Buenos Aires: An International Monetary
Fund (IMF) team, led by Luis Cubeddu, Deputy Director of the Western
Hemisphere Department and Ashvin Ahuja, Mission Chief for Argentina, issued
the following statement in Buenos Aires today following the conclusion of
discussions on the seventh review of the Extended Fund Facility (EFF)
arrangement for
Argentina[1].:
“IMF staff and the Argentine authorities reached understandings on a set of
economic policies that can restore macroeconomic stability in Argentina and
bring the current program back on track. This agreement, subject to
continued and durable policy implementation, will be brought forward for
approval by the IMF Executive Board, over the coming weeks. Upon completion
of the review, Argentina would have access to about US$ 4.7 billion (or SDR
3.5 billion), consistent with some rephasing within the envelope of the
program.
“The proposed disbursement is intended to support the new authorities’
strong policy efforts to restore macroeconomic stability and help Argentina
meet its balance of payments needs.
Background
“The new administration inherited an exceptionally challenging economic and
social situation, with rising macroeconomic imbalances primarily reflecting
inconsistent and expansionary policies, especially during the final quarters
of last year. Monthly inflation accelerated to 12.8 percent in November,
reserves were depleted, the currency became even more overvalued, and the
FX gap rose to historic highs.
Continued reliance on central bank financing and interventionist measures
led to a further deterioration of the central bank’s balance sheet and an
overhang of importers’ commercial debt. Meanwhile, real wages fell further
to multi-year lows, and poverty levels are estimated to have exceeded 45
percent.
“The program went severely off track. The end-September primary fiscal
deficit and domestic arrears targets were missed, and preliminary data
suggest that the end-year targets were missed by an even larger margin. The
targets for net international reserves were also missed, with deviations
relative to end-year target by around US$15 billion prior to the start of
the new administration.
An ambitious stabilization plan
“Against this backdrop, President Javier Milei and his economic team moved
quickly and decisively to develop and begin to implement a strong policy
package to restore macroeconomic stability and are fully determined to
bring the current program back on track.
“The authorities are building social and political support for their
stabilization plan. The plan centers on the establishment of a strong and
credible fiscal anchor, along with actions to rebuild reserves, correct
relative price misalignments, strengthen the central bank’s balance sheet,
and create a simpler, rules-based, and market-oriented economy. The plan
also looks to scale up of social assistance to protect the most vulnerable.
An Emergency Decree has been issued and an Omnibus bill has been submitted
to congress to support the authorities’ stability and growth plans.
Although the path to stability will be a challenging one, with conditions
worsening before they get better, initial actions were successful in
avoiding an intensification of the crisis. This marked an inflection point,
with central bank FX purchases exceeding US$3.6 billion over the past
month, and some Argentine corporates starting to tap international markets.
In the initial stages, the elimination of legacy price controls and
correction of the FX misalignment will have an inflationary impact and
deepen the contraction in activity that is already underway.
As policies are implemented and credibility is rebuilt, a gradual
disinflation process should take hold, accompanied by a further
strengthening in the external position, and an eventual recovery in output,
demand, and real wages. Given large uncertainties, the authorities are
committed to recalibrating polices as needed to meet the program’s
objectives.
Key understandings
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Fiscal policy. The authorities intend to achieve a
primary surplus of 2 percent of GDP this year (consistent with overall
balance), through a combination of revenue and expenditure measures.
Revenues are expected to be supported temporarily by higher
trade-related taxes, as well as gains from the normalization of
agricultural production. Meanwhile, expenditure rationalization will be
underpinned by reductions in administrative costs, energy and transport
subsidies, discretionary transfers to provinces and state-owned
enterprises, and lower-priority infrastructure spending. Initial
measures will be complemented by efforts over time to safeguard an
overall fiscal balance, through high-quality improvements in the
efficiency of the tax and expenditure systems.
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Social protection. The authorities have significantly
reinforced social assistance through the child allowance and food stamp
programs, while also moving away from social programs distributed
through costly intermediaries. They plan to preserve the real value of
pensions and scale up social assistance as conditions warrant.
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FX policy and reserves. Following the large step
devaluation in mid-December, the authorities exchange rate policy will
continue to support reserve accumulation goals. Importantly, they have
abandoned the opaque system of administrative import controls (SIRA) and
are in the process of addressing the large importer debt overhang, by
offering FX instruments to importers that properly register their
commercial debts. They have moved to a more market-based regime and
have abandoned the previous approach of intervening in the parallel and
non-deliverable futures FX markets, while lifting trading restrictions.
They are strongly committed to continuing to eliminate multiple
currency practices and exchange restrictions in the near term, while
seeking to unwind capital flow management measures (CFMs) as imbalances
are addressed and conditions permit. These policies are expected to
lead to a US$10 billion build up in net reserves by end-2024, including
US$2.7 billion accumulated during the final weeks of 2023.
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Monetary policy. The monetary policy stance will evolve
to support money demand and disinflation, while the monetary policy
framework and operations will be adjusted to strengthen its anchoring
role. The authorities have committed to end central bank credit to the
government and will continue to reduce the large peso overhang, while
also gradually strengthening the central bank’s balance sheet.
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Financing plans. Consistent with the fiscal program,
the government will not seek any form of net market financing, rather
focusing on improving the domestic debt maturity profile. Rebuilding
relationships with international capital markets is also a top priority.
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Structural policies. The authorities are determined to
address the long-standing impediments to growth and exports, and boost
Argentina’s vast energy and mining potential, including by increasing
competition and simplifying red tape. Recent legislative initiatives
represent an important step in this direction, for which political
support is being sought.
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Program modalities. The authorities updated program
targets, consistent with their plans for a more ambitious fiscal and
external consolidation.
“IMF staff thank the Argentine authorities, led by Minister Caputo, Central
Bank President Bausili and Chief of Cabinet Nicolas Posse, for their deep
engagement, as well as their strong commitment to the hard work of
restoring economic stability and setting the basis for a more sustainable
and vigorous private sector led economy that benefits all Argentines.
