Abstract
On behalf of the Argentinean authorities, we thank Mr. Cubeddu and the entire IMF mission team for the constructive and in-depth policy dialogue and engagement facilitating the process to reach a staff-level agreement and for the staff report on the Second Review of the Extended Fund Facility for Argentina.
On behalf of the Argentinean authorities, we thank Mr. Cubeddu and the entire IMF mission team for the constructive and in-depth policy dialogue and engagement facilitating the process to reach a staff-level agreement and for the staff report on the Second Review of the Extended Fund Facility for Argentina.
We would like to highlight that a new economic team took office in early August, amid a global and local context of uncertainty. This team, headed by Sergio Massa -the head of one of the three components of the ruling coalition, and former Speaker of the House of Representatives-, brought about a greater sense of ownership, and enhanced implementation capabilities. This is due to, on the one hand, a greater concentration of areas, coupled with a more in-depth coordination with the Central Bank, and on the other hand, by a greater political unity of purpose regarding the key policies of the Program.
The new team is staunchly committed to its vision for the future, which can be captured in four basic pillars: fiscal sustainability, reserve accumulation, promotion of exports (in particular, value-added exports), and continued growth with social inclusion. Along that vein, we also envision, while fostering and preserving general growth, the furthering of key economic sectors such as: the knowledge economy, energy, mining, and agro-industry.
To be clear, our economic team is convinced that the Program policies are an anker in themselves, not merely performance criteria to be met. They are needed as a key element of Argentina’s prosperity. So much so that, despite slippages, and an increasingly difficult global context, it redoubled efforts and faced challenges that allowed Argentina to stabilize the situation within the framework of the Program.
We want to emphasize that all through even September, all Performance Criteria will be met; the monetary was met already, as well as the reserve accumulation PC. As for the fiscal PC, available preliminary data show that it will be met too. We are, thus, in an auspicious path regarding the tasks going forward.
As we mentioned, notwithstanding an increasingly complex global backdrop, following a period of market turbulence, multi-decade high peaks in inflation, the war in Ukraine, high food and energy prices, and tighter global financial conditions, our authorities are taking bold steps to avoid disorderly adjustment and restore stability, ensuring program implementation and continue tackling Argentina’s challenges. More importantly, despite all the mentioned difficulties and against all odds, the Argentine economy continues to recover, and the program is well on track. There are significant challenges ahead, but our authorities are confident they will be able to take the necessary steps to avoid disorderly adjustments, minimize turbulent market fluctuations and continue to rebuild a strong and resilient economy.
Corrective actions allowed our country to meet the relevant performance criteria, including the primary balance of the federal government, and the ceiling on the central bank financing of the fiscal deficit. Moreover, had there been no war, we estimate our stock of net international reserve to be around US$ 4.9 billion larger. All end-June indicative targets were also met, and our authorities made steady progress in meeting structural benchmarks, although revisions to the timeline will be required.
Going forward, our authorities have taken critical steps to restore fiscal order through improved budget management, including a combination of stricter expenditure controls, enhanced targeting of subsidies, and strengthened revenue compliance. Our authorities have reinforced the implementation of monetary policy, by limiting monetary financing of the fiscal deficit below program levels, while our authorities continue to mobilize domestic and external financing and increasing roll over rates. During September, our authorities built a resilient base of international reserves, through targeted actions aimed at improving the trade balance and catalyzing external support from private and official sources.
These initial actions have been complemented by a more consistent and forceful application of the monetary policy framework to ensure sufficiently positive real interest rates. The 2023 Budget presented to Congress on September 15, represents a key stone for macroeconomic stability, the recompositing of the purchasing power of income and the strengthening of the economy. Our authorities will continue to take the necessary actions to address underlying imbalances and secure more sustainable and inclusive growth.
Program Performance
The program remains well on track, despite the challenging international context. Our authorities remain committed to the program and are taking the necessary steps to meet the incoming targets. The primary fiscal deficit through end-June was ARS 800 billion (1 percent of GDP), roughly ARS 50 billion below the adjusted target, reflecting our efforts to control cash spending. As for the end September targets, while final numbers are not yet available, the greater challenges we face were met by a redoubling of efforts, making us more than comfortably optimistic regarding the meeting of such targets. As for the average quarterly stock of domestic arrears, it remained below target. The social spending indicative target was observed as spending exceeded the established floor on account of efforts to shield the lower-income households from higher inflation, and the real revenues indicative target was somewhat higher than programmed.
