## 1argea2022003 ## Source details **Canonical URL:** [1argea2022003](https://www.imf.org/-/media/files/publications/cr/2022/english/1argea2022003.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1argea2022003.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1argea2022003.pdf.json) --- ### Executive summary — context and program objectives - Episodes of domestic policy uncertainty and acute market pressures in mid-2022, coupled with a more challenging global environment, required firmer program implementation to ensure macroeconomic stability, rebuild policy credibility, and safeguard program objectives. - Initial decisive actions by the new economic team since early-August started to stabilize markets, but the situation remains fragile: reserve coverage is low and inflation is unanchored at multi-year highs. - Review focused on assessing recent progress, updating the macroeconomic framework, and agreeing on a policy package to restore stability and achieve program objectives. - Program’s key objectives related to the primary fiscal deficit, monetary financing of the deficit, and net international reserves remain unchanged over 2022–2023; near-term quarterly targets are proposed to be modified to reflect higher-than-programmed inflation and earlier setbacks. ### Recent developments and macroeconomic dynamics - Market and financial conditions: - FX and domestic bond markets: gap between parallel and official rate rose to over 150 percent in July; later declined to a range of 90-110 percent. - BCRA interventions: intervened heavily in futures and secondary bond markets (amounting to 1½ percent of GDP) and sterilized liquidity injections; reserves fell by over US$2 billion during the period. - Real yields on two-year inflation-indexed bond jumped to 20 percent in mid-July. - Activity and demand (S1:2022): - Real GDP grew by 6.5 percent y/y. - Private consumption up 10.8 percent y/y cumulative through June. - Investment up 14.8 percent y/y cumulative through June. - Public expenditure expanded by 11 percent y/y through end-June. - Output over 10 percent above pre-pandemic levels; output gaps virtually closed. - External balance and reserves (Jan–Aug 2022): - Import volume growth: 18.7 percent y/y. - Export volumes fell 1.6 percent. - Real exchange rate appreciated an additional 12 percent since end-2021. - Since June, importers required to seek 180-days trade financing in USD for any imports 5 percent above their 2021 imports; agriculture sector financing horizon 90 days for intermediate goods. - Inflation and money demand: - Headline inflation: averaged over 5 percent m/m in Q2:2022; jumped to 7.4 percent m/m in July; fell to 7.0 percent m/m in August. - Core inflation: 6.8 percent m/m in August. - Real base money balance through August 2022 fell by 18.3 percent (y/y). - Base money reached 5 percent of GDP (lowest levels since 2023). - Financial sector: - Banks’ capital buffers: 27.8 percent (end-June). - System-wide NPLs: 3.2 percent. - Bank exposure to public sector: 50 percent of banking system assets. - Private sector loans: 6.8 percent of GDP; down 0.4 percent y/y in real terms in August. - Private sector peso deposits: down 2.0 percent y/y in real terms. ### Program performance through end-June and end-September - End-June outcomes: - Most end-June quantitative program targets were met, except the floor on net international reserves (missed by US$296 million). - Primary fiscal deficit through end-June: ARS 800 billion (1 percent of GDP), about ARS 50 billion below adjusted target. - Stock of domestic arrears at end-June: ARS 485 billion (roughly ARS 127 billion below ceiling). - Continuous performance criteria on exchange restrictions and MCPs: non-observance due to policy setbacks and measures adopted. - All three end-June structural benchmarks were met. - End-September outcomes (preliminary): - Cumulative change in NIR through end-September: US$4.6 billion versus adjusted program floor of US$3.6 billion (driven by soy liquidation scheme). - Central bank financing at end-September: ARS 620 billion (below program ceiling ARS 665 billion). - Central bank stock of non-deliverable futures narrowed to US$3.1 billion by end-September (below program ceiling US$9 billion). - Publication of National AML/CFT Strategy met end-September structural benchmark. ### Key policy measures implemented - Fiscal measures: - Strengthened expenditure controls, reduced arrears, improved targeting of subsidies and social assistance. - Containment of the wage bill including hiring freeze extension to public companies. - Cumulative real public spending growth moderated to 7 percent y/y in August (down from 14 percent y/y in May). - Monetary and FX measures: - Since end-July, BCRA raised policy interest rates by 2,300 basis points in annual nominal terms; monthly equivalent policy rate at 6.3 percent m/m (107 percent annual effective). - Policy rate above end-year inflation expectations and model-based reference rate. - Rate of crawl raised to about 6.0 percent m/m. - Domestic debt management: - Short-term government securities priced consistently above monetary policy (LELIQ) rates; net market financing goals met; discontinued BCRA financing of fiscal deficit for remainder of year. - Voluntary debt exchanges (e.g., “Bono Dual”) converted August–October 2022 maturities into June–August 2023 maturities. - Net financing raised since July: ARS 820 billion (about 1 percent of GDP); rollover ratios above 200 percent. - Reserve accumulation measures: - Temporary one-month scheme (ending September 30) to incentivize soy stock liquidation allowed BCRA to purchase US$3.3 billion in FX reserves since early September; soy sold at preferential ARS 200 per USD (roughly 40 percent above official rate), with Treasury issuing a dollar-linked bond to BCRA (gives rise to MCP). - Other measures: - Efforts to contain services balance deterioration, mobilize MDB and bilateral financing, strengthen customs enforcement, and encourage FDI in key sectors. ### Program risks, capacity to repay, and exceptional access assessment - Program risks: very elevated. - Global downside risks: protracted war in Ukraine; stronger-than-anticipated tightening in global financial conditions; sudden reversal in the terms of trade. - Domestic risks: high implementation risk given complex economic, social, and political situation, especially ahead of October 2023 Presidential Elections. - Fund enterprise risks remain significant. - Capacity to repay: - Argentina’s capacity to repay Fund obligations subject to very high risks and hinges on strong policy implementation, reserve rise, and resumption of market access by repayment time. - Fund debt service obligations would remain very large: around 6.2 percent of exports, or 11 percent of gross reserves, with Fund credit outstanding declining only gradually below 6 percent of GDP by 2027. - Exceptional access (EA) criteria — staff judgment: - Criterion 1 met: exceptional balance of payments pressures. - Criterion 2 met: debt is sustainable but not with high probability; adequate safeguards assessed to be in place. - Criterion 3 met: prospects of regaining market access judged feasible (re-access starting 2025 feasible under program). - Criterion 4 met: prospect of policy success contingent on decisive implementation; risks high given political opposition within ruling coalition. ### Macroeconomic outlook and baseline projections (selected) - Real GDP growth: - 2022 projected to expand by 4 percent (unchanged). - 2023 projected to moderate to 2 percent. - Medium-term growth projected at 2 percent per year. - Inflation (end of period): - 2022 revised to 90-100 percent (about 30 percentage points higher relative to first review). - 2023 projected 46.0-54.0 percent (point projection elsewhere: annual end of period inflation of 60 percent under a scenario where m/m falls to around 3½ percent by end-2023). - External and reserve projections: - External current account 2022 estimated deficit of 0.3 percent of GDP (from surplus 0.5 percent projected earlier); projected surplus 0.6 percent of GDP in 2023. - Cumulative NIR expected to remain unchanged at US$9.8 billion during 2022-23, with US$5 billion projected by end-2022. - Change in net int’l reserves (US$bn): 2022 5.8; 2023 5.0. - Fiscal projections: - Primary fiscal balance (% of GDP): 2022 -2.5; 2023 -1.9. - Underlying adjustment of 0.9 percent of GDP in 2023. - Monetary financing (% GDP): 2022 1.0; 2023 0.8. - Baseline table highlights (selected ranges and figures): - GDP growth (avg, %): 2022 [3.5 - 4.5], 2023 [2.5 - 3.5] - Inflation (eop, %): 2022 [90.0 - 100.0], 2023 [46.0 - 54.0] - Monetary base (% of GDP): 2022 6.5; 2023 6.5 ### Debt, financing plans, and DSA findings - Public debt path (selected): - Federal government debt (percent of GDP): 2021 80.9; 2022 76.0; 2023 69.5; 2024 69.6; 2025 70.0; 2026 67.1; 2027 63.8. - Gross financing needs and debt service (selected): - GFNs (percent of GDP): 2021 18.2; 2022 17.3; 2023 15.5; 2024 12.6; 2025 14.4. - IMF debt service (US$ millions) series and amortization schedules detailed in tables (staff projections include large Fund-related service needs). - DSA summary assessment: - Final assessment: "Sustainable but not with high probability". - Overall risks of sovereign stress: High. - Medium-term risks: Moderate; Long-term risks: High. - Assessment predicated on steadfast implementation of prudent macroeconomic policies and resumption of international market access in 2025. - SRDSF macro and financing assumptions (selected): - Real GDP growth: 4.0 percent in 2022; 2 percent in 2023; potential growth 2 percent. - Inflation (eop): rise to 90-100 percent in 2022; around 60 percent in 2023 in one projection; then decline over 2024–2026. - BCRA transfers limited to 0.8 percent of GDP in 2022; 0.6 percent of GDP in 2023; zero from 2024. ### Structural reforms, benchmarks, and conditionality - Structural priorities and proposed SBs: - Strengthen revenue compliance and administration (comprehensive compliance gap analysis; CRM established; risk management unit to be created). - Publish strategy to improve sustainability and efficiency of energy sector (SB reset from end-September to end-December 2022). - Issue resolutions to reach full cost recovery for electricity and gas for consumers with greatest capacity to pay (end-January 2023 SB). - Preparatory work to improve personal wealth taxation and property valuation updates (reset to end-March 2023). - Publish enhanced quarterly reports for public corporations and trust funds (end-March 2023 SB). - MTDS completion by end-December 2022 (SB) and establish Committee for the Development of the Capital Markets. - Energy subsidy segmentation scheme (Box 2 highlights): - Expected energy subsidy savings: 0.6 percent of GDP in 2023. - Residential consumer segmentation: High income ~20 percent, Middle-income ~30 percent, Low-income ~50 percent. - Middle-income consumption thresholds: electricity 400kw/month; gas 70 percent of average past consumption. - Implementation supported by RASE database; access to FX limited for individuals receiving subsidized energy to improve compliance. - Domestic bond market actions (Box 3 highlights): - Two-year CER-linked bond yields rose from around 1 percent in early-June to over 20 percent in mid-July; inflation-indexed instrument yields decreased by 600 bps on average since July. - Voluntary exchange introduced “Bono Dual” (maturing June–August 2023) with exchange rate and inflation protection. - Financing program 2023 assumes new net debt placements around 2½ percent of GDP; net peso financing goal about 2½ percent of GDP in 2023. ### Policy recommendations and staff appraisal (main points) - Macroeconomic policy tightening essential to durably strengthen stability and avoid disorderly adjustments: - Moderate fast-growing domestic demand and imports. - Support gradual reduction in inflation through sustained positive real policy rates. - Improve reserve coverage for market access and unwinding of FX controls. - Fiscal policy: - Adhere to primary fiscal deficit targets of 2.5 percent of GDP in 2022 and 1.9 percent in 2023. - Improve budget management, reprioritize spending, and protect key infrastructure investments. - Improve targeting of subsidies (energy, transport, water) and rationalize social assistance while safeguarding vulnerable groups. - Monetary and FX policy: - Consistent application of enhanced monetary and FX framework to deliver sustained positive real interest rates and increase demand for peso assets. - Avoid substituting FX restrictions for underlying macro adjustments; seek gradual easing of exchange restrictions and MCPs as conditions permit. - External financing and debt: - Mobilize support from MDBs and bilateral partners; continue engagements with Paris Club creditors. - Structural agenda: - Strengthen public financial management, combat tax evasion and money laundering, deepen domestic debt market, and boost net export potential in strategic sectors. - Contingency planning: - Given very limited policy space and elevated risks, contingency planning and agile policy adjustment essential. ### Program monitoring, waivers, and requests - Authorities requested: - Completion of the financing assurances review. - Approval of exchange restrictions and MCPs under Article VIII sections 2 and 3 (on grounds temporary and for balance of payments reasons). - Waivers of nonobservance for continuous PCs related to exchange restrictions and MCPs; staff supports waivers given temporary nature and planned corrective actions. - Modifications of end-September and end-December 2022 nominal PCs on primary fiscal balance and stock of domestic arrears to accommodate higher inflation; modification of end-December PC on monetary financing and on accumulation of NIR consistent with preserving cumulative targets through end-2023. - Monitoring provisions and data requirements detailed in TMU: daily/weekly/monthly reporting deadlines, program exchange rates (e.g., Argentine Pesos to the US dollar 1/107.93), inflation point estimates for program PCs (95 percent in 2022 and 60 percent in 2023), and adjustors for NIR and project financing. *International Monetary Fund — EXECUTIVE SUMMARY (1argea2022003)* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - Episodes of domestic policy uncertainty and acute market pressures in mid-2022, coupled with a more challenging global environment, necessitated firmer program implementation and stronger policy reaction to ensure macroeconomic stability, rebuild policy credibility, and safeguard program objectives. - Initial decisive actions and strengthened commitments by the new economic team since early-August have started to stabilize markets, although the situation is fragile as reserve coverage remains low while inflation is unanchored and stands at multi-year highs. - The review discussions focused on: assessing recent progress; updating the macroeconomic framework; and reaching understandings on a solid policy package to durably restore stability and achieve the program objectives. ### Program performance - Most end-June quantitative program targets were met, with the exception of the floor on net international reserves, which was missed due to higher-than-programmed import volume growth and delays in external official support. - Inflation has been substantially higher than projected. - Policy setbacks and uncertainties resulted in a period of market stress, contributing to a non-observance in the continuous performance criteria related to exchange restrictions and multiple currency practices. - Corrective actions are underway to ensure durable achievement of program objectives, and progress continues on structural benchmarks; revisions to timelines will be required due to recent cabinet changes and incorporation of technical assistance recommendations in areas including revenue compliance and energy policy. - Updates of the end-September performance criteria, which govern this review, will be reported in a Staff Supplement. ### Program risks - Program risks remain very elevated. - Global downside risks highlighted include: - a protracted war in Ukraine; - stronger-than-anticipated tightening in global financial conditions; - a sudden reversal in the terms of trade. - Domestic risks include high implementation risk given the very complex economic, social and political situation, especially as the October 2023 Presidential Elections draw closer. - Rebuilding policy credibility will require time, consistent effort, and strong political support. - The Fund continues to face significant enterprise risks. ### Recent developments and macroeconomic dynamics - Market disruption began in late-June against a backdrop of tightening global financial conditions and domestic policy uncertainties. - FX and domestic bond markets: - The gap between the parallel and official rate rose to a record high of over 150 percent in July. - The BCRA intervened heavily in futures markets; reserves fell by over US$2 billion during the period, in tandem with resident withdrawals of FX bank deposits. - Real yields on the two-year inflation indexed bond jumped to 20 percent. - The BCRA intervened in the secondary bond market in the amount of 1½ percent of GDP and sterilized liquidity injections through issuance of its own securities. - Activity and demand (S1:2022): - Real GDP grew by 6.5 percent y/y. - Private consumption was up 10.8 percent y/y cumulative through June. - Investment was up 14.8 percent y/y cumulative through June. - Public expenditure expanded by 11 percent y/y through end-June. - Output levels already over 10 percent above pre-pandemic levels; output gaps virtually closed with unemployment and manufacturing idle capacity at multi-year lows. - External balance and reserves (Jan–Aug 2022): - Import volume growth reached 18.7 percent y/y. - Export volumes fell 1.6 percent. - The real exchange rate appreciated an additional 12 percent since end-2021. - Since June, importers are required to seek 180-days trade financing in USD for any imports 5 percent above their 2021 imports levels; for the agriculture sector the financing horizon is 90 days when importing intermediate goods. - Policy actions by the new economic team have begun to yield improvements: the gap between official and parallel rates has declined, reserves are being rebuilt, and BCRA intervention in futures and government securities markets has diminished. ### Policy discussion — Key measures implemented - Fiscal measures: - Strengthened expenditure controls and reduced arrears. - Improved targeting of subsidies and social assistance (see Box 2 referenced). - Containment of the wage bill, including extending a hiring freeze to public companies. - Cumulative real public spending growth moderated to 7 percent y/y in August, down from 14 percent y/y in May. - Monetary and FX measures: - Since end-July, the BCRA raised policy interest rates by 2,300 basis points in annual nominal terms, bringing the monthly equivalent policy rate to 6.3 percent m/m (107 percent in annual effective terms). - The policy rate is above end-year inflation expectations and the program’s model-based reference rate. - The rate of crawl was raised to about 6.0 percent m/m to limit further appreciation of the exchange rate. - These actions supported a reduction in the FX gap and an unwinding of BCRA intervention in the futures market. - Domestic debt management: - More proactive pricing of short-term government securities consistently above monetary policy (LELIQ) rates. - Aimed to meet net market financing goals while discontinuing BCRA financing of the fiscal