Argentina: Ex-Post Evaluation of Exceptional Access Under the 2018 Stand-By Arrangement-Press Release and Staff Report

1. This report reviews Argentina’s 2018–21 Fund-supported program against its objectives and applicable Fund policies.

Abstract

1. This report reviews Argentina’s 2018–21 Fund-supported program against its objectives and applicable Fund policies.

Introduction

1. This report reviews Argentina’s 2018–21 Fund-supported program against its objectives and applicable Fund policies.

  • The Stand-By Arrangement (SBA) supporting the program was approved by the IMF’s Executive Board in June 2018, with the final purchase to become available in June 2021. The SBA was augmented in October 2018, providing Argentina with access to Fund financing of SDR 41 billion (equivalent to US$57 billion, or 1,277 percent of quota), the largest disbursing arrangement in Fund history. Implementation of the program went off track in August 2019, after only four out of the twelve planned reviews had been completed and with SDR 32 billion (currently US$45 billion) disbursed. The arrangement was cancelled by the authorities in July 2020.

  • As required in exceptional access cases, this Ex-Post Evaluation (i) reviews performance against original program objectives; (ii) discusses whether the program design was appropriate; and (iii) assesses whether the program was consistent with Fund policies. The report reviews the experience under the program from its adoption in June 2018 through to its effective suspension. It examines weaknesses and vulnerabilities of the Argentine economy, objectives and policies under the program, the balance of financing and adjustment, and the justifications for exceptional access.1

2. The report proceeds as follows. After describing the program’s goals and strategy, the report analyzes in detail program outcomes and design issues. It then evaluates whether the program was consistent with IMF policies and procedures. The penultimate section contains an overall assessment of the program, while the final section suggests lessons of general relevance. Appendices provide a detailed account of economic developments and policies leading up to the program request (Appendix I), summarize the 2004 Independent Evaluation Office report (Appendix II) and the 2006 Ex-Post Assessment and Ex-Post Evaluation on Argentina (Appendix III), and present the authorities’ views on the EPE staff team’s assessments (Appendix IV).

Program Strategy: Overview

The program supported by the SBA aimed to galvanize investor confidence, on the assumption that Argentina was facing a temporary liquidity crunch. To that end, fiscal and monetary policy would be tightened to demonstrate commitment to eliminating underlying imbalances, and substantial financing would be provided by the IMF. Considerable emphasis was placed on the administration’s ownership of program policies, with explicit provisions made for social protection. The program was considered risky from the outset, but contingency plans were not incorporated into the program upfront.

3. Policy decisions and economic imbalances set the stage for a “sudden stop” in the spring of 2018. (Appendix I provides an overview of economic developments and policies from 2015 through to the program request.) Capital inflows to Argentina—notably in the form of portfolio debt flows—surged after its capital account was reopened at the end of 2015, boosted also by easy global financial conditions. Meanwhile, the government pursued a deliberate policy of fiscal “gradualism” in an attempt to limit adverse effects of consolidation, notwithstanding some progress in cutting subsidies. Structural distortions remained. The authorities aimed to lower inflation under a nascent inflation targeting regime, despite persistent fiscal deficits, extensive dollarization, weak monetary transmission, and unanchored inflation expectations. Sovereign borrowing steadily increased to finance fiscal and external deficits. By early 2018, Argentina, like other emerging market economies, was experiencing more challenging external conditions. With foreign investors already concerned about sovereign debt sustainability, a tipping point seems to have been the implementation of a tax on financial assets in April 2018, which caused a sell-off, firstly of central bank bills (LEBACs) that had been the object of a profitable carry trade, then spreading to a more general run on Argentine assets. Facing a sharp exchange rate depreciation and rapidly worsening access to external financing, the government announced in May 2018 that Argentina would seek an IMF arrangement.

4. The program aimed to restore confidence, reduce balance of payments and fiscal imbalances, bring down inflation, and protect society’s most vulnerable.2 Restoring confidence would, in turn, allow time to return to dealing with longer-term challenges facing the Argentine economy. Specifically,

  • To restore market confidence, the goal was to lessen short-term government financing needs substantially by providing Fund support to Argentina and putting public debt on a firm downward trajectory. The target in the program adopted in June 2018 was to reduce the federal government primary deficit from 3.8 percent of GDP in 2017 to 1.3 percent in 2019, and to achieve primary balance by 2020. After the First Review in October, more ambitious fiscal adjustment targets were adopted, aiming for primary balance already in 2019 and a surplus by 2020. (See paragraphs 11, 16, and 19–24 below for more details on fiscal policy.)

  • To protect the most vulnerable, the program sought to strengthen the social safety net through redesigned assistance programs and also featured measures to increase female labor force participation. On the former, the level of social spending was protected through program conditionality in the form of spending floors and measures to support more effective and better targeted social safety nets (¶32–35). The latter included the elimination of tax disincentives and improvement in state-provided childcare.

  • To strengthen monetary policy, the program called for institutional and operational independence of the central bank and a flexible exchange rate, to underpin the formal inflation targeting framework. The goal was to achieve single-digit inflation by the end of the three-year program. Plans to strengthen the balance sheet of the central bank were also laid out. After the First Review, formal inflation targeting was replaced by monetary base targeting, to provide a simpler and more easily communicated anchor. Monetary base targeting was initially combined with a commitment on short-term policy interest rates, which were not to fall below 60 percent until inflation expectations had clearly declined. The rules on foreign exchange intervention (FXI) were adapted to provide more clarity on FXI and limit the scope for ad hoc interventions (¶11, 15, 25–31).

  • To mitigate risks to the balance of payments, the central bank would rebuild foreign exchange reserves so as to have sufficient precautionary foreign currency liquidity (¶16).

  • In comparison to other programs, the program included relatively few undertakings relating to structural reforms and the financial sector (¶36–38).

5. Argentina’s complicated history with the IMF motivated a strong emphasis on government ownership in the design of program policies. Considerable deference was given by the Fund to the authorities’ views on macroeconomic prospects and policies.

  • The relationship between Argentina and the IMF had often been contentious (Appendices II and III). Prior to the 2018 SBA, Argentina had 21 programs supported by IMF arrangements, increasing in size over time, but only a few of these arrangements were fully disbursed (Annex I). Relations were distant for a decade from 2006—the authorities did not consult with the Fund under Article IV until 2016; Fund support for capacity development was minimal; in 2011, the Executive Board of the Fund found Argentina to be in breach of its obligations under Article VIII of the Articles of Agreement due to provision of inaccurate data; and the Fund’s resident representative office was closed in 2013 (and reopened only in 2018). The image of the IMF in Argentina suffered from program involvement during the country’s earlier economic crises, starting with the first IMF arrangement in 1958. This history limited the opportunities for the Fund to work with the authorities in analyzing economic developments and policy options, to engage with the Argentine public, and to address negative perceptions.

  • Mindful of the public backlash that had accompanied previous programs, the Fund stressed the administration’s ownership of the 2018 program, the message being that the government had requested IMF support to implement its own policy plans to address longstanding macroeconomic vulnerabilities, make debt sustainable, reduce inflation, and boost growth.3 The program’s conditions to safeguard spending on social protection were also highlighted.4

  • In the same vein, the IMF moved quickly to provide rapid and substantial financing, but without the usual preliminary missions to resolve technical issues. It did not seek far-reaching changes in the government’s economic policy plans or secure financial support from other IFIs. As the program was designed to restore confidence and deal with temporary illiquidity, structural reforms were not considered a priority for the short term, and so the program involved relatively limited structural policies.

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IMF Arrangements with Argentina

(Percent of quota)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

6. The strategy was further shaped by domestic political considerations. The administration’s perception of limited political space—together with the view that the economy was primarily facing acute liquidity pressures, rather than solvency issues—implied that faster fiscal consolidation would neither be feasible nor appropriate. Similarly, the administration judged that aiming for extensive structural reforms would risk making the program hostage to its fragile position in the legislature—such reforms were expected to be added to the policy agenda and SBA after the general election—and did not seek to build a broader coalition in support of reforms or the program more generally. The initial program had no prior actions, as these were viewed as inimical to ownership.5 Critically, the administration ruled out reintroducing capital flow management measures (CFMs), engaging in a public debt operation, or introducing incomes policies.

7. The program was supported by a stand-by arrangement that was, in absolute terms, the largest in IMF history.

  • Access was initially set at SDR 35.4 billion (approximately US$50 billion, or 1,110 percent of Argentina’s Fund quota), and was increased to SDR 40.7 billion (approximately US$57 billion, or 1,227 percent of quota). This was the largest arrangement in IMF history in absolute terms (excluding Flexible Credit Lines), although other arrangements, including some during the euro area and Asian crises, had been larger in percent of quota (based on the country’s quota at the time of the approval of the arrangement). Early disbursements were very large in SDR terms, giving the appearance of a front-loaded arrangement, but this reflects the exceptional size of the SBA; in fact, the relative size of early disbursements to the total arrangement was about average, even after the augmentation. (Although the shift to a disbursing arrangement and increase in access at the First Review made the arrangement more frontloaded—see ¶49.)

  • The SBA has been the workhorse IMF lending instrument for emerging and advanced economies, allowing the Fund to support a country’s adjustment policies with short-term financing. The choice of an SBA was consistent with the diagnosis of a sudden liquidity shock. The SBA was also seen as the most suitable instrument to accommodate a request for urgent support under the IMF’s Emergency Financing Mechanism. Given the shared diagnosis of Argentina’s balance of payments problem, an Extended Fund Facility arrangement—which would have offered a longer repurchase period—was not requested, as that instrument is designed to support programs addressing structural challenges.

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Comparison of Arrangement Size

(Largest 20 access/quota ratios, excluding FCL and PCL/PLL; SDR billions)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

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Comparison of Arrangement Access

(Largest 20 Programs, excluding FCL and PCL/PLL; percent of IMF quota)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

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Phasing of Access1

(percent of total access)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

1/ Comparator ranges are based on the other 19 arrangements among the Fund’s largest 20 arrangements (excluding FCL and PCL/PLL). Augmented phasing is considered when applicable.

8. The SBA was initially to be treated as principally precautionary, to catalyze lending to Argentina from other sources, but was soon turned into a fully disbursing arrangement. The aim was to restore confidence by providing access, if needed, to substantial funds while giving the Fund’s imprimatur to the administration’s economic policies. Like with the program’s policies, this approach was consistent with the initial belief that the shock to liquidity would not be persistent. Accordingly, at the outset, the bulk of the access was intended to be treated as precautionary: only the initial drawing (SDR 10.6 billion, or US$15 billion) was predicated on an actual balance of payments need, concentrated in the period from June to December 2018..6 Access to the remainder of the Fund resources (SDR 24.8 billion, or US$35 billion) was to be evenly phased based on twelve quarterly reviews. As the program did not have the intended catalytic effect in the period immediately following the approval in June, access was augmented in October 2018, in the context of the First Review, to US$57 billion; the augmentation entailed some frontloading and was combined with a shift to a disbursing arrangement, the proceeds of which the authorities used for budget financing.

9. From the outset, the program involved considerable risks.

  • As with all programs, Argentina’s 2018 SBA was susceptible to forecast errors, implementation risks, and political and external developments. General elections were scheduled for October 2019, effectively halfway through the program period, and some regional elections—a bellwether of public opinion—would take place only 11 months after the program was put in place. In terms of the macroeconomic strategy, the program faced a difficult balancing act: to pull back from excess borrowing without an overly-austere fiscal policy; to bring down inflation while not tightening financial conditions too much; and to let the exchange rate find its equilibrium without allowing inflation to surge. Most important, especially given Argentina’s history of economic instability, was the assumption that the economic policy strategy and financial support under the program would restore confidence and reverse capital flight.

  • Several of these risks were recognized from the outset, including those to macroeconomic projections, debt sustainability, and the political environment (IMF, 2018a). Less well appreciated at the time the program was adopted was the structure of debt. First, the Fund took assurance from estimates that only a fraction of existing foreign currency-denominated public debt would come due before 2020.7 But available data obscured the short maturity of this foreign-currency debt. Despite its size, the SBA did not take Argentina fully out of the market—with little burden sharing and without debt reprofiling, the need to roll over debt and the consequent sequence of redemptions (along with capital flight by residents) put considerable pressure on the exchange rate. Inability to address persistent exchange rate pressures arising from high FX debt rollover needs and capital flight in turn undermined monetary and fiscal adjustment and damaged real incomes, given the high pass-through to inflation arising from extensive dollarization and indexation. Second, some of the existing debt instruments would prove highly problematic. The vulnerabilities arising from central bank liabilities (LEBACs) were not well understood at the time of the program request. Later, it would emerge that collateralized arrangements made by the government in 2016 and 2017 (so-called “repos”) would not only have to be rolled over at higher rates in 2018 and 2019, but were also subject to margin calls and termination clauses, draining reserves and further undermining confidence at the height of the crisis.

10. Although the overall risks were well recognized, there were no contingency plans incorporated into the program early on. The staff reports for the SBA request and each of the program reviews laid out risks associated with the program, but it proved difficult to engage the authorities in contingency planning.

  • An IEO Report prepared in 2004 (summarized in Appendix II) noted that earlier IMF arrangements with Argentina had lacked contingency plans for when programs went off track, and recommended that such plans be included—with explicit triggers—at the outset of any future programs.8 Developing a contingency plan early on could have helped to raise the authorities’ awareness of policy alternatives and prepare Fund staff to respond to adverse developments. Nonetheless, contingency plans were not incorporated until the Fourth Review of the 2018 SBA, although the adverse scenario in the Staff Report for the SBA Request aimed to illustrate the consequences of downside risks materializing.

  • The Fund recognized that if the program did not restore sufficiently favorable market access, a reassessment of the strategy would be required. But no easy option was available: in principle, the Fund could either have increased access further to eliminate the need for market borrowing for an extended period; suspended or delayed reviews, in effect pausing the program; or continued with the program only once the authorities agreed to embark on a debt operation. However, the additional financing required to eliminate the need for market access until after the October 2019 elections would likely have been beyond the IMF’s tolerance, ruling out the first option. Exercising the second option would mean that the IMF had “pulled the plug” on the program, as it did in 2002, and would likely have worsened the crisis.9 The need for a debt operation was not clear at the outset of the program, neither on the basis of the debt sustainability assessments at that time nor the diagnosis that the problem was a temporary liquidity shock. A debt operation would likely have required complementary CFMs to prevent further capital flight, but both debt operations and CFMs were ruled out by the administration.

