinforcing the BCRA’s autonomy - By "March 2019," submit to Congress a new charter for the central bank (structural benchmark) to: - Reinforce price stability as the key mandate of the BCRA. - Give the BCRA authority to set, "in consultation with the Ministry of the Treasury, the inflation targets for the three years ahead." - Require the BCRA, "in case of material deviations from the targets," to send a public letter to Congress and the President explaining causes and corrective actions. - Provide well-defined and limited grounds for dismissal of the Governor, Vice-Governor, and Board members. - Improve transparency by restoring international accounting standards for the Central Bank’s balance sheet. - "Discontinue all direct or indirect central bank financing of the Government and reduce the credit exposure of the central bank to the government in a predictable and phased manner." - Clarify legal status of the BCRA’s official foreign reserves to be used only for exchange rate and monetary policies. - "Limit transfers to the Treasury only to realized profits," distributing only when BCRA’s capital exceeds an adequate level; unrealized FX revaluation profits/losses booked separately. - Commitment already made on "June 7" to "immediately end all new direct or indirect central bank transfers to the Treasury." Continued adherence is a performance criterion. - BCRA will begin introducing International Financial Reporting Standards "within the next two years" to improve transparency and accountability. ### Central Bank Balance Sheet - Previous administrations accumulated "non-interest bearing, non-marketable securities" on the central bank balance sheet, reducing international reserves and masking the government's debt. - Commit to reverse prior measures via: - An independent assessment of the BCRA balance sheet. - Adoption of international accounting standards and more transparent valuation of BCRA assets and liabilities. - By "December 2019," the government is committed to provide the BCRA with financial autonomy in the form of "an adequate level of capital." This is a structural benchmark. - The Ministry of Finance intends to gradually repurchase a sizable portion of the non-marketable government securities held by the Central Bank, starting in June. *Italic: IMF staff and Argentine authorities program document (CR18219).* ### 2018. The objective is to reduce the BCRA’s net claim on the government by at least US$25 ### 2018. The objective is to reduce the BCRA’s net claim on the government by at least US$25 ### BCRA liabilities and financial re-intermediation - Program objective: reduce the BCRA’s net claim on the government by at least US$25 billion by May 2021 (performance criterion). - Policy approach: - Use repayment of government liabilities held by the central bank to drain peso liquidity and lessen reliance on issuing LEBAC securities. - Establish a senior-level debt management coordinating committee between Treasury-Finance-BCRA to meet weekly and coordinate sterilization and debt issuance plans (structural benchmark). - Limit the BCRA’s counterparties to local banks by end-September 2019 (structural benchmark). ### Inflation goals and monetary policy - New year-on-year consumer price (IPC) inflation targets for the BCRA: - end 2018: 27 percent - end 2019: 17 percent - end 2020: 13 percent - end 2021: 9 percent - Program features: - Consultation bands surrounding the inflation target and net domestic assets of the central bank. - Maintain current restrictive monetary policy until realized inflation and end-2019 inflation expectations show tangible declines. - Calibrate monetary policy forward-looking to ensure convergence to targets; adjust response to adverse supply or external shocks consistent with monetary policy lags and shock characteristics. ### Exchange rate and international reserves - Commitment to a flexible, market-determined exchange rate as part of the inflation-targeting framework. - Limit sales of foreign currency reserves to periods of clear market dysfunction; absorb external pressures via flexible exchange rate and very limited FX sales. - Intention to build international reserves over the medium term and not let net international reserves fall below a floor that provides space for decumulation during current volatility while rising over time (see Table 2). - BCRA to publish by end-June 2018 a regulation introducing a foreign exchange auction to intervene in spot and forward markets (structural benchmark). - At the Treasury request, the BCRA will announce a program of preannounced daily sales to sell part of IMF budget support to fund peso-denominated Treasury obligations via FX auctions. ### Banking sector assessment - Risks judged limited due to: small sector size, high capital and liquid assets, and limited bank exposure to the sovereign. - Authorities commit to closely monitoring financial sector developments and preparing prompt responses to deterioration. ### Macroeconomic outlook and growth projections - Near-term shocks: recent financial market volatility, drought affecting agriculture, and higher world energy prices. - Growth outlook for the year: - Expected range: between 0.4 percent and 1.4 percent for the year as a whole. - Fiscal projection assumption: 0.4 percent economic growth (conservative planning assumption). - 2019 growth: expected to be around 2 percent. - Balance of payments: expected rapid reversal of the recent rise in the current account deficit, continued fall through 2020, to be financed comfortably by foreign direct investment inflows and additional portfolio capital inflows; central bank intends to absorb portfolio inflows through increases in international reserves. ### Supply-side and structural policies - Anti-corruption and AML-CFT: - Continue strengthening anti-corruption regime, institutional framework, prosecutorial and judicial proceedings. - Improve AML-CFT legal framework (penalization of noncompliance, information-sharing, asset freezing/administration). - Strengthen Financial Intelligence Unit operations using a risk-based approach; design concrete measures in consultation with Fund staff by the first review date. - Statistics: - Continue improving statistical system to align with internationally accepted methodologies and reporting standards in collaboration with international organizations. - Domestic credit markets (Ley de Financiamiento Productivo): - Instruments: electronic invoices for factoring, simplified debentures, tradable IOUs; inflation-adjusted mortgages to facilitate securitization and covered bonds; new insurance instruments for mortgages. - Elimination of double taxation in closed-end mutual funds to promote long-term savings and investment. - CNV empowered to issue regulations to avoid conflicts