Argentina inks US$45-billion staff-level IMF deal in key step

Argentina inked an agreement with the staff of the International Monetary Fund on a new programme Thursday, a key step toward finalising a US$45-billion deal after almost two years of negotiations.

The staff-level accord, which includes commitments to narrow the government’s fiscal deficit and money-printing while unwinding energy subsidies, will seek to address the country’s “persistent” high inflation and improve public finances, according to a statement released by the IMF.

The programme will now be sent by the government to Congress for approval, Argentina's Economy Ministry said in a separate statement, before reaching the IMF’s executive board for final approval.

“Argentina’s deep socio-economic challenges have been exacerbated by the global pandemic,” the Washington-based organisation said in the statement. “IMF staff and the Argentine authorities have reached agreement on a pragmatic and realistic programme, with credible economic policies to strengthen macroeconomic stability and to address Argentina’s deep-rooted challenges to sustainable growth.”

Economy Minister Martín Guzmán, along with other members of his economic team, are scheduled to present the agreement to Congress on March 7. The government faces not only a divided ruling coalition but also increasing animosity from the opposition, making the approval more challenging.

Argentina’s short-dated dollar-denominated bonds edged up after the announcement but ended the day little changed, with the nation’s US$16 billion in securities due 2030 climbing to 31.45 cents on the dollar.

“The focus on composition rather than the level of fiscal policy could reduce political resistance to some of the proposed changes. However, infighting in the coalition base and rhetoric against the opposition pose important challenges in approving even a less politically costly programme.” – Adriana Dupita, Latin America economist

As part of the deal, the IMF sees Argentina’s economy growing between 3.5 percent to 4 percent this year and inflation slowing to between 38 percent to 48 percent from its current level of 51 percent. The country is expected to reach a primary fiscal balance, meaning without counting interest payments, by 2025, according to IMF officials who spoke to reporters after the announcement.

Without providing specifics, the officials said the agreement intends to roll back Argentina’s currency controls, which companies operating in the country often complain about.

“The programme will also feature a plan for easing controls over time,” said Julie Kozack, the IMF’s Western Hemisphere deputy director who co-led negotiations. “We are aiming to find ways in the programme to improve the framework for currency controls.”

The agreement is the latest chapter in the country’s tumultuous relationship with the IMF. Once approved by Congress and the Fund’s board, the deal would effectively reschedule over US$40 billion in outstanding payments owed by the Latin American nation to the lender from a record 2018 bailout that failed to stabilise the crisis-prone economy.

It will also mark the country’s 22nd programme with the organisation since 1958.

Talks between Argentina and the IMF gained momentum in the past weeks as the country nears a late March deadline in which it must make payments of about US$2.8 billion. On Tuesday, President Alberto Fernández said a deal was already reached, but added that details were still being worked out.

Political ownership

Fernández’s government passed a law requiring this IMF programme to be approved through Congress as a way to ensure widespread political ownership. But before the staff-level deal was announced, few legislators publicly backed its broad framework that the government rolled out a month ago.

Lawmakers from the more radical-left faction of the president's broad Frente de Todos coalition already came out against his negotiation strategy with the IMF. Powerful Vice-President Cristina Fernández de Kirchner, who was president from 2007 to 2015, hasn’t commented on the negotiations or agreement either. And some opposition leaders walked out of the chamber during Fernández’s annual address to Congress on Tuesday, boosting tensions with the government.

It’s also uncertain if the deal will have sufficient support from the IMF’s Executive Board, with US officials saying as recently as January that Argentina needs to put forward a credible economic plan.

Neither Argentina or the IMF’s statements included attachments outlining the time-lines or specific targets of the deal, beyond those on spending that had been agreed to in January. Details of the programme are expected to be included in the presentation to Congress.

Energy subsidies

Earlier Thursday, government officials announced a new framework within the agreement over energy subsidies, a hot-button issue in Argentina. The government spent nearly US$11 billion on these subsidies last year, double the amount from 2019, a level seen as unsustainable with the Central Bank facing depleted reserves.

The new system plans to segment Argentine residents into three categories. The wealthiest citizens would pay full price with no subsidies. The second and third segments of society would see utilities rise according to a wage index.

IMF Managing Director Kristalina Georgieva said last month that the Fund and Argentina should concentrate on reaching an agreement that the nation could feasibly implement and that would lead to economic improvement rather than trying to come up with a plan to solve every single one of the country’s problems.

But some former IMF officials criticise the agreement, while others had already warned it will set a bad precedent.

The new programme “aims at barely passing a minimal smell test,” said Mark Sobel, a former US Treasury official who also represented the country at the IMF. “The fiscal path is highly gradual, but may well prove onerous for Argentina. The details are remarkably murky about the exchange rate. There is little evidence that Argentina will be able to reduce its very high inflation to single digits.”

Alejandro Werner, a former top IMF official who negotiated Argentina’s last agreement in 2018, warned in a recent Project Syndicate Op-Ed that the Fund is risking its reputation with a “very weak” programme, adding that “it will generate moral hazard as other countries will demand similar treatment.”