## 1argea2021001 ## Source details **Canonical URL:** [1argea2021001](https://www.imf.org/-/media/files/publications/cr/2021/english/1argea2021001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2021/english/1argea2021001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2021/english/1argea2021001.pdf.json) --- ### Executive summary and context - On June 20, 2018, the Executive Board approved the largest stand‑by arrangement in the Fund’s history in support of Argentina’s 2018-21 economic program. - After an augmentation in October 2018, access under the arrangement amounted to US$57 billion (1,227 percent of Argentina’s IMF quota). - The arrangement saw only four of the planned twelve reviews completed and was canceled on July 24, 2020. - The government elected in late 2015 reopened the capital account rapidly and borrowed abroad while following a gradual approach to addressing fiscal imbalances, setting the stage for a sudden stop and the SBA request. - Capital inflows—mainly portfolio flows—surged after the capital account reopening, even as macroeconomic imbalances and structural distortions persisted. - By early 2018 Argentina faced more challenging external conditions and announced in May 2018 that it would seek IMF financial support. ### Program strategy and design - Program objective: address a temporary liquidity shock by catalyzing renewed capital inflows. - Strategy components: - Fiscal and monetary tightening. - Targeted structural reforms. - Specific measures to support vulnerable segments of the population and to address gender inequality. - Important design constraints and choices: - Government ownership was prioritized; a debt operation and reintroduction of capital flow management measures (CFMs) were ruled out from the beginning. - Fund staff accepted the authorities’ preferred macroeconomic projections, which proved too optimistic. - Assessments of exceptional access criteria were finely balanced. - Fiscal consolidation was described as low quality and structural reforms as unaspiring. - There was no agreed “Plan B” with authorities upfront. ### Financing, access, and risk profile - Initial access and modality: - Initial access: SDR 35.4 billion (approximately US$50 billion, or 1,110 percent of Argentina’s Fund quota). - Augmented access: SDR 40.7 billion (approximately US$57 billion, or 1,227 percent of quota). - Arrangement initially intended to be principally precautionary with only the initial drawing (SDR 10.6 billion, or US$15 billion) premised on an actual balance of payments need; remainder to be phased across twelve quarterly reviews. - Evolution and risk: - With the exception of the disbursement at approval, the 2018 SBA was conceived as precautionary, but early disbursements were very large because of the arrangement’s overall size. - Deteriorating financial conditions prompted a switch to a fully disbursing arrangement; increased access and frontloading at the First Review raised further financial risks to the Fund. - The Fund’s role as the largest creditor to a relatively large country raised questions about burden sharing with other official creditors and private creditors. - Key funding numbers in program adjustments: - SDR 10.6 billion (approximately US$15 billion): external financing gap concentrated June–December 2018 in initial plan. - SDR 24.8 billion (approximately US$35 billion): remainder of Fund resources initially treated as precautionary. - SDR 35.8 billion (US$51 billion): revised concentrated access through Q3 2019 at First Review. - SDR 4.9 billion (US$7 billion): residual amount to be purchased over remainder of arrangement in seven equal installments. ### Outcomes and channels of program failure - Program failed to restore confidence in fiscal and external sustainability and did not meet growth and inflation objectives. - Key adverse dynamics and outcomes: - Argentina borrowed considerable amounts in the markets despite the large Fund arrangement; without a debt operation and with little burden sharing, rollovers were met at increasingly shorter maturities and higher interest rates until market access was lost in August 2019. - Mounting redemptions and capital flight by residents put considerable pressure on the exchange rate. - Despite FX interventions beyond program provisions, the exchange rate continued to depreciate, increasing inflation and the peso value of public debt, and weakening real incomes, especially of the poor. - Fundamental constraints included weak public finances with rigid budgets and revenue sharing arrangements, high dollarization, feeble monetary policy transmission, a small domestic financial sector, and a narrow export base. - Standard consolidation measures risked a vicious circle: fiscal and monetary tightening could lower growth, raise risk premia, weaken the currency, worsen balance sheets, and put viability further out of reach. - Authorities’ redlines and political economy constraints severely limited policy options and the durability of reforms required to restore confidence. ### Macroeconomic outcomes (growth, inflation, labor, external) - Growth, composition, and labor market: - Program projections revised at First Review to -2.8 percent in 2018 and -1.6 percent in 2019, close to actual outcomes of -2.6 percent and -2.1 percent, respectively. - Private demand fell considerably—especially private consumption—driven by precautionary savings and reduced real incomes as inflation surged. - Unemployment remained consistently above 9 percent throughout the program, peaking at 10½ percent in 2019Q2. - Inflation dynamics: - By program end, consumer prices were increasing at a rate of 54 percent per annum—three times the inflation rate envisioned under the initial program and double the revised rate at the First Review. - The cumulative increase in consumer prices exceeded 80 percent over the course of the program, substantially eroding real incomes. - Drivers: exchange rate pass-through, wage indexation, regulated utility price increases, and persistent inflation expectations. - Contribution decomposition over 15 months of the program: inflation expectations accounted on average for slightly less than half; peso depreciation and wage growth each accounted for slightly less than a quarter; increases in regulated prices accounted for nearly a tenth. - External sector, reserves, and exchange rate: - Real exchange rate depreciation was large but expenditure-switching effects on exports were limited due to pervasive dollar invoicing: more than 95 percent of Argentine exports and 85 percent of imports are denominated in U.S. dollars. - From 2018Q2 to 2019Q3 the peso fell by over 100 percent in nominal terms; import prices in local currency increased by almost 100 percent, while export prices in U.S. dollars dropped by 7 percent. - Net flows: capital inflows declined in early 2018; net flows turned negative in Q3 2018 despite SBA approval. Net flows turned positive at end-2018/beginning-2019 but remained negative through remainder of program. - Market access lost: August 2019. - Reserves: program target for BCRA reserves to exceed 100 percent of the IMF’s ARA metric was reached by end‑2018 mainly due to official flows and Fund disbursements, but reserves collapsed after the primary elections in August 2019. ### Fiscal balances, public debt, and financing needs - Fiscal targets and outcomes: - Initial fiscal target: reduce federal government primary deficit from 3.8 percent of GDP in 2017 to 1.3 percent in 2019, and achieve primary balance by 2020; after First Review targets tightened to aim for primary balance in 2019 and a surplus by 2020. - Primary fiscal deficit reduced from 3.8 percent of GDP in 2017 to 0.4 percent of GDP in 2019 (close to program target of zero). - Primary balance targets were met despite disappointing growth outcomes; measures judged low quality and often temporary. - Public debt dynamics: - Nearly 70 percent of the government’s debt was denominated in or linked to the U.S. dollar. - Discovery during the 3rd Review of previously undisclosed debt amounting to 10 percent of GDP further increased public debt beyond projections. - Exchange rate depreciation and short maturities materially increased debt ratios—debt-to-GDP rose from 65 percent at program approval to 81 percent by the First Review. - Program numerical table excerpts: - Stock of public debt: Prog. 53.0; 1st Rev. 59.3; 4th Rev. 61.3 - Underpinning fiscal adjustment: Prog. 5.0; 1st Rev. 5.1; 4th Rev. 4.8 - Additional fiscal adjustment required to achieve 53% debt-to-GDP ratio: 0.0; 6.3; 8.3 - Total fiscal adjustment required to achieve 53% debt-to-GDP ratio: 5.0; 11.4; 13.1 - Target year: 2023 - Financing needs and projections: - Financing needs in domestic currency over 2018 and 2019: total debt due and primary deficits came to US$66 billion, whereas disbursements used for budget support totaled US$37 billion. - In June 2018 CGFN of the federal government for 2018 and 2019 projected at about AR$3.5 trillion (US$134 billion using projected exchange rates at the time); CGFN exceeded AR$5.3 trillion (about US$146 billion) by the Fourth Review. - Projected cumulative gross external financing needs for 2018 and 2019 stood at US$254 billion at the time of the 2017 Article IV consultation and remained around this level throughout the program. ### Monetary policy, FX intervention, and central bank issues - Monetary framework shifts: - Initial plan: institutional and operational independence of the central bank and a flexible exchange rate to underpin inflation targeting; goal to achieve single-digit inflation by the end of the three-year program. - After First Review: formal inflation targeting replaced by monetary base targeting; commitment that short-term policy interest rates were not to fall below 60 percent until inflation expectations had clearly declined. - FX intervention rules and outcomes: - First Review introduced a non-intervention zone (initial band AR$ 34-44 per U.S. dollar increasing by 3 percent per month through end-2018) with limits on daily BCRA interventions. - BCRA sold about US$9 billion into the market in May–June 2018 and later carried out ad hoc interventions that breached program limits in Aug–Sep 2018. - Under revised rules BCRA could sell or buy up to US$150 million per day when outside the band (later reduced to US$50 million per day). - FX intervention series: BCRA bought close to US$1 billion from the market in Jan–Feb 2019 when peso traded below the lower edge of the non-intervention zone. - Vulnerabilities from LEBACs and central bank balance sheet: - By 2018 total stock of LEBACs had reached 10 percent of GDP, or 120 percent of base money. - LEBACs attracted foreign and non-institutional investors, fueling carry trades and creating flash points for reversals when maturities came due. - LEBACs' monthly rollover created volatility in exchange and interest rates; entire stock eliminated by December 2018 and replaced by LELIQs. - Monetary outcomes: - Policy interest rates of 40–60 percent during the program had only limited effect on inflation given high pass-through and elevated inflation expectations. - Recapitalization of BCRA planned but did not take place; new charter required for recapitalization did not pass Congress before program de facto ended. ### Program design, contingency planning, and Exceptional Access Framework (EAF) - Contingency planning: - Recognized program risks included forecast errors, implementation risks, political and external developments, and debt sustainability concerns. - Staff initially estimated that 20 percent of existing foreign currency‑denominated public debt held by the private sector would come due before 2020; by the First Review this was revised to one quarter (about US$37 billion). - Contingency plans were not incorporated at the outset; Plan B deliberations accelerated only later and were not agreed with authorities until the Fourth Review in July 2019. - Possible Fund responses if program failed included: increase access further; suspend or delay reviews; continue only if authorities agreed to a debt operation. - Application of EAF: - Normal access limits: 145 percent of quota for any 12‑month period; cumulatively 435 percent of quota over the program period. - The 2018 SBA was nearly three times the cumulative limit, thus subject to the EAF. - EAC judgments: Argentina was deemed to meet the EACs at Board approval and in all four program reviews, though assessments of three of the four criteria were finely balanced. - Key EAF statistics and stress indicators: - EMBIG spreads: 415 basis points at approval rising to 630 basis points by First Review. - DSA heat map: 12 out of 15 cells red by the Fourth Review. - Other official IFI support during program period: about US$2.7 billion (about 6 percent of additional IFI financing including the Fund). ### What could have increased the program’s chance of success - Potential alternative or complementary steps identified: - An early debt operation combined with reintroduction of CFMs could have delivered a more robust program. - More consistent communication by the authorities could have boosted the catalytic effect. - Maintaining closer collaboration between Argentina and the Fund during the decade-long hiatus before the program could have better aligned analysis and communication. - Greater burden sharing with other official creditors could have provided additional financing and signaled broader international support to bolster confidence. - Suggested contingency measures: - Agree contingency plans upfront with specific triggers and actions (debt operations, CFMs). - For high-risk programs, involve Office of Risk Management earlier and provide the Board sufficient information for robust discussion of assumptions and alternative strategies. ### Lessons and policy implications (general lessons) - i. Ensure robustness of programs through conservative yet plausible baseline assumptions and sensitivity testing to alternative assumptions and explanations of the crisis; consider contingency plans where warranted. - ii. Tailor programs to country circumstances and consider unconventional measures when traditional policy space is limited (example: capital flow management measures). - iii. Sharpen application of the Exceptional Access Framework (EAF), fully laying out analysis and risks underlying key judgments, particularly for market access and debt sustainability assessments. - iv. Carefully balance ownership against the quality and appropriateness of program policies and risks to the Fund’s reputation; question policy “redlines” that could compromise program objectives and seek to expand political space when needed. - v. Ensure effective external communication so programs are well understood by the population and financial markets; country authorities should play the central role in communication, facilitated by close policy dialogue in normal times. - vi. Revisit internal Fund processes for assessment and mitigation of broader risks associated with large-scale arrangements to provide the Board sufficient information for robust discussion of assumptions and alternative strategies; for high-risk programs, agree contingency plans with defined triggers and actions. - vii. Consider broader implications for the Fund’s role in the global financial safety net, including burden sharing with other IFIs and private creditors; the Fund needs to take a stand on burden sharing and consider when to "pull the plug" on programs whose objectives are unlikely to be met within the existing financing envelope. ### Structural policies, governance, gender, and social protection - Structural conditionality and coverage: - Program had relatively few structural reform and financial-sector undertakings compared with other programs; volume of structural conditions less than one third of other exceptional access SBAs. - Half the structural measures concerned the central bank; half concerned fiscal and PFM issues combined; there were no structural conditions on the financial sector. - High-depth measures included recapitalization of the BCRA and submission of a new central bank charter (not enacted by program end). - Social protection and gender policies: - A floor on social spending was a performance criterion and was met throughout the program. - Authorities increased social spending from the Third Review onwards, particularly in childcare and social assistance, financed in part by other IFIs. - Despite measures, poverty rose from 27 percent in 2018H1 to 35 percent in 2019H1. - Gender commitments (e.g., eliminating the second-earner penalty; paternity leave) lacked legislative follow-through by the Fourth Review. - Governance and anticorruption: - Governance commitments were included but implementation was limited; staff added a full section on tackling corruption in the Second Review Staff Report. ### Market access, issuance patterns, and domestic debt dynamics - Market issuance and investor flows: - A total of US$9 billion in external debt was successfully issued in January 2018; after that the Treasury no longer placed bonds externally. - Domestic issuance continued in January 2018–July 2019 in both U.S. dollars and pesos, and short-term paper (mostly LECAP and LETES). - Non-residents reduced LETES holdings by US$5.2 billion from end-March 2018 to end-March 2019; non-residents increased LECAP holdings to a peak of US$6.7 billion by end-March 2019. - Maturities and rollover: - Average maturity of LETES fell from 213 days in 2018 to 158 days in 2019. - Maturities concentrated: about two-thirds of LETES and LECAP 2019 issuances were due before the October presidential election, creating a significant refinancing need during high uncertainty. - Issuance of peso-denominated debt interest rates: average 26 percent in January-April 2018; average 42 percent in May-August 2018; in 2019 interest rates on peso-denominated debt reached 60 percent. - Domestic placements ended after the primary elections in August 2019 when attempts to issue LECAPs and LETES failed. ### Authorities’ views (Appendix IV) — selected emphases and statistics - Authorities assert the EPE underestimates the SBA’s flaws and the damage it inflicted on Argentina. - Authorities’ key figures and claims: - Original SBA approved in June 2018 for US$50 billion (SDRs 35.379 billion), about 1,110 percent of Argentina’s quota. - IMF augmentation to US$56.3 billion (about 1,277 percent of Argentina’s quota). - Disbursement chronology reported by authorities: - Initial disbursement: US$15 billion. - After first review (October 2018): ~US$5.7 billion drawn. - Second review (December 2018): additional ~US$7.6 billion; total since June ~US$28.09 billion. - Third review (April 2019): US$10.8 billion; total since June 2018 ~US$38.9 billion. - Fourth review (July 2019): US$5.4 billion; total disbursed June 2018–July 2019 = US$44.1 billion. - Authorities’ outcome metrics: - EMBI+ index rose by 264 points between agreement establishment and 4th review (from 507 to 771 basis points). - Year-on-year inflation rose from 29.9 percent in June 2018 to 53.9 percent in July 2019 (increase of 24 percentage points). - Poverty rose from 27.3% in 2018H1 to 35.4% in 2019H1 (increase of 8.1 percentage points). - GDP contractions: -2.6 percent in 2018 and -2.0 percent in 2019. - Residents’ Foreign Asset Formation (FAF) 2015–2019 exceeded US$86 billion; a small group of 100 agents made net purchases for US$24.679 billion; the FAF of the 10 main buyers accounted for US$7,945 million. - Authorities contend the Program financed capital flight and servicing of private creditors and failed to achieve the four stated pillars. ### Key statistics and dates (compiled from the document) - Arrangement approval date: June 20, 2018. - Augmented access after October 2018: US$57 billion. - Augmented access expressed as percent of quota: 1,227 percent of Argentina’s IMF quota. - Planned reviews: 12; completed reviews: 4. - Arrangement canceled: July 24, 2020. - Market access lost: August 2019. - Initial drawing at approval: SDR 10.6 billion (US$15 billion). - Disbursed by Fourth Review: SDR 32 billion (currently US$45 billion as reported in the document). - Public assessment of debt sustainability at program start: “sustainable but not with high probability.” - Selected program stress and DSA numbers: - Debt-to-GDP ratio: 65 percent at program approval rising to 81 percent by the First Review. - EMBIG spreads: 415 basis points at approval rising to 630 basis points at the First Review. - DSA heat map: 12 out of 15 cells red by the Fourth Review. - Financing and official support: - Other IFI net support during program period: about US$2.7 billion (about 6 percent of all additional financing from IFIs, including the Fund). - Fourth Review estimated official financing: US$1.6 billion in 2018 and US$3.0 billion in 2019. ### Concluding observations and recommended policy directions - Program fragility stemmed from optimistic baseline assumptions, limited structural reform ambition, political redlines that ruled out debt operations and CFMs, and limited burden sharing with other official creditors. - Recommended approaches for future high‑risk programs include: - Use conservative baseline assumptions and robust