of interest, reduce systemic risk, simplify administrative processes, and pursue faster sanctions; CNV loses previous powers to intervene in corporations and appoint overseers with veto powers. - Competition reform: - New antitrust framework (approved May 2018) creates National Competition Authority (ANC) with independent budget and decision-making, introduces ex-ante merger control, fast-track procedure for low-impact cases, leniency program, and a specialized Appellate Court in Antitrust Matters. - De-bureaucratization: - New law simplifies incorporation of corporations, allows digital accounting records, simplifies patent processes, expedites establishment of ports, unifies air traffic control, removes restrictions on road cargo and agricultural equipment circulation, removes barriers to financial services access, enables digital files and electronic signatures at federal government levels. ### Program conditionality, structural benchmarks, and timetable highlights - Key structural benchmarks and proposed timings: - Publish regulation introducing foreign exchange auction for BCRA intervention in spot and forward markets — Jun-2018 (Proposed). - Establish senior-level debt management coordinating committee between Treasury-Finance-BCRA (weekly) — Sep-2018 (Proposed). - Present a 2019 budget to Congress with transparent medium-term primary balance objectives and elimination of article 27 of Law 11,672 — Oct-2018 (Proposed). - Provide sufficient resources to Congressional Budget Office (CBO) — Dec-2018 (Proposed). - Submit new central bank charter ensuring operational autonomy and strengthened mandate — Mar-2019 (Proposed). - Limit BCRA counterparties for sale of LEBACs, open market operations and repos to domestic banks — Sep-2019 (Proposed). - Recapitalize central bank to ensure adequate capital as percent of monetary base plus outstanding stock of LEBACs — Dec-2019 (Proposed). - Design compliance improvement plan for taxpayer segments and core taxes — Jun-2019 (Proposed). - IMF Stand-By Arrangement schedule of reviews and purchases (SDR millions): - June 20, 2018: 10,613.71 (333% quota) — Approval of Arrangement - September 15, 2018: 2,063.78 (65% quota) — First Review and end-June 2018 performance criteria - December 15, 2018: 2,063.78 (65% quota) — Second Review and end-September 2018 performance criteria - March 15, 2019: 2,063.78 (65% quota) — Third Review and end-December 2018 performance criteria - June 15, 2019: 2,063.78 (65% quota) — Fourth Review and end-March 2019 performance criteria - September 15, 2019: 2,063.78 (65% quota) — Fifth Review and end-June 2019 performance criteria - December 15, 2019: 2,063.78 (65% quota) — Sixth Review and end-September 2019 performance criteria - March 15, 2020: 2,063.78 (65% quota) — Seventh Review and end-December 2019 performance criteria - June 15, 2020: 2,063.78 (65% quota) — Eighth Review and end-March 2020 performance criteria - September 15, 2020: 2,063.78 (65% quota) — Ninth Review and end-June 2020 performance criteria - December 15, 2020: 2,063.78 (65% quota) — Tenth Review and end-September 2020 performance criteria - March 15, 2021: 2,063.78 (65% quota) — Eleventh Review and end-December 2020 performance criteria - June 1, 2021: 2,063.71 (65% quota) — Twelfth Review and end-March 2021 performance criteria - Total: 35,379.11 (110% quota) ### Quantitative performance criteria, indicative targets, and consultation clauses (selected figures) - Fiscal and monetary performance criteria (selected entries, values shown as in source): - Primary balance of the federal government (floor) — series: -148 .0, -256.0, -362.5, -32.0, -100.0 - Federal government accumulation of domestic arrears (ceiling) — series: 8.2, 14.9, 21.6, 27.1, 39.7 - Social assistance spending (floor) — series: 87.7, 131.1, 177.5, 60.0, 112.6 - Change in net international reserves (floor) (in billions of U.S. dollars): 5.5, 5.5, 5.5, 5.5, 7.5 - Change in stock of non-deliverable FX forwards (ceiling) (in billions of U.S. dollars): 1.0, 0.0, -0.5, -1.0, -1.5 - Change in central bank credit to government (ceiling) (in Argentine pesos): 0.0, -78.0, -156.0, -234.0, -312.0 - Inflation bands (percent, y-o-y) — Center inflation target series by period: 27, 27, 27, 24, 22 (with inner and outer bands listed in Table 2) ### Technical Memorandum highlights - Program exchange rates (average daily selling rates at end of May 2018): - Argentine Pesos to the US dollar: 24.96 - Argentine Pesos to the SDR: 35.36 - Argentine Pesos to the Euro: 29.14 - Argentine Pesos to the Canadian dollar: 19.22 - Argentine Pesos to the British pound: 33.16 - Argentine Pesos to the Renminbi: 3.89 - Gold prices (US$/ounce): 1298.29 *Source: IMF country document (cr18219) — Argentina program documentation excerpt.* ### 4. Pre-announced BCRA foreign exchange sale of the counterpart of Fund resources to be ### 4. Pre-announced BCRA foreign exchange sale of the counterpart of Fund resources to be used for budgetary purposes ### Foreign exchange operations: definitions - Pre-announced BCRA foreign exchange sale of the counterpart of Fund resources to be used for budgetary purposes: the BCRA sells for the Treasury a pre-announced amount of US dollars on a daily basis to fund Treasury obligations denominated in pesos. The program is fixed for a month and the daily fixed amount is announced at least three business days ahead of time. - Foreign exchange auction: mechanism in which the BCRA sells US dollars to banks for Argentine pesos. All banks in Argentina can participate. Bids are allotted solely based on the price proposed by the counterparties, starting from highest peso per US dollar rate until the pre-announced amount is exhausted. The auction weighted average, marginal rate, total bid amount, and the final allotment are published one hour after the auction allotment. ### Quantitative performance criteria: definitions of institutional coverage and primary balance - Federal government (Sector Público Nacional No Financiero) for program purposes consists of: - the central administration, the social security institutions, the decentralized institutions (Administración Nacional), PAMI, fiduciary funds, and other entities and enterprises of the federal government. - Primary balance of the Federal government: - Defined in accordance with the monthly and annual reporting of the “Esquema IMIG”. - Equals total revenues (ingresos totales, according to “Esquema IMIG”) minus primary spending (gastos primarios). - Revenues are recorded on a cash basis and include: tax revenues (ingresos tributarios), revenue income (rentas de la propiedad), other current revenues (otros ingresos corrientes), capital revenues (ingresos de capital), and imputed revenues associated with the 2008 nationalization of private