On March 3rd, Argentine authorities and IMF staff have reached a staff-level agreement on the economic and financial policies to be backed by a 30-month Extended Fund Facility (EFF) Arrangement (the “Agreement”). As required by Argentine law, this and any future program or agreement undertaken with the IMF will require a Law from the Argentine National Congress that expressly approves it. In this sense, the Agreement has been submitted for approval by the National Congress under the terms of Law 27,612 on Strengthening the Sustainability of the Public Debt. This bill, related to the approval of the “Agreement for the Refinancing of the Debt between the Argentine Republic and the International Monetary Fund”, includes as annexes all the documents that constitute the agreement, i.e., the Memorandum of Economic and Financial Policies and the Technical Memorandum of Understanding. Furthermore, once the program is approved by the Argentine National Congress, the staff-level agreement is subject to approval by the IMF’s Executive Board.

The Agreement

The Agreement requests access to Special Drawing Rights (SDRs) 31.914 billion –equivalent to US$ 45 billion or 1000 percent of quota. It aims to provide Argentina with balance of payments and budget support to address the country’s most pressing economic challenges and to enhance the prospects of all Argentines by implementing measures designed to promote growth and protect essential social programs.

It includes 10 reviews to be conducted quarterly for two and a half years. The first disbursement will be made after approval of the program by the IMF Board. The remaining disbursements will be made after the completion of each review. The repayment period for each disbursement is 10 years, with a grace period of 4 and a half years, which implies repayment beginning in 2026 and ending in 2034.

Under a comprehensive approach, the government and the IMF agreed that inflation is a multi-causal phenomenon and will be addressed concurrently: achieving growth by sustaining exports to strengthen international reserves, improving the profile of public policy financing, and reducing monetary financing gradually. No increase in the exchange rate is expected, exchange rate policy will continue to be in line with the objective of accumulation of international reserves to promote resilience on the external front and to stabilize expectations. Additionally, a target for reserve growth of at least USD 5.8 billion by 2022 is set.

The Agreement’s objectives

The Agreement sets forth a program defining a fiscal consolidation path that will form a key policy anchor of it. The agreed fiscal path would gradually and sustainably improve public finances and reduce monetary financing. Importantly, it would also allow for spending increases on infrastructure and science and technology, and protect targeted social programs.

The program reinforces the commitment to foreign exchange stability, ruling out abrupt movements and establishing that the foreign exchange administration will seek to ensure the medium-term compatibility of the real exchange rate with the objective of building up reserves. Moreover, progress will be made to achieve a progressive fiscal consolidation that reduces the fiscal deficit, within the framework of the recovery of economic activity and the gradual reduction of its monetary financing, as well as a monetary policy implementation that results in positive interest rates to strengthen the demand for assets in Pesos. Thus, it is proposing a gradual reduction of the fiscal deficit, consistent with a moderate growth of spending in real terms, in order to sustain the ongoing economic recovery, while strengthening credit and the domestic currency. Specifically, a multi-year fiscal consolidation strategy has been developed, with the objective of achieving a primary deficit of 2.5% of GDP in 2022, falling to 1.9% of GDP in 2023 and 0.9% of GDP by 2024.

Another important aspect of the Agreement is related to energy policies. In this regard, a medium-term energy plan will be developed including actions to: (i) encourage private and public investment to increase energy generation and transmission, including the construction of gas pipelines and the expansion of LNG and renewable energy production capacity; (ii) reduce the losses of the distribution segment by improving energy meters, billing and collection; (iii) improve energy consumption efficiency and resource conservation; (iv) strengthen the targeting and progression of energy subsidies; and (v) ensure that, over time, energy tariffs for residential and non-residential users better and more predictably reflect wholesale gas and electricity costs.

In this sense, one of the goals is achieving reasonable tariff levels that can be applied to public gas and electricity services observing the standards of justice and distributive equity and in accordance with the relevant objective parameters for each case. These revisions will include both residential and non-residential users. For residential users, the salary variation coefficient will be considered as an objective criterion, as established by Law No. 27,443. This coefficient index is published by INDEC and estimates the evolution of salaries paid, covering the registered private sector, the unregistered private sector and the public sector. In the case of non-residential users, the proposal establishes payment of the full tariff for Large Distributor Users, and for the rest, a tariff revision will be made according to the proposal to be defined at the public hearing convened for late April 2022.