sensitivity analysis. - Tailor program instruments to country circumstances, including consideration of CFMs and debt reprofiling where appropriate. - Sharpen application of the EAF and provide the Executive Board with comprehensive risk assessments and contingency plans. - Ensure effective external communication and broaden the notion of ownership to include legislative and societal buy‑in. - Revisit internal Fund processes for early involvement of risk management and clearer treatment of enterprise and reputational risks. *Source: 1argea2021001 — https://www.imf.org/-/media/files/publications/cr/2021/english/1argea2021001.pdf* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Overview and context - On June 20, 2018, the Executive Board approved the largest stand-by arrangement in the Fund’s history in support of Argentina’s 2018-21 economic program. - After an augmentation in October 2018, access under the arrangement amounted to US$57 billion (1,227 percent of Argentina’s IMF quota). - The arrangement saw only four of the planned twelve reviews completed and was canceled on July 24, 2020. - The government elected in late 2015 reopened the capital account rapidly and borrowed abroad while following a gradual approach to addressing fiscal imbalances, setting the stage for a sudden stop and the SBA request. - Capital inflows—mainly portfolio flows—surged after the capital account reopening, even as macroeconomic imbalances and structural distortions persisted. - By early 2018 Argentina faced more challenging external conditions and announced in May 2018 that it would seek IMF financial support. ### Program strategy and design - The program was designed to address a temporary liquidity shock by catalyzing renewed capital inflows. - Strategy components: - Fiscal and monetary tightening. - Targeted structural reforms. - Specific measures to support vulnerable segments of the population and to address gender inequality. - Important design constraints and choices: - Government ownership was prioritized; consequentially, a debt operation and reintroduction of capital flow management measures (CFMs) were ruled out from the beginning. - Fund staff accepted the authorities’ preferred macroeconomic projections, which proved too optimistic. - Assessments of exceptional access criteria were finely balanced. - Fiscal consolidation was described as low quality and structural reforms as unaspiring. - There was no agreed “Plan B” with authorities upfront. ### Financing, access, and risk profile - The SBA represented substantial financial risks to the IMF, increasing with the enlarged and more frontloaded access approved at the First Review. - With the exception of the disbursement at approval, the 2018 SBA was conceived as precautionary, but early disbursements were very large because of the arrangement’s overall size. - Deteriorating financial conditions prompted a switch to a fully disbursing arrangement; increased access and frontloading at the First Review raised further financial risks to the Fund. - The Fund’s role as the largest creditor to a relatively large country raised questions about burden sharing with other official creditors and private creditors. ### Outcomes and channels of program failure - The program failed to restore confidence in fiscal and external sustainability and did not meet growth and inflation objectives. - Key adverse dynamics and outcomes: - Argentina borrowed considerable amounts in the markets despite the large Fund arrangement; without a debt operation and with little burden sharing, rollovers were met at increasingly shorter maturities and higher interest rates until market access was lost in August 2019. - Mounting redemptions and capital flight by residents put considerable pressure on the exchange rate. - Despite FX interventions beyond program provisions, the exchange rate continued to depreciate, increasing inflation and the peso value of public debt, and weakening real incomes, especially of the poor. - Fundamental constraints included weak public finances with rigid budgets and revenue sharing arrangements, high dollarization, feeble monetary policy transmission, a small domestic financial sector, and a narrow export base. - Standard consolidation measures risked a vicious circle: fiscal and monetary tightening could lower growth, raise risk premia, weaken the currency, worsen balance sheets, and put viability further out of reach. - Authorities’ redlines and political economy constraints severely limited policy options and the durability of reforms required to restore confidence. ### What could have increased the program’s chance of success - Potential alternative or complementary steps identified: - An early debt operation combined with reintroduction of capital flow management measures could have delivered a more robust program. - More consistent communication by the authorities could have boosted the catalytic effect. - Maintaining closer collaboration between Argentina and the Fund during the decade-long hiatus before the program could have better aligned analysis and communication. - Greater burden sharing with other official creditors could have provided additional financing and signaled broader international support to bolster confidence. ### Lessons and policy implications (general lessons) - i. Ensure robustness of programs through conservative yet plausible baseline assumptions and sensitivity testing to alternative assumptions and explanations of the crisis; consider contingency plans where warranted. - ii. Tailor programs to country circumstances and consider unconventional measures when traditional policy space is limited (example: capital flow management measures). - iii. Sharpen application of the Exceptional Access Framework (EAF), fully laying out analysis and risks underlying key judgments, particularly for market access and debt sustainability assessments. - iv. Carefully balance ownership against the quality and appropriateness of program policies and risks to the Fund’s reputation; question policy “redlines” that could compromise program objectives and seek to expand political space when needed. - v. Ensure effective external communication so programs are well understood by the population and financial markets; country authorities should play the central role in communication, facilitated by close policy dialogue in normal times. - vi. Revisit internal Fund processes for assessment and mitigation of broader risks associated with large-scale arrangements to provide the Board sufficient information for robust discussion of assumptions and alternative strategies; for high-risk programs, agree contingency plans with defined triggers and actions. - vii. Consider broader implications for the Fund’s role in the global financial safety net, including burden sharing with other IFIs and private creditors; the Fund needs to take a stand on burden sharing and consider when to "pull the plug" on programs whose objectives are unlikely to be met within the existing financing envelope. ### Key statistics and dates (as presented) - Arrangement approval date: June 20, 2018. - Augmented access after October 2018: US$57 billion. - Augmented access expressed as percent of quota: 1,227 percent of Argentina’s IMF quota. - Planned reviews: 12; completed reviews: 4. - Arrangement canceled: July 24, 2020. - Market access lost: August 2019. - Public assessment of debt sustainability at program start: “sustainable but not with high probability.” *Prepared by an interdepartmental team led by Odd Per Brekk (APD) with contributions from Juliana Araujo (SPR), Olivier Basdevant (FAD), Henrique Chociay (FIN), Gunes Kamber (MCM), Frederic Lambert (WHD), Nan Li (RES), and Alasdair Scott (APD).* ### INTRODUCTION ### INTRODUCTION ### Scope and purpose - This report reviews Argentina’s 2018–21 Fund-supported program against its objectives and applicable Fund policies. - As required in exceptional access cases, this Ex-Post Evaluation (i) reviews performance against original program objectives; (ii) discusses whether the program design was appropriate; and (iii) assesses whether the program was consistent with Fund policies. - The report reviews the experience under the program from its adoption in June 2018 through to its effective suspension, examining weaknesses and vulnerabilities, objectives and policies, the balance of financing and adjustment, and the justifications for exceptional access. ### Program strategy: overview - Program diagnosis: Argentina was viewed as facing a temporary liquidity crunch; policy mix emphasized tightening fiscal and monetary policy to demonstrate commitment to eliminating underlying imbalances, with substantial IMF financing to galvanize investor confidence. - Key program aims: - Restore market confidence and put public debt on a firm downward trajectory. - Reduce balance of payments and fiscal imbalances. - Bring down inflation. - Protect society’s most vulnerable through safeguarded social spending and redesigned assistance programs. - Fiscal target in initial program (June 2018): reduce federal government primary deficit from 3.8 percent of GDP in 2017 to 1.3 percent in 2019, and achieve primary balance by 2020. - After the First Review (October 2018): targets tightened to aim for primary balance in 2019 and a surplus by 2020. - Monetary policy framework shifts: - Initial plan: institutional and operational independence of the central bank and a flexible exchange rate to underpin inflation targeting; goal to achieve single-digit inflation by the end of the three-year program. - After First Review: formal inflation targeting replaced by monetary base targeting; commitment that short-term policy interest rates were not to fall below 60 percent until inflation expectations had clearly declined. - FX intervention (FXI) rules were adapted to provide more clarity and limit ad hoc interventions. - Program had relatively few structural reform and financial-sector undertakings compared with other programs. ### Size, instrument, and initial modality - Stand-By Arrangement (SBA) approved June 2018; augmented October 2018. - Initial access: SDR 35.4 billion (approximately US$50 billion, or 1,110 percent of Argentina’s Fund quota). - Augmented access: SDR 40.7 billion (approximately US$57 billion, or 1,227 percent of quota) — the largest arrangement in IMF history in absolute terms (excluding Flexible Credit Lines). - Arrangement treatment: initially intended to be principally precautionary with only the initial drawing (SDR 10.6 billion, or US$15 billion) premised on an actual balance of payments need; remainder (SDR 24.8 billion, or US$35 billion) to be phased across twelve quarterly reviews. - Early implementation: implementation went off track in August 2019 after only four out of twelve planned reviews had been completed, with SDR 32 billion (currently US$4 5 billion) disbursed. The arrangement was cancelled by the authorities in July 2020. ### Political economy and ownership - Strong emphasis on government ownership given Argentina's history with the IMF; considerable deference to authorities’ macroeconomic views. - Political constraints: administration perceived limited political space; aimed to avoid faster fiscal consolidation and broad structural reforms before the general election (October 2019). The initial program had no prior actions. - Authorities ruled out reintroducing capital flow management measures (CFMs), engaging in a public debt operation, or introducing incomes policies. ### Risks recognized and contingency planning - Recognized program risks included forecast errors, implementation risks, political and external developments, and debt sustainability concerns. - Staff initially estimated that 20 percent of existing foreign currency-denominated public debt held by the private sector would come due before 2020; by the First Review this was revised to one quarter (about US$37 billion). - Vulnerabilities not fully appreciated at adoption: short maturity of foreign-currency debt and problematic debt instruments (e.g., LEBACs and collateralized “repos” with margin calls and termination clauses). - Contingency planning: although risks were repeatedly highlighted, contingency plans were not incorporated at the outset; contingency planning and “Plan B” deliberations accelerated only later and were not agreed with the authorities until the Fourth Review in July 2019. - Possible Fund responses if program failed to restore market access (discussed internally): (i) increase access further to eliminate need for market borrowing; (ii) suspend or delay reviews (pause the program); or (iii) continue only if authorities agreed to a debt operation. Each option had major constraints. ### Timeline and evolution of program strategy - Initial program (June 2018): modest fiscal acceleration, strengthened inflation targeting, safeguard social protection, policies to address gender inequality; limited financing from other IFIs. - First Review (October 2018): in response to continued deterioration in financial conditions and missed monetary targets, Board approved augmentation and frontloaded access; proceeds used for budget financing; macro targets revised and simpler monetary regime adopted; diagnosis of temporary liquidity shock retained; no debt operation. - Second Review (December 2018): signs of stabilization—short-term interest rates fell back to September 2018 levels, exchange rate within non-intervention band; 2019 budget with more ambitious fiscal adjustment passed; all quantitative performance criteria for end-October met. - Third Review (April 2019): end-December 2018 and end-March 2019 performance criteria met; inflation and inflation expectations increased after de facto relaxation in monetary policy. - Fourth Review (July 2019): quantitative and structural conditions met or on track; exchange rate pressures eased but gross financing needs remained high and market sentiment was skittish ahead of elections. - Program effectively ceased after August 2019 primary elections: financial turbulence, ratings downgrades, finance minister resignation, domestic debt reprofiling plans, imposition of some capital controls; selective default called in September; only four of twelve planned reviews completed; new government initiated foreign-law debt restructuring in March 2020, defaulted in May 2020, finalized restructuring of US$80.5 billion of foreign- and domestic-law FX-denominated debt in September; SBA cancelled July 24, 2020. ### External communication and market perception - Uneven communication by administration undermined confidence; delays in publishing the Staff Report for the SBA request (authorities delayed publication by a month) limited the Fund’s ability to explain the program. - High turnover in central bank governors and finance ministers and significant early FX intervention inconsistent with the program complicated messaging. - Presidential public address in late August 2018 inaccurately suggesting full upfront disbursements triggered a 14 percent exchange rate depreciation on the day of the address. - Hybrid initial modality (precautionary/disbursing) created confusion about whether and under what conditions financing would be drawn, potentially reducing catalytic impact. ### Macroeconomic targets, projections and outcomes - Capital flows and exchange rate: - Capital inflows declined in early 2018; net flows turned negative in Q3 2018 despite SBA approval. - Net flows turned positive at end-2018/beginning-2019 but remained negative through the remainder of the program. - Largest capital outflows came from private flows; capital controls introduced in September 2019 proved relatively loose and capital flight continued, causing large reserve losses. - Exchange rate: depreciation accelerated after SBA request in May 2018 and continued until the late-September 2018 revamp; more stable in Q4 2018; resumed depreciation in early 2019 and again in August 2019. By August 2019 the peso traded at about one-third of its value at the time of the SBA request. - Baseline program projections were optimistic on the exchange rate: - Baseline envisaged stabilization of nominal exchange rate corresponding to a real exchange rate appreciation of 9 percent during the program period. - At program start real exchange rate had already depreciated by about 20 percent from 2017 level by 2018Q2. - The 2018 External Sector Assessment estimated a 17.5-32.5 percent overvaluation that had largely been eliminated by program start. - The baseline real exchange rate projection was in the 10th percentile of experiences under programs with sudden stops (i.e., relatively optimistic). - Overall assessment of outcomes (summary): - Program was fragile from inception and did not durably restore market confidence. - Inconsistent policy implementation and communication missteps contributed to failure to restore confidence. - Absence of fundamental reforms before the October 2019 election meant program could not assure resolution of underlying imbalances. - Arrangement size was not sufficient to fully finance Argentina absent debt reprofiling or CFMs (both ruled out by authorities), leaving program vulnerable to rollover needs. - Peso depreciation raised inflation, increased government debt burden, lowered real incomes, and undermined efforts to protect vulnerable households. - Program did not achieve fiscal and external viability, while economic growth and employment faltered; program was de facto suspended in August 2019 with only four of twelve planned reviews completed. *Source: 1argea2021001 - INTRODUCTION — https://www.imf.org/-/media/files/publications/cr/2021/english/1argea2021001.pdf* ### 2.9 percent in 2017 to 0.4 percent in 2018, followed by a rapid recovery from 2019 onwards. ### 1argea2021001 - 2.9 percent in 2017 to 0.4 percent in 2018, followed by a rapid recovery from 2019 onwards. ### Growth, composition, and labor market - Growth revisions and outcomes: - Program projections revised at First Review to -2.8 percent in 2018 and -1.6 percent in 2019, close to actual outcomes of -2.6 percent and -2.1 percent, respectively. - Private demand fell considerably—especially private consumption—driven by precautionary savings and reduced real incomes as inflation surged. - Composition of growth: - Imports (especially of investment goods) declined by more than a quarter between 2017 and 2019. - Export volumes remained flat despite substantial real exchange rate depreciation; agricultural exports hit by the 2018 drought. - Labor market: - Unemployment remained consistently above 9 percent throughout the program, peaking at 10½ percent in 2019Q2. ### Inflation dynamics and monetary policy - Inflation outcomes: - By program end, consumer prices were increasing at a rate of 54 percent per annum—three times the inflation rate envisioned under the initial program and double the revised rate at the First Review. - The cumulative increase in consumer prices exceeded 80 percent over the course of the program, substantially eroding real incomes. - Drivers of inflation: - The unexpectedly large exchange rate depreciation played a pivotal role via pass-through to domestic prices. - Wage indexation and regulated utility price increases also boosted inflation. - Inflation expectations remained persistently high—above 20 percent since 2010—and accounted for on average slightly less than half of inflation over the 15 months of the program. - Peso depreciation and wage growth each accounted for slightly less than a quarter of inflation; increases in regulated prices accounted for nearly a tenth. - Private sector unions obtained revisions to their paritarias that increased the annual average to 30–40 percent. - Monetary policy stance and effectiveness: - Policy interest rates of 40–60 percent during the program had only limited effect on inflation, consistent with high pass-through of exchange rate movements and elevated inflation expectations. - The monetary policy regime under the SBA was not robust to dollarization and extensive indexation; preconditions for successful inflation targeting were not in place. ### Fiscal balances, public debt, and financing needs - Fiscal targets and outcomes: - The program’s fiscal objectives were formulated as targets for the primary fiscal balance; these targets were met despite disappointing growth outcomes. - Fiscal measures were generally of low quality and the program did not durably address long-standing weaknesses in public finances. - Public debt dynamics: - Nearly 70 percent of the government’s debt was denominated in or linked to the U.S. dollar. - Public debt ratios far exceeded projections, mainly because of valuation effects. - Discovery during the 3rd Review of previously undisclosed debt amounting to 10 percent of GDP further increased public debt beyond projections. - Short maturities and deteriorating rollover conditions (higher interest rates and shorter maturities) adversely affected debt ratios and debt sustainability. - Financing needs and projections: - Financing needs in domestic currency over 2018 and 2019: total debt due and primary deficits came to US$66 billion, whereas disbursements used for budget support totaled US$37 billion. - The initial program underestimated fiscal financing needs: - In June 2018, cumulative gross financing needs (CGFN) of the federal government for 2018 and 2019 were projected at about AR$3.5 trillion (US$134 billion using projected exchange rates at the time). - CGFN increased during the program to exceed AR$5.3 trillion (about US$146 billion) by the time of the Fourth Review. - Projected cumulative gross external financing needs for 2018 and 2019 stood at US$254 billion at the time of the 2017 Article IV consultation and remained around this level throughout the program. - The difference between total financing needs and Fund disbursements implied substantial market refinancing needs with short average maturities—requiring frequent rollovers. ### External sector, reserves, and exchange rate - Exchange rate and trade invoicing: - Real exchange rate depreciation was large, but expenditure-switching effects on exports were limited due to pervasive dollar invoicing: more than 95 percent of Argentine exports and 85 percent of imports are denominated in U.S. dollars. - From the second quarter of 2018 to the third quarter of 2019, the peso fell by over 100 percent in nominal terms; import prices in local currency increased by almost 100 percent, while export prices in U.S. dollars dropped by 7 percent. - Current account and reserves: - The current account underperformed in 2018 but adjusted rapidly in 2019, with the adjustment concentrated in imports. - Reserves were drawn down after program approval as the BCRA intervened heavily; program target for BCRA reserves to exceed 100 percent of the IMF’s ARA metric by end of program was reached by end-2018, mainly due to official flows and Fund disbursements. - Reserves collapsed after the primary elections in August 2019, reversing prior gains. - Reserves increased to over ten months of imports at one point, but narrow export base, extensive dollarization, and history of capital flight suggested the need for higher reserves. ### Program design, scenarios, and outcomes - Scenario comparisons: - Most outcomes were worse than those in the adverse scenario presented with the SBA request: growth fell well short and inflation far exceeded program objectives. - The projected 1.3 percent contraction in GDP in 2018 and return to growth in 2019 in the adverse scenario proved optimistic relative to actual growth. - Across 2018 and 2019, cumulative external financing needs were broadly constant, but fiscal financing needs increased as the currency depreciated. - Argentina did not succeed in raising significant external funds during the program and relied on issuing debt in domestic markets until the de facto end of the program. - Market access and debt profile: - The debt profile deteriorated significantly, with increases in yields and concentration at shorter maturities in the lead-up to the August 2019 primary election. - Rollover rates for public debt securities were close to those assumed under the adverse scenario, but market funding fell short. ### Analysis and policy implications - Preconditions and policy sequencing: - The rapid pass-through from exchange rate depreciation, extensive dollarization, and high indexation imply that an inflation-targeting framework requires preconditions (lower dollarization, lower inflation, and less indexation) that were absent. - Monetary tightening had limited impact given elevated inflation expectations and currency mismatch. - Fiscal policy emphasis: - Given Argentina’s history of fiscal dominance and vulnerability to exchange rate movements, demonstrating durable fiscal consolidation and extending the maturity profile of public debt were central to reducing vulnerabilities. - The Fund urged authorities to extend debt maturities and provided technical assistance on debt management, but maturities held by foreign investors remained short. - Reserve adequacy and external buffers: - High dollarization, narrow export base, and capital flight risk imply that standard reserve metrics may understate the reserves needed for adequate policy space in Argentina’s context. - Program design lessons: - Program assumptions were overly optimistic given procyclical monetary and fiscal policies and a large share of hand-to-mouth consumers; the Fund deferred to the government’s outlook. - The initial program underestimated fiscal and financing needs; contingent scenarios underestimated the scale of inflation and depreciation experienced. *International Monetary Fund — Argentina: assessment of the 2018 SBA program (excerpts).* ### 4.4 percentage points of GDP, with primary balance to be achieved in in 2020. At the First ### 1argea2021001 - 4.4 percentage points of GDP, with primary balance to be achieved in in 2020. At the First ### Fiscal adjustment design and implementation - Program initial adjustment: 4.4 percentage points of GDP, with primary balance to be achieved in in 2020. - First Review adjustment: increased to 5.6 percent of GDP and achievement of primary balance brought forward to 2019. - Front-loading: 2.4 percent of potential GDP in 2018, or about 40 percent of the total adjustment. - Comparative assessment: - Overall adjustment not severe relative to other Fund-supported programs but on the high side among exceptional access cases. - 2015 Crisis Program Review argued fiscal adjustment above 5 percent of GDP over three years could be self-defeating. ### Fiscal multipliers and projection assumptions - Multiplier assumptions in the 2018 SBA: - 0.8 on average for changes to spending. - 0.6 for changes to tax revenues. - Comparison with common rule of thumb and empirical evidence: - Common rule of thumb: 0.5. - Empirical evidence: fiscal multipliers for emerging market economies generally lower than advanced economies. - Carrière-Swallow et al. (2018): fiscal consolidations in Latin American and Caribbean economies typically lead to an output contraction of 0.5 percent on impact and of 0.9 percent after two years (conditional on other macro variables). - Auerbach and Gorodnichenko (2012) suggest somewhat larger multipliers could be considered given negative output gaps. - Program analysis conclusion: - Projections may have moderately underestimated negative output effects of fiscal consolidation. - Adverse growth effects from currency depreciation, capital flight, and uncertainty played a larger role. - Early program analysis indicated higher multipliers would have made little difference to debt sustainability assessment. ### Fiscal outcomes, quality of measures, and composition - Primary balance targets: met—primary fiscal deficit reduced from 3.8 percent of GDP in 2017 to 0.4 percent of GDP in 2019 (close to program target of zero). - Quality of measures: - Achieved mainly by lowering expenditures; measures were generally of low—and decreasing—quality. - Many expenditure measures were temporary and relatively easy to reverse; revenue measures were limited and of low quality. - Quality of measures deteriorated over time as authorities sought to meet targets in a worsening macroeconomic environment; policy later loosened in run-up to the election. - Revenue measures and outcomes: - Initial staff proposals included structural revenue reforms (expand scope of PIT on labor income; strengthen VAT)—rejected by authorities as politically sensitive. - Implemented revenue measures: temporary tax on exports, modest one-off measures, lowering of corporate income tax rate, cuts in other taxes in 2019 (initially decided in 2017), cancellation of scheduled utility tariff increases in early 2019, generous tax incentives to SMEs, Congress law providing future tax exemptions from 2020 to 2029. - Some actions to improve tax compliance but insufficient to offset revenue reduction. - Revenues fell short of program approval projections by about 1¼ percent of GDP for 2018 and 1¾ percent of GDP for 2019 (in part reflecting cyclical factors with tax buoyancy well below unity). - Expenditure measures and outcomes: - Adjustment relied on inflation-induced reduction in public sector wages and pensions, subsidy cuts to bring utility tariffs closer to cost recovery, and squeeze in current discretionary and capital spending. - Higher-than-expected inflation helped reduce the real value of public wages and pensions temporarily, aiding primary spending adjustment. - One-off revenue measures of 0.7 percent of GDP and cuts in capital spending flattered the adjustment. ### Fiscal governance and structural reforms - Reforms to strengthen budget processes: - Creation of a fiscal watchdog and strengthening of medium-term fiscal planning—either met or implemented with delay. - Reforms to address risks from fiscal federalism were postponed. - Noted historical reporting issues in past programs: failure to account for off-budget expenditures and weak controls of provincial finances, revenue centralization vs. decentralized spending. ### Debt dynamics and sustainability - Nominal effective interest rates on debt: about 11 percent in 2018 and 6 percent in 2019. - Nominal GDP growth rates: 37 percent in 2018 and 51 percent in 2019. - Exchange rate depreciation effects: - Exchange rate depreciation more than offset improvements from primary balance and inflation effects, greatly increasing the debt ratio. - Achieving originally targeted debt level of 53 percent of GDP by 2023 would have required more than doubling the size of fiscal adjustment planned at time of the First Review. - Without debt reprofiling early on (at the time of the First Review) to lower large refinancing needs of short-maturity debt, fiscal policy scope to address debt vulnerabilities and bolster confidence was very limited. - Debt reprofiling was ruled out by the administration. - Program numerical table (selected entries; sources: Argentine authorities, and IMF staff estimates): - Stock of public debt: Prog. 53.0; 1st Rev. 59.3; 4th Rev. 61.3 - Underpinning fiscal adjustment: Prog. 5.0; 1st Rev. 5.1; 4th Rev. 4.8 - Additional fiscal adjustment required to achieve: - 53% debt-to-GDP ratio: 0.0; 6.3; 8.3 - 40% debt-to-GDP ratio: 13.0; 19.3; 21.3 - Total fiscal adjustment required to achieve: - 53% debt-to-GDP ratio: 5.0; 11.4; 13.1 - 40% debt-to-GDP ratio: 18.1; 24.4; 26.1 - Target year: 2023 ### Overall fiscal assessment (summary) - The fiscal adjustment and reforms under the program did not achieve fiscal sustainability. - Primary fiscal deficit reduced from 3.8 percent of GDP in 2017 to 0.4 percent of GDP in 2019. - Adjustment flattered by one-off revenue measures of 0.7 percent of GDP and cuts in capital spending; did not create durable increase in tax receipts or stabilization of expenditures. - Recession reduced income and consumption tax receipts; decisions in early 2019 (freeze utility tariffs through end-2019; generous SME tax incentives) created additional fiscal uncertainties. - Federal government primary deficit remained subject to significant risks. - Exchange rate depreciation escalated the debt ratio to nearly 90 percent of GDP. - Low quality of fiscal measures likely eroded confidence. ### Monetary and exchange rate policy framework and outcomes - Initial program objectives: - Retain inflation targeting (IT) framework and a flexible exchange rate. - Pursue ambitious disinflation objectives: BCRA set to target single-digit inflation by 2021. - Program included net domestic asset (NDA) ceilings, an interest rate policy commitment linked to inflation, recapitalization of BCRA, legislative changes to bolster central bank independence. - Limits on foreign exchange intervention (FXI) were designed to promote exchange rate flexibility. - Policy shifts and implementation: - Continued exchange rate pressures after SBA approval met with ad hoc FXI inconsistent with program. - Program shifted at the First Review to base money targeting; targeting of base money coupled with some scope for FXI and continuation of inflation-linked interest rate policy. - New framework initially helped stabilize market conditions, but inflation expectations did not become durably anchored. - Changes to framework, inconsistent interventions, and a premature reduction in interest rates, compounded by doubts about durability of fiscal consolidation, undermined confidence. - Program ultimately was not successful in containing exchange rate depreciation and reducing inflation. - Argentina monetary regime background: - 1991: currency board (Convertibility Plan) until 2001 crisis. - From 2002: monetary aggregates targeted. - From 2012: BCRA assigned “multiple objectives.” - At SBA request time, authorities pursuing inflation targeting with a floating exchange rate (nascent framework adopted in 2016). - Program operational features: - Inflation consultation clause (ICC): consultation with Fund staff if 12-month inflation breaches inner band; consultation with Executive Board if inflation outcomes exceed outer band. - Inflation targets and consultation bands (table entries): - Dec-18: Outer Band - Upper Limit 32; Inner Band - Upper Limit 29; Midpoint 27; Inner Band - Lower Limit 25; Outer Band - Lower Limit 22 - Dec-19: Outer Band - Upper Limit 21; Inner Band - Upper Limit 19; Midpoint 17; Inner Band - Lower Limit 15; Outer Band - Lower Limit 13 - Dec-20: Outer Band - Upper Limit 16; Inner Band - Upper Limit 15; Midpoint 13; Inner Band - Lower Limit 11; Outer Band - Lower Limit 10 - Dec-21: Outer Band - Upper Limit 11; Inner Band - Upper Limit 10; Midpoint 9; Inner Band - Lower Limit 8; Outer Band - Lower Limit 7 - Under base money targeting (First Review): - BCRA announced zero base-money growth rate until June 2019. - Commitment not to reduce policy rate below 60 percent until one-year-ahead inflation expectations had fallen for two consecutive months. - Authority maintained commitment to let exchange rate float; FX sales allowed if peso moved outside a defined band. - Recapitalization efforts: - Planned recapitalization of BCRA ultimately did not take place; new charter required for recapitalization did not pass Congress before program de facto ended. - LEBACs management: - Reduction in outstanding LEBACs to be financed by government-issued peso-denominated securities (LECAPs). - Entire stock of LEBACs eliminated by December 2018 and replaced by LELIQs; issuance calibrated to match base money targets. ### FX intervention under the 2018 SBA (Box summary) - Initial limits: relatively strict limits to central bank FX intervention; included floor on net international reserves and ceiling on stock of non-deliverable forwards; consultation with IMF if net foreign exchange sales breached set limits. - May–June 2018 actions: BCRA sold about US$ 9 billion into the market and raised interest rates aggressively until SBA approval in June. - August–September 2018: BCRA exceeded program limits and carried out ad hoc interventions; net international reserves fell below end-September program floor and stock of non-deliverable forwards rose above ceiling. - First Review revamp: - Base money targeting replaced inflation targeting. - Option to intervene only when peso moved outside a defined band (initial band AR$ 34-44 per U.S. dollar, both ends increasing by 3 percent per month through end-2018). - Non-intervention zone implied a 30 percent width. - BCRA could sell or buy up to US$ 150 million per day when outside the band; purchases expected to be unsterilized (change in NIR matched by expansion/contraction of base money). - Only BCRA allowed to carry out FXI; state-owned banks not allowed to engage in official FX sales on behalf of the government. - Adjustments at Second Review: - Monthly change of non-intervention zone for 2019Q1 reduced to 2 percent per month. - Non-intervention limit reduced to US$50 million per day to avoid excessive deviation from zero-base money growth target (deviation capped at 2 percent). - Market reaction: - Following tighter stance and higher interest rates after adoption of base money framework, peso appreciated by 15 percent in October 2018 and hovered close to the higher edge of the non-intervention zone for most of November 2018. - Empirical FX intervention series (figure references in source showing BCRA daily sales and cumulative value since Apr 2018; AR$/US$ daily exchange rate series from SIOPEL). *Sources: Countries’ Authorities; IMF Staff Calculations and Projections.* ### Box 2. Argentina: FX Intervention Under the 2018 SBA (Concluded) ### Box 2. Argentina: FX Intervention Under the 2018 SBA (Concluded) ### FX intervention actions and outcomes - During January and early February 2019, the peso traded below the lower edge of the non-intervention zone, allowing the BCRA to buy close to US$ 1 billion from the market. - The change in the slope of the non-intervention zone was reduced further, from 2 percent to 1¾ percent per month, in 2019 Q2. - Higher-than-expected March inflation and increased political uncertainty triggered a sharp sell-off in Argentine assets in April 2019. - The FX I strategy was changed once more, reducing the monthly rate of change of the non-intervention zone from 1¾ to zero percent and committing not to buy FX in the event of appreciation. - The BCRA would be prepared to sell up to US$ 250 million if the exchange rate were to depreciate beyond AR$ 51.5 per U.S. dollar and would undertake additional interventions to counteract episodes of excessive volatility, while keeping the option to sell dollars within the non-intervention zone depending on market dynamics. - All FX sales would be unsterilized which would ensure a reduction in the monetary base, further tightening the monetary stance and supporting the exchange rate. - After this announcement, the peso appreciated and remained broadly stable until August 2019. ### Vulnerabilities from LEBACs (Box 3) - The central bank used its own liabilities—LEBACs—to mop up excess liquidity. High yields attracted private non-institutional and foreign investors, fueling a carry trade and creating a flash point for a sudden reversal of flows. - By 2018, the total stock of LEBACs had reached 10 percent of GDP, or 120 percent of base money. - Use of central bank instruments to sterilize capital inflows has been associated with incentivizing additional capital inflows, inflationary bias (because of the high interest costs of sterilization), and stresses on central bank balance sheets. - The Argentine central bank’s balance sheet was weak to begin with—the scale of sterilization needs was greater than could be covered by the central bank’s holdings of marketable government securities, hence the use of central bank instruments. - Purchase of LEBACs was open to foreign and noninstitutional investors. Domestic investors perceived the central bank to have lower credit risk than the government and invested heavily in LEBACs; foreign investors were drawn to the relatively high yields. - The recurrent monthly rollover of LEBACs therefore created the potential for significant volatility in both exchange rates and interest rates, especially around the LEBACs’ maturity dates. - The instability of interest rates threatened the ability of the BCRA to set interest rates in a predictable way consistent with its inflation objectives. - Given the inherent volatility of capital flows, LEBACs became a potential trigger point for sudden stops. ### Monetary policy implementation, inflation, and program outcomes - Inflation had been targeted to fall from around 25 percent in 2017 to single-digit levels during the program period, but instead increased steadily to over 50 percent. - Rapid exchange rate depreciation starting in mid-2018 made the targeted disinflation path unrealistic due to the high passthrough. - After the First Review, inflation slowed towards end-2018. But subsequent increases in government transfers and salaries, adjustments to utility prices, and loosening of monetary policy led to higher inflation in early 2019 and further exchange rate depreciation. - Program actions aimed to bolster monetary policy credibility and strengthen the policy framework, but actual implementation was inconsistent: - Between approval of the SBA and completion of the First Review, FX I was ad hoc and the program limits were breached. - After the monetary policy framework was revised in October, interest rates rose substantially and the exchange rate stabilized. However, the authorities abandoned the 60 percent floor on policy interest rates prematurely, in early December. - The base money target for December was relaxed to accommodate a seasonal increase in money demand, but was not reversed subsequently. - The program’s rules on FXI were changed—and breached—frequently. - Even with consistent and well-calibrated implementation, bringing inflation down would have been challenging due to deep-seated fears of fiscal dominance undermining monetary policy credibility. - The inconsistent implementation and communication undermined achievement of inflation goals; political situation and doubts about the durability of fiscal consolidation fed capital flight, exchange rate depreciation, increasing inflation, and worsening debt. ### Social protection and gender policies - The program included features to safeguard social protection and increase female labor force participation; outcomes did not meet the goals in part because adverse general economic conditions outweighed targeted policies and due to