Analysis: IMF’s 10 demands to sign an agreement with Argentina

RIO DE JANEIRO, BRAZIL – Speculation on the timing for signing a new program aside, these are Washington’s diagnosis and premises to allow the country to defer the payment of its US$45 billion debt.

Regardless of the timing, sooner or later the Argentine government will sign a new agreement with the International Monetary Fund (IMF) to refinance the payment of its US$45 billion debt over a 10-year term.

While some reports suggest that the government has changed its mind and no longer wants to sign the agreement in May but only after the October elections, as stated several times by Minister Martin Guzmán, the truth is that Argentina does not want to pay the capital maturities between this year and 2023.

Consequently, it will need another program, irrespective of what it will do with the payment of US$1.8 billion on September 22nd (which could eventually be covered with the issuance of SDRs planned by the organization’s partner countries).

These are the 10 premises and the Fund’s assessment of the Argentine situation and how it should be corrected with the signing of such program, as reported by sources in Washington.

1 – Macroeconomic imbalances: the Fund believes, as it stated last year, that the country has important fiscal and monetary imbalances that must be corrected, taking into account the context of the pandemic, but in a clear direction.

2 – Inflation: Argentina’s persistent rise in consumer prices, which makes it the country with the second-highest inflation in the region, must be tackled with macroeconomic instruments, as it is done in other countries. Inflation is high due to the country’s imbalances, in addition to the circumstantial effect of the increase in the price of raw materials which plays a part, although it is cushioned by export tax exemptions.

3 – Fiscal deficit: the national budget target is not ambitious (4.5% of GDP) and a greater effort must be made, not only by increasing tax resources, but also public spending, but everything will depend on the level of economic growth this year and on the reform package implemented by the Government, with or without an agreement with the IMF.

4 – Exchange rate gap: although the gap fell from its peak last August and stabilized at around 60%, the IMF believes that it is still high and entails risks of a new spike if the underlying causes are not solved. The persistence of multiple exchange rates discourages the improvement of foreign trade indicators and is a risk for the current account.

5 – Monetary issuance: the economic team’s efforts to reduce the issuance rate are appreciated, although the program planned for this year still poses a risk of multiplying the aforementioned imbalances.

6 – Increase in the Central Bank’s reserves: although the technical team of the body headed by Miguel Pesce highlights the increase in reserves, in fact, to a large extent, this occurs in a hard tightening context, which the Fund approves only in transitory terms. The ultimate test would consist in seeing if the Central Bank manages to increase them with fewer controls, within a reactivation context.

7 – The reform of the government: within the chapter of structural issues included in an extended facilities agreement such as the one the government wants to sign, the multilateral organization wants to see greater efficiency in the public sector. The sacrifice required for the economy to return to growth must be shared equally between the private sector and the government.

8 – Increased investment: the government must provide a clear and categorical direction for confidence to return and for the economy to grow steadily. Argentine bond prices currently reflect the opposite by placing the country at the top of the country risk ranking.

9 – Tax reform: the economic team last year pledged that it would present society with a tax reform that was never made public. Instead, an initiative to reform part of the income tax was designed by the president of the Chamber of Deputies, Sergio Massa. In parallel, the provinces were allowed to again raise their gross income rates, once again breaking a fiscal pact signed less than four years ago.

10 – Apart from each separate issue, the new program must work collectively to ensure that Argentina does not fall back into another debt crisis in the short-term. In other words, the request for flexibility made by the Ministry of Economy will be taken into account, but with limits, due to two issues: Argentina has a record of signed and unfulfilled programs with the organization and, on the other hand, other countries that have agreed on programs over the past year have accepted the conditions in force for agreements of this nature. The prospect of granting an exception -the staff has already expressed its disagreement with the credit granted to the government of Mauricio Macri, which came about under pressure from the Trump administration- would set a bad precedent that could trigger claims from other governments.

Four sources consulted in Washington -the organization did not wish to disclose its position on the matter- said that, regardless of the Fund’s Managing Director Kristalina Georgieva’s rhetorical support for the government, there will be no preferential consideration. There may be a faster negotiation, but this does not ensure that there will be an agreement if the Fund’s staff and, above all, the most important IMF member countries consider that the premises for signing the agreement will not be met. This implies a consistent economic program in monetary and fiscal terms, as Georgieva and the staff stated.

“The IMF has entered into many agreements in the past year in the wake of the pandemic economic crisis, with demands for each of the countries that signed them. If it were to close a more flexible agreement with Argentina, other governments would immediately demand equal conditions, with fewer demands,” explained a source with access to the negotiations.

“If the country does not implement any of the reforms that the international economic community is demanding, it will have problems with its reserves, foreign exchange and fiscal situation, which will have repercussions on the extent and sustainability of its recovery,” the source added.

Another source added a nuance: he clarified that, due to the pandemic, the “gradualism” of Minister Guzmán to lower the fiscal deficit to 4% of GDP this year may be accepted, particularly if the upward trend of tax revenue is maintained, due to reactivation, the rise of raw materials and higher fiscal pressure. But this does not imply that more demanding conditions will not be requested for 2022 onward, given that it will be a 10-year agreement, as the government wants.

“There is a good predisposition on the part of the staff and the board of directors to reach an agreement, mainly because they perceive good will in Minister Martín Guzmán, although they are afraid of what Vice-President Cristina Kirchner might do,” he added, aware of the internal tensions within the ruling party.

This ten-step list sounds broad – in reality it is more extensive, given that an AFE requires other structural measures – but it is based on the government’s interest in rescheduling the debt in the long-term. Were it to seek fewer requirements, it could choose another stand-by, such as the one signed in 2018, but it would have fewer years to repay. What it can’t do is enjoy additional time in exchange for fewer requirements, it is argued in Washington.

Source: Infobae