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IMF Executive Board Approves Stand-By Agreement with Argentina

Along with the agreement, the Fund will disburse US$ 5.7 billion.

By | [email protected] | October 26, 2018 2:57pm

us-imf-argentina-economy-957066670-5b1a9285865c9-1Minister of Finance Nicolas Dujovne (left) and Christine Lagarde (right), via Getty
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The International Monetary Fund’s (IMF) Executive Board approved the Stand-By agreement reached with Argentina, which was announced on September 26 by Treasury and Finance Minister Nicolás Dujovne and the Fund’s Managing Director, Christine Lagarde.

However, contrary to what had been announced back then, the credit line will be increased by US$ 6.3 billion, not US$ 7.1 billion. Nonetheless, the Fund will expedite most disbursements to 2018 and 2019, in an attempt to ensure the markets that Argentina will be able to meet its financial obligations at least in those years.

The Fund has made US$ 5.7 billion immediately available, while the next disbursement, of US$ 7.6 billion, will take place on December 15.

In exchange for these new conditions, the Macri administration committed to eliminating the primary fiscal deficit – that is, without taking sovereign debt payments – and monetary expansion until June 2019.

As for 2019, the government will receive a total US $22.6 billion in quarterly installments, starting in March. The remaining US $6.3 billion, on their end, will be disbursed in 2020.

The government has already used US $15 billion from the original agreement signed in June to cancel sovereign debt payments, face regular expenses and, particularly, attempt to keep the exchange rate at bay by auctioning US dollars in the market.

In regards to the exchange rate, the Central Bank, now led by Guido Sandleris, established a so-called “no intervention zone” where it sets a “floor” and a “ceiling” for the peso and lets it float freely between these boundaries, but intervenes if the exchange rate gets near any of them. In October, the rates were of AR $34 and $44 per US dollar, respectively, but they will increase by three percent each month.

Ever since the plan was enacted, the peso appreciated from roughly AR $40 per dollar to AR $37.5 at the moment this article is being written. This can largely be explained by the sharp increase in benchmark interest rates for banks, called Leliq, used to encourage institutions to invest in treasury notes in pesos. However, to a large extent, banks don’t really have other options as the BCRA also increase the so-called encajes bancarios, which determine the minimum percentage of reserves that banks must keep in its vaults and not invest in the market. Therefore, banks’ two options are using these encajes to subscribe leliqs, or not do anything with them.

Come November, the Fund will go back to having a permanent office in Buenos Aires, from where it will continue to monitor the conditions to which the Argentine government committed to implementing.

Roberto Cardarelli, the IMF official in charge of the “Argentine case” is set to arrive in the country next month to monitor the state of the economy during the third trimester.