Equipo Nizkor - Executive Summary of IMF Country Report No. 24/167.

Argentina: Eighth Review Under the Extended Arrangement Under the Extended Fund Facility, Requests for Modification of Performance Criteria, Waivers of Nonobservance of Performance Criteria, and Financing Assurances Review

EXECUTIVE SUMMARY

Context. Decisive implementation of the stabilization plan--centered on a strong fiscal anchor with no new monetary financing, and relative price corrections--has led to twin fiscal and external surpluses, a marked turnaround in reserves, faster-than-expected disinflation, a bolstering of the BCRA's balance sheet and a reduction in sovereign spreads to multi-year lows. Selected easing of FX restrictions and deregulatory efforts are improving resource allocation. Nevertheless, macroeconomic imbalances and growth bottlenecks remain sizable and a long and difficult adjustment process still lies ahead, where policies need to evolve to build on earlier gains and support a turnaround in activity. Efforts are also underway to build political and societal support for reforms, as well as to scale up social assistance to protect the most vulnerable and ensure the burden of the adjustment does not fall disproportionally on working families. That said, delays in securing key legislation in Congress have led to some market volatility.

Program performance. The program is firmly on track. All quantitative performance criteria through end-March were met with margins, with good progress made in meeting structural benchmarks (SBs). Some unwinding of the most distortive multiple currency practices (MCPs) and exchange restrictions is underway, although many remain temporarily in place as imbalances are being addressed, with a minor modification to limit tax arbitrage.

Policy discussion. Sustaining the strong early progress requires improving the quality of fiscal adjustment, taking initial steps towards an enhanced monetary and FX policy framework, implementing the structural agenda, and securing financing assurances. This will require continued efforts to secure congressional approval of key fiscal and structural legislation, already passed by the lower house, as well as agile policy making, if external and implementation risks are realized.

Fiscal policy. The authorities are fully committed to achieving a primary surplus of 1.7 percent of GDP this year, consistent with overall balance. About two-thirds of the adjustment planned (around 5 ppts of GDP) has been achieved as of end-April, mainly through temporary higher import-related taxes, lower subsidies, and discretionary spending cuts. The fiscal package, which is expected to be approved by Congress--covering a personal income tax reform, a tax amnesty, an improvement to personal asset taxes and tobacco excises--will support and improve the quality of consolidation efforts. Beyond this year, the authorities intend to sustain an overall balance, which will require putting greater focus on reforming the tax, pension, and revenue-sharing systems, including to unwind distortive taxes.

Monetary and FX policies. Monetary and FX policies will evolve to entrench the disinflation and safeguard reserve accumulation. Specifically, to support the transition towards a new monetary regime ("currency competition"), the central bank will ensure monetary policy rates move into positive territory in real terms, while FX policy will become more flexible with the easing of capital flow management measures (CFMs) as conditions allow. That said, the authorities remain committed to an early unwinding of the most distortive MCPs and exchange restrictions. Finally, a further streamlining of banking regulations is necessary to strengthen monetary transmission and continue to unlock private credit.

Supply side policies. The authorities will continue to correct relative price misalignments and create a more market-oriented economy. The expected approval of the landmark reform legislation (Ley Bases) will support the recovery and boost productivity over time through (i) increased labor market flexibility; (ii) upgrades in the legal framework and properly-designed incentives for large long-term investments in hydrocarbon and other strategic sectors; (iii) reduced state participation in the economy; and (iv) removal of entry barriers and policies to safeguard competition.

Financing strategy and assurances. The authorities' domestic financing strategy will continue to focus on reducing rollover risks, while gradually reducing vulnerabilities by extending maturities, avoiding FX-and inflation-linked securities, and shifting from overnight central bank paper to Treasuries. On the external side, firm financing assurances have been sought from multilateral and regional development banks. Firm commitments from China are in place, including to substantially refinance the activated portion of the PBOC swap and to address project loan delays in line with project implementation progress. Continued efforts to address imbalances and sustain twin surpluses will be critical to ensure Argentina's return to external markets in a timeframe consistent with debt refinancing needs.

Program baseline. Minor revisions to the baseline are being proposed on account of a stronger contraction in activity in late 2023, and a more rapid decline in inflation. Output is now projected to contract by around 3½ percent in 2024 (previously 2¾ percent), although a turnaround in activity is expected during the second half of this year, as the headwinds from fiscal consolidation ease, real wages start to recover, and investment gradually picks up in response to reform efforts. Monthly inflation is expected to fall further, converging to around 4 percent by end-2024 (140 percent y/y vs. 150 percent previously), and declining further over the medium term, as peso demand recovers from historically low levels. Meanwhile, reserves are projected to remain unchanged as the less favorable terms of trade are largely offset by stronger net capital inflows. Sustained fiscal and external surpluses over the medium term--supported by tight policies, productivity gains and structural improvements in the energy balance--will strengthen reserves and secure international market access prospects.

Program and enterprise risks. Risks remain elevated, although they have become more balanced following bold actions to restore stability. Downside risks persist. External conditions could become less favorable, and the ongoing recession could become more protracted, fueling social tensions and complicating program implementation. Further delays in securing congressional approval of the fiscal and structural packages could also hamper stabilization efforts, and would require that strong offsetting measures under the control of the Executive be taken as needed to secure all program targets. Efforts should also continue to ensure proper burden sharing and build reform consensus given the very fragile social and political landscape. Against this backdrop, Fund enterprise risks remain significant, although these have moderated, including near-term balance sheet risks from overdue financial obligations.

Program modalities. Purchases under the eighth review are at SDR 0.6 billion, which will be maintained in the SDR Holding Account at the IMF to meet Fund obligations as they fall due. Program targets for the primary fiscal balance and reserves have been strengthened to reflect program overperformance and updates to the macroeconomic framework. Approval for multiple currency practices under Article VIII, assessed in line with the new MCP policy, are sought on the grounds that the measures have been imposed for balance of payments reasons, are temporary, non-discriminatory in nature, and do not give Argentina unfair competitive advantage over other members. In the context of easing of cross-border dividend payment restrictions and limiting potential tax arbitrage, approval of a new exchange restriction and MCP arising from the application of the tax on FX access (impuesto pais) for payment of dividends and profits to nonresident investors is also sought as the conditions for approval are met. In addition, waivers of nonobservance are also requested, as this new measure caused nonobservance of the continuous PCs against the imposition/intensification of exchange restrictions and the introduction/modification of MCPs.

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Full report available at:
https://www.imf.org/-/media/Files/Publications/CR/2024/English/1ARGEA2024002.ashx

[Source: Executive Summary, Argentina: Eighth Review Under the Extended Arrangement Under the Extended Fund Facility, Requests for Modification of Performance Criteria, Waivers of Nonobservance of Performance Criteria, and Financing Assurances Review, IMF Country Report No. 24/167, International Monetary Fund, 31May24.]

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