lack of follow through on the legislative agenda. - The program committed to strengthen the social safety net and maintain the level of social spending, and aimed to reduce poverty rates even if there were a slower-than-expected economic rebound. - Program reforms and protections: - Improvement in public childcare to protect poor households and raise female labor force participation. - Better targeting and broader reach of the universal child allowance. - Strengthened monitoring of social conditions to address needs of the most vulnerable. - A floor on social spending was a performance criterion and was met throughout the program; authorities increased social spending from the Third Review onwards, particularly in childcare and social assistance, financed in part by other IFIs. - Despite these measures, weaker-than-expected growth and higher-than-expected inflation undermined efforts: - The share of the population living in poverty rose from 27 percent in 2018H1 to 35 percent in 2019H1. - The recession pushed real wages down and unemployment and informality up, exposing gaps in social protection. - Higher inflation led to lower living standards, including for government workers and pensioners, in part reflecting backward-indexation of public wages and pensions. - To compensate, authorities suspended the planned increase in energy prices. - Gender-related outcomes: - The SBA Request committed to measures such as eliminating the second-earner penalty in the tax system and increasing support for households with children to raise female labor force participation. - By the time of the Fourth Review, congressional approval of legislation to increase paternity leave and legal changes to eliminate tax disincentives for female labor force participation had not been passed. - Wage differentials stayed roughly the same, and female labor force participation increased only marginally during the program. ### Pension reform (Box 4) - The Argentine pension system was actuarially unsustainable. Pension system costs reached 10 percent of GDP in 2018. - The main component was a pay-as-you-go scheme covering nearly 40 percent of workers. - Workers’ and employers’ contributions amounted to 5.2 percent of GDP in 2017, while contributory benefits stood at 7.5 percent of GDP. - Non-contributory pensions had risen rapidly in the previous decade and accounted for the remaining share of pension spending. - The old-age dependency ratio was projected to increase from 17 percent in 2017 to about 28 percent by 2050, adding to stress on the system. - No changes were made to pension system parameters during the program. However, a change to the pension indexation formula at the end of 2017 revised indexation to quarterly adjustments based on wage and price inflation (weights of 30 and 70 percent, respectively). - As inflation accelerated during the program, the real value of pensions fell; this unplanned reduction in pension spending as a share of GDP contributed to the fiscal adjustment under the program. ### Structural policies, financial sector reform, and governance - The program focused on short-term stabilization and contained relatively limited conditionality on structural policies, reflecting constrained political space and the financial sector’s small size and sound position. - Structural conditionality was narrowly targeted, focused on macroeconomic stabilization, fiscal reforms, and monetary policy, with actions on fiscal, PFM and central bank reforms. - The program had no structural policy prior actions at approval but featured three such actions during the program. - Comparative assessment of structural conditionality: - The volume of structural conditions in the program was less than one third of other exceptional access SBAs. - Half the structural benchmarks set at approval were assessed to be of low depth; the share of high-depth measures was larger, while medium-depth measures represented a smaller share. - High-depth measures planned included the recapitalization of the BCRA and submission of a new central bank charter to Congress, with relatively late test dates (end-December 2019 and end-March 2019 respectively) and no explicit commitment of fiscal resources. - The overall design reflected political constraints (administration’s lack of majority in Congress) and aimed to support stability initially and move to deeper reforms later. - Structural policy commitments went beyond benchmarks and included supply-side measures aimed at strengthening the anti-corruption regime and AML-CFT legal framework, developing domestic credit markets, increasing competition, and reducing red tape. *Source: BCRA.* ### Box 5. Argentina: Structural Conditionality Under the 2018 SBA (Concluded) ### Box 5. Argentina: Structural Conditionality Under the 2018 SBA (Concluded) ### Structural conditionality and program focus - All structural conditions were focused on areas of core Fund responsibility. - Subject breakdown: - Half the measures concerned the central bank. - Half concerned fiscal and PFM issues combined. - There were no structural conditions on the financial sector (atypical for exceptional access programs). - Reform depth classification used in the program documentation: - “High depth”: reforms that lead to permanent institutional changes (e.g., legislative changes, pension reform, privatization). - “Medium depth”: one-off measures with immediate but not lasting effects (e.g., budget approval, one-time controlled price changes). - “Low depth”: intermediate preparatory steps (e.g., preparation and/or announcement of plans). - Governance emphasis grew over time: - Initial June 2018 program request included a general commitment to strengthen the anti-corruption regime and improve the AML-CFT legal framework. - Implementation of the Fund’s new framework for enhanced engagement on governance (approved April 2018) prompted inclusion of a full section on tackling corruption in the Staff Report for the Second Review. ### A. Financing — program design, adjustments, and outcomes - Program conception and shifts: - The 2018 SBA was conceived as primarily precautionary but switched to a fully disbursing arrangement as adverse conditions materialized. - Initial external financing gap concentrated between June and December 2018 of SDR 10.6 billion (approximately US$15 billion). - Remainder of Fund resources (SDR 24.8 billion, or approximately US$35 billion) were to be precautionary, phased evenly over twelve quarterly reviews over three years. - Rollover assumptions and changes: - Baseline scenario in the initial program assumed rollover rates between 75 and 100 percent; adverse scenario assumed rollover rates between 75 and 90 percent. - Rollover rates deteriorated after program approval in June and through September. - Rollover rate assumptions were reduced to 50 percent in 2018, gradually increasing to 70 percent in 2019 for privately held bonds. - First Review adjustments: - Augmentation of the arrangement, some frontloading, and actual use of Fund resources to close the fiscal financing gap. - Revised purchase schedule involved concentrated access through the third quarter of 2019 of SDR 35.8 billion (US$51 billion), slightly above the original arrangement. - Residual amount (SDR 4.9 billion or US$7 billion) to be purchased over the remainder of the arrangement in seven equal installments. - Coverage of the financial sector: - Limited coverage due to a smaller and conservative banking system in 2018 (high proportion of low-credit-risk assets, limited sovereign lending exposure). - Fund staff modelling of capital flow restrictions and debt operations nonetheless covered the financial sector. ### B. Burden sharing and official financing - Actual official support and dependence on IMF: - Between end-March 2018 and end-2019, actual net financial support from other IFIs during the program period was about US$2.7 billion (about 6 percent of all additional financing from IFIs, including the Fund). - The Fourth Review estimated official financing of US$1.6 billion in 2018 and US$3.0 billion in 2019. - Assessment under the IMF’s financing assurances policy: - Program financing relied primarily on IMF financing and domestic debt issuance (with limited foreign participation). - The limited burden sharing and frontloading signaled that a larger share of near-term financing needs would be met by the Fund, reducing catalytic expectations on private flows. - The frontloading and augmentation compressed Fund financing in the 15 months before the 2019 election, generating substantial financial risks to the Fund. ### C. Application of the Exceptional Access Framework (EAF) - Applicability and EAF limits: - Normal access limits: 145 percent of quota for any 12-month period; cumulatively 435 percent of quota over the program period. - The 2018 SBA was nearly three times the cumulative limit, thus subject to the EAF. - Exceptional Access Criteria (EAC) required (as updated in early 2016): - EAC1: Exceptional balance of payments pressures on current or capital account. - EAC2: High probability that public debt is sustainable in the medium term (or, if unsustainable ex ante, financing from other sources restores sustainability with high probability; or if “sustainable but not with high probability,” financing from other sources improves sustainability and sufficiently enhances safeguards). - EAC3: Prospects of regaining private capital market access within a timeframe and scale enabling obligations to the Fund to be met. - EAC4: Policy program provides a reasonably strong prospect of success, including institutional and political capacity to deliver adjustment. - How EACs were judged in Argentina: - Argentina was deemed to meet the EACs at Board approval and in all four program reviews, though assessments of three of the four criteria were finely balanced. - EAC1: Met — actual balance of payments need and potential for stronger pressures; purchase of about US$15 billion at SBA approval; reserves below the Fund’s ARA metric. - EAC2: Deemed met on grounds that market access was retained and private claims falling due during the program period were small; debt was categorized as “sustainable but not with high probability” (the “gray zone”). - Debt dynamics and market indicators worsened during the program: - Debt-to-GDP ratio jumped from 65 to 81 percent of GDP in the first four months from SBA approval to First Review. - EMBIG spreads increased from 415 to 630 basis points over the same period (above the 600 bp threshold). - By the Fourth Review, 12 out of 15 cells in the DSA heat map were red. - The Fund relied on the DSA, safeguards provisions, and judgment; safeguards measured as the ratio of post-program restructurable debt relative to peak Fund credit decreased relative to expectations after augmentation. - EAC3 and EAC4: Assessed as met at each review but with finely balanced judgments given weakening market access and deterioration of several indicators. ### Key statistics and thresholds reported - SDR 10.6 billion (approximately US$15 billion): external financing gap concentrated June–December 2018 in initial plan. - SDR 24.8 billion (approximately US$35 billion): remainder of Fund resources initially treated as precautionary. - SDR 35.8 billion (US$51 billion): revised concentrated access through Q3 2019 at First Review. - SDR 4.9 billion (US$7 billion): residual amount to be purchased over remainder of arrangement in seven equal installments. - Rollover rate assumptions: - Baseline: between 75 and 100 percent. - Adverse initial scenario: between 75 and 90 percent. - Revised assumptions: 50 percent in 2018, gradually increasing to 70 percent in 2019 for privately held bonds. - IMF normal access limits: 145 percent of quota for any 12-month period; cumulative 435 percent of quota over program period. - Debt and market indicators: - Debt-to-GDP ratio: 65 percent at program approval rising to 81 percent by the First Review. - EMBIG spreads: 415 basis points at approval rising to 630 basis points. - DSA heat map: 12 out of 15 cells red by the Fourth Review. - Other official IFI support during program period: about US$2.7 billion (about 6 percent of additional IFI financing including the Fund). - Fourth Review official financing estimates: US$1.6 billion in 2018 and US$3.0 billion in 2019. ### Policy implications and lessons highlighted - Precautionary versus disbursing design: - The shift from precautionary to fully disbursing signaled that the catalytic effect fell short of expectations; frontloading and augmentation reduced the Fund’s leverage and may have worked against catalyzing private flows. - Burden sharing and financing assurances: - The Fund’s role as de facto sole official creditor in a context of highly uncertain financing needs raises questions on the Fund’s stance toward burden sharing and on scrutiny of debt rollover assumptions. - Exit and reengagement costs: - Pulling out from a program after deterioration is difficult; the Fund may face choices between forceful debt reprofiling and accepting high financial risk of taking a member country “out of the market.” - Speed of engagement and Emergency Financing: - Given the weight of initial financing decisions, the speed of action (including resort to the Emergency Financing Mechanism) should be weighed against longer-term risks associated with program engagement. - Need for broader view in exceptional access cases: - The Argentina experience highlights scope for taking a broader view of risks to the Fund in exceptional access cases, especially where large and intertwined fiscal and external financing needs, little room for adjustment, limited other official support, and dispersed private creditors exist. *Source: Box 5. Argentina: Structural Conditionality Under the 2018 SBA (Concluded).* ### Box 6. Argentina: Market Access During the 2018 SBA ### Box 6. Argentina: Market Access During the 2018 SBA ### Market access and issuance patterns - Argentina was not able to raise significant funds externally during the program period. - A total of US$ 9 billion in external debt was successfully issued in January 2018; after that the Treasury no longer placed bonds externally. - Domestic issuance continued in January 2018–July 2019 in both U.S. dollars and pesos, as well as short-term paper (mostly LECAP and LETES). - Non-residents continued to participate in the domestic debt market while rebalancing from LETES to LECAP. - Domestic placements ended after the primary elections in August 2019 when an attempt to issue short-term paper in pesos (LECAPs) and U.S. dollars (LETES) failed. ### Investor flows and portfolio shifts - Non-residents reduced LETES holdings by US$5.2 billion from end-March 2018 to end-March 2019. - By end-March 2019 non-residents held only 10 percent of the outstanding LETES stock. - Non-residents increased LECAP holdings to a peak of US$6.7 billion (67 percent of the total stock) by end-March 2019. - Non-residents began exiting LECAPs thereafter, offloading 20 percent of their total holdings by end-June 2019, with a broadly equal increase in domestic private sector participation. ### Changes in outstanding stocks, rollover and maturities - LETES rollover rates dropped: the total outstanding LETES stock fell by US$4.2 billion from end-March to end-Dec 2018, but on average remained stable until August 2019. - The outstanding stock of LECAP increased rapidly in 2018, with the U.S. dollar value fluctuating until August 2019. - Following the run on short-term BCRA paper at end-April 2018, total issuance in dollars dropped to only US$ 1.1 billion in May, before recovering to US$ 3.4 billion in June after announcement of a Fund staff-level agreement on an exceptional access Stand-By Arrangement. - Issuance of peso-denominated debt continued but interest rates rose significantly: - average 26 percent in January-April of 2018 - average 42 percent in May-August 2018 - in 2019 interest rates on peso-denominated debt reached 60 percent - Average maturity of LETES fell from 213 days in 2018 to 158 days in 2019. - Maturities were concentrated: about two-thirds of LETES and LECAP 2019 issuances were due before the October presidential election, creating a significant refinancing need during a period of high uncertainty. - Risks were compounded by government borrowing via repos collateralized by government dollar-denominated debt securities, whose drop in market value led to margin calls and further increases in financing needs. ### Exceptional Access Framework (EAF) application and Fund judgments - Prospects of regaining market access on an adequate scale—and thereby being able to service debt to the Fund—were mixed, but on balance EAC3 was judged to be met. - As market conditions deteriorated, the likelihood of attaining adequate access to private capital markets weakened; however, rollover rates recovered after the First Review and the Fund judged prospects to be sufficient, expecting program implementation with international community support to safeguard market access. - Assessments of institutional and political capacity under EAC4 were deemed satisfactory though commitments were fairly light. - Political assurances in the run-up to the October 2019 elections were based on private consultations with two opposition presidential candidates who remained publicly critical and indicated they would seek to renegotiate the program. - Institutional capacity was judged sufficient to deliver core program elements; program reforms aimed to strengthen budget and tax administration, anti-corruption, and debt management capacity (two structural benchmarks and TA provided). A March 2019 structural benchmark called for a new central bank charter; by program end the charter had not passed. - High turnover of central bank governors (three governors from May 2018 to August 2019) raised questions about policy continuity and central bank independence. ### Safeguards, risks to the Fund, and internal processes - The high level of access under the SBA represented considerable financial, reputational and enterprise risks for the Fund; safeguards policies were followed including a regular Safeguards Assessment and a supplementary fiscal safeguards review when IMF proceeds were channeled to the government budget. - At program request, capacity to repay was assessed as “good” under the baseline and “adequate” under the alternative (full drawing) scenario; some risk indicators were worrisome: - under full drawing, capacity to repay indicators (relative to reserves and exports) were above or at the higher end of the range of recent exceptional access arrangements; - credit outstanding to Argentina would be around double the Fund’s precautionary balances (SDR 16 billion at end-FY2020); - yearly charges would be considerably above the absorption capacity of the burden sharing mechanism. - The augmentation and frontloading of access at the First Review significantly increased financial risks; risk assessment was revised to “adequate although subject to heightened/sizable risks.” - The Office of Risk Management (ORM) had limited involvement in assessing broader risks related to the SBA and was not consulted in real time. - Safeguards assessments and fiscal safeguards review timing lagged front-loaded disbursements: - a safeguards assessment was concluded by the First Review as required; - a fiscal safeguards review was completed before the Second Review; - key recommendations (central bank independence amendments, recapitalization, treasury single account move to the central bank) were not implemented by program end. ### Lending Into Arrears (LIA) and arrears handling - The program complied with the LIA policy for a small amount of remaining arrears. - Program start included a residual amount of US$1.2 billion in principal, or about US$3.2 billion including accrued interest, subject to the LIA policy requiring financing assurances and assessments of good-faith efforts to resolve arrears. - During the program, the IMF judged authorities to be making good-faith efforts; some payments to holdout creditors were made (for example, to Japanese intermediary banks). A smaller arrear to an official bilateral creditor proceeded on a non-objection basis. ### Program design, conditionality and performance - The technical design of program conditions was consistent with Fund practices and allowed appropriate targeting to accommodate ownership; relatively few structural benchmarks were used and these were generally of narrow scope. - Use of prior actions was limited: no prior actions at SBA approval; three prior actions were included later (two at First Review, one at Second Review). - Conditionality performance: - all three prior actions were met; - seven out of ten structural benchmarks were met (three with delay); - after the First Review and revamp, all performance criteria were met except the end-December 2018 NDA ceiling. - Monetary policy conditionality was unusually specified: an initial Inflation Consultation Clause (ICC) was applied, and an NDA ceiling was added as a safeguard given fragility of the inflation targeting regime; interest rate commitments in the LOI were intended to underpin the monetary framework. - The perimeter of fiscal policy was narrow, covering only central government debt; provincial FX-denominated debt rose during the program, posing risks to external debt service capacity and contingent central government liabilities. Sterilization needs increased quasi-fiscal costs. ### Assessment of program outcomes and lessons - The program was fragile from the outset given Argentina’s structural characteristics and political constraints; restoring confidence required sustained demonstration of fiscal and external sustainability, which was difficult with general elections 16 months away at program approval. - The diagnosis of a temporary liquidity shock was reasonable initially but became less tenable as the program proceeded; continued framing as a liquidity shock may have hindered fundamental reassessment. - Program weaknesses included: optimistic macroeconomic assumptions, low-quality fiscal measures, political redlines removing policy options, limited structural reform ambition, and avoidance of debt reprofiling and CFMs. - Revisions at the First Review simplified objectives and were followed by tentative signs of revived confidence, but debt sustainability had deteriorated and financing needs increased. - Suggested alternative or reinforcing measures (noting uncertainty of outcomes) included: - undertaking a debt operation early combined with reintroduction of CFMs to extend maturities and lower repayments; - agreeing a contingency plan early with specific triggers and actions (debt operations, CFMs); - more consistent communication led by authorities to bolster catalytic effects; - closer Fund engagement before the program (Article IVs, resident representative, regular TA) to improve program design and external communication. Key general lessons emphasized: - Use conservative baseline assumptions, perform sensitivity analysis, and agree contingency plans upfront. - Tailor programs to country circumstances and consider unconventional measures (e.g., CFMs) when traditional policy space is limited. - Sharpen application of the Exceptional Access Framework, especially EAC2 and EAC4; assess market access across maturities and sustainable yields. - Balance government ownership with program quality and Fund reputation; question political “redlines” that compromise objectives. - Ensure effective external communication by authorities and the Fund so the program achieves intended catalytic effects. - Revisit internal Fund processes to assess and mitigate broader risks associated with exceptional access arrangements, including stronger treatment of financial and liquidity risks and earlier ORM involvement. - Consider the implications for the international financial safety net and burden sharing when the IMF becomes the largest and most senior creditor. *Source: Argentinian authorities and IMF staff calculations, Box 6. Argentina: Market Access During the 2018 SBA, IMF country report.