Argentina’s next round of IMF talks complicated by weak reserves

It’s a question of accountancy but also real-life banknotes – namely whether the incoming dollars obtained come from exports, advances or linked to a debt which will have to be paid at some point.

Those are the famous debates over whether the reserves are net or liquid or not. It might seem like just semantics at this point, although it could perfectly well be the core of the discussion and the decisive point when Argentina’s economic team sits down with officials responding to Kristalina Georgieva at the International Monetary Fund (IMF).

In a few weeks the IMF will begin its second review of Argentina’s US$44.5-billion debt deal, on whose approval will depend the remittance to meet the next debt payment of over US$6 billion. Even if there is finally fumata bianca, the battle ahead is not to be underestimated. 

The government is already taking it for granted that there will be plenty of tension although it has one ace in its favour – being concentrated on the second quarter when Martín Guzmán was steering the economy and will not be around to take all the blame. Instead the negotiator will be Economy Minister Sergio Massa who will be taking all the responsibility for the third review (covering a period still in progress) and where there will be far more tension.

As from September the IMF will be aiming its missiles at runaway inflation but especially at the feeble reserves of the Central Bank under Miguel Pesce, who has been engaging in creative accountancy and betting on the Chinese currency swap, harvest dollars being cashed and reduced energy spending now at a monthly US$2.4 billion. And also the Repos (repurchase agreements) which the government hopes to be signing soon with European, Asian and North American Banks to repurchase debt and boost reserves. It would be a mechanism (still under discussion) similar to that used in 2016 but aiming at a longer term.

It is further hoped that tranches from international organisations pending from the first half of the year can be accelerated to the tune of a few billion dollars. The Central Bank also looks to maintain a position to buy which it claims to have sustained since this government took power in late 2019 although if inflation were lower, the capital controls could be more solidly applied.

The economic cabinet sees data which it considers encouraging in the balance of trade. For example, in the second week of this month the soy harvest began to be cashed with the new special 70/30 exchange rate, permitting these agricultural transactions to be maintained at a daily average of US$160 million this month.

From the perspective of the economic cabinet, the trump card will be the signals as to fiscal austerity, promising to reduce the red ink to 2.5 percent of gross domestic product by the end of the year. But it is precisely there where the tensions within the ruling coalition come into play because not all sectors want to be tied down to cuts in funding.

The other indicator under IMF scrutiny will be without doubt inflation. As in the case of Central Bank reserves, that future scrutiny stands to be more complex than the review of second quarter accounts beginning next month although when it comes to prices, they are likely to take a more benevolent view, given the global surge in inflation due to the pandemic and the energy costs of the ongoing war in Europe.

In reality that international context would give the IMF more scope for benevolence in its final statement. But when it comes to the reserves, more than in the case of double-digit inflation (a national phenomenon), that rhetorical clemency would become more difficult to sustain domestically in terms of political endorsements and internal audits.