IMF-Argentina: three key targets and consequences if country does not meet them

RIO DE JANEIRO, BRAZIL – Argentina began to transit the review with the International Monetary Fund (IMF) after renegotiating the record debt taken in 2018. In that path, the acceleration of inflation and the rise in the costs of natural gas imported by the country appear as two of the central challenges to meeting the targets set by the Fund.

The process is being carried out virtually and slowly, according to official sources told Bloomberg Línea, who did not specify when the first litmus test for the country before the multilateral organization and on which the second disbursement of funds to the country depends, will be completed.

In the last hours, the IMF assured that the dialogue with Argentina in this instance shows “good progress” and ratified that there would be no changes in the goals set so far. However, most economists see serious difficulties for the country to achieve the three main goals for 2022.

The three goals to be met before the IMF: The main goals to be approved by Argentina, among other points, are those related to international reserves, primary deficit, and monetary emission, according to Matías De Luca, economist of the consulting firm LCG.

Argentina has committed to complying with these objectives quarterly, and its compliance depends on the IMF continuing with the disbursement of funds and, in turn, avoiding default, he explained in an interview with Bloomberg Línea.

#1 BCRA’S INTERNATIONAL RESERVES

De Luca said the reserves target “is not going very well”, although he clarified that “it always depends on the Fund’s disbursements”. He estimated that the goal could be met this year but that 2023 will present “the most difficult part”.

“The difficult part comes from the reserves side. As of May 16, the accumulated net reserves against December 31 are US$2.78 billion, while the target is US$4.1 billion for the second review. In other words, US$1.32 billion remain to be accumulated, but the drawback is that net disbursements during the second quarter are only US$284 million,” he said.

Diego Piccardo, an economist at Fundación Libertad y Progreso, evaluated that “the goal of accumulation of net reserves is unlikely to be met, if at the time of the year with the highest liquidation of foreign currency the Central Bank was barely able to buy some dollars”.

“What plays in favor is that this year there is a `surplus` of disbursements from the IMF, and part of those net disbursements (about US$4.4 billion) will swell the net reserves, making the goal more attainable”, he analyzed in declarations to this media.

#2 MONETARY ISSUANCE

Regarding monetary issuance, De Luca said that between the end of April and the end of May, US$254 million were issued and some US$376 million during 2022.

He also stated that “the accumulated limit for the second review is US$438.5 million. That is to say, for now, they are meeting the issuance goal”.

According to Piccardo, “the monetary target sets a ceiling of US$438.5 billion by the end of June”. “Currently, according to the official series, up to May 12, there are US$288.5 billion in Temporary Advances so far this year, although it seems that in the last few days, there was US$90 billion more, almost reaching the limit of the ceiling for this quarter. It set off the alarm bells in the Ministry led by Guzmán, and he put all his efforts into achieving a “rollover” of the debt in pesos to compensate for the higher fiscal deficit,” he estimated.

“The only way for this goal to be met this quarter is if the debt bids are very successful. However, the annual target is unlikely to be met,” he predicted.

#3 FISCAL DEFICIT

Piccardo indicated that, by the end of June, “the Treasury should have an accumulated deficit of US$566.8 billion.” “The March target was met thanks to Guzman’s creative accounting to create revenues where there were none, something he can rarely continue to do in the revisions that follow,” he said.

The economist considered that “the most likely thing is that the goals will end up ‘recalibrated'”. “Recalibration does not mean that the targets as a percentage of GDP will change, but rather that, given the failure of the assumptions of the agreement, such as 48% annual inflation, the nominal targets will remain old,” he explained.

“Likewise, beyond the recalibration, the fiscal target is unlikely to be met due to the spending increases that we are observing and the lack of significant progress in reducing economic subsidies,” he pointed out.

What happens if Argentina does not meet the targets?

“If Argentina does not comply with any of these points, either the agreement will fall, which is unlikely to happen, or Argentina will ask for a waiver based on the fact that it has been demonstrating its willingness to comply,” said De Luca.

Regarding the main objectives to be met, Piccardo assured that fiscal and monetary “are naturally interconnected since, if the fiscal goal is not met, the monetary financing needs grow”.

“In case of non-compliance, we do not see the Fund getting tough with Argentina. In that sense, the agreement is a bridge to December 2023. “Most likely, they will grant waivers at each default, sustaining a discourse that deviations are caused by external shocks, such as the war in Ukraine,” he noted.
Challenges beyond targets

Federico Moll, director of the consulting firm Ecolatina, assured that the program with the IMF “is focused on correcting certain relative prices that have lagged behind over the last few years”.

“Tariffs is the first point. Although the agreement with the Fund does not solve it, there is no defined trajectory for tariffs and, therefore, it is not at all obvious how the fiscal deficit will be corrected in the coming years”, he pointed out.

In addition, Moll remarked on the “exchange rate” because “the cepo exists for a reason”. “The official exchange rate does not reflect the market price of the dollar and, therefore, to the extent that the cepo wants to be dismantled, which is a necessary condition for growth, there is going to have to be a movement in which, in the best of cases, there will be a jump that should be smaller.”

“There is no lifting of the cepo without an exchange rate jump behind it. That is the main challenge, which the agreement with the Fund orders or pauses, but does not solve in the least”, he warned.

With information from Bloomberg