pension assets. - Revenues exclude: financial transfers from the Central Bank (Adelantos Transitorios), interest income from intra-public sector holding of securities and debt obligations, and proceeds from the sale of other financial assets. - Profit transfers from the central bank are regarded as revenues for program purposes. - Federal government primary expenditure: - Recorded on a cash basis and includes: social protection (prestaciones sociales), economic subsidies (subsidios económicos), operational expenses (gastos de funcionamiento), current transfers to provinces (transferencias corrientes a provincias), other current spending (otros gastos corrientes), and capital spending (gastos de capital), which includes capital transfers to provinces, and capital spending on Programa de Inversiones Prioritarias currently recorded under “Adelantos a Proveedores y Contratistas”. ### Pension assets accounting for FGS (2008 nationalization) - Authorities and staff agreed on an IMF technical assistance mission by end-2018 to collect necessary information and advise on record keeping consistent with IMF’s Government Finance Statistics. - Interim treatment: - The value of pension fund assets seized in 2008 will be spread over time as revenue to partially offset future pension spending. - The amount will be divided by the average life expectancy of contributors to those schemes at 2018, that is 20 years. - The limit on the amount to be recognized as revenue shall be 0.4 percent of GDP per year. - If mission recommendations change measurement of the budget balance, no additional policy measures would be sought or applied for the purposes of the IMF-supported program. ### Treatment of PPPs and divestment costs - Government-funded public-private partnerships will be treated as traditional public procurements; federal government obligations associated with PPPs will be recorded transparently in budget data and measured as part of the Federal government deficit on a cash basis. - Costs associated with divestment operations or liquidation of public entities (e.g., cancellation of contracts, severance payments) will be allocated to current and capital expenditures accordingly. ### Non-cash settlements and primary expenditure recording - All primary expenditures (including fines) directly settled with bonds or any other form of non-cash liabilities will be recorded as spending above-the-line and will decrease the primary balance. - Exclusions: settlement of pension liabilities towards people enrolled in the federal pension system (Sistema Integrado de Pensiones y Jubilaciones) incurred in the past and related to existing and pending court rulings, and payments of arrears as per ICSID or similar arbitration rulings. - Measurement timing: Federal government’s primary balance will be measured at each test date as the cumulative value starting from the beginning of each calendar year. - Monitoring: All fiscal data needed for program monitoring will be provided to the Fund with a lag of no more than 25 calendar days after the end of each month. ### Floor on Federal Government Spending on Social Assistance Programs - Definition: Social spending for the program is the sum of all federal government spending (recurrent and capital) on the following social protection programs: - Asignación Universal para Protección Social (includes: Asignación Universal por Hijo, Asignación por Embarazo, Ayuda Escolar Anual). - Asignaciones Familiares Activos (includes: Asignación Prenatal, por Adopción, por Hijo, por Hijo Discapacitado, por Maternidad, por Matrimonio, por Nacimiento, Ayuda Escolar Anual). - Asignaciones Familiares Pasivos (includes: Asignación Prenatal, por Cónyuge, por Hijo, por Hijo Discapacitado, Ayuda Escolar Anual). - Asignaciones Familiares Sector Público Nacional (includes: Asignación Prenatal, por Hijo, por Hijo Discapacitado, por Maternidad, Ayuda Escolar Anual). - Monitoring: Data provided to the Fund with a lag of no more than 25 calendar days after the end of each month. - Adjustor to the primary balance for social spending: - The floor on the primary balance of the federal government (cumulative since the beginning of the year) would be adjusted downward by the amount that expenditures in the Universal Allowances for Social Protection programs exceed the programmed values defined in Table 2. - Cap: 13,500 million of pesos in 2018 and 0.2 percent of GDP in each successive calendar year. - Program baseline cumulative social spending figures (AR$ millions, cumulative from January 1): - end-June 2018: 37,187 - end-September 2018: 55,368 - end-December 2018: 74,836 - end-March 2019: 25,818 - end-June 2019: 47,735 ### Adjustor for external financing projects - The primary balance target will be adjusted up (down) by the shortfall (excess) in expenditure financed by disbursements of external project loans by International Financial Institutions and bilateral partners, compared to capital expenditures settled in the budget (Table 3). - Cap: cumulative 30,000 million pesos in 2018, and 0.2 percent of GDP in each successive calendar year. - Starting in 2019, the benchmark is the expenditure financed by disbursements of external project loans by IFIs and bilateral partners, as stated in the budget. - Program baseline cumulative multilateral/bilateral funded capital spending (AR$ millions, cumulative from January 1): - end-June 2018: 15,171 - end-September 2018: 20,025 - end-December 2018: 30,341 ### Ceiling on Federal Government Accumulation of Domestic Arrears - Definition: Domestic arrears = floating debt = primary spending recorded on an accrual basis (gasto devengado, SIDIF) minus primary spending recorded on a cash basis (base caja, Treasury). Excludes intra-public transfers (transferencias figurativas). Includes spending for: personnel (gasto en personal), acquisition of goods and services (bienes y servicios), non-professional services (servicios no profesionales), capital expenditures (bienes de uso), and transfers (transferencias). - Measurement: arrears measured on a daily basis. - Quarterly average cap: 0.5 percent of GDP, that is 67,500 million pesos by the end of December 2018. - Monitoring: Daily-frequency data provided to the Fund with a lag of no more than 25 calendar days after the end of each month. ### Federal Government Non-Accumulation of External Debt Payments Arrears - Definition of debt: residency criterion; “debt” defined as a current, not contingent, liability created under a contractual arrangement requiring future payments in assets or services. Forms include: - i. Loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements). - ii. Suppliers’ credits (deferred payments for goods/services). - iii. Leases (present value at lease inception of all expected lease payments, excluding