* ### Annex I. History of Fund-Supported Programs ### Annex I. History of Fund-Supported Programs ### Exceptional balance of payments pressures and access (Criterion 1) - The member is experiencing or has the potential to experience exceptional balance of payments pressures on the current account or the capital account, resulting in a need for Fund financing that cannot be met within the normal limits. - Program Request assessment: - Tightening of global financial conditions and a shift in portfolio preferences away from peso assets led to exceptional capital account pressures. - Given the large size of Argentina’s external financing need over the course of the proposed arrangement, this would give rise to a substantial external financing need that would not be able to be met within the normal limits of access. - First Review assessment: - Tighter global financial conditions since approval in June reinforced the shift away from peso assets and intensified capital account pressures. - The return of market confidence did not materialize as envisaged, resulting in a weaker-than-expected exchange rate and a lower rollover rate of private holdings of public debt. - This gives rise to a larger financing need than envisaged at program design, which cannot be met within the normal limits of Fund access. - Second Review assessment: - The return of market confidence has been broadly as expected since the conclusion of the First Review, with somewhat better-than-expected rollovers. - Nonetheless, under current assumptions, Argentina’s sizable external financing need over the course of the arrangement cannot be met within the normal limits of access. - Third Review assessment: - The return of market confidence has been somewhat better than expected since the conclusion of the Second Review; rollovers of most maturing debt in 2019 so far has been near or over 100 percent. - Despite improved rollovers, Argentina’s large external financing needs over the course of the arrangement cannot be met within the normal limits of access. - Fourth Review assessment: - Still fragile market confidence implies that Argentina’s sizable external financing needs (largely driven by interest and amortization obligations of the federal government) over the course of the arrangement cannot be met within the normal limits of access. ### Debt sustainability assessment and exceptional access conditions (Criterion 2) - General framework: - A rigorous and systematic analysis assesses whether the member’s public debt is sustainable in the medium term. - Where debt is assessed as sustainable but not with a high probability, exceptional access requires the existence of non-Fund financing that improves debt sustainability and ensures sufficient safeguards for Fund resources. - Program Request and baseline projection: - In the baseline scenario—which assumes a partial draw—Argentina’s federal government debt and gross financing needs are projected to remain below the respective risk thresholds (70 and 15 percent, respectively); and federal debt-GDP, after peaking this year, falls steadily over the medium term. - Risks include the large share of foreign currency debt and significant rollover needs. - First Review update: - Under staff’s new baseline, Argentina’s federal government debt is projected to increase above the high-risk threshold (70 percent). - Gross financing needs (GFN) are high but remain below the 15 percent of GDP high-risk threshold during the projection period. - The end-2018 federal debt-to-GDP ratio forecast for end-2018 is 16 percentage points higher than at program approval (due to depreciation, and to a lesser extent, lower growth rate). - Notwithstanding this, the debt-GDP ratio is projected to fall over the medium term. - Second Review update: - Projected debt dynamics and risks remain in line with those at the First Review. - Public debt is assessed as sustainable but not with a high probability; exceptional access requires non-Fund financing that improves debt sustainability and ensures sufficient safeguards for Fund resources. Staff judges that the required safeguards are in place. - Third and Fourth Review updates: - The starting position for the debt ratio is weaker (due to the large upward revision to the end-2018 level), and financing needs are more elevated than at the Second Review. - As before, debt is projected to remain on a downward path and fall below 60 percent by 2024. - With public debt assessed as sustainable, albeit not with a high probability, exceptional access requires the existence of non-Fund financing that improves debt sustainability and ensures sufficient safeguards for Fund resources. ### Stress-test benchmarks and risk-assessment thresholds used in debt sustainability heat maps - Debt burden benchmark: 70 percent. - Gross financing needs benchmark: 15 percent. - Risk-assessment benchmark values (lower and upper): - Bond spreads: 200 and 600 basis points. - External financing requirement: 5 and 15 percent of GDP. - Change in the share of short-term debt: 0.5 and 1 percent. - Public debt held by non-residents: 15 and 45 percent. - Share of foreign-currency denominated debt: 20 and 60 percent. - Heat-map cell coloring rules (as used by staff): - Green if benchmark is not exceeded under specific shock or baseline. - Yellow if exceeded under specific shock but not baseline. - Red if benchmark is exceeded under baseline. - White if stress test is not relevant or data unavailable. *Source: IMF staff (Annex I. History of Fund-Supported Programs).* ### Annex III. ### Annex III. Application of Exceptional Access Framework under 2018 SBA ### Exceptional Access Criteria and Debt Sustainability - Staff assessment: "debt is sustainable but not with a high probability" under both the baseline and adverse scenarios. - Exceptional access justification: requires existence of non‑Fund financing that - "improves debt sustainability" and - "enhances sufficient safeguards for Fund resources." - Mitigating and risk factors noted: - Long maturity of privately‑held foreign currency‑denominated debt "improves the prospects of adequate private creditor exposure being maintained throughout the program." - Large share of public debt held by other public sector entities serves as "an important mitigating factor." - Risks include: high level of debt to GDP, large share of foreign currency debt, significant rollover needs, implementation risks around fiscal consolidation, vulnerability to changing market sentiment, movements in the real exchange rate, and potential contingent liabilities from the broader public sector (including BCRA recapitalization needs). ### Prospects for Market Access and Financing - Rationale for confidence in non‑Fund financing: - Argentina "has access to both domestic and foreign financial markets." - Market access is expected to strengthen provided fiscal targets are met and authorities implement the program. - Reported stocks and maturities (as stated in staff assessments): - "Of the outstanding stock of the federal government’s foreign currency debt held outside the public sector (US$156 billion), only about one fifth is expected to mature by end-2020." - "As of end‑September 2018, the stock of the federal government’s privately held foreign currency denominated debt is approximately US$120 billion, of which about one quarter is expected to mature by end-2020." - Earlier broader definition cited: "approximately US$147 billion." - "As of end‑2018, the stock of the federal government’s privately-held foreign currency denominated debt is approximately US$112 billion, of which about one quarter is expected to mature by June 2021 (the expiry of the SBA)." - "Of the outstanding stock of the federal government’s foreign currency debt held by the private sector (US$117 billion), only about one quarter is expected to mature by June 2021 (the expiry of the SBA)." - Market activity and investor participation: - Continued peso‑ and U.S. dollar‑denominated bond placements in domestic markets. - "Rollover rates have improved in September to November and non-residents have purchased nearly US$2.3 billion of peso denominated LECAPs." - At other points: "non‑residents have purchased over US$2 billion of peso‑denominated LECAPs in the past five months." - State‑owned oil and gas company successfully issued a 10‑year global bond (timing described as "in June" in the source). ### Program Ownership, Policy Implementation, and Political Economy - Staff judgments on program prospects: - The policy program "provides a reasonably strong prospect of success" contingent on institutional and political capacity to deliver adjustment. - Authorities have demonstrated commitment to fiscal adjustment and to the policy framework supported by the Stand‑By Arrangement. - Political and institutional considerations: - Concerns about the government's ability to build congressional support given minority status in both houses of Congress at the time of earlier assessments. - Authorities worked with provincial governors and opposition figures; the passage of the 2019 budget "earlier than expected and with a wider‑than‑expected margin in the Senate" was cited as evidence of commitment and cross‑party consensus. - Social opposition to the program remained "more subdued than might have been expected" despite Argentina’s difficult history with IMF lending. - Monetary policy measures and central bank actions: - The central bank implemented a tighter monetary policy framework (announced "in late September"), which: - "led to an initial large spike in short-term interest rates and an appreciation of the peso." - included adherence to "a freely floating exchange rate regime with a transparent FX intervention rule." - resulted in no FX intervention since the new framework announcement in some assessments and purchases of FX in limited amounts once the peso moves outside the strong side of the non‑intervention zone in later assessments. - Policy rate action: the central bank "has raised policy rates by a cumulative 20 percent" (relative to the time of program approval). - Expectations tied to program success: - With "successful implementation of Argentina’s policy program, combined with support from the international community," staff expects a steady restoration of confidence, decline in costs of budgetary financing, and reestablishment of access to international capital markets on reasonable terms. ### Key Statements and Program Conditions Cited - Exceptional Access Policy amended effective January 20, 2016. - Recurrent formulation in staff assessments: "debt is sustainable but not with a high probability." - Repeated emphasis on required conditions for exceptional access: - existence of non‑Fund financing that improves debt sustainability and ensures sufficient safeguards for Fund resources; - prospects of gaining or regaining access to private capital markets "within a timeframe and on a scale that would enable the member to meet its obligations falling due to the Fund." - Market access indicators referenced: - US$156 billion (federal government foreign currency debt held outside public sector) - US$147 billion (broader earlier definition) - US$120 billion (stock as of end‑September 2018) - US$112 billion (stock as of end‑2018) - US$117 billion (stock of foreign currency debt held by private sector) - one fifth; one quarter (maturity shares by specified dates) - nearly US$2.3 billion; over US$2 billion (non‑resident purchases of peso‑denominated LECAPs) - cumulative 20 percent (policy rate increases since program approval) - June (issuance timing of a 10‑year global bond by a state‑owned oil and gas company) - June 2021 (expiry of the SBA) - end-2020 (maturity horizon referenced) *Source: Annex III. Application of Exceptional Access Framework under 2018 SBA (staff assessments and reviews) from the provided IMF document.* ### 1. Primary balance of the federal government (floor) 3/ 8/-148.0 - ### 1argea2021001 - 1. Primary balance of the federal government (floor) 3/ 8/-148.0 - ### Fiscal targets and performance indicators - Primary balance of the federal government (floor) - Reported sequence: 3/ 8/-148.0 - - Time series and status snippets: 155.1 -122.6Met-256.0 -273.0 -181.2Met-290.0 -299.1 -200.1Metn.a.n.a.-362.5 -370.0 -378.0-404.4 -374.3Met - Alternate table entries (2018 panel): n.a.n.a. n.a.n.a.n.a. n.a.-32.0 6.06.0 10.5Metn.a. n.a. n.a. n.a. n.a. n.a.-100.0 40.0 20.0 -17.3 30.2Metn.a. n.a. n.a. n.a.60.0 70.0n.a.n.a.0.0 - Primary balance of the general government (floor) — indicative target - Example figures: 3/ 8/-163.0-47.9-272.0n.a.n.a.n.a.n.a.n.a.n.a.-382.4 -370.0 -378.0-404.4 -303.2 - Federal government accumulation of external debt payment arrears (ceiling) - Repeated zero outcomes: 4/0.00.0Met0.00.0Met0.00.0Met0.00.00.00.00.00.0Met - Additional sequences: 4/0.00.0 0.00.00.0 0.00.0 0.00.0Met0.00.0 0.0 0.00.00.00.0 0.00.00.0Met0.0 0.0 0.0 0.0 0.0 0.00.00.00.0 - Federal government accumulation of domestic arrears (ceiling) - Sample entries: 3. 8.2-1.9Met14.9-3.3Met17.011.6Metn.a.n.a.21.6 24.424.411.9Met - Alternate panel (2018): n.a.n.a. n.a.n.a.n.a. n.a.27.1 30.05.6Metn.a. n.a. n.a. n.a. n.a. n.a.39.7 40.0 45.013.0Metn.a. n.a. n.a. n.a.53.2 53.2n.a.n.a.58.5 - Social assistance spending (floor) - Reported values: 3/87.787.7Met131.1133.9Met144.0148.8Metn.a.n.a.177.5 173.0173.0184.9Met - Alternate panel (2018): n.a.n.a. n.a.n.a.n.a. n.a.60.0 60.072.7Metn.a. n.a. n.a. n.a. n.a. n.a.112.6 110.0 132.0157.6Metn.a. n.a. n.a. n.a.205.0 223.5n.a.n.a.325.0 ### Monetary targets, performance criteria, and outcomes - Change in non-borrowed net international reserves (floor) 6/ 8/ 9/ - Selected values: 5.52.02.7Met5.5-2.0-8.7Not Met3.74.35.3Met2.11.42.25.57.17.16.57.2Met - Alternate panel (2018): 5.34.1 7.43.52.9 8.85.5 12.54.4 5.5Met8.09.0 10.5 4.26.23.87.5 5.89.00.7 4.0Met8.4 8.4 8.2 8.2 13.1 13.111.510.59.8 - Change in stock of non-deliverable FX forwards (ceiling) 6/ - Reported: 1.00.4Met0.01.3Not Met0.0-2.0Met0.0-2.3-0.50.00.0-3.6Met - Alternate panel: 0.00.0-3.6-0.7-0.7 -3.6 -1.0 -1.0-3.3Met-1.2 -1.2 -2.6 -1.5 -1.5 -5.2-1.5 -1.7-1.7-6.6Met-2.00.0-2.30.0-2.60.00.00.00.0 - Change in central bank credit to government (ceiling) 7/ - Reported: 0.00.0Met-78.0-39.4Not Met0.00.0Met0.00.0 -156.00.00.0-432.3Met - Alternate panel: 0.00.0 0.00.00.0 0.0 -234.0 0.00.0Met0.00.0 0.0 0.00.00.0 -312.0 0.00.00.0Met0.0 0.0 0.0 0.0 0.0 0.00.00.00.0 - Central bank financing of the government (ceiling) - Consistently zero outcomes: 4/0.00.0Met0.00.0Met0.00.0Met0.00.00.00.00.00.0Met - Alternate panel: 4/0.00.0 0.00.00.0 0.00.0 0.00.0Met0.00.0 0.0 0.00.00.00.0 0.00.00.0Met0.0 0.0 0.0 0.0 0.0 0.00.00.00.0 - Change in net domestic assets (NDA) of the central bank (ceiling) 7/ 8/ - Notation: **15.0 - Reported sequence with status notes: 40.0-98.0 - Flags and outcomes: no EB consultation 64.0 251.2 441.7 EB Consultation97.797.728.9Met-55.7 -16.5 -121.6 166.0 -46.2-46.2-10.624.5Not Met - Alternate panel excerpts: - 112.1 -112.1 -157.5-36.0 -36.0 -177.5 173 -185.6 -154.5 -212.6Met-300.3--####-- 184 -101.5------------ - Change in monthly average monetary base (ceiling) - Entries: -- - Alternate panel: - - - - - -0.0 -18.40.0-0.6-0.0-1.1Met0.0 0.0 0.0 -18.0 0.0 -33.0 -45.0-45.038.0 ### Inflation bands and consultation clauses - Inflation bands (in percent, y-o-y) - Center inflation target: 25 25 25 - Inner Band (upper): 27 29.5 - Outer Band (upper): 29 29 29 - Inner Band (lower): 22 22 22 - Outer Band (lower): 32 32 32 (noted as a header sequence in the table) - Staff and EB consultation notes: Staff Consultation2740.5; EB Consultation27 - Inflation Consultation Clause mechanics - The ceiling in the change in NDA of the Central Bank is set as a QPC starting in the First Review. - Prior to that, as complement to the Inflation Consultation Clause, if net domestic assets of the central bank were to exceed the thresholds established in the program, the clause would be triggered, requiring a consultation with the Executive Board on the authorities’ proposed policy response. - Targets and measurement notes - 1/ Targets as defined in the Technical Memorandum of Understanding (TMU). - 2/ Based on program exchange rates defined in the TMU. - 3/ Cumulative flows from January 1 through December 31. - 4/ Continuous performance criterion. - 5/ The accumulation is measured against the average during Q4 2017, which stood at 45.6 billion pesos. - 6/ In billions of U.S. dollars. - 7/ See Quantitative Performance Criteria Table (Staff Report Program Request-Fourth Review) for the reference of each review. - 8/ Targets subject to adjustors as defined in the TMU. - 9/ Increases reflect IMF disbursements, which increase NIR. ### Context: economic developments leading up to the 2018 SBA - Political and policy context - The Cambiemos coalition of Mauricio Macri won the 2015 general elections on a platform of a more open, less protectionist, and more market-oriented economy. - The administration faced a narrow margin in Congress and mid-term elections in late 2017. - Macroeconomic imbalances and structural issues (selected observations) - Output stagnant since 2011; investment share in GDP declining. - Large fiscal deficits financed by money creation contributed to high inflation and an overvalued exchange rate. - The economy was highly dollarized; foreign exchange reserves were running low; central bank was not independent. - Capital account liberalization and external financing - Administration lifted capital controls, let exchange rate float, eased restrictions on currency purchases, and settled with external creditors. - Resulting capital inflows restored central bank reserves but were skewed toward portfolio debt and foreign-currency-denominated issuance. - Noted issuance example: issuance of a 100-year bond in 2017. - Policy trade-offs and monetary framework - Inflation targeting was introduced in 2016 without sustained disinflation, reduction of fiscal dominance, or assured central bank independence. - Tension existed between focusing on inflation versus managing the exchange rate, with risks of nominal depreciation passing through into higher prices and increasing peso value of dollar-denominated debt. - Deterioration in 2018 and IMF engagement - External conditions worsened in early 2018; the peso came under particular pressure amid a drought affecting exports and tighter global financial conditions. - With rapidly worsening access to financing and a market reaction to a withholding tax on nonresidents applied April 24, 2018, the government sought IMF support on May 8, 2018; IMF Executive Board approved a standby arrangement on June 20, 2018. *Source: 1argea2021001 - 1. Primary balance of the federal government (floor) 3/ 8/-148.0 - (PDF).