## 1argea2023001 ## Source details **Canonical URL:** [1argea2023001](https://www.imf.org/-/media/files/publications/cr/2023/english/1argea2023001.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2023/english/1argea2023001.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2023/english/1argea2023001.pdf.json) --- ### Executive summary — context and program performance - Implementation of more prudent macroeconomic policies in the second half of 2022 supported a moderation in inflation and improvements of fiscal and external balances through end-2022. - Large macroeconomic imbalances and an increasingly severe drought have made nascent improvements in inflation and reserve coverage evasive. - Review discussions focused on strengthening policies to secure delivery of key underlying program objectives and adapting to a more complex environment while avoiding building future vulnerabilities. - All quantitative performance criteria through end-2022 were met, supported by firmer macroeconomic policy implementation in the second half of 2022 and efforts to mobilize external financing. - Progress since end-2022 has been mixed owing to the severe drought, and setbacks in energy, pension, and exchange rate policy. Key recent developments and indicators (preserved as in source) - Economic activity contracted between September and December 2022; real supermarket sales fell by 5.1 percent y/y in December; average real wages down 2.3 percent during 2022. - Monthly inflation averaged 6.3 percent m/m in January/February (compared to 5 percent in November/December), reaching an annual rate of 102.5 percent. - 12-month-ahead inflation expectations remain close to 100 percent y/y at end-2023. - Weak money demand: 4.4 percent of GDP base money in February. - Goods trade surplus US$4.3 billion in Q4:2022 (from deficit of US$0.4 billion in Q3:2022); exports volume growth up 4.1 percent q/q, sa in Q4:2022; goods imports volumes down 11.6 percent q/q, sa in Q4:2022. - Soy FX incentive scheme liquidated US$3 billion worth of soy. - NIR increased by US$5.4 billion during 2022, but reduced by US$5.8 billion since start-2023. - Gross reserve coverage fallen to less than 3 months of imports (after excluding swap lines). - Gap between parallel exchange rates and official rate near 90 percent. - Staff assesses real exchange rate overvaluation between 10-25 percent (Annex I). - Sovereign spreads risen to above 2300 bps. - BCRA raised policy interest rates by 600 bps to 113 percent (in annual effective terms); inflation reference rate 101 percent; 12-month inflation expectations 103.5 percent. - Real spending: cumulative contraction 10 percent y/y during August-December 2022; real spending expanded 8.7 percent y/y during January-July 2022; primary deficit 0.13 percent of GDP in January 2023; real spending 6 percent y/y in January 2023. - New pension moratorium likely to create additional pension liabilities around 0.4 percent of GDP over the medium-term. - Net domestic financing around 0.3 percent of GDP during January-February 2023. - Voluntary exchange addressing 5.2 percent of GDP of peso maturities due Q2:2023; participation around 60 percent (public entities 86 percent, commercial banks 84 percent, other private sector investors 9 percent). - Operation reduced Q2:2023 maturities by 2.8 percent of GDP, leaving around 2.2 percent of GDP to be refinanced; riskier rollovers manageable at 1.3 percent of GDP. - Bank capital buffers 29.6 percent; system-wide NPLs 3.1 percent at end-2022. - Bank holdings of BCRA securities rose from 22 percent to 35 percent (January 2023) since end-2021; banking system exposure to public sector 49 percent of domestic currency assets. - Private sector credit in pesos down 14.2 percent y/y in February in real terms, standing at 6 percent of GDP. - Treasury purchased around US$550 million in securities through a debt buyback in January-February in the parallel FX market; central bank exposure in the non-deliverable forward market fell to US$350 million from a July 2022 peak of US$8 billion. ### Policy recommendations (summarized) - Overall: A stronger policy package is necessary given the increasingly severe drought, weak and falling reserve coverage, and limited financing options. - Fiscal policy - Continue adherence to fiscal targets through timely implementation of high-quality measures, particularly on energy and social assistance, to offset lower export taxes from the drought and make room for priority infrastructure spending. - Mitigate cost from the unfunded mandate created by the new pension moratorium through prudent regulations to ensure entry is targeted at those with the greatest need. - Monetary and FX policy - Maintain a tight monetary policy stance to tackle high and rising inflation pressures and support demand for peso assets. - Sufficiently high real policy rates are needed until inflation expectations are on a clear downward path; further rate increases may be warranted if inflation shocks or FX pressures intensify. - The rate of crawl should be consistent with improvements in external competitiveness over time to reduce the FX gap and boost reserves. - Early decisive actions are needed to rationalize the complex FX regime and improve its effectiveness. - Interventions in the FX parallel market using net international reserves or short-term external debt instruments should be eschewed. - Financing strategy - Continue the proactive, market-oriented domestic financing strategy to mobilize net financing and mitigate near-term rollover risks, while limiting vulnerability buildup and protecting debt sustainability. - Ensure timely delivery of external official financing commitments and finalize technical understandings with remaining Paris Club creditors. - Protect the central bank’s balance sheet by limiting interventions in the secondary bond market to addressing financial stability risks. ### Program risks and contingency guidance - Program risks are more elevated due to a less favorable economic backdrop and rising policy implementation challenges. - Key risks: - Worsening drought could further reduce agricultural exports and foreign currency inflows, negatively impacting growth, reserves, inflation, and fiscal balances. - Slower-than-anticipated global growth or tighter global financial conditions could adversely impact Argentina via commodity price channels and the domestic debt market. - Program implementation risks remain very elevated given complex domestic economic, social, and political situation; higher inflation and sharply lower growth could fuel social discontent and undermine program support, particularly given the electoral cycle. - Implications: - Contingency planning and agile policy making are indispensable; additional policy tightening and FX policy adjustments may be required. - The Fund continues to face significant enterprise risks as program risks cannot be fully mitigated. ### Requests and commitments to IMF - Program framework revision requested to reflect the unforeseen impact of the drought; high uncertainties persist regarding its severity and evolution. - Specific proposals: - Modify international reserve accumulation target to partially accommodate the drought while accounting for lower energy imports and agreed offsetting policy measures. - Fiscal and monetary financing targets remain unchanged as a share of GDP, implying a larger underlying consolidation due to lower-than-programmed export taxes. - Authorities request completion of the financing assurances review. - New structural benchmarks proposed in energy policy and tax administration. --- ### Fiscal performance, targets, and measures - Primary fiscal deficit through end-December reached ARS 1955 billion (2.3 percent of GDP), meeting the adjusted program target by around ARS 60 billion. - Stock of domestic arrears: - Average ARS 616 billion in Q4 (below program ceiling ARS 654 billion). - Rose to ARS 1000 billion in final weeks of the year; fell to around ARS 700 billion by end-January 2023. - Fiscal projections and table entries (preserved): - Primary fiscal balance: -2.3 (2022), -1.9 (2023) - Federal government debt (% GDP): 80.9 (2021), 79.7 (2022), 83.2 (2022?), 71.1 (2023?), 72.2 (2023?) — preserved as in table. - Revenues and expenditures (Percent of GDP, 2022 vs 2023): Revenues 17.7 (2022) vs 16.7 (2023); Tax revenues 10.9 vs 10.2; Social security contributions 5.1 vs 5.3; Nontax revenues 1.7 vs 1.2; Primary expenditures 20.0 vs 18.6. - Key fiscal priorities and measures: - Adhere to primary deficit target of 1.9 percent of GDP in 2023 (0.8 percent of GDP by S1:2023). - Mobilize revenues; enhance monthly cash and budget management controls; continue sector-wide hiring freeze. - Improve targeting of energy subsidies and social assistance. - Address pension moratorium unfunded costs (0.4 percent of GDP medium term) via decree and implementing regulations as prior action, with strong means-testing. - Strengthen expenditure and budget controls: action plan for extra-budgetary public entities; enhanced quarterly reports (end-March 2023, SB); external ex-post COVID audit (end-June 2023, SB); strengthen Treasury Single Account; publish annual audited financial statements; update procurement regulatory framework. ### Revenue mobilization and tax administration - Implementation of the Compliance Risk Management (CRM) for 2023-25 (end-December 2022, SB) will support revenue mobilization. - Immediate priorities: - Develop specific compliance improvement plans based on finalized compliance gap estimates for key taxes (proposed mid-December 2023, SB). - Complete risk segmentation of taxpayers. - Continued reforms: - Strengthen personal wealth taxation (bienes personales) via enhancements of federal and provincial databases (end-March 2023, SB). - Finalize comprehensive evaluation of tax expenditures (end-June 2023, SB). --- ### Monetary policy, reserves, and FX regime - NIR rose by US$5.4 billion in 2022 (above program floor US$5.0 billion) though compliance associated with multiple currency practices and exchange restrictions. - Since start-2023, NIR reduced by US$5.8 billion. - Stock of non-deliverable futures (NDF) narrowed to about US$0.6 billion at end-2022 (well below program indicative target US$9 billion). - For 2023, NIR targets revised down by US$1.8 billion, with most revisions in H1:2023 to reflect drought’s impact (estimated at over US$5 billion after considering lower energy import prices). - Cumulative NIR target through end-2024 remains US$15 billion (drought assumed temporary). - Monetary financing target kept at 0.6 percent of GDP for 2023; monetary base entries preserved: 7.9 (2021), 6.1 (2022), 6.2 (2022?), 6.4 (2023?), 6.3 (2023?) as in table. - Policy guidance: - Maintain tight monetary stance; policy interest rates should remain firmly positive in real terms. - Nominal policy rates must be sufficiently high to ensure inflation and expectations decline; BCRA should be ready to raise rates if shocks materialize. - Rationalize FX regime early and decisively; avoid using NIR or short-term external debt to intervene in parallel FX market. Monetary and FX indicators (as reported) - Monetary policy rate 6.5 - Inflation reference rate 1/6.0 - Core inflation (3-mo ma)6.1 - Inflation expectations (avg, 3-mo ahead) 2/6.1 - Official rate of crawl5.6 - Devaluation expectations (avg, 3-mo ahead) - NDF market 6.5 - Market expectation 2/5.5 --- ### Financing strategy and near-term debt management - Recent debt exchange extended a significant share of Q2 maturities; remaining obligations through end-2023 total 6.6 percent of GDP and require extension. - Commercial banks: 0.7 percent of GDP. - Other private entities: 2.1 percent of GDP. - Further liability management planned to extend public sector peso debt: 3.8 percent of GDP. - Principles: - Remain market-oriented. - Avoid excessive issuance of FX-linked instruments and protections that harm debt sustainability and the BCRA balance sheet. - Recognize weak money demand: raising net domestic financing will be challenging and should not undermine market confidence. - Success hinges on strong and transparent communication. - External official financing: - Total official disbursements during 2022 exceeded US$4.3 billion; shortfalls relative to program limited to US$400 million. - December and early 2023 disbursements: roughly US$1 billion from multilateral creditors and US$540 million from non-Paris Club creditors. - Critical to ensure official creditors meet net financing commitments of about US$1.9 billion this year, and to secure additional financing of US$1.2 billion for second phase of the gas pipeline. - Finalize bilateral agreements with pending Paris Club creditors. --- ### Debt sustainability (DSA) — baseline projections and risk assessment - Chosen coverage: gross federal (central government) debt held by the private, official and public sectors. - Public debt (percent of GDP) selected baseline projections (Table 2): - Actual 2022: 83.27 - 2023 P: 72.27 - 2024: 72.57 - 2025: 73.07 - 2026: 70.36 - 2027: 67.36 - 2028: 64.76 - 2029: 63.66 - 2030: 62.36 - 2031: 62.06 - 2032: 61.2 - Gross financing needs (percent of GDP): - 2022: 16.4 - 2023 P: 15.0 - 2024: 12.3 - 2025: 12.8 - 2026: 8.4 - 2027: 6.8 - 2028: 8.2 - 2029: 10.7 - 2030: 10.6 - 2031: 12.8 - 2032: 12.6 - Debt stock decomposition (selected 2022 figures, Table 4): - Total: US$394.10 bn (100.00; 83.23 percent of GDP) - External: US$144.44 bn (36.65; 30.50) - Multilateral creditors total: US$75.44 bn (19.14; 15.93) - IMF: US$45.71 bn (11.60; 9.65) - World Bank: US$9.20 bn (2.33; 1.94) - ADB/AfDB/IADB: US$20.35 bn (5.16; 4.30) - Domestic total: US$249.66 bn (63.35; 52.72) - T-Bills: US$98.40 bn (24.97; 20.78) - Bonds (domestic): US$129.11 bn (32.76; 27.27) - Staff assessment: - Public debt projected to decline gradually over the long term under baseline of steadfast program implementation. - Risk analysis: staff assesses risks to the baseline as exceptionally high; probability of debt not stabilizing indicators presented in DSA tables. Policy implications from DSA - Realize projections requires stable macro conditions, sustained fiscal consolidation, deepening domestic capital markets, and boosting exports and productivity. - Central bank weak balance sheet highlighted as key contingent liability; reforms needed. --- ### Arrears policy and exceptional access assessment - Arrears: - Authorities are continuing to make good faith efforts to resolve arrears to external private creditors (US$2.3 billion total) and Mobil Exploration (US$196 million). - Two external arrears claims remain under litigation: Bpifrance Assurance Export and Titan Consortium I, LLC. - Exceptional access — staff assessment against four criteria: - Overall: staff assesses Argentina continues to satisfy the four criteria for exceptional access, premised on steadfast implementation of agreed baseline policies, but notes risks are exceptionally high. - CRITERION 1: Exceptional balance of payments pressures — met. - CRITERION 2: Debt sustainability analysis — continues to be met (public debt sustainable but not with high probability). - CRITERION 3: Prospects of regaining private capital market access — continues to be met; market access possible by 2025 if positive developments materialize. - CRITERION 4: Program provides a reasonably strong prospect of success — would be met, conditional on corrective actions and sustained political support. - Staff recommendations: - Avoid further debt buybacks (they undermine reserve coverage). - Avoid near-term external indebtedness to intervene in FX markets. - Completion of financing assurances review recommended. --- ### Impact of the drought on the balance of payments (Box 1) - Revised baseline assumes recovery in rainfall and an average 15 percent downward revision in grain production estimates relative to third review baseline. - Latest estimates suggest drought could be the worst in 60 years; in that event, corn and soy production could be down by an additional 20 and 35 percent, respectively. - Relative to the third review, estimates of agricultural production for exports revised down by US$6 billion, with offsets: - Lower energy imports (around US$1.5 billion). - Increased liquidation of pre-existing grain stocks and rise in exports pre-financing. - Agricultural production figures as presented: - 2022 agricultural production — Wheat 22.1; Corn 59.0; Soy 44.0 - 2023 agricultural production — Third review baseline: Wheat 14.0; Corn 59.9; Soy 50.8 - 2023 agricultural production — Fourth review baseline: Wheat 13.3; Corn 46.8; Soy 45.5 - Policy implication: secure reserves and stability requires stronger policy actions, notably rationalization of the FX regime to disincentivize hoarding, encourage liquidation, and contain imports. ### Impact of FX measures and import controls (Box 4) - Since March 2022, limits on immediate FX access for imports and requirements for import financing have been in place. - Import financing now worth US$8.9 billion, 13 percent of imports. - Share of imports subject to non-automatic licenses (NAL) has risen