deficit for the remainder of the year. - These actions led to a sharp fall in bond yields and restricted additional BCRA intervention in the secondary domestic debt market. - Reserve accumulation measures: - A temporary one-month scheme (ending September 30) to incentivize liquidation of soy stocks allowed the BCRA to purchase US$3.3 billion in FX reserves since early September. - Under the scheme, soybeans and derivatives sold for exports benefit from a preferential rate of ARS 200 per USD, roughly 40 percent above the official rate; to compensate the BCRA, the Treasury will issue a dollar-linked bond to the BCRA. This measure gives rise to a multiple currency practice under the Fund’s jurisdiction. - Other actions: efforts to contain the deterioration in the services balance, mobilize financing from MDBs and bilateral creditors, strengthen customs enforcement, and encourage foreign direct investment in key sectors. ### Policy recommendations - More decisive program implementation is essential to reduce uncertainties, rebuild policy credibility, and maintain the program as an anchor. - Tight macroeconomic policies are necessary to: - secure key program targets; - gradually moderate domestic demand; - tackle high persistent inflation; and - avoid a disorderly adjustment. - Fiscal consolidation should include improved budget management, and policies to improve targeting of subsidies (energy, transport, and water) and social assistance, while protecting key infrastructure investments. - Monetary and FX policy: - More consistent and resolute application of the enhanced monetary and FX policy framework is needed to deliver sustained positive real interest rates, support a gradual moderation in inflation, increase demand for peso assets, and reduce reliance on central bank financing. - External financing and debt: - Continue efforts to mobilize support from multilateral and bilateral partners and reach agreement with Paris Club creditors. - Structural agenda: - Strengthen public financial management. - Strengthen frameworks to combat tax evasion and money laundering (supported by international exchange of information agreements). - Strengthen the net export potential of strategic sectors. - Exchange restrictions and multiple currency practices: - Since they are no substitute for addressing underlying macroeconomic imbalances, a gradual easing of these restrictions should be sought as conditions permit. ### Program requests and commitments - The program’s key objectives—related to the primary fiscal deficit, monetary financing of the deficit, and net international reserves—remain unchanged over the period 2022 to 2023. - Modification of near-term quarterly targets is being proposed, reflecting higher than programmed inflation (for the primary fiscal balance, monetary financing of the fiscal deficit, and the stock of domestic arrears) and earlier setbacks (in the case of net international reserves). - The authorities request: - completion of the financing assurances review; and - approval of the exchange restrictions and multiple currency practices under Article VIII sections 2 and 3. - The program proposes new and modified structural benchmarks. *International Monetary Fund — EXECUTIVE SUMMARY (1argea2022003)* ### 7. However, the external position remains fragile and inflation pressures remain strong. ### 7. However, the external position remains fragile and inflation pressures remain strong. ### External position - The gap between the parallel and official rate remains high and in the range of 90-110 percent. - Recent peso injections from the liquidation of soy stocks resulted in some added pressures on the gap. - Net international reserves (NIR) after excluding swap lines and reserve requirements on FX deposits stand at around US$2 billion (equivalent to somewhat less than one month of imports), with liquid reserves in negative territory. - International Reserves (US$bn) (Estimates as of September 23, 2022, at program rates): - Gross Reserves: 39.7 (End-2021), 43.2 (End-Mar), 38.7 (Latest) - Swap lines: 23.4, 23.6, 23.6 - Res. Req. on FX Deposits: 12.1, 11.5, 11.3 - Other: 1.8, 1.8, 1.8 - Net reserves: 2.3, 6.3, 2.0 - Gold: 3.2, 3.8, 3.9 - SDRs: 1.1, 6.8, 1.8 - Liquid reserves: -1.9, -4.4, -3.6 ### Inflation and money demand - After averaging over 5 percent m/m during Q2:2022, headline inflation jumped to 7.4 percent m/m in July. - Headline inflation fell to 7.0 percent m/m in August. - Core inflation stood at 6.8 percent m/m in August. - Inflation expectations remain unanchored. - Real base money balance through August 2022 fell by 18.3 percent (y/y). - Base money reached 5 percent of GDP, its lowest levels since 2023. - Projections: - End of period annual inflation for 2022 revised up to 90-100 percent (about 30 percentage points higher relative to the first review). - Inflation projected to fall from around 5 percent m/m by end-2022 to around 3½ percent m/m by end-2023 (equivalent to an annual end of period inflation of 60 percent). - Significant upside risks to inflation persist due to high inertia, unanchored expectations, and policy actions to correct relative price misalignments. ### Financial sector and banking system - As of end-June, banks maintained strong capital buffers: 27.8 percent. - System-wide NPLs: 3.2 percent (low and declining). - Bank exposure to the public sector: 50 percent of banking system assets (within regulatory limit), mainly from increased holdings of LELIQs and longer-term BCRA securities. - Private sector loans: 6.8 percent of GDP; down 0.4 percent y/y in real terms in August. - Private sector peso deposits: down 2.0 percent y/y in real terms. - Financial sector balance sheet risks remain contained. ### Program performance (through end-June) - Compliance with key revised program commitments through end-June was not durable; corrective actions underway. - Fiscal: - Revised end-June performance criteria (PC) on primary fiscal balance and stock of domestic arrears were met. - Primary fiscal deficit through end-June: ARS 800 billion (1 percent of GDP), about ARS 50 billion below the adjusted target. - Stock of domestic arrears: ARS 485 billion, roughly ARS 127 billion below the established ceiling. - Compliance occurred against rising domestic arrears (especially to the energy sector) in the final weeks of June. - Domestic expenditure arrears fell from around ARS 800 billion at end-June to around ARS 530 billion in mid-September; average quarterly arrears already well below the first review program end-September target of ARS 612 billion. - Monetary and reserves: - End-June PC on central bank financing of the federal government: ARS 435 billion (program ceiling ARS 476 billion; 0.6 percent of GDP) — met. - Indicative target on the stock of central bank non-deliverable futures — met. - PC on the floor on NIR was missed by US$296 million due to weaker-than-expected trade balance and delays in official budget support (exceeding program adjustor of US$500 million). - Buildup in reserves in late June reversed during July/August as FX market pressures intensified. - Temporary FX incentive to encourage liquidation of soy exports contravenes the Fund’s policy on Multiple Currency Practices (MCPs). - Efforts underway to boost FX purchases, mobilize additional official support, and achieve end-September target. - Structural benchmarks: - All three end-June structural benchmarks (SBs) were met: 1. Preparation of an action plan to enhance financial and budget reporting of national public sector entities. 2. Modification of resolutions to set prioritization and selection criteria for investment projects ahead of the 2023 Budget. 3. Publication of a plan to streamline the reserve requirements system. - Several SBs proposed to be reset (examples and timeline changes): - Develop a plan to strengthen revenue compliance: from end-August to end-2022. - Publish a strategy to improve the sustainability and efficiency of the energy sector: from end-September to end-2022. - Update property tax valuations: from end-September to end-March 2023. - Evaluation of social support programs and roadmap to gradually unwind FX controls reset to end-March and end-June 2023, respectively. ### Macroeconomic outlook and risks - Real GDP growth: - Projected to expand by 4 percent in 2022 (unchanged from first review). - Projected to moderate to 2 percent in 2023. - Medium-term growth projected at 2 percent per year, consistent with Argentina’s average over the past 20 years. - External balance: - External current account for 2022 estimated to weaken to a deficit of 0.3 percent of GDP (from a surplus of 0.5 percent projected at first review). - Current account projected to improve to a surplus of 0.6 percent of GDP in 2023. - Cumulative NIR expected to remain unchanged at US$9.8 billion during 2022-23, with US$5 billion projected by end-2022. - Fiscal: - Primary fiscal deficit for 2022 assumed to reach 2.5 percent of GDP. - Primary fiscal deficit for 2023 assumed to narrow to 1.9 percent of GDP. - Underlying adjustment of 0.9 percent of GDP in 2023, achieved primarily through measures to strengthen targeting of subsidies and social assistance. - Annual financing mix for 2022-23 generally unchanged; somewhat higher rollover rate on domestic debt of 130 percent (vs.125 percent at first review). - Monetary financing of the fiscal deficit projected to fall from 0.8 percent of GDP in 2022 to no more than 0.6 percent of GDP in 2023. - Baseline table highlights (selected): - GDP growth (avg, %): 2022 [3.5 - 4.5], 2023 [2.5 - 3.5] - Inflation (eop, %): 2022 [90.0 - 100.0], 2023 [46.0 - 54.0] - Primary fiscal balance (% of GDP): 2022 -2.5, 2023 -1.9 - Current account balance (% GDP): 2022 -0.3, 2023 0.6 - Change in net int’l reserves (US$bn): 2022 5.8, 2023 5.0 - Monetary base (% of GDP): 2022 6.5, 2023 6.5 - Monetary financing (% GDP): 2022 1.0, 2023 0.8 - Program risks: - Global downside risks: (i) a protracted war in Ukraine; (ii) stronger-than-anticipated tightening in global financial conditions; (iii) sudden worsening in terms of trade. - Domestic risks: limited external buffers, weak policy credibility, potential new bouts of market volatility if reserves are not rebuilt or confidence in domestic government bond market is undermined. - Political/timing risks ahead of October 2023 Presidential Elections (spending and wage pressures, difficulties implementing subsidy and social assistance reforms, securing domestic debt rollover rates). - Contingency planning and agile policy adjustment essential given very limited policy space. ### Policy discussion and recommendations - A further tightening of macroeconomic policies is essential to durably strengthen stability and avoid disorderly adjustments. - Steadfast implementation of tight macroeconomic policies needed to: - Moderate fast-growing domestic demand and imports. - Support gradual reduction in inflation. - Achieve a stronger trade surplus. - Improve reserve coverage for medium-term international market access and unwinding of FX controls. - Fiscal consolidation necessary to safeguard debt sustainability and restore confidence in domestic debt market. - Continued implementation of enhanced monetary and FX policy framework to complement inflation, competitiveness, and reserve objectives. - Measures to improve targeting of subsidies critical to reduce distortions from relative price misalignments and improve budget structure. - Recent market interventions and FX controls adopted to arrest disorderly market conditions will need to be unwound as conditions permit. ### A. Fiscal policies — 2022–2023 priorities and measures - 2022 objective: Restore fiscal order and achieve 2.5 percent of GDP primary deficit target. - Actions: improve cash and budget management, reprioritize spending, maintain existing nominal budgetary spending ceilings (modified in June Emergency Decree). - Measures being supported by: - Improve targeting of subsidies (energy, water and transport). - Rationalize social assistance and public sector wage bill. - Bring forward a portion of next year’s corporate tax income (yields projected small in 2022: 0.1 percent of GDP). - 2023 objective: Meet primary deficit target of 1.9 percent of GDP. - Draft 2023 budget submitted to congress incorporates conservative revenue assumptions and expenditure-based credibility measures. - Underlying adjustment estimated at 0.9 percent of GDP (income from inflation-linked debt operations worth 0.3 percent of GDP in 2022 excluded in 2023). - Policies underpinning 2023 adjustment include: - Reductions in subsidies: 0.5 percent of GDP, largely in the energy sector. - Rationalization of social assistance: 0.7 percent of GDP (unwinding emergency bonuses, reducing overlaps, incentivizing labor market entry). - Continued restraint on public sector wages (freeze in public sector hiring), transfers to provinces and SOEs, adherence to pension indexation formula. - Special care required to manage current spending given frontloaded infrastructure spending and 2023 Presidential Election non-recurrent costs (0.15 percent of GDP). - Expenditure management and quality: - Energy subsidies: tariff segmentation scheme to eliminate electricity and gas subsidies for residential users with greatest payment capacity in three stages (September and November 2022, and January 2023); final resolutions to reach cost recovery expected in January 2023 (proposed end-January 2023, SB). - Middle-income consumers to pay full cost for electricity and gas above thresholds; subsidies for commercial users significantly reduced in 2023 and fully eliminated by 2024. - Social assistance: comprehensive evaluation of income-support programs to improve efficiency and targeting (end-December 2022, SB; reset to end-March 2023, SB). - Pensions: spending projected to decline as share of GDP in 2023 but remain 35-40 percent of all federal government spending; Ministry of Labor-led study to identify reform options (end-December 2022, SB). *Source: IMF staff report excerpt (chapter/section).* ### 16. Continued efforts to improve expenditure and budget controls will also support fiscal ### 16. Continued efforts to improve expenditure and budget controls will also support fiscal ### Expenditure and budget controls - Action plan developed to enhance financial and budget reporting of national public sector entities (beyond the National Administration) and strengthen monitoring, governance, and prioritization of investment projects (both end-June 2022, SBs). - Next steps: - Establish a framework to strengthen controls over Treasury transfers to public corporations/trusts and modernize oversight through enhanced information requirements. - Publish enhanced quarterly reports for public corporations and trust funds, including a breakdown of assets and liabilities, and execution of public investment funded by transfers and earmarked taxes (proposed end-March 2023, SB). - Strengthen procurement practices by updating the regulatory framework and improving monitoring mechanisms. - Investment project selection criteria (starting with the 2023 budget) will prioritize ongoing projects and, among the major projects, those with pre-feasibility or feasibility studies. ### Revenue mobilization (medium-term priority) - Revenue administration: - Need to combat tax and customs evasion via strengthened information exchange, international cooperation, and improvements in revenue administration capacity and efficiency. - Finalize a comprehensive compliance gap analysis for key taxes and develop an action plan for segmentation of the taxpayer base (missed end-August 2022 SB; reset to end-December 2022, SB). - Risk Management committee (CRM) in the tax administration established in August; creation of a new risk management unit expected before end-2022. - Revenue policy: - Review costly corporate tax incentives. - Strengthen property tax collection and conduct preparatory work to improve personal wealth taxation (bienes personales), including connecting provincial cadasters and property tax registers with federal tax-payers’ identification numbers, initially for the Greater Buenos Aires Metropolitan Area (end-September 2022, SB; modified and reset to end-March-2023, SB). - Additional conditionality in these areas may be considered in future reviews. ### Financing strategy (domestic and external) - Domestic debt market strategy: - Enhanced domestic debt market strategy has mobilized net financing and mitigated rollover risks but increased maturity and currency risks, and built up amortizations ahead of the Presidential Elections (June-August 2023). - Critical actions: - Build cash buffers (including by increasing frequency of short-term issuances). - Resume issuance of longer-term securities as conditions allow to push rollovers into 2024. - Expand the investor universe through the Committee for the Development of the Capital Markets. - Implement a well-coordinated annual borrowing plan. - Develop a medium-term debt strategy (MTDS) (end-December 2022, SB). - Net peso financing goal: about 2½ percent of GDP in 2023, dependent on fiscal consolidation and enhanced monetary and FX policy framework. - External financing: - Shortfalls in external official financing through the first half of the year reached US$0.9 billion. - Budget support and project financing commitments expected on a net basis to reach US$2.3 billion in 2022 and US$1.8 billion in 2023. - Maintain good faith efforts to reach agreement with Paris Club creditors on repayment schedule for legacy obligations consistent with debt sustainability, repayment capacity, and reserve accumulation goals. - Assumption: re-access to international capital markets assumed to start gradually in 2025. ### Monetary and exchange rate policies - Monetary policy framework: - Maintain tightening bias guided by enhanced framework based on actual core inflation and forward-looking measures, and broader market and reserves dynamics. - Sustain positive real policy rates; continue pricing Treasury securities above policy rates and maintain a narrow corridor on monetary policy instruments. - Strengthen transmission of policy rates to deposit rates via unwinding regulated bank deposit and lending rates and gradual reduction in the number of special reserve requirements, considering capital and liquidity positions of banks. - Support for reserve accumulation: - Sustained positive real interest rates encourage demand for peso assets and permit the rate of crawl to move in line with or above inflation, improving external competitiveness and supporting reserve accumulation. - Tight fiscal policy required to moderate demand and anchor devaluation and inflation expectations. - Avoid intervention in parallel markets; use intervention in non-deliverable futures markets (indicative target) only to address disorderly FX market conditions. - Key indicators (Sep-22): - Monetary policy rate 6.3 - Inflation reference rate 1/6.0 - Core inflation (3-mo-ma)6.4 - Inflation expectations (avg, 3-mo ahead) 2/5.7 - Official rate of crawl6.0 - Devalutation expectations (avg, 3-mo ahead) - NDF market8.8 - Market expectation 2/5.2 - Notes: - 1/ Combines backward-looking core inflation measures along with a model-based forecast of inflation. - 2/ Based on BCRA survey of end-August 2022. - Central bank balance sheet: - Recent interventions increased sterilization needs. - Stock of central bank securities stands near historic highs at close to 10 percent of GDP. - Carrying cost of these securities is expected to rise to around 4 percent of GDP in 2022. - BCRA to conduct an assessment of its balance sheet with IMF technical assistance and develop a strategy