operation/repair/maintenance payments). - Definition of external arrears for program monitoring: - External debt obligations (principal and interest) falling due after May 30, 2018 that have not been paid, considering contractual grace periods. - Arrears, penalties and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. - Failure to make payment on an obligation not considered debt (e.g., payment on delivery) will not give rise to debt. - Coverage exclusions for this performance criterion: - (i) arrears on trade credits, (ii) arrears on debt subject to renegotiation or restructuring, and (iii) arrears resulting from the nonpayment of commercial claims that are the subject of any litigation initiated prior to May 30, 2018. - Monitoring: this performance criterion will be monitored on a continuous basis. ### Floor on the Change in Net International Reserves (NIR) - Definitions: - NIR of the BCRA = U.S. dollar value of gross official reserves of the BCRA minus gross official liabilities with maturities of under one year. - Non-U.S. dollar denominated foreign assets and liabilities converted into U.S. dollar at the program exchange rates. - Gross official reserves (BPM6-consistent) include: - (i) monetary claims, (ii) free gold, (iii) holdings of SDRs, (iv) the reserve position in the IMF, (v) holdings of fixed income instruments, and (vi) net cash balances within ALADI. - Excluded: assets pledged/collateralized/encumbered, claims on residents, claims in foreign exchange arising from derivatives vis-à-vis domestic currency, precious metals other than gold, assets in nonconvertible currencies, and illiquid assets. - Gross official liabilities in foreign currencies include: - (i) foreign currency liabilities with original maturity of one year or less, (ii) the use of Fund resources extended in the context of the exceptional financing package, (iii) any deliverable forward FX liabilities on a net basis undertaken by the BCRA or by any other financial institutions on behalf of the BCRA. - The Federal government’s foreign liabilities are not considered gross foreign liabilities of the BCRA. - The foreign currency swap with the People’s Bank of China is considered a foreign exchange liability of the BCRA with a maturity of one year or less for program purposes. - Baseline stock reference: - Change in NIR measured relative to the stock on June 4, 2018, which stood at US$23.1 billion. - Monitoring: Foreign exchange asset and liability data provided to the Fund at daily frequency within one day. - Adjustors to NIR targets: - Adjust upward (downward) by surplus (shortfall) in program loan disbursements from multilateral institutions (the IBRD, IDB and CDB) and grants, relative to baseline projection reported in Table 4. Program loan disbursements are defined as external loan disbursements (excluding project financing disbursements) from official creditors usable for financing the general government. - Adjust downward by the total amount of dollars sold by the Treasury through transparent, pre-announced, BCRA-run auctions undertaken each business day to the market (to meet the peso obligations of the government) plus the total amount of net cash payments financed from accounts numbered 20501, 20502, 20503, 20504, 20505, 20506, 20518 on FX-denominated debt of the federal government. This cumulative adjustor amount is capped at US$7.5 billion. - Program baseline cumulative flows from end-May 2018 (Budget support loans from multilateral sources, in millions of US$): - End-June 2018: 0 - End-September 2018: 0 - End-December 2018: 900 - End-March 2019: 900 - End-June 2019: 900 ### Ceiling on the change in the BCRA’s stock of non-deliverable forwards (NDF) - Definition: stock of NDF = sum of the U.S. dollar notional value of all contracts entered by the BCRA involving the Argentinian peso, either directly or through any institution they use as their financial agent. - Measurement: change measured relative to the stock on June 4, 2018, which stood at US$2.3 billion. - Monitoring: Daily data provided to the Fund at the end of each day. ### Continuous stop to BCRA’s financing of the government - Definition: BCRA financing to the government includes overdraft transfers from the BCRA to the Federal Government (line Adelantos Transitorios in the summary account of the BCRA), advance distribution of unrealized profits, and acquisition of government debt on the primary market or by purchase from public institutions. - Commitment: The BCRA will extend zero net financing to the government for the duration of the program. - Monitoring: Daily data provided to the Fund within two days; target monitored on a continuous basis. ### Ceiling on Central Bank Credit to the Government - Definition: central bank credit to the government = stock of government securities held by the BCRA (line Títulos Públicos) plus overdraft transfers from the BCRA to the Federal Government (line Adelantos Transitorios). - Path and reductions: - Starting in July 2018, the stock of central bank credit to the government shall decrease by the peso equivalent of US$3.125 billion per quarter until end-June 2019, and then per semester until end-April 2021. - By end-May 2021, the total decrease will correspond to US$25 billion. - This decrease shall reflect cash payments of this amount in pesos by the Treasury to the BCRA; variation due to exchange rates or accounting practices are excluded. - Monitoring: Daily data provided to the Fund within two days. ### Quantitative indicative target: cumulative floor on primary balance of the general government - Definitions: - General government = federal government (as defined above) plus aggregate position of provincial governments (23 provinces plus the Autonomous City of Buenos Aires). - Primary balance of the general government includes: - Primary balance of the federal government (including adjustors) plus revenues of provincial governments (including transfers from the federal government) less cash expenditures of provincial governments. - Provincial government expenditures include wages, goods and services, transfers and subsidies, capital spending and transfers to municipalities from the provincial government. - Expenditures of municipalities and municipal revenues are excluded. - Provincial results measured from above-the-line, with expenditure defined according to information provided by the Secretaría de Hacienda. *Source: cr18219 - 4. Pre-announced BCRA foreign exchange sale of the counterpart of Fund resources to be used for budgetary purposes (IMF).