Central bank financing of the fiscal deficit was limited to ARS 435 billion (0.54 percent of GDP) through end-June, below the program target of ARS 476 billion (0.6 percent of GDP), thanks to our authorities’ efforts to frontload peso debt issuance in the domestic market. International Reserve accumulation fell US$296 million short of the adjusted program target for end June (reflecting the weaker-than-expected trade balance and delays in budget support from multilateral partners), but it has rebounded remarkably during September; so much so that the target was met. As mentioned above, estimations from the BCRA suggests that, due to the Ukraine war alone, our stock of net international reserves is around US$ 4.9 billion lower than would otherwise have been the case. These deviations on the reserve front grew during June-July, although successful efforts were made to boost net international reserves and mobilize additional official support. The stock of central bank non-deliverable futures narrowed through end-June 2022, remaining well below the program’s ceiling.
All three end-June structural benchmarks were met, including the preparation of an action plan to enhance financial and budget reporting of national public sector entities, the modification of resolutions to set prioritization and selection criteria for investment projects ahead of the 2023 Budget, and the publication of a plan to streamline the reserve requirements system. Given the additional time needed to incorporate IMF technical assistance, the preparation of a plan to strengthen revenue compliance is now expected by end-year.
The Macroeconomic Framework
The Argentine economy continues to recover, and it grew at an annual rate of 6.5 percent during the first semester of 2022, driven by private consumption and investment. The level of real GDP is already 10.3 percent above pre-pandemic levels, and capacity utilization levels stand at multi-year highs, while unemployment fell to its lowest level since 2015, with over 350,000 formal private sector jobs added since end-2020 (seasonally adjusted).
The global and local scenario is far from rosy. Tightening global financial conditions and domestic uncertainties in June/July led to a sharp rise of domestic government bond markets yield, an increase in the gap between the official and parallel exchange rates, and reduced international reserves. Since early August, decisive actions by the new economic team have helped to quickly restore credibility and stability, without significant impacts in activity, employment levels, nor implicating a disorderly exchange rate adjustment. Bond yields are now down, the exchange rate gap has fallen near pre-market pressure levels, and central bank intervention in the secondary government bond market and non-deliverable forward market has started to unwind.
Furthermore, an increase of almost US$5 billion in international reserves in September was the consequence of the successful temporary incentive schemes to increase soy liquidation. Significant challenges remain, mainly associated with the recent price dynamics. Inflation pressures are beginning to moderate although they remain strong. After peaking at 7.4 percent m/m in July, headline inflation fell to 7.0 percent m/m in August as uncertainties weighing on the price formation process began to fade.
Going forward, the key ingredients behind our authorities long-run growth, inflation, and trade balance projections are the growth resilience policies and an adequate level of public capital spending. These policies are instrumental to raise the productivity of the private sector and expand the export base, helping to enlarge our net international reserve position while improving the standard of living of the population and tackling inflationary pressures.
Considering the abovementioned developments, our authorities have updated the baseline macroeconomic framework for 2022 in the following way: growth in 2022 is projected to remain unchanged (relative to program approval) at around 4 percent, and gradually moderate to 2 percent next year (consistent with Argentina’s medium-term growth potential, but still a significant improvement when compared to past performance) on account of weaker global outlook and the ongoing policy tightening.
Inflation is now projected to rise to 95 percent by end-2022, reflecting the spike in global food and energy prices and impact of the recent market turbulence. Inflation is projected to fall gradually during the remainder of the year and into next year, from around 5 percent by end-2022 to 3.5 by end-2023, due to a combination of tighter fiscal policies, sufficiently positive real monetary policy rates, reduced monetary financing, improved wage-price coordination, and lower global commodity prices.
The trade surplus is projected to fall to 1.2 percent of GDP (from 3.1 percent of GDP in 2021), reflecting mainly stronger-than-expected import volume growth and less favorable terms of trade (due to higher import prices, including liquefied natural gas and fertilizers). Our end-2022 reserve accumulation target was revised down slightly (US$0.8 billion), although our authorities expect this shortfall to be compensated during 2023 on the back of tighter macroeconomic policies, efforts to increase domestic energy production, and other targeted measures (consistent with a projected rise in the trade surplus to 2.3 percent of GDP in 2023).