to gradually strengthen its balance sheet and financial soundness based on internationally recognized accounting standards (end-December 2022, SB). - Strategy will include a conditions-based approach for the unwinding of government securities recently purchased by the BCRA. ### FX measures and capital flow management - FX restrictions and incentives adopted since end-June resulted in non-observance of continuous performance criteria related to exchange restrictions and multiple currency practices. - Measures include financing requirement on imports (introduced in March) extended to broader goods and some services, expansion of general requirements to access FX market, and favorable FX rates on soy exports and tourists. - Advance income tax withholdings on credit card payment overseas raised from 35 to 45 percent. - Additional measures being considered to limit services imports and increase FX debt flows. - Concerns: - Such measures create multiple currency practices, add distortions, and can be counterproductive. - Gradual easing of FX restrictions should be sought as conditions permit and reserve coverage strengthens. - A working group established to develop a roadmap for a conditions-based easing of CFMs (end-December 2022, SB; reset to end-June 2023, SB). ### Other structural policies - Regulatory frameworks: - Work intensified to advance legislation and regulations to encourage investment and net exports in strategic sectors—hydrocarbon, mining, agro-industry, automotive, hydrogen and biotechnology industries—subject to level playing field and minimized fiscal/regulatory burdens. - Energy sector: - Construction of the Nestor Kirchner gas pipeline remains cornerstone to boost domestic energy production and reduce costly energy imports starting in mid-2023. - First phase expected to be completed by end-June 2023, supporting an increase in the daily supply of domestically-produced gas of 11 million cubic meters. - National electricity strategy being developed with World Bank support to: - Improve energy efficiency by tackling consumption inefficiencies and reducing losses in the distribution sector. - Expand generation capacity for hydroelectricity and other renewables. - Enhance distribution and transmission segments. - Strengthen financial sustainability of the sector. - Published draft strategy and detailed plan to improve implementation of the tariff segmentation scheme expected by end-year (end-September 2022, SB; modified and reset to end-December 2022, SB). - AML/CFT: - National risk assessment of money laundering adopted and consolidated with updated terrorist financing assessment. - Amendments to Law 25.246 submitted to Congress; gap analysis against FATF’s 40 Recommendations completed. - Next steps: - Incorporate key results of the gap analysis into amended AML/CFT legislation and relevant regulations in consultation with IMF staff. - Financial Intelligence Unit to prepare resolutions to facilitate prompt and full implementation once legislation is approved. - Publish National AML/CFT Strategy (end-September 2022, SB), including recommendations to mitigate identified risks, vulnerabilities, and threats. ### Program issues, targets, and benchmarks - Letter of Intent (LOI) and Memorandum of Economic and Financial Policies (MEFP) describe authorities’ progress and commitments; updates to end-September performance criteria to be reported in a Staff Supplement. - Quantitative targets and requests: - Waivers of nonobservance for continuous PCs related to exchange restrictions and MCPs, recommended for approval under Article VIII, and for one measure on temporariness as it will be removed as of the Board meeting date. - Waivers of applicability for end-September PCs on fiscal data not available. - Modifications of end-September and end-December 2022 PCs (nominal) on primary fiscal balance and stock of domestic arrears to accommodate higher-than-expected inflation; modification of end-December 2022 PC on monetary financing of the fiscal deficit. Modifications consistent with keeping program objectives unchanged over 2022–2023. - Modification of end-December 2022 PC on accumulation of NIR to account for more challenging external environment while preserving cumulative reserve accumulation targets through end-2023 (defined in US$). - New PCs proposed for relevant indicators for March/June 2023 (previously ITs); new ITs proposed for September/December 2023. - Definitions and adjustors: - Revision proposed to primary fiscal deficit target definition to exclude non-tax revenues related to gains from reopening inflation-linked securities from revenues in 2023 (see TMU ¶5). - NIR adjustor on cumulative cap on official non-project loans and grants raised to $750 from $500 to reflect lumpy disbursements. - Starting with end-December 2022 target, NIR accumulation target to be reduced downward by payments to Paris Club creditors relating to outstanding debt reprofiled in 2014. - Structural benchmarks (four new SBs proposed to support fiscal consolidation and budget transparency): - Publish strategy for improving sustainability and efficiency of the energy sector (not met end-September 2022, SB; modified and reset to end-December 2022, SB). - Issue resolutions to reach full cost recovery for electricity and gas for consumers with greatest capacity to pay (end-January, 2023 SB). - Conduct preparatory work to improve personal wealth taxation, including establishment of a database (not met end-September 2022, SB; modified and reset to end-March 2023, SB). - Publish enhanced quarterly reports for public corporations and trust funds (end-March, 2023 SB). - Three additional SBs proposed for resetting to incorporate technical assistance recommendations, including plans to: strengthen revenue compliance (not met end-August 2022 SB; reset to end-December 2022, SB); improve efficiency and targeting of social spending (end-December 2022, SB; reset to end-March 2023, SB); and prepare a roadmap to streamline and gradually ease CFMs (end-December 2022, SB; reset to end-June 2023, SB). - Financing assurances and projections: - Firm financing commitments secured from official creditors over the next 12 months. - Net financing from MDBs projected to reach US$2 billion from September 2022 to September 2023 (World Bank, IADB, CAF). - Paris Club legacy debt at US$2.4 billion at end-July 2021; negotiations resumed with a view to reach a deal in coming months. - Baseline assumes financing commitments from other bilateral creditors of roughly US$0.4 billion per annum during 2022-24 (compared to US$0.6 billion per annum at time of first review). - Program-period projected cumulative trade surpluses: US$39 billion. - Program-period projected net FDI inflows: US$27 billion. - Projected accumulation of international reserves (program definition) of roughly US$15 billion, with CFMs playing a supportive role. *Source: 1argea2022003 - 16. Continued efforts to improve expenditure and budget controls will also support fiscal* ### 32. Capacity to repay. Argentina’s capacity to repay its Fund obligations remains subject to ### 1argea2022003 - 32. Capacity to repay. Argentina’s capacity to repay its Fund obligations remains subject to ### Capacity to repay — key findings - Argentina’s capacity to repay its Fund obligations remains subject to very high risks and continues to hinge on strong policy implementation to enable a rise in international reserves and eventual resumption of market access by the time repayments to the Fund come due (Table 12). - The proposed revisions to the baseline do not alter staff’s assessment of Argentina’s capacity to repay. - Full implementation of the EFF would help address the balance of payments need arising from the large obligations due to the Fund related to the 2018 SBA in 2022-23 and the current EFF. - Fund debt service obligations would remain very large over the medium term: - around 6.2 percent of exports, - or 11 percent of gross reserves, - with Fund credit outstanding declining only gradually below 6 percent of GDP by 2027. ### Jurisdictional issues and exchange restrictions - Argentina has introduced additional measures that give rise to new exchange restrictions/MCPs or the intensification/modification of currently existing measures subject to Fund approval under Article VIII, Section 2(a), and 3 (see Annex II). - Intensification of exchange restrictions stems from: - the mandatory financing requirement of imports (initially on specific goods, subsequently extended to all goods and service imports), and - expansion of general requirements for access to the FX market. - New MCPs arise from: - authorization for tourists visiting Argentina to sell USD at the parallel exchange rate up to a certain threshold, and - a decree creating a temporary facility to liquidate during September 2022 the FX proceeds from the exportation of soybean products at a favorable exchange. - These measures resulted in nonobservance of performance criteria on: - non-imposition/intensification of restrictions on making payments and transfers for current international transactions, and - non-introduction/modification of MCPs. ### Arrears policy — status of negotiations and amounts - Staff assesses the authorities are continuing to make good faith efforts under the Fund’s Lending into Arrears policy to resolve arrears to: - external private creditors that did not participate in the 2005/10 debt exchange or did not settle under the terms provided in 2016 and those to which there is debt outstanding from the 2001 default — US$2.5 billion total; - Mobil Exploration — negotiations remain underway on a repayment plan on principal claims — US$196 million. - Other arrears not related to official-sector involvement: - Yacyreta (binational Paraguayan and Argentine entity) — amount of undisputed claims for energy provided has been reduced to US$9.7, and full payment is expected before end-2022; - French export credit agency — US$30 million, where the Courts of appeals is currently considering an appeal to the Argentine Supreme Court. ### Safeguards assessment and follow-up - The 2022 Update Safeguards Assessment recommended strengthening governance arrangements and operational independence through legal reform, and transition to International Financial Reporting Standards (IFRS). - Following an assessment of the BCRA’s balance sheet, staff will engage with the authorities to develop a roadmap for implementing the recommendations, which could be integrated as conditionality in future reviews. - Owing to the electoral calendar, legal reform is unlikely to be feasible before 2024. ### Exceptional access (EA) — staff assessment summary - Staff assesses Argentina continues to satisfy the four criteria for exceptional access, premised on decisive and full implementation of agreed baseline policies. Risks remain exceptionally high. - Criterion 1 (exceptional balance of payments pressures): staff judges this criterion as met. - Argentina is experiencing exceptional balance of payments pressures on the financial account, in the context of low net international reserves, despite tight CFMs and trade surpluses (recently narrowing). - Meeting very large external debt service obligations during 2022–24 will require Fund financial support beyond normal access limits and broader international community support. - Criterion 2 (debt sustainability analysis): staff judges this criterion as met. - Under the revised baseline and policy framework, staff assesses Argentina’s public debt is sustainable but not with high probability (see Annex I). - Adequate safeguards are assessed to be in place to meet EA2. - In the event of adverse shocks, staff assesses that there would be sufficient restructurable FX debt to the private sector potentially available after the program to improve debt sustainability and enhance safeguards for Fund resources. - This assessment is subject to exceptionally high risks and hinges critically on: - implementation of the proposed fiscal consolidation path, - enhanced monetary and FX policy framework, - efforts to strengthen the domestic peso debt market, - efforts to encourage net exports and foreign direct investment. - Projected debt and debt service metrics remain above the indicative targets set out in the March 2020 Staff Technical Note on Public Debt Sustainability; margins to maneuver remain extremely limited and have further shrunk since the first review. - Criterion 3 (prospects of regaining market access): staff judges this criterion as met. - Despite shortfalls in reserve accumulation and external bond prices trading at near-distressed levels, decisive policy implementation should help restore confidence and allow Argentina to gradually regain access to international private capital markets starting in 2025. - Obligations to the Fund begin in late 2026; regaining access by 2025 on a scale that would enable repayment is judged feasible under the program’s policy package and financing plan, which assumes continued domestic peso financing and some net support from other official creditors. - Improvement in reserve coverage is expected to be underpinned by sustained trade surpluses, increased foreign direct investment, and limited financial outflows. - Assessment remains subject to a high degree of uncertainty. - Criterion 4 (prospect of policy success and capacity to implement): staff judges this criterion as met. - Authorities reinforced commitment to program policies; appointment of Minister Massa with an expanded portfolio may improve policy coordination and implementation. - Recent strong actions taken on fiscal, monetary, and subsidy policy fronts and submission to Congress of a draft 2023 budget consistent with the Fund program are cited as evidence (prior action). - A faction within the ruling coalition continues to oppose the program; delivering agreed policy tightening will be especially challenging ahead of the October 2023 Presidential elections. ### Staff appraisal — main points and policy recommendations - Recent progress: important progress toward restoring macroeconomic stability has been made after a period of heightened market pressures; situation remains extremely fragile due to low reserves and high inflation. - Macroeconomic policy tightening is essential to: - moderate fast-growing domestic demand, - support reserve accumulation, - achieve gradual reduction of high inflation, - enable international market access and gradual unwinding of FX controls. - Fiscal policy: - Envisaged fiscal consolidation, if decisively implemented, will help secure debt sustainability and improve quality and targeting of expenditures. - Adherence to primary fiscal deficit targets of 2.5 percent in 2022 and 1.9 percent of GDP in 2023 is necessary to restore confidence in the domestic debt market and reduce reliance on central bank financing. - Frontloading fiscal efforts and containing election-related spending pressures are recommended. - Early adoption of policies to improve targeting of subsidies and social assistance is essential to free resources for priority infrastructure spending and improve budget quality. - Efforts must be stepped up to mobilize external support, including good faith engagements with the Paris Club for restructuring legacy obligations. - Monetary and FX policy: - Continued resolute implementation of the enhanced monetary and FX policy framework is essential to support disinflation and reserve accumulation. - Tight fiscal policies combined with sustained policy interest rates in positive territory are critical to mobilize domestic financing, improve external competitiveness, and strengthen reserve coverage. - FX restrictions can support near-term stability but should not substitute for appropriate macro policies; recent intensification of FX controls and multiple currency practices should be gradually unwound as conditions permit. - Structural reforms: - Advance reforms to strengthen revenue mobilization, public financial management, and targeting of spending. - Strengthen domestic debt market, monetary transmission, and the central bank balance sheet. - Improve predictability and governance frameworks to attract investment in energy, mining, and the knowledge economy. - Risks and contingency planning: - Program risks remain very elevated due to global downside risks (protracted war in Ukraine, faster global tightening, sudden reversal in terms of trade) and domestic implementation risks amid political complexity and upcoming elections. - Contingency planning and agile policy adjustments are essential to safeguard macroeconomic stability. ### Staff decisions and recommendations on measures and waivers - Staff supports approval of the new and revised exchange restrictions and the new and modified MCPs, maintained for balance of payments reasons, on the basis they are temporary and expected to be gradually lifted. - One-month FX incentive for soy exports results in a multiple currency practice but is expected to expire by end-September ahead of the Board meeting. - Staff supports waivers of nonobservance of the performance criteria on non-imposition/intensification of restrictions on payments and transfers for current international transactions and on non-introduction/modification of MCPs, based on temporary nature and planned corrective actions. - Staff supports completion of the Second Review under the Extended Arrangement, waivers of applicability and non-observance, modification of performance criteria, and completion of the financing assurances review given Argentina’s ongoing good faith efforts to resolve external arrears. ### Box 1 — Trade Balance Developments, January–August 2022 (findings) - Argentina’s cumulative trade balance through August 2022 fell sharply, reflecting mainly: - a sharp expansion in overall import volumes (up 18.2 percent for goods), - and a very mild deterioration in terms of trade associated with commodity price spillovers from Russia’s invasion of Ukraine. - Non-energy good exports values reached historic highs driven mainly by a sharp rise in world grain prices: - Nonenergy export prices rose by 17.1 percent, - Volumes declined by 2.9 percent (drought conditions and reduced export liquidation during June-August). - Industrial/manufacturing exports grew by around 4.6 percent. - Non-energy goods imports rose sharply: - import volume growth 16.6 percent, y/y — well above real GDP growth. - Energy deficit widened acutely: - rising world energy prices (84 percent), - energy import volumes (45.1 percent), - energy exports rose 4.8 percent in volume terms. - Energy imports reflect need to import more expensive LNG due to reduced hydroelectricity production and robust electricity and gas consumption. - Services (cash basis) deficit widened substantially: - Net tourism deficit through August jumped to US$2.7 billion (compared to US$0.9 billion in 2021). - Non-tourism services deficit widened to US$5.9 billion (130 percent higher than in 2021). - Significantly negative cash services balance exerts strong draining pressure on international reserves. - Policy implication from box: moderating domestic demand and devaluation expectations through tighter macro policies will be critical to reverse these trends and boost reserves; supply-side policies can support improvements over the medium term. ### Box 2 — The Energy Subsidy Segmentation Scheme (summary and fiscal impact) - Objective: flagship policy to secure large savings in the energy subsidy bill in 2023 and underpin programmed fiscal consolidation. - Expected impact: - Energy subsidies are expected to fall by 0.6 percent of GDP in 2023 due to the new scheme introducing targeting in energy pricing. - New pricing segmentation and features: - High income residential consumers (around 20 percent of residential consumers): - regulated energy price for electricity and natural gas will increase in 3 phases starting in September 2022, to reach cost recovery by January 2023. - Middle-income residential consumers (around 30 percent): - energy prices remain subsidized for consumption below fixed thresholds (400kw/month for electricity and 70 percent of average past consumption for natural gas), - subsidized prices grow at 80 percent of previous year formal sector wages, - above thresholds, price set at cost. - Low-income residential consumers (around 50 percent): - energy prices remain subsidized, growing at 40 percent of previous year formal sector wages, - price not subject to a consumption cap. - Commercial consumers: - for electricity, subsidized commercial users will have subsidies fully removed during 2023-24 with price set at cost; - most commercial users of gas are already unsubsidized. - Implementation and strengthening measures proposed: - Database improvement: policy supported by new RASE database of energy consumers that self-declare income and assets; strengthening via cross-checks with other administrative databases and reducing non-registered consumers is critical. - To improve self-compliance, authorities recently limited FX access for individuals receiving subsidized energy. - Linking subsidized prices to costs rather than wages could produce more ambitious cost recovery. - Less generous consumption ceilings (middle income) could be reduced; a ceiling could be introduced for low-income consumers to encourage energy efficiency. - Enhanced targeting: composition of the three groups could be reconsidered as share in low-income category is relatively large. *Source: Argentine authorities and IMF staff calculations.