sharply; measures contributed to sharp slowdown in nonenergy import volumes and reduction in cash value of imports since mid-2022. - Unintended consequences: discretionary administrative import restrictions and “required” financing measures have created costing uncertainties for importers, likely leading to higher markups and price pressures. - Policy implication: calibrate SIRA/SIRASE application to reduce distortions while preserving containment of FX outflows. --- ### Energy sector, pipelines, subsidies, and Box 3 - Status of Kirchner pipeline: - First phase expected completed by end-June 2023 at estimated cost US$1.6 billion (0.3 percent of GDP) in 2023. - Phase 2 cost US$3.2 billion, construction expected to begin July 2023 and be completed by June 2024. - Impact of pipelines: - Supply of domestically produced gas expected to increase by 11 million cubic meters per day upon completion of first phase in June, doubling by September once new compressors installed. - Expected reductions: - Cut imports by 2.5 billion cubic meters in 2023 (US$2 billion). - Cut imports by 10 billion cubic meters in 2024 (US$6.9 billion). - Import construction costs projected around US$0.5 billion for phase 1 and around US$3.2 billion for phase 2 during 2022-23. - External financing being secured for a portion of phase 2; remaining US$2.2 billion financing to be identified will affect net external impact. - BoP impact table (Kirchner Pipeline, in billion USD, preserved entries) - Energy imports savings: 1.3; 0.7; 2.0; 6.9 - Energy exports: 0.1; 0.4; 0.5; 1.9 - Imported construction costs/1: -0.4; -1.1; -0.7; -2.2 - Financing flows: 0.5; 1.5; 1.0; 3.1; 1.3 (components: CAF 0.5; others 0.4; unidentified 1.5 etc.) - Net: 0.2; 1.9; 1.3; 3.3; 10.1 Energy subsidies and tariff segmentation (selected figures) - Energy subsidies expected to decline to 1.5 percent of GDP in 2023 from 1.9 percent in 2022. - LNG import costs for 2023 secured at around US$20 per MMBTU versus budget projections of US$55 per MMBTU. - Tariff segmentation: - High-income residential consumers: move to full cost recovery effective May (85-90 percent increase). - Other commercial users: increases of 31 percent in May, 17 percent in August, and 7 percent in November to reach full cost recovery. - Policy recommendations: - Continue supply-side improvements and bring tariffs closer to cost recovery while protecting the most vulnerable. - Consider strengthening and simplifying segmentation, including automatic indexing of tariffs to costs. --- ### Social spending, Potenciar Trabajo, and Pensions - Potenciar Trabajo audit: - Around 97,000 ineligible claimants suspended; additional 400,000 beneficiaries expected to re-enter labor market; another 500,000 expected to re-enroll in school. - Nearly 160,000 (10 percent) of beneficiaries failed to validate credentials and were given 60 days before removal; about 60,000 appealed; in mid-March, around 85,000 previous beneficiaries permanently deregistered. - Beneficiaries fell from around 1,365,000 (January 2023) to 1,268,000 at the end of February 2023. - Pensions: - New pension moratorium cost estimated at 0.2 percent of GDP for the year; potential additional liabilities around 0.4 percent of GDP over medium-term. - Decree issued to contain fiscal impact and implement strong means-testing; prior action elements partially unmet (no step-up interest structure; no strict prior-contribution limit), but staff views objective met due to larger-than-anticipated instalment payments. - Measures allow access only to individuals who forego other social benefits and access to the “Dolar Solidario”. --- ### Structural benchmarks, monitoring, and program documentation - Structural benchmarks met on time include: - Finalized study of equity and sustainability of pension system. - Revenue compliance action plan. - Medium-term energy plan. - Medium-term debt strategy. - Delays/not met: - Issuance of resolutions to eliminate subsidies for high-income residential users delayed to April from February (February 2023, SB, not met). - Delays in preparation of a strategy to improve the BCRA financial position. - New proposed structural benchmarks: - Issuance of a resolution to update electricity prices to improve progressivity of energy subsidies (end-April, 2023 SB). - Development of tax compliance improvement plans for key taxes (December 15, 2023 SB). - Program documentation: LOI, MEFP, and TMU describe progress and policy commitments; quantitative targets and adjustors clarified in TMU. --- ### External sector assessment (Annex I) — key messages - Overall: external position in 2022 weaker than implied by medium-term fundamentals and desirable policies; elevated external debt vulnerabilities, precariously low international reserves, and lack of access to international capital markets. - 2022 key external figures (% GDP): - NIIP: 18.2 - Gross Assets: 66.7 - Res. Assets: 6.0 - Gross Liab.: 48.5 - Debt Liab.: 31.1 - Current account: - CA estimated deficit of 0.6 percent of GDP in 2022 (down from surplus 1.4 percent in 2021). - Projected CA surplus of 1 percent of GDP in 2023. - IMF staff CA gap assessed at -1.3 ±1 percent of GDP. - Real exchange rate: - IMF staff assesses 2022 REER gap in range 10 to 25 percent (EBA models: 25.4 percent and 10.8 percent respectively; staff CA gap implies REER gap around 16 percent). - FX intervention and reserves: - Gross international reserves at end-2022: US$44.6 billion. - NIR at end-2022: US$8.8 billion (after exclusions), US$3.6 billion lower than end-2019. - Since end-2022, NIR fallen by more than US$5 billion. - Gross international reserves estimated under 70 percent of IMF composite metric at end-2022, 4 months of imports (after excluding swap lines). - Policy prescription: growth-friendly fiscal consolidation, tight monetary policy, streamlined less-distortionary FX regime, and structural reforms to boost exports and FDI. Gradual, conditions-based easing of CFMs as reserve coverage improves. --- *Source: IMF staff report content (1argea2023001) — Argentina, IMF team discussions January–March 2023.* ### EXECUTIVE SUMMARY ### EXECUTIVE SUMMARY ### Context - Implementation of more prudent macroeconomic policies in the second half of 2022 supported a moderation in inflation and improvements of fiscal and external balances through end-2022. - Large macroeconomic imbalances and an increasingly severe drought have made nascent improvements in inflation and reserve coverage evasive. - Recent policy setbacks have contributed to underperformance and added uncertainties about the political resolve to adhere to the program ahead of the elections. - Authorities reaffirmed commitments to implement the program and view it as the key anchor for policy making. - Review discussions focused on strengthening policies to secure delivery of key underlying program objectives and adapting to a more complex environment while avoiding building future vulnerabilities. ### Program performance - All quantitative performance criteria through end-2022 were met, supported by firmer macroeconomic policy implementation in the second half of 2022 and efforts to mobilize external financing. - Fiscal targets were met due to strong expenditure controls, cash management, and higher export duties from another soy FX incentive scheme. - Achievement of the net international reserves (NIR) target reflected efforts to contain imports and encourage liquidation of exports, including administrative schemes that led to multiple currency practices and exchange restrictions. - Progress since end-2022 has been mixed owing to the severe drought, and setbacks in energy, pension, and exchange rate policy. - Specific recent developments affecting performance: - Economic activity contracted between September and December 2022; real supermarket sales fell by 5.1 percent y/y in December; average real wages down 2.3 percent during 2022. - Monthly inflation averaged 6.3 percent m/m in January/February (compared to 5 percent in November/December), reaching an annual rate of 102.5 percent. - 12-month-ahead inflation expectations remain close to 100 percent y/y at end-2023. - Weak money demand: 4.4 percent of GDP base money in February. - Goods trade surplus US$4.3 billion in Q4:2022 (from deficit of US$0.4 billion in Q3:2022); exports volume growth up 4.1 percent q/q, sa in Q4:2022; goods imports volumes down 11.6 percent q/q, sa in Q4:2022. - Liquidation encouraged: soy FX incentive scheme liquidated US$3 billion worth of soy. - NIR increased by US$5.4 billion during 2022, but reduced by US$5.8 billion since start-2023 due to drought-driven export declines, import behavior, net debt service payments, and FX parallel market intervention. - Gross reserve coverage fallen to less than 3 months of imports (after excluding swap lines). - Gap between parallel exchange rates and official rate near 90 percent. - Staff assesses real exchange rate overvaluation between 10-25 percent (Annex I). - Sovereign spreads risen to above 2300 bps. - BCRA raised policy interest rates by 600 bps to 113 percent (in annual effective terms); inflation reference rate 101 percent; 12-month inflation expectations 103.5 percent. - Real spending: cumulative contraction 10 percent y/y during August-December 2022; real spending expanded 8.7 percent y/y during January-July 2022; primary deficit 0.13 percent of GDP in January 2023; real spending 6 percent y/y in January 2023. - New pension moratorium likely to create additional pension liabilities around 0.4 percent of GDP over the medium-term. - Net domestic financing around 0.3 percent of GDP during January-February 2023. - Voluntary exchange addressing 5.2 percent of GDP of peso maturities due Q2:2023; participation around 60 percent (public entities 86 percent, commercial banks 84 percent, other private sector investors 9 percent). - Operation reduced Q2:2023 maturities by 2.8 percent of GDP, leaving around 2.2 percent of GDP to be refinanced; riskier rollovers manageable at 1.3 percent of GDP. - Bank capital buffers 29.6 percent; system-wide NPLs 3.1 percent at end-2022. - Bank holdings of BCRA securities rose from 22 percent to 35 percent (January 2023) since end-2021; banking system exposure to public sector 49 percent of domestic currency assets. - Private sector credit in pesos down 14.2 percent y/y in February in real terms, standing at 6 percent of GDP. - Treasury purchased around US$550 million in securities through a debt buyback in January-February in the parallel FX market; central bank exposure in the non-deliverable forward market fell to US$350 million from a July 2022 peak of US$8 billion. ### Policy recommendations - Overall: A stronger policy package is necessary given the increasingly severe drought, weak and falling reserve coverage, and limited financing options. - Fiscal policy: - Continue adherence to fiscal targets through timely implementation of high-quality measures, particularly on energy and social assistance, to offset lower export taxes from the drought and make room for priority infrastructure spending. - Mitigate cost from the unfunded mandate created by the new pension moratorium through prudent regulations to ensure entry is targeted at those with the greatest need. - Monetary and FX policy: - Maintain a tight monetary policy stance to tackle high and rising inflation pressures and support demand for peso assets. - Sufficiently high real policy rates are needed until inflation expectations are on a clear downward path; further rate increases may be warranted if inflation shocks or FX pressures intensify. - The rate of crawl should be consistent with improvements in external competitiveness over time to reduce the FX gap and boost reserves. - Early decisive actions are needed to rationalize the complex FX regime and improve its effectiveness. - Interventions in the FX parallel market using net international reserves or short-term external debt instruments should be eschewed. - Financing strategy: - Continue the proactive, market-oriented domestic financing strategy to mobilize net financing and mitigate near-term rollover risks, while limiting vulnerability buildup and protecting debt sustainability. - Ensure timely delivery of external official financing commitments and finalize technical understandings with remaining Paris Club creditors to support programmed reserve accumulation and reduction in monetary financing of the fiscal deficit. - Protect the central bank’s balance sheet by limiting interventions in the secondary bond market to addressing financial stability risks. ### Program risks - Program risks are more elevated due to a less favorable economic backdrop and rising policy implementation challenges. - Key risks: - Worsening drought could further reduce agricultural exports and foreign currency inflows, negatively impacting growth, reserves, inflation, and fiscal balances. - Slower-than-anticipated global growth or tighter global financial conditions could adversely impact Argentina via commodity price channels and the domestic debt market. - Program implementation risks remain very elevated given complex domestic economic, social, and political situation; higher inflation and sharply lower growth could fuel social discontent and undermine program support, particularly given the electoral cycle. - Implications: - Contingency planning and agile policy making are indispensable; additional policy tightening and FX policy adjustments may be required. - The Fund continues to face significant enterprise risks as program risks cannot be fully mitigated. ### Program requests and commitments - Program framework revision to reflect the unforeseen impact of the drought; high uncertainties persist regarding its severity and evolution. - Specific proposals: - Modify international reserve accumulation target to partially accommodate the drought while accounting for lower energy imports and agreed offsetting policy measures. - Fiscal and monetary financing targets remain unchanged as a share of GDP, implying a larger underlying consolidation due to lower-than-programmed export taxes. - Authorities request completion of the financing assurances review. - New structural benchmarks proposed in energy policy and tax administration. *Source: EXECUTIVE SUMMARY (1argea2023001) — Argentina, IMF team discussions January–March 2023.* ### 5. All quantitative performance criteria through end-December were met, although ### 1argea2023001 - 5. All quantitative performance criteria through end-December were met, although ### Fiscal - The primary fiscal deficit through end-December reached ARS 1955 billion (2.3 percent of GDP), meeting the adjusted program target by around ARS 60 billion, supported by tight expenditure controls and export duties associated with the reintroduction of the temporary FX incentives for soy producers and exporters in December. - The stock of domestic arrears was contained to an average of ARS 616 billion in Q4, below the program ceiling of ARS 654 billion. - The stock of arrears rose in the final weeks of the year to ARS 1000 billion but fell to around ARS 700 billion by end-January 2023 (seasonal pattern noted). - Fiscal projections and targets: - Primary fiscal balance: -2.3 (2022), -1.9 (2023) - Federal government debt (% GDP): 80.9 (2021), 79.7 (2022), 83.2 (2022? FY), 71.1 (2023?), 72.2 (2023?) — preserved as in table. - Revenues and expenditures (Percent of GDP, 2022 vs 2023): Revenues 17.7 (2022) vs 16.7 (2023); Tax revenues 10.9 vs 10.2; Social security contributions 5.1 vs 5.3; Nontax revenues 1.7 vs 1.2; Primary expenditures 20.0 vs 18.6. - Federal Government: Fiscal 2022-2023 table entries preserved as presented. - Key fiscal policy priorities and measures: - Adhere to the primary deficit target of 1.9 percent of GDP in 2023 (0.8 percent of GDP by S1:2023). - Mobilize revenues; enhance monthly cash and budget management controls; continue adherence to the sector-wide hiring freeze; improve targeting of energy subsidies and social assistance. - Consider further reprioritization of spending (reduced transfers to trust funds, public companies and entities) to ensure timely completion of gas pipelines to lower costly energy imports and fiscal subsidies in H2 2023. - Address unfunded fiscal costs of the pension moratorium (0.4 percent of GDP over the medium term) via timely measures (decree and implementing regulations as prior action) to target entry on those with greatest need, ensuring strong means-testing and other safeguards. - Strengthen expenditure and budget controls: action plan to enhance financial oversight over extra-budgetary public entities; publication of enhanced quarterly reports for public corporations and trust funds (end-March 2023, SB); timely publication of external ex-post audit on COVID spending (end-June 2023, SB); strengthen Treasury Single Account, publish annual audited financial statements, update procurement regulatory framework and improve monitoring mechanisms. ### Monetary and reserves - Net international reserves (NIR) rose by US$5.4 billion in 2022, above the program floor of US$5.0 billion, although compliance was associated