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IMF Country Report No. 22/322

ARGENTINA

October 2022

SECOND REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, REQUESTS FOR WAIVERS OF APPLICABILITY AND NONOBSERVANCE OF PERFORMANCE CRITERIA, MODIFICATION OF PERFORMANCE CRITERIA, AND FINANCING ASSURANCES REVIEW—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR ARGENTINA

In the context of the Second Review Under the Extended Arrangement Under the Extended Fund Facility, Requests for Waivers of Applicability and Nonobservance of Performance Criteria, Modification of Performance Criteria, and Financing Assurances Review, the following documents have been released and are included in this package:

• A Press Release including a statement by the Chair of the Executive Board.

• The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on October 7, 2022, following discussions that ended on September 2022 with the officials of Argentina on economic developments and policies underpinning the IMF arrangement under the Extended Fund Facility. Based on information available at the time of these discussions, the staff report was completed on September 26, 2022.

• A Staff Supplement updating information on recent developments.

• A Statement by the Executive Director for Argentina.

The documents listed below have been or will be separately released:

Letter of Intent sent to the IMF by the authorities of Argentina*

Memorandum of Economic and Financial Policies by the authorities of Argentina* Technical Memorandum of Understanding*

*Also included in Staff Report

The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.

© 2022 International Monetary Fund

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Press Release

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PRESS RELEASE

PR 22/344

IMF Executive Board Completes Second Review of the Extended Arrangement Under the Extended Fund Facility for Argentina

FOR IMMEDIATE RELEASE

• The Executive Board of the International Monetary Fund completed today the second review of Argentina’s 30-month EFF arrangement, allowing for an immediate disbursement of about US$ 3.8 billion.

• Decisive actions by the new economic team have been critical to stabilizing markets and to begin rebuilding confidence.

• Relevant end-September quantitative program targets were met, including for net international reserves and monetary financing of the fiscal deficit.

• In the context of a more challenging global backdrop and ongoing domestic risks, steadfast and continued program policy implementation going forward will be critical to achieve program objectives, entrench stability, and secure sustained and inclusive growth.

Washington, DC – October 7, 2022: The Executive Board of the International Monetary Fund (IMF) completed today the second review of the extended arrangement under the Extended Fund Facility (EFF) for Argentina. The Board’s decision enables an immediate disbursement of SDR 3 billion (about US$3.8 billion), bringing total disbursements under the arrangement to about US$17.5 billion.

In completing the review, the Executive Board assessed that recent decisive actions were critical to stabilizing markets, rebuilding confidence, and to secure key quantitative targets, including the end-September floor f or net international reserves and ceiling on monetary financing of the fiscal deficit. The Board also approved waivers of non-observance for the continuous performance criteria relating to exchange restrictions and multiple currency practices.¹

Argentina’s 30-month EFF arrangement, with access of SDR 31.914 billion (equivalent to US$44 billion, or about 1000 percent of quota), was approved on March 25, 2022 (see Press Release No. 22/89). The authorities’ IMF-supported program provides Argentina with balance of payments and budget support that is linked to the steadfast continued implementation of program polices aimed at strengthening public finances, tackling persistent high inflation, boosting reserve accumulation, and setting the basis for sustained and inclusive economic growth.

Following the Executive Board discussion on Argentina, Ms. Kristalina Georgieva, Managing Director, issued the following statement:

“In response to the market disruptions of mid-2022, Argentina’s new economic team adopted decisive corrective measures that are starting to restore confidence and policy credibility. Prudent macroeconomic policies and steadfast program implementation will be needed to address the still fragile situation, strengthen stability, and deliver the objectives of the authorities’ Fund-supported program, which remains a key macroeconomic anchor.