* ### Appendix II. The IMF and Argentina, 1991–2001—Summary of ### Appendix II. The IMF and Argentina, 1991–2001—Summary ### A. Economic Developments - Argentina experienced economic stagnation and high inflation between 1975 and 1990: - Real GDP declined 6 percent over the period. - Inflation often above 100 percent. - July 1989 attempt (devaluation and structural reforms) produced early good results but ended in wage increases, speculative attacks and hyperinflation by end-1989. - Government measures included a debt conversion to U.S. dollars, measures to strengthen public finances and privatizations, but depreciation and inflation persisted. - Convertibility Law peg to the U.S. dollar (April 1991) coincided with a relatively long period of growth and stability: - Growth through 1998 was about 6 percent per year. - Fiscal deficits were contained at about 1 percent. - Inflation declined to single digits by 1994 and remained low thereafter. - Argentina performed well after the 1994 Mexican crisis, aided by an adjustment program and favorable external developments (weak U.S. dollar and Mercosur tariff reductions). - Capital inflows (portfolio and FDI) were strong, even shortly after the 1997 Asian crisis. - Vulnerabilities built up because supporting policies for the peg were insufficient: - Small and homogeneous export base; limited trade and economic cycle links to the U.S.; product and labor market rigidities implying adjustment through output contraction. - Fiscal deficits maintained throughout the 1990s (except for 1993). - Off-budget liabilities (notably the pension reform) relaxed the actual fiscal stance. - Reliance on external and foreign-currency denominated borrowing made Argentina vulnerable to sudden stops despite careful maturity management. - Between 1998 and 2000 external shocks and policy slippages raised sustainability concerns and Argentina lost market access: - Capital reversal after August 1998 Russian crisis and increase in the Fed funds rate tightened financing conditions. - Competitiveness affected by lower commodity prices, the 1999 devaluation in Brazil, and U.S. dollar appreciation relative to the euro. - Election-driven fiscal spending in 1999 led to a sharp increase in debt levels. - Argentina lost market access in late 2000 and shifted toward augmented IMF financing. - Response to the crisis in 2001 was erratic and culminated in currency and debt crisis and abandonment of the peg: - Authorities implemented uncoordinated steps with the Fund; banks weakened by allowing government securities to meet reserve requirements. - Peg anchor changed to a dollar/euro basket; heterodox tax exemptions used to restore competitiveness. - A market-based bond exchange (“mega-swap”) improved maturities at high financing costs. - Fiscal strategy late in 2001 focused on an inefficient and unsustainable “zero-deficit” plan. - In December 2001 the Fund withheld further support; under political turmoil Argentina imposed capital controls and a partial deposit freeze and partially defaulted on external debt. - Dual exchange rate briefly used; reunified with an asymmetric asset/liability rate conversion harming the banking sector. - In March (year implied 2002) debt under Argentine law was converted into pesos and exchange rate reached AR$4 per dollar. ### B. Fund Involvement - Argentina was under Fund-supported programs for most months between 1991 and 2001: - July 1991: 12-month SBA to support the peg (SDR 780 million, 56 percent drawn); cut short in March 1992. - March 1992: 3-year EFF arrangement (SDR 2.1 billion), augmented to SDR 4.0 billion (fully drawn) and extended one year to weather 1994 Mexican crisis. - April 1996: 21-month SBA (SDR 720 million, 85 percent drawn). - February 1998: precautionary 3-year EFF arrangement (SDR 2.1 billion, undrawn). - March 2000: 3-year precautionary SBA (SDR 5.4 billion) replaced off-track EFF arrangement. - January 2001 augmentation to SDR 10.6 billion; September 2001 augmentation to SDR 16.9 billion (58 percent drawn). - Program effectively ended with decision not to complete a program review in December 2001. - Missed chances to exit the peg; Fund became supportive of the peg by late 1990s: - Fund initially treated the peg as stabilization device and did not analyze medium-term sustainability fully; concerns existed about appreciation, overheating and inadequate fiscal adjustment. - 1994 provided first window for exit due to real depreciation, but staff had stopped voicing concerns about the exchange rate regime. - 1996–97 was the last low-cost exit opportunity; staff did not pursue it. - Staff temporarily embraced arguments for “full dollarization” and “automatic adjustment.” - Analytical work on exit strategies began only with deepening recession in second half 1999; conclusion then was to boost confidence and competitiveness via fiscal adjustment, structural reforms and official support rather than explore exit costs fully. - The Fund did not convey the extent and urgency of fiscal consolidation required by the peg: - Fiscal targets were regularly missed and accommodated. - Excessive focus on flow variables prevented earlier course correction; impact of off-budget expenditures on debt was underestimated. - Fiscal targets until 1998 were based only on federal side despite comparable provincial spending; limited structural reforms to address weak provincial fiscal controls. - Initial low debt levels and good borrowing masked deficiencies: high share of foreign currency and external debt, elevated spreads, and vulnerability to market sentiment. - Staff did not explore fiscal solvency risks in detail given optimistic growth projections. - Structural reform advice was identified but light-touch approach produced limited progress: - Some tax reform measures in EFF arrangements (1992 and 1998) reduced distortions, but federal-provincial revenue-sharing reform was discussed extensively and not concluded. - Technical assistance on tax compliance could not overcome political and cultural constraints. - Labor market reform did not gain sufficient political support until May 2000. - 1994 social security reform (voluntary fully-funded system) effectively debt-financed; transition costs not fully grasped by authorities and IMF. - Financial system had strong banking supervision and prudential policy, but main vulnerability was exposure to devaluation; staff did not press on this until late 1999. - Fund crisis response under the 2000 SBA did not properly address relevant risks: - Two possible diagnoses: liquidity crisis from temporary confidence shock, or fundamental overvaluation with large debt implications. - Fund adopted catalytic approach in December 2000 package: growth, competitiveness, medium-term fiscal discipline, augmented and frontloaded access, and financing from other official and private sources (a US$40 billion shielding or blindaje package). - Strategy was risky and functioned as a “market test” because official financing did not cover all needs. - Program did not thoroughly address potential external shocks and policy slippages, did not address large current account deficit, and lacked an exit strategy if catalytic approach failed. - Fund doubled down as confidence effect failed and alternatives were not seriously pursued until too late: - Recovery of market conditions was short-lived; fiscal performance slipped and structural reforms were challenged in courts. - Reshufflings in Ministry of Economy led to more heterodox approaches; meeting fiscal targets became increasingly unlikely. - Fund proceeded with and further augmented the program despite deteriorating chances of success and market skepticism. - Factors in decisions included giving benefit of doubt, avoiding blame, and preventing contagion. - Financial risks to the Fund were overlooked; second augmentation completed without a capacity to repay assessment. - Internal task force (mid-1999) discussed alternatives but often dismissed them as too costly without deeper analysis; contingency plan was developed only late 2001. - A “stop-loss” trigger (authorities agreed to consider alternatives if reserves went below Fund credit) was not conveyed to the Executive Board. - By October 2001 staff knew December review requirements would not be met, but discussions on debt restructuring or exchange rate regime did not occur until decision not to complete the review; sudden program exit left no space for dialogue to influence end-of-peg policies. ### C. Lessons and Recommendations - Core shortcomings spanned surveillance, program design, crisis management, and decision-making: - Reluctance to discuss the exchange rate regime and fiscal advice missing key elements of debt dynamics. - Excessive deference to authorities and overemphasis on ownership reduced Fund leverage at critical points. - Programs approved without clear balance of payments need reduced traction and weakened market discipline. - Failure to evaluate alternatives to the confidence-based strategy and delayed Board engagement left inadequate contingency options. - Selected lessons from the IEO evaluation with corresponding recommendations (as summarized in Table A2.1): - Surveillance and Program Design/Relationship - Lessons: - The IMF must exercise firm, candid and routine surveillance over the exchange rate regime to ensure it is consistent with other policies and constraints. - The level of sustainable debt for emerging market economies may be lower than had been thought. - Authorities’ treating an arrangement as precautionary may weaken standards for IMF support. - Ownership is not sufficient if based on misguided or excessively weak policies. - Favorable macroeconomic performance can mask underlying institutional weaknesses. - Recommendations: - Medium-term exchange rate and debt sustainability should form the core focus of IMF surveillance. - The IMF should refrain from a program relationship with a member country without immediate balance of payments need and with serious political obstacles to policy adjustment or structural reform. - Exceptional access should entail a presumption of close cooperation between the authorities and the IMF, possibly with: - mandatory disclosure to the Executive Board of any critical issue or information that the authorities refuse to discuss with (or disclose to) staff or management, and - presumption that the IMF would not endorse publicly measures not subject to prior consultation. - Crisis management - Lessons: - Decisions to support a policy framework involve probabilistic judgment; fallback strategy needed from the outset. - The catalytic approach to resolving a capital account crisis works only under quite stringent conditions. - Financial engineering in voluntary, market-based debt restructuring is costly and unlikely to improve debt sustainability if undertaken under crisis conditions and without a credible, comprehensive economic strategy. - Delaying required action can significantly raise eventual cost of a crisis. - Recommendations: - The IMF should have a contingency strategy from the outset of a crisis, including “stop-loss rules”. - Where sustainability of debt or exchange rate is in question, the IMF should indicate that its support is conditional upon a meaningful shift in the country’s policy. - Decision-making process - Lessons: - Risk analysis, accountability, and predictability must be improved. - Recommendations: - To strengthen the role of the Executive Board, adopt procedures to encourage: - effective Board oversight of decisions under management’s purview; - provision of candid and full information to the Board on all issues relevant to decision making; and - open exchanges of views between management and the Board on all topics, including the most sensitive ones. - IMF shareholders—especially the largest ones—should collectively uphold the role of the Executive Board as the prime locus of decision making in the IMF. - Applicability to the 2018 SBA (selected observations): - Exchange rate/debt sustainability nexus: 2018 SBA again saw exchange rate risk move debt into unsustainable territory despite improved tools. - Catalytic approach: Confidence effect did not materialize under the 2018 SBA; strong fundamentals and sustainable debt and exchange rates remain paramount. - Ownership, precautionary access, and program standards: 2018 SBA also showed Fund deference to Argentinian authorities and reluctance to question assumptions and policy choices. - Fallback strategy and timely action: Internal discussions occurred early in 2018 SBA, but concrete alternative policies were agreed only towards the effective end of the program; Executive Board engagement on a “Plan B” was limited. *Source: Appendix II. The IMF and Argentina, 1991–2001—Summary (IEO Evaluation Report).* ### 2003. The latter aimed to restore macroeconomic stability, comprised structural reforms in the fiscal, ### 1argea2021001 - 2003. The latter aimed to restore macroeconomic stability, comprised structural reforms in the fiscal, ### Macroeconomic performance under the programs - Overall performance "exceeded expectations", with quantitative targets met and growth and inflation outcomes "consistently better than projected". - Contributing factors to overperformance: "a conservatism in forecasts (after the emerging markets crises)", the supportive external sector, and "‘frozen’ utility prices". - Structural reform implementation was "poor", reflecting "lack of ownership and weak implementation capacity", and a "reduced sense of urgency" due to the strong rebound and frontloaded Fund access. ### Fiscal outcomes and composition of adjustment - Rapid revenue growth led by export and financial transactions taxes supported fiscal performance. - Temporary compression of spending occurred on wages and federal pensions. - The additional fiscal space financed a sharp increase in primary spending, particularly on capital goods. - The outcome represented a tightening relative to the September SBA assumptions, but was "short of the compression of primary spending envisaged in the January SBA". - The compression of real wages and pensions began to be unwound in 2004-05. - Increased expenditures made the fiscal stance "significantly expansionary in 2005". - Alternative revenue sources to the distortive export and financial transactions taxes "remained elusive". ### Monetary policy and exchange rate tensions - Monetary policy achieved price stability, allowing reduction in inflation to "low single digits in 2003 and 2004". - Strong money demand and reserve accumulation required target adjustments and facilitated: - liberalization of exchange controls, - lifting of restrictions on bank deposits, - redemption of quasi-monies issued by local governments. - Staff and authorities disagreed on nominal exchange rate flexibility and the objective of monetary policy (exchange rate stability vs price stability). - Authorities argued reserve accumulation would strengthen the external position, stabilize government finances, and aid industrial recovery. - Staff warned that resisting currency appreciation could lead to real appreciation through higher inflation and erode central bank credibility; "price pressures indeed rose steadily during 2005". - Staff pushed for exchange rate flexibility, monetary tightening and productivity-enhancing structural reforms; authorities emphasized price controls, export restrictions, reduction in severance packages, and moral suasion. ### Progress on structural reforms - Progress was "limited and uneven"; most structural conditionality targets were not met. - Protracted negotiations resulted from differences between staff and authorities. - Politically complex reforms requiring provincial coordination and broader social support fell behind. - Mismatch between frontloaded access and backloaded reforms reduced incentives. - Key areas of Fund advice: - Fiscal: - Improve relations between central and provincial governments and pursue tax reform. - Revenue sharing arrangements undermined fiscal discipline and created incentives for distortive non-shared federal taxation. - Bilateral agreements hardening provincial finances were signed but on an ad hoc and voluntary basis. - A fiscal responsibility law was approved but "did not guarantee consistency between provincial budgets and fiscal policy". - A comprehensive tax reform was not implemented, partly due to the gradualist approach and the entrenchment of high-yield export and financial transaction taxes. - Banking: - Broad agreement on weaknesses and scope of reforms; strategy included bank diagnosis and resolution, central bank autonomy, prudential regulation, lender of last resort, public bank reform, and short-term forbearance. - Limited progress during the program; afterwards authorities reached agreements with banks on business plans and compensation for asymmetric "pesoization". - Institutional and public bank reforms continued lagging. - Public services: - Staff deemed reform of the utilities sectors crucial. - The September SBA aimed to grant the executive fast track power for contract negotiation and to establish a general framework law for public services. - Fast track powers were given, but concession renegotiation was slow and controversial. - A general framework was submitted to congress but "not approved by the time of the evaluations". ### Access to Fund financing and reserve outcomes - Program assumed no resumption of market access and large capital outflows (the latter assumption turned out to be pessimistic). - Under those assumptions, access was "too low": reserves would increase by just US$5 billion, and indicators of adequacy (relative to imports and debt obligations) would deteriorate. - Need to safeguard Fund resources influenced access limits because of risks to capacity to repay, credit concentration, and insufficient financial buffers (precautionary balances and burden sharing). - Access kept credit outstanding to the Fund broadly constant at around SDR 10-11 billion, requiring frontloading and lumped repayments in 2007–08. - Despite low access, Argentina accumulated reserves faster than projected; end-2005 reserves were US$16 billion above target. ### Exceptional Access Framework (EAF) and Lending-into-Arrears (LIA) application - The EAF was "observed in procedure but not in spirit". - Two EAF criteria were not clearly met from the outset: - debt sustainability without restructuring (EAC2), - resumption of market access (EAC3). - Flexibility was applied due to provisions for restructuring and inability to make large repurchases. - Several risks to implementation (EAC4) existed, but Argentina received the benefit of the doubt because of "considerable ownership" and personal involvement of President Kirchner. - Decision to grant exceptional access under those conditions undermined confidence building, did not provide medium-term assurances, created moral hazard, and disincentivized preemptive action by other members. - LIA policy application was hampered by lack of a fully quantified medium-term fiscal framework and contentious engagement with creditors: - Neither program contained a fully quantified medium-term fiscal framework (the September SBA had primary surpluses only for 2004). - Differences between authorities and staff on the medium-term surplus; authorities argued a pre-defined path would compromise negotiation position. - Major shareholders pushed for a "market-oriented" approach to debt restructuring with private creditors. - Creditor perceptions: Argentina was "not prepared to negotiate" and authorities' final offer was not the result of collaborative dialogue; authorities claimed they introduced refinements in response to creditor suggestions. - Assessing "good faith" was difficult due to lack of objective indicators and absence of an Executive Board-endorsed primary surplus path, making evaluations of "reasonableness" impractical. ### Lessons and reactions - The September SBA suffered from inconsistent design and, more importantly, lack of ownership. - The January SBA's short-term transitional design was reasonable to retain engagement and contain financial risks to the Fund. - The September SBA failed to reconcile competing concerns, resulting in: - delayed structural reforms, - phasing out of line with balance of payments needs and timing of key measures, - diminished Fund role in debt restructuring negotiations. - Lack of ownership by all branches of government was "fatal for the program". - Lessons relevant to later programs: - Implementation of difficult reforms can be improved by accelerating their pace; gradual phasing can entrench distortions. A similar backloading occurred in the 2018 SBA. - Phasing should be consistent with reform commitments; frontloaded access can reduce incentives for backloaded reforms. The 2018 SBA purchase schedule reflected projected financing needs rather than considerations of Fund policy leverage. - Fund engagement in debt restructuring