with adoption of multiple currency practices and exchange restrictions. - Since August, authorities refrained from direct central bank financing of the fiscal deficit, allowing such financing to remain capped at ARS 620 billion in 2022 (below program ceiling of ARS 665 billion). - The stock of non-deliverable futures (NDF) narrowed to about US$0.6 billion at end-2022, significantly below the program indicative target of US$9 billion. - For 2023, NIR targets are being revised down by US$1.8 billion, with most revisions in H1:2023 to reflect the drought’s impact (estimated at over US$5 billion after considering lower energy import prices). - The cumulative NIR target through end-2024 remains unchanged at US$15 billion (drought assumed temporary). - Monetary financing: target kept unchanged at 0.6 percent of GDP for 2023; monetary base (% of GDP) entries preserved: 7.9 (2021), 6.1 (2022), 6.2 (2022?), 6.4 (2023?), 6.3 (2023?) as in table. - Policy implications: mobilizing reserves will require early and bold efforts to rationalize the FX regime while avoiding reliance on distortionary ad-hoc FX measures. ### Structural benchmarks and implementation - Structural benchmarks met on time: - Finalized study of the equity and sustainability of the pension system. - Revenue compliance action plan. - Medium-term energy plan. - Medium-term debt strategy. - Delays and not met SBs: - Issuance of resolutions to eliminate subsidies for high-income residential users delayed to April from February (February 2023, SB, not met); challenges in ensuring lower income households register for subsidies noted. - Delays in preparation of a strategy to improve the BCRA financial position. - Energy sector: commercials expected to achieve cost recovery by end-2023, with frontloaded increases in May. ### Macroeconomic outlook and risks - Real GDP growth: - Output growth revised up to around 5.4 percent in 2022. - Growth projected to moderate in 2023 due to worsening drought, policy tightening, and continued weakness in real wages; subdued in H1:2023 with recovery conditional on drought and political uncertainties. - GDP growth (avg, %) entries: 10.4 (2021), 4.6 (2022), 5.4 (2022), 2.0 (2023), 2.0 (2023) — preserved as in table. - Inflation: - Projected to decline gradually from over 6 percent m/m in Q1:2023 to around 4 percent by mid-2023; large upside risks persist. - Inflation (avg, %) entries: 48.4 (2021), 72.7 (2022), 72.4 (2022), 76.5 (2023), 79.6 (2023) — preserved as in table. - External balance: - Current account: deficit of 0.5 percent of GDP in 2022; projected surplus of 1 percent of GDP in 2023 (slightly below third review projection due to drought). - Change in net int’l reserves (US$bn): -1.5 (2021), 5.0 (2022), 5.4 (2022), 4.8 (2023), 2.6 (2023) — preserved as in table and text. - Fiscal and financing projections: - Primary fiscal deficit projected to narrow to 1.9 percent of GDP in 2023 from 2.3 percent in 2022. - Real spending estimated to contract by 5 percent in 2023 to compensate for lower export revenues. - Monetary financing of the deficit assumed 0.6 percent of GDP (unchanged). - Medium-term fiscal and financing paths generally unchanged; assumed gradual international market access from 2025 onwards. - Risks: - More severe and prolonged drought could further reduce agricultural exports, foreign currency inflows, and increase inflation, undermining program objectives. - Sharper slowdown in trading partner growth or tighter global financial conditions could add headwinds. - Policy implementation risks may rise given the political cycle; policy slippages or more heterodox approaches could increase FX and bond market pressures and weaken reserve coverage. - Contingency planning and agile macro adjustment will be critical; tighter-than-programmed policies (higher real interest rates, sharper spending cuts, FX policy measures addressing exchange rate misalignment) may be needed. Reliance on administrative responses (price and FX controls) should be avoided. ### Policy discussion and recommended actions - A stronger policy package is necessary in light of the drought, falling reserves, and rising inflation: - Adhere to unchanged primary fiscal deficit target and offset lower export taxes through timely implementation of high-quality measures to better target energy subsidy and social assistance. - Early and decisive actions required to durably address unfunded fiscal costs of the pension moratorium (estimated 0.4 percent of GDP over the medium term). - Address rising inflation pressures by maintaining sufficiently positive real interest rates to encourage peso demand; process expected to be gradual given high inertia and relative price misalignments. - Mobilize reserves via rationalization of the FX regime and avoid distortionary ad-hoc FX measures. - Continued implementation of a well-coordinated domestic financing strategy to manage large and lumpy maturities, while limiting buildup of debt vulnerabilities. ### Energy subsidies and tariffs - Energy subsidies expected to decline to 1.5 percent of GDP in 2023 from 1.9 percent in 2022; average cost recovery estimated to improve due to lower production costs and higher real tariffs (mid-2022 tariffs among the lowest relative to emerging market peers). - Tariff segmentation scheme and planned adjustments: - New resolution to bring tariffs for high-income residential consumers to full cost recovery effective May (85-90 percent increase) and increase tariffs by 31 percent in May for other commercial users and municipal streetlighting (proposed end-April 2023, SB). - For other commercial users, additional increases in August (17 percent) and November (7 percent) to achieve full cost recovery. - LNG import costs for 2023 secured at around US$20 per MMBTU versus budget projections of US$55 per MMBTU. ### Social spending and Potenciar Trabajo - Priority to improve quality and targeting of social spending: - Potenciar Trabajo audit: around 97,000 ineligible claimants suspended; additional 400,000 beneficiaries expected to re-enter labor market; another 500,000 expected to re-enroll in school. - Nearly 160,000 (10 percent) of beneficiaries failed to validate credentials and were given 60 days before removal; about 60,000 appealed; in mid-March, around 85,000 previous beneficiaries permanently deregistered. - Comprehensive evaluation of social support programs (end-March 2023, SB) to reduce program overlaps, including capping total social assistance benefits for those receiving other social transfers at or below the minimum wage. *IMF staff report excerpt (1argea2023001) — content provided by the source document.* ### 15. Revenue mobilization remains necessary. Efforts to strengthen tax administration, ### 1argea2023001 - 15. Revenue mobilization remains necessary. Efforts to strengthen tax administration, ### Revenue mobilization and tax administration - Implementation of the Compliance Risk Management (CRM) for 2023-25 (end-December 2022, SB) will support revenue mobilization; focus should be on timely implementation of the plan. - Immediate priorities: - Development of specific compliance improvement plans, based on finalized compliance gap estimates for key taxes (proposed mid-December 2023, SB). - Complete the risk segmentation of taxpayers. - Continued efforts to improve equity and efficiency of the tax system: - (i) Strengthen personal wealth taxation (bienes personales), including through enhancements of federal and provincial databases (end-March 2023, SB). - (ii) Finalize a comprehensive evaluation of tax expenditures (end-June 2023, SB) to identify options to streamline tax incentive schemes, based on enhanced technical criteria. ### Financing strategy and near-term debt management - Recent debt exchange extended a significant share of Q2 maturities beyond the elections, particularly for debt held by banks, while avoiding increased reliance on USD-linked papers. - Remaining obligations through end-2023 total 6.6 percent of GDP and require extension to avoid debt monetization or forced restructuring. - Tailored approach needed for: - Commercial banks: 0.7 percent of GDP. - Other private entities: 2.1 percent of GDP. - A further liability management operation is planned to extend maturities for most of the remaining peso debt held by the public sector: 3.8 percent of GDP. - Pushing bulk of rollovers beyond the 2023 elections will help reduce uncertainties and facilitate gradual reduction in borrowing costs, while protecting the central bank’s balance sheet. - Strategy principles: - Remain market-oriented. - Avoid excessive issuance of FX-linked instruments, overly onerous interest rates, and protections that harm debt sustainability and the central bank balance sheet. - Recognize weak money demand: raising net domestic financing will be challenging and should not undermine market confidence or balance sheets of other public entities. - Success hinges on strong and transparent communication. - External official financing: total official disbursements during 2022 exceeded US$4.3 billion, with shortfalls relative to program limited to US$400 million. - December and early 2023 disbursements: roughly US$1 billion from multilateral creditors and US$540 million from non-Paris Club creditors (mainly related to the large hydropower dam). - Critical to ensure official creditors meet net financing commitments of about US$1.9 billion this year (¶ 31), and to secure additional financing for construction of the second phase of the gas pipeline (US$1.2 billion). - Prompt finalization of bilateral agreements with pending Paris Club creditors is necessary. ### Monetary and exchange rate policies - Monetary stance: - A tight monetary policy stance remains essential to tackle rising inflation pressures and support peso demand. - Policy interest rates should remain firmly in positive real territory—guided by the enhanced monetary policy framework, based on actual core inflation and forward-looking measures, as well as by broader market and reserves dynamics. - Nominal policy rates must remain sufficiently high to ensure inflation and inflation expectations are put on a clear downward path; the BCRA should stand ready to raise rates in line with the policy framework if inflation shocks materialize. - Transmission and coordination: - Following simplification of the reserve requirements regime, continue efforts to strengthen monetary transmission by: - Enhancing coordination with the Treasury. - Maintaining the narrower corridor on monetary policy instruments. - Gradually unwinding regulated bank deposit and lending rates. - Well-designed wage-price coordination (extended through June and expanded to a broader set of products) could complement disinflation; avoid unilateral, involuntary price controls. - Exchange rate and FX market: - Align the rate of crawl to improve external competitiveness and support reduction in the FX gap and reserves accumulation. - Discontinue interventions in parallel FX markets given scarce reserves. - Central bank purchases of non-deliverable futures should be limited to addressing disorderly FX market conditions, given potential risks to the central bank balance sheet. - Reliance on administrative import restrictions should be carefully calibrated to limit distortionary effects, including on inflation. - Drought-related FX policy actions: - Streamline complex and distortionary FX incentives and restrictions. - Strengthen monitoring and enforcement to address irregularities in imports of goods and services. - Timely submission of the revised Foreign Exchange Criminal Law to congress remains essential (end-March 2023, SB; proposed to be reset to end-May). - As conditions permit, seek gradual unification of the exchange rate regime together with unwinding of capital flow management measures (CFMs) and elimination of MCPs and exchange restrictions. - Authorities requested technical assistance for a roadmap for conditions-based easing of FX controls (end-June 2023, SB). - Protecting and strengthening the BCRA balance sheet: - Stock of central bank securities reached about 12½ percent of GDP at end-2022. - Refrain from temporary advances to the Treasury and limit central bank secondary market purchases (0.1 percent of GDP thus far this year). - Implement domestic financing strategy and coherent FX policy to protect the BCRA’s balance. - Secondary bond market interventions should be limited to ensuring normal market functioning, at market prices, with offsetting sterilization measures. - Medium-term strategy (designed with IMF technical assistance; end-December 2022, SB; not met, progress is ongoing) should include: - Elimination of monetary financing of the fiscal deficit. - Strengthening the quality of existing assets. - Adoption of IFRS. - Recent and forthcoming enhancements in accounting of currency swap bilateral arrangements with central banks and repo transactions, along with financial disclosures towards compliance with IFRS-7 (end-May 2023, SB) are important first steps. - Monetary and FX indicators (as reported): - Monetary policy rate 6.5 - Inflation reference rate 1/6.0 - Core inflation (3-mo ma)6.1 - Inflation expectations (avg, 3-mo ahead) 2/6.1 - Official rate of crawl5.6 - Devaluation expectations (avg, 3-mo ahead) - NDF market 6.5 - Market expectation 2/5.5 ### Other structural policies - Energy sector: - Boosting energy production and increasing efficiency, equity, and sustainability of the energy sector are essential to improve external resilience. - Construction of gas pipelines connecting "Vaca Muerta" reserves to large urban areas can reduce energy imports and boost crude oil and gas exports over the medium term. - Supply-side efforts need accompanying improvements in electricity generation, distribution, and transportation and more predictable regulatory frameworks to encourage investment. - Initial actions underway to implement a new medium-term strategy prepared with World Bank technical assistance (end-December 2022, SB). - Regulatory frameworks: - Advance new legislation and regulation to encourage investment and exports in strategic sectors—hydrocarbon, mining, agroindustry, automotive, hydrogen and biotechnology industries—in a way that ensures a level playing field and avoids costly fiscal and regulatory burdens. - Independent estimates suggest announced investments in lithium and copper could lead to a five-fold increase in mining exports over the next decade (US$18 billion per year by 2030). - AML/CFT: - Strengthen and implement Argentina’s AML/CFT regime ahead of the FATF evaluation in March 2024. - Key reforms identified: terrorist financing, role and responsibility of the financial intelligence unit (FIU), the sanctioning regime, and non-government organizations. - AML/CFT legislation being amended to incorporate virtual assets service providers; the FIU is preparing necessary resolutions to facilitate prompt and full implementation once legislation is approved. ### Program issues, targets, and financing assurances - Program documentation: Attached Letter of Intent (LOI) and Memorandum of Economic and Financial Policies (MEFP) describe progress and future policy commitments; Technical Memorandum of Understanding (TMU) clarifies program definitions and quarterly targets. - Quantitative targets: - Key quantitative fiscal targets broadly unchanged relative to the third review, with minor revisions to the primary balance floor in H2:2023 to reflect nominality. - Authorities request modification of the NIR accumulation target: US$8.0 billion over 2022-2023 (versus US$9.8 billion at the third review) to partially accommodate the more severe drought; offsetting factors include lower global energy prices and policy measures to secure stability. - NIR accumulation target for end 2024 remains unchanged at US$15 billion. - Quarterly performance criteria set through September 2023; quarterly indicative targets through end-December 2023 with revisions to adjustors reflecting updated projections on external disbursements. - Prior action: Authorities will issue a decree and specific regulations to contain fiscal costs of the pension moratorium recently approved by Congress, including targeting entry into the scheme to those with the greatest need. - Structural Benchmarks (new SBs proposed): - (i) Issuance of a resolution to update electricity prices to improve progressivity of energy subsidies, facilitate a faster move towards cost recovery, and support fiscal consolidation (end-April, 2023 SB). - (ii) Development of tax compliance improvement plans for key taxes (December 15, 2023 SB). - Financing assurances: - Official creditors provided firm financing commitments over the next 12 months. - Multilateral development banks (World Bank, IADB, CAF) committed to provide net financing of around US$1.5 billion in 2023 (budget support and project loans). - Paris Club creditors agreed to restructure Argentina’s legacy debt with repayment by September 2028. - Other bilateral creditors committed to provide net financing of around US$0.4 billion per annum starting in 2023, with construction of a hydroelectric powerplant project underway. - Despite NIR shortfalls through end-2023 due to drought, baseline still assumes accumulation of US$15 billion during the program period, with projected cumulative trade surpluses (around US$35 billion) and net FDI inflows (around US$30 billion) more than offsetting net external debt obligations, and CFMs continuing to help limit capital outflows. - Capacity to repay: - Argentina’s capacity to repay Fund obligations remains subject to exceptional risks and hinges on strong policy implementation to improve reserve coverage and resumption of market access by the time Fund repayments come due. - Proposed baseline revision (lower NIR accumulation due to drought) does not alter staff’s assessment of capacity to repay over the medium term. - Full implementation of the EFF would help address the balance of payments need arising from 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 7 percent of exports, or 12 percent of gross reserves, with Fund credit outstanding declining only gradually below 6 percent of GDP by 2027. - Jurisdictional measures: - Authorities requested, and staff supports, extension by twelve months of the Board’s approval on March 25th, 2022, for retention of the MCPs and exchange restrictions identified at arrangement approval in March 2022. - These measures are maintained for balance of payment reasons, are temporary, expected to be gradually eliminated over the arrangement period as conditions allow, and do not give rise to an unfair competitive advantage over other members or discriminate among members. *Source: IMF staff report text provided.