* ### Box 3. Domestic Bond Market Developments and Challenges ### Box 3. Domestic Bond Market Developments and Challenges ### Recent developments in the peso debt market - Against the backdrop of tightening global financial conditions, fiscal setbacks and domestic policy uncertainties, the local peso debt market experienced heightened pressures during June-July 2022. - The sell-off was associated with large redemptions in fixed income funds and migration to money market funds and bank demand deposits, as investors sought protection against rumors of a domestic debt restructuring. - Two-year CER-linked bond yields rose from around 1 percent in early-June to over 20 percent in mid-July. - Significant BCRA intervention in the secondary market was necessary to stabilize markets in June and July, along with the introduction of sales of put options by the BCRA to support the primary issuance of government securities. - Market pressures have abated with the application of a more proactive debt management strategy: - The duration of new issuances was shortened. - A more consistent alignment of the cut-off rates to the BCRA policy rate was applied. - Important efforts were made to extend maturities through a voluntary debt exchange operation that converted large maturities falling due during August-October 2022 into new “Bono Dual” instruments maturing in June-August 2023. - The new “Bono Dual” provides exchange rate and inflation protection by allowing the owner to obtain the maximum rate between the inflation rate and exchange rate variation during the period. ### Financing outcomes and market reaction - The new approach enabled higher rollover rates and moved domestic bond yields away from distressed levels. - Since July, net financing for ARS 820 billion (about 1 percent of GDP) was raised with rollover ratios above 200 percent. - Inflation-indexed instruments yields decreased by 600 bps on average. - The voluntary exchange (involving the “Bono Dual”) increased markedly exposure to FX risks. - The yield curve continues to suggest persistent dislocation with significant premium required by investors, especially at the longer end. ### Financing program outlook and risks - The financing program for 2023 assumes new net debt placements of around 2½ percent of GDP, and the rollover of maturities falling due, which are especially lumpy in the run-up to next year’s August primary and October presidential elections. - Given these challenges, it remains critical to: - Build cash buffers through the issuance of short-term securities. - Resume the issuance of long-term securities once conditions permit. - The planned creation of a Committee for Capital Markets Development should help in the development of a near- and medium-term strategy, and strengthen ongoing efforts to strengthen investor relations to expand the investor base. ### Key statistics and market indicators (as reported) - Two-year CER-linked bond yields: around 1 percent in early-June → over 20 percent in mid-July (June-July 2022). - Net financing raised since July: ARS 820 billion (about 1 percent of GDP). - Rollover ratios since July: above 200 percent. - Inflation-indexed instrument yields: decreased by 600 bps on average. - Financing program 2023 assumed new net debt placements: around 2½ percent of GDP. - Voluntary exchange converted maturities due in August–October 2022 into “Bono Dual” maturing in June–August 2023. *Source: Box 3. Domestic Bond Market Developments and Challenges (excerpt).* ### 0.3 percent of GDP income from issuance of inflation linked debt securities. This income is excluded from revenues from ### 1argea2022003 - 0.3 percent of GDP income from issuance of inflation linked debt securities. This income is excluded from revenues from ### Revenues (In Percent of GDP) - Revenues: 17.6; 18.1; 18.3; 18.0; 17.6; 18.2; 16.8; 17.6; 18.2; 18.7; 19.0 - Tax revenues: 10.4; 11.0; 11.1; 11.4; 11.0; 11.5; 10.8; 11.1; 11.6; 11.9; 12.0 - Social security contributions: 5.6; 5.1; 5.1; 5.3; 5.1; 5.7; 5.2; 5.4; 5.5; 5.6; 5.8 - Nontax revenues 1/: 1.6; 2.0; 2.0; 1.2; 1.5; 1.1; 0.8; 1.0; 1.2; 1.2; 1.2 ### Primary expenditures (In Percent of GDP) - Primary expenditures: 24.0; 21.1; 22.3; 20.4; 20.0; 20.1; 18.7; 18.5; 18.2; 17.9; 17.7 - Wages: 3.2; 2.9; 2.9; 2.9; 2.9; 2.9; 2.9; 2.9; 2.9; 2.9; 2.9 - Goods and services: 0.8; 1.0; 1.0; 0.6; 0.6; 0.6; 0.7; 0.6; 0.6; 0.6; 0.5 - Pensions: 9.5; 7.9; 8.0; 8.1; 7.7; 8.3; 7.5; 8.0; 8.3; 8.5; 8.8 - Current transfers to private sector: 7.9; 6.6; 6.7; 6.1; 6.2; 5.4; 5.0; 4.4; 4.1; 3.7; 3.3 - Social assistance: 5.4; 3.7; 3.7; 3.5; 3.6; 3.1; 2.9; 2.8; 2.6; 2.5; 2.4 - Subsidies: 2.5; 3.0; 3.0; 2.6; 2.6; 2.3; 2.1; 1.6; 1.4; 1.2; 0.9 - Discretionary current transfers to provinces: 1.2; 0.8; 0.8; 0.6; 0.6; 0.5; 0.5; 0.5; 0.5; 0.4; 0.5 - Other current: 0.3; 0.5; 0.5; 0.3; 0.4; 0.3; 0.5; 0.4; 0.3; 0.3; 0.3 - Capital spending 2/: 1.0; 1.4; 1.4; 1.8; 1.5; 2.1; 1.6; 1.6; 1.6; 1.6; 1.6 ### Balances (In Percent of GDP) - Primary balance: -6.4; -3.0; -3.0; -2.5; -2.5; -1.9; -1.9; -0.9; 0.0; 0.8; 1.3 - Interest cash: 2.0; 1.5; 1.5; 1.5; 1.4; 1.8; 1.8; 2.7; 2.8; 3.3; 3.3 - Overall Balance: -8.3; -4.5; -4.5; -4.0; -3.8; -3.7; -3.7; -3.7; -2.9; -2.5; -2.1 ### Financing (In Percent of GDP) - Financing: 8.3; 4.5; 4.5; 4.0; 3.8; 3.7; 3.7; 3.7; 2.9; 2.5; 2.1 - Treasury deposits (+, drawdown) 3/: -0.3; -0.4; -0.4; -0.5; -0.6; 0.3; 0.0; 0.2; 0.0; 0.0; 0.0 - External: 0.2; 0.2; 0.2; 1.5; 1.3; -0.1; -0.2; 0.0; 0.2; 0.3; 0.0 - IMF (net): 0.0; 0.1; 0.1; 1.2; 1.1; -0.3; -0.3; -0.2; 0.0; -0.2; -0.7 - Other official (net) 4/: 0.3; 0.2; 0.2; 0.4; 0.3; 0.3; 0.2; 0.3; 0.3; 0.3; 0.3 - Private (net): -0.1; -0.1; -0.1; -0.1; -0.1; -0.1; -0.1; -0.1; -0.1; 0.2; 0.4 - Issuances: 0.0; 0.4; 0.4; 0.3; 0.3; 0.0; 0.0; 0.1; 0.4; 0.7; 1.0 - Amortization: 0.1; 0.5; 0.5; 0.4; 0.3; 0.2; 0.1; 0.1; 0.5; 0.6; 0.6 ### Domestic financing and public sector flows (In Percent of GDP) - Domestic: 8.3; 4.6; 4.6; 2.9; 3.2; 3.5; 3.8; 3.5; 2.7; 2.2; 2.0 - Private (net) 5/: 1.3; 2.3; 2.3; 2.0; 3.1; 2.2; 2.7; 2.3; 1.3; 0.6; 0.2 - Issuance: 7.3; 8.1; 8.2; 11.8; 9.9; 8.9; 10.5; 5.4; 7.2; 3.1; 1.7 - Amortization: 6.0; 5.8; 5.9; 9.8; 6.7; 6.7; 7.9; 3.1; 5.9; 2.5; 1.5 - Public entities (net) 6/: 8.7; 4.5; 4.5; 1.2; 1.1; 1.3; 1.2; 1.4; 1.7; 1.9 - of which: BCRA transfers: 7.4; 3.6; 3.7; 1.0; 0.8; 0.6; 0.6; 0.0; 0.0; 0.0; 0.0 - Other 7/: -1.7; -2.2; -2.2; -0.3; -1.0; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0 ### Memorandum items (In Percent of GDP) - One-off spending (COVID-19 & Solidarity Levy): 3.7; 1.1; 1.1; 0.4; 0.2; 0.0; 0.0; 0.0; 0.0; 0.0; 0.0 - Primary balance without COVID support: -2.6; -1.9; -1.9; -2.1; -2.2; -1.9; -1.9; -0.9; 0.0; 0.8; 1.3 ### Structural measures and debt (In Percent of GDP) - Structural primary balance 8/ 9/: -0.7; -1.9; -2.1; -2.2; -2.5; -1.9; -2.0; -1.0; 0.0; 0.8; 1.3 - Federal government debt 6/: 102.8; 80.2; 80.9; 73.2; 76.0; 73.2; 69.5; 69.6; 70.0; 67.1; 63.8 ### Notes and data definitions (as in source) - 2/ Includes federal capital transfers to provinces. - 3/ Deposit accumulation in 2022 largely reflects Federal Government deposits at the BCRA related to IMF purchases. - 5/ Includes Banco Nacion and public entities other than BCRA and FGS. - 6/ Includes BCRA and FGS. - 7/ Corresponds to cash management operations of the non-financial public sector entities (-, deposits). - 8/ Excludes COVID and Solidarity Levy-related spending. - 9/ Adjusts for the economic and commodity price cycles; in percent of potential GDP. - 4/ Assumes repayment to the Paris Club of the outstanding obligations reprofiled in 2014 by 2026. - (Percent of GDP) Sources: National authorities and Fund staff estimates and projections. - 1/ Non-tax revenues deviate from GFSM 2014 accounting, with the inclusion of sale of nonfinancial assets and exclusion of BCRA profit transfers. Non-tax revenues in 2022 include *Source: Prepared from the provided IMF table excerpt.* ### 0.3 percent of GDP income from issuance of inflation linked debt securities. This income is excluded from revenues from ### 1argea2022003 - 0.3 percent of GDP income from issuance of inflation linked debt securities. This income is excluded from revenues from ### General government fiscal position and projections (Table 4) - Revenues: 33.5, 33.2, 33.5, 33.6, 33.0, 34.1, 32.3, 33.2, 34.0, 34.7, 35.2 (percent of GDP for 2020–2027 series as shown). - Tax revenues: 23.6, 23.5, 23.8, 24.5, 24.0, 24.8, 23.8, 24.4, 24.9, 25.4, 25.7 (percent of GDP). - Social security contributions: 7.3, 6.6, 6.6, 6.8, 6.4, 7.2, 6.5, 6.7, 6.8, 6.9, 7.1 (percent of GDP). - Primary expenditures: 39.6, 35.7, 36.0, 35.6, 34.9, 35.7, 33.7, 33.7, 33.5, 33.3, 33.2 (percent of GDP). - Primary balance (general government): -6.2, -2.5, -2.5, -2.1, -1.9, -1.5, -1.4, -0.5, 0.5, 1.4, 2.0 (percent of GDP). - Overall balance (general government): -8.6, -4.3, -4.3, -3.8, -3.5, -3.5, -3.3, -3.4, -2.5, -2.0, -1.4 (percent of GDP). - Federal government primary balance: -6.4, -3.0, -3.0, -2.5, -2.5, -1.9, -1.9, -0.9, 0.0, 0.8, 1.3 (percent of GDP). - Federal interest (cash): 2.4, 1.8, 1.8, 1.7, 1.6, 2.0, 1.9, 2.9, 3.0, 3.4, 3.4 (percent of GDP). - General Gov't structural primary balance (percent of potential GDP): -3.1, -1.6, -1.9, -1.9, -2.2, -1.4, -1.5, -0.5, 0.5, 1.4, 2.0. - Consolidated public sector balance: -11.7, -7.6, -7.6, -7.3, -7.7, -6.5, -6.7, -6.2, -5.0, -4.3, -3.3 (percent of GDP). ### Central Bank operations and quasi-fiscal impacts (Table 5a) - Net foreign assets (in billions of AR$): 1,390, 1,670, 1,670, 3,889, 4,008, 6,467, 7,359, 12,509, 21,239, 31,701, 43,249 (end-period 2020–2027). - Gross foreign assets (in billions of AR$): 3,314, 4,075, 4,075, 7,455, 7,933, 11,886, 13,850, 22,281, 35,644, 50,699, 67,331. - Gross foreign liabilities (in billions of AR$): 1,925, 2,405, 2,405, 3,565, 3,925, 5,419, 6,492, 9,772, 14,406, 18,998, 24,082. - Credit to the public sector (net, AR$ billions): 6,351, 9,272, 8,783, 12,198, 14,060, 18,141, 21,896, 31,019, 43,382, 55,917, 69,011. - BCRA securities (AR$ billions): -2,942, -5,045, -5,045, -7,729, -9,729, -11,435, -13,943, -19,836, -27,870, -37,208, -49,620. - Monetary base (AR$ billions): 2,470, 3,654, 3,654, 4,974, 4,990, 7,535, 9,398, 14,564, 20,937, 29,270, 39,461. - Quasi-fiscal deficit (percent of GDP, memorandum): 3.2, 3.3, 3.3, 3.5, 4.2, 3.0, 3.3, 2.8, 2.5, 2.3, 1.8. - Net foreign assets (billions of USD, memorandum): 16.5, 16.3, 16.3, 25.5, 24.1, 27.9, 26.7, 30.2, 34.8, 39.3, 42.3. ### Banking sector summary and monetary aggregates (Table 5b) - Net domestic assets (AR$ billions): 6,273, 9,579, 9,551, 14,738, 15,524, 22,564, 27,876, 42,380, 61,032, 83,839, 107,346 (end-period). - Claims on the private sector (AR$ billions): 3,762, 5,356, 5,357, 8,644, 9,482, 13,615, 17,773, 28,270, 41,547, 59,145, 80,505. - Holdings of central bank securities (AR$ billions): 2,942, 5,045, 5,045, 7,729, 9,729, 11,435, 13,943, 19,836, 27,870, 37,208, 49,620. - Reserves at central bank (AR$ billions): 1,488, 2,202, 2,202, 3,220, 3,093, 4,999, 5,931, 9,225, 13,323, 18,405, 19,191. - M3 (AR$ billions, memorandum): 7,668, 11,529, 11,510, 16,578, 17,580, 25,135, 31,954, 49,519, 70,345, 99,519, 134,169. - M3 (percent of GDP): 27.9, 24.7, 24.9, 21.7, 21.5, 21.7, 21.7, 22.0, 21.7, 22.0, 22.0. - Credit to the private sector, real (eop, y/y percent change): -2.2, -5.7, -5.6, 2.8, -9.2, 5.0, 17.1, 10.5, 5.0, 5.4, 4.7. ### Public and external debt overview (Table 6) - Gross federal debt (US$ billions): 335.7, 364.5, 373.3, 371.5, 378.6, 371.4, 377.5, 381.8 (est/proj series). - Gross federal debt (percent of GDP): 102.8, 80.2, 80.9, 73.2, 76.0, 73.2, 69.5, 67.1, 69.6, 70.0, 67.1, 63.8 (table shows time series). - Federal debt by creditor (US$ billions, selected): IMF 46.0, 42.6, 46.0, 44.2, 42.9, 42.9, 41.8, 35.1 (series as shown). - By currency (US$ billions): Domestic currency 125.7, 109.3, 109.8, 106.5, 111.0, 99.7, 100.7, 101.0; Foreign currency 210.0, 255.3, 263.5, 265.0, 267.7, 271.7, 276.8, 280.8. - BCRA Debt (Leliqs and Pases, percent of GDP): 10.7, 10.9, 11.9, 9.5, 8.8, 8.6, 8.2, 8.1. - Overall external debt (US$ billions): 271.4, 266.7, 277.0, 279.8, 283.9, 288.8, 295.3, 298.8. - External debt (percent of GDP): 83.1, 59.2, 56.4, 52.3, 52.2, 54.5, 52.5, 50.0. ### Federal government gross financing needs and sources (Table 7) - Total Needs (US$ millions, selected rows/time points): 74,538; 87,448; 22,180; 36,773; 17,703; 34,855; 111,511; 42,213; 25,696; 43,352; 23,049; 134,310; 76,909; 86,229; 51,934; 46,252 (series as shown). - Primary fiscal deficit (US$ millions, and percent of GDP memo): 24,455 (2020), 14,636 (2021), with primary fiscal deficit (percent of GDP) 6.4, 3.0, 0.2, 0.7, 0.6, 0.9, 2.5, 0.3, 0.5, 0.6, 0.5, 1.9, 0.9, 0.0, -0.8, -1.3 (period series). - Interest (US$ millions): 6,422, 5,848, 1,895, 826, 1,358, 2,732, 6,811, 2,956, 1,488, 2,567, 2,253, 9,264, 15,212, 15,388, 18,450, 19,644 (table entries). - Amortizations (US$ millions): 42,190; 61,835; 15,006; 27,488; 7,454; 20,557; 70,506; 31,394; 15,059; 32,768; 13,448; 92,669; 48,768; 68,315; 34,836; 27,786 (series). - IMF Debt Service (US$ millions): 1,471; 5,128; 3,802; 3,801; 5,175; 5,974; 18,752; 5,932; 5,910; 4,150; 4,137; 20,128; 6,858; 2,315; 3,453; 7,102. - Total Sources (US$ millions, aggregate series): 74,538; 87,448; 12,523; 32,764; 17,703; 24,763; 87,754; 36,894; 21,706; 40,027; 19,724; 118,351; 73,681; 86,229; 51,934; 46,252. - Total Gap and IMF Disbursements (US$ millions): Total Gap entries show 0; 9,656; 4,009; 0; 10,092; 23,757; 5,319; 3,990; 3,325; 3,325; 15,958; 3,229; 0; 0; 0; 0. IMF Disbursements mirror these IMF-related entries: 0; 9,656; 4,009; 0; 10,092; 23,757; 5,319; 3,990; 3,325; 3,325; 15,958; 3,229; 0; 0; 0; 0. - Memo: Private Rollover Rates (percent): 120, 134, 145, 104, 195, 171, 143, 155, 225, 97, 124, 132, 170, 118, 125, 128 (series as shown). - Note: Financing needs and issuances are significantly lower in 2026-2027 relative to the first review, reflecting use of longer-maturity CER-linked bonds from 2024, which extend maturities beyond the projection period and reduce the interest bill (as the inflation uplift is captured in amortization). ### External (residency) gross financing needs and sources (Table 8) - Total Needs (US$ millions, 2023 quarterly and annual breakdown): 99,651 (total for year), quarterly: 32,857; 33,398; 35,202; 34,044; 135,501 (multi-column layout; table presents quarterly and annual cells). - Imports G&S (US$ millions): 72,362 (2023); quarterly shown 21,842; 26,684; 26,062; 19,908; annual 94,497 and subsequent projection years with values near 90,407; 90,419; 90,339; 92,133; 95,166. - Exports G&S (US$ millions): 87,415 (2023); quarterly 22,453; 28,060; 25,835; 26,013; annual 102,361 and projected series up to 115,264. - Reserve drawdown (adjusted, memo): 105; -3,709; -2,121; 4,969; -7,125; -7,986; -2,656; -3,454; -4,581; -4,583; -3,000 (series). - Total Sources equal Total Needs with residual Total Gap and IMF Disbursements as in Table 7: Total Gap 0; 9,655; 4,009; 0; 10,092; 23,757; 15,958; 3,229; 0; 0; 0 and IMF Disbursements 0; 9,656; 4,009; 0; 10,092; 23,757; 15,958; 3,229; 0; 0; 0 (table alignment as presented). ### International Investment Position, financial soundness, and Fund credit indicators (Tables 10–12) - Net IIP (US$ millions and percent of GDP rows): Net IIP values and percent-of-GDP series included in Table 10 across 2017–2021 (exact numeric rows preserved in table). - Financial Soundness Indicators (Table 11, selected): Regulatory Capital to Risk-Weighted Assets series across 2015–2022: 13.3, 16.7, 15.6, 16.0, 17.5, 24.2, 25.6, 27.8 (private banks table); Non-performing Loans to Total Gross Loans: 1.7, 1.8, 1.8, 3.1, 5.7, 3.9, 4.3, 3.2 (series). - Indicators of Fund Credit (Table 12, 2022–2032): Existing and Prospective drawings (30-month EFF) 17,500.0, 12,000.0, 2,414.00 (years shown), with Total (2022-2032) summarized. Amortization (1/): 6,003.4, 13,303.4, 3,412.5, 0.0, 833.3, 3,500.0, 5,050.0, 5,319.0, 5,319.0, 5,319.0, 4,485.7, 52,545.4 (series). Total debt service 1/: 6,453.7, 15,135.5, 5,127.5, 1,721.4, 2,552.1, 5,125.8, 6,442.1, 6,408.0, 6,097.9, 5,786.7, 4,678.7, 65,529.2 (series). Outstanding stock 1/ (US$ millions): 34,215.9, 32,912.5, 31,914.0, 31,914.0, 31,080.7, 27,580.7, 22,530.7, 17,211.7, 11,892.7, 6,573.7, 2,088.0 (series). - Memo items: Exports of goods and services (US$ mn) 103,462; 105,212; 104,007; 107,969; 110,913; 115,266; 121,840; 128,789; 136,135; 139,356; 142,654. Gross International Reserves (US$ mn) 45,957; 48,614; 52,068; 56,649; 61,232; 64,232; 73,824; 82,488; 93,388; 99,911; 102,598. *Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1argea2022003.pdf* ### Annex I. Application of the Sovereign Risk and Debt Sustainability ### Annex I. Application of the Sovereign Risk and Debt Sustainability Framework ### DSA Summary Assessment - Final assessment: "Sustainable but not with high probability". - Overall risks of sovereign stress: High. - Medium-term risks: Moderate (unchanged from the first review); GFN module: Moderate; Debt fanchart: Moderate. - Long-term risks: High. - Rationale and caveats: - The 2020 restructuring and implementation of the program should help contain financing risks. - The continued high/moderate borderline result is largely due to the very wide fan chart, reflecting Argentina’s history of high volatility. - Projected long-term debt and debt service metrics remain above the targets set out in the March 2020 Technical Note on Debt Sustainability—another indication that buffers remain limited. - Assessment is predicated on "the steadfast implementation of prudent macroeconomic policies included in staff’s baseline, consistent with the resumption of international market access in 2025 and a gradual unwinding of capital controls." - Staff judgment: "Staff concurs