* ### 41. Reporting: Data will be provided to the Fund with a lag of no more than 60 calendar ### Reporting: Data will be provided to the Fund with a lag of no more than 60 calendar days after the end of each quarter. ### Reporting and monitoring requirements - Quarterly reporting: Data to be provided to the Fund with a lag of no more than 60 calendar days after the end of each quarter. - Monthly inflation monitoring: Data on inflation to be provided to the Fund on a monthly basis with a lag of no more than 20 calendar days after the end of each month. - Monthly NDA monitoring: Data on the BCRA’s net domestic assets (NDA) to be provided to the Fund on a monthly basis with a lag of no more than 10 days. - Daily monitoring for interventions and NDFs: Daily data will be provided to the Fund at the end of each day; the consultation clauses on foreign exchange interventions and on the stock of non-deliverable forwards (NDF) apply on a continuous basis. ### Inflation consultation clause — definitions, bands, and procedures - Definition: Inflation is defined as the change over 12 months of the end-of-period headline national consumer price index (Indice de Precios al Consumidor, IPC), as measured and published by INDEC. - Monitoring frequency: Monthly data with a lag of no more than 20 calendar days after month-end. - Consultation mechanics: - Inflation prospects are a critical part of each review under the arrangement. - If the 12-month IPCA inflation rate exceeds the upper limit of the inner band specified, the BCRA will discuss with Fund staff the appropriate policy response. - If the 12-month IPCA inflation rate exceeds the upper limit of the outer band specified, the authorities will complete a consultation with the Executive Board of the IMF on their proposed policy response before purchases under the arrangement would become available. The consultation with the Executive Board will explain: - (i) the stance of monetary policy and whether the Fund-supported program remains on track; - (ii) the reasons for deviations from the specified band, considering compensating factors; and - (iii) proposed remedial actions, as deemed necessary. - Quarterly consultation bands on inflation (as presented): - Outer Band - Upper Limit - 32 32 32 28 26 23 21 - Inner Band - Upper Limit - 29 29 29 26 24 21 19 - Midpoint - 27 27 27 24 22 19 17 - Inner Band - Lower Limit - 25 25 25 22 20 17 15 - Outer Band - Lower Limit - 22 22 22 20 18 15 13 - (Table identified as Table 6. Inflation Consultation Band) ### Net Domestic Assets (NDA) — definition, adjustors, and consultation clause - Definition of NDA: NDA are defined as the difference between the monetary base and the net international reserves of the BCRA (NIR), converted into Argentine pesos at the program’s exchange rate. - Monetary base includes currency in circulation and the accounts denominated in Argentine pesos at the BCRA of the banks subject to the reserve requirement. - NIR are defined as in this TMU. - Monitoring: Monthly data with a lag of no more than 10 days. - Adjustors: - NDA ceiling will be adjusted if the minimum reserve requirement on commercial banks is changed. The ceiling will be increased (decreased) by the same peso amount as the increase (decrease) in required reserves. - NDA ceiling will be adjusted in line with any adjustments made to the floor on the change in Net International Reserves at program exchange rates; the NDA ceiling will be increased (decreased) by the same amount as the decrease (increase) in the floor on the change in NIR. - Consultation clause if NDA exceed ceiling: - Should the NDA of the BCRA exceed the upper limit specified in Table 2 of the MEFP, the authorities will complete a consultation with the Executive Board of the IMF on their proposed policy response before purchases under the arrangement would become available. That consultation will explain: - (i) the reasons for deviations from the specified ceiling, considering compensating factors; and - (ii) proposed remedial actions, as deemed necessary. ### Intervention staff consultation clause — FX interventions and NDFs - Definitions: - Foreign exchange interventions are defined as spot and deliverable foreign currency sales by the BCRA either directly or through any institution they use as their financial agent. - The stock of non-deliverable forwards (NDF) is defined as the sum of the US$ notional value of all contracts entered by the BCRA involving the Argentine peso, either directly or through any institution they use as their financial agent. - Commitments and constraints: - The BCRA commits to not loosen monetary conditions, particularly by lowering the policy rate, in the context of foreign exchange interventions, until there has been such a discussion with IMF staff. - If net NDF sales exceed an accumulated amount, the BCRA commits to not loosen monetary conditions, particularly by lowering the policy rate, until there has been such a discussion with IMF staff. - Monitoring: Daily data to be provided to the Fund at the end of each day; consultation clauses apply continuously. ### Other information requirements (additional data to ensure adequate monitoring) - Daily data: - Nominal exchange rates; interest rates on domestic debt instruments including LETES (at different maturities), LEBAC (at different maturities), and BOTES; total currency issued by the BCRA; deposits held by financial institutions at the BCRA; required and excess reserves of the banking sector in local and foreign currency; total liquidity assistance to banks through normal BCRA operations, including overdrafts; interest rates on overnight deposits and on 7-day repurchase and reverse repurchase agreements. - Individual banks’ gross foreign exchange positions by currencies. - Individual banks’ foreign currency accounts with the BCRA. - Weekly: BCRA balance sheet. - Monthly data (with specified lags where given): - Federal government operations including monthly cash flow from the beginning to the end of the current fiscal year (and backward revisions as necessary), with a lag of no more than 25 days after the closing of each month, according to both the format of the Informe Mensual de Ingresos y Gastos (IMIG) and to the format of the Cuenta Ahorro Inversion Financiamiento (AIF). - Expected monthly federal government and provincial government debt amortization and repayments (local currency and FX bonds, treasury bills, Eurobonds, domestic loans, external commercial and external official loans), including both direct and guaranteed debt. In the case of issuance of government guaranteed debt, include the name of the guaranteed individual/institution. - Federal government and provincial government debt stock by currency, as at end month, including by (i) creditor (official, commercial domestic, commercial external); (ii) instrument (local currency and FX denominated bonds, treasury bills, Eurobonds, domestic loans, external commercial and external official loans); and (iii) direct and guaranteed. - Balances of