  • Within the Fund, deliberations on a “Plan B” began soon after the initial program was approved. In addition to identifying fiscal measures that could be deployed if the primary balance target appeared at risk, exercises were conducted to estimate “stop-loss” thresholds (such as minimum rollover rates) at which point additional sources of financing and/or a debt reprofiling would be required. The work recognized that reintroduction of CFMs would have been essential to buttress a debt operation; CFMs could also, by containing capital within the country, have limited the need for increases in interest rates. There were continuous efforts by the Fund, throughout the duration of the program, to engage the authorities in contingency planning. However, while the authorities acknowledged to the IMF Executive Board early in the program that a more fundamental rethink of policies to ensure debt sustainability would be required if financing conditions did not improve as envisaged, an understanding between staff and the authorities on the steps to be taken in such an event was not reached until the Fourth Review in July 2019.

Program Design Issues and Outcomes

The program was fragile from its inception and did not durably restore market confidence. Inconsistent policy implementation and communication missteps were partly responsible. More fundamentally, the authorities did not want to instigate fundamental reforms before the general election, meaning that the program was not able to provide assurances that underlying imbalances would be resolved and growth restored. Yet the arrangement was not sufficiently large to fully finance Argentina, which, given that a debt operation and CFMs were off the table, made the program vulnerable to rollover needs. The peso continued to depreciate, raising inflation, increasing the government debt burden, lowering real incomes and overwhelming the efforts to protect vulnerable households. Ultimately, the program did not achieve fiscal and external viability, while economic growth and employment faltered. The program was de facto suspended in August 2019, with only four of the planned twelve reviews completed.

A. Timeline: Program Approval and Reviews

11. The policy strategy evolved over time, as the program faced ongoing challenges in delivering the intended results. The program approval in June 2018 was followed by substantial revisions in strategy already in October. Additional, albeit less far-reaching, adjustments continued throughout the program:

  • Initial program (June 2018): The initial program envisaged a modest acceleration in fiscal consolidation; strengthening of the existing inflation targeting framework (including an end to monetary financing and more independence for the central bank); safeguarding of social protection; and policies to address gender inequality. The policy elements were designed to be complementary: for example, addressing fiscal dominance would support inflation targeting; safeguarding social protection would alleviate the impact of fiscal restraint on the poor, while remaining consistent with consolidation objectives; and increased female labor participation would provide a boost to the supply side. (See IMF, 2018a.) In contrast to some other large programs, financing from other IFIs was limited and no official bilateral financing was forthcoming.

  • First Review (October 2018). After the approval of the arrangement in June, financial conditions continued to deteriorate, the exchange rate depreciated sharply, and monetary targets were missed. The strategy was thus revamped at the First Review. The Board approved an augmentation of Fund financing, with frontloaded access and with the proceeds of the purchases under the arrangement used for budget financing. Also, the revamped program involved substantially revised macroeconomic targets, further acceleration of fiscal consolidation, and the adoption of a simpler monetary policy regime. (See IMF, 2018b.) However, the diagnosis that Argentina was facing a temporary liquidity shock was retained. Yet, additional financing from other IFIs or bilateral creditors remained elusive. Although debt sustainability indicators had worsened, the revised program did not include a debt operation.

  • Second Review (December 2018). By the time of the Second Review, there were signs of stabilization: short-term interest rates had fallen back, albeit only to the level of September 2018, and the exchange rate had stayed within the non-intervention band. The 2019 budget, featuring more ambitious fiscal adjustment, had been passed. All quantitative performance criteria for end-October had been met, and most structural benchmarks had been observed, albeit with some delay. (See IMF, 2018c.)

  • Third Review (April 2019). The end-December 2018 and end-March 2019 performance criteria were met, and structural reforms relating to the debt strategy and the submission of a new BCRA charter were moving ahead as envisaged. However, inflation and inflation expectations were again increasing, following a de facto relaxation in monetary policy and firms’ pass-through of costs arising from administered prices. Argentine financial assets were under renewed pressure, with markets viewing the continuing struggle to tame prices and revive the economy as potentially leading to a change in government following the October general elections. (See IMF, 2019a.)

  • Fourth Review (July 2019). As with previous reviews quantitative and structural program conditions had been met or were on track to be met, and exchange rate pressures had eased. However, the IMF noted that the most challenging period for the program was still to come— especially as gross financing needs remained high. Market sentiment was clearly skittish in advance of the general elections. (See IMF, 2019b).

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Exchange Rate, 2018–19

(AR$/US$, official rate)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

12. After the Fourth Review, the program continued to struggle, and its implementation effectively ceased by August 2019. Following the Executive Board’s completion of the Fourth Review in July 2019, Fund staff started preparations for the Fifth Review, to take place in September, ahead of the October general elections. However, financial turbulence returned following the August primary elections;10 ratings agencies downgraded Argentina, the finance minister resigned, and the administration announced plans to reprofile domestic debt and imposed some capital controls. In September, ratings agencies called a selective default on Argentine sovereign debt. Fund staff work on the Fifth Review was aborted following the primary elections and after the government’s effective suspension of program policies. This in practice marked the end of the program, with only four out of the twelve planned reviews completed. In effect, the program did not fulfil the objectives of restoring confidence in fiscal and external viability while fostering economic growth, one test of success of GRA-supported programs.11 The new government that took office after the 2019 elections initiated the process to restructure its foreign-law governed debt in March 2020, defaulted on this debt in May, and finalized the restructuring of US$80.5 billion of foreign- and domestic-law FX-denominated debt held by private creditors in September. The new government cancelled the SBA on July 24, 2020.

B. External Communication

13. Uneven communication of program policies by the administration undermined confidence. Achieving consistent communication of the program was going to be crucial. Lack of consistent engagement at a technical level with the IMF in the years leading up to the program and erosion of institutional knowledge constrained the new government’s understanding of Fund procedures. IMF staff established close relations and developed common outreach strategies for the SBA. However, these were only partially followed through on the side of the administration. For example, the publication of the Staff Report for the SBA request was delayed by the authorities for a month. (The authorities were concerned about the market reaction to the standard language used to characterize debt, as “sustainable but without high probability.”) This restricted the Fund’s ability to explain the program, notably the financing available and its nature, dampening the catalytic effect at a crucial moment for market confidence. Changes in central bank governors and finance ministers—along with significant FXI early in the program period that was inconsistent with the program and could not be explained in simple terms—did not help reassure investors of the durability of the program. The President’s public address in late August 2018, in which he indicated that the Fund would support Argentina with full disbursements upfront—which had not been agreed—was meant to bolster confidence but instead unsettled financial markets, triggering a 14 percent exchange rate depreciation on the day of the address.

14. Communication challenges relating to the precautionary nature of the initial SBA may have hampered an early boost to confidence. Aware of the political risk of requesting help from the IMF, the administration was keen to emphasize the liquidity (rather than solvency) nature of the crisis and preferred a “precautionary” arrangement, which was the basis for the initial program (changed after the First Review; ¶11). Precautionary SBAs are common, and generally signal an underlying strength of the economy when compared with disbursing arrangements. The initial program was, unusually, a hybrid of a precautionary and a disbursing arrangement. This approach appears to have created confusion in some circles about whether Argentina would—and under what conditions it could—draw on the financing, which may have reduced rather than boosted market confidence. Although the Staff Report for the SBA request (IMF, 2018a) explained that the intent to treat the SBA as precautionary after the first disbursement was not a binding commitment, and as such did not prevent Argentina from making purchases, there was lack of clarity, both in the government and in markets, surrounding the availability of the Fund financing. The delay in publishing the staff report for the program request hindered the Fund’s ability to help explain the unusual nature of the financing structure.

C. Macroeconomic Targets, Projections and Outcomes

15. As confidence was not durably restored, balance of payments pressures and a depreciation of the currency caused significant damage to the program.

  • Capital inflows had started to decline in early 2018, and net flows turned negative in the third quarter, the approval of the SBA in June notwithstanding. The revision of the program in October was initially viewed positively—net flows turned positive at the end of 2018 and beginning of 2019—but confidence then ebbed and net flows were negative through the remainder of the program. The largest capital outflows were not generated by flight from government debt, but rather by private flows. Capital controls were announced at the beginning of September 2019, after the volatility following the August 2019 primary election; the peso initially appreciated, but the controls were relatively loose and capital flight continued, causing a large reserve loss.

  • Driven by capital flows, the depreciation of the peso accelerated after the announcement of the SBA request in May and continued until the revamp of the program was announced in late September. The exchange rate was more stable during the fourth quarter of 2018, but depreciation resumed at the beginning of 2019 and continued until modifications to the monetary and FXI framework in April-May. The volatility of August 2019 brought with it another significant decline in the value of the currency, which was by then trading at a third of its value at the time of the SBA request.

  • In contrast to this outcome, the baseline underlying the original program framework, predicated on restored market confidence, had envisaged a stabilization of the nominal exchange rate, corresponding to a real exchange rate appreciation of 9 percent during the program period. (In the adverse scenario, the real exchange rate was assumed to depreciate slightly.) The real exchange rate had already depreciated by about 20 percent from its 2017 level by 2018Q2—hence, the estimated 17.5–32.5 percent overvaluation assessed in the 2018 External Sector Assessment had largely been eliminated by the time the program started. However, compared with other program episodes, the baseline real exchange rate projection was on the optimistic side, being in the 10th percentile of experiences under programs with countries experiencing sudden stops.

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Net Capital Inflows

(Percent of GDP, quarterly)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

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Real Depreciation after Fund Arrangements of Comparable BOP Crises

(Percent)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

Sources: IMF INS database. Staff calculations.Note: The figure shows the accumulated rate of REER depreciation starting from the onset of a comparable IMF program. IMF programsfollowing sudden stop crises are chosen for this comparison, including Mexico (1995, 2009), Indonesia (1997), Korea (19970), Thailand (1997), Uruguay (1997, 2002), Philippines (1998), Panama (2000), Brazil (2002), Turkey (2002), Ukraine (2004, 2008,2014), Pakistan (2008), Latvia (2008), Hungary (2008), Belarus (2009) and Jordan (2012).

16. Against this background, by most metrics, macroeconomic performance fell short of the initial program projections (Figure 1).

  • Economic growth: The initial program envisaged a relatively mild slowdown in growth, from 2.9 percent in 2017 to 0.4 percent in 2018, followed by a rapid recovery from 2019 onwards. Although these assumptions were not clearly consistent with the program’s procyclical monetary and fiscal policies applied to an economy with a large share of hand-to-mouth consumers, the Fund deferred to the government’s views on the outlook.12 At the First Review, projected growth was revised down to -2.8 percent in 2018 and -1.6 percent in 2019, close to the actual outcome of -2.6 percent and -2.1 percent, respectively..13 Export values recovered in the second half of 2018, after the drought earlier in the year. But private demand fell considerably—especially private consumption, driven by a combination of precautionary savings and reduced real incomes as inflation surged as a result of peso depreciation—and did not recover during the program. Unemployment remained consistently above 9 percent throughout the program, peaking at 1OV2 percent in 2019Q2.

  • Inflation: Despite a general tightening of monetary policy, inflation was not brought under control. By the time the program effectively ended, consumer prices were increasing at a rate of 54 percent per annum, three times the inflation rate envisioned under the initial program and double the revised rate envisioned at the First Review. The cumulative increase in consumer prices exceeded 80 percent over the course of the program, substantially eroding real incomes. The unexpectedly large exchange rate depreciation played a pivotal role, reflecting the passthrough to domestic prices. Wage indexation and regulated utility price increases also boosted inflation. By contrast, despite policy interest rates of 40–60 percent during the program, monetary policy is estimated to have had only limited effect on inflation, consistent with high pass-through of exchange rate movements and inflation expectations that remained elevated when the program commenced (Box 1. Argentina: Inflation Dynamics).

  • Fiscal balances and public debt: The program’s fiscal objectives were formulated as targets for the primary fiscal balance. These targets were met, despite disappointing growth outcomes (1121). Nevertheless, public debt ratios far exceeded projections, mainly because of valuation effects, as nearly 70 percent of the government’s debt was denominated in or linked to the U.S. dollar (¶23)..14 In addition, short maturities accentuated debt dynamics—the terms at which Argentina rolled over its debt became less favorable as time passed, with higher interest rates and shorter maturities adversely affecting debt ratios and debt sustainability (1(17 and Box 6. Argentina: Market Access During the 2018 SBA).

  • The current account underperformed in 2018, but adjusted rapidly in 2019, exceeding the adjustment in the original program projections. However, the adjustment was concentrated in imports (especially of investment goods), which declined by more than a quarter between 2017 and 2019. Despite the substantial real exchange rate depreciation, export volumes remained flat. This outcome is partly explained by the drought of 2018, which hit agricultural exports hard. Moreover, nonagricultural export volumes did not respond to the peso depreciation, reflecting pervasive dollar invoicing—more than 95 percent (85 percent) of Argentine exports (imports) are denominated in U.S. dollars (Boz et al. 2020), implying limited expenditure switching effects of exchange rate movements on exports, but high pass-through to import prices (Adler et al. 2020)..15

  • The underperformance of the current account and capital flight undermined the restoration of international reserves. Reserves were drawn down after the program was approved as the BCRA intervened heavily (Box 2. Argentina: FX Intervention Under the 2018 SBA). The program’s target was for BCRA’s foreign exchange reserves to exceed 100 percent of the IMF’s ARA metric by the end of the program period, to mitigate risks to the balance of payments. This target was reached by the end of 2018, mostly as a result of official flows, mainly Fund disbursements. Reserves collapsed after the primary elections in August 2019, reversing the gains that had been achieved. The true adequacy of the reserve level of Argentina is difficult to evaluate. Reserves increased to over ten months of imports, a level which would typically indicate some flexibility to intervene and manage inflation more directly, as in many other emerging economies with inflation targeting regimes. However, the narrow and volatile export base in Argentina, extensive dollarization, and the history of capital flight may, all else equal, have called for higher reserves.

Figure 1.
Figure 1.

Comparison of Actual and Projected Scenarios

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

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Composition of Growth

(Percent)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

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Exports and Imports

(US$ billion)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

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Reserve Adequacy

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

Sources: IMF WEO and IMF Staff Calculations.

Argentina: Inflation Dynamics

Inflation increased during the program, driven mostly by persistently high inflation expectations, peso depreciation, and wage increases. This suggests that the targeted reduction in inflation was optimistic: the monetary policy regimes under the SBA were not robust to the challenges of dollarization and extensive indexation, as shown by the rapid pass-through from the nominal exchange rate depreciation that followed the sudden stop. In short, the preconditions for a successful implementation of a formal inflation targeting framework may not have been in place.