with the mechanical signal." *DSA summary sentence from the text:* "The Sovereign Risk and Debt Sustainability Framework (SRDSF) tools indicate that debt is sustainable but not with high probability, although overall risks of sovereign stress are high." ### Assessment of Debt Sustainability - Staff assessment: Argentina’s debt is "sustainable, but not with high probability". - Tools informing assessment: - Debt Fanchart analysis (prospects for debt stabilization). - GFN Financeability module (rollover risks). - Crisis prediction model (probability of unsustainable debt events such as sovereign default and restructuring). - Additional inputs: 10-year Debt Fanchart; updated assessment of federal government debt and debt service (excluding intra-public sector obligations to BCRA and FGS). - Key condition: Full implementation of program policies and re-entry to international markets in 2025. ### Medium-Term Risk Analysis - GFN Financeability Module: - Indicates moderate risk. - Baseline GFNs average around 13 percent of GDP over the 2022-27 period (slightly below the first review). - At end-May 2022, banks’ exposures to government debt: around 15 percent of banking system assets. - Banking sector assets: 40 percent of GDP. - In the stress scenario, the domestic banking sector would have to use an extra 14 percent of assets to absorb residual issuances. - Risks to absorbing GFNs: low export base, small banking sector, weak policy credibility, uncertainties ahead of the 2023 Presidential Elections, historical volatility. - Mitigants: lack of new debt issuances to foreign private creditors; large share of FX debt held by IFIs; large share of overall debt held by the intra-public sector; capital controls. - Debt Fanchart Module: - Points to moderate risk of sovereign stress, close to the border with high risk. - Public debt projected: around 81 percent of GDP at end-2021 to 64 percent of GDP by end-2027. - Probability of debt stabilization under the baseline: above 99 percent. - Institutions-adjusted median debt level in 2026: around 45 percent of GDP. - Fanchart width (uncertainty): around 65 percent. - Medium-Term Index (MTI): - MTI = 0.35 (in line with the first review; close to the high-risk threshold). - Predictions of stress events with false alarms: 21 percent probability. - Predictions of missed crises: 27 percent probability. - Mechanical signal: moderate sovereign stress risk. - Note: "the high probability of debt stabilization may be distorted by negative real interest rates, reflecting the current situation of strict capital controls and high inflation (notwithstanding the prevalence of inflation-linked debt)." ### Longer-Term Risk Analysis - Long-term fanchart (10-year horizon ending in 2031): - Probability of debt stabilization: around 60 percent (broadly unchanged from the first review). - Interpretation: consistent with debt sustainability, albeit "with substantial risks". - Long-term refinancing needs: need to refinance maturing debt obligations from the 2020 debt restructuring and Fund repurchases, likely at less favorable financing terms. - Capacity to repay depends on IMF program implementation and re-accessing international private credit markets. - Buffers and thresholds: - Federal debt (excluding BCRA and FGS) projected to fall close to 40 percent of GDP. - FX debt service projected to stabilize at 3.2 percent of GDP during 2025-30. - Overall GFNs projected to average around 7.5 percent of GDP during 2025-2030—over 2 ppts above the March Technical Note target. - Implication: limited buffers and reliance on large and sustained domestic financing in the program baseline; potential challenge during gradual easing of capital flow measures. - Policy priority: strengthening domestic debt management. ### SRDSF Key Macroeconomic and Financing Assumptions - Core program objectives reflected: fiscal consolidation, reserve accumulation, peso market development, eventual easing of CFMs with re-access to international capital markets. - Macroeconomic assumptions: - Real GDP growth: 4.0 percent in 2022; 2 percent in 2023; 2 percent in 2024. - Potential growth: 2 percent. - Inflation (eop): rise to 90-100 percent (mid-point 95 percent) in 2022; around 40 percentage points higher than at the first review; then fall to around 60 percent in 2023 and 45 percent in 2024. - REER: projected broadly unchanged for remainder of 2022; gradual real depreciation through 2025 to reach average 2021 levels. - Primary fiscal deficit path: fall from 2.5 percent of GDP in 2022 to 0.9 percent of GDP in 2024; further consolidation required to reach a 1.3 percent of GDP surplus by 2027. - CFMs: assumed to remain in place through the program (with targeted easing in key sectors); gradual easing as reserve coverage improves and return to international markets in 2025. - Financing assumptions: - External official financing and market access: - Annual official net financing: lower by US$150 million in 2022 and US$600 million in 2023 compared with previous assumptions. - Annual net financing from MDBs: 0.3 percent of GDP through 2024, and over the medium term. - IMF EFF: positive net financing in 2022 (0.8 percent of GDP), with zero net financing thereafter. - Repayment of outstanding 2014 legacy debt: assumed by end-2026 following resumption of Paris Club negotiations. - Debt service on FX-denominated debt to the foreign private sector: assumed to follow the 2020 restructuring schedule, with modest new issuance in international markets from 2025 onwards. - Monetary financing: - BCRA transfers: limited to 0.8 percent of GDP in 2022; 0.6 percent of GDP in 2023; zero from 2024 onwards. - Peso market financing: - Baseline assumes rebuilding of confidence in the peso market after June-July disorderly conditions. - Peso market financing projected to average 2.7 percent of GDP during the program, consistent with average annual rollover rates of around 145 percent. - Updated financing strategy: reliance on short-term fixed rate instruments and inflation (CER)-linkers in the near term; issuance of longer term-CER linkers from 2024 onwards; gradual shift to fixed rate issuances over the medium to long-term. - Domestic real interest rates: assumed to gradually rise from 2 percent in 2022 to 4½ percent by 2028. ### Debt Coverage and Disclosures (selected) - Debt coverage in the DSA: central government? - 1a. If central government, are non-central government entities insignificant? No. - Subsectors included in the chosen coverage: - Budgetary central government: Yes. - Extra budgetary funds (EBFs): No. - Social security funds (SSFs): No. - State governments: No. - Local governments: No. - Public nonfinancial corporations: No. - Central bank: No. - Other public financial corporations: No. *Source: Fund staff.* ### 5. Debt consolidation across sectors: ### 1argea2022003 - 5. Debt consolidation across sectors ### Coverage, recording, and contingent liabilities - Coverage described: gross federal (central government) debt held by the private, official and public sectors; excludes GDP warrants, debt of the provinces or municipalities, and debt of the central bank. - Exclusions and rationale: - Excludes FGS/ANSES liabilities; excludes state govt liabilities; excludes local govt liabilities. - Staff does not judge the exclusion of provincial debt as a significant contingent liability risk, given the federal government's non-bailout approach to recent provincial debt restructuring. - Central bank liabilities, including central bank swaps, are excluded under a risk-based approach provided: (i) they represent normal monetary or liquidity operations (not sovereign-to-sovereign medium-term balance of payments support), and (ii) the central bank can extinguish the swap position without actions detrimental to government debt levels (SM/20/169). - Argentina has drawn on one central bank bilateral FX swap; the drawn amount is below the 1 percent of GDP de minimis threshold. - Central bank balance sheet risk: - The central bank’s weak balance sheet is highlighted as a key contingent liability, necessitating a strategy to strengthen both its finances and governance. - With IMF technical assistance, the BCRA is conducting an initial assessment of the balance sheet based on internationally recognized accounting standards to inform contingent liability analysis in future SRDSA reviews. - Basis of recording and valuation notes (as provided): - Includes distinctions: non-consolidated, CPS, NFPS, GG expected; non-cash basis vs cash basis; nominal value vs face value vs market value. - Notes explain definitions of nominal value, face value, market value, IPSGs, and proxy use of stock of arrears for accounts payable. ### Debt structure and projected evolution - Currency composition and medium-term outlook: - Commentary: Foreign-currency denominated debt will continue to dominate over the long term, but its share is expected to fall as domestic peso market development facilitates repayment of official creditors (including the IMF) and private external creditors. Modest resumption of international capital market access is expected from 2025 onwards. - Near term financing strategy (while inflation is high and unanchored): reliance on short-term fixed rate instruments and inflation (CER)-linkers, with an increase in maturity envisaged over the medium term. - Large share of FX debt is held by IFIs; large share of overall debt held by intra-public sectors (including non-marketable instruments) mitigates rollover risks. - Maturity and instrument objectives: - Medium-term objective is to lengthen maturity and deepen domestic peso market; resumption of international market access envisaged from 2025 with modest initial issuances. ### Baseline scenario (Key projections and fiscal dynamics) - Public debt (Percent of GDP) by year: - 2021: 80.9 - 2022: 76.0 - 2023: 69.5 - 2024: 69.6 - 2025: 70.0 - 2026: 67.1 - 2027: 63.8 - 2028: 62.0 - 2029: 60.1 - 2030: 58.9 - 2031: 59.5 - Change in public debt (percent of GDP) by year: - 2021: -21.9 - 2022: -4.9 - 2023: -6.5 - 2024: 0.1 - 2025: 0.4 - 2026: -2.9 - 2027: -3.3 - 2028: -1.8 - 2029: -1.9 - 2030: -1.2 - 2031: 0.5 - Contribution of identified flows (percent of GDP) by year: - 2021: -21.5 - 2022: -10.4 - 2023: -8.4 - 2024: -5.1 - 2025: -4.8 - 2026: -4.2 - 2027: -3.9 - 2028: -2.7 - 2029: -1.8 - 2030: -0.7 - 2031: -0.2 - Primary deficit (percent of GDP) by year: - 2021: 3.0 - 2022: 2.5 - 2023: 1.9 - 2024: 0.9 - 2025: 0.0 - 2026: -0.8 - 2027: -1.3 - 2028: -1.3 - 2029: -1.3 - 2030: -1.3 - 2031: -1.3 - Automatic debt dynamics and components (percent of GDP): - Automatic debt dynamics: 2021: -24.5; 2022: -13.0; 2023: -10.4; 2024: -5.9; 2025: -4.9; 2026: -3.5; 2027: -2.6; 2028: -1.5; 2029: -0.5; 2030: 0.6; 2031: 1.0 - Interest rate-growth differential: 2021: -40.8; 2022: -34.0; 2023: -31.9; 2024: -21.1; 2025: -17.8; 2026: -16.1; 2027: -13.4; 2028: -10.1; 2029: -7.8; 2030: -4.8; 2031: -3.1 - Real interest rate: 2021: -31.2; 2022: -30.9; 2023: -30.3; 2024: -19.7; 2025: -16.4; 2026: -14.7; 2027: -12.1; 2028: -8.8; 2029: -6.5; 2030: -3.7; 2031: -2.0 - Real growth rate: 2021: 9.7; 2022: -3.1; 2023: -1.5; 2024: -1.4; 2025: -1.4; 2026: -1.4; 2027: -1.3; 2028: -1.3; 2029: -1.2; 2030: -1.2; 2031: -1.2 - Gross financing needs (GFN) and debt service (percent of GDP): - Gross financing needs: 2021: 18.2; 2022: 17.3; 2023: 15.5; 2024: 12.6; 2025: 14.4; 2026: 8.7; 2027: 7.6; 2028: 9.4; 2029: 12.2; 2030: 11.4; 2031: 13.3 - Of which: debt service: 2021: 15.1; 2022: 14.8; 2023: 13.6; 2024: 11.6; 2025: 14.4; 2026: 9.5; 2027: 8.8; 2028: 10.7; 2029: 13.4; 2030: 12.6; 2031: 14.6 - Local currency GFN: 2021: 10.8; 2022: 9.7; 2023: 7.9; 2024: 7.4; 2025: 9.9; 2026: 6.2; 2027: 4.9; 2028: 6.0; 2029: 7.5; 2030: 6.9; 2031: 6.1 - Foreign currency GFN: 2021: 4.3; 2022: 5.1; 2023: 5.7; 2024: 4.3; 2025: 4.5; 2026: 3.3; 2027: 4.0; 2028: 4.7; 2029: 5.9; 2030: 5.8; 2031: 8.5 - Macro assumptions (selected): - Real GDP growth (percent): 2021: 10.4; 2022: 4.0; 2023–2031: 2.0 (each year shown as 2.0) - Inflation (GDP deflator; percent): 2021: 53.9; 2022: 70.3; 2023: 76.0; 2024: 50.4; 2025: 40.8; 2026: 37.1; 2027: 32.1; 2028: 26.0; 2029: 22.2; 2030: 17.3; 2031: 13.9 - Nominal GDP growth (percent): 2021: 68.4; 2022: 76.6; 2023: 80.0; 2024: 53.2; 2025: 43.8; 2026: 39.8; 2027: 34.8; 2028: 28.5; 2029: 24.7; 2030: 19.6; 2031: 14.6 - Effective interest rate (percent): 2021: 2.4; 2022: 2.7; 2023: 4.3; 2024: 7.0; 2025: 6.9; 2026: 7.8; 2027: 7.8; 2028: 8.2; 2029: 9.1; 2030: 10.0; 2031: 10.1 - Staff commentary summary: - Public debt is projected to decline gradually over the medium term and stabilize by 2030, reflecting baseline assumptions of steadfast program implementation of the Fund-supported EFF. - Stable macroeconomic conditions, sustained fiscal consolidation (including beyond the program), deepening domestic capital markets, and boosting exports and productivity are essential to mobilize domestic saving, strengthen reserves, and improve prospects of international market access to strengthen debt-servicing capacity. - Forecast track record analysis points to baseline optimism, particularly on debt reduction and exchange rate paths; risks to the baseline remain exceptionally high. ### Medium-term risk analysis and financeability - Medium-term tools assessment: - Both medium-term tools point to a moderate level of risk, but are borderline moderate/high. - The fanchart results are driven by extreme width reflecting Argentina's history of high volatility. - Probability of debt stabilization remains above 99 percent. - Key risk metrics and indices: - Fanchart width: 64.1 0.9 - Probability of debt not stabilizing (pct): 0.540.0 - Terminal debt level x institutions index: 44.61.0 - Debt fanchart index: 1.90 - Average GFN in baseline: 12.74.3 - Bank claims on government (pct bank assets): 15.35.0 - Change in claims on govt. in stress (pct bank assets): 13.84.6 - GFN financeability index: 13.9 - Medium-term index (MTI) normalized level and weights are reported; overall signal described as moderate. - Crisis prediction metrics: - Prob. of missed crisis, 2022-2027 (if stress not predicted): 27.3 pct. - Prob. of false alarm, 2022-2027 (if stress predicted): 21.6 pct. - Overall assessment: - GFN module shows moderate risk partly because vulnerabilities are contained by the 2020 restructuring and expectations of financing from less risky creditors. ### Decomposition by creditor (selected aggregates) - Key stock and creditor aggregates (Table 7; In US$ bn unless otherwise noted): - Total (2022): 373.76 - External: 147.98 - Multilateral creditors: 73.55 - IMF: 46.63 - World Bank: 8.56 - CAF: 3.67 - ADB/AfDB/IADB: 13.93 - Domestic: 225.77 - T-Bills (domestic): 94.27 - Bonds (domestic): 105.52 - Loans (domestic): 23.74 - Nominal GDP: 626.34 - Memo and contingent items: - Collateralized debt: 2.24 (In US$ bn) - Collateralized debt (percent of GDP): 0.1% (represented as 0.78 and 0.04 in the table breakdown) - Contingent liabilities: 1.46 (In US$ bn) — o/w Public guarantees: 1.46 - Notes on classifications: - External vs domestic is based on residency definition. - Multilateral creditor definition: institutions with more than one official shareholder; may not align with other IMF policies. - Non-Paris Club bilateral includes Paris Club member creditor performing obligations not reprofiled in 2014; Paris Club includes only obligations reprofilied in 2014. ### Policy implications and recommendations (staff conclusions) - Strengthen central bank: - Strategy needed to strengthen both the BCRA’s finances and governance; IMF technical assistance is supporting an initial balance-sheet assessment under internationally recognized accounting standards. - Fiscal consolidation and macro stability: - Sustained fiscal consolidation, including beyond the program period, is essential to stabilize and reduce public debt. - Domestic market development: - Deepen domestic peso capital markets to facilitate repayment of official and private external creditors, lengthen maturities, and support resumption of international market access (envisaged from 2025). - Growth-enhancing measures: - Boost exports and productivity to mobilize domestic saving, strengthen reserves, and improve debt-servicing capacity. - Risk management: - Recognize baseline optimism and exceptionally high risks; monitor volatility and implement reforms to entrench stability. *Source: IMF staff — 1argea2022003 - 5. Debt consolidation across sectors.* ### Annex II. Update of Foreign Exchange Regime as it Applies to ### Annex II. Update of Foreign Exchange Regime as it Applies to Exchange Restrictions and Multiple Currency Practices ### Overview - Since end-June 2022, Argentina has taken measures to its foreign exchange (FX) regime that give rise to new multiple currency practices (MCPs), exchange restrictions, and intensify pre-existing exchange restrictions. - These actions are subject to Fund jurisdiction under Article VIII. ### Measures (exchange restrictions and MCPs) - Soy Dollar: - Exporters of soybean and derivates can fulfill their surrender requirement by exchanging their dollar receipts at a preferential exchange rate of 200 pesos per dollar until end-September 2022. - The preferential rate compared to the official exchange rate (which trades at around 140 pesos per dollar) exceeds two percent, constituting a new MCP subject to Fund jurisdiction. - Reference: Decree 576/22, September 4, 2022. - Tourist Dollar: - Non-resident tourists in Argentina may exchange foreign currency (in an amount up to USD 5000 within the last 30 days) for pesos with domestic commercial banks at a preferential exchange rate equivalent to the implicit rate available on the capital market, by selling securities acquired in pesos and settled in foreign currency. - The spread between this rate and the official exchange rate exceeds two percent, constituting a new MCP subject to Fund jurisdiction. - Reference: Communication A7551. - Imports of Goods and Services: - Importers of goods face a complex system (the “SIMI” system) that sets annual limits on the amount of foreign exchange that may be immediately accessed for imports of goods, giving rise to an exchange restriction subject to Fund jurisdiction. - At end-June 2022, the exchange restriction was intensified temporarily until end-December 2022 as follows: - (i) the annual limits on undelayed FX access were lowered; and - (ii) FX market access beyond those limits was further restricted for certain import categories subject to non-automatic import licenses (the list of which was expanded). - A similar system for payments of imports of services (the “SIMPES” system) was implemented in June, intensifying restrictions on payments for imports of services. - References: Communication A7466; Communication A7532. - Other: - Argentina requires general conditions to access the official foreign exchange market. - In July 2022 the scope of these conditions was extended to include transactions with Argentine Certificates of Deposits Representative Foreign Shares (CEDEARS), adding them to the list of capital market transactions that cannot be undertaken 90 days prior to and after access to the official FX market is granted, intensifying an existing exchange restriction. - Reference: Communication A7552. ### Letter of Intent — Key commitments and requests (September 25, 2022) - Policy pillars and recent actions: - Restore fiscal order via expenditure curbs, improved targeting of subsidies (energy, water, transportation), and reprioritizing spending to protect vulnerable groups and secure critical investments. - Address persistent high inflation through prudent fiscal management, reduced reliance on monetary financing (below the original 2022 program target), and consistent implementation of the monetary policy framework. Since end-July, the policy rate was raised by 2,300 basis points. - Strengthen reserve coverage via fiscal and monetary implementation, targeted trade-balance measures, combating customs abuses, temporary incentive to encourage grain sales, and mobilizing external official support and FDI. - Revitalize structural agenda: review corporate tax incentives, combat tax evasion and money laundering (AML/CFT), strengthen public financial management, the peso government debt market, FX operations, and net export potential in strategic sectors (particularly energy). - Requests to the IMF: - Completion of the second review, with a disbursement of SDR 3,000 million. - Waivers of nonobservance of the continuous performance criteria (PC) on not introducing/modifying multiple currency practices and on not imposing/intensifying exchange restrictions. - Waivers of applicability for the end-September primary fiscal balance and domestic arrears PCs. - Modification of end-September and end-December 2022 PCs (nominal) on the primary fiscal balance and the stock of domestic arrears to accommodate higher-than-expected inflation, and modification of end-December 2022 PC on monetary financing of the fiscal deficit. - Modification of the end-December 2022 PC on net international reserves to reflect more challenging external environment and less favorable terms of trade. - Completion of the financing assurances review and approval of exchange restrictions and MCPs under Article VIII sections 2 and 3, on grounds that they are temporary, for balance of payments reasons, and non-discriminatory. - Monitoring: - Program monitored through quarterly reviews, prior actions, quantitative performance criteria, indicative targets, and structural benchmarks per the MEFP and TMU. *Source: Annex II and accompanying materials from the IMF staff report and attachments (Argentina), as provided in the source content.