cases requires a primary surplus path and a medium-term balance of payments need to meet LIA objectives. - Meeting EAF procedures but not its essence can undermine objectives; the 2018 SBA highlighted technical challenges in applying the flexibility of the EAF introduced in the 2016 revision. *Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1argea2021001.pdf* ### Appendix IV. The Authorities’ Views on the ### Appendix IV. The Authorities’ Views on the Ex-Post Evaluation of Exceptional Access Under the 2018 Stand-by Arrangement ### A. Introduction — framing and overall assessment - The Argentine authorities thank the EPE authors and consider the evaluation important but argue it falls short in assessing the 2018 SBA’s flaws and the significant damage the 2018 SBA inflicted on Argentina. - Key contextual figures: - Original SBA approved in June 2018 for US$50 billion (SDRs 35.379 billion), equivalent to about 1,110 percent of Argentina’s quota at the IMF. - SBA had a three-year duration, conditional on fiscal and monetary targets. - The Program had five disbursements and four reviews (of twelve expected). - Initial disbursement: US$15 billion (half for budget support; half to strengthen Central Bank foreign exchange reserves). - IMF augmentation to US$56.3 billion (about 1,277 percent of Argentina’s quota). - Disbursement chronology: - After first review (October 2018): about US$5.7 billion drawn. - Second review (December 2018): additional US$7.6 billion; total since June ~US$28.09 billion. - Third review (April 2019): US$10.8 billion; total since June 2018 ~US$38.9 billion. - Fourth review (July 2019): US$5.4 billion; total disbursed June 2018–July 2019 = US$44.1 billion. - IMF net disbursements for entire 2020 totaled US$46 billion — comparable to what was given to Argentina in about a year. - Authorities’ central claims: - None of the four stated Program pillars were achieved. - The Program was built on flawed premises: neglect of external vulnerabilities; narrow views on inflation and monetary policy; inappropriate emphasis on fiscal consolidation during a deep downturn; failure to recognize limits of catalytic approach; lack of timely capital flow management measures (CFMs) and debt restructuring. - The Program operated under a “one size fits all” logic and amounted to a “political loan” in practice, financing capital flight and privileging short-term market access over medium- and long-term welfare. ### B. Summary of the 2018 SBA and its consequences - Program pillars: restoring market confidence; protecting society’s most vulnerable; strengthening Central Bank inflation-targeting credibility; progressively lessening balance of payments strains. - Chronology and outcomes: - SBA intended to be catalytic and assumed a liquidity, not solvency, problem. - Despite US$50 billion support, the run on the peso continued; SBA reinforced in September 2018 with an additional US$7 billion. - Central Bank authorized to sell up to US$9.6 billion of foreign-exchange reserves (March 2019). - Exceptional measures March–May 2019: utility tariff freeze for remainder of 2019; measures to contain price increases expanded to 60 basic food items. - Primary elections August 2019 signaled strong popular discontent; additional tranche for September 2019 (about US$5.4 billion) was never disbursed. - CFMs reintroduced only after marked deposit-dollarization and large private sector FX purchases; monthly purchases of foreign exchange for non-commercial purposes restricted to US$10,000 per person, later reduced to US$200 per capita after general elections. - Macroeconomic outcomes the authorities emphasize: - EMBI+ index rose by 264 points between agreement establishment and 4th review (from 507 to 771 basis points). - Population below poverty line increased by 8.1 percentage points (from 27.3% in first semester 2018 to 35.4% in same period 2019). - Year-on-year inflation rose by 24 percentage points between June 2018 (29.9%) and July 2019 (53.9%). - Balance of payments improved from US$-8.4 billion in Q2 2018 to US$-1.8 billion in Q2 2019, mainly via exchange rate adjustment and domestic demand contraction. - Residents’ Foreign Asset Formation (FAF) 2015–2019 exceeded US$86 billion; a small group of 100 agents made net purchases for US$24.679 billion; FAF of the 10 main buyers accounted for US$7,945 million. - GDP contraction: -2.6% in 2018 and -2% in 2019. - Commercial sectors: down 4% in 2018 and 7.8% in 2019. - Industry: down 4.8% in 2018 and 6.2% in 2019. - Construction: down 4.3% in 2019. - Agriculture: +23.2% in 2019 (after a 15.6% drop in 2018 driven by severe drought). - Public debt rose substantially as a fraction of GDP while international reserves were depleted; IMF resources effectively financed a capital flight and servicing of private creditors. ### C. The Flawed Premises of the 2018 SBA Program — detailed critiques - Core argument: Program failure derived from ill-founded premises and a diagnosis that ignored Argentina’s specificities. Major defects and evidence: - Neglected external fragility - SBA assumed restoring confidence would restore market access and that Argentina faced liquidity, not solvency, problems. - Capital account liberalization in 2016–2017 produced massive inflows of short-term speculative capital, leaving the economy vulnerable to a sudden stop in 2018. - The SBA downplayed risks of capital account liberalization and the need for capital flow regulations; catalytic success was over-assumed. - The SBA’s front-loaded disbursements (US$44 billion effectively disbursed) supported an open capital account and facilitated capital flight and payment of unsustainable public debt, postponing CFMs and debt restructuring. - Narrow views on inflation and monetary policy - SBA treated inflation as purely monetary and relied on zero growth of the monetary base as a principal tool (policy of zero growth endorsed at first review, October 2018). - Expectations of quick disinflation failed; inflation rose amid large currency depreciation and monetary contraction increased interest rates and implied higher seignorage needs. - Policy presumed steady money demand and rapid pass-through from base control to prices, ignoring strong inertia, dollarization, and indexation in Argentina. - EPE acknowledgement: monetary regimes under the SBA were not robust to dollarization and extensive indexation; rapid pass-through from nominal exchange rate depreciation occurred. - Authorities argue stabilization requires coordinated fiscal, monetary, and income policies to anchor expectations; monetary restraint alone was ineffective and costly. - Neglected pro-cyclical effects of fiscal consolidation - Fiscal and monetary contraction reduced aggregate demand, forced bankruptcies, aggravated recession, worsened debt sustainability prospects, and raised risk premia. - Floating exchange rate plus depreciation increased foreign-currency debt burden and fueled inflation. - EPE note: achieving a targeted debt level of 53 percent of GDP by 2023 would have required more than doubling the fiscal adjustment planned at First Review. - Authorities stress fiscal multipliers likely higher in Argentina, making austerity particularly contractionary. - Conclusion: stabilization requires recovery-supporting (countercyclical) fiscal policy and recovery of real wages; fiscal deficit reduction must not jeopardize recovery. - Regressive tax reform (context prior to and during SBA) - Tax reform December 2017 and measures since 2016 reduced tax progressivity and collection capacity. - Personal property tax changes affected approximately 750,000 taxpayers (2.5% more wealthy of the Economically Active Population). - Corporate income tax rates reduced from 35% in 2017 to 30% in 2019 (planned fall to 25% in 2020 suspended by Social Solidarity Law, December 2019). - Share of progressive taxes on total tax revenues fell; taxes on income, profits and capital gains fell from 6.46% to 5.14% of GDP; property tax fell from 0.32% to 0.15% of GDP. - Treasury resources as share of GDP fell from 20.36% in 2015 to 17.02% and 18.17% in 2018 and 2019 respectively. - Lower tax rates did not spur expected investment and revenues, worsening financing needs and driving deeper expenditure cuts and export taxes. - Over-optimism and limits of the “catalytic view” - Catalytic approach works only under stringent conditions; when debt and exchange rate sustainability are in doubt, voluntary reversal of capital flows is unreasonable. - IMF support may be perceived by private creditors as increasing their protection and thus increase their risk-taking; IMF involvement can be endogenous to investor assessments. - SBA negotiation lacked broad social consultation; 77 representatives rejected the agreement and criticized the Program. - IMF staff were constrained from considering alternative measures that might have better fit Argentina’s needs. - Structural reforms and development strategy - IMF claim that additional market-friendly structural reforms and stronger fiscal consolidation would have prevented failure is rejected by authorities. - Structural reforms as conceived by the IMF reflect an ideological view that undervalues public roles in productive policy, human capital, infrastructure, financial deepening. - Authorities argue Argentina needs: - Expansion of tradable goods supply and diversification of productive system. - Higher investment in critical activities supported by productive policies. - Development of a deep domestic-currency capital market to reduce currency mismatches and domestic investors’ demand for foreign currency. - Reestablishment of local currency debt market and broader peso options to address currency mismatches and foster domestic savings. - Lip service to governance and gender equity policies - Governance: - IMF staff judged administration’s institutional capacity strong (IMF, 2018; p.32), but authorities report little governance progress. - Financial Intelligence Unit (FIU) and General Justice Inspection (GJI) did not meaningfully advance anti-money-laundering or oversight; no enabling legislation was introduced. - IGJ issued resolutions that eliminated or restricted control mechanisms over companies, trusts, and legal entities; AML compliance became formal rather than substantive. - Anticorruption Office objectives lacked follow-through; no registry or validation of compliance programs, no serious conflict-of-interest investigations. - Gender equity: - Gender policies were treated as part of social protection rather than a cross-cutting axis; no studies, diagnostics, or strategies to analyze differential gender impacts were produced. - No gender-specific indicators or monitoring were included in fiscal evaluation criteria or social assistance spending metrics; commitments lacked targets and monitoring indicators. - Authorities characterize governance and gender commitments as political flagships without concrete implementation. ### D. Conclusion — lessons and forward-looking recommendations - Broad lessons the authorities draw: - IMF-supported program frameworks require revising program success definitions; market access alone is an inadequate and potentially misleading metric of success. - Exceptional access and large Fund financing should be evaluated against social and economic sustainability, not solely portfolio holdings by international investors. - Programs must avoid serving as tacit political support for incumbent administrations’ policy choices; programs should not be structured to preserve chosen policy models at the expense of national welfare. - Timely debt reprofiling and appropriate CFMs and macroprudential policies are crucial to restore sustainability and avoid financing capital flight. - Ownership must be defined broadly: programs should secure support from Congress, civil society, unions, political parties, and society at large—not be confined to executive branch consent. - Authorities note submission (and House approval on February 11th 2021) of the “Ley de Fortalecimiento de la Sostenibilidad de la Deuda Pública” to make congressional approval mandatory for future IMF-supported programs. - Policy directions and recommendations emphasized by the authorities: - Revise IMF program premises to account for external fragility, dollarization, indexation, and the multifaceted nature of inflation. - Avoid overreliance on zero-growth monetary-base rules; combine monetary and fiscal tools with coordination policies (including income policies where appropriate) to anchor expectations. - Recognize and avoid pro-cyclical fiscal consolidation in deep downturns; prioritize countercyclical measures to sustain recovery and real wages. - Implement CFMs and macroprudential policies as permanent features to minimize destabilizing short-term portfolio flows while allowing orderly unwinding consistent with reserve rebuilding. - Pursue timely debt restructuring/reprofiling when necessary to restore public debt sustainability and allow fiscal policy space. - Promote productive, tailor-made policies to expand tradable goods supply, diversify the productive structure, stimulate investment (including via targeted incentives), and deepen domestic-currency capital markets. - Ensure governance and gender-equity commitments are backed by measurable targets, diagnostics, legislation, and monitoring—not only declaratory language. - Final assessment in authorities’ view: - The 2018 SBA failed to achieve its four pillars, financed capital flight and private creditor servicing, and imposed long-lasting economic and social damage. - For the IMF to be effective in the post-Covid world, it must revise institutional culture and program premises, embrace diverse technical views, and adopt a more demanding and inclusive notion of program ownership. *Argentine authorities’ views as presented in Appendix IV. The Authorities’ Views on the Ex-Post Evaluation of Exceptional Access Under the 2018 Stand-by Arrangement* ### References ### References ### Cited literature - Furceri, D., and Loungani, P. (2015). Capital Account Liberalization and Inequality. IMF Working Papers 15/243, International Monetary Fund. - Furceri, D., and Loungani, P. (2018). The distributional effects of capital account liberalization. Journal of Development Economics, 130: 127-144. - Giannini, C., Cottarelli, C. (2002). Bedfellows, Hostages, or Perfect Strangers? Global Capital Markets and the Catalytic Effect of IMF Crisis Lending. IMF Working Paper WP/02/193. - Guajardo, J., Leigh, D., and Pescatori, A. (2011). Expansionary Austerity: New International Evidence. IMF Working Paper WP/11/58. - Habermeier, K., Kokenyne, A., and Baba, C. (2011). The Effectiveness of Capital Controls and Prudential Policies in Managing Large Inflows. IMF Staff Discussion Note SDN/11/14. - IEO (2016). The IMF and the Crises in Greece, Ireland and Portugal: An Evaluation by the Independent Evaluation Office. - IEO (2018). Report on the Evaluation of the Role of the IMF in Argentina, 1991–2001. - IEO (2020). IMF advice on capital flows: evaluation report 2020. - IEO (2021). Growth and adjustment in IMF-supported programs. - IMF (2015). Review of Crisis Programs. - IMF (2018). Request for Stand-By Arrangement - press release and staff report. IMF Country Report No. 18/219. - IMF (2021). IMF Mission Team Statement on Argentina. March 25th. Available in: https://www.imf.org/en/News/Articles/2021/03/25/pr2186-argentina-imf-mission-team-statement-on-argentina - Kose, A., Prasad, E., Rogoff, K., and Wei, S. (2009). Financial Globalization: A Reappraisal. IMF Staff Papers, 56(1): 8-62. - Ostry, J., Ghosh, A., Habermeier, K., Chamon, M., Qureshi, M., Reinhardt, D. (2010). Capital Inflows: The Role of Controls. IMF Staff Position Note SPN/10/14. ### Statement by Sergio Chodos, Executive Director for Argentina and Bernardo Lischinsky, Senior Advisor to Executive Director (December 22, 2021) — Authorities’ Views: key findings and statistics - Purpose of the statement: - Discuss the Ex-Post Evaluation Report of Exceptional Access Under the 2018 Stand-By Arrangement (EPE) and the derailed 2018 SBA program. - Provide Authorities’ Views to inform a successor program and avoid past mistakes. - Overview of economic impacts attributed to the 2018 SBA: - GDP contracted in 2018 and 2019 by -2.6 percent and -2.0 percent, respectively. - Commercial activity decreased by -11.8 percent and industrial activity decreased by -11 percent; agriculture grew by 7.6 percent (noted as having no incidence on employment). - Resources of the Treasury: reduced from 20.36 percent in 2015 to 17.02 percent in 2018 and 18.17 percent in 2019. - Unemployment: 7.61 percent in 2015 (female unemployment 8.68 percent) and 9.84 percent in 2019 (female 10.7 percent). - Population below the poverty line increased by 8.1 percentage points (from 27.3 percent in the first semester of 2018 to 35.4 percent in the same period of 2019). - Gini coefficient: 41.6 in 2014 and 42.9 in 2019. - Per capita income: US$ 13,789.1 in 2015 to US$ 9,912.3 in 2019. - Program design, scale, and disbursements: - Original SBA approved June 2018 for US$50 billion (SDRs 35.379 billion), about 1,110 percent of Argentina’s quota; described as the largest loan by the Fund to a single country in its history. - Program duration: supposed three-year; conditional disbursements contingent on fiscal and monetary targets. - Five disbursements and four reviews (of twelve expected). - Initial disbursement: US$15 billion (half for budget support, half to strengthen Central Bank foreign exchange reserves). - IMF augmentation to increase access to US$56.3 billion (about 1,277 percent of Argentina’s quota). - Timeline of purchases/disbursements: - After first review (October 2018): additional equivalent of about US$5.7 billion. - December 2018 (second review): additional equivalent of US$7.6 billion; total about US$28.09 billion since June. - April 2019 (third review): equivalent of US$10.8 billion; total about US$38.9 billion since June 2018. - July 2019 (fourth review): disbursement of US$5.4 billion; total final disbursements from June 2018 to July 2019: US$44.1 billion. - Comparative IMF activity: during the COVID-19 pandemic the Fund assisted 87 countries and provided debt relief for 29 for a total of circa US$ 160 billion; IMF net disbursements for the entire 2020 totaled US$ 46 billions — noted as an amount equivalent to what was given to Argentina during the course of a year. - Assessment of program objectives and outcomes (four pillars): - Four pillars: restoring market confidence; protecting society’s most vulnerable; strengthening credibility of Central Bank’s inflation targeting; progressively lessening strains on balance of payments. - None of the objectives of the four-pillar Program were achieved. - Specific outcome metrics: - EMBI+ index: grew by 264 points between establishment of the SBA agreement and the 4th review (from 507 to 771 basis points). - Year-on-year inflation: increased by 24 percentage points between signing in June 2018 (29.9 percent) and the fourth review in July 2019 (53.9 percent). - Balance of payments: improved from US$ -8.4 billion in Q2 2018 to -1.8 billion in Q2 2019 — improvement primarily attributed to exchange rate adjustment and contraction of domestic demand reducing import demand. - Poverty increase: from 27.3% to 35.4% between first semester 2018 and same period 2019 (increase of 8.1 percentage points). - Residents’ Foreign Asset Formation (FAF) between end-2015 and implementation of CFMs in 2019: reached over US$ 86 billion; noted concentration of wealth with a small group of 100 agents making net purchases for US$ (sentence truncated in source). - Authorities’ diagnosis of program failures and underlying premises: - Program conceived under ill-founded premises; prioritized financing of foreign asset formation and bailing out private creditors over welfare. - Program rested on flawed assumptions: neglect of external vulnerabilities; narrow views on inflation and its drivers; excessive emphasis on fiscal consolidation during a deep downturn; inappropriate definition of program ownership. - Characterized as following a “one size fits all” logic that failed to account for Argentina’s specific economic, social, and political idiosyncrasies. - IMF staff reportedly disagreed with the then Argentine authorities on need for debt operation to restore public debt sustainability and on capital flow management measures; Fund’s decision supported authorities’ position, resulting in lack of debt restructuring and continued disbursements that financed capital flight. - Authorities view the program as having elements of a “political loan” that may have supported electoral chances of the incumbent Administration. - Policy and institutional recommendations and lessons: - Strengthen IMF institutional culture to better accommodate alternative views and diverse opinions to improve program design and effectiveness. - For Argentina, a path to sustainable long-term growth should include: - Gradual fiscal consolidation based on genuine growth of economic activity. - Tackling inflation as a multi-causal problem that cannot be addressed by monetary policy alone. - Policies to improve Argentina’s tradable sector performance. - Strengthening local