In Argentina inflation expectations by the general public have been persistently high, remaining above 20 percent since 2010.1/ Over the past decade, they have moved closely with the peso depreciation. (By contrast, inflation and base money are not highly correlated; during some phases, they have been negatively correlated.) High inflation expectations, together with a high level of wage indexation, generate significant inflation inertia. In addition, the U.S. dollar has become de facto the unit of account for much of the economy and serves as a nominal anchor for inflation expectations. As a result, the pass-through from depreciation of the peso to an increase in prices is substantial and quick.

A simple empirical model that relates inflation to inflation expectations, the change in the exchange rate, nominal wage growth, regulated price increases, the real policy rate, and delayed effects of those factors suggests that the increase in inflation during the program reflected mainly a combination of higher inflation expectations, the large peso depreciation, and higher nominal wages. Of course, inflation expectations themselves reflect underlying factors—including movements in the exchange rate, labor costs, regulated prices, and policy reactions by the central bank—so the estimates are only indicative. Nonetheless, this simple empirical analysis suggests that inflation expectations drove on average slightly less than half of inflation over the 15 months of the program, with peso depreciation and wage growth each accounting for slightly less than a quarter (as private sector unions obtained revisions to their paritarias that increased the annual average to 3CMKD percent). Increases in regulated prices account for the remainder (nearly a tenth). Monetary policy had a dampening effect on inflation, but the magnitude was not large enough to curtail inflationary pressure from expectations and depreciations.

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Inflation Expectations and Headline Inflation

(percent, y/y)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

uA001fig12

Inflation and Peso Depreciation

(percent, y/y)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

uA001fig13

Inflation Decomposition

(Percent, m/m)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

uA001fig14

Inflation Before and After Adopting Inflation Targetting

(Percent)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

Sources: Banco Central de la República Argentina, Instituto Nacional de Estadística y Censos, INDEC, and IMF International Financial Statistics and IMF Staff Calculations.

Inflation quickly fell in 2016, which caused many to believe that the introduction of inflation targeting had been sufficient to anchor expectations. The results presented here suggest that this was more likely the result of exchange rate appreciation associated with capital inflows. Viewed this way, the target of single-digit inflation by 2021 was overly ambitious—the inflation rate was lower than previously at the time of the program request, but nonetheless reached 30 percent in June 2018, with a rapidly depreciating exchange rate—and as such created a tension between the need to gradually build confidence in the IT framework and achieving the inflation targets. By contrast, most inflation targeting regimes have been put in place after inflation had first been lowered to single-digit levels, often taking several years—that is, inflation targeting regimes have been used to consolidate, rather than achieve, disinflation (Svensson, 2008). In addition, without first reducing the degree of dollarization, monetary transmission would remain weak. Finally, the BCRA adopted a free-floating exchange rate regime—staff analysis, based on definitions in Ilzetzki et al. (2019), indicates extensive use of crawling bands in other cases. In other Latin American countries, inflation targeting has been accompanied by widespread foreign exchange interventions and unconventional policies including CFMs (Cespedes, et al, 2014). Studies also suggest that some degree of exchange rate management may improve inflation outcomes for inflation targeting emerging market economies, especially in cases of currency mismatch (Berganza and Broto 2012, Buffie et al 2018; Hofman et al. 2020 and Ostry et al. 2012).

1/ The measure shown is the survey of the general public conducted by UTDT. The survey of market participants conducted by the BCRA starts only in early 2016.

17. Financing needs in domestic currency increased over the course of the program. Total debt due and primary deficits over 2018 and 2019 came to US$66 billion, whereas disbursements used for budget support totaled US$37 billion. The difference would have to be financed in the market, with the short average maturities implying a need to refinance this amount about every six months. The Fund urged the authorities to extend the maturity profile of public debt and provided technical assistance on debt management, but maturity of debt held by foreign investors remained short, leaving the program with a crucial vulnerability.

  • The initial program projections underestimated the ultimate fiscal financing needs. In June 2018, cumulative gross financing needs (CGFN) of the federal government for 2018 and 2019 were projected at about AR$3.5 trillion (US$134 billion using projected exchange rates at the time). Despite the progress in reducing the fiscal deficit, the fiscal CGFN steadily increased during the program, and remained at multiples of the access under the SBA,.16 exceeding AR$5.3 trillion (about US$146 billion) by the time of the Fourth Review. The underestimation reflected deviations in macroeconomic developments relative to the original assumptions, especially as regards the exchange rate and amortizations.

  • Projected cumulative gross external financing needs for 2018 and 2019 stood at US$254 billion at the time of the 2017 Article IV consultation and remained around this level throughout the program, as they were mostly unaffected by the depreciation of the exchange rate. Exceptional balance of payment pressures emerged soon after the program approval and remained until the Fourth Review. Although external financing needs remained large and stable throughout the program, portfolio inflows dropped substantially during 2018 and 2019.

uA001fig15

Projected Federal Government Gross Financing Needs over 2018–19

(AR$ billion)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

1/ Projected financing needs at program request with revised macro assumptions (growth, inflation, exchange rate, an dinteresyt rates) from 4th review. Source: Public Debt Sustainability Analysis.

18. All told, most outcomes were worse than laid out in the adverse scenario presented with the SBA Request (Figure 2). Growth fell well short of and inflation far exceeded the program objectives. As the SBA was initially treated as precautionary, an adverse scenario was developed for the SBA request to estimate potential balance of payment needs as a basis for determining the proposed access (Figure 2). The projected 1.3 percent contraction in GDP in 2018 and return to growth in 2019 in the adverse scenario turned out to be optimistic compared with actual growth. By the same token, inflation and exchange rate outcomes were considerably worse than assumed in the adverse scenario. Debt increased sharply with the exchange rate depreciation. The current account deficit was far worse in 2018 than what was projected at the program request, but smaller in 2019; across 2018 and 2019, cumulative external financing needs were broadly constant. However, fiscal financing needs increased as the currency depreciated. Rollover rates for public debt securities were close to those assumed under the adverse scenario (and in other precautionary arrangements), but Argentina did not succeed in raising significant funds externally during the program period— instead, it relied on issuing debt in domestic markets up until the de facto end of the program. The debt profile deteriorated significantly, with an increase in yields and concentration at shorter maturities in the lead-up to the August 2019 primary election (Box 6: Argentina: Market Access During the 2018 SBA and Figure 4).

Figure 2.
Figure 2.

Actual, Baseline and Adverse Scenarios

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

Figure 3.
Figure 3.

Debt Indicators1

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

1/ Dashed lines correspond to DSA benchmarks. This includes 70 percent for debt burden and 15 percent for gross financing needs. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement.
Figure 4.
Figure 4.
Figure 4.

Public Debt Issuances

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

Source: Argentinian authorities and staff calculations.1/ Planned amortizations for 2018 as of 04/27/2018 (US$1 = AR$20.4) and planned amortizations for 2019 as of 12/30/2018 (US$1 = AR$37.8).2/ Note that multiple issuances may occur or mature on the same date.3/ Increases in the interest rate before May 2018 correspond to long-term debt issuances.

D. Fiscal Policy

Fiscal dominance has been central to Argentina’s economic challenges for decades. The 2018 Fund-supported program aimed to accelerate fiscal adjustment, both to signal a break with gradualism and to help reduce the government’s financing needs. Fiscal policy had to contend with several constraints. The pace of adjustment needed to weigh short-term growth impacts against potential confidence effects. Moreover, as the scope for high-quality fiscal adjustment measures was constrained by political circumstances, an accelerated pace of adjustment might have entailed poorer quality and more distortionary measures. Finally, the government’s financing needs were sensitive to movements in the exchange rate—as the exchange rate depreciated (and without a debt operation) the fiscal adjustment needed to offset the effects of currency depreciation on debt and debt service became untenable. All told, the program’s fiscal balance targets were met, but financing needs and debt measured in domestic currency continued to increase. The fiscal measures were generally of low quality and the program did not durably address the long-standing weaknesses in Argentina’s public finances.

19. Weak public finances have been at the heart of Argentina’s longer-term economic problems. Argentina has a history of fiscal dominance and debt defaults. The undoing of the convertibility regime in 2001 (¶25 and Appendix II, section A) was lack of fiscal control, including at the provincial level. In the years prior to the 2018 SBA, primary spending had been ramped up, from 23 percent of GDP in 2003 to 39 percent in 2017. As part of its market-oriented reform efforts, the Macri administration reduced taxes early on but left more comprehensive tax reforms for later, resulting in primary deficits of nearly 5 percent of GDP in 2016 and just above 4 percent in 2017.

20. The fiscal adjustment under the program aimed to balance the need to strengthen the public finances against the short-term growth effects. With a debt reprofiling ruled out, the program aimed for somewhat accelerated fiscal adjustment, combined with proceeds of the Fund arrangement used for budget financing, and relied on the catalytic effect to maintain market access. The fiscal policy measures supporting short-term adjustment did not involve fundamental changes.

  • At the time of the SBA request, Argentina’s public debt was considered “sustainable but not with high probability.” While the debt ratio per se did not stand out, the high share of foreign currency-denominated external debt, combined with a weak export base, shallow domestic financial system, and past history of defaults, suggested that Argentina’s safe debt level was lower than the 50 percent benchmark for “high scrutiny” cases in the IMF’s debt sustainability framework (IMF, 2013), as such pointing to substantial consolidation needs and/or a debt operation.16 F17 Further, Argentina’s history of fiscal dominance called for demonstrating a commitment to budget discipline to help boost the credibility of monetary policy and the program more broadly.

  • In the initial program, the planned primary balance improvement from 2017 to 2020 was 4.4 percentage points of GDP, with primary balance to be achieved in in 2020. At the First Review, the adjustment was increased to 5.6 percent of GDP and the achievement of primary balance brought forward to 2019. The adjustment envisaged was front loaded—2.4 percent of potential GDP in 2018, or about 40 percent of the total adjustment. The overall adjustment was not severe in comparison to other Fund-supported programs but was on the high side among exceptional access cases. Experience in other countries justified concerns about the implications of consolidation during a crisis; for instance, the 2015 Crisis Program Review had argued that fiscal adjustment above 5 percent of GDP over three years could be self-defeating.18

  • The fiscal multipliers used for the projections were higher than those typically applied. Empirical evidence had generally found fiscal multipliers for emerging market economies to be lower than those in advanced economies.18 F19 However, experiences in other programs had raised concerns about the effects of ambitious fiscal adjustment (e.g., Baum et al., 2012), and the 2015 Crisis Program Review had noted that fiscal multipliers during IMF programs had tended to be high, and often higher than initially assumed. Instead of the common rule of thumb of 0.5, the fiscal multiplier assumed in the 2018 SBA was set at 0.8 on average for changes to spending and 0.6 for changes to tax revenues. These values were based on comparison with consolidations in other countries in the region and are broadly consistent with more recent studies of fiscal multipliers in Latin America—for example, Carrière-Swallow et al. (2018) found that fiscal consolidations in Latin American and Caribbean economies typically lead to an output contraction of 0.5 percent on impact and of 0.9 percent after two years, conditional on other macroeconomic variables such as the exchange rate, output, and external balances. Somewhat larger multipliers could have been considered given negative output gaps (see Auerbach and Gorodnichenko, 2012) and the shift in the fiscal adjustment under the 2018 SBA towards decreases in higher-multiplier public investment and subsidies. However, analysis conducted early in the program period indicated that higher multipliers would have made little difference to the assessment of debt sustainability. This suggests that, although the projections may have moderately underestimated the negative overall output effects of fiscal consolidation, the adverse growth effects of other factors—namely currency depreciation, capital flight, and uncertainty—played a larger role.

uA001fig16

Primary Fiscal Balance

(percent of GDP)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

Sources: Countries’ Authorities, and IMF Staff Calculations and Projections.
uA001fig17

Planned Change in Primary Balance Over Exceptional Access Programs vs. Initial Debt Levels

(Percent of GDP)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

Sources: Countries’ Authorities, and IMF Staff Calculations and Projections.

21. The primary balance targets were met, mainly by lowering expenditures, although the measures were generally of low—and decreasing—quality throughout the program. Notwithstanding early efforts to reduce the wage bill and energy subsidies, most expenditure measures taken during the program period were temporary and relatively easy to reverse, undermining the credibility of the consolidation effort; moreover, revenue measures were limited and of low quality. The quality of measures deteriorated over time as the authorities sought to meet targets in a worsening macroeconomic environment; policy was later loosened in the run-up to the election.

  • Revenue: Initial staff proposals included structural revenue reforms, such as expanding the scope of PIT on labor income and strengthening the VAT. These reforms were rejected by the authorities as politically sensitive. In the end, revenue measures were limited to a temporary tax on exports and some modest one-off measures. In a nod to the authorities’ preferences, and recognizing Argentina’s relatively high tax burden, revenue was further reduced through a lowering of the corporate income tax rate and cuts in other taxes in 2019 (initially decided in 2017). In early 2019, the authorities cancelled scheduled increases in utility tariffs and provided generous tax incentives to SMEs. In addition, Congress passed a law providing future tax exemptions to a number of economic sectors, with effect from 2020 to 2029. Some actions were taken to improve tax compliance, but were not sufficient to offset the reduction in revenues. Revenues fell short of what was projected at program approval by about 1¼ percent of GDP for 2018 and 1¾ percent of GDP for 2019, in part reflecting cyclical factors (with tax buoyancy well below unity).

  • Expenditure: Ultimately, the fiscal adjustment relied on inflation-induced reduction in public sector wages and pensions, subsidy cuts to bring utility tariffs closer to cost recovery levels, and a squeeze in current discretionary and capital spending. Although inflation, made more persistent by indexation, caused real incomes to deteriorate, the adjustment in primary spending in this period was helped by higher-than-expected inflation, which reduced—albeit temporarily—the real value of public wages (because of wage restraints) and pensions (because of backward looking pension indexation).

uA001fig18

Changes in Current Primary Spending, 2017–19

(Percent of GDP)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

Sources: Argentine Authorities, and IMF Staff Calculations and Projections.1/ The impact of measures are those estimated at the time of the program approval (for 2017) and at the time of the Second Review (2018), compared, respectively, to outcome (for 2018), and expected outcome at the time of the Fourth Review (for 2019).2/ Estimated impact from inflation surprise between the program approval and preliminary estimates at the time of the Fourth Review (2018), and between the first review of the projections at the time of the Fourth Review (2019). For example, if w is the wage bill (measures excluded) expected at the time of the program/review with an inflation rate of π and if the realized inflation rate is π’ then unexpected inflation leads to a wage bill lower by w-w[(1+π)/(1+π’)]. The impact applies to the wage bill and transfers, due, respectively, to restraint on real wages and backward indexation of pensions.3/ Residual; includes other factors such as the difference between the actual and estimated impact of measures, and other autonomous factors (e.g., higher social protection spending when increasing number of households are covered).

