The Argentine government announced yesterday it reached a US $50 billion, 36-month stand-by agreement with the International Monetary Fund. The Macri administration resorted to the international organization in mid-May, following a sharp depreciation of the peso, a result of a foreign exchange crisis.
The government also reached separate agreements with the Inter-American Development Bank, the World Bank and the CAF development bank of Latin America. overall, they amount to US $5.65 billion.
This is the largest loan the IMF has agreed to in its history, and amounts to about 1,110 percent of Argentina’s quota in the organization. Although its Executive Board still has not officially approved the staff-level agreement – is set to do so on June 20 – the fund’s Managing Director, Christine Lagarde, officially came out to congratulate President Mauricio Macri, indicating she was “pleased that we can contribute to this effort by providing our financial support, which will bolster market confidence, allowing the authorities time to address a range of long-standing vulnerabilities.
Shortly before the IMF announcement, Treasury Minister Nicolás Dujovne and Central Bank (BCRA) Governor Federico Sturzenneger held a press conference to outline the details of the agreement, which Dujovne assured “illustrates the support of the international community of Argentina.”
“It is good news, we are extremely happy,” began Dujovne, who nonetheless argued that the loan will not have a “magical effect,” as “the IMF can help us, but solving our problems is up to us.” “We are convinced that we are going down the right path. We managed to avoid a crisis. We have a consistent plan and seek support for it,” he added.
Argentine authorities intend to draw on the first tranche of the arrangement, of approximately US $15 billion, immediately after the Executive Board’s vote, but subsequently treat the loan as precautionary, the IMF explained in a release.
The agreement will have palpable consequences. The government has pledged to accelerate the reduction of its primary fiscal deficit – i.e the fact that it spends more than it collects. Although the goal for this year, of a 2.7 percent deficit, will remain untouched, next year’s will have to be of 1.3 percent of the GDP, rather than the initially intended 2.2 percent.
The new ulterior target aims at reaching fiscal balance in 2020 instead of 2021. With an eventual surplus, the government would be able to stop rolling over sovereign debt interests – that is, issuing long-term debt to pay soon-to-expire debt – and begin paying them with its own money, putting an end to the snowball effect.
The mentioned turbulence and the new fiscal deficit targets will result in less economic growth than expected. Dujovne indicated that the government now expects the GDP to grow by 1.4 percent in 2018 and between 1.5 and 2.5 percent next year, when last year the expectations for both years were above 3 percent.
A more independent Central Bank was another relevant condition requested by the IMF. As a result, it was already announced the government will send a bill aimed at reforming its charter to congress.
As a result, the BCRA will no longer finance the government by printing money and giving it to the treasury, a move that creates inflation.
“The little machine has been turned off; it has been unplugged,” the Central Bank governor, Federico Sturzenegger, said, making reference to a money-printing machine.
Furthermore, the BCRA will let the foreign exchange rate float freely, and remove the virtual barrier that was the offer of US $5 billion at an AR $25 rate. At the moment this article is being written, the exchange rate was already closing up to AR $26 per US dollar.
The agreement also includes new inflation targets. In the press conference, Sturzenneger indicated that the Central Bank has completely scrapped its goal for this year – which in December 2017 was changed from 10 to 15 percent – and that there will not be a new one. “We hope it to be as low as possible,” he said. According to a survey conducted by the entity he presides, private analysts, in average, expect it to be around 27 percent.
As of now, the BCRA will have complete autonomy to set its own inflation targets up to three years in advance. The new ones are of 17 percent for 2019; 13 percent for 2020; and 9 percent for 2021.