Hopes for an Argentina-IMF agreement are growing, but at what cost?

Two decades ago the leftist leader Alejandro Bodart marched through the streets of Buenos Aires to protest against the International Monetary Fund (IMF), which many Argentines then blamed for the ‘austerity measures’ that aggravated the worst economic crisis in the history of the country.

Now the drums of war are beating again for Bodart, who fears that what looks like an imminent deal with the Fund to renegotiate $ 45 billion of debt will translate into adjustment policies in Argentina, where four out of 10 people live in poverty. .

“There is going to be social resistance,” Bodart, secretary general of the Socialist Workers’ Movement (MST), told Reuters. “We do not see the possibility of a viable country within the framework of an agreement with the IMF, so we believe that it should be rejected,” he explained.

Bodart’s position is at one end of the scale. However, it does not fail to underline the challenge for the IMF and the center-left government of Alberto Fernández to reach a solution that balances fiscal responsibility with the need for growth.

Argentines resent the potential impact of an agreement on public spending that has been critical to sustaining economic growth this year.

In turn, any austerity measure could be a political blow to the government in the face of the 2023 presidential elections.

An Argentine economic team traveled to Washington over the weekend to advance negotiations with the IMF, and many analysts believe the chances of a deal are growing despite differences between the parties on how to finance fiscal consolidation.

“Not agreeing is not an option, because it is worse for the country,” said Hernán Lacunza, who was Minister of Finance and Finance during the government of former President Mauricio Macri, who contracted the debt with the IMF that Argentina is currently negotiating.

The current Peronist coalition that governs Argentina accuses Macri, a center-right politician, of rushing to take out a loan with the Fund in 2018 and increasing the country’s foreign debt level.

For Lacunza, Argentina must achieve concrete progress in the dialogue in the short term due to the impact that uncertainty is generating on the country’s currency, foreign exchange reserves and the prices of its bonds.

“They have been talking for a year and a half, without concrete progress. Time is not indifferent since uncertainty costs resources ”, he explained.

Adjust the belt?

Fernández and his Minister of Economy, Martín Guzmán, have said that a new agreement with the IMF should avoid fiscal adjustments that could impact the economic growth that the country registers after years of recession and the COVID-19 pandemic.

A government source told Reuters in November that the central question with the IMF is how to reduce the fiscal deficit without a “contractionary spending policy.” Argentina seeks to improve its tax collection and find funds from other lenders.

Fernández also faces the difficult task of regaining voters for the 2023 elections, after a tough defeat in the midterm elections last month in which Peronism lost the majority it had in the Senate since 1983.

This political panorama could put any decision to reduce public spending to the test, especially with the openly critical stance towards the IMF of the powerful Argentine vice president, Cristina Fernández de Kirchner, who calls for higher public spending.

“Due to ideological and political needs, it is difficult to imagine any kind of orthodox and disciplined approach to fiscal and monetary policies, no matter what is written in an agreement with the IMF,” said Benjamin Gedan, deputy director of the Latin America Program at the Wilson Center in Washington.

Gedan, however, believes that an agreement will be reached, as the government this month seeks to send the Argentine Congress a multi-year economic plan blessed by the IMF, which would serve as the foundation for a new agreement.

“It is supposed to be on the right track, but we will have to wait,” said a government source who asked not to be named regarding the possibility of reaching an agreement in the remainder of the year.

An economic plan with the support of the IMF would probably imply goals for the fiscal balance, the recovery of the dwindling reserves of the central bank, plans to reduce inflation that gallops around 50% and disarm capital controls that have created a range of different Exchange rates.

Edward Moya, an analyst at currency brokerage OANDA, said a new deal would likely mean Latin America’s third largest economy has a sour glass to drink.

“Argentina is still struggling with a very difficult debt problem, a currency crisis and a lack of reserves, which is why it does not have the money to pay the IMF,” Moya said.

“This movie will probably not end well for Argentines, since the IMF is going to ask for significant cuts in public spending,” he added.