The International Monetary Fund praised the Milei administration’s past and future austerity measures but warned that the path to stability will be ‘challenging’ in its latest Argentina staff report, which was published Thursday.

The report also confirmed that the government has promised to lift exchange restrictions known as the cepo this year, with a roadmap that it will develop in June.

One day after the Fund’s board approved a US$4.7 billion disbursement, the lender published the seventh review of the Extended Fund Facility, confirming the extension of the agreement through the end of the year and revealing the new payment schedule. 

The original plan — which renegotiated Mauricio Macri’s 2018 deal with the lender — involved two US$1.07 billion disbursements that the staff would approve in March and June, and one of US$1.08 billion in September. The new schedule consists of the US$4.7 billion made in January plus US$800 million on May 10, US$532 million on August 10, and US$550 million on November 10.

The report states that President Javier Milei came to power with “a strong reform mandate,” but described “a fragmented Congress and a delicate social situation” that would pose “implementation challenges” for his austerity measures, noting that he would need to compromise because his party is a minority in both upper and lower houses. 

The Fund said that December’s 25.5% inflation largely reflected that month’s steep devaluation, and that January price rises are “projected to remain above 25%” as price controls were unwound. Reductions in energy subsidies, electricity and gas tariffs — which it described as “inefficient” — are expected to increase over 200% and 150% respectively this month. 

The report said that Milei’s program is centered on the establishment of a strong fiscal anchor — going from a projected 0.9% deficit under the previous IMF-sanctioned program to a 2% surplus with the new plan. It also said that December’s devaluation also helped boost international reserves.

Calling the public sector “oversized,” the Fund welcomed the elimination of ministries and cuts in transfers to provinces. It also said that the government is limiting transfers to state-owned enterprises “as a first step to reform and privatization.” 

Privatization of 36 state companies is one of the major sticking points of Milei’s reform package known as the omnibus bill, which is being debated in Congress at the time of writing. Some parties are calling for the privatizations to be voted on on a case-by-base basis, rather than en masse, as is currently proposed. Lawmakers from the provinces are asking for specific carve-outs in their region.

Regarding the Argentine state’s revenue, the Fund noted that export duties were temporarily increased to “capture windfall gains” from the devaluation, while the PAIS tax on accessing foreign currency was extended to “all goods and services imports.” 

The report calls Milei’s measures “bold” and “impressive,” welcoming the halt to the 28-day LELIQ auctions and the designation of the one-day repo transactions as the new policy interest rate. However, it warned that the government should tighten its monetary policy stance to support money demand and disinflation. The benchmark interest rate remains at 100%, well over projected inflation.

Measures taken by the previous government including income tax cuts and VAT rebates, estimated to be worth 1.3% of GDP, were described as a “difficult inheritance” that added to the fiscal imbalance.  

The Fund also criticized the previous administration’s “inconsistent policies” which it said led to a “higher fiscal deficit, a depletion of international reserves, and increased interventionist measures.” The report blames these for Argentina’s present triple-digit inflation, the deterioration of the central bank’s balance sheet, and a sharp rise in importers’ commercial debt. However, it added, economic activity and consumption were nonetheless robust in the penultimate quarter of 2023, with record-low unemployment.

In a letter of intent attached to the report, Economy Minister Luis Caputo and Central Bank head Santiago Bausili committed to eliminating the current pension indexation mechanism and using discretionary bonuses to keep their purchasing power. They also said that the Omnibus Bill aims to create “a more rules-based and market-oriented economy” and provide “the backbone for future growth and development.”

“We strongly believe that this Omnibus bill represents an inflection point in Argentina’s history,” the letter said.