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Argentina: Third Review Under the Stand-by Arrangement, Request for Waivers of Applicability of Performance Criteria, Financing Assurances Review, and Request for Modification of Performance Criteria—Supplementary Information

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
April 2019
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This supplement provides additional information that has become available since the Staff Report (EBS/19/17) was circulated to the Executive Board on March 26, 2019. The information does not alter the thrust of the staff appraisal.

1. Economic activity in January was stronger than expected. The monthly proxy GDP increased 0.6 percent (m/m sa) which was above staff’s forecast of 0.2 percent. Almost all sectors expanded on a monthly basis, in contrast with the December outcome, with manufacturing and construction rebounding strongly. In y/y terms, the economy contracted by 5.7 percent in January, compared to a 6.6 percent contraction in December.

2. Current account and trade data confirmed the external adjustment is under way. The current account balance posted a US$2.3 billion deficit in 2018Q4, well below the US$7.5 billion deficit in the previous quarter and the US$9.4 billion deficit in 2017Q4. The current account deficit for the whole 2018 closed at 5.2 percent of GDP (slightly below staff’s 5.4 percent of GDP forecast). In February, the trade balance recorded another surplus (the sixth in a row), as imports continue to contract (by about 22 percent y/y). In February, private capital outflows were 51 percent lower compared to a month earlier.

Current Account

(% 4-quarter rolling GDP)

Source: IMF staff calculations and estimates.

3. Poverty increased in the second half of 2018. Despite the authorities’ efforts to expand coverage and increase the level of social assistance benefits, the share of the population living in poverty rose to 32 percent (from 27.3 percent in 2018H1). The share of the population living in extreme poverty also rose, to 6.7 percent from 4.9 percent in 2018H1.

4. The BCRA announced a floor on LELIQ rates of 62.5 percent for the month of April. Since the circulation of the Staff Report, LELIQ rates have risen slightly, to around 68 percent. However, the spread between the LELIQ rate and banks’ time deposit rate has increased, raising concerns about the monetary policy transmission from short-term rates to interest rates on term deposits. In an effort to increase the pass-through from short term rates to those on term deposits, the central bank decided to provide greater certainty on the prospects for short-term interest rates in the coming month. Specifically, the BCRA has committed to manage its liquidity operations in order to maintain the LELIQ rate above 62.5 percent during April.

Interest Rates

(Percent)

Source: BCRA.

5. NDA, NIR and NDF stock overperformed their quarterly performance criteria for end-March. End-March NIR was US$21.2 billion, US$1.1 billion above the adjusted program target. The NDA outturn was AR$362 billion, AR$58.1 billion above target. The stock of net NDF position decreased by US$3.3 billion relative to end-September level, meeting the target. An updated QPC table is included.

6. The government has submitted the draft BCRA charter to Congress (meeting the structural benchmark under the program). The draft law, inter alia, (i) establishes price stability as the priority mandate of the BCRA, (ii) prohibits any forms of monetary financing of the government by the BCRA, (iii) allows for remuneration of commercial banks’ accounts that are held at the BCRA, (iv) strengthens the appointment procedure of the BCRA president and members of the Board, (v) improves the decision-making structure of the central bank by establishing an Oversight Board with an Audit Committee, and (vi) provides the legal basis for establishing IFRS as the accounting standard for the BCRA. The draft law considerably strengthens the BCRA’s operational mandate, its decision-making structures, as well as autonomy, transparency and accountability at the central bank.

7. Tax revenues continue to be moderately weaker than projected. In March, tax revenue increased by 37.3 percent (y/y), a 10 percent contraction in real terms. There was a AR$10 billion gap relative to staff projections, mainly reflecting lower revenues from export taxes, although income taxes, property tax, and fuel taxes were also modestly below staff forecasts.

8. On March 26 the Supreme Court ruled in favor of a plaintiff that contested having to pay income taxes on her pension. The court affirmed that levying income tax on the claimant constitutes an unfair tax burden on a vulnerable person and, as such, is unconstitutional (since the constitution protects retirees as a vulnerable group). The ruling has no immediate implications for income tax payments by other pensioners, but the court did ask Congress to pass legislation to extend the same exemption for all pensioners who are in vulnerable conditions. In the event all taxable pensioners were to be exempted, the fiscal cost could be about 0.04 percent of GDP per year and possibly more if extended retroactively.