22. The program called for reforms to strengthen the credibility of budget processes, which were implemented largely as envisaged. The fiscal-structural reforms included the creation of a fiscal watchdog and the strengthening of medium-term fiscal planning, which were either met or implemented with delay. However, reforms to address risks from fiscal federalism were postponed.19 F20

23. Debt sustainability was undermined by exchange rate depreciation; offsetting this shock through fiscal consolidation alone would have required a major additional adjustment.

  • Improvements in the primary balance contributed to lowering the debt ratio. Higher-than-expected inflation also helped improve debt dynamics, as the nominal effective interest rates on debt (about 11 percent in 2018 and 6 percent in 2019) were far below nominal GDP growth rates (37 and 51 percent, respectively).21 However, these effects were more than offset by the effects of exchange rate depreciation.

  • Achieving the originally targeted debt level of 53 percent of GDP by 2023 would have required more than doubling the size of fiscal adjustment planned at the time of the First Review (see text table). Hence, without a debt reprofiling early on (i.e., at the time of the First Review) to lower the large refinancing needs of the short maturity debt, the scope for fiscal policy to address debt vulnerabilities and bolster confidence appears, ex post, very limited, especially given that the low-quality fiscal measures available were unlikely to have sustained effects. That said, Argentina’s case is consistent with the general tendency to delay debt operations, even when ultimately unavoidable, substantially raising their costs (IMF, 2014 and 2020b). However, that possibility was ruled out by the administration.

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Sources: Argentine authorities, and IMF staff estimates.
uA001fig19

Change in Public Debt, 2017–19: Contributing Factors

(Percent of GDP)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

Sources: Argentine Authorities; and IMF staff estimates and projections.1/ Impact of exchange rate depreciation (mostly stock revaluation). Derived as ae(1+r)/(1+g)*d, where d is the previous debt ratio, r the nominal interest rate, g the nominal GDP growth rate, a the share of FX-denominated debt, and e the depreciation factor of the nominal exchange rate (measured by an increase in local currency per U.S. dollar). See IMF DSA template for more details.2/ Impact of the primary balance (reduced with fiscal adjustment efforts, but still positive).3/ Impact of the differential between the nominal interest rate and nominal GDP growth. Derived as (r-g)/(1+g)*d, where d is the previous debt ratio, r the nominal interest rate, g the nominal GDP growth rate, and e the depreciation factor of the nominal exchange rate (measured by an increase in local current of the US$).4/ Includes asset changes, LEBAC operations, and errors and omissions.

24. In sum, the fiscal adjustment and reforms under the program did not achieve fiscal sustainability. The primary fiscal deficit was reduced from 3.8 percent of GDP in 2017 to 0.4 percent of GDP in 2019, close to the program target of zero. However, the adjustment was flattered by one-off revenue measures of 0.7 percent of GDP and cuts in capital spending, and did not lay the foundations for a durable increase in tax receipts and stabilization of expenditures. The recession hit income and consumption tax receipts, while decisions in early 2019 to freeze utility tariffs until the end of 2019 and provide generous tax incentives to SMEs created additional fiscal uncertainties. The federal government primary deficit therefore remained subject to significant risks. The exchange rate depreciation overwhelmed the fiscal targets, as the debt ratio escalated to nearly 90 percent of GDP. The low quality of the fiscal measures likely eroded confidence.

E. Monetary and Exchange Rate Policy

The initial program aimed to retain the inflation targeting (IT) framework and a flexible exchange rate, and pursued ambitious disinflation objectives. Recognizing the need to bolster confidence in the nascent IT framework, the program supplemented the standard inflation consultation clause (ICC) with net domestic asset (NDA) ceilings and an interest rate policy commitment linked to inflation, and also called for recapitalization of the BCRA to strengthen its balance sheet and legislative changes to bolster central bank independence. Limitations on foreign exchange intervention (FXI) were designed to promote exchange rate flexibility. The program did not have the catalytic effect intended, and continued exchange rate pressures in the wake of the SBA approval in June 2018 were met with ad hoc FXI inconsistent with the program. The program shifted to a simpler base money targeting approach at the First Review. The targeting of base money was coupled with some scope for FXI and a continuation of the inflation-linked interest rate policy. The new framework at first helped stabilize market conditions. However, inflation expectations did not become durably anchored. Changes to the framework, inconsistent interventions, and a premature reduction in interest rates, compounded by doubts about the durability of fiscal consolidation, undermined confidence. Ultimately, the program was not successful in containing exchange rate depreciation and reducing inflation.

25. Argentina’s economic history has encompassed a full range of monetary regimes. Over time, most permutations of monetary and exchange rate policies have been tried, none proving durable. Starting in 1991, Argentina operated under a currency board arrangement, the Convertibility Plan, which ended amidst a debt, currency, and banking crisis in 2001 (Appendix II); from 2002, monetary aggregates were targeted; and from 2012 the BCRA was assigned “multiple objectives.” At the time of the SBA request, the authorities were pursuing inflation targeting with a floating exchange rate, a nascent framework adopted only in 2016.22

26. Changes to the monetary framework, focused on bringing inflation under control, were central to the program strategy.

  • In the first version of the program, with inflation running at 30 percent annually, the inflation targeting framework was retained. The BCRA charter was to be altered to formally define inflation as the goal of monetary policy and to safeguard central bank independence. The BCRA was set to target single-digit inflation by 2021. Given the historical experience of chronically high inflation, the lack of credibility of the central bank, and fiscal dominance, this disinflation path was ambitious. The program therefore included several features designed to strengthen the monetary policy regime. First, an ICC stipulated that a consultation with Fund staff on policy responses would be triggered if the 12-month inflation rate were to breach an inner inflation band, while the authorities would complete a consultation with the Executive Board in the event inflation outcomes were to exceed an outer band (text table). Second, under the program, the BCRA committed not to lower interest rates until there were clear signs of a decline in both end-2019 inflation expectations and in realized year-on-year inflation outcomes. Third, the program included a ceiling on net domestic assets of the BCRA, combined with a clause calling for consultation with the Fund in case of a breach. Finally, exchange rate flexibility was to be safeguarded by limitations on FXI via floors on net international reserves and limits on high-frequency FXI (Box 2. Argentina: FX Intervention Under the 2018 SBA).

  • With continued exchange rate pressures and inflation and inflation expectations diverging sharply from target, the First Review brought a move to base money targeting, replacing the inflation targeting framework. The BCRA announced a zero base-money growth rate until June 2019. Base money targeting was seen as a simpler and hence a stronger anchor that would help to bring down inflation expectations more rapidly.22 F23 Given the common problems under money targeting in calibrating the stance of monetary policy in the face of instability in money demand, the BCRA also committed not to reduce the policy rate below 60 percent until one-year-ahead inflation expectations had fallen for two consecutive months. The authorities maintained their commitment to let the exchange rate float; the new arrangement allowed FX sales if needed to prevent the exchange rate from moving outside a defined band. This approach would automatically tighten or loosen monetary policy in response to balance of payments developments that would move the exchange rate outside the band; the reduced discretion under this mechanism was intended to bolster credibility.

Inflation Targets and Consultation Bands

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27. To increase monetary policy space, the program called for a strengthening of the balance sheet of the central bank. To this end, the program included steps to recapitalize the BCRA and to reduce the vulnerabilities related to its LEBAC liabilities (Box 3. Argentina: Vulnerabilities Arising from LEBACs).

  • The planned recapitalization ultimately did not take place. Estimates of recapitalization needs were under preparation by the time of the Fourth Review, but the new charter for the central bank required for recapitalization did not pass Congress before the program de facto ended.

  • Under the program, the reduction in outstanding LEBACs was to be financed by government-issued peso-denominated securities in the local market (LECAPs). Moreover, the BCRA committed to limit the counterparties for sale of LEBACs, open market operations, and repos to local banks. In the event, the entire stock of LEBACs was eliminated by December 2018 and replaced by LELIQs, issuance of which was then calibrated to match the base money targets.

Argentina: FX Intervention Under the 2018 SBA

The program specified limits to intervention in the FX market by the central bank. Initially, these limits were relatively strict, but over time they became looser, in effect allowing more weight to be put on the exchange rate in the central bank’s reaction function.

The BCRA adopted a formal inflation targeting regime in September 2016, having declared a short-term interest rate as its main tool earlier in the year. From December 2015 until the first trimester of 2018, there was relatively little FX intervention by the BCRA, although the central bank had built up international reserves. However, starting in May 2018, the BCRA reacted to capital flight by selling about US$9 billion into the market, while also raising interest rates aggressively, until the SBA was approved in June.

The initial program committed the central bank to maintaining a flexible exchange rate regime, with foreign currency sales restricted to periods of clear market dysfunction. Accordingly, the program included a floor on net international reserves of the central bank and a ceiling on the stock of non-deliverable forwards. Additionally, the program committed the central bank to initiate a consultation with the IMF if its net foreign exchange sales in spot and forward markets breached set limits. During August-September 2018, the BCRA exceeded those limits, carrying out ad hoc interventions. As a result, net international reserves fell below its end-September program floor and the stock of non-deliverable forwards rose above the ceiling.

The FX intervention strategy was revamped in the context of the First Review, when base money targeting replaced the inflation targeting framework. Under the new approach, the BCRA had the option to intervene only when the peso moved outside a defined band. Initially, the band was set at AR$34–44 per U.S. dollar, with both ends of the band increasing by 3 percent per month through end-2018. The band implied a relatively wide (30 percent) non-intervention zone, which aimed to signal the authorities’ intention to let the exchange rate be driven mainly by market forces. The growth rate of the band was an important component of the monetary policy strategy as it conveyed the broad inflation forecasts of the authorities for the near future. Whenever the exchange rate moved outside the non-intervention zone, the BCRA could sell or buy up to US$150 million per day. All foreign exchange purchases were expected to be unsterilized. As such, the change in NIR would be matched by an expansion or contraction of base money, providing an automatic adjustment of the monetary policy stance (while still observing the zero base money growth target). Moreover, the authorities committed to allowing only the BCRA to carry out FXI, not allowing state-owned banks to engage in official FX sales on behalf of the government.

On the back of a tighter monetary policy stance and higher interest rates following the adoption of the base money framework, the peso appreciated by 15 percent in October 2018 and hovered close to the higher edge of the non-intervention zone for most of November 2018. At the Second Review, completed in December 2018, the broad approach was retained, with a reduction of the monthly change of the nonintervention zone for 2019Q1 to 2 percent per month. The non-intervention limit was reduced to US$50 million per day, to avoid an excessive deviation from the zero-base money growth target (the deviation from the monthly target would be capped at 2 percent).

uA001fig20

BCRA FX Intervention

(US$ billion)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

uA001fig21

AR$/US$

(Daily exchange rate from SIOPEL)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

During January and early February 2019, the peso traded below the lower edge of the non-intervention zone, allowing the BCRA to buy close to US$1 billion from the market. The change in the slope of the non-intervention zone was reduced further, from 2 percent to 1¾ percent per month, in 2019 Q2.

Higher-than-expected March inflation and increased political uncertainty triggered a sharp sell-off in Argentine assets in April 2019. The FXI strategy was changed once more, reducing the monthly rate of change of the non-intervention zone from 1¾ to zero percent and committing not to buy FX in the event of appreciation. The BCRA would be prepared to sell up to US$250 million if the exchange rate were to depreciate beyond AR$51.5 per U.S. dollar and would undertake additional interventions to counteract episodes of excessive volatility, while keeping the option to sell dollars within the non-intervention zone depending on market dynamics. All FX sales would be unsterilized which would ensure a reduction in the monetary base, further tightening the monetary stance and supporting the exchange rate. After this announcement, the peso appreciated and remained broadly stable until August 2019.

Argentina: Vulnerabilities Arising from LEBACs

The central bank used its own liabilities—LEBACs—to mop up excess liquidity. High yields attracted private non-institutional and foreign investors, fueling a carry trade and creating a flash point for a sudden reversal of flows.

The BCRA had for many years issued its own short-term peso-denominated liabilities (Letras del Banco Central, or LEBACs). These instruments were used to sterilize the effects on the money supply from FX interventions (Frenkel and Repetti, 2008). Starting in 2016, the issuance of LEBACs increased sharply with the increase in private capital inflows, particularly from issuance of foreign currency sovereign debt. By 2018, the total stock of LEBACs had reached 10 percent of GDP, or 120 percent of base money.

uA001fig22

LEBACS

(AR$ millions)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

This was known to be a risky strategy; in other countries, use of central bank instruments to sterilize capital inflows had been associated with incentivizing additional capital inflows, inflationary bias (because of the high interest costs of sterilization), and stresses on central bank balance sheets (as the return on foreign reserves is typically less than sterilization costs).1/ Generally, a central bank would sell government securities to withdraw excess liquidity from the banking system. However, the Argentine central bank’s balance sheet was weak to begin with—the scale of sterilization needs was greater than could be covered by the central bank’s holdings of marketable government securities, hence the use of central bank instruments.

Unusually, perhaps owing to Argentina’s small domestic investor base, purchase of LEBACs was open to foreign and noninstitutional investors. Domestic investors perceived the central bank to have lower credit risk than the government, and invested heavily in LEBACs. Foreign investors were drawn to the relatively high yields. The recurrent monthly rollover of LEBACs therefore created the potential for significant volatility in both exchange rates and interest rates, especially around the LEBACs’ maturity dates. The instability of the interest rates, in turn, threatened the ability of the BCRA to set interest rates in a predictable way consistent with its inflation objectives. Given the inherent volatility of capital flows, LEBACs therefore became a potential trigger point for sudden stops.

1/ See Mehotra (2012).

28. Although wage setting and indexation represented obstacles to disinflation, incomes policies were not part of the program. The high degree of indexation and other rigidities posed a challenge to the success of inflation targeting, by making the effects of temporary movements to the exchange rate and one-time increases in regulated prices more persistent. Incomes policies— that is, tripartite agreements on wage increases, usually with quid-pro-quo agreements on taxes and administered prices, such as utility tariffs—could in principle have helped inflation expectations to settle, and were evaluated by IMF staff. However, given mixed experiences in other countries and difficulties in quickly agreeing on a complex range of issues, incomes policies were ultimately not considered suitable.