* ### 34. Arrears Policy. Consistent with the Fund’s Lending into Arrears policy, staff assesses that the ### 1argea2023001 - 34. Arrears Policy. Consistent with the Fund’s Lending into Arrears policy, staff assesses that the ### Arrears Policy - Staff assessment: - Authorities are continuing to make good faith efforts to resolve arrears to: - the 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$2.3 billion total); - Mobil Exploration, where negotiations remain underway on a repayment plan on principal claims (US$196 million). - Two external arrears claims remain under litigation: - Bpifrance Assurance Export: the firm filed an appeal with the Supreme Court of Justice on December 2, 2022, after the Court of Appeal had rejected the extraordinary appeal submitted by the agency on grounds of statute of limitations. - Titan Consortium I, LLC: a legacy claim currently under litigation on grounds of statute of limitations. - Authorities affirmed that no other external arrears were incurred since the third review. ### Exceptional Access — Staff Assessment Against the Four Criteria - Overall: - Staff assesses that Argentina continues to satisfy the four criteria for exceptional access, premised on steadfast implementation of agreed baseline policies, but notes risks are exceptionally high (severe drought, challenging global environment, domestic implementation risks, pre-election intensification). The assessment is subject to finely balanced judgements. - CRITERION 1: Exceptional balance of payments pressures - Staff assessment: met. - Rationale: - Argentina is experiencing exceptional balance of payments pressures on the financial account, aggravated by the severe drought, low reserve coverage, and broader macroeconomic imbalances. - Meeting very large external debt service obligations during 2023–24 will require Fund financing beyond normal limits and broader international support. - CRITERION 2: Debt sustainability analysis - Staff assessment: continues to be met. - Rationale and caveats: - Under the current baseline and policy framework, Argentina’s public debt is sustainable but not with high probability (see Annex II). - Adequate safeguards are assessed to be in place to meet EA2. - If adverse shocks materialize, staff assesses there would be sufficient restructurable FX debt to the private sector potentially available after the program to improve debt sustainability. - Projected debt and debt service metrics remain above indicative targets set out in the March 2020 Staff Technical Note on Public Debt Sustainability (at the time, consistent with an assessment of sustainable debt with high probability). - Prudent implementation of plans to extend maturities for domestic debt could significantly reduce gross financing needs, though care is needed to avoid overreliance on FX-linked instruments. - Recommendation: avoid further debt buybacks since they undermine reserve coverage and near-term debt service capacity. - CRITERION 3: Prospects of regaining private capital market access - Staff assessment: continues to be met. - Observations: - External bond prices trade at distressed levels, indicating lingering difficulties accessing external market financing. - Difficulties in accumulating reserves persist, aggravated by the drought and policy setbacks, partly reflecting exchange rate misalignment. - Steadfast policy implementation is critical to mobilize reserves and allow gradual market re-access by the time Fund obligations fall due (beginning in late 2026), with prospects of regaining market access by 2025 if positive developments materialize. - Policy guidance and cautions: - Macroeconomic and structural policies should strengthen external competitiveness, trade surpluses, and foreign direct investment, and catalyze net official financing. - Completion of the gas pipelines would significantly improve the external energy trade balance and repayment capacity. - CFMs are needed to limit outflows in the near term, but improvements in reserve coverage should allow their gradual lifting and re-accessing markets starting in 2025. - Avoid debt buybacks or near-term external indebtedness to intervene in FX markets, including operations involving collateral that create more senior claims. - CRITERION 4: Program provides a reasonably strong prospect of success - Staff assessment: would be met. - Rationale and risks: - Economic team committed to implementing the program; program seen as policy anchor. - Corrective actions are being taken after energy and pension policy setbacks; central bank keeps policy interest rates in positive territory. - Political support from key stakeholders remains strong (e.g., commercial banks’ participation in recent voluntary debt exchange). - Risks: social and political support could wane if inflation does not recede and growth falters, especially if the drought worsens; elections could weaken support; criticism from within coalition and opposition is rising; congressional approval of the recent pension moratoria could presage pre-election spending pressures. - Implementation challenges include mitigating rollover risks of domestic debt, requiring broad political support. - Note: While Presidential elections are slated to take place in October, Presidential primaries will take place in August, and key Presidential candidates will be defined by end-June. ### Staff Appraisal — Key Findings and Policy Recommendations - Recent performance and evolving challenges: - Implementation of more prudent macroeconomic policies helped stabilize the economy through end-2022, supporting a moderation in inflation, improvements in fiscal and external balances, and achievement of all end-2022 quantitative performance criteria. - The situation has become more challenging due to the increasingly severe drought and recent policy setbacks. - Policy package required: - Stronger policy package needed to secure macroeconomic stability and maintain program anchoring. - With limited financing and weak/falling reserve coverage, tight macroeconomic policies are essential to offset drought impact, address rising inflation, and secure stability. - Continued implementation of a well-coordinated domestic financing strategy is necessary to deal with large maturities and mobilize reserves; early and decisive efforts needed to rationalize the FX regime. - Fiscal policy: - Achieving the primary fiscal deficit target of 1.9 percent of GDP in 2023 requires decisive efforts to strengthen tax compliance, expenditure controls, and targeting of energy subsidies and social assistance. - Address the unfunded mandate from the new pension moratorium via implementing regulations to ensure the scheme targets retirees with greatest need. - These actions are necessary to safeguard stability and medium-term debt sustainability while providing space for priority infrastructure spending, especially the gas pipelines. - Domestic financing strategy: - Continued prudent implementation is critical to reduce rollover risks and enhance market confidence. - Efforts should mobilize net financing, mitigate near-term rollover risks, limit buildup of vulnerabilities, and safeguard debt sustainability. - Central bank intervention in the secondary bond market should be limited to addressing financial stability risks. - Ensure timely delivery of official program financing and finalize understandings with remaining Paris Club creditors, consistent with the 2022 joint declaration. - Monetary and FX policy: - Steadfast implementation needed to tackle rising inflation and improve external competitiveness. - Sufficiently high real policy rates are needed to encourage demand for peso assets and tackle inflation pressures. - Maintain a tight monetary stance until inflation expectations are clearly on a downward path; central bank should be ready to raise rates if further inflation shocks or FX pressures occur. - Well-designed wage-price coordination could complement disinflation, but involuntary schemes should be discarded. - To improve reserve coverage, the rate of crawl should support competitiveness; early and decisive efforts are needed to rationalize the complex FX regime. - As conditions permit and imbalances are addressed, seek unwinding of CFMs and elimination of MCPs and exchange restrictions; temporary administrative FX measures are not a substitute for sound macroeconomic policy. - Avoid interventions in the parallel FX market using international reserves or near-term external indebtedness. - Boosting net export capacity: - Intensify efforts on the gas pipeline connecting shale reserves with large urban areas and northern regions to reduce energy imports and boost crude oil and gas exports over the medium term. - Enhance regulatory frameworks in strategic sectors (energy, mining, knowledge economy) to boost investment and export potential. - Contingency planning: - With program risks elevated and the drought worsening, agile policy-making and contingency planning are indispensable. - Further policy tightening and improvements in the FX regime may be needed to address shortfalls in exports or domestic financing given scarce reserves. - MCPs and exchange restrictions: - Staff supports the authorities’ request for a 12-month extension of Board approval to maintain MCPs and exchange restrictions (first granted March 2022), given these are temporary, maintained for balance of payments reasons, expected to be gradually eliminated, and do not create unfair advantage or discriminate among members. - Review completions and financing assurances: - Staff supports completion of the Fourth Review under the Extended Arrangement and modification of performance criteria, including requested modification of the reserve accumulation target to partially accommodate drought impacts, taking into account agreed offsetting policy measures. - Staff recommends completion of the financing assurances review, given Argentina’s ongoing good faith efforts to resolve external arrears. ### Box 1 — Impact of the Drought on the Balance of Payments, 2023 - Harvest and production revisions: - Third review baseline assumed moderate wheat damage; drought has become progressively more severe with downward revisions by experts. - Revised baseline assumes recovery in rainfall and an average 15 percent downward revision in grain production estimates. - Risks skewed to downside; latest estimates suggest this drought could be the worst in 60 years. In that event, corn and soy production could be down by an additional 20 and 35 percent, respectively. - Balance of payments impacts and offsets: - Relative to the third review, estimates of agricultural production for exports are revised down by US$6 billion, with offsets: - Lower energy imports (around US$1.5 billion) due to lower-than-projected natural gas prices. - Sector-specific factors: increased liquidation of pre-existing grain stocks (especially soy) and a rise in exports pre-financing as farmers/exporters smooth the shock. - Downside risks: if incentives to hoard exceed smoothing motives or lending conditions are unfavorable, liquidation and pre-financing may not materialize and reserve losses would be higher. - Global grain prices could rise if Argentina’s crop impact is sufficiently severe. - Policy implication: securing reserves and stability requires stronger policy actions, notably early and decisive rationalization of the complex FX regime to disincentivize hoarding, encourage liquidation of grains, and contain imports (especially services and luxury products potentially subject to over invoicing). - Agricultural production figures as presented: - 2022 agricultural production - WheatCornSoy - 22.1 59.0 44.0 - 2023 agricultural production - Third review baseline - 14.0 59.9 50.8 - Fourth review baseline - 13.3 46.8 45.5 - Quarterly Agricultural Exports: Revisions to baseline, billion of USD (chart referenced; soy, corn, wheat revisions noted). ### Box 2 — Energy Subsidy Policies - Overview: - Energy subsidies peaked at 2.1 percent of GDP in 2021, fell marginally to 1.9 percent of GDP last year, and projected to continue declining in 2023 due to lower production costs and a new segmentation scheme. - Estimates are sensitive to costs, inflation, and policy efforts. - Key drivers and projections: - Production cost: - LNG prices projected to fall in 2023 to multi-year lows (US$20 MMBtu) and below budget projections (US$55 MMBtu). - Expansion of cheaper domestic natural gas production/distribution and some recovery in hydroelectric generation expected to reduce real energy production costs by 15-20 percent in 2023. - Tariff segmentation (effective October 2022): - Expected to deliver large improvements in cost recovery for high-income residential consumers and subsidized commercial users (representing 53 percent of subsidized consumption), while protecting low- and middle-income households and small businesses. - Average wholesale electricity prices projected to increase by about 25-35 percent in real terms during 2023: - Subsidized commercial and high-income residential users: 55-70 percent real increase. - Other subsidized users: 15-25 percent real decline. - Lower (upper) range assumes average monthly inflation of 6 percent (4 percent) in 2023. - Assumptions: high income residential users start paying cost recovery in May; ‘tarifa alta’ commercial users (above 800kWh) observe increases in May (31 percent), August (17 percent), November (7 percent) to reach cost recovery; municipalities (street lighting) subject to higher tariffs starting in May. - Average wholesale natural gas prices projected to change by an average of [-3-6] percent in real terms: - Subsidized commercial and high-income residential users: 40-55 percent increase. - Other subsidized users: 20-25 percent real decline. - Average real tariffs and cost recovery remain low by historical standards. - Policy recommendations: - Further efforts needed to converge durably to cost recovery: - Continue supply-side improvements. - Bring tariffs closer to cost recovery while protecting the most vulnerable. - Consider strengthening and simplifying segmentation, including automatic indexing of tariffs to costs (replace ad-hoc adjustments and indexation to past wages) to ensure consistency with financial sustainability, improve regulatory predictability, and encourage investment. - Distributional and modeling notes: - User segmentation classification (RASE database) based on income self-declarations; non-registered residential consumers automatically classified as high-income. - Quoted tariff ranges assume 2023 annual inflation in the range of 60 to 100 percent. - Charts referenced: Subsidies (Percent of GDP) and Real Electricity Tariffs (PEST) (Constant 2022 prices) with projected 2023 values. *Italic: IMF staff report content as provided in the source PDF.