Fiscal Policy
Our authorities remain committed to the fiscal path envisaged in the program, and are taking important steps to improve fiscal management, redoubling efforts to meet the 2022 primary deficit target of 2.5 percent of GDP. Efforts are underway to implement the required policy package to compensate for higher energy subsidies and social assistance spending (both needed to counterbalance the effects of the war in Ukraine), while aiming to maintain public capital spending as much as possible. Securing adequate levels of public capital spending, as well as an efficient execution, is of the utmost importance to ensure that growth proceeds at sufficiently fast pace, which is critical for program success. Moreover, in the medium and long run it is clear that there is direct link between infrastructure and capital spending -that help to structurally boost exports-, and the ability of Argentina to accumulate reserves. Our approach is bearing fruit, with real spending having been contracting through September, alongside a significant reduction in domestic arrears.
Our authorities recently advanced payments of income taxes from companies with extraordinary profits related to the global commodity price shock, introduced a temporary export incentive for the soy sector, with positive revenue spillovers, tightened controls to limit monthly accrual spending to cash resources available and prioritize/reallocate expenditures within existing budgetary spending ceilings, by over 0.5 percent of GDP during the year. In addition, our authorities are taking steps to improve the targeting of energy subsidies by expanding the tariff segmentation scheme, capping utility subsidies for middle income consumers for level of consumption above certain thresholds and reducing subsidies for commercial users, raise tariffs on water utilities and public transport and contain the wage bill, by extending the public sector hiring freeze to include public companies and state-owned enterprises.
To cement the budget path, our authorities recently submitted a bill of the 2023 Budget to Congress, consistent with the 1.9 percent of GDP program deficit target. This bill includes a description and the details of the underlying policies needed to deliver the 1.9 percent of GDP primary deficit target for the non-financial public sector on a cash basis. Achievement of the proposed adjustment is largely underpinned by strengthened revenue mobilization efforts, improved targeting in subsidies (0.5 percent of GDP), including on energy, transport and water, the streamlining of social assistance (0.7 percent of GDP) and tighter expenditure controls in key areas. In turn, the wage bill is projected to remain unchanged as a share of GDP, while pension spending will continue to follow the indexation formula.
Congress approved the Fiscal Consensus agreed with 21 provincial governments in mid-September 2022. The Fiscal Consensus proposes a strategic agenda for reviewing the definition of escape clauses, an appraisal of the role of Federal Fiscal Responsibility Council, and a limit on foreign-currency denominated borrowing by provincial governments. In addition, our authorities are working to increase the speed of provincial government fiscal reporting, to ensure timely quarterly and end-year general government reports.
Building on recommendations of the IMF’s Public Investment Management Assessment (PIMA), our authorities are advancing on the development of an action plan to enhance financial and budget reporting of the entities of the national public sector other than the National Administration and to strengthen the monitoring and governance of investment projects. The government recently modified a resolution to improve the prioritization and selection criteria for the public investment projects to be included in the 2023 Budget and recommendations from the recently updated fiscal safeguards review have also been assessed.
Our authorities are intensifying efforts to improve property tax collection and to strengthen the tax and customs administration, drawing on the ongoing IMF Technical Assistance. The plan will be underpinned by institutional policies and guidelines for risk segmentation of taxpayers and foreign trade operators along with a comprehensive compliance gap analysis for key taxes. The new plan includes a new compliance risk management committee and a new risk management unit to be established by end-2022. Our authorities will also thoroughly review tax incentives to both, streamline fiscal performance and ensure that such incentives are aligned with key policies objectives.
Our authorities would also like to emphasize and underscore the importance of tax information exchanges and international cooperation for combating tax evasion and improving fiscal performance; not just in our case, but even more broadly for EMDCs.
Financing Strategy
Our authorities are also implementing an enhanced domestic peso market financing strategy buttress on strengthened commitments to meet the fiscal goals. The development of the domestic capital money and capital markets is a vital component of the macroeconomic framework. In fact, due to a more proactive debt management policy to alleviate pressures and secure additional net peso financing, the financing strategy remains on track. Voluntary debt exchanges successfully pushed around 2.3 percent of GDP of obligations falling due in August-October 2022, into the third quarter of 2023. In the most recent auctions, our authorities have secured rollover rates near 200 percent by offering sufficiently attractive interest rates (above the effective BCRA policy rate), while considering to increase the frequency of short-term issuances. In 2023, our goal is to continue extending maturities to reduce rollover risks, using inflation- and foreign exchange-linked instruments, while relying on fixed-rate instruments playing a role, as conditions allow. In addition, our authorities will seek to accumulate buffers through issuances of LEDES (Treasury short term instruments) and normalize the yield curve through operations in the secondary treasury market. The combination of these efforts will allow us to reduce monetary financing of the fiscal deficit to 0.8 percent in 2022 (below the current program target) and 0.6 percent of GDP in 2023.
