The International Monetary Fund (IMF) has approved the eighth review of the current Extended Fund Facility for Argentina. This allows for the drawing of 600 million special drawing rights (SDRs), an amount equivalent to about USD790 million, exceeding the next amortization payment to the IMF of about USD645 million (July 2024).
The payment due in July is the last amortization payment to the IMF under the current program, which expires in November 2024. As from that payment and for the next two years (until September 2026), Argentina will not face any other maturities of principal amortization with the IMF.
The Executive Board of the IMF has taken this decision within a context in which the economic policy measures implemented by the current administration resulted in an overperformance of the quantitative targets established in the seventh review of the program (accumulation of BCRA’s net international reserves, public sector fiscal balance, and monetary financing of the Treasury).
Reserve Accumulation Target
The BCRA built up net international reserves for USD9 billion as of March 31 (at program prices). The target for that date was USD6 billion. Such performance with a comfortable margin, along with the growth of net international reserves in the subsequent months, resulted in a cumulative recovery of USD11.3 billion to date, which will soon be increased with the approved disbursement of USD790 million.
Considering that the level of reserves currently accumulated exceeds the program’s target for the entire second quarter (original target of USD9.2 billion by June 30, 2024), it was agreed that the second quarter’s target would be raised to USD10.9 billion, without affecting the original annual target (which remains at USD9.7 billion by December 31, 2024).
In line with the regulatory framework for the payment of imports and the seasonality of Argentina’s foreign trade set out in the seventh review, the eighth review of the program maintains a downward trend in the accumulation of net international reserves during the third quarter of 2024, reaching a level of USD8.7 billion (increased in this review), and a subsequent recovery in the fourth quarter.
Fiscal Balance Target
The Government’s strong commitment to the immediate implementation of a fiscal anchor turned out to be a key factor for macroeconomic stabilization. The financial balance achieved by the non-financial public sector as from 2024 has eliminated the long-standing need for net borrowing by the Treasury or monetary issuance to finance fiscal deficit.
The financial balance objective set forth in the Agreement was achieved in record time. Starting with a financial deficit of 4.6% of GDP in 2023, in the first four months of 2024, the primary surplus reached 0.7% of GDP and the financial surplus, 0.2% of GDP. This was achieved through a combination of permanent expenditure cut and temporary tax increases. Primary expenditure was reduced by 32% y.o.y. in real terms, with an 85% y.o.y. drop in capital expenditure, a 76% y.o.y. fall in discretionary current transfers to provinces and a 43% y.o.y. decrease in other current expenditure.
The fiscal balance was achieved without neglecting the most vulnerable population, significantly reinforcing social security benefits that—without intermediaries—reach beneficiaries directly. In particular, the universal child allowance was raised by 335% between November 2023 and June 2024, resulting in an estimated increase of 90% in real terms. The Alimentar and Primeros Mil Días food stamp programs also exhibited estimated increases of 4% and 470%, respectively, in real terms over such period. Pensions—excluding the bonus payment—showed an estimated increase of 3% in real terms, as a result of the 12.5% extraordinary payment granted in April and the shift to an automatic update based on inflation with a lag of two months in accordance with Emergency Executive Order 274/2024 issued by the Executive Branch. It is expected that pensions will continue to increase in real terms given the ongoing disinflation process.
In the second half of 2024, with economic growth resuming and with the energy tariff changes, the fuel tax update and the reduction in operating expenses having an impact on fiscal accounts, the Government expects a significant reduction in the most distortive taxes, starting with the PAIS tax once the omnibus bill called Ley Bases (Bases Law) is enacted. Thus, the non-quantitative commitments set forth in the Agreement would also be met.
Monetary Financing Target
Within a framework of strict fiscal discipline, the BCRA was able to implement a radical shift in monetary policy. In the twelve months before December 10, 2023, the BCRA financed the Treasury for ARS50 trillion (at prices of June 2024) directly and indirectly. However, these flows were reversed by the new administration. By the end of the first quarter, the BCRA’s net monetary financing to the Treasury exhibited a balance of -ARS2.1 trillion, at current values, overperforming the quarterly target, which had a limit of ARS0.
This balance is a source of contraction of the amount of pesos in circulation, thus contributing to the correction of the BCRA’s balance sheet. However, it does not reflect the total monetary impact of the transactions made by the Treasury. To date, the target of net monetary financing to the Treasury continues in negative ground (-ARS82 billion at current values) and the contractionary monetary impact of the transactions made by the Treasury results in a much higher total absorption of pesos by the BCRA (ARS17 trillion), thus contributing to the disinflationary process.
Additional Monetary Actions and Results
The Agreement does not provide for monetary or foreign exchange quantitative targets. The BCRA chose to prioritize actions aimed at drastically reducing endogenous monetization arising from the interest on existing remunerated liabilities. Interest on the BCRA’s remunerated liabilities fell 80%, from more than ARS5 trillion in November 2023 (at current prices) to around ARS0.6 trillion per month at present, thus helping to anchor inflation expectations. In addition to the strong progress made with regard to importers’ debt, the broad monetary base excess (monetary base plus remunerated liabilities) has been reduced, virtually reaching monetary base levels that have historically been associated with periods of monetary market balance.
The macroeconomic balance resulting from the overperformance of the three targets set out in the Agreement with the IMF together with the other measures adopted by the authorities have contributed to a rapid reduction of inflation. In May, inflation was 4.2%, half the inflation rate projected for that month by the private sector in December. The inflation accumulated over the past six months has been nearly 50 p.p. lower than the inflation expected by market analysts (Market Expectations Survey (REM)) in December.
Finally, it is important to highlight the two objectives set by the Argentine economic authorities in the Agreement and confirmed in the eighth review of the IMF program, namely: the timely submission of a monetary programming framework and the removal of foreign exchange controls, without requirements as to timing or form.
Monetary Programming Framework
The BCRA will continue to conduct monetary policy in a flexible, prudent and pragmatic manner. Building on the progress made in recovering monetary policy tools and controlling factors of money creation, the Agreement provides for the submission of a monetary programming framework to the IMF by the end of June 2024. The purpose of this framework is to contribute to further reducing uncertainty by providing more information on the projected behavior of monetary variables in line with the ongoing macroeconomic stabilization process.
Removal of Foreign Exchange Controls
The BCRA plans to move forward with the removal of foreign exchange controls and greater exchange rate flexibility as long as these measures do not entail excessive risks for the inflation reduction process and for strengthening its balance sheet, as provided for in the Agreement. The process will be defined by the Argentine authorities, considering the evolution of the relevant economic variables and sharing with the IMF the parameters to be monitored, excluding commitments regarding specific dates or measures.