29. The inability to anchor inflation added to the program’s struggles. Inflation outturns were much higher than envisaged: inflation had been targeted to fall from around 25 percent in 2017 to single-digit levels during the program period, but instead increased steadily to over 50 percent. Rapid exchange rate depreciation starting in mid-2018 made the targeted disinflation path unrealistic due to the high passthrough. After the First Review, inflation slowed towards end-2018. But this price stabilization was followed by increases in government transfers and salaries to support domestic demand, adjustments to utility prices, and loosening of monetary policy; the resulting higher inflation in early 2019 led to further exchange rate depreciation. The failure to contain inflation was instrumental to the damage to debt sustainability and real incomes under the program.

30. Although program actions aimed to bolster monetary policy credibility and strengthen the policy framework, the actual implementation of monetary policy was inconsistent. Between approval of the SBA and completion of the First Review, FXI was ad hoc and the program limits were breached.24 After the monetary policy framework was revised in October, interest rates rose substantially and the exchange rate stabilized. However, the authorities abandoned the 60 percent floor on policy interest rates prematurely, in early December. Furthermore, the base money target for December was relaxed to accommodate a seasonal increase in money demand, but was not reversed subsequently. Also, the program’s rules on FXI were changed—and breached—frequently. More consistent, on the other hand, was the steady decline in credit growth.

uA001fig23

Interest Rates 1/

(percent)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

Source: BCRA.1/ The lending rate corresponds to interest rates on loans granted to the non-financial private sector.
uA001fig24

Credit Growth

(y/y growth)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

Source: BCRA.1/ The lending rate corresponds to interest rates on loans granted to the non-financial private sector.

31. Even with consistent and well-calibrated implementation of monetary policy, bringing inflation down would have been challenging. At a fundamental level, monetary policy credibility was undermined by deep-seated fears of fiscal dominance. This was especially so for the recently adopted inflation targeting regime, given the dependence of that approach on anchoring expectations of future inflation. The inconsistent implementation and communication undermined the achievement of the inflation goals under both monetary regimes during the SBA. But given the political situation and underlying doubts about the durability of fiscal consolidation, it is unlikely that any particular monetary policy framework on its own would have been able to overcome these fears, which fed capital flight, furthering exchange rate depreciation, increasing inflation, and worsening debt in a vicious circle.

F. Social Protection and Gender Policies

The program included features to safeguard social protection and increase female labor force participation. These program elements were aimed both to support vulnerable households and build political support for the reform agenda. The outcomes did not meet the goals, in part because the more adverse general economic conditions outweighed the targeted social protection policies and in part because of a lack of follow through on the legislative agenda.

32. The program aimed to protect economically vulnerable households. To secure political support, the administration and the Fund were eager to distinguish the 2018 SBA from previous Fund-supported programs, which had been associated with increases in economic inequality. Consequently, protecting the vulnerable was one of the program’s overarching goals described in the Letter of Intent. The program committed the administration to strengthen the social safety net and maintain the level of social spending, and noted the authorities’ ambition to reduce poverty rates over the course of the program even if there were to be a slower-than-expected economic rebound.

33. Social policies were reformed to better target the poor and a floor on government social spending was applied—and respected—throughout the program. Specifically, the program aimed for: (i) an improvement in public childcare, not only to protect poor households, but also to raise female labor force participation; (ii) a better targeting—together with an broader reach to the population—of the universal child allowance; and (iii) a strengthened monitoring of social conditions of households to help address the needs of the most vulnerable. The SBA included a floor on social spending as a performance criterion, which was met throughout the program— indeed, the authorities increased social spending from the Third Review onwards, particularly in the area of childcare and social assistance, which was financed in part by other IFIs.

34. However, weaker-than-expected growth and higher-than-expected inflation undermined the efforts to mitigate poverty. Despite the increase in social spending, the share of the population living in poverty—disproportionately concentrated in children—rose from 27 percent in 2018H1 to 35 percent in 2019H1. The recession pushed real wages down and unemployment and informality up, exposing gaps in social protection (such as for younger workers in the informal sector). Higher inflation led to lower living standards, including for government workers and pensioners, in part reflecting backward-indexation of public wages and pensions (Box 4. Argentina: Pension Reform). To compensate, the authorities suspended the planned increase in energy prices. Overall, the program’s specific social spending commitments were met, but were overwhelmed by the general impact of the crisis.

35. Features were introduced to reduce gender inequality, but progress fell short.

  • Gender issues had been emphasized in the Staff Report for the 2017 Article IV Consultation, which noted the lower female labor participation rate in Argentina than in other Latin American countries and a pronounced gender wage gap. Women were also more likely to work in the informal sector, characterized by low pay, poor working conditions, and limited access to social protection.2 25 Gender inequality was considered important not only for social cohesion and equity, but also macro critical—increasing participation and eliminating practices that resulted in wage gaps would increase output and productivity. Against this backdrop, the SBA Request committed to a range of measures to increase female labor force participation, such as eliminating the second-earner penalty in the current tax system. The increased support for households with children was also intended to raise female labor force participation, particularly for lower-income households.

  • By the time of the Fourth Review, congressional approval of legislation to increase paternity leave and legal changes to eliminate tax disincentives for female labor force participation— potentially the most effective measure of those envisaged in the SBA Request—had not been passed. Wage differentials stayed roughly the same, and female labor force participation increased only marginally during the program.

Argentina: Pension Reform

The Argentine pension system was actuarially unsustainable. Changes had been made to the pension indexation formula before the program, intended to reduce costs over the medium term while providing some protection of benefits. In the event, rising inflation resulted in a reduction in real pension benefits during the program.

Pension system costs reached 10 percent of GDP in 2018, a large number in light of Argentine demographic pressures. The main component of the system was a pay-as-you-go scheme covering nearly 40 percent of workers. The system was actuarially unsustainable. Pension benefits were not fully financed by current contributions, weighing on public finances—workers’ and employers’ contributions amounted to 5.2 percent of GDP in 2017, while contributory benefits stood at 7.5 percent of GDP. Non-contributory pensions, which had risen rapidly in the previous decade, accounted for the remaining share of pension spending. The old-age dependency ratio was projected to increase from 17 percent in 2017 to about 28 percent by 2050, adding to the stress on the system.

No changes were made to the parameters of the pension system during the program. However, changes to the pension indexation formula before the 2018 SBA was approved had important effects during the program: the formula used to calculate increases in pension benefits was revised at the end of 2017 from an indexation system based on semi-annual adjustments based on growth in wages and taxes (which had contributed to an increase in the pension cost-to-GDP ratio in the previous decade) to one of quarterly adjustments based on wage and price inflation (with weights of 30 and 70 percent, respectively). This change brought the indexation system more in line with international best practices. However, as inflation accelerated during the program, the real value of pensions fell (if inflation had decelerated as foreseen, the new formula would have delivered an increase the real value of pensions). This resulted in an unplanned reduction in pension spending as a share of GDP, which contributed to the fiscal adjustment under the program.

G. Structural Policies, Financial Sector Reform, and Governance

Consistent with its focus on short-term stabilization, and also reflecting the administration’s constrained political space, the program contained relatively limited conditionality on structural policies. Moreover, the financial sector’s small size and overall sound position motivated less focus on financial sector reform than in other similar programs. Governance frameworks and related vulnerabilities came increasingly into focus, in line with the Fund’s renewed emphasis on these issues.

36. Structural reforms and related conditionality were narrowly targeted. The program had no structural policy prior actions at approval, but featured three such actions during the program, two under the First Review and one under the Second Review. A comparative analysis of structural conditionality suggests that the number of conditions in the SBA was lower than typical (see Box 5. Argentina: Structural Conditionality under the 2018 SBA).2 26 The measures were well targeted in the context of the program’s emphasis on short-term financial stabilization, with the structural reform agenda focused on macroeconomic stabilization, fiscal reforms and monetary policy and with the actions singled out for conditionality focused on fiscal, PFM and central bank reforms. The design of structural conditionality was also a de facto acknowledgment of the existing political constraints as the administration’s lack of majority in Congress would likely have hampered reforms requiring legislative action. The overall strategy was to support stability in the initial part of the program and move on to deeper reforms later. That said, the structural policy commitments included in the program went beyond those anchored on benchmarks and included supply side policy measures aimed at strengthening the anti-corruption regime and AML-CFT legal framework, develop domestic credit markets, increase competition, and reduce red tape.

Argentina: Structural Conditionality Under the 2018 SBA

This box looks at prior actions, structural benchmarks, and structural performance criteria.1/ A comparison of the Argentina SBA with other exceptional access cases shows that, although the structural benchmarks were relatively few and of relatively limited depth, they were well aligned with the program’s emphasis on short-term macroeconomic stabilization.

An assessment of structural reforms under the program points to relatively limited but well focused structural conditionality when compared with other exceptional access SBAs. Following the 2018 Review of Conditionality (IMF, 2019c), structural conditionality at the time of program approval is assessed by volume, depth, and focus. The volume of structural conditionality is defined as the number of conditions per program year. Depth is defined as the degree and durability of structural conditions, with measures separated into high-, medium-, and low-depth categories.2/ Focus is assessed by categorizing structural conditions into core, shared, and non-core areas of Fund responsibility. Based on these three criteria, Argentina’s 2018 SBA is compared below to other exceptional-access SBAs from 2008 to 2018.3/

The volume of structural conditions in the program was less than one third of other exceptional access SBAs. Moreover, the Argentina program did not include prior actions at the time of the request, which was the case in less than one third of comparable programs.

Structural conditions tended to be of lesser depth than in comparable programs. Half the structural benchmarks set at the time of program approval were assessed to be of low depth, a higher proportion than in other exceptional access SBAs. On the other hand, the share of high-depth measures was larger, while medium-depth structural conditions represented a smaller share of all structural conditions. High-depth measures planned included the recapitalization of the BCRA and the submission of a new central bank charter to Congress, albeit with relatively late test dates (end-December 2019 and end-March 2019 respectively) and no explicit commitment of fiscal resources, which also contributes to the assessment of “light” structural conditionality at the time of the program approval.

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Depth of Structural Measures

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

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Focus of Structural Measures

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

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Subject of Structural Measures

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

All structural conditions were focused on areas of core Fund responsibility.4/ In terms of subject, half the measures concerned the central bank, and half fiscal and PFM issues combined. There were no structural conditions on the financial sector, which is atypical for exceptional access programs.

1/ Structural performance criteria were eliminated from the Fund’s lending and conditionality framework in 2019.2/ “High depth” designates reforms that lead to permanent institutional changes, such as involving legislative changes, or measures with long-lasting impact (e.g., pension reform, privatization). “Medium depth” corresponds to one-off measures that might bring immediate, but not lasting, effects, such as budget approval or one-time changes to controlled prices. “Low depth” involves reforms that could serve as intermediate steps but would not by themselves bring significant economic change, such as preparation and/or announcement of plans.3/ Other exceptional-access SBAs include Armenia (2009), Belarus (2009), Georgia (2008), Greece (2010), Hungary (2008), Iceland (2008), Jordan (2012), Latvia (2008), Mongolia (2009), Pakistan (2008), Romania (2009), Sri Lanka (2009), St. Kitts and Nevis (2011), and Ukraine (2008, 2010, 2014).4/ Areas of “core” Fund responsibility include fiscal, PFM, central bank, financial sector, and pension and civil service reform issues. See Appendix II in IMF (2019c).

37. The program featured limited coverage of the financial sector. Capital account crises have often been accompanied by financial sector crises, and in Argentina funding pressures on the sovereign could conceivably have spilled over to banks. However, Argentina’s financial sector in 2018 was much smaller than it had been at the time of the previous crisis, and banks’ business models were very conservative—banks typically held a high proportion of low-credit-risk assets (such as central bank securities) and had limited lending exposure to the sovereign. Moreover, financial soundness indicators were reassuring. This and few signs of bank stress motivated the relatively limited coverage of the financial sector; nevertheless, the work of Fund staff modelling the effects of capital flow restrictions and debt operations did cover the financial sector.

38. Governance measures became more prominent over time. The IMF’s assessment of governance vulnerabilities focused on corruption and AML/CFT, and was relatively light on reforms of public financial management. The June 2018 program request included a general commitment to strengthen the anti-corruption regime and improve the AML-CFT legal framework. The program’s emphasis on governance increased with the implementation of the Fund’s new framework for enhanced engagement on governance approved by the Executive Board in April 2018,27 which prompted the inclusion of a full section on tackling corruption in the Staff Report for the Second Review.

Consistency with Fund Policies and Procedures

Fund policies and procedures relating to financing, safeguards and program design were adhered to. The approach to precautionary Fund financing and the associated communication challenges may have undermined the catalytic effect of the program. The Fund’s Exceptional Access Framework was followed, but its application was challenging. The experience with the Argentina SBA highlights scope for taking a broader view of the risks to the Fund associated with exceptional access cases.

A. Financing

As the adverse scenario came to bear already by the time of the First Review, access was increased, and the program become fully disbursing with all proceeds of IMF resources used by the authorities for budget financing. The scale of Fund support matched the financing needs projected at that time and as such was appropriate. That said, rollover rates remained an element of considerable uncertainty when assessing actual financing needs. Moreover, the shift to a disbursing arrangement signaled an acknowledgement that the catalytic effect of the program had fallen short of expectations. The experience points to broader implications of exceptional-access Fund-supported programs for the global financial safety net and burden sharing amongst creditors.

39. The 2018 SBA was conceived as primarily precautionary, but deteriorating financial conditions quickly prompted a switch to a fully disbursing arrangement. The initial program assumed an external financing gap, concentrated between June and December 2018, of SDR 10.6 billion (approximately US$15 billion). The remainder of the Fund resources (SDR 24.8 billion, or approximately US$35 billion) were to be treated as precautionary, with access to be phased evenly based on twelve quarterly reviews over three years (see text chart). With very limited financing from non-Fund official sources, the projected financing gap relied critically on the assumed rollover rates of privately held debt.27 F28 Rollover rates deteriorated after program approval in June and through September. Treasury issuances in the domestic market were limited, and increasingly at short maturities as the authorities sought to avoid paying higher interest rates. Consequently, at the First Review in October, a change in the amortization schedule2 29 called for an augmentation of the arrangement, some frontloading, and actual use of Fund resources to close the fiscal financing gap (which translated into a corresponding external gap). The revised purchase schedule involved concentrated access through the third quarter of 2019 (SDR 35.8 billion, or US$51 billion, slightly above the original arrangement) and envisaged the residual amount (SDR 4.9 billion or US$7 billion) being purchased over the remainder of the arrangement in seven equal installments.

