The Executive Board of the International Monetary Fund (IMF) completed today the first review of Argentina’s economic performance under the 36-month Stand-By Arrangement (SBA) that was approved on June 20, 2018.
The completion of the review allows the authorities to draw the equivalent of about US$5.7 billion (SDR 4.10 billion), bringing total disbursements since June to about US$20.4 billion (SDR 14.71 billion). The Board also approved an augmentation of the Stand-By Arrangement to increase access to about US$56.3 billion (equivalent to SDR 40.71 billion or 1,277 percent of quota)1. The authorities have requested the use of this IMF financing as budget support.
Argentina’s strengthened economic plan aims to bolster confidence and stabilize the economy through a reduction in the budget deficit, the adoption of a simpler monetary policy framework, and freely floating the exchange rate (with foreign currency intervention limited to cases of an extreme overshooting of the currency). Protecting the most vulnerable in Argentina continues to be a central component of the authorities’ efforts including by prioritizing social assistance spending and planning for an increase in spending on social assistance programs in the event that social conditions deteriorate.
Following the Executive Board discussion of Argentina’s economic plan, Ms. Christine Lagarde, the IMF’s Managing Director, stated:
“Argentina has faced difficult market conditions but the authorities have remained steadfastly committed to the Stand-By Arrangement’s main policy objectives to address longstanding vulnerabilities, protect the vulnerable, ensure that the public debt remains sustainable, reduce inflation, and foster growth and job creation.
“To achieve these goals, the authorities have redoubled their reform efforts by accelerating the reduction in the fiscal deficit to reach primary balance in 2019 and achieve a primary surplus starting in 2020. The 2019 budget, which is anchored by this target, has been approved by the Lower House. Its passage into law will be key to restoring confidence and ensuring policy continuity.
“The authorities have redesigned their monetary policy framework with strict limits on the growth in the monetary base. This framework is expected to provide a simpler and more effective anchor that will decisively lower inflation and inflation expectations.
“The authorities are allowing the currency to freely float. However, in the event that there is a significant overshooting of the exchange rate, the Central Bank is prepared to intervene in a limited, simple, and rules-based way.
“The program continues to emphasize improving gender equality, protecting society’s most vulnerable, and laying the foundation for growth and job creation. The authorities have already taken measures to increase social assistance programs and have prioritized social assistance and childcare spending in the 2019 Budget.
“Despite the challenging environment the government has proactively strengthened its policy plans. Important challenges remain. However, full implementation of the policies that underpin the Stand-By Arrangement, together with strong support from the international community, should allow the country to return to macroeconomic stability and fulfill its full economic potential, for the benefit of all Argentines.”
The main elements of Argentina’s revised economic plan are summarized below:
Fiscal Policy: The authorities are fully committed to reducing the federal government’s financing needs and placing public debt on a firm downward path. They aim to strengthen the country’s fiscal position by achieving a primary balance in 2019 and primary surpluses starting in 2020. To this end, the government is seeking support in the Argentine Congress for revenue-enhancing and cost-cutting measures that include: introducing taxes on exports, increasing the wealth tax, scaling back inefficient energy subsidies, reprioritizing capital spending, and improving the structure of federal transfers to provinces.
Monetary Policy: To decisively reduce inflation, the Central Bank will shift toward a stronger, simpler, and more verifiable monetary policy regime, temporarily replacing the inflation targeting regime with a monetary base target. At the center of the new framework is a commitment to cap the growth of money to zero percent per month (calculated as the change in the monthly average) until June 2019, with the aim of decisively bringing down inflation and inflation expectations. This framework is supplemented by a commitment not to allow short-term rates to fall below 60 percent until 12-month inflation expectations decisively fall for at least two consecutive months.
Exchange Rate Policy: The Central Bank of Argentina (BCRA) has adopted a floating exchange rate regime without intervention. However, in the event of extreme overshooting of the exchange rate, the BCRA may conduct limited intervention in foreign exchange markets to prevent disorderly market conditions. Such intervention would be unsterilized.
Social Protection and Gender Equality. The draft federal budget strengthens the social safety net. The floor on social assistance spending and the framework for adjusting social spending will be maintained. The draft budget increases social spending and preserves health spending (while better targeting health outlays to the most vulnerable). It also includes a 12 percent expansion of public childcare in an effort to raise female labor force participation (particularly for lower income households). With the support of the World Bank, the National Social Security Administration (ANSES) will continue to improve targeting and expand coverage of the universal child allowance (AUH). Finally, the government has also developed a system to improve the monitoring of social conditions to better respond to emerging needs of low income households.
Augmentation and Re-phasing of Fund Resources. Under the revised arrangement, Fund resources for Argentina in 2018–19 have increased by US$19 billion. A total of about US$ 56.3 billion would be made available to Argentina for the duration of the program through 2021. Fund disbursements for the remainder of 2018 would more than double compared to the original Fund-supported program, to a total of US$13.4 billion (on top of the US$15 billion already disbursed). Planned disbursements in 2019 are also nearly doubled, to US$22.8 billion, with US$5.9 billion planned for 2020–21. The resources available in the program are no longer expected to be treated as precautionary and the authorities have requested the use of the IMF financing for budget support.
US dollar amounts have been calculated using today’s exchange rate: SDR ONE EQUALS U.S. DOLLARS – 1.38371/U.S. DOLLAR ONE EQUALS SDR – 0.722697