* ### Box 3. Energy Sector Potential: Fiscal and External Implications ### Box 3. Energy Sector Potential: Fiscal and External Implications ### Status of gas pipelines - Construction of new gas pipelines connecting the shale oil and gas reserves of Vaca Muerta with large urban areas and the northern provinces is underway. - The first phase of the pipeline is expected to be completed by end-June 2023, at an estimated cost of US$1.6 billion (0.3 percent of GDP) in 2023. - Phase 2 of the pipeline—now in the engineering design stage—would transport gas to additional consumption hubs, at a cost of US$3.2 billion, with construction expected to begin in July 2023 and be completed by June 2024. ### Impact of pipelines - Once complete, the pipeline is projected to reduce energy imports, supporting the planned reduction in fiscal subsidies. - The supply of domestically produced gas is expected to increase by 11 million cubic meters per day upon completion of the first phase in June, doubling by September once new compressors are installed. - Increased distribution of domestic gas will reduce reliance on costlier LNG and Bolivian gas imports, cutting imports by 2.5 billion cubic meters in 2023 (US$2 billion, based on current prices) and by 10 billion cubic meters (US$6.9 billion) in 2024. - This reduced reliance in costly imports is a key driver behind the projected improvement in Argentina’s external and fiscal position. - The “net” near-term external impact will depend importantly on the precise timing and financing of construction. - Import construction costs are projected to be around US$0.5 billion for phase 1 and around US$3.2 billion for phase 2 during 2022-23. - External financing is being secured for a portion of phase 2 of the project from official creditors. - The precise external impact in 2023-24 will depend on the timing of construction and whether additional external financing sources are identified for the remaining US$2.2 billion. ### Other efforts and export potential - In parallel, efforts are being made to increase gas exports to neighboring countries. - Gas sales to Chile, which rose to 7 million cubic meters per day in October 2022, are projected to almost double by 2024 to around US$2 billion, as the Vaca Muerta site comes on stream. - Building additional export capacity to further tap domestic gas reserves would require major infrastructure investment over the medium term, including construction of natural gas liquefaction terminals. - Independent experts suggest that crude oil exports could increase by US$8 billion per year over the medium term, if the necessary investments materialize. ### Medium-term energy transition and fiscal implications - Over time, savings generated from the new gas pipelines could support fiscal consolidation and the transition to a more efficient, sustainable, and low carbon energy sector, taking into consideration the recommendations of the World Bank’s Country Climate and Development Report (CCDR). - The gas pipelines provide an important foundation for a broader strategy, which includes: - scaling up investment in renewables, - reducing energy subsidies, - improving energy efficiency (end-December 2022, SB). - Ongoing efforts to improve the targeting of energy subsidies, alongside other efficiency initiatives (e.g., regulatory reforms for new buildings), will also contribute to reducing reliance on carbon energy consumption. - Boosting investment and production will require efforts to strengthen and improve the predictability of regulatory frameworks, in addition to implementing macroeconomic policies that can durably secure stability. ### BoP Impact of the Kirchner Pipeline (in billion USD) - Energy imports savings1.30.72.06.9 - Energy exports0.10.40.51.9 - Imported construction costs/1-0.4 -1.1 -0.7-2.2 - Financing flow s0.51.51.03.11.3 - CAF0.50.5 - others0.40.40.4 - unidentified1.50.72.21.0 - Net0.21.91.33.310.1 *Source: Authorities estimates; Ministry of energy estimates; Box 3, "Energy Sector Potential: Fiscal and External Implications".* ### Box 4. Impact of the 2022 FX Measures (concluded) ### Box 4. Impact of the 2022 FX Measures (concluded) ### Design and immediate effects of FX and import measures - Since March 2022, limits on immediate FX access for imports and requirements for import financing have been in place. - Import financing has increased and is "now worth US$8.9 billion, 13 percent of imports". - The share of imports subject to non-automatic licenses (NAL) has risen sharply in parallel with the introduction of the new import clearance and monitoring systems for goods (SIRA) and services (SIRASE). - These measures contributed to a sharp slowdown in nonenergy import volumes and a reduction in the cash value of imports since mid-2022. ### Unintended consequences and price effects - The more discretionary administrative import restrictions and “required” financing measures have created costing uncertainties for importers. - Importers likely respond to these uncertainties by raising markups, adding to price pressures more broadly. ### Broader external and market developments linked to FX measures - Tight FX restrictions have helped to contain FX outflow. - Reserve accumulation remains challenging, reflecting weak agricultural exports under the severe drought and export hoarding given elevated pressures in the parallel exchange rate market. - FX deposits have continued to recover. - The BCRA has been able to unwind most of its position in the futures markets as a result of developments in FX flows and deposits. ### Policy implications and recommended actions - Ongoing efforts to calibrate the application of SIRA/SIRASE are necessary to reduce distortions and address import irregularities. - Calibration should aim to preserve the containment of FX outflows while reducing costing uncertainty for importers to limit upward pressure on markups and inflation. *Source: 1argea2023001 - Box 4. Impact of the 2022 FX Measures (concluded).* ### Annex I. External Sector Assessment ### Annex I. External Sector Assessment ### Overall Assessment - The external position in 2022 remained weaker than the level implied by medium-term fundamentals and desirable policies, based holistically on elevated external debt vulnerabilities, precariously low international reserves, and lack of access to international capital markets. - Despite the impact of the severe drought, it remains critical to continue to implement prudent macroeconomic policies that strengthen the external current account and reserve coverage to secure stability and external sustainability. - This ESA assessment is preliminary. The final assessment will be presented in the 2023 External Sector Report. ### Potential Policy Responses - Growth-friendly fiscal consolidation, combined with tight monetary policy and a more streamlined and less distortionary FX regime, is essential to: - moderate domestic demand growth, - strengthen the trade balance, - rebuild international reserves, - regain market access, - ensure fiscal/external debt sustainability. - Structural reforms to boost Argentina’s export capacity and encourage FDI are required. - As stability and confidence are reestablished, a gradual conditions-based easing of CFM measures, exchange restrictions, and MCPs will need to be considered. ### Foreign Asset and Liability Position and Trajectory - Background: - Argentina’s external gross liabilities stood at 48.5 percent of GDP at the end of Q3:2022, similar to the levels at end-2017. - The NIIP became more positive, reaching 18.2 percent of GDP in Q3:2022 (up 16 percentage points since end-2017), driven by continued private capital outflows and deleveraging by firms, despite tight CFM measures. - Assessment: - In 2020, Argentina restructured US$82 billion (21.4 percent of GDP) in domestic and foreign law sovereign FX debt held by the private sector, with cash flow relief of US$34 billion during 2020–30. - Additional relief was achieved during 2021, as provincial governments restructured US$13 billion of foreign-law FX debt obligations, with total cash flow savings estimated at around US$6.5 billion for 2021–27. - Gross debt and debt service obligations remain substantial and meeting these obligations over the medium term will depend on implementation of a strong economic reform plan that restores market access. - 2022 (% GDP) key figures: - NIIP: 18.2 - Gross Assets: 66.7 - Res. Assets: 6.0 - Gross Liab.: 48.5 - Debt Liab.: 31.1 ### Current Account - Background: - The CA is estimated to have reached a deficit of 0.6 percent of GDP in 2022 down from surplus of 1.4 percent in 2021, on account of a strong expansion of goods import volumes and a widening services deficit. - Terms of trade played a more minor role as higher grain export prices largely offset higher import prices on energy and intermediate goods. - The CA balance is projected to reach a surplus of 1 percent of GDP in 2023, mainly on account of moderating domestic demand and imports, and higher interest income on private Argentine assets abroad. - The evolution of the severe drought introduces a high level of uncertainty to these projections. - Assessment: - The EBA CA cyclically adjusted balance is projected to reach a deficit of -0.3 percent of GDP in 2022, compared with an EBA CA norm surplus of 0.2 percent of GDP. - The transitory impact of the COVID-19 crisis is estimated at -0.2 percent for travel services (including tourism) and 0.4 percent for transport sectors, with a narrow impact of 0.2 percent on the cyclically adjusted CA. - The IMF staff judges the near- to medium-term CA norm to be closer to 1 percent of GDP, implying an adjustment to the norm of 0.8 percent of GDP. - The IMF staff assesses the CA gap to be -1.3 ±1 percent of GDP. - 2022 (% GDP) key figures: - CA: -0.6 - Cycl. Adj. CA: -0.3 - COVID-19 Adj.: 0.2 - EBA Norm: 0.2 - Other Adj.: 0.8 - Staff Gap: -1.3 ### Real Exchange Rate - Background: - The average REER, after depreciating by over 35 percent between 2017 and 2019, appreciated by over 25 percent during 2020-22 as the rate of crawl lagged headline inflation during most of this period. - The REER has remained generally unchanged since end-2022. - Assessment: - The IMF staff CA gap implies a REER gap of around 16 percent in 2022 (applying an estimated elasticity of -0.12). - The EBA REER index model suggests a REER gap of 25.4 percent, while the EBA REER level model estimates a gap of 10.8 percent, albeit surrounded by significant uncertainty. - Overall, the IMF staff assesses the 2022 REER gap to be in the range of 10 to 25 percent. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Strict CFM and MCP measures were introduced in late 2019 to contain capital outflows. - In the context of continued FX pressures (the gap between the parallel and official exchange rate remains around 90-100 percent) and challenges in accumulating reserves, these measures have been intensified during 2022, including through: - incentives to encourage the liquidation of soy exports; - tax measures on tourism inflows and outflows to reduce the services deficit; and - financing requirement on imports to limit short-term FX demand. - Assessment: - CFM and MCP measures have helped to contain capital outflows yet have introduced distortions that discourage trade and foreign investment. - These measures are not a substitute for sound macroeconomic policies. - While CFMs are needed in the near term as imbalances are being addressed, import controls and MCPs should be avoided. - Development of a conditions-based easing of CFMs, exchange restrictions and MCPs will be necessary, especially to encourage FDI. ### FX Intervention and Reserves Level - Background: - At end-2022, gross international reserves reached US$ 44.6 billion. - Net international reserves (NIR), after excluding swap lines with other central banks, reserve requirements on domestic US dollar deposits, and deposit insurance, reached US$ 8.8 billion, US$ 3.6 billion lower than end-2019 levels. - Since end-2022, NIR has fallen by more than 5 billion. - Assessment: - Gross international reserves are estimated under 70 percent of the IMF’s composite metric at end-2022, 4 months of imports (after excluding swap lines). - Tighter fiscal and monetary policies are necessary to secure the projected trade surpluses and improve reserve coverage, which in turn is essential to pave the way for market access and the easing of CFM measures over the medium term. - Given reserve scarcity, FX sales (in the official or parallel market) should be consistent with reserve accumulation goals, while taking into account variability coming from seasonal factors and temporary bouts of excessive volatility. *Source: Annex I. External Sector Assessment (content unit 1argea2023001).* ### 1. De bt cove rage in the DSA: 1/CGGGNFPSCPSOther ### 1argea2023001 - 1. De bt cove rage in the DSA: 1/CGGGNFPSCPSOther ### Coverage and scope - Chosen coverage: gross federal (central government) debt held by the private, official and public sectors. - If central government, are non-central government entities insignificant? No - Subsectors included in the chosen coverage in (1): - 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 - Commentary on exclusions: - The DSA does not include GDP warrants, debt of the provinces or municipalities, or debt of the central bank. - Staff does not judge the exclusion of provincial debt as a significant contingent liability risk, citing the federal government's non-bailout approach to the recent provincial debt restructuring. - Under the risk-based approach, the drawn amount of one central bank bilateral fx swap is below the 1 percent of GDP de minimis threshold and thus not included in public debt for DSA purposes. - The central bank’s weak balance sheet is highlighted as a key contingent liability, necessitating a strategy to strengthen both its finances and governance. ### Accounting, recording, and valuation notes - Basis of recording: Not applicable (per table entries). - Excludes FGS/ANSES liabilities. - Excludes state government liabilities. - Excludes local government liabilities. - Valuation of debt stock: - Nominal value and face value concepts noted (definitions provided). - Market value: only traded debt securities have observed market values (footnote 7). - Reporting on intra-government debt holdings: tables indicate zero consolidation entries across listed holders (Budget. central govt, Extra-budget. funds, Social security funds, State govt., Local govt., Nonfin. pub. corp., Central bank, Oth. pub. fin. corp. all marked 0). ### Key findings and commentary on public debt structure - Foreign-currency denominated debt will continue to dominate over the long term, but its share is expected to fall as ambitious domestic peso market development facilitates repayment of official creditors (including the IMF) and private external creditors. - Near-term financing strategy (while inflation is high and unanchored): - Reliance on short-term fixed rate instruments and inflation (CER)-linkers. - 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. ### Baseline projections (selected figures from Table 2) - Public debt (percent of GDP) series: - Actual 2022: 83.27 - 2023 P: 72.27 - 2024: 72.57 - 2025: 73.07 - 2026: 70.36 - 2027: 67.36 - 2028: 64.76 - 2029: 63.66 - 2030: 62.36 - 2031: 62.06 - 2032: 61.2 - Change in public debt (percent of GDP): - 2022: 2.3- - 2023 P: -11.0 - 2024: 0.3 - 2025: 0.5 - 2026: -2.8 - 2027: -3.0 - 2028: -2.6 - 2029: -1.1 - 2030: -1.3 - 2031: -0.4 - 2032: -0.8 - Contribution of identified flows (percent of GDP): -17.3- (2022); -12.4- (2023 P); -6.9 (2024); -6.9 (2025); -6.6 (2026); -5.9 (2027); -4.8 (2028); -3.2 (2029); -2.0 (2030); -1.3 (2031); -1.2 (2032). - Primary deficit (percent of GDP): 2.3 (2022); 1.9 (2023 P); 0.9 (2024); 0.0 (2025); -0.8 (2026); -1.3 (2027 onward through 2032 at -1.3 except listed). - Noninterest revenues (percent of GDP): 25.5 (2022); 24.7 (2023 P); 25.8 (2024); 26.6 (2025); 27.4 (2026); 27.7 (2027 onward 27.7). - Noninterest expenditures (percent of GDP): 27.8 (2022); 26.6 (2023 P); 26.6 (2024–2032 mostly 26.5–26.6). - Automatic debt dynamics (percent of GDP): -21.2- (2022); -13.5- (2023 P); -7.4 (2024); -6.9 (2025); -5.9 (2026); -4.6 (2027); -3.5 (2028); -1.9 (2029); -0.7 (2030); 0.0 (2031); 0.1 (2032). - Real GDP growth (percent): 5.4 (memo, unspecified year); 2.0 (2023 P and projected 2024–2032 each 2.0 or 2.0/2.0 as listed). - Inflation (GDP deflator; percent): 71.1 (2022); 80.5 (2023 P); 47.6 (2024); 40.8 (2025); 37.2 (2026); 32.2 (2027); 27.5 (2028); 20.8 (2029); 17.3 (2030); 15.0 (2031); 13.9 (2032). - Effective interest rate (percent): 3.6 (2022); 3.4 (2023 P); 5.6 (2024); 5.2 (2025); 5.9 (2026); 6.5 (2027); 6.9 (2028); 7.8 (2029); 8.8 (2030); 9.4 (2031); 9.6 (2032). - Gross financing needs (percent of GDP): 16.4 (2022); 15.0 (2023 P); 12.3 (2024); 12.8 (2025); 8.4 (2026); 6.8 (2027); 8.2 (2028); 10.7 (2029); 10.6 (2030); 12.8 (2031); 12.6 (2032). - Of which debt service (percent of GDP): 14.1 (2022); 13.1 (2023 P); 11.4 (2024); 12.8 (2025); 9.1 (2026); 8.1 (2027); 9.5 (2028); 12.0 (2029); 11.9 (2030); 14.1 (2031); 13.9 (2032). - Local currency component (percent of GDP): 9.0 (2022); 7.5 (2023 P); 7.2 (2024); 8.5 (2025); 6.1 (2026); 4.4 (2027); 5.1 (2028); 6.8 (2029); 6.9 (2030); 6.5 (2031); 6.5 (2032). - Foreign currency component (percent of GDP): 5.1 (2022); 5.6 (2023 P); 4.2 (2024); 4.3 (2025); 3.0 (2026); 3.7 (2027); 4.4 (2028); 5.3 (2029); 5.0 (2030); 7.6 (2031); 7.4 (2032). ### Medium-term risk analysis (selected indicators from Table 3) - Fanchart width: 72.31.0 - Probability of debt not stabilizing (pct): 0.690.0 - Terminal debt level x institutions index: 45.21.0 - Debt fanchart index: ...2.04 - Average GFN in baseline: 10.53.6 - Bank claims on government (pct bank assets): 15.04.9 - Chg. in claims on govt. in stress (pct bank assets): 19.36.4 - GFN financeability index: ...14.9 - Prob. of missed crisis, 2023-2028 (if stress not predicted): 27.3 pct. - Prob. of false alarm, 2023-2028 (if stress predicted): 15.9 pct. - Overall assessment: Both medium-term tools point to a moderate level of risk; probability of debt stabilization remains above 99 percent. ### Decomposition of public debt and debt service by creditor (selected figures, Table 4) - Debt Stock (end of period) totals (In US$ bn; Percent total debt; Percent GDP) — selected rows: - Total: 394.10 (100.00; 83.23) [2022] - External: 144.44 (36.65; 30.50) [2022] - Multilateral creditors total (2022): 75.44 (19.14; 15.93) - IMF: 45.71 (11.60; 9.65) [2022] - World Bank: 9.20 (2.33; 1.94) [2022] - ADB/AfDB/IADB: 20.35 (5.16; 4.30) [2022] - Bilateral creditors (2022): 5.09 (1.29; 1.07) - Paris Club (2022): 1.97 (0.50; 0.42) - Non-Paris Club (incl. China) (2022): 3.11 (0.79; 0.66) - China (2022): 2.54 (0.65; 0.54) - Bonds (2022): 63.00 (15.99; 13.30) - Domestic total (2022): 249.66 (63.35; 52.72) - T-Bills (2022): 98.40 (24.97; 20.78) - Bonds (domestic, 2022): 129.11 (32.76; 27.27) - Loans (domestic, 2022): 19.86 (5.04; 4.19) - Memo items: - Collateralized debt (2022): 0.83 (0.21; 0.17) - Contingent liabilities (2022): 1.46 (0.37; 0.31) - Note: Debt service payment for year 2022 is preliminary actual results, whereas 2023 and 2024 are projections. ### Staff commentary and policy implications - Public debt is projected to decline gradually over the long term, reflecting baseline assumptions of steadfast program implementation of the Fund-supported EFF. - Necessary conditions to realize projections: - Stable macroeconomic conditions. - Sustained fiscal consolidation (including beyond the program). - Deepening domestic capital markets. - Boosting exports and productivity to mobilize domestic saving, strengthen reserves, and improve prospects of international market access. - Risks and optimism: - Forecast track record analysis points to baseline optimism, particularly on debt reduction and exchange rate paths; staff assesses risks to the baseline as exceptionally high. - Envisaged fiscal consolidation appears relatively optimistic but broadly in line with other EM post-debt restructuring episodes over the last 20 years. - Bond issuance analysis supports peso market development objectives, gradual increase in maturity, rise in real interest rates, and modest resumption of international market access from 2025 onwards. - Central bank weak balance sheet is a key contingent liability requiring reforms to finances and governance. *Source: IMF Staff (from the provided DSA content).* ### Appendix I. Letter of Intent ### Appendix I. Letter of Intent ### Key recent developments and program performance - Despite shocks (drought, war in Ukraine, tighter global financial conditions), Argentina met end-2022 program targets with margins by restoring fiscal order, bolstering the trade balance, and improving reserve coverage. - 2022 outcomes and near-term performance: - Primary fiscal deficit in 2022: 2.3 percent of GDP (compared to a 2.5 percent of GDP target). - Net international reserves (NIR) rose by US$5.4 billion, US$ 400 million above the target. - Economic activity estimated to have expanded by 5.4 percent in 2022. - Goods trade balance: surplus of US$4.4 billion in Q4:2022; deficit of US$0.5 billion in January (drought effects). - Core inflation: 6.5 percent m/m in January/February. - Gap between parallel and official FX rates: hovering around 90 percent (down from over 150 percent in July). - Net domestic private financing secured between August and December 2022: 1.2 percent of GDP. - Reduction of maturities falling due between March and June: 2.8 percent of GDP. - Stock of non-deliverable futures (NDF): under US$ 0.6 billion (below program ceiling of US$9 billion). - Central bank direct financing of the fiscal deficit capped at ARS 620 billion (below program ceiling of ARS 654 billion). - Quarterly average stock of arrears contained at ARS 616 billion; social assistance spending protected at ARS 818 billion for end-2022. ### Updated macroeconomic framework and projections - Baseline updates and assumptions: - Real GDP growth: estimated 5.4 percent in 2022; projected to moderate to 2 percent in 2023. - Inflation path: from 6.3 percent m/m in January/February to around 3 percent m/m by end-2023. - Goods trade surplus: projected to increase from about 1.8 percent of GDP in 2022 to around 2.8 percent of GDP in 2023. - NIR accumulation objective for 2022–23: US$8.0 billion (below the US$9.8 billion objective set at the third review). - Revised Macroeconomic Projections (Text Table): - GDP growth (avg, %): 2021: 10.4; 2022: 5.4; 2023: [1.5 - 2.5]; 2024: [1.5 - 2.5] - Inflation (eop, %): 2021: 50.9; 2022: 94.8; 2023: [55 - 65]; 2024: [40 - 48] - Primary fiscal balance (% of GDP): 2021: -3.0; 2022: -2.3; 2023: -1.9; 2024: -0.9 - Current account balance (% GDP): 2021: 1.4; 2022: -0.6; 2023: 1.0; 2024: 0.8 - Change in net int’l reserves (US$bn) 1/: 2021: -1.5; 2022: 5.4; 2023: 2.6; 2024: 7.0 - Monetary base (% of GDP): 2021: 7.9; 2022: 6.2; 2023: 6.3; 2024: 6.5 - Monetary financing (% GDP): 2021: 3.7; 2022: 0.7; 2023: 0.6; 2024: 0.0 - Note 1/: NIR are gross reserves net of swap lines, deposit insurance, reserve requirements on FX deposits, and other reserves liabilities. ### Fiscal policy commitments and measures - 2022 fiscal outcomes and near-term targets: - Primary fiscal deficit 2022: 2.3 percent of GDP (below program target of 2.5 percent). - Consolidation in Q4 2022 delivered a 10 percent y/y contraction in real spending (August-December 2022). - Commitment to cap primary deficit at 0.3 percent of GDP in Q1:2023 and 0.8 percent of GDP by June 2023. - Key 2023 fiscal policy actions and priorities: - Achieve 2023 primary deficit target of 1.9 percent of GDP through: - Mobilizing revenues. - Strengthening budget management controls. - Improving effectiveness and targeting of subsidies and social assistance while protecting priority social and infrastructure spending. - Protect priority social assistance and increase priority capital spending versus 2021. - Specific measures to improve targeting and efficiency: - Energy, transport, and water subsidy improvements expected to yield at least 0.6 percent of GDP. - Streamlining social assistance around 0.7 percent of GDP. - Pensions and pension amnesty (Plan de Pago de Deuda Previsional, Law 27705): - Executive, ANSES, AFIP, and relevant agencies to issue a new decree and regulations to ensure appropriate targeting, including: - Strong means-testing by wealth and income. - Step-up structure in interest rates according to number of installments. - Qualifying mechanism to ensure access only for those who previously made some contributions. - Allow entry only for those withdrawing from certain social benefits and foregoing access to the ‘dolar solidario’ (Prior Action). - Any additional fiscal costs from this initiative in 2024 and beyond will need to be covered through high-quality revenue and expenditure measures. ### Energy strategy - Multipronged objectives: - Boost domestic production, transportation, and distribution. - Reduce costs and reliance on imported energy. - Improve targeting and increase progressivity of energy subsidies so higher-income sectors do not benefit unfairly. - Tariff and subsidy adjustments: - Tariffs for high-income residential consumers and commercial users have been raised significantly since February 2022. - For high-income residential users: subsidies will be eliminated by May, subject to a cap over the peak consumption months. - For commercial users: additional frontloaded tariff increases to be implemented during the course of the year. - Infrastructure priority: - Complete gas pipelines by end-June to reduce costly energy imports/subsidies in the second half of the year. ### Financing and debt management - Domestic and external financing strategy: - Proactive domestic debt management to extend forthcoming domestic peso maturities (especially in Q2 and Q3), mobilize domestic net financing, and improve local debt and FX market functioning. - Continue mobilizing official financing from multilateral and bilateral sources, including finalizing technical understandings with remaining Paris Club creditors. - Operations undertaken: - A limited and temporary debt buyback operation in early 2023 aimed at improving debt sustainability and reducing sovereign debt yields. - Monitoring: - Quarterly reviews, quantitative performance criteria, indicative targets, and structural benchmarks as set in the MEFP and TMU will continue to monitor the program. ### Monetary and FX policy and reserve coverage - Monetary policy stance and FX market conduct: - Ensure policy rates remain positive in real terms and secure a gradual improvement in external competitiveness. - Refrain from interventions (by the BCRA or Treasury) in the financial FX markets that require use of international reserves, consistent with reserve accumulation goals. - Continued emphasis on reducing monetary financing of the fiscal deficit in line with program targets. - Reserve coverage objectives and modification request: - Plan to mobilize international reserves and reverse recent trends; enhance FX controls and incentives to improve effectiveness. - Modification requested: NIR target for end-March 2023 revised to US$1.9 billion; NIR accumulation of US$8.0 billion over 2022 and 2023 (below original US$9.8 billion target). - NIR target through end-2024 remains unchanged at US$15 billion. - Commitment to lock in any reserve accumulation overperformance throughout the year (TMU, ¶18). ### Risks, contingencies, and program requests - Risks and uncertainties: - External downside risks: sharp slowdown in key advanced and emerging economies, tighter global financial conditions, intensification of the war in Ukraine, sudden worsening in terms of trade. - Domestic risks: further worsening of the drought; large and unforeseen impact on exports and tax revenues. - Requests to the IMF: - Completion of the fourth review with a disbursement in the amount of SDR 4,000 million. - Modification of all quarterly 2023 targets for net international reserves to partially accommodate the impact of the drought, and modification of the floors for the primary balance in the second semester to account for nominality. - Extension of Executive Board approval (granted on March 25, 2022) regarding the exchange restrictions and multiple currency practices in place at that time, on grounds that they continue to be maintained for balance of payments reasons and are temporary and non-discriminatory. - Completion of the financing assurances review, recognizing the need for continued efforts to mobilize domestic and external financing. *Appendix I. Letter of Intent, Buenos Aires, Argentina, March 20, 2023.* ### 18. Achieving our multi-year fiscal consolidation plan requires redoubling revenue ### 18. Achieving our multi-year fiscal consolidation plan requires redoubling revenue ### Revenue mobilization and tax administration - Completed a tax compliance action plan for 2023-2025 to support revenue mobilization (end-December 2022, SB); implementation to be accelerated during 2023, including development of specific compliance improvement plans based on a comprehensive assessment of compliance gaps for various taxes (mid-December 2023, new SB). - Completed a comprehensive evaluation of tax expenditures (end-June 2023, SB). - Strengthened information exchange and international cooperation to combat tax evasion. - Improving personal wealth taxation (bienes personales) by enhancing the federal tax database through connecting provincial cadasters and property tax registers with federal taxpayers’ identification numbers (CUIT/CUIL), starting with the AMBA region (end-March 2023, SB). - Around 75 percent of CUIT/CUILs linked to the relevant property in the AMBA region as of end-January. - Organismo Federal de Valuaciones de Inmuebles (OFEVI) developing a unified methodology for property valuations so bienes personales valuations are based on the greater of either (i) the provincial valuation; or (ii) the OFEVI unified methodology valuation. ### Social expenditures and targeting - Social assistance: - Strengthening targeting and governance of income support programs (end-March 2023, SB). - Closing of Potenciar Trabajo social program to new entrants announced November 2022. - Audit of Potenciar Trabajo recipients completed; claimants had until March 15 to verify eligibility. - Audit identified close to 97,000 ineligible claimants, who have been suspended and will be permanently removed if eligibility not verified. - Beneficiaries fell from around 1,365,000 (January 2023) to 1,268,000 at the end of February 2023. - Focus on ensuring remaining beneficiaries register to improve education or begin training to re-enter the labor market; working on regulations to reduce potential disincentives to re-enter the labor market. - Most savings from transfer reductions will be used to strengthen human capital through delivery of tools or financing of polos productivos. - Pensions: - Ministry of Labor, with University of Buenos Aires, completed focused study on special pension regimes (end-December 2022, SB) to determine options for strengthening equity and sustainability, including reducing fragmentation. - Studies submitted to Congressional Commissions on Pensions and Social Security. ### Public financial management - Improvements underway to strengthen transparency and public spending controls: - Enhance financial and budget reporting of national public sector entities other than the National Administration. - Strengthen monitoring and governance of investment projects. - General framework to implement and control transfers from the Treasury to public corporations, trust funds, and other entities established (Decree 712); will facilitate enhanced quarterly reports for public corporations and trust funds (end-March 2023, SB). - Reports to be further enhanced to include information on major investment projects financed by federal transfers and earmarked taxes. ### Financing policy (domestic and external) - Mobilized net domestic market financing of 3.8 percent of GDP last year; net flows of ARS 700 billion in December 2022 and more than ARS 400 billion in January and February 2023. - Implementing comprehensive financing strategy to extend peso maturities beyond 2023 and secure net financing for the year (¶15). - External financing: - US$ 1.5 billion of disbursements in December to February, supported by multilateral budget support and bilateral project financing, consistent with comparability of treatment commitments with the Paris Club. - Begun signing bilateral agreements with Paris Club creditors to restructure US$ 1.97 billion of legacy debt; expect to finalize soon with remaining creditors consistent with October 2022 joint declaration. - Domestic financing strategy: - Voluntary exchange of maturities extended maturities of ARS 4.3 trillion (2.8 percent of GDP) coming due between March and June into 2024 and 2025. - Banking sector participation: 84 percent. - Plan to implement a liability management operation with public entities aimed at raising net financing of up to 0.6 percent of GDP in 2023 and extend maturities for most remaining peso debt held by the public sector. - Drawing on medium-term debt strategy (MTDS) (end-December 2022, SB) to consider new mechanisms to enhance transparency and stability of government securities market. - Continue strong coordination between MECON and BCRA. - Official sector support: - New financing of over US$ 4.5 billion secured through 2023 for priority water/sanitation, transport, and energy projects. - Majority of financing for second phase of the Kirchner pipeline and “reversion Norte” (US$ 2.5 billion) identified and expected to be disbursed by mid-2024. - Aim to limit monetary financing of the fiscal deficit to 0.6 percent of GDP in 2023 and support reserve accumulation. ### Monetary and exchange rate policies - Raised the policy rate by 600 basis points to 113.3 percent in annual effective terms, above actual inflation (102.5 percent y/y in February) and forward-looking measures of monthly core inflation. - Raised the rate on overnight facility and finalized simplification of the reserves requirement regime to improve monetary policy transmission. - Enhancing FX control system to reduce complexity and support reserve accumulation. - Policy stance: - Commit to keeping real monetary policy rates firmly in positive territory; maintain nominal interest rates unchanged until inflation and inflation expectations are on a clear downward path. - Rates on short-term government paper to remain consistent with monetary policy rate. - Higher policy rates may be considered if inflation pressures rebound or FX pressures intensify. - FX policy: - Ensure official rate of crawl more consistently remains above inflation (and below policy interest rates) to strengthen competitiveness and encourage reserve