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IMF Country Report No. 22/388

ARGENTINA

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

December 2022

In the context of the Third Review Under the Extended Arrangement Under the Extended Fund Facility, Request for Waivers of Nonobservance 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 December 22, 2022, following discussions that ended on November 17, 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 December 12, 2022.

• A Staff Supplement updating information on recent developments.

• A Statement by the Executive Director for Argentina.

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.

Copies of this report are available to the public from

International Monetary Fund • Publication Services

PO Box 92780 • Washington, D.C. 20090

Telephone: (202) 623-7430 • Fax: (202) 623-7201

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Price: $18.00 per printed copy

International Monetary Fund

Washington, D.C.

© 2022 International Monetary Fund

Press Release

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PR22/459

IMF Executive Board Completes Third 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 third review of Argentina’s 30-month EFF arrangement, allowing for an immediate disbursement of about US$6 billion.

• Tighter macroeconomic policies since July are starting to bear fruit—inflation is moderating, the trade balance is improving, and reserve coverage is gradually strengthening.

• With a more challenging external and domestic backdrop, decisive program implementation will be critical to safeguard stability and program objectives.

Washington, DC – December 22, 2022: The Executive Board of the International Monetary Fund (IMF) completed today the third review of the extended arrangement under the Extended Fund Facility (EFF) for Argentina. The Board’s decision enables an immediate disbursement of SDR 4.5 billion (about US$6 billion), bringing total disbursements under the arrangement to about US$23.5 billion.

In completing the review, the Executive Board assessed that all quantitative performance criteria through end-September 2022 were met, on the back of prudent macroeconomic management by the new economic team. In addition, the Board also approved waivers of non-observance associated with the introduction of policy measures that gave rise to new exchange restrictions and multiple currency practices and called for their unwinding as conditions permit.

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 implementation of polices to strengthen public finances, tackle persistent high inflation, improve reserve coverage, and set the basis for sustained and inclusive economic growth.

At the conclusion of the Executive Board’s discussion, Ms. Gita Gopinath, First Deputy Managing Director and Acting Chair, made the following statement:

“Continued decisive policy actions are starting to bear fruit. Against a more challenging external and domestic backdrop, resolute policy implementation, including tightening of fiscal and monetary policies, is leading to a reduction in inflation as well as improvements in the trade balance and reserve coverage. Nevertheless, macroeconomic imbalances persist, and conditions remain fragile. Continued enhanced program implementation will therefore be critical to achieve key program objectives and maintain the program as an anchor for stability. Exchange restrictions and multiple currency practices should be avoided and unwound as early as conditions permit, and macroeconomic imbalances are addressed.

“Fiscal consolidation as budgeted will be needed to support the disinflation and reserve accumulation processes, alleviate financing pressures, and strengthen debt sustainability. Reducing the primary fiscal deficit to 1.9 percent of GDP in 2023 while providing space for priority infrastructure spending will require continued efforts to mobilize revenues, strengthen expenditure controls, and, importantly, improve the targeting of energy subsidies and social assistance. The timely implementation of measures will be critical to boost credibility.

“Sustained positive real interest rates remain essential to reduce persistent high inflation and strengthen the demand for peso assets. In addition, it would allow for improvements in competitiveness and reserve coverage, while avoiding reliance on ad-hoc FX incentives and restrictions as they are not a substitute to consistent macroeconomic policies. Meanwhile, voluntary price and wage coordination could play a complementary role as macroeconomic imbalances are addressed.

“A proactive market-oriented debt management strategy is vital to mobilize domestic financing, mitigate rollover risks, and reduce central bank financing of the deficit. Building on recent progress, including the welcome restructuring agreement with Paris Club creditors, mobilizing support from multilateral and bilateral partners remains essential to ensure financing commitments are met and reserve coverage is strengthened.

“Continued efforts on the structural front remain key to support broader macroeconomic goals, including by strengthening public financial management, the peso government debt market, AML/CFT framework, the central bank balance sheet, and the efficiency and sustainability of the energy sector.

“Agile policy making remains essential to meet program objectives, and further policy actions could be necessary to safeguard macroeconomic stability if downside risks materialize. Broad political support for program policies remains critical in the period ahead.”