the (federal) government at the central bank and in the commercial banking system needed to determine the cash position of the (federal) government. - Deposits in the banking system: current accounts, savings and time deposits within six weeks after month end. Average monthly interest rates on loans and deposits within two weeks of month end; weighted average deposit and loan rates within six weeks after month end. - Balance sheets of other financial corporations (non-deposit taking), including holdings of federal and provincial debt and of the BCRA instruments within one month after month end. - Data on the total loans value of all new federal government-funded public private partnerships. ### Key program financing and phasing statistics (proposed SBA access and schedule) - Authorities requesting a 36-month SBA with access equivalent to SDR 35.379 billion (1,110 percent of quota). Under proposed phasing, access is frontloaded. - Availability and purchase schedule (as presented in Table 1. Argentina: Proposed SBA — Access and Phasing; figures shown as Availability Date/SDR millions Purchase Cumulative): - 2018 June 10,613.71 333.0 333.0 - 2018 September 2,063.78 64.8 397.8 - 2018 December 2,063.78 64.8 462.5 - 2019 March 2,063.78 64.8 527.3 - 2019 June 2,063.78 64.8 592.0 - 2019 September 2,063.78 64.8 656.8 - 2019 December 2,063.78 64.8 721.5 - 2020 March 2,063.78 64.8 786.3 - 2020 June 2,063.78 64.8 851.0 - 2020 September 2,063.78 64.8 915.8 - 2020 December 2,063.78 64.8 980.5 - 2021 March 2,063.78 64.8 1,045.3 - 2021 June 2,063.71 64.7 1,110.0 - Total 35,379.0 1,110.0 - Operational note: After approval of the arrangement, all subsequent purchases will depend on completion of a review and compliance with performance criteria and consultation clauses established under the arrangement. - Example scenario noted in text: - Authorities intend to make the first purchase, using one-half of the Fund resources (SDR 5.307 billion) for budgetary purposes, and intend to treat the remainder of the arrangement as precautionary. - In a full-drawdown scenario where real GDP ends up being 8 percent lower than in the precautionary baseline by 2023, the first purchase would be followed by 12 quarterly purchases each equivalent to SDR 2.064 billion (64.8 percent of quota) during the remainder of the arrangement period. - By mid-June 2019, cumulative available purchases would amount to SDR 18.869 billion (592.0 percent of quota or 53.3 percent of the proposed access). - Final purchase would become available in June 2021, following completion of the twelfth review. ### Background highlights and risk context (program-level findings) - Historical use of Fund resources: Argentina was a prolonged and large user of Fund resources up to the mid-2000s, with multiple SBAs and EFFs in the 1990s and early 2000s. - External debt and debt service: - Total external debt-to-GDP: from 27⅓ percent in 2013, nearly 28 percent by end-2015, and almost 37 percent of GDP by end-2017. - Total external debt expected to increase to 51 percent of GDP in 2018, reflecting bonds issued earlier in the year and the scheduled first purchase under the proposed SBA. - Short-term debt represents about one-third of total external debt. - Public sector accounted for 70 percent of Argentina’s external debt in 2017. - Argentina’s total external debt service for 2017 is estimated at around 11 percent of GDP, of which more than 70 percent represents obligations of the private sector. _The International Monetary Fund staff report (June 15, 2018) summarized in this content unit._ ### 5. Argentina’s public debt is relatively high and is projected to rise further by end-2018. ### 5. Argentina’s public debt is relatively high and is projected to rise further by end-2018. ### Public debt levels and recent evolution - Over the period 2007–15, the public debt-to-GDP ratio averaged nearly 47½ percent. - Public debt increased to nearly 57 percent of GDP by end-2017, reflecting larger gross financing needs since 2016. - This debt level is 17 percentage points of GDP above the median public debt at the time of approval of recent exceptional access cases. - The public debt-to-GDP ratio is projected to increase further to almost 63½ percent of GDP by end-2018 (Table 4). ### External debt structure (selected figures, 2011–2017; end of year) - Total External Debt (in millions of U.S. Dollars): - 2011: 167,477 - 2012: 167,960 - 2013: 167,018 - 2014: 170,375 - 2015: 178,933 - 2016: 189,639 - 2017: 235,740 - Public external debt (in millions of U.S. Dollars): - 2011: 103,809 - 2012: 103,343 - 2013: 102,973 - 2014: 109,862 - 2015: 113,180 - 2016: 130,228 - 2017: 164,130 - Bonds (public, in millions of U.S. Dollars): - 2011: 68,368 - 2012: 69,393 - 2013: 69,921 - 2014: 74,219 - 2015: 70,173 - 2016: 89,730 - 2017: 116,772 - Of which Holdouts (in millions of U.S. Dollars): - 2011: 11,177 - 2012: 11,482 - 2013: 11,529 - 2014: 11,633 - 2015: 11,521 - 2016: 8,468 - 2017: 2,788 ### Comparisons with recent exceptional access cases (figures summarized from panels) - Argentina’s end-2017 ratios are shown relative to other recent exceptional access arrangements across: - Total External Debt (percent of GDP at time of approval) - Public External Debt (percent of GDP at time of approval) - External Debt Service to Exports of Goods and Services (percent) - Total Public Debt (percent of GDP at time of approval) - The text notes Argentina’s debt level is materially above medians of recent exceptional access cases, particularly in total public debt (17 percentage points above the median at approval). ### IMF exposure, program size, and projected Fund-related debt-service - The proposed SBA (if fully drawn on the schedule) would: - After the scheduled first purchase upon approval, make Argentina the Fund’s largest borrower with SDR 10.6 billion credit outstanding (333 percent of quota), representing 22 percent of total Fund credit outstanding. - Lead to Argentina’s outstanding use of GRA resources rising to: - 592 percent of quota at end-June 2019 - 722 percent of quota at end-December 2019 - Peak at 1,110 percent of quota in June 2021 - Peak Fund exposure metrics (if all purchases made as scheduled): - Peak Fund exposure would peak around 83 percent of projected gross international reserves (over twice the 39 percent median peak of recent exceptional access cases). - As a share of total external debt, peak Fund exposure would be 14 percent (median peak 11 percent). - As a share of GDP, peak Fund exposure would be 8.4 percent (median peak 10.4 percent). - Projected payment obligations to the Fund (if all purchases made as scheduled): - Projected to peak in 2023 at SDR 11 billion, representing almost 18 percent of projected gross international reserves. - Debt service to the