“Achieving the fiscal primary deficit targets of 2.5 percent of GDP in 2022 and 1.9 percent of GDP in 2023 is critical to moderate import growth, accumulate reserves, strengthen debt sustainability, and further reduce reliance on central bank financing of the deficit. This will require further strengthened expenditure controls and increased efficiency of subsidies and social spending, which in turn would create space for critical energy infrastructure projects and targeted assistance to the vulnerable.

“Continued resolute implementation of the monetary policy framework is essential to sustain positive real interest rates and tackle the persistent high inflation. Doing so will also encourage demand for peso assets, increase external competitiveness, and boost reserves. While targeted FX measures can temporarily support the balance of payments, they are not a substitute for sound macroeconomic policy. As such, exchange restrictions and multiple currency practices should be unwound as conditions permit and reserve coverage strengthens.

“A proactive debt management approach, coupled with prudent macroeconomic policies, remains necessary to mobilize domestic peso financing while mitigating rollover risks. Continued good faith efforts, on all sides, are also needed to secure a successful restructuring of Paris Club debt. Ensuring that international partners deliver on financing commitments is also critical to support key program objectives.

“The structural reform agenda remains critical to address deep-seated economic challenges. Continued progress is needed to strengthen public financial management, monetary transmission and central bank finances, as well as the frameworks to combat tax evasion and money laundering. Similarly, strong and stable regulatory frameworks can help boost Argentina’s export potential in key sectors, including energy.

“Amid the challenging global environment and ongoing domestic risks, resolute implementation of the program and agile policy making are critical to meet objectives and secure stability. Broad political support for the program’s policies remains essential in the period ahead.”

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ARGENTINA

SECOND REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, REQUESTS FOR WAIVERS OF APPLICABILITY AND NONOBSERVANCE OF PERFORMANCE CRITERIA, MODIFICATION OF PERFORMANCE CRITERIA, AND FINANCING ASSURANCES REVIEW

September 26, 2022

EXECUTIVE SUMMARY

Context. Episodes of domestic policy uncertainty and acute market pressures in mid-2022, coupled with a more challenging global environment, necessitated firmer program implementation and stronger policy reaction to ensure macroeconomic stability, rebuild policy credibility, and safeguard program objectives. Initial decisive actions and strengthened commitments by the new economic team since early-August have started to stabilized markets, although the situation is fragile as reserve coverage remains low while inflation is unanchored and stands at multi-year highs. The review discussions focused on assessing recent progress, updating the macroeconomic framework, and reaching understandings on a solid policy package to durably restore stability and achieve the program objectives.

Program performance. Most end-June quantitative program targets were met, with the exception of the floor on net international reserves, which was missed on account of higher-than-programmed import volume growth and delays in external official support. However, inflation has been substantially higher than projected and policy setbacks and uncertainties resulted in a period of market stress, which in turn contributed to a non-observance in the continuous performance criteria related to exchange restrictions and multiple currency practices. That said, corrective actions are underway to ensure that program objectives can be durably met, and progress continues to be made in meeting structural benchmarks; although revisions to the timeline will be required given recent cabinet changes, and the need to incorporate technical assistance recommendations in key areas, including revenue compliance and energy policy. Updates of the end-September performance criteria, which govern this review, will be reported on in a Staff Supplement.

Program risks. Program risks remain very elevated. The global outlook is subject to significant downside risks, including from a protracted war in Ukraine, stronger-than-anticipated tightening in global financial conditions, and a sudden reversal in the terms of trade. In addition, while renewed commitments and recent policy actions are positive, implementation risks remain elevated given the very complex economic, social and political situation, especially as the October 2023 Presidential Elections draw closer. Rebuilding policy credibility will take time, consistent effort, and strong political support. Contingency planning and the agile adjustment of policies will be essential to safeguard macroeconomic stability and to ensure that program objectives are met. The Fund continues to face significant enterprise risks.

