IMF sees ‘policy setbacks’ in review of US$44-billion deal

The International Monetary Fund called on Argentina to make stronger efforts to address foreign reserve losses, galloping inflation and other “policy setbacks” amid a severe drought that’s hitting the country’s crucial commodities sector.

Argentina and the IMF staff agreed on Monday on the review of the country’s US$44-billion programme, a key step for the Washington-based lender to disburse about US$5.3 billion to the government, pending approval by its executive board.

In order to reach agreement, the IMF said a change to a key target in the programme, known as net reserve accumulation, “is being requested” after “recent reserve losses.” The current target is US$4.8 billion and the Fund did not say in the statement what the new figure would be. Net reserves, or the stockpile of cash at the Central Bank, is seen as crucial to preventing a major currency devaluation.

“Against the challenges of an increasingly severe drought, a stronger policy package is necessary to safeguard macroeconomic stability, address rising inflation and recent policy setbacks,” Luis Cubeddu, the IMF’s mission chief to Argentina, said in the statement.

The government expects to reduce the 2023 reserve target in the IMF deal by about US$2 billion, according to two senior government officials who requested not to be named to discuss unpublished figures. Pending board approval, that would bring the annual reserve target down to roughly US$2.8 billion from the current US$4.8 billion stipulated in the last IMF review.

The sharpest change to the quarterly reserve targets, which are the key benchmarks to pass IMF reviews and receive more disbursements, will happen in the first half of this year, the officials added.

Argentine policy makers are also weighing whether to make payments totalling about US$2.7 billion to the IMF scheduled for March 21-22 with current reserves or wait for the IMF board to approve the next disbursement and make the payments with those new funds. Per IMF rules, a country can wait until the final day of a month and bundle multiple payments together without a risk of falling into arrears or default.

Officials expect the IMF board to approve the programme before the end of March.

In a bid to protect the Central Bank’s cash stockpile, Argentina also agreed to not use reserves or repurchase debt to intervene in currency markets as a strategy to contain a gap between the official exchange rate and parallel rates. Intervening in currency markets and repurchasing debt had contributed to a decline in reserves in recent months.

The next US$5.3-billion disbursement, if approved by the the Fund’s executive board, will be used to repay Argentina’s debts owed to the IMF from a previous programme that failed to stabilise the country's economy.

Changing the reserve target for the third time would mark another setback for a year-old programme that’s facing growing obstacles as a historic drought dwindles crop exports needed to bolster economic growth and tax revenue. Economic activity has declined for four straight months through December and annual inflation is charging toward 100 percent.

Argentina’s economy is expected to contract three percent this year, according to estimates earlier this month from Buenos Aires-based consulting firm EconViews. That contrasts with the government’s projection for two-percent growth in its annual budget.

The programme does maintain the primary fiscal deficit target, another key anchor. The IMF said Monday Argentina planned to meet the target – a gap of 1.9 percent of gross domestic product – with “improved targeting of energy subsidies” to households and businesses, eliminating subsidies for high-income Argentines and businesses by the end of 2023.

Still, lost tax revenue stemming from the commodity harvest threatens the government’s fiscal effort. Extra spending cuts to make up for lost revenue would prove politically costly in an election year.

Argentina’s latest IMF agreement is entering its second year after government officials dragged out negotiations for more than two years following the record bailout with the previous administration in 2018.

The current agreement is already on its third Argentine economy minister after the first two left the job last July amid an ongoing political crisis.