IMF ready to ease targets after review of debt deal
International Monetary Fund confirms staff-level agreement with Argentina on fourth review of Us$44.5-billion debt programme and calls for “modification of net international reserve accumulation target”; Decision paves way for new tranche of US$5.3 billio
The International Monetary Fund (IMF) has reached a staff-level agreement with Argentina’s government over the fourth review of the country’s multi-billion-dollar aid package and indicated that the deal’s economic targets will be adjusted.
The decision, which is subject to approval by the multilateral lender’s executive board, paves the way for a crucial disbursement of around US$5.3 billion later this month.
In a statement confirming the news, the IMF indicated that targets outlined in the Us$44.5-billion aid programme agreed last March would likely be altered in response to the economic challenges facing Argentina.
Yet the Fund warned of government “policy setbacks” amid a severe drought that’s hitting the country’s commodities sector and warned that “temporary administrative measures should not be a substitute for sound economic policy.”
In order to reach agreement, the IMF said a change to a key target in the programme, known as net reserve accumulation, “is being requested” after “recent reserve losses.” The current target is US$4.8 billion and the Fund did not say in the statement what the new figure would be. Net reserves, or the stockpile of cash at the Central Bank, is seen as crucial to preventing a major currency devaluation.
The government expects to reduce the 2023 reserve target in the IMF deal by about US$2 billion, according to two senior government officials who requested not to be named to discuss unpublished figures. Pending board approval, that would bring the annual reserve target down to roughly US$2.8 billion from the current US$4.8 billion stipulated in the last IMF review.
The sharpest change to the quarterly reserve targets, which are the key benchmarks to pass IMF reviews and receive more disbursements, will happen in the first half of this year, the officials added.
Changing the reserve target for the third time would mark another setback for a year-old programme that’s facing growing obstacles as a historic drought dwindles crop exports needed to bolster economic growth and tax revenue.
Economic activity has declined for four straight months through December and annual inflation now surpasses 100 percent.
‘LIMITING VULNERABILITIES’
The review, the fourth since the revised deal was signed last year, focused on assessing progress and reaching “understandings on a strong policy package to durably address macroeconomic imbalances while limiting future vulnerabilities” of Argentina’s economy, said the IMF.
“Prudent macroeconomic management in the second half of 2022 supported stability and helped secure programme targets through end-2022 with some margin,” said the Fund.
The agreement “is subject to approval by the IMF’S executive board, which is expected to meet in the coming weeks” and “once the review is completed, Argentina will have access to about US$5.3 billion,” it added.
In a joint statement quoted in the communiqué, Luis Cubeddu, the department’s deputy director for the Americas, and Ashvin Ahuja, mission chief for Argentina, confirmed that “all quantitative performance criteria through end-december 2022 were met with some margin.”
President Alberto Fernández’s government has committed to increasing its international reserves and reducing the fiscal deficit from three percent of GDP in 2021 to 2.5 percent in 2022, 1.9 percent in 2023 and 0.9 percent in 2024.
In 2022, Argentina’s deficit was 2.3 percent of GDP and net international reserves increased by US$5.4 billion, above the target agreed with the IMF of US$5 billion.
But the Fund’s officials warn that “against the challenges of an increasingly severe drought, a stronger policy package is necessary to safeguard macroeconomic stability” and “address rising inflation,” which totalled 102.5 percent over the last 12 months.
Highlighting “recent policy setbacks,” the IMF warned that policies “firmly and consistently implemented” to ensure “underlying programme objectives” are met.
“While stronger macroeconomic policies and efforts to mobilise financing are expected to enhance reserve coverage and reverse recent reserve losses, a modification of the 2023 net international reserve accumulation target is being requested,” confirmed the Fund.
The IMF confirmed that the “bulk” of the “accommodation” is requested to take place in early 2023, consistent with the front-loaded impact of the drought.”
AGREED POLICIES
Detailing the talks, the multilateral lender went on to confirm that agreements had been reached with Economy Ministry officials on “fiscal, monetary,” exchange rate and financing policies.
For the former, Fernández’s government committed to “continued expenditure controls, “improved targeting of energy subsidies and social assistance” and to “protecting priority social and infrastructure spending.”
As such, Argentina will continue implementing a new segmentation scheme to eliminate energy subsidies for the well-off from May onwards and for commercial users by the end of 2023.
“Early and resolute actions will be taken to sustainably address the fiscal costs of the unforeseen approval of the pension moratorium to secure fiscal targets for this year and beyond,” the Fund added.
In addition, the government made a commitment on the “timely rationalisation of FX policy” and “not to use international reserves or issue short-term external debt instruments to intervene in the parallel FX markets.”
On financing, Cubeddu and Ahuja praised the government’s “proactive market-based domestic debt management strategy,” which is said is being “cautiously implemented and well communicated.”
Kind words were also reserved for the effort to mobilise “official financing from multilateral and bilateral sources,” notably via new bilateral debt restructuring agreements reached with the Paris Club group of wealthy creditors.
“We thank the Argentine authorities for their ongoing open and constructive discussions and welcome their continued commitment to tackle macroeconomic imbalances, and safeguard stability,” the Fund concluded.
The upcoming Us$5.3-billion disbursement, if approved by the Fund’s executive board, will be used to repay Argentina’s debts owed to the IMF from a previous 2018 programme that failed to stabilise the country’s economy.
The current agreement, now entering its second year, is already on its third Argentine economy minister after the first two left the job last July amid an ongoing political crisis.