Title page

ARGENTINA

THIRD REVIEW UNDER THE EXTENDED ARRANGEMENT UNDER THE EXTENDED FUND FACILITY, REQUEST FOR WAIVERS OF NONOBSERVANCE OF PERFORMANCE CRITERIA, AND FINANCING ASSURANCES REVIEW

December 12, 2022

EXECUTIVE SUMMARY

Context. Early decisive policy implementation by the new economic team was critical to stabilizing markets and begin rebuilding confidence in the run-up to the second review. Domestic demand has since slowed in response to tighter macroeconomic policies, with high frequency indicators pointing to a further moderation in inflation, a contraction in goods imports, and improvements in the trade balance. Nonetheless, and against a more challenging external and domestic backdrop, the situation remains fragile. Inflation is still high and unanchored, reserves are low, and confidence needs further strengthening. Moreover, social discontent has risen amid spending restraint and some decline in real wages. Review discussions focused on strengthening macroeconomic policies to safeguard stability and achieve program objectives, especially a durable reduction in inflation and improvement in reserve coverage.

Program performance. All quantitative performance criteria through end-September were met due to more decisive policy implementation, but also the introduction of temporary measures that have given rise to a new multiple currency practice (MCP) and intensified/modified existing exchange restrictions/MCPs, thereby leading to the nonobservance of the respective continuous PCs. Fiscal targets were met on account of strong expenditure controls and cash management, as well as higher export duties from the FX incentive scheme. Progress is being made in implementing the structural agenda, including in the areas of revenue administration, public debt management, and energy policy. Completion of the second review also catalyzed official financing, including budget support, and paved the way for a restructuring agreement with Paris Club creditors. Preliminary data suggest that end-2022 quantitative targets are within reach if prudent macroeconomic management is maintained.

Policy recommendations. Continued resolute program implementation remains essential to help strengthen policy credibility and the anchoring role of the program. Prudent macroeconomic policies are necessary to secure key program targets, address high persistent inflation, and improve reserve coverage. The planned reduction in the primary fiscal deficit, supported by expenditure controls and actions to improve the targeting of subsidies and social assistance, is essential to ensure a healthy moderation in domestic demand, alleviate financing pressures, and support reserve accumulation. These high-quality spending measures are also essential to improve the structure of spending, facilitate fiscal consolidation beyond 2023, and ensure debt sustainability. Continued application of the enhanced monetary and FX policy framework, maintaining sufficiently positive real interest rates, remains critical to reduce inflation, encourage the demand for peso assets, reduce reliance on central bank financing, and improve competitiveness. Meeting domestic financing objectives for the remainder of 2022 and 2023 will require a more proactive market-oriented debt management strategy centered on extending maturities to mitigate rollover risks given the complex external and domestic context, including the political cycle. Building on recent progress, mobilizing support from multilateral and bilateral partners will be essential to ensure financing commitments are met. On the structural reform front, further efforts are needed to strengthen revenue mobilization, public financial management, the central bank balance sheet, and the efficiency/sustainability of the energy sector. Reliance on ad-hoc and distortionary measures, including exchange restrictions and multiple currency practices, should be avoided going forward, as they are not a suitable way to address macroeconomic imbalances. Meanwhile, a gradual easing of these restrictions should be sought as conditions permit including to support the return to international capital markets by the time repurchases to the Fund come due. Broad political support for the program remains essential, especially as elections draw closer.

Program risks. Program risks remain elevated in the context of a less favorable external environment and ongoing policy implementation risks. A sharper-than-anticipated slowdown in global growth or tightening in global financial conditions could adversely impact Argentina, including through negative knock-on effects on commodity prices and the domestic bond market. Intensification of the ongoing drought could reduce agricultural exports and foreign currency inflows, stoking inflation and jeopardizing program objectives. Program implementation risks remain elevated given the very complex domestic economic, social, and political situation. Social discontent could escalate further, weakening political support for the program and leading to policy slippages and interventionist measures, especially ahead of the elections. Contingency planning and agile policy making will remain essential to help meet program objectives, and further policy tightening may be necessary should risks materialize. The Fund continues to face significant enterprise risks, as program risks cannot be fully mitigated.

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. The authorities also request: (i) completion of the financing assurances review; (ii) a waiver for the non-observance of the continuous performance criterion related to the imposition or intensification of exchange restrictions and the introduction or modification of MCPs; and (iii) Board approval of the temporary retention of the measures giving rise to exchange restrictions and MCPs under Article VIII, Sections 2(a) and 3. The program also proposes new and modified structural benchmarks.

Approved By

Luis Cubeddu (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. Understanding Recent Inflation Dynamics

• 2. Strengthening BCRA’s Balance Sheet

• 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