Our authorities have finalized an annual borrowing plan, which will be implemented in the fourth quarter of 2022 and thereafter on an ongoing basis. The required work to complete a medium-term debt strategy (MTDS) remains on track and will be completed by end-2022, with Fund technical support. A Committee for the Development of the Capital Markets will be established soon, to bring together public and private actors to study and discuss initiatives to strengthen the local debt market, including proposals to widen the investor universe.
Our authorities have intensified the efforts to secure official (non-IMF) external financing. Total external disbursements in the first half of 2022 reached almost US$800 million, around US$900 million below projections established during the first review. Our government efforts in this area start to bear fruit, and official net financing is expected to pick up and reach US$ 770 million by end-September, and US$ 2,300 million by end-2022, largely reflecting a catch-up in programed budget support. The bulk of net official financing comes from multilateral development banks (US$ 2,200 million) and the remainder from bilateral creditors. Our authorities have resumed the negotiations with the Paris Club and our goal is to reach an agreement in the coming months, based on a repayment schedule that is consistent with our repayment capacity and debt sustainability.
Monetary, Exchange Rate Policies, and Anti-Inflationary Policies
Higher global energy and food prices along with domestic uncertainties have exacerbated the challenge of addressing inflation. Our authorities continue to implement monetary and exchange rate policies to secure sufficiently positive real monetary policy interest rates, which along with efforts to reduce the fiscal deficit, limit monetary financing, and improve wage-price coordination, will gradually reduce inflation. Our authorities stand ready to adapt policies based on the evolution of core inflation, forward-looking measures of inflation, and international reserves dynamics, ensuring that real policy rates stay firmly in positive territory, to guard against further inflationary shocks and keep the quasi-fiscal deficit in check.
Our authorities have raised the nominal annual policy rate by about 2300 basis points terms since end-July, bringing the monthly equivalent policy rate to 6.2 percent. Our authorities have narrowed the interest rate corridor, together with a proactive pricing policy by the Treasury on its recent issuances, helping to align interest rates of peso-denominated assets, improving the monetary policy transmission, and reducing the exchange rate gap.
The rate of crawl of the exchange rate has been adjusted, and it will remain consistent with the evolution of inflation and trading partner currency developments. This is essential to maintain competitiveness and Argentina’s current account surplus, which will be critical to boost reserve accumulation and meet the program targets. Recently introduced temporary export incentive schemes are encouraging exports of stockpiled soy and consideration is being given to measures to contain the widening services deficit and transfer pricing abuse.
Measures that improve the transmission of monetary policy rates to deposit rates are continuing to be implemented, including further raising commercial banks’ deposits floor rates and lending ceiling rates. Since the first review, the BCRA has also developed and published a plan to simplify the reserve requirements regime. The adopted regulations streamline incentives for lending to small and medium-sized enterprises and to consumers, while gradually phasing out a number of special rebates on reserve requirements, with due consideration for the capital and liquidity positions of commercial banks, and an overarching goal of minimizing the impact on the overall liquidity position of the banking system.
The banking system remains liquid and well capitalized, supported by strong oversight. Efforts are underway to support and sustain the development of the secondary market for government securities. To this end, government securities recently purchased by the BCRA in the secondary market, will be used to smooth yield curve volatility. Our authorities will consider a gradual tapering of these holdings, as conditions allow.
In the face of heightened market pressures and reserve losses, capital flow measures have been tightened, including through a broadening of import financing requirements, and additional charges on overseas credit card payments, to avoid a disorderly adjustment that would have jeopardized the program. A recently established working group to analyze CFM restrictions is advancing the preparation of a roadmap. This is expected to be completed by end-June 2023 to enable input from recently requested IMF technical assistance. As conditions permit, and reserve coverage strengthens, steps will be taken to advance gradually to ease these restrictions.
In line with the recommendations of the recently completed IMF Safeguards Assessment, our authorities are working in evaluate the underlying health of the central bank’s balance sheet and discussing the options to strengthen it, based on internationally recognized accounting standards, and supported by IMF technical assistance.
Growth and Resilience Policies
Promoting strategic sectors remains key to program success. Growth and resilience policies are essential to diversify and boost net exports and to solidify the macroeconomic framework. Our authorities are giving special emphasis to policies aimed at improving the efficiency, fairness, and sustainability of the energy sector, as well as building a stronger and more diverse export base.