* ### 10. As part of our commitment to our multi-year fiscal consolidation path, we recently ### 1argea2022003 - 10. As part of our commitment to our multi-year fiscal consolidation path, we recently ### Fiscal consolidation and 2023 Budget - Draft 2023 Budget submitted to Congress consistent with the 1.9 percent of GDP program deficit target (prior action; previously mid-September 2022, SB). - Baseline macroeconomic framework and policies aim to deliver a 1.9 percent of GDP primary deficit target for the non-financial public sector on a cash basis, down from a 2.5 percent of GDP deficit objective in 2022. - Proposed adjustment underpinned by: - strengthened revenue mobilization efforts (see ¶11); - improved targeting in subsidies totaling 0.5 percent of GDP, including on energy (see ¶29-30), transport and water; - streamlining of social assistance totaling 0.7 percent of GDP, with measures to encourage labor market insertion, limit indexation of certain benefits, and reduce redundancy (see ¶12); - tighter expenditure controls in key areas; wage bill projected to remain unchanged as a share of GDP; pension spending to continue following the indexation formula. ### Revenue mobilization and tax administration (¶11) - Action plan to improve revenue compliance advanced with IMF technical assistance (end-August 2022 SB; reset to end-December 2022, SB). - Plan elements: - institutional policies and guidelines for risk segmentation of taxpayers and foreign trade operators; - comprehensive compliance gap analysis for key taxes. - Organizational changes: - new Compliance Risk Management committee (CRM) established in August; - new risk management unit to be established by end-2022. - Additional measures: - review of corporate tax incentives; - strengthening information exchanges and international cooperation to combat tax evasion; - preparatory work to improve personal wealth taxation (bienes personales) by enhancing AFIP database and connecting provincial cadasters and property tax registers with federal tax-payers’ identification numbers (CUIT/CUIL). - First stage coverage: AMBA region (end-September 2022, SB; modified and reset to end-March 2023, SB). - OFEVI will develop a unified methodology for property valuations; bienes personales valuation to be assessed based on the greater of: i) the provincial valuation, or ii) the OFEVI unified methodology valuation. ### Social assistance and pensions (¶12) - Ministry of Social Development, with universities, conducting comprehensive evaluation of income support programs (Potenciar Trabajo, Progresar, Tarjeta Alimentar, ANSES programs) to strengthen efficiency and targeting (end-December 2022; reset to end-March 2023, SB). - Actions: - compile data on recipients at the household level and cross-check against other official databases; - identify options to improve and integrate beneficiary databases, reduce redundancy, and limit leakage to higher-income groups while ensuring coverage of vulnerable groups. - Immediate focus: Potenciar Trabajo by end-December 2022. - Pension study: Ministry of Labor with University of Buenos Aires to consider options to strengthen equity and sustainability and reduce fragmentation (end-December 2022, SB). ### Transparency, public spending controls, and PIMA follow-up (¶13) - Action plan developed (Resolution 117/2022) to enhance financial and budget reporting of national public sector entities other than the National Administration (Law 25.917, Article 3) and strengthen monitoring and governance of investment projects (end-June 2022, SB). - Implementation measures: - establish general framework to execute and control transfers from the Treasury to public corporations, trust funds and other entities via a Disposition of the Undersecretary of Budget; - clarify criteria for transfer execution, information requirements and sanctions for non-compliance; - modernize oversight through a joint Resolution of the Secretaries of Treasury and Finance to enhance information requirements. - Publication plans: - enhanced quarterly reports for public corporations and trust funds proposed end-March 2023, SB; - include information on major investment projects financed by federal transfers and earmarked taxes starting mid-2023. ### Federal-Provincial fiscal coordination (¶14) - Congress approved the Fiscal Consensus agreed with 21 provincial governments in mid-September, 2022. - Fiscal Consensus strategic agenda includes: - revision to the definition of escape clauses; - review role of Federal Fiscal Responsibility Council; - limit on foreign-currency denominated borrowing by provincial governments. - Agenda to be developed by Federal and provincial governments. - Working to increase speed of provincial government fiscal reporting for timely quarterly and end-year general government reports. ### Financing policy and domestic peso market (¶15-16) - Enhanced domestic peso market financing strategy implemented. - Voluntary debt exchanges pushed some 2.3 percent of GDP of obligations falling due in August-October 2022 into Q3:2023. - Recent auctions secured rollover rates near 200 percent by offering interest rates above the effective BCRA policy rate; consideration to increase frequency of short-term issuances. - 2023 goal: continue extending maturities, use inflation- and foreign exchange-linked instruments, with fixed-rate instruments as conditions permit. - Seek to accumulate buffers through issuances of LEDES and normalize yield curve via secondary treasury market operations. - These operations will help limit monetary financing of the fiscal deficit to 0.8 percent in 2022 (below the current program target) and 0.6 percent of GDP in 2023. - Annual borrowing plan completed and to be implemented in Q4-2022 and thereafter. - Medium-term debt strategy (MTDS) to be completed by end-2022 (end-December 2022, SB) with Fund technical support. - Committee for the Development of the Capital Markets to be established to study initiatives to strengthen local debt market. ### External official financing and arrears (¶17-18) - Total external disbursements in H1 2022 reached almost US$800 million, around US$900 million below projections at the first review. - Official net financing expected to pick up to reach US$ 770 million by end-September, and US$ 2,300 million by end-2022, largely reflecting catch-up in programmed budget support. - Bulk of net official financing from multilateral development banks: US$ 2,200 million; remainder from bilateral creditors. - Negotiations with Paris Club creditors resumed aiming for repayment schedule consistent with repayment capacity and debt sustainability. - External arrears being addressed include: - outstanding arrears to vulture funds and holdout creditors that did not participate in the 2005/10 debt exchange or settle under 2016 terms; - disputed and undisputed claims to Yacyreta (undisputed claims reduced to US$9.7 million at end-August 2022, expected to be fully repaid by end-2022); - outstanding sovereign arrears to private external firms. - Court of Appeal found claims of French export credit agency outside statute of limitations; appeal to Argentine Supreme Court under consideration. ### Monetary and exchange rate policies (¶19-21) - Commitment to tackle high inflation and rebuild reserves; need to decisively implement enhanced monetary and FX policies, reduce fiscal deficit, limit monetary financing, and improve wage-price coordination. - Real monetary policy interest rates to remain sufficiently positive. - BCRA raised nominal annual policy rate by about 2300 basis points since end-July, bringing the monthly equivalent policy rate to 6.2 percent. - Policy actions: - narrow interest rate corridor; - proactive Treasury pricing on issuances to align interest rates of peso-denominated assets, improve transmission and reduce exchange rate gap. - Ready to adapt policy based on core inflation, forward-looking inflation measures, and international reserves dynamics to ensure real policy rates stay firmly positive. - Proactive FX management: - rate of crawl to remain consistent with inflation and trading partner currency developments to maintain competitiveness of real effective exchange rate and current account surplus; - boost reserve accumulation and meet program targets; - improve trade balance via export incentive schemes to liquidate soy exports, measures to contain services deficit and transfer pricing abuse; - BCRA operations in non-deliverable futures market focused on addressing disorderly FX market conditions. ### Monetary operations, financial stability, and reserve requirements (¶22-23) - Structural measures to strengthen operational framework and monetary policy effectiveness. - BCRA measures to improve transmission: raise commercial banks’ deposits floor rates and lending ceiling rates. - BCRA developed and published plan to simplify reserve requirements regime (end-June 2022, SB). - Regulations streamline incentives for lending to SMEs and consumers, gradually phase out special rebates on reserve requirements, considering banks’ capital and liquidity and minimizing impact on banking system liquidity. - Banking system remains liquid and well capitalized with strong oversight. - Government securities purchased by BCRA in secondary market to be used to smooth yield curve volatility consistent with monetary and financial stability mandate; gradual tapering of these holdings to be considered as conditions allow. ### Capital flow management policies (CFMs) and easing roadmap (¶24) - CFMs adjusted and tightened in response to heightened FX pressures and reserve losses, including broadening import financing requirements and additional surcharge on overseas credit card payments. - As reserve coverage strengthens, steps will be taken to gradually ease CFM restrictions. - Working group preparing roadmap for easing CFMs to be completed by end-June, 2023 to enable input from requested IMF technical assistance (end-December 2022, SB; reset to end-June 2023, SB). ### Central Bank balance sheet assessment (¶25) - Assessment of BCRA’s balance sheet underway to evaluate health and options to strengthen it using internationally recognized accounting standards with IMF technical assistance. - Based on recommendations, a strategy to gradually and durably improve the central bank’s financial position will be developed (end-December 2022, SB). ### Growth, resilience, and sectoral strategies (¶26-28) - Commitment to boost net export potential to strengthen resilience and foundations for sustainable and inclusive growth. - Efforts to advance legislation and regulations to boost investment and net exports in hydrocarbon, mining, agro-industry, automotive, hydrogen and biotechnology industries. - Intensified discussions with stakeholders and international investors to secure financing and increase investment. - Regulatory enhancements to boost productive and export capacity. - Energy sector focus: - boost domestic energy production, transportation and distribution; - reduce energy costs and reliance on imported energy; - ensure financial sustainability via end-user prices that better reflect production costs and improve targeting/progressivity of energy subsidies. - Supply-side measures: - arrangements with Bolivia and Brazil to secure energy supplies at favorable rates during winter and reduce reliance on costly LNG imports; - construction of Nestor Kirchner gas pipeline: first and second phases expected completed by end-June and end-December 2023, respectively; - pipeline to increase daily supply of domestically-produced gas by 11 million cubic meters starting in July 2023; - launch of new Plan Gas to extend current production volumes to 2028 to incentivize exports; - strengthening bilateral agreements with Chile to expand foreign markets; - objective to improve financial position of sector by updating tariff agreements with electricity distributors for the metropolitan region of Buenos Aires next year and reducing arrears to/from the state-owned electricity dispatch operator. ### Energy subsidy reform and targeting (¶29-30) - June decree established new residential subsidy segmentation to eliminate electricity and gas subsidies by end-2022 for residential consumers nationwide with greatest payment capacity. - Removal schedule: three stages (September, November, and January), with issuance of final resolutions to reach cost recovery for both electricity and gas in January 2023 (proposed end-January 2023, SB). - Implementation supported by voluntary database (RASE) of energy consumers requesting to keep subsidy and classified by socio-economic characteristics. - Estimated share subject to full subsidy removal: around 20 percent of electricity users and 15 percent of gas users. - Further differentiation and caps: - subsidy differentiation between middle-income and low-income consumers and consumption cap for middle-income consumers; - increased reference prices for electricity (PEST) and gas (PIST) effective June 1. - 2023 pricing rule: overall increase in subsidized reference prices capped at 40 percent and 80 percent of growth in the wage index for low- and middle-income consumers, respectively. - Middle-income residential consumers subject to additional consumption cap and pay full cost for: - electricity use above 400KWh/month (with higher thresholds for some regions without access to gas); - gas use above 70 percent of the previous 5-year average for each category of users in the relevant region. - Phased implementation aligned with subsidy removals in ¶29 to contain subsidy bill and improve energy conservation. *International Monetary Fund — Argentina staff report extract (selected paragraphs).* ### 31. We are also fully removing electricity subsidies for commercial users. Commercial users ### 1argea2022003 - 31. We are also fully removing electricity subsidies for commercial users. Commercial users ### Removal of electricity subsidies for commercial users - Commercial users (defined in ¶33, TMU) that currently receive electricity subsidies will have these subsidies: - significantly reduced in 2023; and - fully eliminated during 2024. ### Medium-term national energy strategy (development and objectives) - A national strategy to improve the efficiency and financial sustainability of the energy sector in the medium term is being developed, supported by World Bank technical assistance. - The strategy aims to reduce costly energy subsidies, improve the quality of energy services, and safeguard affordability for vulnerable households, with special emphasis on the electricity sector. - Key actions included in the strategy: - i. Improve energy efficiency for the sector as a whole by tackling consumption inefficiencies, better tailoring efficiency policies to regional consumption patterns, and reducing losses in the distribution sector through improvements in metering, billing, and user-targeting. - ii. Support electricity generation cost management by expanding hydroelectricity and other renewables generation capacity, and improving risk management for energy imports. - iii. Strengthen the electricity distribution and transmission segment: strengthen federal regulatory coordination for the distribution and transmission sector; improve current Value-Added Distribution allocation schemes and service quality provision, including through reviewing minimum quality standards and incentives. - iv. Strengthen the recent electricity and gas segmentation scheme by improving databases and the exchange of information to better target energy subsidies, and ensure that tariffs are fully cost-reflective for those able to afford them. An initial detailed plan will be developed by the end of the year to strengthen the implementation of the segmentation scheme going forward. - v. Improve the overall financial sustainability of the sector by reviewing cost generation and remuneration criteria across different subsectors and consumers, to ensure a more sustainable sector and that over time end-user tariffs better and more predictably reflect wholesale gas and electricity costs. - Timing and deliverables: - The Energy Secretariat expects to publish a draft strategy for consultation with key stakeholders by the end of the year, along with a detailed plan to improve implementation of the segmentation scheme (end-September 2022, SB; modified and reset to end-December 2022, SB). ### Transparency, governance, and AML/CFT progress - Preparations ahead of FATF evaluation in 2023: - Completed a gap analysis of the entire AML/CFT regime against FATF’s 40 Recommendations. - In consultation with IMF staff, key items to be incorporated into amended AML/CFT legislation or relevant regulations will be identified during the Congressional review process. - The Financial Intelligence Unit (FIU) is preparing resolutions to facilitate prompt and full implementation of amended legislation once approved. - Finalized and adopted the national risk assessment of money laundering, consolidated with an updated terrorist financing assessment (Decrees Nº 652/2022 and Nº 653/2022). - Remain on track to publish the National AML/CFT Strategy (end-September 2022, SB), including recommendations to mitigate the risks, vulnerabilities, and threats identified in the national risk assessments. ### Program monitoring and adjustments (quantitative targets and TMU) - Program monitoring: - Program targets and structural benchmarks have been adjusted to reflect the new macroeconomic framework and policy priorities. - The program will continue to be monitored through quarterly reviews. Revised targets and definitions are set out in Table 1 and further specified in