Policy recommendations. More decisive program implementation remains essential to reduce uncertainties, rebuild policy credibility and maintain the program as an anchor. Tight macroeconomic policies are not only necessary to secure key program targets, but also to gradually moderate domestic demand, tackle high persistent inflation, and avoid a disorderly adjustment. Fiscal consolidation will require improved budget management, along with policies to improve the targeting of subsidies (energy, transport, and water) and social assistance, while protecting key infrastructure investments. More consistent and resolute application of the enhanced monetary and FX policy framework is needed to deliver sustained positive real interest rates, supporting a gradual moderation in inflation, increasing demand for peso assets, and reducing reliance on central bank financing. In parallel, efforts should continue to mobilize support from multilateral and bilateral partners and to reach agreement with Paris Club creditors. Stronger efforts are also needed on the structural agenda to strengthen public financial management, frameworks to combat tax evasion and money laundering (supported by international exchange of information agreements), and the net export potential of strategic sectors. Since exchange restrictions and multiple currency practices are no substitute for addressing underlying macroeconomic imbalances, a gradual easing of these restrictions should be sought as conditions permit.

Program requests/commitments. The program’s key objectives—related to the primary fiscal deficit, monetary financing of the deficit, and net international reserves—remain unchanged over the period 2022 to 2023. Modification of near-term quarterly targets is being proposed, reflecting higher than programmed inflation (in the case of the primary fiscal balance, monetary financing of the fiscal deficit, and the stock of domestic arrears), and earlier setbacks (in the case of net international reserves). The authorities also request completion of the financing assurances review and approval of the exchange restrictions and multiple currency practices under Article VIII sections 2 and 3. The program also proposes new and modified structural benchmarks.

Approved By

Ilan Goldfajn, Luis Cubeddu (both WHD), Ceyla Pazarbasioglu, Andrea Schaechter (both SPR)

Contents

• CONTEXT

• RECENT DEVELOPMENTS

• PROGRAM PERFORMANCE

• MACROECONOMIC OUTLOOK AND RISKS

• POLICY DISCUSSION

• A. Fiscal Policies

• B. Financing Strategy

• C. Monetary and Exchange Rate Policies

• D. Other Structural Policies

• PROGRAM ISSUES

• EXCEPTIONAL ACCESS

• STAFF APPRAISAL

• BOXES

• 1. Trade Balance Developments, January–August 2022

• 2. Energy Subsidy Segmentation Scheme

• 3. Domestic Bond Market Developments and Challenges

• FIGURES

• 1. Recent Financial Market Developments

• 2. Economic Activity and the Trade Balance Developments

• 3. Fiscal and Financing Developments

• 4. Inflation and Monetary Developments

• 5. Banking Sector Developments

• 6. Performance Relative Key Program Targets

• TABLES

• 1. Selected Economic and Financial Indicators, 2020–2027

• 2. External Balance of Payments, 2020–2027

• 3a. Federal Government Operations, 2020–2027 (In Billions of Argentine Pesos)

• 3b. Federal Government Operations, 2020–2027 (In Percent of GDP)

• 4. General Government Operations, 2020–2027

• 5a. Summary Operations of Central Bank, 2020–2027

• 5b. Summary Operations of the Banking Sector, 2020–2027

• 6. Summary Public and External Debt, 2020–2027

• 7. Federal Government Gross Financing Needs and Sources, 2020–2027

• 8. External (Residency) Gross Financing Needs and Sources, 2021–2027

• 9. Federal Government Debt by Creditor, 2015–2022

• 10. International Investment Position, 2017–2021

• 11. Financial Soundness Indicators, 2015–2022

• 12. Indicators of Fund Credit, 2022–2032

• 13. Schedule of Reviews and Purchases

• ANNEXES

• I. Application of the Sovereign Risk and Debt Sustainability Framework

• II. Update of Foreign Exchange Regime as it Applies to Exchange Restrictions and Multiple Currency Practices

• APPENDIX

• I. Letter of Intent

• Attachment I. Memorandum of Economic and Financial Policies Update

• Attachment II. Technical Memorandum of Understanding Update