The International Monetary Fund (IMF) considered that Argentina’s Fund-backed economic program has gone “off track” and that its economy has “become increasingly fragile” in its staff report released on Friday. According to the review, the reasons were “the historic drought along with policy slippages and delays.”

Nevertheless, the Fund approved the combined fifth and sixth reviews of Argentina’s agreement, unlocking a US$7.5 billion disbursement after protracted negotiations. In the review, the IMF approved waivers of non-observance for the missed targets, changed some performance criteria, and demanded a new “policy package” — including hikes on power tariffs and limits on state wages.

The IMF expects the GDP to contract by 2.5% in 2023 due to the drought and the “tighter macroeconomic policies during the remainder of the year” — that is, the Fund’s program. Inflation is projected to reach 120% by the end of the year, “although this will much depend on the evolution of the exchange rate pass through to prices and policy implementation,” they added.

According to the report, Argentina missed its primary fiscal deficit through the end of June by 0.3% of GDP, reflecting weaker-than-anticipated export duties due to the drought and higher current expenditures. The fiscal deficit goal for the year, however, will remain unchanged at 1.9% of the GDP. To reach the goal, the country has to cut spending by 11% from August to December this year, according to the IMF.

The government has committed to announcing a new resolution to further increase electricity prices to “limit energy subsidies to around 1.5% of the GDP,” while agreeing to limited wage increases with unions representing state workers, and raising pensions only “in line with the mobility formula.” Last Wednesday, Energy Secretary Flavia Royón said that the government will raise energy tariffs for high-income homes due to an update in operational costs following the devaluation.

The IMF acknowledged  however that public spending “contracted by 6 percent in real terms in the first half of the year.”

The review also said that net international reserve accumulation was about US$11 billion below the program target at the end of June, reflecting the US$20 billion slash in exports due to the drought, continued capital flight, insufficient import reduction, and interventions in parallel foreign exchange markets.

According to the Fund, net international reserves fell from US$8.8 billion at the end of 2022 to negative US$9.8 billion by the end of June 2023, which they called “dangerously low levels.” The Fund lowered the reserve accumulation goal by US$7 billion, although they admit it implies “an ambitious accumulation during the second half of the year” — an extra US$8 billion through the end of 2023.

The report also said that monetary emission to finance the fiscal deficit rose to 0.8% of GDP through June, “exceeding the program ceiling by a significant margin.”

The Fund also said that with the recent 22% devaluation and the prior fiscal devaluation, the government recognized “the need for a significant course correction.” However, they said that the new measures will “require strict implementation despite the challenges posed by the election cycle.”

According to the Fund, “electoral dynamics have complicated policymaking and added to uncertainties.”

“Policy slippages reflected political restrictions and electoral considerations, including the fact that Economy Minister Sergio Massa is also a Presidential candidate, with political uncertainties adding to strains more recently,” they added.

The IMF will also allow social spending “to increase within the agreed deficit target” to compensate for the impact of the devaluation. The extra spending will focus on the beneficiaries of the Family Allowance program (AUH, by its Spanish initials) and the food support program (Tarjeta Alimentar). However, the government has yet to make such announcements.