Fund as a share of exports of goods and services would peak at about 15 percent (twice the median peak level for recent exceptional access cases). - Total external debt service as a share of projected exports of goods and services is projected to peak at 178 percent (the highest ratio among recent exceptional access cases). ### Capacity to repay indicators (selected projections from Table 4; preserves numeric precision) - GRA credit to Argentina (Exposure and Repayments, in SDR millions): - 2018: 14,741.3 (462.5 percent of quota) - 2019: 22,996.4 (721.5 percent of quota) - 2020: 31,251.5 (980.5 percent of quota) - 2021: 32,467.6 (1,018.7 percent of quota) - 2022: 23,549.1 (738.8 percent of quota) - 2023: 13,414.5 (420.9 percent of quota) - 2024: 5,417.4 (170.0 percent of quota) - 2025: 773.9 (24.3 percent of quota) - 2026: 0.0 (0.0 percent of quota) - Debt and Debt Service Ratios (In percent of GDP): - Total external debt: 2018: 51.4; 2019: 59.2; 2020: 61.6; 2021: 60.9; 2022: 63.6; 2023: 65.4; 2024: 67.7; 2025: 69.9; 2026: 72.2 - External debt, public: 2018: 36.8; 2019: 43.1; 2020: 45.3; 2021: 45.0; 2022: 47.3; 2023: 49.0; 2024: 51.1; 2025: 53.1; 2026: 55.3 - GRA credit to Argentina (percent of GDP): 2018: 4.0; 2019: 6.4; 2020: 8.4; 2021: 8.0; 2022: 5.7; 2023: 3.1; 2024: 1.2; 2025: 0.2; 2026: 0.0 - Total external debt service (percent of GDP): 2018: 15.6; 2019: 18.4; 2020: 20.4; 2021: 21.6; 2022: 23.8; 2023: 25.2; 2024: 27.4; 2025: 29.4; 2026: 31.7 - Public external debt service (percent of GDP): 2018: 8.4; 2019: 10.0; 2020: 11.3; 2021: 12.0; 2022: 13.1; 2023: 14.0; 2024: 15.1; 2025: 16.2; 2026: 17.5 - In percent of Gross International Reserves: - Total external debt: 2018: 505.7; 2019: 566.3; 2020: 612.2; 2021: 621.6; 2022: 517.3; 2023: 456.5; 2024: 391.1; 2025: 340.0; 2026: 293.5 - GRA credit to Argentina (percent of gross international reserves): 2018: 38.8; 2019: 61.7; 2020: 83.2; 2021: 82.3; 2022: 46.4; 2023: 21.8; 2024: 7.0; 2025: 0.8; 2026: 0.0 - In percent of Exports of Goods and Services: - Total external debt service: 2018: 105.5; 2019: 112.1; 2020: 124.6; 2021: 134.5; 2022: 143.1; 2023: 150.1; 2024: 159.2; 2025: 168.0; 2026: 177.7 - Public external debt service: 2018: 57.0; 2019: 61.1; 2020: 68.9; 2021: 74.9; 2022: 79.2; 2023: 83.1; 2024: 88.1; 2025: 92.9; 2026: 98.3 - Debt service due on GRA credit: 2018: 0.4; 2019: 1.0; 2020: 1.5; 2021: 6.5; 2022: 14.9; 2023: 15.2; 2024: 10.9; 2025: 5.8; 2026: 0.9 ### Impact on Fund liquidity and risk exposure - The proposed arrangement would reduce the Fund’s liquidity by 16.0 percent. - Current one-year Forward Commitment Capacity (FCC) as of 6/7/2018: 221,590.8 (millions of SDR) - Impact on FCC on approval: -35,379.0 (in percent of current one-year FCC) -16.0 - Prudential measures: - Fund GRA credit outstanding to Argentina (projected at time of approval / scheduled first purchase): 10,613.7 (millions of SDR) - In percent of current precautionary balances: 61.0 - In percent of total GRA credit outstanding: 22.1 - Fund GRA credit outstanding to top five borrowers (percent of total GRA credit outstanding): 77.9 (before Argentina’s first purchase) - In percent of total GRA credit outstanding including Argentina's first purchase: 74.8 - Fund’s precautionary balances (FY 2018): 17,400 (millions of SDR) - Fund's residual burden-sharing capacity: 107.8 (millions of SDR) - Argentina's annual GRA charges in percent of Fund's residual burden sharing capacity for 2018: 180.2 - Projection outcomes and risks related to arrears and charges: - GRA commitment to Argentina amounts to nearly twice the current level of precautionary balances. - If all purchases are made as scheduled, Fund exposure to Argentina as a share of the current level of precautionary balances would rise from 61 percent after the first purchase to 132 percent by end-2019 and peak at 203 percent in June 2021 (assuming the current level of precautionary balances). - Projected GRA charges for Argentina: SDR 194 million for the remainder of 2018; projected to average SDR 894 million a year over 2019–2024 if all purchases are made as scheduled. - Were Argentina to accrue arrears on charges after drawing, the Fund’s burden sharing mechanism would be clearly insufficient in the current environment of relatively low interest rates. ### Assessment, program purpose, and key risks - Purpose of the proposed SBA: - Intended to support the authorities’ economic program during a period of macroeconomic adjustment to reduce vulnerabilities and promote strong, sustainable, and inclusive growth. - Program success depends critically on acceleration of fiscal consolidation to restore credibility and boost market confidence. - Building a broad consensus on program objectives and policies is critical for political sustainability and implementation momentum. - Principal risks identified: - Gross financing needs and debt vulnerabilities are expected to remain high; debt trajectory is sensitive to deviations from program assumptions (exchange rate, economic growth, fiscal adjustment). - If domestic support for policies and reform measures is not sustained, the program could lose credibility despite measures to protect the most vulnerable. - Failure to realize envisaged fiscal adjustment could deteriorate market confidence, trigger sell-offs of Argentine assets, curtail access to private financing, and exert significant pressures on the exchange rate. - An adverse macroeconomic scenario (policy slippages, constrained market access, weaker growth in trading partners, deterioration of terms of trade, tighter global financing conditions, or a combination) could pose serious risks to debt sustainability and greatly increase Argentina’s debt service burden. *Source: IMF staff report excerpt (cr18219 — "5. Argentina’s public debt is relatively high and is projected to rise further by end-2018.")