currency capital markets. - Starting point for any new program should be a revision of the premises on which IMF recommendations were based, with policy choices respecting budgetary and external constraints to guarantee long-term sustainable recovery. - Recognize political uses of IMF programs, revise programs’ definition of success, and reconsider the meaning of real ownership. - Chronology and policy responses during the program and after: - SBA signed June 2018 in response to sudden stop in capital flows. - SBA reinforced September 2018 with additional US$7 billion; funds used to meet scheduled debt payments. - March 2019: IMF authorized Central Bank to sell up to US$ 9.6 billion of foreign-exchange reserves to support exchange rate. - March–May 2019: exceptional measures introduced (freeze of utility tariffs for remainder of 2019; measures to contain price increases for mass consumption goods expanded to 60 basic food items). - Primary elections August 2019: strong popular discontent; additional tranche for September 2019 (~US$5.4 billion) was never disbursed. - After primaries and general elections: private sector foreign exchange purchases accelerated; large drop in dollar deposits; authorities reintroduced Capital Flows Management measures (CFMs), including capital controls: - Required producers to surrender export proceeds on short notice. - Monthly purchases of foreign exchange for non-commercial purposes restricted to US$10,000 per person (later reduced to US$200 per capita after general elections). ### Conclusions emphasized by the Authorities - The Program failed to restore confidence and market access; output contracted and inflation increased while public debt rose as a fraction of GDP. - The Program’s outcomes demonstrate limits of a catalytic approach to capital account crises and the endogenous effects of IMF-supported programs on investor confidence. - The Authorities call for IMF reform in program design, implementation, and governance to avoid repetition of similar outcomes in future crises. *Source: 1argea2021001 - References* ### 24.679 billion. In turn, the FAF of the 10 main buyers accounted for US$ 7,945 million. ### 1argea2021001 - 24.679 billion. In turn, the FAF of the 10 main buyers accounted for US$ 7,945 million. ### Macroeconomic performance (2018–2019) - GDP contraction during 2018 and 2019 was -2.6% and -2%, respectively. - Sectoral year-on-year real changes: - Commercial sectors: down 4% in 2018 and 7.8% in 2019. - Industry: down 4.8% in 2018 and 6.2% in 2019. - Construction: down 4.3% in 2019. - Agriculture: +23.2% in 2019 (noted as following a 15.6% drop in 2018 due to severe drought, generating a very low comparison base). - Progressive reduction of the fiscal deficit met Arrangement targets but coincided with increases in poverty and unemployment, the latter reaching double digits in the first half of 2019. - FAF of the 10 main buyers accounted for US$ 7,945 million. - Aggregate figure referenced: 24.679 billion. ### Major critique: The Flawed Premises of the 2018 SBA Program - IMF and Argentine authorities assumed fiscal and monetary contraction would restore market confidence; instead, policies exacerbated the crisis. - Four reviews were passed: October 2018, December 2018, May 2019, and July 2019. - The authorities argue the Program financed a massive formation of foreign assets and bailed out private creditors, favoring other interests over medium- and long-term welfare. ### Neglected external fragility - The 2018 SBA ignored risks from building external fragility and assumed restored confidence would reestablish market access despite deteriorating tradable sector performance and rising debt ratios. - Capital account liberalization consequences cited: - Favored massive inflow of short-term speculative portfolio capital in 2016-2017. - Left the economy vulnerable to a sudden stop, which materialized in 2018. - Increased exchange rate volatility, fueling inflation. - The Program’s front-loaded disbursements: - US$ 44 billion effectively disbursed, which helped sustain an open capital account during 2018 and most of 2019 and is described as having misused IMF resources by allowing capital flight at convenient rates and payment of unsustainable public debt, postponing capital controls and debt restructuring. - References to relevant literature and IEO findings noting risks of rapid removal of capital account restrictions and limitations of the catalytic approach. ### Narrow views on inflation and monetary policy - The SBA treated inflation as a purely monetary phenomenon to be curbed solely with monetary instruments. - Inflation targeting framework was abandoned shortly after SBA approval, but exclusive reliance on monetary policy continued. - Policy of zero growth of the monetary base was established and endorsed by the first review (October 2019). - Outcomes observed: - Inflation escalated quickly in the context of a large currency depreciation. - Contractionary monetary policy led to sharp increases in interest rates, implying higher seignorage would be needed to meet consolidated public sector budget constraints. - Real money balances fell and cost of credit rose, creating additional contractionary impulse and aggravating the recession. - EPE assessments cited: - “Inflation increased during the Program, driven mostly by persistently high inflation expectations, peso depreciation, and wage increases. This suggests that the targeted reduction in inflation was not feasible: the monetary policy regimes under the SBA were not robust to the challenges of dollarization and extensive indexation, as shown by the rapid pass-through from the nominal exchange rate depreciation that followed the sudden stop.” (IMF, 2021b; p.23) - The high degree of indexation and other rigidities posed a challenge to inflation targeting; income’s policies (tripartite wage agreements with quid-pro-quo on taxes and administered prices) were evaluated but ultimately not considered suitable (IMF, 2021b; 39). - Conclusion: Monetary restraint alone was unlikely to succeed due to Argentina’s inertial inflation, indexation, and need for coordinated fiscal-monetary and income policies to anchor expectations. ### Neglected pro-cyclical effects of fiscal consolidation - Fiscal and monetary contraction reduced aggregate demand, forced many indebted firms into bankruptcy, worsened debt sustainability, undermined social conditions, and increased uncertainty. - Program established a floating exchange rate that, via depreciation, increased foreign-currency debt burdens and fueled inflation. - EPE finding: “Achieving the originally targeted debt level of 53 percent of GDP by 2023 would have required more than doubling the size of fiscal adjustment planned at the time of the First Review” (IMF, 2021b; p. 33). - Observations: - Fiscal multipliers likely higher in Argentina given widespread poverty and low access to credit, implying larger contractionary effects of fiscal austerity. - The Program presumed “expansionary fiscal contraction” in a recession—a premise the text argues is highly unlikely with high capital mobility and unsustainable debt burdens. - Debt reprofiling and capital controls were introduced very late; delaying these measures limited the scope for fiscal policy to address debt vulnerabilities. - Policy implication: A successor refinancing program should allow recovery to continue and combine countercyclical fiscal policy with recovery of real wages; fiscal deficit reduction must be paced so as not to jeopardize economic recovery. - On CFMs and macroprudential policies: - Unwinding CFMs must be consistent with the pace at which foreign exchange reserves are rebuilt. - Not all regulations should be avoided; macroprudential policies should be a permanent feature to minimize destabilizing effects of short-term portfolio capital flows and prevent dilapidation of foreign exchange. ### Regressive tax reform - Tax measures since 2016 and a tax reform (December 2017) reduced tax system progressivity and undermined revenue-raising capacity. - Measures and impacts: - 2016: gradual reduction of personal property tax rates; elimination of increasing marginal rates; suspension of application for three years for people not entering the 2016 Tax Amnesty Law. - Approximately 750,000 taxpayers are subject to Personal Property Tax, representing the 2.5% more wealthy of the Economically Active Population. - Corporate income tax reduced from 35% in 2017 to 30% in 2019 (planned fall to 25% in 2020 was suspended by Social Solidarity Law in December 2019). - Resulting shifts in tax revenue composition: - Taxes that tax income, profits and capital gains fell from 6.46% to 5.14% of GPD between 2015 and 2019. - Property tax revenue fell from 0.32% to 0.15% of GDP. - Treasury resources fell from 20.36% in 2015 to 17.02% and 18.17% in 2018 and 2019, respectively. - The reform was intended to improve the primary balance via lower tax rates assuming higher investment and production, but produced greater underfinancing and required deeper public expense reductions; part of the gap was covered by export taxes applied to all goods and services. ### Over-optimism and limits of the “catalytic view” - The “catalytic approach” assumed IMF support would restore private investor confidence and voluntary reversal of capital flows; evidence and IEO work indicate this works only under stringent conditions and is unlikely when debt and exchange rate sustainability are in doubt. - Perception issues: - IMF debt may be perceived by private creditors as increasing risk rather than reducing it, especially where political consensus is lacking. - The Argentine 2018 SBA was negotiated without broad social discussion and without National Congress debate: 77 representatives rejected the agreement and sent a letter criticizing the Program. - IMF staff constraints and inability to consider certain measures led to a set of measures that did not fit the Program’s purpose, closed policy space, and limited investment in achieving SBA pillars. *Source: IMF content provided in the supplied PDF chapter/section.* ### 3.5 Structural reforms ### 3.5 Structural reforms ### Critique of IMF-style structural reforms - The SBA between Argentina and the IMF "failed to restore financial markets’ confidence, and the sharp contraction in economic activity undermined public debt sustainability." - IMF position: had the previous Administration adopted additional "market -friendly" structural policies and a stronger fiscal consolidation, the Program would not have failed. - Definition of "structural reforms" in this context: policies that seek to boost the supply side by removing obstacles to the functioning of goods and factor markets, accompanied by a social safety net "to minimize the negative impacts on those segments of the population that cannot participate from the benefits of the reformed economy." - Authority critique: this stance reflects an ideological view that market economies should "aspire" to the paradigm of perfect markets and that state intervention is limited to correcting static "market failures"; this view "ignores that markets do not work in a vacuum but rather in environment that are shaped by power." - Historical assessment: "there is no direct link between the implementation of IMF recommendations and the exit of crises." While some structural reforms may produce positive effects, past reforms' benefits "were overstated and their risks minimized" and resulted in "a massive transfer of risk to the most vulnerable" (examples: 2001 crisis and the 2018 SBA). ### Alternative view of development and policy priorities - A healthy economy is not necessarily a "reformed" economy under the IMF's conventional criterion. - Priority factors for growth and social conditions include: - accumulation of human capital (spending in health and education), - expansion of trade, - improved infrastructure, - financial deepening. - These outcomes "can be achieved in a myriad of ways, with very different degrees of public-sector involvement," and should consider "the specific needs associated with Argentina's economic and social structure." - Ultimate answer to social problems: "not transfer schemes, but job creation through inclusive and sustainable economic growth." - Argentina needs "tailor made initiatives and policies that address the particularities of our social and economic structure." ### Supply of tradable goods and productive policies - Argentina needs to "expand its supply of tradable goods." - Problem statement: "In an economy that lacks an adequate growth in the supply of tradable goods, its overall macroeconomic performance cannot be satisfactory." - Required strategy: - diversify the productive system, - increase the rate of investment in critical activities to overcome the external constraint that periodically suffocates growth. - Rationale: only an economic structure that "leaves behind the external constraint, generates enough foreign exchange and has market access" can sustain steady growth with creation of formal employment for the majority. - Policy mix to develop these sectors: - stimulate additional investment via correct incentives, including productive policies (because "the correct incentives may not be fully provided by free markets"), - ensure macroeconomic stability. - Acknowledgement: "Profit rates between sectors do not adequately reflect the social benefits of the different economic activities, and not all the sectors that Argentina needs can progress without support." - Productive policy stance: "The question is not whether governments should engage in productive policy, but how to do it right." ### Domestic currency capital market development - A "deep and stable domestic currency capital market is also critical for development." - Benefits: - Overcomes limited profitable investment options in domestic currency and helps avoid channeling excess liquidity into pressure on the exchange rate. - Reduces demand for foreign currency. - Increases domestic savings, critical to promote growth while minimizing volatility. - Policy implication: reestablishing the local currency debt market and widening peso-denominated options for domestic investors are essential to address currency mismatches and foster domestic investment and sustainable growth. ### Final findings on structural reforms - Structural reforms, as envisaged by the SBA, were insufficient and at times counterproductive to Argentina's needs. - Emphasis on market-access‑oriented metrics neglected core structural constraints and social implications. *Source: 1argea2021001 - 3.5 Structural reforms (excerpt)* ### 3.6 Lip service to governance and gender equity policies ### Overview - At presentation, the agreement included conditions "aimed at improving institutions and protecting the most vulnerable," with particular emphasis on governance and gender equity. - Argentine authorities' view: these banners were raised to generate political consensus but "in practice no concrete progress was made." ### 3.6.1 Absence of governance improvements — findings - Governance improvements were considered crucial for exceptional access criteria; staff assessment claimed: "The administration is committed to prudent policy making, transparent government, and a strong governance framework. Staff deems the administration's institutional capacity and technical competence to be strong and fully able to deliver the core elements of the expected reform program." (IMF, 2018; p. 32). - Empirical assessment of institutions: - Financial Intelligence Unit (FIU): expected to be strengthened and adapt to FATF best practices; "no legislation was introduced in that regard to the National Congress." - FIU performance: "lacked initiative in critical areas," abandoned pursuit of several judicial cases initiated prior to 2016, had "a scarce exercise of its power to file complaints," and reduced intensity of supervision on registered regulated entities, especially in the financial sector. - General Justice Inspection (IGJ): during the agreement, guidelines for control and oversight over companies, trusts and legal entities were deregulated; main Resolutions "eliminated or restricted all the control mechanisms" — preventing effective knowledge of companies or trusts operating in the City of Buenos Aires; AML compliance was "only formal" and inconsistent with best practices. - Anticorruption policies: no dissemination, implementation, or control actions; "no registry or validation of compliance programs, no training, permanent communication or empowerment policies, and no serious investigation of conflicts of interest related to public officials." - A participatory process for a new law on Ethics in the Public Service did not receive political support to reach parliamentary treatment; Anticorruption Office objectives were "denied by its political superiors." - Net result: "lack of action and deregulation were the common denominator" in governance during the period. ### 3.6.2 Absence of gender equity improvements — findings - Gender equality was treated under the same umbrella as social protection and poverty, not as a crosscutting policy axis. - Gender equity and social protection were used as political flagships without implementation: - No studies diagnosing women's situation or the differential gendered impact of the crisis. - No strategy for implementing policies to improve women’s situation or monitor actions. - Program design failures: - quantitative criteria, goals, and consultation clauses did not consider a gender perspective; - "there were no specific indicators within the dimension of 'spending on social assistance' ... as part of evaluation criteria of fiscal objectives"; - "there was also no data or diagnosis that served as an initial reference point"; - "no compliance indicators for gender goals, nor were there any monitoring indicators." - Memorandum commitments regarding gender equity "lacked targets and monitoring indicators." - Conclusion: "lip service was paid to governance reform and gender equity, no real effort was made to turn these ideals into reality." *Source: 1argea2021001 - 3.6 Lip service to governance and gender equity policies (excerpt)* ### 4. Conclusion — lessons and key statistics ### Central lessons for IMF program design and evaluation - Need for introspective analysis of the definition of success: success is often qualified as recovery of market access, equating market signals with program success is flawed. - Market access is only one dimension; the IMF should weigh market demands against broader social and economic success criteria. - Critique of market-access metric in 2018 SBA: compliance was judged by significant holdings of local paper by international investors, despite domestic-currency portfolio investors being a source of instability and exploiting carry trades. - Failure to diagnose and change strategy: Argentina had lost market access by May 2018 and had not regained it; yet reviews repeatedly assessed that policies would become successful instead of recognizing failure. - Monetary policy and market-access politics: - Failure to admit Program ineffectiveness "served the purpose of tacitly justifying the unwarranted monetary contraction" leading to unconscionable interest rates. - Avoiding a debt operation maintained policy design attached to high interest rates to sustain perception of "market access." - Political use of the Program: - Program design focused on continuing to finance the previous Administration's policy priorities and avoiding debt restructuring and CFMs reintroduction. - Structure of the Program was "upside down": main objective became maintaining chosen policies with IMF financing rather than efficiently addressing balance of payments crisis. - Financial outcome and capital flight (exact figures preserved): - "Between May 2018 and until strict exchange controls were established in October 2019, close to US$ 44.5 billion were disbursed." - "These funds sustained a capital flight from the private sector, which reached US$ 45.1 billion from May 2018 to October 2019." - Note: "only four months after the first disbursement of US$15 billion, international reserves had returned to the previous level." - Concern that a portion of formed foreign assets "may have been located in tax havens." - Program ownership critique: - "Ownership" of the 2018 SBA was narrow—custom tailored by the prior Administration—but lacked broader societal ownership (Congress, civil society, unions, political parties, society at large). - Recommendation: adopt a more demanding notion of ownership that includes program support from Congress, civil society, unions, political parties and society at large. - Institutional reform example: submission to National Congress of "Ley de Fortalecimiento de la Sostenibilidad de la Deuda Pública," approved by the House of Representatives on February 11th 2021, making Congressional approval mandatory for any future IMF-supported program agreement — a measure aimed at strengthening national ownership and preventing unilateral deals with multigenerational consequences. *Source: 1argea2021001 - Sections 3.5, 3.6, and 4 (excerpts)* --- _Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1argea2021001.pdf_