Program Performance

The program remains well on track. We remained committed to the program and we are taking the necessary steps to meet the targets. All quantitative performance criteria and indicative targets through end-September were met. Also, preliminary data confirms our confidence that end-2022 criteria and targets will be met.

The primary fiscal deficit through end-June was ARS 1,096 billion (1.3 percent of GDP), about ARS 40 billion below the adjusted target, reflecting our efforts to control public finances. The average quarterly stock of domestic arrears remained below target (ARS 590 billion). The social spending was observed, as spending exceeded the established floor on account of efforts to shield 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 620 billion through end-September, below the program target of ARS 665 billion. Reserve accumulation reached US$4.6 billion, above the program target of US$3.6 billion. The stock of central bank non-deliverable futures was limited to US$3.1 billion, remaining well below the program ceiling of US$9 billion.

Progress is being made in advancing the structural agenda, including areas of revenue administration, energy policy, and public debt management.

The Macroeconomic Framework

Economic activity remains robust and grew at an annual rate of 6.4 percent accumulated as of the third quarter of 2022, driven by private consumption and investment. The level of real GDP is above pre-pandemic levels, and capacity utilization levels stands at multi-year highs, while unemployment fell to its lowest level since 2015.

The global and local scenario is increasingly complex. Tightening global financial conditions and domestic developments led to a more challenging government bond market and put pressure in the FX market. However, the decisive actions adopted since August have helped to quickly restore credibility and stability, without adverse impacts in activity and employment levels and avoiding disorderly exchange rate adjustment. Bond yields are down, the financial sector balance sheet remains contained, the exchange rate gap remains near pre-market pressure levels, and central bank intervention in the secondary government bond market and non-deliverable forward market continues to unwind. The stock of international reserves has stabilized, thanks in part to the temporary incentive schemes to increase soybean liquidation.

Significant challenges remain, mainly associated with the recent price dynamics. Nevertheless, inflation pressures are beginning to notably ease. After peaking at 7.4 percent m/m in July, headline inflation got into a consistent downward path, falling to 4.9 percent during November. A notable feat considering global dynamics.

Growth in 2022 is now projected to expand by 4.6 percent (against 4 percent at the time of the second review), gradually moderating to 2 percent next year. This is a significant improvement when compared to past performance, and taking stock of a weaker global outlook and the ongoing fiscal effort.

Inflation is projected to reach to 95.9 percent by end-2022, reflecting in part the spike in global food and energy prices. Inflation is projected to continue the downward path, falling gradually during the remainder of the year and into next year, from less than 5 percent by end-2022 to 3.5 by end-2023, due to a combination of fiscal policies, sufficiently positive real monetary policy interest rates, reduced monetary financing, improved wage-price coordination, and lower global commodity prices.

The annual financing mix for 2023 remains broadly unchanged, underpinned by a pickup in net official financing and an improvement in domestic debt market conditions, to enable rollover rates above 100 percent and support the reduction in monetary financing of the fiscal deficit. Our domestic financing strategy is proving successful. During the first half of December, we faced maturities for approximately 412.000 M pesos, obtaining financing for around 830.000 M pesos (which represents a more than 200 percent rollover rate). Offers received reached 1.2 B pesos. A record. As for interest rates, these were in line with past issuances, and even some instruments could have their rates compressed.

The current account balance is projected to reach a surplus of 1.2 percent of GDP in 2023. The trade surplus is still projected at around 1.2 percent of GDP, consistent with our policy set, imports administration, improvements in competitiveness and terms of trade, as well as higher income from residents abroad. The strong current account and limited capital outflows are expected to support reserve accumulation of US$9.8 billion during 2022-2023 (unchanged relative to the second review).

Fiscal Policy

We remain committed to the fiscal path envisaged in the program. We are intensifying our efforts to meet the 2022 primary deficit target of 2.5 percent of GDP. Our approach is bearing fruit, with spending contracting by 13 percent and revenues increased by 3 percent (y/y) in real terms in September, alongside a significant reduction in domestic arrears.

The 2023 Budget, which is consistent with the 1.9 percent of GDP program deficit target, saw the rollout of new prioritization and selection criteria for investment projects, ensuring a focus on large and ongoing projects.

As part of the action plan to enhance financial and budget reporting of national public sector entities, a framework is now being developed to strengthen controls over Treasury transfers to public corporations/trusts. A decree has been recently issued to strengthen financial oversight of these entities through improved information reporting, with the aim of supporting the timely publication of enhanced quarterly reports for public corporations and trust funds. In line with fiscal safeguard recommendations, improving expenditure control and accountability will benefit from a further strengthening of the Treasury Single Account and the prompt publication of the annual audited financial statements.

Once completed, a comprehensive review of tax expenditures (estimated at near 21/2 percent of GDP) will help identify options for streamlining tax incentive schemes, while efforts to strengthen property tax collection should continue. An action plan is being finalized, with the support of Fund technical assistance, to strengthen revenue administration capacity and efficiency. Key elements of this plan include a comprehensive compliance gap analysis for key taxes as well as policies and guidelines for the risk segmentation of taxpayers and foreign trade operators. A new risk management unit has been created to support the work of the recently established Compliance Risk Management Committee (CRM). Moreover, the recently signed tax information exchange agreement with the United States could improve revenues in the near to medium term.

Financing Strategy

The development of the domestic capital money and capital markets is a key component of our macroeconomic framework. 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. The combination of these efforts will allow us to reduce monetary financing of the fiscal deficit to 0.8 percent in 2022 and 0.6 percent of GDP in 2023.

