Washington DC April 2 2023: The Executive Board of the International Monetary Fund (IMF) completed yesterday the fourth review of the extended arrangement under the Extended Fund Facility (EFF) for Argentina. The Board’s decision enables an immediate disbursement US$5.4 billion (SDR 4 billion), bringing total disbursements under the arrangement to about US$28.9 billion.
In completing the review, the Executive Board assessed that all quantitative performance criteria through end-December 2022 were met with some margin. In addition, the Board approved waivers of non-observance associated with the introduction of policy measures that gave rise to new exchange restrictions and multiple currency practices. The Board also approved modifications to the reserve accumulation targets to partially accommodate the impact of the severe drought, alongside stronger policies to safeguard stability, address setbacks, and secure program objectives, while maintaining the anchoring role of the program.
Argentina’s 30-month EFF arrangement, with access of SDR 31.914 billion (equivalent to US$44 billion, or about 1000 percent of quota), was approved on March 25, 2022. The authorities’ IMF-supported program provides Argentina with balance of payments and budget support that is linked to the implementation of polices to strengthen public finances, tackle persistent high inflation, improve reserve coverage, and set the basis for sustained and inclusive economic growth.
At the conclusion of the Executive Board’s discussion, Ms. Gita Gopinath, First Deputy Managing Director and Acting Chair, made the following statement:
“More prudent macroeconomic policies in the second half of 2022 supported a moderation in inflation and improvements in fiscal and external balances, helping to secure end-2022 program targets. However, the economic situation has become more challenging since the beginning of this year in light of the increasingly severe drought and policy setbacks. Given the magnitude of the weather shock, some downward adjustments to reserve accumulation targets are warranted, although a stronger policy package is now necessary to safeguard stability and maintain the anchoring role of the program.
“Achieving the 2023 primary fiscal deficit target of 1.9 percent of GDP remains essential to support disinflation and reserve accumulation, alleviate financing pressures, and strengthen debt sustainability. Timely implementation of high-quality measures, particularly improving the targeting of energy subsidies and social assistance, will help offset lower export taxes due to the drought, protect priority infrastructure and social spending, and secure the fiscal targets. Specifically, it will be critical to ensure that energy tariffs for high-income residential and commercial users move to become fully aligned with costs, including to reduce the regressivity of the system. Meanwhile, the fiscal cost of the new pension moratorium should be mitigated through strong regulations to target entry only to those with the greatest need.
“Real interest rates should remain sufficiently positive to tackle high inflation and support demand for peso assets. Further rate increases may be warranted in the event of further inflation shocks or intensification of FX pressures. The rate of crawl should continue to support competitiveness, with recent actions to rationalize the FX regime and boost exports also helping to support reserve accumulation. Interventions in the parallel FX market using reserves or short-term external debt instruments should be eschewed. As conditions permit and imbalances are addressed, capital flow management measures, multiple currency practices, and exchange restrictions should also be unwounded, as they are no substitute for sound macroeconomic policy.
“On the domestic financing front, prudent efforts will be needed to mitigate near-term rollover risks and mobilize net financing, while limiting the buildup of vulnerabilities and protecting debt sustainability. Meanwhile, central bank interventions in the secondary bond markets should be limited to address financial stability risks. Mobilizing support from multilateral and bilateral partners, including finalizing technical understandings with remaining Paris Club creditors, is essential to ensure financing commitments are met and strengthen reserve coverage.
“Given that downside risks have risen further, including in the context of a very severe drought, agile policymaking remains indispensable to underpin program success, as additional macroeconomic policy tightening and further modifications to FX policies may be required to safeguard macroeconomic stability. Political support for program policies remains critical in the period ahead.”