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ECONOMY | 25-08-2023 11:36

IMF says Argentina must 'contain' public spending on wages, pensions

IMF statement stresses need for Argentina to "contain spending on wages and pensions."

The International Monetary Fund (IMF) has stressed to Argentina the need to "contain spending on wages and pensions" in a lengthy statement issued Friday outlining recent policy steps agreed by both parties.

It also called for the updating of energy tariffs to hit key fiscal targets and help the country’s troubled economy offset huge losses from a punishing drought.

The statement arrives two days after the IMF’s board signed off on a new US$7.5-billion disbursement for Argentina, despite an admission from officials that key financial targets had been missed in the country’s multi-billion-dollar rescue programme.

The board’s approval of the fifth and sixth quarterly reviews of the country’s 30-month, US$44-billion IMF programme is aimed at improving Argentina’s dire economic situation.

Total disbursements under the deal so far amount to some US$36 billion, with the next review scheduled for November 2023.

Addressing the fifth and sixth reviews, conducted simultaneously, the IMF admitted in Friday's statement that “key programme targets were missed through end-June 2023 on account of the historic drought along with policy slippages, requiring the approval of waivers of nonobservance.”

Additional passes were granted for “the introduction of temporary measures that gave rise to introduction or intensification of exchange restrictions and multiple currency practices,” added the Fund.

As a result of talks between IMF and Argentine government officials, “modifications to the reserve accumulation target, as well as to the primary fiscal balance and monetary financing of the deficit target” were also approved.

A new package “centred on rebuilding reserves and enhancing fiscal order” has now been agreed, according to the multilateral lender.

 

‘Challenging’

In the second part of the statement IMF Managing Director Kristalina Georgieva – who met with Economy Minister Sergio Massa in Washington on Wednesday – admitted that Argentina’s economic situation had become “increasingly challenging” since the fourth review of the government’s debt programme.

“Against the backdrop of high inflation and balance of payments pressures, the authorities are implementing a new policy package to safeguard stability and underpin medium-term sustainability centred on rebuilding reserves and enhancing fiscal order,” she said.

Pointing hopefully to Argentina’s primary fiscal deficit target of 1.9 percent of GDP, she warned that efforts must be made to limit spending, noting the importance of updating energy tariffs and limiting state expenditure on wages and pensions, while protecting priority social and infrastructure spending.

“These actions are being complemented by temporary increases in FX taxes on selected goods and services to also help offset the loss of drought-related export receipts.” she added.

Referencing the recent 22-percent devaluation of the peso against the dollar, the IMF managing director observed that “the recent realignment of the exchange rate, coupled with the tightening of monetary policy, should continue to help support reserve accumulation while limiting the exchange rate passthrough to inflation.”

“Going forward, the rate of crawl will be carefully calibrated to help achieve reserve accumulation and disinflation goals, while real interest rates will remain sufficiently positive to continue to support demand for peso assets,” said Georgieva.

She also warned that “interventions in the securities and futures FX [foreign exchange] market” must be “limited and temporary, focused on addressing disorderly conditions.”

Finally, the IMF chief offered praise for the boosting of “export potential and reserves” and the “completion of the first phase” of the President Néstor Kirchner gas pipeline.

Georgieva concluded by saying that “broad political support and programme ownership remain critical in the near and medium term,” admitting that “resolving the country’s deep challenges will require continued efforts by future administrations.”

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