The International Monetary Fund (IMF) considered that Argentina’s policy implementation has become “less reliable” and demanded more austerity measures in its fourth review of the country’s program published yesterday.
Even though the IMF’s Executive Board approved Argentina’s fourth review and allowed an immediate disbursement of about US$5.4 billion, the lender demanded “a stronger policy package.” The IMF also allowed a relaxation of the reserve targets due to the ongoing drought, but did not modify the fiscal deficit target and said that progress since the end of 2022 has been “more mixed” than in the second quarter of 2022.
The government and the IMF signed an Extended Fund Facility agreement in 2022 after renegotiating the US$44 billion debt former President Mauricio Macri acquired in 2018. The deal includes an economic program that Argentina must comply with in order to receive disbursements every three months, which are used to pay for the previous debt with the IMF.
The fiscal deficit goal will remain unchanged at 1.9% of the GDP, and the IMF said that to achieve that, the government will have to implement “high-quality measures” such as the continued adherence to the hiring freeze in the public sector; and the improved targeting of energy subsidies and social assistance.
In its report, the lender of last resort specifically highlighted Argentina’s new pension buyback scheme, the Potenciar Trabajo welfare plan, and the crawling peg rate, among other policies.
Three weeks ago, Congress passed a law — often referred to as a “pension moratorium” — that implemented a new scheme by which people of retirement age who do not have the required 30 years of contributions can purchase or “buy back” years in order to retire. Thanks to that law, the government calculated that 800,000 people would be able to receive a pension.
However, the IMF described the decision as “unforeseen,” “unfunded,” and part of the reason why the country’s policy implementation has become “less reliable,” together with the recent debt buybacks and energy policy shortfalls. The IMF demanded “early and decisive actions” to mitigate its “significant” fiscal costs, which it calculates at 0.4 percent of GDP over the medium term.
The report revealed that the March 31 decree the government issued announcing the new pension regulations was in fact a measure that needed to be implemented before the Board approved of the fourth review.
The decree sought to limit access to the scheme to “individuals who have made prior contributions to the pension system and are not receiving other social benefits” and once they apply, they cannot buy dollars.
The IMF also said that the government will make “efforts to strengthen targeting” of the Potenciar Trabajo social employment program, which benefits 1.2 million people with a AR$34,750 monthly payment.
The IMF recognized that the government suspended “around 97,000 ineligible claimants,” and said that the government will “reduce program overlaps,” and introduce a cap on the total amount of benefits a person can receive, keeping the sum at or below the minimum wage to “encourage formal labor market entry.”
The head of Polo Obrero social organization, Eduardo Belliboni, told the Herald that people who collect Potenciar Trabajo benefits are the ones who “sustain soup kitchens all over the country.”
“The IMF is ruling this country through the Peronist party,” he said. The Polo Obrero announced 128 pickets for tomorrow.
The IMF report also anticipated a measure that the government will announce tomorrow to boost reserves, the “agro dollar,” According to the IMF, the government will apply a differential exchange rate during April and through June “for a select set of primary exports (including soy and other agricultural commodities) and imports, especially tourism and transport service.”
The report said that multiple currency practices are not a “substitute for sound macroeconomic policies” and called for their elimination as conditions allow.
The power tariffs are expected to further increase. The government announced a plan to fully eliminate subsidies for high-income residential consumers by May. For commercial users, additional price increases will be implemented in August and November to fully cover the energy cost.
The IMF anticipated that the government would issue a resolution this month to announce these changes.
Devaluation and monetary policy
The government assured the IMF that it will maintain the crawl rate “above inflation,” meaning that the official US dollar exchange rate has to increase more than consumer prices. The lender calculated that the real effective exchange rate appreciated by 25% between 2020 and 2022.he government is projected to gradually correct exchange rate lag with a “smooth” depreciation of the peso through 2025.
The government also said that it would “refrain from interventions (either by the Central Bank or the Treasury) in the financial foreign exchange markets that require the use of international reserves.”