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. We will seek to accumulate buffers through issuances of LEDES, and normalize the yield curve through operations in the secondary treasury market. We will pursue a proactive market-oriented debt strategy, while ensuring that central bank intervention in the securities market is limited to ensuring normal market functioning. The strategy envisages among other things extending maturities of the debt held by intra-public sector entities (representing close to 60 percent of amortizations falling due next year); as well as a tailored approach for institutional investors, such as banks, mutual funds, and insurance companies. We have made significant progress in advancing the structural agenda to support the financing strategy.

We have completed 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.

We are overall very confident in achieving our objectives for domestic financing, as our December 2022 debt operations described above show.

On the external financing front, we have redoubled our efforts to secure official non-IMF external financing. Despite shortfalls through Q3, disbursements are now back on track, with US$1.2 billion of IDB support in October/November, and US$250 million expected by end year from other bilateral creditors. Meanwhile, an agreement was reached with Paris Club creditors to restructure US$1.97 billion, appropriately reflecting our capacity to repay and debt sustainability.

All these efforts will secure debt sustainability, before and after the general selections of the next year. Financing needs through the following years are in line with the domestic market capacity to roll over existing debt stocks and provide the required additional finance, which will shrink over time, given the fiscal path. We are confident that there will be no further disruptions of domestic financial market.

Monetary, Exchange Rate Policies and Anti-Inflationary Policies

We 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, and improve the Central Bank’s balance sheet. We 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.

We have raised the nominal annual policy rate, which now stands over 107 percent in annual effective real terms, above actual inflation. We have calibrated the rate of crawl of the exchange rate, and it will remain consistent with the evolution of inflation and trading partner currency developments. The recently reintroduced temporary export incentive schemes are encouraging the liquidation of stockpiled soy exports.

We implemented voluntary wage-price coordination mechanisms to complement broader disinflation efforts, including agreements with the largest mass consumption companies to hold the price of 2000 products and limit price increases at 4 percent m/m of 30,000 products between November 2022 and February 2023. Negotiations are taking place with wholesale agents as to lower prices for neighborhood shops. The agreements will be revisited after the four months.

We remain committed to implement measures that improve the transmission of monetary policy rates to deposit rates, 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.

Capital flow measures have been adapted, including through a broadening of import financing requirements, to avoid a disorderly adjustment. We nevertheless remain committed to ease the regulations. We are advancing the preparation of a roadmap, and we expect this to be completed by end-June 2023 to enable input from recently requested IMF technical assistance. More generally, as conditions permit, and reserve coverage strengthens, steps will be taken to gradually ease restrictions.

In line with the recommendations of the recently completed IMF Safeguards Assessment, we are working in assessing the 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. The balance sheet will strengthen in the next years, thanks to our proacted efforts to meet program targets, secure public debt sustainability, and restore market access. Given the evolution of macroeconomic fundamentals, we are confident that we will improve Central Bank net worth in the long term.

Growth and Resilience Policies

A key priority are the policies to diversify and boost net exports. We 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. An important part of our strategy is eliminating subsidies for residential users with the greatest payment capacity. Building on efforts to reduce costly energy imports, we 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 at favorable rates during winter and reduce reliance on costly imports of liquefied natural gas.

We are also advancing with the construction of the Nestor Kirchner gas pipeline, which is expected to be completed by end-2024. Once completed, the pipeline will connect the vast shale oil and gas reserves of “Vaca Muerta” with large urban areas, supporting an increase in the daily supply of domestically produced gas, initially by 11 million cubic meters, and by 22 million cubic meters once compressors are installed. These pipelines have the potential to sharply reduce costly energy imports from mid-2023 with positive spillovers for fiscal and external balances from 2024 onwards.

To encourage an increase in gas supply for the domestic market and incentivize exports, we will also launch a new Plan Gas, which will extend current production volumes to 2028. Moreover, we have been working on strengthening bilateral agreements with Chile to expand foreign markets. Finally, to underpin the increase in domestic production, our 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 to support CAMMESA’s incomes.

Progress is being made to eliminate the subsidies for those with sufficient capacity to pay. 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 gas) and gas use above 70 percent of the previous 5-year average for each category of users in the relevant region. We will significantly reduce these subsidies for commercial users in 2023 and we will fully eliminate them during 2024.

We are also finalizing the development of a national strategy to improve the efficiency and financial sustainability of the energy sector in the medium term. Development of this strategy is supported by World Bank 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. In addition, recommendations from the recently completed World Bank Country Climate and Development Report (CCDR) are being assessed and with the view of considering future conditionality in this area.

Governance and Transparency

Ahead of the evaluation by the Financial Action Task Force (FATF) in 2023, we have made further progress in strengthening our AML/CFT regime. We recognize the need to improve governance and transparency, in order to tackle tax avoidance and external assets formation. We have published the National AML/CFT Strategy, including recommendations to mitigate the risks, vulnerabilities, and threats identified in the national risk assessments. In consultation with IMF staff, we 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.

Conclusion

Our authorities underline their commitment to the policies and objectives of the economic program supported by the IMF under the EFF. Once more not only for commitment reasons, but because such policies are Argentina’s best anchor. Argentina has shown a remarkable commitment to being able to execute a notable fiscal performance. The cornerstone of our macro policy. We remain convinced, at the same time, that Argentina’s future depends on our ability to develop infrastructure so that we can catalyze investment in the real economy, as well on our capacity to maintain our social safety nets. We are showing a consistent downward inflation path and we are maintaining healthy growth dynamics. We are consolidating our domestic debt market. We have met all targets and the proximate targets appear to be on track. The structural agenda is being implemented.

Considering all of the above, we encourage Executive Directors to support the third review under the extended arrangement under the Extended Fund Facility, including the requests for waivers for non-observance of continuous performance criteria against imposing or intensifying restrictions on the making of payments and transfers for current international transactions an introducing or modifying multiple currency practices.