Five obstacles that Argentina must overcome to agree with the IMF

The Argentine government announced on January 28 the outlines of an initial agreement with the International Monetary Fund, but there are still many obstacles to overcome before sealing the deal.

The talks made important progress and led officials to announce an understanding on key issues, including the pace of government spending and the central bank’s money printing. Still, the outlines left many open questions about the details of the deal, as Argentina seeks to reschedule payments of about $40 billion from a previous program.

These are some of the remaining hurdles that analysts and investors will be watching for solutions.

political divisions

President Alberto Fernández, who governs a broad Peronist coalition, faces the challenge that his most radical faction of the left does not support the agreement in Congress, where it needs approval before sending it to the IMF board. He faced a delay this week when Maximo Kirchnerson of the vice president, Cristina Fernandez de Kirchnerresigned from his leadership position in Congress due to discrepancies with the agreement.

“This also leaves Fernandez in an extremely weak position.“, He said daniel kernermanaging director for Latin America of the consultancy Eurasian Group. “He could back down and toughen his stance with the IMF, but that would make the deal difficult.”.

The vice president herself has not commented on the tentative deal, but some of her allies openly suggested that defaulting on the IMF payment would not be such a bad thing. On top of that, Fernández will also need the support of opposition senators, some of whom have said that if the vice president doesn’t explicitly endorse the deal, they won’t discuss it either.

The government wants to finalize a deal before the end of March, when a $2.9 billion payment is due, after reaching a staff-level deal sometime this month.

Monetary politics

Fernández emphasized that there will be no devaluation as part of the preliminary agreement reached with the IMF, and Economy Minister Martín Guzmán added that Argentina will continue with the government-managed monetary policy.

With currency controls in place since 2019, the main parallel exchange rate is trading at more than double the official peso, which is controlled through a moving parity. This gap adds pressure on price expectations—inflation is above 50% a year—and makes doing business more difficult for companies large and small. Officials have not yet explained their plan to close this loophole.

There is also the question whether the staff-level agreement will include any mention of removing broader controls, which include a web of restrictions, including a ban on Argentines legally exchanging more than $200 a month.

energy subsidies

The leadership of IMF says that the government agreed to gradually reduce its energy subsidies, which in 2021 were almost US $ 11,000 million. But there are no details yet on how exactly that process will take place, and raising prices may be the most politically sensitive decision in Argentina’s deal with the IMF.

Surveys show that low-income Argentines equate government-regulated price increases on electricity and water bills with an increase in taxes. Before the deal, the government planned for utility prices to rise just 20% this year, even with inflation expectations above 50%.

Government financing

Argentina’s central bank has accumulated more than 4.8 trillion pesos ($45.6 billion) of short-term debt. It is almost certain that a detailed reduction plan will be part of the “appropriate monetary policy” which IMF officials say is important for the deal to succeed.

The staff of IMF he has also called for interest rates to outpace inflation. It is unclear how quickly the central bank, which is not independent of the government, plans to move the current benchmark rate of 40% above annual inflation. But higher interest rates, and payments, risk expanding the debt load and hurting activity.

sustainability

Overall, the big question is whether the new program, the 22nd between Argentina and the IMF, is strong enough to avoid the fate of previous deals, which failed to lift the crisis-prone economy.

Since Argentina has requested a plan known as the Extended Facility from the IMF, the deal is likely to require some of the country’s so-called structural reforms.

The Government has already said that some of the policy changes included in previous agreements with the IMF, such as labor reform, the privatization of national assets or the redesign of pensions, will not be necessary this time. That leaves Argentina watchers wondering what the two sides will agree on as the main political tools to change the course of the economy.

For him IMFaccepting a less strict program would be a way of avoiding the conditionality that on previous occasions ended up politically harming its agreements with Argentina.