accumulation. - BCRA interventions in the non-deliverable futures market limited to addressing disorderly FX market conditions and supporting the crawling peg regime. - Refrain from interventions in financial FX markets that require use of international reserves. ### FX controls reform and enforcement - Streamline FX controls and FX incentives to reduce complexity and support reserve accumulation; enhance monitoring and enforcement, particularly for services imports. - Draft revised Foreign Exchange Criminal Law prepared and to be submitted to Congress (end-March, SB; proposed to be reset to end-May 2023, SB) to introduce administrative fines and make sanctioning framework more efficient. - Initial reductions in restrictions in key sectors: - Gradual reduction in surrender requirements for the knowledge economy. - Easing of prefinancing and administrative requirements for critical imports related to health, education and exporting sectors. - Conditions-based liberalization roadmap of FX controls to be prepared (end-June 2023, SB); IMF technical assistance requested. ### Financial stability and central bank balance sheet - BCRA to limit central bank purchases of government securities in the secondary market to ensure market functioning and financial stability; purchases will be at market prices and sterilized to support disinflation. - Consider gradual tapering of peso securities purchased by the BCRA as market conditions allow. - Strategy to strengthen BCRA's financial position: - First draft shared with Fund staff; finalizing for submission to BCRA board shortly (end-December 2022, SB). - Strategy anchored on planned elimination of monetary financing of the fiscal deficit, unwinding of government securities, and gradual adoption of IFRS. - Progress on financial disclosures towards compliance with IFRS-7 (end-May 2023, SB). - IT infrastructure updates to allow removal of forward leg of repo transactions for 2023 financial statements. - Modified accounting for currency swap bilateral arrangements with central banks as per IFRS at end-December 2022. - Clarified functional reporting lines of Internal Audit Department (IAD) and strengthened reporting and review functions; working with Risk Management Department. ### Income policies and wage-price coordination - Voluntary wage-price coordination agreements complement macro-policy disinflation efforts. - Voluntary price agreements (Precios Justos) originally covering food, beverage and cleaning staples extended through June 2023 and expanded to apparel, medicines, education, and construction materials. - Agreements aim to limit monthly price increases to 3.2 percent for 50,000 products; prices of 2000 products will also remain frozen. - Agreements to be revisited after end-June depending on inflation and other developments. - Negotiations advanced with wholesale agents; new technologies being used to ensure compliance. ### Energy policies: efficiency, supply, and subsidy reform - Multipronged strategy to (i) boost domestic energy production, transportation, and distribution; and (ii) reduce energy costs and reliance on imported energy while improving targeting and progressivity of energy subsidies. - Price adjustments since February 2022: - High-income residential consumers saw increases of over 380 percent y/y in both PEST and PIST. - Commercial users saw increases of around 350 percent y/y in PEST and 140 percent y/y in PIST. - Supply-side measures: - Imports: arrangements to import gas from Bolivia and through Chile; MOU with Brazil for electricity imports to secure 2023 winter supplies and reduce LNG reliance. Strategic purchases of LNG secured prices well below those assumed in the 2023 budget for most of LNG needed for 2023. - Gas pipelines: - Nestor Kirchner gas pipeline construction: around 40 percent of the first stage completed as of February; first stage expected finished by end-June 2023. - Expected increase in daily supply of domestically produced gas to 11 million cubic meters by June and to 22 million cubic meters by September following compressor installation. - Second stage construction expected to begin in July 2023 and be completed by June 2024. - Flow reversal of the North pipeline to reduce costly imports and increase export potential. - New Plan Gas launched in November to incentivize domestic production and exports by extending producer price agreements to 2028. - Projected impacts in 2023 from completion of Kirchner pipeline: - Reduce energy imports by about US$2 billion. - Increase exports by about US$ 0.45 billion. - Once Vaca Muerta gas fields reach full potential in 2025, Kirchner pipeline projected to: - Achieve energy imports savings of over US$ 8 billion. - Increase exports by about US$ 2.5 billion. - Other opportunities: - Completion of crude transportation and field development projects could boost crude exports by US$8 billion over the medium term. - Numerous mining projects (lithium, gold, silver, and copper) could expand export capacity and opportunities in battery production and electro-mobility sectors. - Prospects for LNG exports being explored; will require significant time and investment. - Subsidy elimination and segmentation: - Policy to reduce regressivity in energy subsidies by bringing high-income residential and ‘other’ commercial users with greatest payment capacity to cost recovery while protecting low- and middle-income consumers. - Aim to keep energy subsidy bill below 1.6 percent of GDP in 2023, consistent with fiscal targets. - Large non-residential users to pay 100 percent of the cost of electricity and gas. - Residential consumers with greatest payment capacity (Level 1) to see further electricity price increase in May to immediate move to the monomic price of May (around 85-90 percent); subsequent changes to evolve with monomic price over time, subject to a cap during peak months. - Other commercial users to face electricity price increases in May (31 percent), August (17 percent), and November (7 percent) to reach cost-recovery levels. - Small commercial users subject to contracts below 10 kW power will have a lower electricity price applying to consumption up to 800 kWh per month, estimated to benefit approximately 74 percent of commercial users and 22 percent of total consumption by commercial users of the AMBA region. - As of May, lower tariffs will no longer apply to municipal streetlighting, which will pay the same price as ‘other’ commercial users. - Middle- and low-income residential users price updates: - For middle-income consumers, subsidized reference price of electricity (PEST) raised by 28 percent in February and price of natural gas (PIST) raised by the same amount in March. - For low-income consumers, prices left unchanged. - Policy commits to anchor updates in energy costs and regulated distribution price (Valor Agregado de Distribución, VAD) on past average wage growth and cap overall increase in electricity and natural gas bill at 40 percent and 80 percent of growth in the wage index, for low- and middle-income consumers, respectively. - For middle-income consumers, subsidized electricity consumption subject to a cap of 400KWh, above which consumption priced at same rate paid by residential consumers with highest payment capacity. - For natural gas, cap set at 70 percent of average consumption over the past 5 years. *International Monetary Fund — Chapter content (1argea2023001 — section 18).* ### 36. Efforts are also underway to improve the finances of the electricity distribution sector. ### 1argea2023001 - 36. Efforts are also underway to improve the finances of the electricity distribution sector. ### Electricity distribution finances and arrears - Tariff agreements with electricity distributors for the metropolitan region of Buenos Aires were updated in February 2023. - Updates included an agreement to address distributors’ arrears to the state-owned electricity dispatch operator (CAMMESA) to alleviate pressures on government finances. - Since the second half of 2022, CAMMESA has reached agreement on repayment plans covering more than 90 percent of distributors’ outstanding debt. ### Energy sector strategy, consultation, and implementation timeline - A comprehensive strategy to improve the efficiency and financial sustainability of the energy sector was published (end-December 2022, SB). - A consultation process through the Consejo Federal de Energia was launched to build consensus among key stakeholders. - An implementation action plan and timetable is expected to be developed by end-June 2023. - The strategy was prepared with World Bank technical assistance. ### Planned actions in the energy sector strategy - Energy efficiency - Conduct an analysis of technical and non-technical losses. - Expand education programs for efficient energy use. - Develop a national registry of energy efficiency auditors for the industrial sector. - Modify the household survey to better inform the design of energy efficiency initiatives. - Electricity generation - Analyze remuneration criteria for different generators to reduce costs. - Complete a survey of existing hydroelectric concessions. - Analyze alternative generation and supply for non-residential demand. - Electricity distribution and transmission - Promote good practices and the standardization of regulatory criteria across provinces. - Develop actions for compliance. - Subsidy segmentation scheme - Strengthen targeting by improving the quality of information in the RASE database. - Improve the estimation of energy needs for the most vulnerable households. ### Transparency, governance, and AML/CFT preparatory work - Preparations ahead of the Financial Action Task Force (FATF) evaluation scheduled for March 2024 identified reforms related to: - terrorist financing, - role and responsibility of the financial intelligence unit (FIU), - sanctioning regime, - non-government organizations. - AML/CFT gap analysis against the FATF’s 40 Recommendations identified virtual assets service providers (VASPs) as an additional key item where reforms are needed. - VASPs reforms are being incorporated into the amended AML/CFT legislation or other relevant legislation. - The FIU is preparing necessary regulations/resolutions to facilitate prompt and full implementation of the amended legislation once approved. - Work on finalizing COVID spending audits is underway (end-June 2023, SB). ### Selected program numbers, dates, and exchange/inflation parameters referenced - Publication and benchmark dates: - end-December 2022 (strategy published, SB) - February 2023 (updated tariff agreements for AMBA) - end-June 2023 (implementation action plan and timetable expected; COVID spending audits completion) - March 2024 (FATF evaluation scheduled) - Coverage and targets: - CAMMESA repayment plans cover more than 90 percent of distributors’ outstanding debt. - TMU program inflation assumptions (for program purposes): - 95.9 percent in 2022 (point estimate) - 60 percent in 2023 (end of period) - Program exchange rates (as of March 2, 2022): - 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 *Source: 1argea2023001 - 36.* ### 4. Definitions: The Federal government (Sector Público Nacional No Financiero) for the ### 1argea2023001 - 4. Definitions: The Federal government (Sector Público Nacional No Financiero) for the ### Scope of the Federal Government (Sector Público Nacional No Financiero) - For the purposes of the program the Federal government consists of: - the central administration, - the social security institutions, - the decentralized institutions (Administración Nacional), - PAMI, - fiduciary funds, - other entities and enterprises of the federal government. ### Primary Balance: Definition and Treatment of Revenues and Expenditures - Primary balance measurement: - Measured above-the-line and defined in accordance with the monthly and annual reporting of the “Esquema IMIG”. - Equivalent to total revenues (ingresos totales, according to “Esquema IMIG”) minus primary spending (gastos primarios). - Revenues recorded on a cash basis and include: - tax revenues (ingresos tributarios), - revenue income (rentas de la propiedad), - other current revenues (otros ingresos corrientes), - capital revenues (ingresos de capital). - Exclusions from revenues for assessing the floor of the primary deficit: - any type of financial transfers from the Central Bank (including Utilidades and Adelantos Transitorios), - interest income from intra-public sector holding of securities and debt obligations, - proceeds from the sale of financial assets, - special drawing rights (SDRs) allocated by the Fund or received bilaterally from other IMF members. - Treatment of debt issuance revenue: - Revenue income from the issuance of government debt that is part of non-tax revenues (resto rentas de la propiedad) will be capped at 0.28 percent of GDP in 2022 and will be excluded from revenues in 2023 for calculation of the primary fiscal deficit under the program. - Footnote: This reflects the amount recorded through end-May 2022 as no further amounts have been recorded since then. - Definition of federal government primary expenditure (cash basis): - 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), - capital spending (gastos de capital), which includes capital transfers to provinces. - Public-private partnerships and other special treatments: - Government-funded public-private partnerships treated as traditional public procurements; obligations recorded in budget data and measured as part of the Federal government deficit on a cash basis. - Costs from divestment or liquidation of public entities (e.g., contract cancellations, severance payments) allocated to current and capital expenditures accordingly. - All primary expenditures (including fines) directly settled with bonds or other non-cash liabilities recorded above-the-line and contribute to a decrease in the primary balance. - Exclusions to that rule: settlement of liabilities related to pensions, revenue sharing and expenditure allocation with provinces and the Autonomous City of Buenos Aires associated with court proceedings finalized or pending as of March 3, 2022; payments of arrears as per ICSID or similar arbitration rulings; payments to the BCRA for losses from export incentive schemes in September and December 2022. ### Measurement and Monitoring of Primary Balance - Measurement: - The Federal government’s primary balance will be measured at each test date as the cumulative value starting from the beginning of each calendar year. - Monitoring: - All fiscal data referred to above and needed for program monitoring purposes 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 - Mechanism: - 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 the program baseline (Text Table 2). - Caps: - The value of the adjustor would be capped at cumulative 0.2 percent of GDP in 2022 and 2023 (163,511 million pesos and 308,609 million pesos respectively). - 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 in 2022 and ARS55,000 in 2023. - Baseline projection entries (AR$ millions 1/ cumulative from January 1 of each year): - end-March 2022 27,028 - end-June 2022 78,423 - end-September 2022 122,201 - end-December 2022 232,354 - end-March 2023 44,293 - end-June 2023 102,430 - end-September 2023 201,235 - end-December 2023 294,359 ### Ceiling on Federal Government Accumulation of Domestic Arrears — Definition and Coverage - Definition of domestic arrears: - Floating debt = 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). - Includes transferencias figurativas, and primary spending for: - personnel (gasto en personal), - acquisition of goods and services (bienes y servicios), - nonprofessional services (servicios no profesionales), - capital expenditures (bienes de uso), - transfers (transferencias). - Clarification: - Transferencias figurativas were excluded for measurement against the end-March 2022 performance criterion; starting from the end-June 2022 performance criterion, transferencias figurativas will be included in the definition of domestic arrears. ### Measurement, Targets, and Monitoring for Domestic Arrears - Measurement: - Arrears measured on a daily basis. - Targets: - Program will cap the quarterly average of the daily stock of arrears for 2022, consistent with reducing 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 will remain unchanged at 0.8 percent of GDP during 2023 (1,177,375 million pesos). - Monitoring: - 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 and Coverage - Definitions: - Debt: a current, i.e., not contingent, liability created under a contractual arrangement through provision of assets or services requiring future payments to discharge principal and/or interest. Primary forms include: - loans (including deposits, bonds, debentures, commercial loans, buyers’ credits, repurchase agreements, official swap arrangements), - suppliers’ credits, - leases (debt is the present value at inception of all lease payments expected, excluding payments covering operation, repair or maintenance). - Under this debt definition, arrears, penalties, and judicially awarded