* ### 10. The steadfast implementation of the program will be critical. With the proposed ### 10. The steadfast implementation of the program will be critical. ### Fund exposure and repayment schedule - With the proposed access and schedule of purchases and repurchases, the Fund would be highly exposed to Argentina for an extended period in terms of both the stock of outstanding credit and debt service falling due. - Reflecting the proposed frontloaded access, Argentina would become the Fund’s top borrower soon after approval of the proposed SBA. - The Fund’s exposure to Argentina would be significant and increase thereafter with each purchase, if made, exceeding the Fund’s precautionary balances for several years to come. - Scheduled repayments to the Fund are large during 2022–25, with a peak of SDR 10.98 billion (almost 344 percent of quota) in 2023. - The experience with Argentina’s 2003 SBA-supported program highlights the importance of sustaining broad political support for reforms and readiness to recalibrate policies in reaction to potential adverse shocks to stabilize the economy and facilitate sustained market access and official financing. ### Impact on Fund liquidity - On approval of the arrangement, the Fund’s liquidity would be reduced by the full amount of the proposed access, which is the largest ever in absolute size for a Fund arrangement (except for some arrangements under the FCL). - While the Fund’s liquidity position would remain adequate, current uncertainties in the global economy could result in further demands for Fund resources. - A close monitoring of the Fund’s liquidity position is warranted. ### Multiple-price foreign exchange auction and multiple currency practice (MCP) - Authorities announced the introduction of a multiple-price auction to buy and sell foreign exchange (FX) to institutionalize exchange rate flexibility; all domestic banks will have access and FX will be allocated solely based on rates proposed by auction participants. - Auctions will be conducted for a period of no more than 12 months. - The multiple-price auction gives rise to a multiple currency practice (MCP) subject to Fund approval under Article VIII, Section 3 of the Articles of Agreement. - In the absence of a mechanism preventing (i) a spread deviation of more than 2 percent in exchange rates at which the BCRA sells FX to successful bidders; and (ii) a spread deviation of more than 2 percent between auction rates and the market exchange rate, the auction results in an MCP. - The authorities requested Fund approval for retention of the MCP. Staff supports Executive Board approval of the multiple-price auction, given it is temporary (no more than 12 months), does not harm the interest of other members, and does not discriminate between Fund members. - The Technical Memorandum of Understanding (TMU) was amended to carve out from the continuous performance criterion on introduction or modification of multiple-currency practices any modification to this foreign exchange auction. ### Supplementary Letter of Intent — program financing and priorities - The Argentine government formally requests an IMF Stand-By Arrangement for a period of 36 months, in the amount of SDR 35,379 million (equivalent to around US$ 50 billion, or 1,110 percent of Argentina’s quota with the IMF). - Plan to draw the first tranche (US$ 15 billion) upon approval of the arrangement, half of which will be used as budget support, while treating the remaining of the arrangement as precautionary. - Commitment to accelerate convergence to a primary fiscal balance and to lower inflation within a more consistent and institutionally sound monetary policy framework. - Fiscal recalibration will seek to share burden fairly and protect the most vulnerable; authorities intend to protect social assistance spending and, if social conditions deteriorate, to identify additional resources to increase funding for the most effective social assistance programs. - Program includes a stated objective to address long-standing gender inequities and ensure equitable economic opportunities for women. ### Amendments to the TMU - Addendum to the June 2018 TMU reads: "The performance criterion on the introduction or modification of multiple currency practices (MCP) excludes multiple currency practices arising from any modification to the multiple-price foreign exchange auction system introduced in June 2018." ### Recent market pressures, policy actions, and market outcomes (June 2018) - Pressures on the FX intensified since the Staff Report: on Thursday June 14, the peso depreciated by 6.5 percent, in a day with very low liquidity and without any intervention by the BCRA. - On the evening of Thursday June 14, the Governor of the Central Bank, Federico Sturzenegger, resigned and was replaced by the Finance Minister, Luis Caputo; other key members of the Monetary Policy Committee also resigned. - Authorities announced measures to stabilize FX markets and absorb liquidity, including: - Increasing reserve requirements by 3 percentage points on June 21 (and a further 2 percentage points on July 18). The incremental part of this reserve requirement could be satisfied through holdings of fixed rate, peso Treasury bonds maturing in 2020. - Relaxing restrictions on banks’ ability to purchase US$-denominated, domestic law debt in the secondary market. - Reducing the limit on banks’ net open FX position from 10 to 5 percent of regulatory capital, while allowing an additional 25 percent of regulatory capital to be held in these US$-denominated Treasury instruments. - Announcing the mechanism (although not the volumes) for the central bank to auction the Treasury’s FX holdings (arising from Fund budget support), based on a multiple-price auction set to begin on Thursday of that week. - Announcing a process (without volumes) for central bank auctions of foreign currency after market close in cases of clear market dysfunction. - Announcing the intention to auction FX for an amount up to US$ 400 million, only on Monday and Tuesday of that week, based on a multiple-price auction that would take place after market close. - These measures contributed to stabilize the peso: the peso appreciated about 2 percent on Monday and was relatively stable on Tuesday, with still relatively low traded volumes. - After market close on Monday, the central bank sold US$ 175mn at a rate of AR$ 27.5; the bank did not sell any FX on Tuesday. - Authorities issued USD 4 billion equivalent in peso bonds on Monday, at relatively high rates: - Treasury placed US$ 2 billion equivalent in a 28-month peso bonds (at a yield of 27.7 percent). - Another US$ 2 billion (1.7 of which in US dollars) in a 12-month dual currency bond (that gives the investor a choice between a US$ yield of 4.5 percent or peso yield of 33 percent). - Revenues from the issuance would finance the buyback of non-marketable, low interest, Treasury papers held by the BCRA to allow the BCRA to roll off LEBACs by an equivalent amount. - Equity and bond markets experienced heavy losses: the stock market lost 4½ percent since last week, EMBI spread increased by around 70 bps over the last week reaching 590 bps (highest since 2015), and 3-year US dollar denominated bond prices fell by about 1½ percent since last Wednesday. - On Tuesday, the BCRA completed its monthly LEBAC auction: with the peso equivalent of US$ 18.5 billion in LEBAC coming to maturity on Thursday, the BCRA accepted offers for a total of US$ 11.5 billion, with a cut-off interest rate of 47% for the 1-month bills. *IMF staff supplement and related attachments (June 18–20, 2018).* --- _Source: https://www.imf.org/-/media/files/publications/cr/2018/cr18219.pdf_