the Technical Memorandum of Understanding (TMU). - TMU methodological details and key numeric assumptions: - For program purposes, all foreign currency-related assets, liabilities, and flows will be evaluated at “program exchange rates” as defined below, except items affecting government fiscal balances, which will be measured at current exchange rates. The program exchange rates are those that prevailed on March 2, 2022. - Inflation point estimates used for setting program PCs and ITs: 95 percent in 2022 and 60 percent in 2023 (end of period), within the revised program inflation range. - Program exchange rates (as shown in Table 1): - Argentine Pesos to the US dollar 1/107.93 - Argentine Pesos to the SDR 1/150.08 - Argentine Pesos to the Euro 1/119.83 - Argentine Pesos to the Canadian dollar 1/85.21 - Argentine Pesos to the British pound 1/144.22 - Argentine Pesos to the Renminbi 1/17.07 - Gold price (US$/ounce) 2/1,928.72 - Notes on exchange rates and prices: - 1/ Rate published by the BCRA as of March 2, 2022. - 2/ Spot price published by Bloomberg as of March 2, 2022. - Fiscal definitions and measurement (selected highlights): - The Federal government for program purposes consists of the central administration, the social security institutions, the decentralized institutions (Administración Nacional), PAMI, fiduciary funds, and other entities and enterprises of the federal government. - Primary balance definition: - Measured above-the-line in accordance with “Esquema IMIG” = total revenues (ingresos totales) minus primary spending (gastos primarios). - Revenues are recorded on a cash basis and include tax revenues (ingresos tributarios), revenue income (rentas de la propiedad), other current revenues (otros ingresos corrientes), and capital revenues (ingresos de capital). - For assessing the primary deficit floor, revenues exclude: financial transfers from the Central Bank (including Utilidades and Adelantos Transitorios), interest income from intra-public sector holdings of securities and debt obligations, proceeds from sale of financial assets, and special drawing rights (SDRs) allocated by the Fund or received bilaterally from other IMF members. - Revenue income from issuance of government debt that is part of non-tax revenues (resto rentas de la propiedad) will be capped at ARS$222.1 billion in 2022 and will be excluded from revenues in 2023 for calculation of the primary fiscal deficit under the program. - Primary expenditure: - Recorded on a cash basis and includes spending on social protection (prestaciones sociales), economic subsidies (subsidios económicos), operational expenses (gastos de funcionamiento), current transfers to provinces (transferencias corrientes a provincias), other current spending (otros gastos corrientes), and capital spending (gastos de capital), which includes capital transfers to provinces. - Treatment of PPPs and non-cash settlements: - Government-funded public-private partnerships treated as traditional public procurements and recorded in budget data as they occur (cash basis). - All primary expenditures directly settled with bonds or any other form of non-cash liabilities will be recorded as spending above-the-line and contribute to a decrease in the primary balance, with specified exclusions related to certain province/City of Buenos Aires court-related obligations as of March 3, 2022, and ICSID or similar arbitration rulings. - Measurement and monitoring: - The Federal government’s primary balance is measured at each test date as the cumulative value starting from the beginning of each calendar year. - All fiscal data needed for program monitoring will be provided to the Fund with a lag of no more than 25 calendar days after the end of each month. - Adjustor for external project financing disbursements: - The target for the primary balance will be adjusted up (down) by the shortfall (excess) in disbursements of project loans from multilateral and bilateral partners compared to project loans in the program baseline (Table 2). - The value of the adjustor is capped at cumulative 0.2 percent of GDP in 2022 and 2023 (163,511 million pesos and 294,343 million pesos, respectively). *Source: Excerpt from 1argea2022003 PDF (Argentina IMF report) provided in the content unit.* ### 9. Definition: Domestic arrears are defined as the floating debt, that is the difference between ### 1argea2022003 - 9. Definition: Domestic arrears are defined as the floating debt, that is the difference between ### Definition of domestic arrears - Domestic arrears are defined as the floating debt: the difference between primary spending recorded on an accrual basis (gasto devengado, from the SIDIF system) and primary spending recorded on a cash basis (base caja, from the Treasury). - Included components: transferencias figurativas, gasto en personal (primary spending for personnel), acquisition of goods and services (bienes y servicios), nonprofessional services (servicios no profesionales), capital expenditures (bienes de uso), and transfers (transferencias). - Clarification: Transferencias figurativas were excluded for measurement against the end-March 2022 performance criterion, but the TMU was updated to clarify that, starting from the end-June 2022 performance criterion, transferencias figurativas will be included in the definition of domestic arrears. - Adjustment note: The upward adjustment to the primary balance would exclude already executed expenditures linked to projects with temporary delays on their associated external disbursements up to a maximum of ARS30,000 million pesos in 2022. - Cap note: The cap for the adjustor for end-June 2022 was set in the TMU of IMF Country Report No. 22/192 at 0.2 percent of the nominal GDP projected at that time (153,042 million pesos). ### Stock of domestic arrears (AR$ millions) — cumulative from January 1 each year - end-March 2022: 27,028 - end-June 2022: 78,453 - end-September 2022: 142,728 - end-December 2022: 256,927 - end-March 2023: 29,360 - end-June 2023: 148,324 ### Measurement and targets for domestic arrears - Measurement frequency: arrears are measured on a daily basis. - Program cap objective 2022: reduce the stock from 1.2 percent of GDP at end-2021 to 0.8 percent of GDP (654,045 million pesos) in Q4 2022; the quarterly average cap for the daily stock of arrears for 2022 is set consistent with this objective. - 2023 cap: The quarterly average cap for the daily stock of arrears will remain unchanged at 0.8 percent of GDP during 2023 (1,177,375 million pesos). ### Monitoring of domestic arrears - Daily data on the stock of arrears and underlying spending on an accrual and cash basis, recorded at daily frequency, will be provided to the Fund with a lag of no more than 25 calendar days after the end of each month. ### Federal government non-accumulation of external debt payments arrears — definitions - Debt: current liability under contract requiring future asset/service payments; includes loans, suppliers’ credits, and leases (debt equals present value at lease inception of expected lease payments excluding operation/repair/maintenance). - Arrears, penalties, judicial damages arising from failure to make payment under contractual obligation that constitutes debt are debt; failure to pay obligations not considered debt (e.g., payment on delivery) will not give rise to debt. - External debt (for program purposes): determined by residency criterion, encompassing nonresident holdings of Argentine law peso and foreign currency debt. - External arrears (program monitoring): external debt obligations (principal and interest) falling due after March 3, 2022, that have not been paid, considering contractual grace periods. ### Coverage and monitoring of external arrears - Coverage: performance criterion covers the federal government. - Exclusions: (i) arrears on trade credits, (ii) arrears on debt subject to renegotiation or restructuring, (iii) arrears resulting from nonpayment of commercial claims subject to litigation initiated prior to March 3, 2022. - Monitoring: this performance criterion will be monitored on a continuous basis. ### Cumulative floor on the change in Net International Reserves (NIR) of BCRA — definitions - NIR: balance of payments concept = U.S. dollar value of gross official reserves of the BCRA minus gross official liabilities; non-U.S. dollar foreign assets/liabilities converted at program exchange rates. - Gross official reserves include: (i) monetary claims, (ii) free gold, (iii) holdings of SDRs, including all Fund disbursements since March 25, 2022, (iv) reserve position in the IMF, (v) holdings of fixed income instruments, (vi) net cash balances within ALADI. - Excluded from reserves: assets pledged/collateralized/encumbered; claims on residents; claims in foreign exchange from derivatives in foreign currency vis-à-vis domestic currency; precious metals other than gold; assets in nonconvertible currencies; illiquid assets. - Gross official liabilities in foreign currencies include: (i) foreign currency liabilities with original maturity of one year or less, (ii) Fund cumulative disbursements except for the net financing component of the program (SDR 3.166 billion), net of cumulative Fund payments since March 25, 2022, (iii) any deliverable forward FX liabilities on a net basis payable in foreign currencies directly undertaken by the BCRA or by any other financial institutions on behalf of the BCRA. - Specific items treated as foreign exchange liabilities of BCRA with maturity of one year or less for program purposes: foreign currency swap with the People’s Bank of China and with the BIS, foreign exchange bank reserve requirements, SEDESA, ALADI and other non-resident deposits. - Federal government foreign liabilities nor its FX deposits at the BCRA are not considered gross foreign liabilities of the BCRA. ### Measurement and monitoring of NIR target - Measurement: change in NIR = cumulative change in stock of NIR at each test date relative to stock on December 31, 2021. - Monitoring: foreign exchange asset and liability data at the BCRA provided to the Fund at daily frequency within two days. ### NIR adjustors - Official non-project loans and grants: NIR targets adjusted upward (downward) by surplus (shortfall) in program loan disbursements and grants from multilateral institutions (BCIE, IBRD, IDB, CAF) and bilateral partners, relative to baseline in Table 3. - Downward adjustor cap: capped at a cumulative of US$750 million in each calendar year. - Program loan disbursements definition: external loan disbursements (excluding project financing disbursements and IMF budget support) from official creditors for financing the general government. - Paris Club payments: starting end-December 2022 performance criterion, NIR accumulation targets will be adjusted downward by amount of any payments to Paris Club creditors relating to outstanding debt reprofiled in 2014. ### Program loan disbursements — Baseline projection (In millions of US$) — cumulative from January 1 of each year - end-March 2022: 55 - end-June 2022: 62 - end-September 2022: 1,132 - end-December 2022: 1,967 - end-March 2023: 20 - end-June 2023: 20 ### Cumulative ceiling on the BCRA’s financing of the Federal Government - Definition: BCRA financing includes (i) overdraft transfers (Adelantos Transitorios), (ii) distribution of profits (Utilidades), (iii) acquisition of government debt in the primary market or by direct purchases from public institutions. - Cap measurement 2022: cap at 654,045 million pesos (0.8 percent of GDP in 2022) by end-December 2022, cumulative flows from end-December 2021 in millions of pesos. - Cap measurement 2023: cap of cumulative flows by end-December 2023 set at 0.6 percent of GDP (883,031 million pesos), with zero net financing in 2024. - Clarification: Any decrease in the stock of Adelantos shall only reflect cash payments in pesos by the Treasury to the BCRA. Transfer of Letras Intransferibles to the BCRA will not reduce the stock of Adelantos. - Monitoring: Daily data provided to the Fund within two days; flow measured at each test date as cumulative value starting from beginning of calendar year. ### Continuous performance criteria - Commitments: seek not to (i) impose or intensify any exchange restrictions, (ii) introduce or modify Multiple Currency Practices (MCPs), (iii) conclude bilateral payment agreements inconsistent with Article VIII, (iv) impose or intensify import restrictions for balance of payment reasons. ### Quantitative indicative targets — selected variable definitions and measurement - Cumulative Floor on Real Federal Government Revenues: - Definition: Federal government revenues as defined in ¶5. - Measurement: “Real” revenues = nominal monthly revenues deflated by monthly headline consumer price index published by INDEC (nivel general del Índice de precios al consumidor (IPC)). Measured cumulatively from start of calendar year and compared with program baseline projection. - Note: This target will no longer be part of program conditionality after June 2022. - Monitoring: federal government revenue data provided with lag no more than 25 calendar days after month end. - Cumulative Floor on Federal Government Spending on Social Assistance Programs: - Definition: cumulative sum of all federal government spending (current and capital) on: Asignación Universal para Protección Social (includes Asignación Universal por Hijo, Asignación por Embarazo, Ayuda Escolar Anual), Tarjeta Alimentar, Progresar. - Monitoring: data provided with lag no more than 25 calendar days after month end. - Ceiling on the BCRA’s Stock of Non-Deliverable Futures: - Definition: net of U.S. dollar notional value of all long and short position contracts entered by BCRA involving the Argentine peso. - Measurement: net stock = value of all short position contracts minus value of all long position contracts. - Caps: capped at US$9 billion by end-2022, and at US$9 billion by end-2023. - Reference stock: stock of net non-deliverable futures stood at US$4.185 billion on December 31, 2021. - Monitoring: indicative target monitored quarterly; daily data provided to the Fund within two working days. ### Other definitions relevant for program conditionality - Wage growth: - Definition: Average wage growth for energy bill adjustments (excluding subsidy-segmentation scheme beneficiaries) defined by Salary Variation Coefficient (Coeficiente de Variacion Salarial (CVS)) as established by vetoed Law 27.443; published by INDEC; covers registered private sector, unregistered private sector and public sector. - Energy prices and user categories: - Energy prices: regulated pass-through prices paid by distributors for electricity (precio estacional, PEST) and gas (precio del gas natural en punto de ingreso al sistema de transporte, PIST). - User categories for electricity and natural gas at regulated prices: (i) high-income residential users and those who did not apply for the subsidy (Nivel 1); (ii) low-income residential users (Nivel 2); (iii) middle income residential users (Nivel 3); (iv) commercial users; (v) other non-residential users subsidized as low-income residential users (Nivel 2); (vi) large non-residential users (GUDIs) (applies for electricity only). - Measurement for program purposes: energy price measured as weighted averages of actual PESTs/PISTs charged to different categories with weights based on estimates of energy consumption. - Commercial electricity users: all non-residential users other than large industrials (GUDIs), public hospitals, educational entities, welfare entities, and social clubs. - Monitoring: for each category, data on estimated energy consumption and actual PEST and PIST values provided to the Fund. ### Other information requirements (data provision frequency and items) - Daily: - Nominal exchange rates; total currency issued by BCRA; deposits at BCRA; total liquidity assistance to banks through normal BCRA operations including overdrafts; interest rates on overnight deposits. - Aggregated banks’ foreign exchange positions by category: public national; public provincial; private domestic; private foreign; small banks. - BCRA sales and purchases of securities settled in different currencies: weekly frequency, no more than two business days after week end. - BCRA position of non-deliverable futures by maturity: provided within two working days. - Weekly: - BCRA balance sheet. - Daily data on BCRA holdings of government securities by maturity. - Daily data on BCRA-issued securities by type and interest rate. - Daily data on sales and purchases of securities settled in different currencies recorded/provided by Comisión Nacional de Valores, including BCRA trading; includes daily estimation of total stocks and implicit exchange rate of representative securities transacted in the CCL and MEP modalities and operations. - Daily data on Treasury deposits in SDRs at the BCRA. - Fortnightly: - Interest rates on domestic debt instruments including LELITE, LEDES, LECER, LEPAS, BONAR, BONTE, BONAD and BONCER (different maturities). - Daily data on external financing from each multilateral and bilateral creditor, broken down by budget support and project financing, and by largest bilateral projects. - Monthly (lag no more than 25 days after month end): - Federal government operations including monthly cash flow from start to end of current fiscal year (and backward revisions), in IMIG and AIF formats. - Specific reporting: i. Revenues from sales of physical assets and 12-month projections for future sales; ii. Income related to issuance of government debt securities (resto de rentas de la propiedad). - Data on stock of domestic arrears by ministry or agency. - Fiscal financing sources (below-the-line), including BCRA transfers, issuance of domestic public securities, financing from within non-financial public sector, external financing, other financing schemes. - Detailed quarterly financing plan for coming twelve months to be provided one month in advance. - External financing received and projections for coming four quarters, categorized by program and project. - On federal debt: - i. Domestic and external debt service with lag no more than 25 days after month end; projected monthly federal government amortization/repayments and interest payments (local currency and FX bonds, treasury bills, Eurobonds, domestic loans, external commercial and external official loans), including direct and guaranteed debt; in case of government guaranteed debt issuance, include name of guaranteed individual/institution. - ii. Information on stock of external arrears reported on a continuous basis. - iii. Federal government debt stock by currency as at end month, including by creditor, instrument, and direct/guaranteed. - iv. Balances of the federal government at the central bank and in the commercial banking system needed to determine cash position. - Required and excess reserves of banking sector in local and foreign currency. - Deposits in banking system: current accounts, savings, time deposits within six weeks after month end; average monthly interest rates on loans and deposits within two weeks of month end; weighted average deposit and loan rates within six weeks after month end. - Balance sheets of other financial corporations (non-deposit taking), including holdings of federal and provincial debt and BCRA instruments within one month after month end. - Data on total loans value of all new federal government-funded public private partnerships. - Semi-annual: - Federal government expenditures to provinces and Autonomous City of Buenos Aires related to settlement of liabilities associated with pensions, revenue sharing and expenditure allocation, and payments of arrears per ICSID or similar arbitration rulings. - On provincial debt: - i. Quarterly data on provincial government debt stock by currency provided within six months of semester close (end-June, end-December), including by creditor, instrument, and direct/guaranteed. - ii. Quarterly domestic and external debt service of provincial governments provided within six months of semester close. - iii. Quarterly projections for following semester for provincial debt amortization/repayments and interest payments, at least 30 days before end of each semester; includes local currency and FX bonds, treasury bills, Eurobonds, domestic loans, external commercial and external official loans; both direct and guaranteed debt; in case of government guaranteed debt, include name of guaranteed individual/institution. *Supplement prepared by the Argentina team of the Western Hemisphere Department; October 4, 2022.