Despite the drought, it is considered that Activity -beyond the agricultural sector- has “shown resilience, reflecting solid domestic demand, partly as a result of policy deviations.”
Warns that: “inflation and external pressures have intensified, with reserves falling to dangerously low levels due to drought and insufficient adjustment policy.” He explains that these deviations partly reflect the constraints of politics as well as electoral issues.
Breach
The targets for accumulation of reserves, fiscal deficit and monetary financing of the deficit were not met “by wide margins”.
The introduction of new exchange measures implied more exchange restrictions and practices of multiple exchange rates with the consequent “non-observance” of the program criteria.
Progress on the structural agenda was “limited”, reflecting in part a greater focus on safeguarding stability in the short term.
The report warns that “the key objectives of the program (reducing inflation and rebuilding reserves) remain elusive, as imbalances have increased in the context of external shocks and weak policy implementation.
Measures
As a result of the difficulties, a new package of measures was determined focused on the short term with “quickly rebuilding reserves and strengthening fiscal order.” For them it is pointed out that “the exchange regime is strengthened” and apply “tighter macroeconomic policies to contain inflation and mitigate the risk of possible disorderly pressures in the markets”.
However, it is considered that to achieve lasting progress it will require “strict implementation” (of these measures) despite the “challenges posed by the electoral cycle”.
The authorities are committed to addressing macroeconomic imbalances and dismantle multiple exchange rates and currency restrictions next year as the impact of the drought subsides, exports grow, and the impact of tighter macroeconomic policies begins to take hold.
Inflation and GDP
Despite “robust domestic demand during the first half, GDP is expected to contract 2.5% this year” due to the greater impact of the drought and the application of “tighter macroeconomic policies during the remainder of 2023” .
Regarding inflation, the IMF estimates that it will reach 120% by the end of 2023, although it clarifies thatthis will depend to a large extent on the evolution of the transfer of the exchange rate to prices and the implementation of policies”.
The new policy package will increase net international reserves by approximately 8 billion dollars between August and December, although they will not reach the goal of 7 billion dollars foreseen in the fourth revision.
Regarding the outlook, although overcoming the consequences of the drought should support growththe recovery is expected to “be gradual”, given the difficulties derived from the policies necessary to correct macroeconomic imbalances.
exchange policy
It is considered that “andhe strengthening and harmonization of the exchange rate regime are essential to rebuild reserves in a lasting manner and resolve relative price imbalances.”
The report summarizes the prior actions that the government implemented, among them the devaluation of the peso by 27% in relation to the level at the end of July and the increase in the interest rate to 2,100 basis points.
in the immediate “the crawl rate will be calibrated to support the accumulation of reserves”, while the monetary policy interest rates will remain at positive levels with the purpose of “support the demand for pesos and control high inflation.”
However, the Minister of EconomySergio Massa announced that the official exchange rate will remain fixed until November 15 and from that date it will be adjusted based on October inflation minus one point.
The IMF emphasizes that “monetary policy will continue to be a key instrument to contain market pressures”.
Consider that Intervention in the parallel and futures markets of the exchange market “should be concentrated solely to address disorderly situations.”
tax adjustment
The primary deficit target for 2023 remains unchanged at 1.9% of GDP “consistent with a tightening of fiscal policy during the remainder of this year.”
Although he considers that taxes on imports, among other aspects, should help to improve income, he points out that “Greater control of spending will be necessary throughout the electoral period, including to prioritize social and infrastructure spending.”
The report says that The Argentine government “has committed to making greater efforts to bring energy rates up to date in line with production costs and contain public sector salaries and pensions given past deviations in these areas.”
Financing
The IMF staff ponders the recent measures adopted to substantially reduce the risks of rolling over public debt.
It indicates that the purchases of the BCRA in the secondary market of bonds are “limit to maintain the normal functioning of the market”
A restrictive fiscal policy and efforts to obtain both internal and external financing should help to avoid monetary financing of the deficit in the future and support the necessary strengthening of the BCRA balance sheet.
Medium-term policies
Beyond this year, the report notes that tackling high inflation, improving external policies, and fiscal sustainability will require, above all, accelerating fiscal consolidation efforts.
It also maintains the need for “greater harmonization of the exchange regime, including the rapid elimination of “distortive multiple exchange rates and exchange restrictions”
Once the reserves are recovered and the imbalances are addressed, a gradual process is considered necessary to facilitate the flow of capital.
Among other measures, it indicates that:
- More efficient and predictable regulatory frameworks will be needed to boost Argentina’s export potential, especially in the areas of energy and mining.
- It proposes improving the targeting and efficiency of social safety nets to support inclusive growth.
A political fact is that both the current government and the opposition parties “have expressed their commitment to the general terms of this strategy”, says the IMF.
Program risks
The document warns that “The risks remain high, reflecting an increasingly fragile economic and social situation, greater difficulties in program implementation, and electoral uncertainties.”
They warn that “In addition, the risks could intensify if the projected improvements in climatic conditions do not materialize or external conditions worsen.
He concludes by forecasting that “Resolving Argentina’s deep structural imbalances will likely take many years and require significant attention from the future administration.”
Program issues and modalities
The IMF contemplates modifications to the objectives of the program.
- The reserve accumulation target was lowered
- Minor modifications to the targets for the primary fiscal balance are proposed due to higher-than-scheduled inflation, but without changing the target of 1.9% of GDP.
Waivers
The Argentine government requested dispensations for
- non-compliance with the reserve accumulation targets set at the end of June,
- the monetary financing of the deficit
- financing and the level of the primary fiscal deficit;
- failure to meet performance criteria relating to the imposition or intensification of foreign exchange restrictions and the introduction of multiple exchange rates.
Finally, the document acknowledges that the restrictions and multiple exchange rates will continue until the impact of stricter macroeconomic policies takes hold.
Source: Ambito