Enactment

The Ministry of Economy stated that the first disbursement would be 7,000 million SDRs at the time of approval of the program by the IMF Executive Board, which would imply a first transfer of 9,700 million dollars, which would be enough to cover the amounts to be paid to the organization in the next three months and leaving a balance of USD 6,200 million in Argentina’s Central Bank’s (BCRA) reserves.

At the time of the first review, taking place in June, the government’s objective would be to add USD 4.155 billion in the BCRA reserves. Moreover another USD 4.155 billion transfer is expected for September, while after the fourth review in December, the sum to be sent by the IMF, if Argentina meets the required targets, would be USD 6.23 billion. In total over the course of 2022, the Treasury would receive USD 24.62 billion, USD 7 billion more than the maturities remaining until the end of the year. In essence it will allow the Government to refinance its debt and obtain fresh funds needed for infrastructure development.

In this regard, the government expressed “[w]e plan to outline a strategy for the gradual easing of exchange controls by outlining the necessary conditions and objectives, including support for the gradual restoration of international market access starting in 2025”, referring to an annex of the agreement to be published shortly.

Furthermore, the Agreement establishes a Cumulative ceiling on the BCRA’s Financing of the Federal Government[1], which includes: (i) overdraft transfers from the BCRA to the Federal Government (Adelantos Transitorios), (ii) distribution of profits (Utilidades), and (iii) the acquisition of government debt in the primary market or by direct purchases from public institutions. The program caps such financing at 705,228 million Pesos –equivalent to 1% of GDP in 2022– by the end of December 2022. The cap for 2023 will be 0.6 percent of GDP, with zero net financing in 2024.

In order to be consistent with the commitment in IMF arrangements to follow a ‘continuous performance criteria’, the institution undertakes not to: (i) impose or intensify any exchange restrictions, (ii) introduce or modify Multiple Currency Practices (MCPs), (iii) conclude bilateral payment agreements that are inconsistent with Article VIII of the IMF’s Articles of Agreement; and (iv) impose or intensify import restrictions for balance of payment reasons (continuous performance criteria).

Regarding the implementation of the program, Argentine authorities must commit to provide certain information requested by IMF’s staff so they can monitor its progress. In addition to this, authorities must provide a series of data for the monitoring of economic variables. This data provision is divided into: (i) daily, such as for nominal exchange rates and total currency issued by the BCRA, (ii) weekly, such as for BCRA balance sheet and on sales and purchases of securities settled in different currencies, recorded and provided by the National Securities Agency, (iii) fortnightly, such as for interest rates on domestic debt instruments, (iv) monthly, such as for fiscal financing sources and external financing received, and (v) semi-annual, such as for federal government expenditures to the provinces and the Autonomous City of Buenos Aires related to the settlement of liabilities associated with pensions, revenue sharing and expenditure allocation.

This Agreement is seen by both parties as a pragmatic and realistic program, with credible economic policies which aim at strengthening macroeconomic stability and which will address Argentina’s deep-rooted challenges to sustainable growth. As a matter of fact, the IMF foresees Argentina’s economy growing between 3.5% to 4% during 2022 and inflation slowing to between 38% to 48% from its current level of 51%. Moreover, the IMF’s Communications Department issued a statement expressing that the IMF “look[s] forward to our continuing work with the authorities to support Argentina and its people.”[2]

Once approved by Argentina’s Congress and the IMF’s Board, the Agreement will have the potential to increase the level of Argentina’s credibility and economic stability, leading to more investment in the region, necessary to strengthen the Central Bank’s treasury and overcome the socio-economic crisis.

References

[1] Defined as: (Sector Público Nacional No Financiero) the central administration, the social security institutions, the decentralized institutions (Administración Nacional), and PAMI, fiduciary funds, and other entities and enterprises of the federal government.

[2] IMF’s Communications Department Press release No. 22/56 March 3rd, 2022