Table 11.Argentina: Quantitative Performance Criteria and Indicative Targets 1/2/(In billions of Argentine pesos unless otherwise stated)
20182019
end-Decend-Janend-Febend-Marend-Aprend-Mayend-Junend-Julend-Augend-Sep
PCAdjustedActualITActualITActualPCAdjustedActualStatusITITPCProposed Revised PCITITProposed PC
Fiscal targets
Performance Criteria
1. Primary balance of the federal government (floor) 3/9/-378.0-404.4-374.3n.a.n.a.n.a.n.a.6.0n.a.n.a.n.a.n.a.40.020.0n.a.n.a.60.0
2. Federal government accumulation of external debt payment arrears (ceiling) 4/0.00.00.00.00.00.00.00.0Met0.00.00.00.00.00.00.0
3. Federal government accumulation of domestic arrears (ceiling) 5/24.411.9n.a.n.a.n.a.n.a.30.0n.a.n.a.n.a.40.045.0n.a.n.a.53.2
4. Social assistance spending (floor) 3/173.0184.9n.a.n.a.n.a.n.a.60.0n.a.n.a.n.a.110.0132.0n.a.n.a.205.0
Indicative targets
5. Primary balance of the general government (floor) 3/9/-378.0-404.4-303.2n.a.n.a.n.a.n.a.-14.0n.a.n.a.n.a.n.a.30.010.0n.a.n.a.80.0
Monetary targets
Performance Criteria
6. Change in non-borrowed net international reserves (floor) 6/ 9/ 10/7.16.57.24.17.42.98.812.54.45.5Met9.06.25.89.08.48.213.1
7. Change in stock of non-deliverable FX forwards (ceiling) 6/11/0.0-3.60.0-3.6-0.7-3.6-1.0-3.3Met-1.2-1.5-1 7-1.7-2.0-2.3-2.6
8. Change in central bank credit to government (ceiling) 7/0.0-432.30.00.00.00.00.00.0Met0.00.00.00.00.00.00.0
9. Central bank financing of the government (ceiling) 4/0.00.00.00.00.00.00.00.0Met0.00.00.00.00.00.00.0
10. Change in net domestic assets of the central bank (ceiling) 8/9/-46.2-10.624.5-112.1-157.5-36.0-177.5-185.6-154.5-212.6Met---101.5----
11. Change in monthly average monetary base (ceiling) 12/----------0.00.00.00.00.00.00.0

Targets as defined in the Technical Memorandum of Understanding (TMU).

Based on program exchange rates defined in the TMU.

Cumulative flows from January 1 through December 31.

Continuous performance criterion.

The accumulation is measured against the average during Q4 2017, which stood at 45.6 billion pesos.

In billions of U.S. dollars. The change is measured against the value on September 28, 2018.

The change is measured against the value on September 28, 2018, which stood at 2,592.86 billion pesos.

The change is measured against the average value for September 2018, which was AR$ 574 billion.

Targets subject to adjustors as defined in the TMU.

Increases reflect IMF budget support disbursements, which increase NIR.

Continuous performance criterion until end-December 2018. Thereafter, this is a quarterly performance criterion with monthly indicative targets.

The change is measured against the average value for February 2019, which was AR$1,343 billion.

Targets as defined in the Technical Memorandum of Understanding (TMU).

Based on program exchange rates defined in the TMU.

Cumulative flows from January 1 through December 31.

Continuous performance criterion.

The accumulation is measured against the average during Q4 2017, which stood at 45.6 billion pesos.

In billions of U.S. dollars. The change is measured against the value on September 28, 2018.

The change is measured against the value on September 28, 2018, which stood at 2,592.86 billion pesos.

The change is measured against the average value for September 2018, which was AR$ 574 billion.

Targets subject to adjustors as defined in the TMU.

Increases reflect IMF budget support disbursements, which increase NIR.

Continuous performance criterion until end-December 2018. Thereafter, this is a quarterly performance criterion with monthly indicative targets.

The change is measured against the average value for February 2019, which was AR$1,343 billion.

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