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External Financing Needs – SBA Request

(US$ million)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

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External Financing Needs – First Review

(US$ million)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

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Fiscal Financing Gap

(US$ million)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

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External Financing Gap

(US$ million)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

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Original Phasing

(Adverse scenario with full drawing, SDR billion)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

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Revised Phasing at First Review

(SDR billion)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

40. Burden sharing was limited, with the Fund providing the bulk of official financing. The IMF’s financing assurances policy29 F30 requires that a program be “fully financed,” with firm commitments of financing for the first 12 months of the arrangement (or the 12 months following a review) and “good prospects” thereafter. Under the SBA, Argentina’s financing needs were to be met primarily through IMF financing and debt issuance in the domestic market (with participation of foreign creditors). Between end-March 2018 and end-2019, actual net financial support from other IFIs during the program period was set at about US$2.7 billion,31 or about 6 percent of all additional financing from IFIs (including the Fund).32 Program financing therefore depended on the debt rollover rates. At the time of the First Review, when rollover rates had fallen below those assumed in the initial program, program financing relied on the augmentation of the arrangement and the accelerated move to fiscal balance. Financing assumptions remained stable at both the Second and Third Reviews. By the time of the Fourth Review, financing needs had increased as a result of a steeper yield curve and reduced maturities of issuances (up to three months), but with an assumption of higher rollover rates, the program was deemed fully financed.

41. Financing choices at the time of the SBA’s approval were consistent with the initial diagnosis and strategy, but may nevertheless have worked against instilling confidence. The initial access and phasing were consistent with the diagnosis of a temporary liquidity shortage and the strategy of catalyzing market access to provide space for gradual implementation of policy reforms.

  • The limited burden sharing can be seen as a consequence of the urgency to provide financing. The frontloading, augmentation of access and use of proceeds for budget financing at the time of the First Review (¶8, 40) signaled that a larger share of the near-term financing needs would be met by the Fund, in lieu of a catalytic effect on private flows. The lack of additional major sources of financing (other than a new swap line with the People’s Bank of China) may have put in question the confidence-shock narrative. The frontloading of access may also have lessened the Fund’s leverage to secure reforms, working against the catalytic effect.

  • The increased access and frontloading incorporated at the First Review compressed the original Fund financing in the 15 months before the 2019 election, generating substantial financial risks to the Fund, and may have also played against its catalytic role.

42. The experience with the Argentina SBA poses broader questions on the role of the Fund in cases of large absolute financing needs. Challenges in the Argentina case were multiple: large and intertwined fiscal and external financing needs, very little room for adjustment, limited support from other official sources, a dispersed private creditor base, and pressure for swift action. Given that such conditions may resurface in other exceptional access cases, the Fund needs to be clear about the roles it is called to play, and which constraints should be challenged (considering that accepting constraints would tend to increase the size of arrangements).

  • In the 2018 SBA, the Fund accepted being de facto the sole official creditor, in a context of highly uncertain financing needs. Going forward, the Fund may wish to revisit its stance towards burden sharing and scrutinize debt rollover assumptions.

  • When a deterioration occurs, pulling out from a program is very difficult,3 33 and the Fund could well face a choice between taking a forceful stance on debt reprofiling and accepting the high financial risk of taking a member country “out of the market.”

  • Given the weight of the initial financing decision, the speed of action (including resort to the Emergency Financing Mechanism) should be carefully weighed against the longer-term risks associated with a program engagement.

B. Application of the Exceptional Access Framework

The application of the Exceptional Access Framework (EAF), updated by the Executive Board in 2016, proved challenging in the economic and political circumstances facing Argentina. The provisions of the updated EAF are intended to provide scope for flexibility and necessarily leave room for judgment about technical matters. Applying the updated EAF in the context of the 2018 SBA involved finely balanced assessments.

43. Because of its size, the SBA was subject to the Exceptional Access Framework. Normal access to Fund financial resources would have limited Argentina to 145 percent of quota for any 12‑month period, and cumulatively to 435 percent of quota (net of repayments) over the period of the program. The 2018 SBA was nearly three times this cumulative limit. Under the EAF as updated by the Executive Board in early 2016, exceptional access arrangements are required to satisfy all four Exceptional Access Criteria (EAC):

  • EAC1. The member is experiencing or has the potential to experience exceptional balance of payments pressures on the current account or capital account resulting in a need for Fund financing that cannot be met within the normal limits.

  • EAC2. A rigorous and systematic analysis indicates that there is a high probability that the member’s public debt is sustainable in the medium term. Where the member’s debt is assessed to be unsustainable ex ante, exceptional access will only be made available where the financing being provided from sources other than the Fund restores debt sustainability with a high probability. Where the debt is considered sustainable but not with a high probability, exceptional access is justified if financing provided from sources other than the Fund, although it may not restore sustainability with high probability, improves debt sustainability and sufficiently enhances the safeguards for Fund resources.34

  • EAC3. The member has prospects of gaining or regaining access to private capital markets within a timeframe and on a scale that would enable the member to meet its obligations falling due to the Fund.

  • EAC4. The policy program of the member provides a reasonably strong prospect of success, including not only the member’s adjustment plans but also its institutional and political capacity to deliver that adjustment.

Argentina was deemed to meet the EACs at the time of the Board approval of the SBA and in all four program reviews, although the assessment of three of the four criteria was finely balanced (Annex III).

44. The balance of payments needs facing Argentina were evident, satisfying EAC1. At the time of the SBA request, Argentina faced an actual balance of payments need and had the potential to experience stronger pressures that warranted exceptional access. Argentina purchased about US$15 billion at the time of the SBA approval; soon after, exceptional balance of payment pressures emerged and remained through the program (¶17). The assessment was further underpinned by the low level of international reserves, which fell short of the Fund’s ARA metric.

45. Despite steadily deteriorating public debt indicators during the program period, EAC2 was deemed to be met on the grounds that market access was retained and that private claims falling due during the program period were small. Debt was initially categorized as “sustainable but not with high probability” (referred to as being in the “gray zone”), and this assessment was maintained throughout the program. The provision of Fund financing under this category had been introduced under the EAF policy to provide flexibility and avoid potentially very costly and unnecessary debt restructurings.35 The flexibility is not unconstrained—in such cases the policy calls for safeguards that would improve debt sustainability and reduce risks to the Fund, laying out a range of options that could meet these requirements, with no presumption that any particular option should apply.36 For example, EAC2 could be satisfied if debt was not clearly sustainable with high probability but the member nonetheless either retained market access or the volume of private claims falling due during the program period would be small. This was the option relied upon during the 2018 SBA. Another option, if the member has lost market access and private claims falling due during the program would constitute a significant drain on available resources, would be to reprofile existing claims. This option was not acted upon under the 2018 SBA. 37 Based on the 2016 EAF, the Fund’s final assessment relied on debt sustainability analysis, safeguards provisions and judgment:

  • Application of the IMF’s Debt Sustainability Analysis (DSA). The DSA provides a bottom-line assessment of sustainability based on an array of indicators and tools, with the overall assessment ultimately relying on judgment. At the time of program approval in June 2018, the IMF assessed that debt was “sustainable, but not with a high probability.” By the time of the First Review, and for the remainder of the program, this judgment had become finely balanced, and the indications from the DSA worsened throughout the program period (Annex II). During the first four months, from the approval of the SBA in June to the First Review in October, the debt-to-GDP ratio jumped from 65 to 81 percent of GDP. As this was above the benchmark threshold of 70 percent in the current and the first projected year, the first row of indicators in the DSA “heat map” turned from green to red. Over the same period, EMBIG spreads increased from 415 to 630 basis points, above the 600 bp threshold, causing the market perception indicator to change from yellow to red. Although gross financing needs under the baseline scenario remained below the 15 percent of GDP rule of thumb until the Third Review, at the time of the program request other structural characteristics indicated high vulnerability—Argentina’s small banking system limited the ability to absorb additional borrowing requirements domestically, and the narrow export sector constrained the ability to carry debt in foreign currency (Figure 3). Overall, the level of debt, gross financing needs, external financing requirements, and risk premia increased during the program, raising questions of whether the liquidity crisis was becoming a solvency crisis. By the time of the Fourth Review in July 2019, 12 out of 15 cells in the DSA heat map were red.

  • Safeguards to Fund resources. Against the backdrop of the considerations above, EAC2 was, on balance, deemed to be met in view of market access and the volume of private claims falling due during the program. With respect to market access, the Argentine Treasury was seen to be issuing bonds domestically during the program, although market access weakened over time (Box 6. Argentina: Market Access During the 2018 SBA). With respect to the volume of private claims, safeguards to the Fund, measured as the ratio of post-program restructurable debt relative to peak Fund credit, decreased relative to expectations at program approval, reflecting the augmentation. However, there is no clear guidance in the policy on when the volume of private claims falling due during a program is small enough (or when the volume of post-program restructurable debt can be deemed large enough) to sufficiently safeguard Fund resources.

Argentina: Market Access During the 2018 SBA

Argentina was not able to raise significant funds externally during the program period. It did, however, issue debt domestically up until the de facto end of the program, albeit with significantly higher yields and shorter maturities.

Argentina’s market access deteriorated after January 2018, when a total of US$9 billion in external debt was successfully issued. In the following period, the Treasury no longer placed bonds externally. Nonetheless, in January 2018-July 2019, the Treasury continued to issue bonds (both in U.S. dollars and pesos) and short-term paper domestically (mostly LECAP and LETES; Figure 4, second row). Non-residents continued to participate in the domestic debt market while rebalancing their portfolio from LETES to LECAP. Domestic placements also came to an end after the primary elections in August 2019, when an attempt to issue short-term paper in pesos (LECAPs) and U.S. dollars (LETES) failed (Figure 4, first row).

Non-residents started to exit the LETES market, dropping their stock holdings by US$5.2 billion from end-March 2018 to end-March 2019 (Figure 4, third row). By then, LETES were a preferred option for residents that had savings in U.S. dollars with non-residents holding only 10 percent of the outstanding stock. Meanwhile, nonresidents steadily increased their holdings of LECAP which peaked at US$6.7 billion (67 percent of the total stock) by end-March 2019. In the following months, non-residents started to exit the LECAP market, offloading 20 percent of their total holdings by end-June 2019 (with a broadly equal increase of the domestic private sector participation). Overall, LETES rollover rates dropped, with the total outstanding stock falling by US$4.2 billion from end-March to end-Dec 2018, but on average remaining stable until August 2019. Meanwhile, the outstanding stock of LECAP increased rapidly in 2018, with the U.S. dollar value fluctuating until August 2019.

Following the run on short-term BCRA paper at the end of April 2018, total issuance in dollars dropped to only US$1.1 billion in May, before recovering to US$3.4 billion in June after the announcement of a Fund staff-level agreement on an exceptional access Stand-By Arrangement. Issuance of peso-denominated debt continued during this period, but interest rates rose significantly from an average of 26 percent in January-April of 2018 to an average of 42 percent in May-August 2018. In 2019, the debt profile continued to deteriorate. Interest rates on peso-denominated debt reached 60 percent and the average maturity of LETES fell from 213 days in 2018 to 158 days in 2019. Moreover, maturities were concentrated: about two-thirds of LETES and LECAP 2019 issuances were due before the October presidential election, creating a significant refinancing need during a period of high uncertainty (Figure 4, fourth row). Risks were compounded by some government borrowing in the form of repos collateralized by government dollar-denominated debt securities, whose drop in market value led to margin calls and further increases in financing needs.

46. Prospects of regaining market access on an adequate scale—and thereby being able to service debt to the Fund—were mixed, but on balance EAC3 was judged to be met. The assessment that the scale of access would be adequate to enable Argentina to meet its future Fund obligations was finely balanced. As market conditions deteriorated, the likelihood of attaining adequate access to private capital markets over the relevant time horizon for EAC3 also weakened. However, rollover rates recovered after the First Review. The assessment was that prospects were sufficient; while noting the declining appetite of non-resident investors for Argentine sovereign debt, the Fund expected that the implementation of the program, with the support of the international community, would safeguard market access.

47. As regards the institutional and political capacity to implement the program called for under EAC4, assurances were deemed to be satisfactory, although commitments made were fairly light.

  • As regards political capacity, in applying the EAF to cases in which a request for Fund resources (or completion of a review) is made in the lead-up to a national election, the Fund has required that the main opposition parties or candidates for premier express their commitment to the overall goals and key policies of a Fund-supported program. This is to ensure that the Fund has confidence that the program will be implemented after the elections, whichever party or coalition comes into power.38 In the case of the 2018 SBA, the significance of this requirement markedly increased in March 2019 as polls began to suggest the possibility of a change in government after the October 2019 elections. In the run-up to the elections, political assurances were based on private consultations with two opposition candidates for president. However, the opposition candidates were publicly critical of the implementation of specific strategies and indicated that they would seek to renegotiate the program.3 39 In principle, stronger assurances— such as written and published commitments—could have been sought.

  • The IMF assessed the administration’s institutional capacity to be sufficient to deliver the core elements of the program. Like under many Fund-supported programs, the SBA nevertheless aimed to strengthen the capacity in some important areas. The program reforms to this end covered budget and tax administration, the anti-corruption regime, and, in particular, the capacity, transparency and communication relating to debt management. (Two structural benchmarks focused on the latter, and the Fund provided TA in debt management.) Moreover, the Fund’s support involved TA to improve official data.39 F40 A March 2019 structural benchmark called for a new central bank charter to end the BCRA’s multiple mandates and establish operational independence. By the end of the program, the charter had not passed. At the same time, the high turnover of central bank governors, with three governors in office from May 2018 to August 2019, may have raised questions about policy continuity and added doubts over central bank independence.

