Government announces power tariff hike as IMF mission visits

In its December review, the financial institution added “fully eliminating” energy subsidies for high-income households as a benchmark for February, but the government has announced it will not follow through.

Energy Secretary Flavia Royón announced yesterday that power prices would go up by 36% during the third stage of subsidy segmentation, which will start this year. This announcement was made the same week that a new mission from the International Monetary Fund (IMF) arrived to review Argentina’s accounts in the context of the Extended Fund Facility (EFF) agreement signed in 2022.

Royón said that the administration will reach the 1.9% fiscal deficit goal, which was agreed on for 2023 with the IMF after both parties renegotiated the US$44 billion loan Mauricio Macri’s administration took with the lender in 2018.

The subsidy segmentation scheme was launched last September and aimed to gradually reduce or eliminate energy subsidies for middle and high-income commercial and residential consumers. According to Royón, a cumulative AR$40 billion was saved during the first two stages of the segmentation, which implied a 40% subsidy reduction for high-income sectors.

Royón stated that, on average, low-income households and small businesses (49% of commercial and residential users) will not see an increase in their energy prices. She added that tariffs will rise by between 17 and 36% for medium and high-income households. Moreover, low-income sectors will not see cuts in their energy subsidies, middle-income sectors will see a 20% reduction, and high-income sectors will see a 40% decrease.

However, the energy tariff is made up of the energy price -which is the same across the country- plus distribution and transport costs and taxes, which vary by province. This means that in the Greater Buenos Aires region, for example, there will still be tariff hikes in April and June, even for low-income households.

In the press conference, Royón stated that, even if the government had previously announced that high-income households would pay the full price of electricity by February, subsidies for them will not be fully eliminated yet.

The Energy Secretary added that one of the reasons is to give people “a larger time window” to request the subsidies, which they can do via a website. The Secretary added that 33% of users had not registered, and stressed that those eligible for the subsidy should do so. “We see that there is still part of that population that may still need government assistance,” she added.

This means the government will not comply with the full elimination of energy subsidies for the highest income tiers, which was due on February 15 this year as part of the list of fiscal structural “benchmarks” demanded by the IMF in last December’s third review of the 2022 agreement. However, Royón said they will still reach the fiscal deficit goal for the year.

The latest staff report even states that energy subsidies as a proportion of  Argentina’s GDP should steadily decline from 2.1% in 2022 to 0.7% in 2027. The goal for this year is for energy subsidies to be no more than 1.6% of the country’s GDP.

Royón’s claims, nevertheless, do not necessarily mean that the government will not pursue the full elimination of subsidies altogether, only that it will not do it according to schedule. The third review even allows “minor delays” to ensure proper registration of users.

Meeting with the IMF

This Sunday, an IMF delegation arrived in the country to advance in the fourth review of the EFF, which will allow a US$5.4 billion disbursement. Conversations are being spearheaded by Economy vice minister Gabriel Rubinstein and the lead advisor for the Economy Ministry, Leonardo Madcur, according to official sources.

One of the subjects being discussed is the fiscal deficit, which reached 2.4% of the GDP last year, meaning the government over-complied with the 2.5% goal agreed with the IMF. According to sources inside the IMF, the communication between the financial institution and the national government is fluid. “A small IMF technical team will visit Buenos Aires this week to continue the discussions and this will be followed by a visit of the [government] authorities to Washington, DC at the end of the month to finish the technical work,” they added.


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