A critical ingredient in our strategy to spur growth is to foster public capital spending in infrastructure, and the private sector should be a partner. Discussions with relevant stakeholders, including international investors to secure financing, have intensified to increase investment in the hydrocarbon, mining, agro-industry, automotive, hydrogen and biotechnology industries. Our authorities are enhancing the regulatory frameworks in these key sectors, with the aim of boosting the country’s productive and export capacity. Reform efforts in the agricultural and energy sectors are expected to reduce energy-related imports, including by tapping into Argentina’s vast gas and fertilizer production potential. Initiatives will help ease international supply constraints and support global energy and food security, taking into consideration domestic market conditions.
Improving the efficiency of the energy sector is a cornerstone of our strategy to build a resilient economy and contribute to the international supply of traditional and cleaner sources of energy. A top policy priority has been mitigating the impact of the recent increase in global energy prices on the energy subsidy bill, while also ensuring distributional fairness and equity. A key part of our strategy is eliminating subsidies for residential users with the greatest payment capacity. Building on efforts to reduce costly energy imports, our authorities are implementing supply-side measures to increase domestic production and unlock Argentina’s energy export potential. Our arrangements with Bolivia and Brazil will help secure energy supplies during winter and reduce reliance on costly imports of liquefied natural gas.
Our authorities are also advancing with the construction of the Nestor Kirchner gas pipeline, the first and second phases of which are expected to be completed by end-June and end-December 2023, respectively. The pipeline will support an increase in the daily supply of domestically produced gas of 11 million cubic meters (m3), starting in July 2023. To encourage an increase in gas supply for the domestic market and incentivize exports, our authorities will also launch a new Plan Gas, which will extend current production volumes to 2028. Moreover, our authorities have been working on strengthening bilateral agreements with Chile to expand foreign markets. Finally, to underpin the increase in domestic production the objective is to improve the financial position of the sector, including by updating tariff agreements with electricity distributors for the metropolitan region of Buenos Aires next year, and reducing arrears to/from the state-owned electricity dispatch operator.
A decree was issued in June establishing a new residential subsidy segmentation scheme that will eliminate electricity and gas subsidies for residential consumers nationwide with the greatest payment capacity. Implementation of the scheme is supported by a new voluntary database (RASE) of energy consumers who request to keep the energy subsidy and are classified according to socio-economic characteristics.
For 2023, the overall increase in the subsidized reference prices will be capped at 40 percent and 80 percent of growth in the wage index for low- and middle-income consumers, respectively. Middle-income residential consumers will be subject to an additional consumption cap and will pay full cost for electricity use above 400KWh/month (with higher thresholds for some regions without access to natural gas) and gas use above 70 percent of the previous 5-year average for each category of users in the relevant region.
The development of the government’s strategy to improve the efficiency and financial sustainability of the energy sector in the medium term is also advancing. The development of this strategy is supported by the World Bank’s technical assistance. The strategy has a special emphasis on the electricity sector and includes actions to improve energy efficiency for the sector as a whole, support electricity generation cost management, strengthen the electricity distribution and transmission segment, strengthen the recent electricity and gas segmentation scheme, and improve the overall financial sustainability of the sector. Our authorities still expect to publish a draft strategy for consultation with key stakeholders, by the end of the year, along with a plan to improve further the implementation of the segmentation scheme.
Governance and Transparency
Our authorities have made additional progress in strengthening our AML/CFT regime. Our authorities recognize the need to improve governance and transparency, in order to tackle tax avoidance and external assets formation. In consultation with IMF staff, our authorities have prepared a gap analysis of the entire AML/CFT regime compared to Financial Action Task Force 40 Recommendations, the findings of which will be incorporated as necessary into the amended AML/CFT legislation during the congressional review process.
In addition, our authorities have finalized and adopted the national risk assessment of money laundering, which has been consolidated with an updated terrorist financing assessment. Lastly, our authorities remain on track to publish the National AML/CFT Strategy, including recommendations to mitigate the risks, vulnerabilities, and threats identified in the national risk assessments.
Conclusion
Our authorities reaffirm their strengthened commitment to the policies and objectives of the economic program supported by the IMF arrangement under the Extended Fund Facility (EFF), and to meeting the program's targets for the remainder of 2022 and next year, which will remain generally unchanged. The updated macroeconomic framework takes into account the more difficult global situation, recent domestic developments, and the conviction that growth and resilient policies and public capital spending, to develop infrastructure to pave the way to private investment in the real economy, are as essential as the implementation of the agreed policy actions program targets and structural benchmarks that have been adjusted to reflect the new macroeconomic framework and policy priorities. Hence, we encourage the Executive Directors to support the second review under the extended arrangement under the Extended Fund Facility, the requests for waivers of applicability and nonobservance of performance criteria, the modification of performance criteria, and the financing assurances review.