damages arising from failure to make payment under a contractual obligation that constitutes debt are debt. - External debt (for program purposes): determined according to the residency criterion consistent with the IMF’s Balance of Payments Manual (would encompass nonresident holdings of Argentine law peso and foreign currency debt). - External arrears: external debt obligations (principal and interest) falling due after March 3, 2022, that have not been paid, considering contractual grace periods. - Coverage: - Performance criterion covers the federal government. - Does not cover: - (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 and Measurement - Definitions: - NIR of the BCRA = U.S. dollar value of gross official reserves of the BCRA minus gross official liabilities. Non-U.S. dollar assets and liabilities converted at program exchange rates. - Gross official reserves (BPM6-consistent) include: - monetary claims, - free gold, - holdings of SDRs, including all Fund disbursements since March 25, 2022, - the reserve position in the IMF, - holdings of fixed income instruments, - net cash balances within ALADI. - Excluded from reserve assets: assets pledged/collateralized/encumbered; claims on residents; claims 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 that have taken place from March 25, 2022 onwards, - (iii) any deliverable forward FX liabilities on a net basis defined as the long position minus the short position payable in foreign currencies directly undertaken by the BCRA or by any other financial institutions on behalf of the BCRA. - Exclusions/considerations: - Neither the Federal government’s foreign liabilities, nor its FX deposits at the BCRA are considered gross foreign liabilities of the BCRA. - The foreign currency swap with the People’s Bank of China and with the BIS, the foreign exchange bank reserve requirements, SEDESA, ALADI and other non-resident deposits are considered foreign exchange liabilities of the BCRA with maturity of one year or less for program purposes. - Measurement: - Change in NIR measured as the cumulative change in the stock of NIR at each test date relative to the stock on December 31, 2021. - Monitoring: - Foreign exchange asset and liability data at the BCRA will be provided to the Fund at daily frequency within two days. ### Adjustors to NIR Targets - Official non-project loans and grants: - NIR targets adjusted upward (downward) by surplus (shortfall) in program loan disbursements and grants from multilateral institutions (including the BCIE, EIB, IBRD, IDB and CAF) and bilateral partners relative to the baseline projection (Text Table 3). - Downward adjustor (shortfall) capped at a cumulative of US$750 million in each calendar year. - Program loan disbursements defined as external loan disbursements (excluding project financing disbursements and IMF budget support) from official creditors for financing the general government. - Paris Club payments: - Starting with the end-December 2022 performance criterion, NIR accumulation targets will be adjusted downward by the amount of any payments to Paris Club creditors relating to outstanding debt reprofiled in 2014. - Accumulation overperformance: - Quarterly NIR targets in 2023 constitute a lower bound. - For end-June, end-September and end-December 2023 performance criteria, cumulative NIR accumulation targets will be adjusted upwards by the full amount of any overperformance at prior 2023 test dates. - Adjusted quarterly targets capped by cumulative NIR targets set in the third review (IMF Country Report No. 22/388). - Baseline projection entries (In millions of US$ 1/ cumulative from January 1 of each year): - end-March 2022 55 - end-June 2022 62 - end-September 2022 543 - end-December 2022 2,181 - end-March 2023 20 - end-June 2023 861 - end-September 2023 1,244 - end-December 2023 1,349 ### Cumulative Ceiling on the BCRA’s Financing of the Federal Government - Definitions of BCRA financing to the government: - (i) overdraft transfers from the BCRA to the Federal Government (line Adelantos Transitorios in the summary account of the BCRA), - (ii) distribution of profits (Utilidades), - (iii) acquisition of government debt in the primary market or by direct purchases from public institutions. - Caps and measurement: - Cap at 654,045 million pesos (0.8 percent of GDP in 2022) by end-December 2022, with cumulative flows from end-December 2021 in millions of pesos. - 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 of this amount 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 will be provided to the Fund within two days. - Flow measured at each test date as the cumulative value starting from the beginning of the calendar year. ### Continuous Performance Criteria and Other Quantitative Indicative Targets - Continuous performance criteria (consistent with IMF commitments): 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. - Cumulative Floor on Real Federal Government Revenues: - Definition: federal government revenues as defined in ¶5. - Measurement: “Real” revenues measured as nominal monthly revenues deflated by the 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. - After June 2022, this target is no longer part of program conditionality. - Monitoring: data provided with a lag of no more than 25 calendar days after end of each month. - Cumulative Floor on Federal Government Spending on Social Assistance Programs: - Definition: social spending is 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 a lag of no more than 25 calendar days after end of each month. - Ceiling on the BCRA’s Stock of Non-Deliverable Futures: - Definition: net of the U.S. dollar notional value of all long and short position contracts entered by the BCRA involving the Argentinian peso, either directly or through any institution used as financial agent. - Measurement: net stock measured as 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. - Monitoring: monitored on a quarterly basis; daily data provided within two working days. ### Other Definitions Relevant for Program Conditionality - Wage Growth: - Definition: Average wage growth used to determine adjustments to energy bills for residential consumers (excluding those subject to the subsidy segmentation scheme) defined by the Salary Variation Coefficient (Coeficiente de Variacion Salarial (CVS)), as established by the vetoed Law 27.443. - The CVS is published by INDEC and estimates evolution of salaries paid covering the registered private sector, the unregistered private sector and the public sector. - Energy Prices and User Categories: - (Section heading present in source; no definitional text supplied beyond the heading in the provided content.) *Source: 1argea2023001 - 4. Definitions: The Federal government (Sector Público Nacional No Financiero) for the (PDF).* ### 33. Definition. Energy prices are defined as the regulated pass-through prices paid by ### 33. Definition. Energy prices are defined as the regulated pass-through prices paid by ### Definition and price components - Energy prices are defined as the regulated pass-through prices paid by distributors for electricity and gas: the precio estacional (PEST) and the precio del gas natural en punto de ingreso al sistema de transporte (PIST), respectively. - These prices can vary depending on user category and level of energy consumption. ### User categories (electricity and natural gas; regulated prices PEST and PIST) - The universe of users will cover all users supplied at the regulated prices (PEST and PIST, respectively), separated into the following categories: - (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) small commercial users (with power of less than 10 kW,); - (v) ‘other’ commercial users defined as having power contracts above 10 kW and below 300 kW; and - (vi) large non-residential users with a power demand above 300 Kw (GUDIs) (the differentiation for non-residential users applies in the case of electricity only). - For program purposes, commercial electricity users comprise all non-residential users other than large industrials (GUDIs), public hospitals, educational entities, welfare entities, and social clubs. ### Differentiation by consumption thresholds - Prices will be further differentiated based on energy consumption levels for the following categories: - (i) for middle income residential users (Nivel 3) electricity consumed above/below 400 kWh, - (ii) for small commercial electricity users electricity consumed above/below 800 kWh, and - (iii) for middle income residential users (Nivel 3) natural gas consumed above/below a cap set at 70 percent of average consumption over the past 5 years. ### Measurement for program purposes - For program purposes, the energy price will be measured as weighted averages of the actual PESTs/PISTs charged to different categories of users, with the weights based on estimates of energy consumption. ### Monitoring (paragraph 34) - For each category of user and consumption threshold described above, data will be provided to the Fund on: - the estimated energy consumption in each category; and - the actual values of the PEST and the PIST. ### Relevant program links and policy context (selected, from surrounding text) - The authorities publicly announced their plan to bring tariffs for high-income residential consumers to full cost recovery effective May. Tariff adjustments for high-income residentials will subsequently follow cost recovery (subject to a cap during winter months); while for other commercial users, additional price increases will be implemented in August and November to achieve full cost recovery. - A resolution is expected to be issued in April defining the tariff increases that would apply to high-income residential users, as well as other commercial users and municipal streetlighting (proposed end-April 2023, structural benchmark). *Source: 1argea2023001 — Supplementary Information, March 30, 2023.* ### 1. A decree was issued today to contain the fiscal impact of the pension ### 1argea2023001 - 1. A decree was issued today to contain the fiscal impact of the pension moratorium ### Pension moratorium decree and exchange restrictions - A decree and implementing regulations were issued to contain the fiscal impact of the pension moratorium and to implement strong means-testing (based on both income and wealth). - Access conditions in the decree: - Allow access only to individuals who forego other social benefits and access to the “Dolar Solidario” (200 US dollars per month at the official exchange rate). - The restriction on official FX market access was also announced by the BCRA and implemented through a resolution. - IMF implication: - The measure gives rise to a Multiple Currency Practice (MCP) and an exchange restriction subject to Fund jurisdiction. - This also occasions nonobservance of the performance criteria against the introduction or modification/intensification of exchange restrictions or MCPs. ### Waiver request and staff recommendation - The authorities requested: - A waiver of nonobservance of the performance criteria (PCs). - Approval of the temporary retention of the MCP and exchange restriction. - Staff assessment: - Staff assess that the criteria for approval are met and recommends a waiver. ### Prior action compliance - The decree does not include: - A step-up interest rate structure on installments for contribution shortfalls. - A limit of access only to those who have made prior contributions to the pension system. - These elements of the prior action were therefore not met. - Management and staff view: - The objective of the prior action has been met because required instalment payments for entry into the moratorium are larger than initially anticipated, making the omitted elements no longer critical. ### Statement by Mr. Chodos on Argentina — overview and context - Date references: - April 3, 2023 - Statement by Mr. Chodos on Argentina: March 31, 2023 - Main themes: - Authorities thanked IMF mission and affirmed commitment to Program implementation. - Argentina faces an unprecedented drought with significant negative effects, affecting external position and fiscal and inflationary pressures. - The drought and the war in Ukraine have increased imported energy costs in 2022. - Authorities emphasize strong implementation capabilities and ownership of the Program. ### Program performance — key quantitative outcomes and targets - Fiscal outcomes and targets: - Primary fiscal deficit for 2022 reached 2.3 percent of GDP (target: 2.5 percent of GDP). - Quarterly average stock of arrears was contained at ARS 616 billion. - Social assistance spending protected at ARS 818 billion. - Central bank financing and reserves: - Central bank financing of the fiscal deficit was limited to ARS 620 billion through end-December (program cap: ARS 665 billion for 2022). - Reserve accumulation reached USD 5.4 billion (program floor: USD 5 billion). - Monetary conditions: - Monetary policy interest rates currently stand in effective terms at more than 113 percent. - Rates are above the rate of currency crawl. - Stock of central bank non-deliverable forwards was down to USD 350 million (July 2022 peak: USD 8 billion). - Other program elements: - End-December indicative targets and most structural benchmarks were met. - Added structural benchmarks: end-April improvement of energy subsidy progressivity; December improvement in specific tax compliance. ### Macroeconomic framework and recent outcomes - Activity and labor: - GDP grew at an annual rate of 5.2 percent in 2022. - Unemployment fell to 6.3 percent. - Employment level at 44.6 percent. - Capacity utilization at 63.8 percent. - Inflation: - Annual inflation rate reached 102 percent in February. - Authorities pursue fiscal curbing, limits on monetary financing, and interest rate and exchange rate policies aiming for gradual disinflation. - Drought fiscal cost and accommodation: - The pension moratorium cost for the year is estimated at 0.2 percent of GDP. - Government intends to address it via regulation for fair targeting of beneficiaries and compensatory measures (transfers, energy subsidies), and to accommodate within the fiscal target. ### Financing strategy and debt management - Domestic and external financing: - Domestic liability operations and a domestic debt swap were used to extend peso maturities beyond the elections. - Current non-bank private holders of short term maturities stand at 1.5 percent of GDP. - Net financing from external official sources in December and January amounted to more than USD 1.5 billion in the aggregate. - Central bank market operations: - Very slim purchases of the central bank in the secondary market this year: 0.1 percent of GDP. - Policy emphasis: - Containment of central bank financing. - Ensuring positive real interest rates. - Mobilization of domestic net financing and improvement of local debt and FX market stability. ### Policy measures and structural actions - Fiscal measures: - Enhanced budget management, stricter expenditure controls, improved targeting of subsidies, strengthened revenue compliance. - Energy policy: - Progressivity of subsidies being improved by removing regressive components (subsidies for highest income residential consumers). - Since February 2022 tariffs have been significantly raised for high income residential users and commercials above certain consumption levels. - By May subsidies for high income residential consumers will be eliminated. - Priorities include boosting domestic energy production, transportation, distribution, and reducing reliance on imports. - Social policy: - Improved quality and targeting of social assistance, including auditing Potenciar Trabajo. - AML and structural reforms: - Continued commitment to AML obligations and workstreams. - Structural benchmarks recalibrated for depth and thoroughness. ### Reserve coverage and NIR target modification request - Authorities’ multi-pronged strategy to mitigate drought effects on reserves includes: - Mobilization of international reserves through international financing. - Reaffirmation of a strong macroeconomic framework. - Enhancement of FX control scheme effectiveness and incentive alignment. - NIR target adjustments requested due to drought: - NIR target for the first quarter of 2023 set at USD 1.9 billion. - Accumulation reaching USD 8 billion over 2023. - End-2024 NIR target remains at USD 15 billion. ### Final considerations and authorities’ request - Authorities underscore: - Overperformance of end-2022 targets and adaptability to shocks. - Need for the Program to adapt to the unprecedented challenges (drought). - The drought’s implications for global food security and the argument that addressing food insecurity is a global public good. - Request: - Approval of the fourth review and partial modification of the NIR target. *Source: 1argea2023001 - 1. A decree was issued today to contain the fiscal impact of the pension moratorium — https://www.imf.org/-/media/files/publications/cr/2023/english/1argea2023001.pdf* --- _Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1argea2023001.pdf_