48. All told, the application of the flexibility under the revised Exceptional Access Framework proved challenging—in hindsight, stricter implementation of EAC2 and EAC4 may have helped. The EAF is intended to provide transparency on how the Fund would handle exceptional access cases. Under the Argentina 2018 SBA, three of the four criteria required finely-balanced judgments. The SBA was the first case to test the revised treatment of “gray zone” cases of debt sustainability under EAC2. The short-term maturity structure of the public debt41 combined with the non-trivial dollar amount of public debt falling due during the program, pointed to a debt reprofiling as envisaged in the 2016 EAF reform.42 With this option ruled out and debt assessed to be sustainable but not with high probability, much depended on the assessment of whether Argentina could be deemed to have market access. In each of the reviews, the issuance of relatively small amounts of debt, domestically and at relatively short maturities, was considered to provide adequate safeguards to conclude that EAC2 was observed. However, it was not evident that market access was improving and that allowing more time would improve debt sustainability and lead to better macroeconomic outcomes, as intended under the provision for “gray zone” cases in the revised EAF. This situation points to the need for an unflinching assessment of debt sustainability, ideally before entering into a program, as—particularly in exceptional access cases—the pressure to not change course once an arrangement is underway can prove overwhelming. The importance of this consideration is compounded by the challenges of reaching agreement on contingency plans from the outset of programs (¶10). Finally, the 2018 SBA provided an illustration of the difficulties in reaching clear-cut assessments of political capacity under EAC4, and in putting in place commitment devices that have traction and are convincing.

C. Risks to the Fund

The high level of access under the SBA represented considerable financial, reputational and enterprise risks for the Fund. The safeguards policies were followed, including the preparation of a regular Safeguards Assessment and a supplementary review of fiscal safeguards as required when proceeds of IMF financial support are channeled to the government budget. The experience with the Argentina SBA points to possibilities for sharpening the risk assessment for Fund finances and taking a broader view of risks to the Fund associated with exceptional access cases.

49. The SBA represented substantial financial risks to the IMF, risks that increased with the enlarged and more frontloaded access approved at the First Review. Following the standard practice for exceptional access cases, staff reports for the program request and augmentation (First Review) were accompanied by a Supplement assessing the risks to the Fund and its liquidity position.43

  • At the time of the program request, capacity to repay was assessed as “good” under the baseline scenario and “adequate” under the alternative (full drawing) scenario. Some risk indicators were worrisome: under full drawing, capacity to repay indicators (relative to reserves and exports) were above or at the higher end of the range of recent exceptional access arrangements, credit outstanding to Argentina would be around double the Fund’s precautionary balances (SDR 16 billion at end-FY2020), and yearly charges would be considerably above the absorption capacity of the burden sharing mechanism.44

  • The augmentation and frontloading of access at the time of the First Review significantly increased the financial risks to the Fund. At the First Review, the risk assessment was revised to “adequate although subject to heightened/sizable risks” and remained the same through all subsequent reviews. As repayments became more concentrated in 2022 and 2023, the capacity-to-repay indicators pointed to higher risks. Even though the SBA was not fully disbursed, capacity-to-repay indicators remained at risky levels. Despite these indications, actions to reduce or mitigate risks to Fund finances did not feature prominently in the program design nor in the discussions. Greater burden sharing could have reduced financial risks to the Fund, while signaling broader support from the international community and potentially instilling greater confidence.

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Fund Credit Outstanding / Reserves

(peak ratio, in percent)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

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Debt Service to the Fund / Exports of Goods and Services

(peak ratio, in percent)

Citation: IMF Staff Country Reports 2021, 279; 10.5089/9781616357993.002.A001

50. The Office of Risk Management (ORM) had limited involvement in assessing the broader risks related to the SBA. The ORM is responsible for assessing the IMF’s overall risk profile, highlighting areas where risk mitigation efforts are required (e.g., strategic risks, core functions, cross-functional assets, and reputation). Risks arising from individual IMF operations, however, are intended to be addressed by internal controls and country reviews by other Fund departments. That said, a large arrangement such as the 2018 SBA poses significant broader risks to the Fund which may not have been considered. However, ORM was not involved in the formal review process during the program, nor was it consulted in real time.

51. Safeguards policies relating to Fund finances were followed, albeit entailing a lag.

  • Since 2000, Fund policies require that the financial procedures of central banks of members under programs be assessed to ensure the proper use of Fund resources.4 45 In addition, since 2015, fiscal safeguards reviews have been required for IMF arrangements in which a member requests exceptional access and there is significant channeling of the proceeds of Fund financial support to the government budget.4 46 These assessments are conducted independently from program discussions.

  • In the case of the Argentina SBA, a safeguards assessment prior to the emergency request for financing was not possible, but an assessment was concluded by the time of the First Review, in line with the policy. As the budget support component of the SBA was increased at the First Review, a fiscal safeguards review was required, and was completed before the Second Review. However, application of recommendations from the safeguards review lagged behind the front-loaded disbursements under the arrangement: the key recommendations to strengthen central bank independence (amendments to the BCRA charter and recapitalization) had not been implemented by the end of the program. The amendments were agreed with the authorities and submitted to Congress in March 2019, but did not progress, and a technical assistance mission to advise on recapitalizing the central bank (a structural benchmark for December 2019) did not take place. The central recommendation from the fiscal safeguards review was to move the treasury single account from a state-owned bank to the central bank to address vulnerabilities. The program envisaged this action by June 2020, with Fund TA support, but this was not implemented.

D. Lending Into Arrears

The program was consistent with the requirements of the Fund’s Lending Into Arrears (LIA) policy, which applied to a small amount of remaining arrears.

52. In compliance with the LIA policy, the Fund assessed that the Argentine authorities were making good-faith efforts during the program period to resolve debt owed to external private creditors. The debt exchange undertaken by the government in 2016 had resolved the bulk of arrears to private creditors,46 F47 but the program started with a residual amount of US$1.2 billion in principal, or about US$3.2 billion including accrued interest. The program was therefore subject to the IMF’s LIA policy, which requires financing assurances at each review and assessment of efforts by the government to solve the arrears.48 Throughout the program, the IMF judged that the authorities were making good-faith efforts, allowing the program to move forward. Some payments to holdout creditors were made during the program—for example, to Japanese intermediary banks.49 There was also a smaller arrear to an official bilateral creditor in regard to which the program proceeded on a non-objection basis.49 F50

E. Technical Program Design

The technical design of program conditions was consistent with Fund practices, which inter alia allowed appropriate targeting in support of program policies to accommodate “ownership.” Relatively few structural benchmarks to support reforms were used, and these generally involved measures of narrow scope and durability.

53. To help convey ownership, the program made limited use of prior actions. At the time of the SBA approval, there were no prior actions. However, two measures—announcement of the program primary balance target and communication to formally adopt program inflation targets— would have met the test for prior actions but were not proposed as such because they had already been taken prior to the start of the SBA negotiations. Later, the program included three prior actions, two in the context of the First Review and one in the context of the Second Review (Annex III). In addition, the program included several structural benchmarks (Box 5 and Annex V).

54. The program conditions were generally observed. During the program, all of the three prior actions were met, while seven out of ten structural benchmarks were met (three with a delay). After the First Review and revamp of the program, all performance criteria were met, except for the end-December 2018 NDA ceiling (Annex IV). That said, the initial fiscal balance targets were not met through a recovery in revenues as envisaged but rather via an inflation-induced reduction in wages and pensions, subsidy cuts, and a squeeze in current discretionary spending. Also, the design of the formal monetary policy conditionality did not prevent ad hoc policy implementation that undermined the achievements of the inflation target.

55. The specification of monetary policy conditionality was unusual, but justified on safeguards grounds. Conditionality on monetary policy has generally taken the form of quantitative targets, such as ceilings on net domestic assets and base money. In keeping with other programs featuring inflation targeting frameworks, the 2018 SBA initially applied an Inflation Consultation Clause (ICC). However, Fund policies stipulate that an ICC is appropriate only in cases in which, inter alia, the central bank has a track record of commitment to low inflation, inflation expectations are well anchored and the transmission mechanism from interest rates to prices is well understood. The addition of an NDA ceiling in the context of the inflation targeting regime, while uncommon, was deemed warranted in the case of Argentina as a safeguard given the fragility of the IT regime. The interest rate commitments in the LOI were intended to further underpin the monetary policy frameworks.

56. The perimeter of fiscal policy was narrow. The program covered only central government debt, whereas the finances of the provinces are a long-standing issue in Argentina. Although provincial debt was low at the start of the program (at about 6 percent of GDP), provincial FX-denominated debt rose during the program period, posing risks to external debt service capacity and to contingent central government liabilities. Moreover, sterilization needs increased quasi-fiscal costs, suggesting that a consolidated approach that included the central bank could have given more credibility to fiscal and monetary policy.

Assessment

The assessment set out below benefits from hindsight. The policy options and decisions may have looked different ex ante, when they had to be considered in the face of great and shifting uncertainties. The structural characteristics of the Argentine economy and the domestic political constraints on the program, taken together, severely limited the range of policy options available. And even in hindsight, not all conclusions regarding policy choices are clear cut. Following the Guidance Note on Ex-Post Evaluations, the discussion focuses on economic policy design and application of internal Fund policies, rather than on decision-making processes.

57. The crisis and the outcome of the Argentina SBA are familiar. An assessment of the 2001–2002 Argentina crisis and program concluded that the “crisis stemmed from a combination of fragility in balance sheets and the inability to mount an effective policy response. In Argentina, the critical fragility was in public sector debt dynamics, which were made explosive by the effects of a prolonged economic slump and the difficulties in rolling over debt. The inability to mount a policy response stemmed from a combination of economic constraints and political factors.”5 51 Despite this experience, strengthened analytical toolkits, reforms to access criteria, and reviews of program conditionality, the 2018 SBA proceeded and foundered. This raises questions: Did the IMF diagnose the problem correctly? Was the program well designed? Why was the program not successful? What could have been done to improve the program? And were IMF procedures followed properly?

A. Did the IMF Diagnose the Problem Correctly?

58. The Fund had highlighted Argentina’s vulnerabilities before the program, but took as given the administration’s decision to open the capital account and pursue inflation targeting. The Article IV consultation reports in 2016 and 2017 emphasized the underlying problems of unsustainable public finances and a weak supply side. The pivotal role of the exchange rate in the highly dollarized economy was noted, as were the challenges of reigning in inflation. In retrospect, it is clearer that the combination of a swift opening of the capital account, fiscal gradualism, and limited structural reforms led to a widening current account deficit and debt build-up while failing to boost investment and capacity, thus leaving the economy vulnerable to a sudden stop.52 Policies could have been devised to slow inflows, but the administration was committed to an open capital account. The 2017 Article IV consultation report took the overall policy strategy as given while warning that not enough was being done to address macroeconomic imbalances, and presciently noted the dangers of a repricing of sovereign risk. 53

59. The program’s diagnosis of a temporary liquidity shock was not unreasonable at first, but became less tenable as the program proceeded. The stop in May 2018 was clearly sudden and at first appeared to be confined to the LEBACs. Moreover, it was not unreasonable at the time to conclude that Argentina had been hit by a common global repricing of risk. But the Argentine economy was burdened by long-standing fiscal weaknesses and riddled with distortions, and it was well understood that liquidity stresses can rapidly generate solvency problems when such economies experience sudden stops.53 F54 The diagnosis of a temporary liquidity crisis continued to frame the analysis and policy choices in each of the four program reviews, perhaps hindering a more fundamental reassessment of the program after the changes made at the First Review.5 55

B. Was the Program Well Designed?

60. The program design followed the initial diagnosis of the problem. The program aimed to restore market confidence by closing the fiscal deficit, reducing inflation, and increasing reserves. The goal was to achieve sufficient adjustment to eliminate imbalances while not incurring a sharp downturn—to this end, the assumption that the underlying problem was a temporary liquidity shock was felt to justify holding back on more ambitious macroeconomic adjustment and deferring structural measures. It also reflected a belief that a large financing arrangement would catalyze a return to market access sufficient to meet rollover needs. This did not happen, and pressures on the exchange rate continued. Interest rates did not fall as anticipated but instead increased significantly, as the assumed path of the exchange rate and inflation proved untenable in the face of diminishing market access. The quality of the fiscal measures was poor, falling short of the fundamental public sector reforms called for. In part, this reflected policy redlines and poor implementation of agreed policies, and the challenging structure of debt, but also that the program was intrinsically fragile owing to the structure of Argentina’s economy and its politics.

61. The program’s attempts to protect the vulnerable proved insufficient as the crisis unfolded. Focusing on social protection was the right thing to do per se, and mitigating inequality was also intended to underpin growth and impart political robustness to the program. Although the program targets on social spending were met, cuts in other spending and subsidies affected the public perception of the program. Even more important, the recession and the failure to bring down inflation as targeted sharply reduced living standards and eroded popular support for the program.

62. The size, phasing and precautionary nature of Fund financing generated challenges. While in line with the projected financing needs, the unprecedented size of the arrangement caused surprise, signaling to some that the crisis was more severe than previously understood; raised unusual financial, operational, and reputational risks to the Fund; and possibly suppressed the catalytic effect by introducing a large share of senior financing that would imply sizeable haircuts on private creditors in the event of default. The original plan to disburse US$15 billion upfront and keep the remaining access of US$35 billion as precautionary was intended to show strength; instead, markets were concerned that the government did not in reality have access to the precautionary financing, and the authorities’ communications may have added to confusion about the availability of Fund resources.

C. Why Was the Program Not Successful?

63. The program was fragile from the outset, with the structure of the Argentine economy limiting the policy choices available. The fundamental problem was a lack of confidence in fiscal and external sustainability. But restoring confidence on a lasting basis would require not merely bringing public and external finances to balance but also demonstrating that this would be sustained. This may have been beyond what could have been achieved even under the best of circumstances, given the country’s deep-seated challenges, but more so with general elections only 16 months ahead when the program was approved. In addition, the underlying structural problems facing Argentina—notably dollarization, feeble monetary policy transmission, a narrow export base, and very limited capacity for the state to borrow domestically, especially in pesos—meant that focusing on one problem risked worsening another. For instance, letting the exchange rate go would raise the peso value of debt and hit real incomes, while exports would not respond very much. Alternatively, trying to defend the exchange rate would raise concerns about burning through reserves (and, ultimately, the exposure of the sovereign to the balance sheet of the central bank). Finally, domestic and foreign investors were alert to Argentina’s history of crises, making them notably quick to switch from buying a 100-year bond to withdrawing their funds.

