The International Monetary Fund announced this Thursday an agreement to refinance the 45,000 million dollars that Argentina owes. A month after signing a basic commitment “of principles”, the parties finally closed the technical details of a “pragmatic, realistic and credible” payment plan, as defined by the IMF in a statement signed from Washington. The Government of President Alberto Fernández has overcome the main international obstacle and now it must do the same at home.
This very afternoon he has sent the text to Congress, which must approve it as a step prior to the IMF’s directory putting the definitive signature. However, it will not be another parliamentary process. Kirchnerism has been warning for weeks that it will not vote for an agreement that, it considers, includes conditions, such as a fiscal adjustment, just as the economy recovers from the debacle of the pandemic.
“The staff of the IMF and the Argentine authorities have reached an agreement at the staff level on economic and financial policies that will be supported by a 30-month extended service agreement of the Fund (FEP),” the statement begins. The sum to be refinanced reaches 45,000 million dollars, which is what Macri received in 2018 as a financial rescue. A year and a half after that agreement was closed, Argentina was no longer in a position to meet its commitments to the IMF and was in default with its private creditors. In August 2020, the Fernández government agreed with the bondholders to lower interest rates from 7% to 3.07% on average and longer maturities, which represented a saving of 37,000 million dollars. It remained, however, to agree with the IMF.
So a short negotiation was thought of, less complex than with the investment funds that had led Argentina to the abyss of default. But the change of government in the US, the pandemic and, above all, the internal fights within the Peronist coalition that governs the South American country complicated things. It took nearly 19 months of talks and the threat of a new default so that, finally, an agreement was reached. This year, Argentina had to pay 19,000 million dollars to the IMF, and a similar figure next year. The sum far exceeds the international reserves of the Central Bank, which are close to zero. The IMF specified that the agreement “aims to provide Argentina with balance of payments and budget support to address the country’s most pressing economic challenges.”
The agreement supposes, in practice, a new credit, like the one granted to Macri in 2018, but whose installments will be disbursed only if Argentina passes the ten quarterly exams to which it will be subjected for two and a half years. The first block is dedicated to reducing the fiscal deficit. Argentina must lower it to 2.5% of GDP in 2022 (from 3% with which it closed last year), to 1.9% in 2023 and 0.9% in 2024. The IMF intends that the public accounts of Argentina reach equilibrium in 2025. The agreed deficit reduction path also implies limiting monetary issuance. Central bank assistance is expected to drop to less than a third this year from last year: from 3.5% to 1%. This cut will force the Argentine Executive to look for alternative ways of financing.
Another of the IMF’s demands to balance the accounts will be to reduce energy subsidies, which in 2021 meant that the State disbursed more than 11,000 million dollars, equivalent to 2.3% of GDP. Electricity, gas and water rates have been frozen since the end of the Mauricio Macri government and have accumulated a delay of 180%. Eliminating subsidies supposes a rise in the bills that reach households, with the consequent impact on purchasing power, in addition to extraordinary pressure on inflation.
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Aware that this point will generate significant resistance inside and outside Congress, the Argentine authorities had authorized a 20% increase in the electricity bill for 2022. The figure was insufficient for the IMF and was one of the points that delayed the agreement. Finally, the withdrawal of subsidies will be done in stages according to purchasing power. The 10% of the population with the highest income must pay 100% of the energy price; for sectors that receive state aid, the increase will be 21.36%; for the rest of the population that is between both extremes, the rise will be 42.7%.
The agreement with the IMF also contemplates strengthening financing in local currency. On the one hand, it wants Argentina to offer positive real interest rates to encourage savings in pesos instead of dollars. On the other hand, it has set as a goal an increase of 5,000 million dollars in BCRA reserves. Fighting high inflation, one of Argentina’s endemic evils —it closed with 50.9% in 2021—, is another of the objectives of the agreement, but the pact does not specify specific goals. Nor is the need for structural reforms in the labor market or in the social security system made explicit, as Kirchnerism feared.
Friendly Fire in Congress
“The Executive Board is expected to discuss the request for the IMF-backed program after the Argentine National Congress approves the economic and financial program,” the IMF negotiating team clarified. This point may be more controversial than it seems. The Government has serious problems in Parliament, due to the reluctance of the deputies and senators of Kirchnerism to cast their vote. In February, Máximo Kirchner, son of the vice president, resigned as leader of the ruling party in Deputies. He then harshly criticized the agreement and made it clear that he would not lift a finger to add wills to the venue. Cristina Kirchner, meanwhile, silently endorsed the departure of her son and since then has not commented on the agreement with the IMF.
The Government trusts, in any case, that it will have the votes to approve the text. To do this, it counts on the opposition, a bloc that is also divided. The toughest sectors, aligned behind former president Mauricio Macri, anticipated that they would vote against. The moderates are inclined to consider themselves part of the debt problem and will give their positive vote.
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