In a significant development, the International Monetary Fund (IMF) staff and the Argentine authorities have reached a staff-level agreement on the combined fifth and sixth reviews of Argentina’s 30-month Extended Fund Facility (EFF) arrangement. This agreement comes amidst a challenging economic situation in the country, with key program targets missed due to the larger-than-anticipated impact of a drought and policy slippages.
The agreement is subject to the continued implementation of agreed policy actions and approval by the IMF Executive Board, scheduled to convene in the second half of August. Upon successful completion of the fifth and sixth reviews, Argentina will have access to approximately US$7.5 billion, which will aid in addressing near-term balance of payments needs and supporting the country’s policy efforts.
Since the fourth review concluded on March 31, 2023, Argentina has faced economic difficulties, largely driven by the adverse effects of the drought on exports and fiscal revenues, as well as domestic policy challenges. To combat these challenges and strengthen the program, the Argentine authorities and IMF staff have agreed on a policy package comprising a sequenced set of measures. These measures aim to rebuild reserves, enhance fiscal sustainability, and protect critical infrastructure and social spending.
The policy package covers several key areas, including foreign exchange and monetary policy, fiscal policy, financing strategy, and reserves. To durably improve reserve coverage and external stability, Argentina will strengthen and harmonize its foreign exchange regime. Additionally, measures have been put in place to encourage export liquidation and manage imports in the near term, with the aim of preserving competitiveness and supporting reserve accumulation goals.
The authorities also plan to sustain peso demand and address high inflation through maintaining sufficiently positive real interest rates. Moreover, monetary policy will play a crucial role in containing market pressures, with interventions in the parallel and futures foreign exchange markets aimed at addressing disorderly conditions.
Regarding fiscal policy, the 2023 primary fiscal deficit target remains unchanged at 1.9 percent of GDP. To adhere to this target, the authorities will tighten the fiscal stance further in the second half of the year, supported by agreed revenue and spending measures. These measures will also safeguard priority infrastructure and social programs while effectively managing wage bill growth and updating energy tariffs to reflect production costs accurately.
The agreed fiscal path assumes no additional reliance on direct monetary financing of the fiscal deficit. Successful voluntary debt exchanges have reduced rollover risks and are expected to support additional net domestic financing throughout the year. Interventions in the secondary bond markets will focus on ensuring normal market functioning while protecting the central bank’s balance sheet.
The policy package is expected to boost reserves during the remainder of the year, with a cumulative net international reserves accumulation target of approximately US$1 billion by the end of 2023. This represents a notable adjustment from the initial target of US$8 billion set at the time of the fourth review. Reserve accumulation is further anticipated to be supported by improvements in the energy balance and a projected recovery from the drought in the latter part of the year.
Amid the economic challenges, the Argentine authorities have expressed their commitment to firmly implement the policy package in the coming weeks and months, adapting proactively to evolving external and domestic conditions. They have also reiterated their dedication to honoring their financial obligations to the IMF, in line with their external sustainability objectives.
The IMF team expressed appreciation for the ongoing open and constructive discussions with the Argentine authorities. They welcomed Argentina’s commitment to strengthen the program and take necessary actions to secure the country’s macroeconomic stability during this challenging period, characterized by the unprecedented drought as a central factor.
The EFF arrangement for Argentina, approved on March 25, 2022, provides access of SDR 31.914 billion (equivalent to US$ billion, or about 1000 percent of quota). As Argentina moves forward with implementing the agreed policy package, the focus will be on achieving a more sustainable, resilient, and inclusive growth trajectory over the medium term.
By Grace Olaogun