64. The fragility was compounded by political constraints on policy design and by interaction between politics and market confidence. The administration’s redlines removed policy options that could have improved the chance of success. The IMF deferred to the authorities’ growth assumptions—more realistic growth projections, although they were to come at the First Review, may have benefited discussions over program strategy and design. Crucially, the risks of sharper depreciation—and the consequences for inflation and debt servicing—were not adequately factored into alternative projections and contingency planning at an early stage. The nascent inflation targeting framework was initially retained, even though the preconditions for success were not in place. The program did not envisage broader structural reforms (consistent also with the view that the immediate problem was primarily a short-term liquidity shock) and accommodated low-quality fiscal measures. Debt reprofiling and CFMs were off the table. The Fund wanted to avoid excessive fiscal austerity, but completely eschewing budget cuts would have required taking Argentina out of the market for an extended period and providing support multiples higher than the record access provided. Despite the clear understanding of previous experiences, and in the absence of policy alternatives (debt reprofiling and CFMs), the program ended up with a procyclical policy stance, arguably worsening capital flight rather than boosting confidence. The political space became narrower as the program proceeded and the elections came closer, interacting with market sentiment.

D. What Could Have Been Done to Improve the Program?

65. The revisions to the strategy adopted at the time of the First Review in October 2018 raised the chances of success. In particular, the revised strategy simplified and clarified the objectives, notably of monetary policy, which should have facilitated communication, and was combined with a fully disbursing program with augmented access. Indeed, the redesign was followed by tentative signs of revived confidence, although modest against the losses of the previous 10 months. However, the economy was weaker by the time of the First Review—notably, the debt sustainability assessment had deteriorated markedly—making the program even more vulnerable to implementation errors and shifts in market sentiment, both of which happened. Moreover, financing needs had increased and, in the absence of burden sharing by official creditors other than the Fund, meeting those needs relied ever more on domestic issuances and shorter maturities.

66. With limited policy space available through conventional measures, a debt operation combined with reintroduction of CFMs could have made the strategy more robust. The scope for effective fiscal and monetary policy measures was curtailed by structural characteristics of the economy and political economy constraints. Whether a more ambitious fiscal adjustment would have boosted market confidence is uncertain, given the scale of fiscal adjustment that would have been needed to offset the effects of exchange rate depreciation on the domestic-currency value of debt. The program could have pushed harder on structural reforms, but this would have tested the limits of the administration’s political space, and with payoffs only well after general elections. While allowing more foreign exchange intervention could in principle have stemmed depreciation and hence inflation, it is not clear that international reserves were sufficient; any doubts would have accelerated capital flight. The rapid shifts in market sentiment towards Argentina highlight the country’s vulnerability to capital flows. Given these constraints, it could have been better to undertake a debt operation at an early stage—combined with CFMs—to extend maturities and lower repayments. Although the outcomes are impossible to state with certainty, this step could have taken pressure off the exchange rate, allowing room for lower interest rates and more growth-friendly fiscal policy, and delivered a safer and more robust program.

67. Agreeing with the authorities on a contingency plan early on could have reduced risks, but in practice proved very difficult to achieve. As recommended in reviews of earlier Fund-supported programs with Argentina and other countries, such a plan should include specific triggers and defined actions, such as debt operations and CFMs, when developments suggest that the program is off track. It would also signal upfront that the IMF might face the decision of not continuing to finance a program. However, in the case of the 2018 SBA such a plan would have run counter to the administration’s basic economic strategy. Moreover, public disclosure of contingencies could itself have worsened the crisis. The Fund may have stayed with the original strategy for too long; alternative plans were being formulated beginning in the immediate aftermath of the SBA approval in June 2018, but staff agreement with the authorities on the broad outlines of a contingency plan was reached only at the time of the Fourth Review in July 2019.

68. More consistent communication led by the authorities might have boosted the catalytic effect of the program. The Fund’s terminology that debt was sustainable “but not with high probability” might initially have undermined confidence. In the first phase of the program, ad hoc high-level political statements and lingering uncertainties about exchange rate policy may have prevented confidence from taking root. Confusion surrounded the precautionary nature of the SBA and what it meant for the availability of Fund financing, which may have undermined the catalytic effect of the SBA.

69. Closer Fund relations with Argentina in the period before the program could have improved program design and external communication. There had been a ten-year hiatus in Article IV consultations, ending only in 2016. Moreover, the resident representative office in Buenos Aires was opened in 2018, after a gap of five years and after the SBA had been requested. In principle—and as seen in practice in many member countries—an IMF office could have boosted the Fund’s understanding of market developments and political realities and the authorities’ understanding of IMF policies and procedures. Also lacking was regular technical assistance, which may have improved the dialogue. All this would of course have required a two-way commitment.

E. Were Fund Procedures Followed Properly?

70. Program conditionality covered the appropriate areas to support the program strategy. Prior actions and structural benchmarks were fewer than usual but well focused. The technical specifications of program conditionality were generally aligned with, and well directed towards, the intermediate policy targets.

71. The updated Exceptional Access Framework was followed, but its application was not straightforward. The SBA with Argentina was the first test of the revised EAF adopted in 2016. It was clear that the balance of payments need criterion was met, but applying the other three criteria—on debt sustainability, market access, and capacity to implement the program—came down to finely balanced judgments. The revised EAF provides flexibility in assessing debt sustainability in “gray zone” cases—albeit limited to cases in which allowing more time would likely improve debt and macroeconomic outcomes, and with the explicit recognition that debt reprofiling might still be needed. In practice, the technical tools used to assess debt sustainability proved sensitive to small variations in assumptions, including those for the exchange rate.5 56 Optimistic macroeconomic projections may also have hindered a robust evaluation of debt sustainability. Once Argentina’s debt was assessed to be “sustainable but not with high probability” and a debt reprofiling was ruled out, the assessment of the exceptional access criterion hinged, in significant part, on whether the government could be deemed to have market access. The general principles for assessing market access have been established, but are not categorical and acknowledge the need for judgment.57 In this case, the assessment of whether market access was retained was skewed towards the ability to issue some form of debt. In hindsight, the ability to access capital markets was not sustained consistently, across a range of maturities, suggesting that the application of the criterion could have been more stringent.57 F58 Argentina’s institutional and political capacity to implement the program also proved hard to assess with precision; in hindsight, perhaps given the wish for ownership and the decade-long pause in relations with the IMF, the assessment may have been too generous. In any event, putting in place convincing political assurances during the election period proved difficult; indicating that such accords, especially in a polarized environment, would be more effective before or at the start of a program, the political calendar permitting.

72. Standard procedures to assess risks to the IMF were followed, but broader risks could have featured more prominently in the deliberations. Traditional program risks were spelled out clearly in the staff reports for the SBA Request and all subsequent reviews. Financial risks were detailed in the staff supplements for the SBA Request and First Review, although the message in the main reports may have been diluted by the bottom-line capacity to repay assessment of “adequate (but subject to risks).” Importantly, the heightened financial risks did not elicit mitigation actions in terms of program design. Additionally, some other types of risks seem not to have been taken fully into account. Not supporting Argentina once the program request had been made public carried risks, but so too did the negotiation of the program under extreme time pressure. Reputational risks were high: the desire to agree on a program and the emphasis on ownership constrained the program design options from the outset. Most fundamentally, the experience highlights that the Fund may trigger a full-blown crisis or contagion by exiting a program, and decisions at each review may be constrained by these exit costs.

General Lessons

73. The experiences under the Fund’s 2018 SBA with Argentina underscore several lessons from earlier EM programs, and also suggest new ones. The program was designed to deal with a situation that shared characteristics with the EM crises of the late 1990s and early 2000s. Lessons for the Fund from those crises have been drawn, broadly and for Argentina itself (including in the 2004 IEO report and the 2006 EPE/EPA on Argentina; Appendices II and III). The 2018 Review of Conditionality (IMF, 2019c) also highlighted lessons from IMF programs that are germane to Argentina’s 2018 SBA, such as avoiding overly optimistic macroeconomic assumptions, ensuring the quality of policy measures, the imperative of confronting debt sustainability issues earlier rather than later, and the need for contingency planning (a point also made in the 2020 Risk Report; see IMF 2020a). In hindsight, the experience of the 2018 SBA highlights the importance of:

  • i. Ensuring robustness of the program by using conservative baseline assumptions and testing the sensitivity to alternative assumptions and explanations of the crisis. Basing programs on conservative yet plausible macroeconomic assumptions, coupled with scenario analysis, would help make programs robust to policy slippages and exogenous shocks. Programs need to be guarded against assumptions of unrealistic returns from reforms. Robustness is especially important when the political backdrop is uncertain and program success depends on catalytic effects on market financing. In such cases, upfront agreement on contingency plans is desirable.

  • ii. Tailoring programs to country circumstances, even if that means embracing unconventional measures when the policy space offered by traditional policies is limited. The idiosyncrasies and specific challenges of each country need to feature centrally in program design, which might imply embracing unconventional policies when circumstances are not “textbook,” as is the case in many emerging market contexts. For instance, the Argentina program might have been more solid had it featured CFMs.

  • iii. Sharpening the application of the Exceptional Access Framework. The 2016 EAF helped focus attention on the right issues and provided the basis for a flexible approach, as intended. However, its implementation was not straightforward, particularly as regards EAC2 and EAC4. Exceptional access cases inevitably involve technical judgments, especially given the uncertainties and rapidly shifting sentiment characterizing a crisis environment. The experience of the 2018 SBA highlights the importance of laying out the analysis and risks underlying key judgments as fully and broadly as possible when applying the EAF. In particular, the consistency and depth of market access, across a wide range of maturities and at sustainable yields, may be crucial to the assessment of EAC2. The experience of the 2018 SBA also highlights the need for rigorous analysis of the adequacy of non-Fund debt obligations in assessing safeguards to Fund resources. To support the implementation of the EAF in future exceptional access cases, the improvements in the DSA framework could be helpful, as would a thorough and systematic analysis of market access prospects. The Fund could also consider how to assess more robustly country authorities’ political and institutional capacity to implement programs (EAC4). Regardless of the specific formulation of the EAF criteria, however, the Fund’s assessment will inevitably rely on judgment. When applying the EAF, the Fund will therefore need to pay due regard to the spirit and objectives of the exceptional access policy, rather than focusing narrowly on technical and procedural requirements, both when deciding whether or not to enter into an arrangement and complete program reviews.

  • iv. Carefully balancing government ownership against the quality and appropriateness of program policies and risks to the Fund’s reputation. Ownership of a program by the authorities is crucial for success. A well-designed program needs to be based on a shared understanding with the Fund of policy priorities and strategies; Fund surveillance well integrated with its capacity development assistance and an IMF resident representative based in the country have important roles to play in this regard. The Fund should question political “redlines” that would compromise program objectives—enhancing ownership should not be understood as a willingness to defer to country authorities’ preference for suboptimal policy choices, which ultimately may not be consistent with the principles of uniformity of treatment.59 This will, in cases, require efforts by the Fund to expand the political space to encompass a broader range of policy options. In particular, ownership should be understood in a broader societal sense, especially when authorities have fragile political support.

  • v. Ensuring effective external communication, so that a program is well understood by the population and in financial markets and has the intended catalytic effect. In the case of the Argentina SBA, Fund staff redoubled their efforts to ensure consistent external communication between the Fund and the authorities. However, country authorities need to play the central role in communicating their program, which calls for a close policy dialogue also in normal times. That said, communication is no substitute for sound program design; fundamentals will eventually assert themselves.

  • vi. Revisiting the Fund’s internal processes for assessment and mitigation of broader risks associated with exceptional access arrangements. The staff reports for the Argentina SBA were candid about “traditional” risks to program objectives and Fund finances. But existing procedures did not provide for a broader assessment of risks to the Fund. More transparency about the risk tradeoffs made at each stage of the decision-making process within the institution is important, and would serve to mitigate the risks stemming from the flexibility provided under the EAF. The risk assessment framework for exceptional access arrangements could also give financial and liquidity risks a more prominent role in program design, possibly under a revised and more structured framework. The approach to assessing financial risks and the capacity to repay could be strengthened, with a comprehensive review of the aggregate impact on the Fund’s financial risk profile. In general, the goal would be to bring sufficient information to the Board to facilitate a robust discussion of program assumptions and alternative policy strategies in response to shocks, before a program is approved. Risk management could also be improved by use of contingency plans that define triggers and actions in the event of a shock that could derail the program. That said, as the Argentina experience highlights, since such a plan in its nature might run counter to the basic strategy of the program, it could be hard to convince country authorities; such plans are also highly market sensitive.

  • vii. Considering the broader implications for the international financial safety net. The experience underscores the need for the Fund to take a stand on burden sharing when entering into exceptional access arrangements—being the largest and most senior creditor to a relatively large country is both exceptionally risky to the IMF and potentially self-defeating to the basic purpose of catalyzing a return to market access. (See also IMF, 2020a.) This in turn raises important questions on when the IMF should be prepared to “pull the plug” on programs whose objectives can no longer realistically be met within the existing financing envelope or not enter into programs from the outset.

Annex I. History of Fund-Supported Programs

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Annex II. Debt Sustainability Analysis Heat Maps During the 2018 SBA

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Source: IMF staff.

The cell is highlighted in green if debt burden benchmark of 70% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

The cell is highlighted in green if gross financing needs benchmark of 15% is not exceeded under the specific shock or baseline, yellow if exceeded under specific shock but not baseline, red if benchmark is exceeded under baseline, white if stress test is not relevant.

The cell is highlighted in green if country value is less than the lower risk-assessment benchmark, red if country value exceeds the upper risk-assessment benchmark, yellow if country value is between the lower and upper risk-assessment benchmarks. If data are unavailable or indicator is not relevant, cell is white. Lower and upper risk-assessment benchmarks are: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for the public debt held by non-residents; and 20 and 60 percent for the share of foreign-currency denominated debt.

Annex III. Application of Exceptional Access Framework under 2018 SBA1/2/

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Annex IV. Performance Criteria under the 2018 SBA 1/ 2/

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**The ceiling in the change in NDA of the Central Bank is set as a QPC starting in the First Review. Prior to that, as complement to the Inflation Consultation Clause, if net domestic assets of the central bank were to exceed the thresholds established in the program, the clause would be triggered, requiring a consultation with the Executive Board on the authorities’ proposed policy response before being eligible for further purchases under the program.

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

Based on program ex change rates defined in the TMU.

Cumulative flows from January 1 through December 31.

Continuous performance criterion.

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

In billions of U.S. dollars. See Quantitative Performance Criteria Table (Staff Report Program Request-Fourth Review) for the reference of each review.

See Quantitative Performance Criteria Table (Staff Report Program Request-Fourth Review) for the reference of each review.

Targets subject to adjustors as defined in the TMU.

Increases reflect IMF disbursements, which increase NIR.