* ### 1. Consistent with the baseline projections, recently released data suggest an incipient ### 1argea2022003 - 1. Consistent with the baseline projections, recently released data suggest an incipient ### Output growth, labor market, and poverty - Economic activity: flat (m/m) in July (down from 1.2 percent m/m in June), bringing expansion through the first seven months of the year to 6.4 percent (y/y). - Growth composition: fairly balanced across most sectors. - Labor market: rising participation rates and declining unemployment, reaching 6.9 percent in Q2:2022. - Poverty: - Overall poverty rate fell to 36.5 percent in S1:2022 from 37.3 percent in S2:2021. - Extreme poverty rose to 8.8 percent from 8.2 percent, largely reflecting the rise in food prices and despite increased social support. ### Program quantitative performance through end-September - General statement: Available data confirm that key end-September quantitative program targets have been met. - Net international reserves (NIR) — performance criterion (PC): - The cumulative change in NIR through end-September reached US$4.6 billion — versus an adjusted program floor of US$3.6 billion. - Largely driven by a scheme (September 5-30) to incentivize the liquidation of soy stocks that supported the settlement and sale of more than US$8 billion of soybean and derivatives. - Staff note: measures are being considered to deal with the rapid widening of the trade services deficit. - Central bank financing of the federal government — performance criterion (PC): - Commitment: cap monetary financing of the fiscal deficit to 0.8 percent of GDP in 2022. - Central bank financing at end-September: ARS 620 billion, below the program ceiling of ARS 665 billion. - Reduced reliance on BCRA transfers in September supported by strong net domestic debt placements of around 0.5 percent of GDP, with minimal BCRA intervention in the secondary bond market. - Central bank stock of non-deliverable futures (indicative target): - Stock narrowed to US$3.1 billion by end-September, significantly below the program ceiling of US$9billion. - Note: some BCRA intervention in the NDF market in late September in response to volatile market conditions. ### AML/CFT strategy and structural benchmark - Milestone: Publication of the National AML/CFT Strategy (met end-September structural benchmark) in preparation for a FATF evaluation in 2023. - Development: Strategy developed in consultation with key stakeholders and IMF staff. - Strategy reflects recommendations from ML/TF national risk assessments. - Key objectives: - (i) harmonizing the AML/CFT legal and regulatory framework in line with FATF standard; - (ii) strengthening the detection and application of sanctions related to ML/TF activities; - (iii) enhancing the identification of ultimate beneficial owners of legal persons/arrangements. - Implementation envisaged through 2024. ### Selected entries from Table 1. Argentina: Baseline Quantitative Performance Criteria and Indicative Targets (In Billions of Argentine Pesos, Unless Otherwise Stated) - Fiscal targets — Performance Criteria - 1. Cumulative floor on the federal government primary balance 3/ : 8/-874.4-849.0-800.7Met-1142.1n.a.n.a.n.a.-1156.8 - 2. Ceiling on the federal government stock of domestic arrears 4/ : 612.2...489.4Met612.2...n.a.n.a.654.0 - Continuous Performance Criterion - 3. Non-accumulation of external debt payments arrears by the federal government : 0.0...0.0Met0.0...0.0Met... - Indicative Targets - 4. Cumulative floor on real federal government revenues 3/ 5/ : 5179.7...5169.6Not met7763.9...n.a.n.a.... - 5. Cumulative floor on federal government spending on social assistance programs : 332.2...343.4Met542.1...n.a.n.a.565.3 - Monetary targets — Performance Criteria - 6. Cumulative floor on the change in net international reserves of BCRA 6/ 8/ : 3.4502.9502.655Not met 4.1003.6004.627Met... - 7. Cumulative ceiling on central bank financing of the federal government 3/ : 475.8...435.1Met665.4...620.1Met... - Indicative Target: (table continues) *Source: IMF staff report content provided in the supplied document.* ### 8. Ceiling on the central bank stock of non-deliverable futures 7/7.000...4.358Met9.000...3.130Met... ### 8. Ceiling on the central bank stock of non-deliverable futures 7/7.000...4.358Met9.000...3.130Met... ### Program performance and targets - Targets and definitions: - 1/ Targets as defined in the Technical Memorandum of Understanding (TMU). - 2/ Based on program exchange rates defined in the TMU. - 3/ Flows from January 1 through December 31. - 8/ Targets subject to adjustors as defined in the TMU. - 4/ Includes intra-public sector transfers (transferencias figurativas). - 5/ Rebased assuming CPI=100 at end-2021. This target will no longer be part of program conditionality after - 6/ In billions of U.S. dollars. The change is measured against the value of NIR on December 31, 2021, which stood at US$2.325 billion. It excludes payments to Paris Club from September 2022 onwards. - 7/ In billions of U.S. dollars. The stock of non-deliverable futures on December 31, 2021 stood at US$ 4.185 billion, as defined in the TMU. - Performance through end-June and end-September 2022: - Central bank financing of the fiscal deficit limited to ARS 435 billion (0.54 percent of GDP) through end-June, below the program target of ARS 476 billion (0.6 percent of GDP). - International Reserve accumulation fell US$296 million short of the adjusted program target for end June but rebounded during September; the target was met in September. - Stock of central bank non-deliverable futures narrowed through end-June 2022 and remained well below the program’s ceiling. - All three end-June structural benchmarks were met. - Authorities’ assessment: - All Performance Criteria through September will be met; monetary financing and reserve accumulation PCs were met already; preliminary data indicate the fiscal PC will be met. - Estimate that, had there been no war, stock of net international reserves would be around US$ 4.9 billion larger. ### Macroeconomic framework and outlook - Recent growth and labor market: - Argentine economy grew at an annual rate of 6.5 percent during the first semester of 2022. - Real GDP is 10.3 percent above pre-pandemic levels. - Over 350,000 formal private sector jobs added since end-2020 (seasonally adjusted); unemployment fell to its lowest level since 2015. - Updated 2022 projections: - Growth in 2022 projected to remain unchanged at around 4 percent (relative to program approval). - Growth projected to moderate to 2 percent in 2023. - Inflation projected to rise to 95 percent by end-2022. - Inflation projected to fall from around 5 percent by end-2022 to 3.5 by end-2023. - Trade surplus projected to fall to 1.2 percent of GDP (from 3.1 percent of GDP in 2021). - End-2022 reserve accumulation target revised down by US$0.8 billion; authorities expect compensation during 2023 with projected trade surplus rising to 2.3 percent of GDP in 2023. - Recent developments: - After peaking at 7.4 percent m/m in July, headline inflation fell to 7.0 percent m/m in August. - Increase of almost US$5 billion in international reserves in September driven by temporary incentive schemes to increase soy liquidation. ### Fiscal policy and public finances - Primary and fiscal deficits: - Primary fiscal deficit through end-June was ARS 800 billion (1 percent of GDP), roughly ARS 50 billion below the adjusted target. - Authorities redoubled efforts to meet the 2022 primary deficit target of 2.5 percent of GDP. - Policy measures and composition: - Stricter expenditure controls, enhanced targeting of subsidies, strengthened revenue compliance. - Advanced payments of income taxes from companies with extraordinary profits; temporary export incentive for the soy sector. - Tightened controls to limit monthly accrual spending to cash resources available and reallocate expenditures within existing budgetary spending ceilings by over 0.5 percent of GDP during the year. - Measures to improve targeting of energy subsidies: expand tariff segmentation, cap utility subsidies for middle income consumers above thresholds, reduce subsidies for commercial users, raise tariffs on water utilities and public transport, contain the wage bill via hiring freeze extension. - 2023 Budget and medium-term: - Bill submitted to Congress consistent with 1.9 percent of GDP program deficit target. - Proposed adjustment underpinned by strengthened revenue mobilization, improved targeting in subsidies (0.5 percent of GDP), streamlining of social assistance (0.7 percent of GDP), and tighter expenditure controls. - Wage bill projected to remain unchanged as a share of GDP; pension spending to follow the indexation formula. - Institutional and reporting reforms: - Fiscal Consensus with 21 provincial governments approved in mid-September 2022. - Work to increase speed of provincial fiscal reporting for timely quarterly and end-year general government reports. - Action plan under development to enhance financial and budget reporting of national public sector entities other than the National Administration; modification of resolution to improve prioritization and selection criteria for public investment projects. ### Financing strategy and external financing - Domestic market financing: - Voluntary debt exchanges pushed around 2.3 percent of GDP of obligations falling due in August-October 2022 into Q3 2023. - Recent auctions secured rollover rates near 200 percent by offering interest rates above the effective BCRA policy rate. - Goal in 2023 to extend maturities, use inflation- and foreign exchange-linked instruments, and accumulate buffers through issuances of LEDES. - Target to reduce monetary financing of the fiscal deficit to 0.8 percent in 2022 (below current program target) and 0.6 percent of GDP in 2023. - Medium-term debt strategy (MTDS) to be completed by end-2022 with Fund technical support. - Committee for the Development of the Capital Markets to be established soon. - External financing: - Total external disbursements in H1 2022 reached almost US$800 million, around US$900 million below projections from the first review. - Official net financing expected to reach US$ 770 million by end-September, and US$ 2,300 million by end-2022. - Bulk of net official financing expected from multilateral development banks (US$ 2,200 million) and the remainder from bilateral creditors. - Negotiations with the Paris Club resumed; goal to reach agreement in coming months on repayment schedule consistent with repayment capacity and debt sustainability. ### Monetary, exchange rate, and anti-inflationary policies - Monetary policy stance: - Nominal annual policy rate raised by about 2300 basis points since end-July; monthly equivalent policy rate at 6.2 percent. - Interest rate corridor narrowed; proactive Treasury pricing on issuances to align interest rates of peso-denominated assets. - Authorities committed to ensuring sufficiently positive real monetary policy rates and to adapt policies based on core inflation, forward-looking inflation measures, and international reserves dynamics. - Exchange rate and reserves management: - Rate of crawl of the exchange rate adjusted to remain consistent with inflation and trading partner currency developments. - Central bank intervention in secondary government bond and non-deliverable forward markets has started to unwind. - Government securities recently purchased by the BCRA in the secondary market will be used to smooth yield curve volatility; gradual tapering to be considered as conditions allow. - Reserve requirement and banking sector measures: - BCRA developed and published a plan to simplify the reserve requirements regime; adopted regulations streamline incentives for lending to SMEs and consumers while phasing out special rebates. - Banking system remains liquid and well capitalized, supported by strong oversight. - Capital flow measures and roadmap: - Capital flow measures tightened, including broadening import financing requirements and additional charges on overseas credit card payments. - Working group to analyze CFM restrictions preparing a roadmap expected to be completed by end-June 2023 to enable IMF technical assistance; easing of restrictions envisaged as reserve coverage strengthens. - Safeguards and central bank balance sheet: - In line with the IMF Safeguards Assessment, authorities are evaluating the central bank’s balance sheet health and options to strengthen it based on internationally recognized accounting standards with IMF technical assistance. ### Growth, resilience, and structural measures - Strategic pillars and sectoral priorities: - Authorities’ four pillars: fiscal sustainability, reserve accumulation, promotion of exports (in particular, value-added exports), and continued growth with social inclusion. - Emphasis on knowledge economy, energy, mining, and agro-industry. - Public capital spending and private investment: - Securing adequate levels and efficient execution of public capital spending is critical to raise productivity, expand the export base, and accumulate reserves. - Discussions intensified with international investors to secure financing for hydrocarbon, mining, agro-industry, automotive, hydrogen and biotechnology industries. - Energy sector strategy: - Policies to improve efficiency, fairness, and sustainability of the energy sector; eliminate subsidies for residential users with greatest payment capacity. - Supply-side measures to increase domestic production and unlock energy export potential. - Arrangements with Bolivia and Brazil to secure energy supplies during winter and reduce costly LNG imports. - Construction of Nestor Kirchner gas pipeline: - First and second phases expected to be completed by end-June and end-December 2023, respectively. - Pipeline will support an increase in daily supply of domestically produced gas of 11 million cubic meters (m3), starting in July 2023. - Launch of a new Plan Gas to encourage increased gas supply for the domestic market and incentivize exports. *Source: National authorities and Fund staff estimates and projections as presented in the IMF staff report chapter.* ### 2028. Moreover, our authorities have been working on strengthening bilateral agreements with ### 1argea2022003 - 2028. Moreover, our authorities have been working on strengthening bilateral agreements with ### Energy sector objectives and actions - Objective: improve the financial position of the sector to underpin the increase in domestic production. - Actions planned: - Update tariff agreements with electricity distributors for the metropolitan region of Buenos Aires next year. - Reduce arrears to/from the state-owned electricity dispatch operator. - Strengthen bilateral agreements with Chile to expand foreign markets. ### Residential subsidy segmentation scheme - A decree was issued in June establishing a new residential subsidy segmentation scheme that will eliminate electricity and gas subsidies for residential consumers nationwide with the greatest payment capacity. - Implementation support: - A new voluntary database (RASE) of energy consumers who request to keep the energy subsidy and are classified according to socio-economic characteristics. ### 2023 price caps and consumption thresholds - For 2023: - The overall increase in the subsidized reference prices will be capped at 40 percent and 80 percent of growth in the wage index for low- and middle-income consumers, respectively. - Middle-income residential consumers: - Subject to an additional consumption cap. - Will pay full cost for electricity use above 400KWh/month (with higher thresholds for some regions without access to natural gas). - Will pay full cost for gas use above 70 percent of the previous 5-year average for each category of users in the relevant region. ### Medium-term energy strategy - Development of a government strategy to improve efficiency and financial sustainability of the energy sector in the medium term is advancing. - World Bank technical assistance supports the strategy. - Strategy emphasis and components: - Special emphasis on the electricity sector. - Actions to improve energy efficiency for the sector as a whole. - Support electricity generation cost management. - Strengthen the electricity distribution and transmission segment. - Strengthen the recent electricity and gas segmentation scheme. - Improve the overall financial sustainability of the sector. - Timeline: Authorities expect to publish a draft strategy for consultation with key stakeholders, by the end of the year, along with a plan to improve further the implementation of the segmentation scheme. ### Governance and transparency: AML/CFT - Progress made in strengthening the AML/CFT regime. - Actions undertaken: - Prepared a gap analysis of the entire AML/CFT regime compared to Financial Action Task Force 40 Recommendations; findings to be incorporated as necessary into the amended AML/CFT legislation during the congressional review process. - Finalized and adopted the national risk assessment of money laundering, consolidated with an updated terrorist financing assessment. - On track to publish the National AML/CFT Strategy, including recommendations to mitigate the risks, vulnerabilities, and threats identified in the national risk assessments. - Authorities recognize the need to improve governance and transparency to tackle tax avoidance and external assets formation. ### Conclusion and IMF program commitments - Authorities reaffirm their strengthened commitment to the policies and objectives of the economic program supported by the IMF arrangement under the Extended Fund Facility (EFF). - Commitment to meeting the program's targets for the remainder of 2022 and next year, which will remain generally unchanged. - The updated macroeconomic framework: - Takes into account the more difficult global situation and recent domestic developments. - Emphasizes that growth, resilient policies, and public capital spending to develop infrastructure to pave the way to private investment are as essential as implementation of agreed policy actions. - Adjusts program targets and structural benchmarks to reflect the new macroeconomic framework and policy priorities. - Request to Executive Directors: support the second review under the extended arrangement under the Extended Fund Facility, the requests for waivers of applicability and nonobservance of performance criteria, the modification of performance criteria, and the financing assurances review. *Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1argea2022003.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1argea2022003.pdf_