Press Release No. 23/281

IMF staff and the Argentine Authorities Reach Staff-Level Agreement on the Combined Fifth and Sixth Reviews of the Extended Fund Facility Arrangement

July 28, 2023

• The Argentine authorities and IMF staff have reached staff-level agreement on the combined fifth and sixth reviews under Argentina’s 30-month Extended Fund Facility (EFF) arrangement. The agreement is subject to the continued implementation of agreed policy actions and approval by the IMF Executive Board, which is expected to meet in the second half of August. Upon completion of the fifth and sixth reviews, Argentina will have access of about US$7.5 billion. The next review is expected to take place in November.
• Since the completion of the fourth review on March 31, Argentina’s economic situation has become very challenging. Key program targets through end-June were missed on account of the larger-than-anticipated impact of the drought, as well as policy slippages and delays.
• Against this backdrop, a policy package has been agreed with a sequenced set of measures to rebuild reserves and enhance fiscal sustainability, while protecting critical infrastructure and social spending. These steps are intended to strengthen the program.

Washington, DC: An International Monetary Fund (IMF) team, led by Luis Cubeddu, Deputy Director of the Western Hemisphere Department and Ashvin Ahuja, Mission Chief for Argentina, issued the following statement in Washington, D.C. today following conclusions of discussions on the combined fifth and sixth reviews of the EFF arrangement for Argentina.[1]

“The Argentine authorities and IMF staff reached staff-level agreement on a policy package and updated macroeconomic framework to complete the combined fifth and sixth reviews under Argentina’s 30-month EFF arrangement. This agreement is subject to the continued implementation of agreed policy actions and approval by the IMF Executive Board, which is expected to meet in the second half of August. Completion of the fifth and sixth reviews will give Argentina access of about US$7.5 billion. The proposed combination of reviews and associated disbursement are intended to support Argentina’s policy efforts and near-term balance of payments needs, including obligations to the Fund. The next review is expected to take place in November.

Since completion of the fourth review, Argentina’s economic situation has become very challenging due to the larger-than-anticipated impact of the drought, which had a significant impact on exports and fiscal revenues. There have also been policy slippages and delays, which have contributed to strong domestic demand and a weaker trade balance. As a result, end-June 2023 performance criteria (PCs) for net international reserves (NIR) accumulation, the primary fiscal balance and monetary financing of the fiscal deficit were not reached. Meanwhile, the introduction of new temporary administrative FX measures, including in recent days, have occasioned nonobservance of the PCs against the introduction of multiple currency practices (MCPs). As such, waivers will be requested, as well as modifications of key targets, on the basis of the agreed corrective actions to strengthen the program.”

“Given this context, the discussions focused on reaching agreement on a policy package to rebuild reserves and enhance fiscal order. Safeguarding stability and addressing underlying imbalances—high inflation and low reserve coverage--are fundamental to secure a more sustainable, resilient, and inclusive growth over the medium term. Agreement was reached in the following key areas:

FX and monetary policy.

• A strengthening and harmonization of the FX regime remains fundamental to durably improve reserve coverage and external stability, and measures have been taken to encourage export liquidation and contain imports in the near term. The rate of crawl will continue to be used to preserve competitiveness and support reserve accumulation goals.
• To sustain peso demand and address high inflation, the authorities plan to continue to ensure that policy rates remain sufficiently positive in real terms. In addition, monetary policy will remain a key instrument to contain market pressures, with interventions in the parallel and futures FX markets focused on addressing disorderly conditions.

Fiscal policy. The 2023 primary fiscal deficit target remains unchanged at 1.9 percent of GDP. Adherence to the target requires further tightening the fiscal stance in the second half of this year, supported by a series of agreed revenue and spending measures, while protecting priority infrastructure and social programs.

• On the revenue side, the new taxes on FX access for imported goods and services, and new measures to mobilize export liquidation will help offset lower export duties resulting from the drought.
• On the expenditure side, efforts remain necessary to (i) contain wage bill growth, (ii) to update energy tariffs to better reflect changes in production costs, while improving the progressivity of the system; and (iii) to strengthen spending controls through better targeted social assistance and further rationalization of current transfers to provinces and state-owned enterprises.

Financing strategy. The agreed fiscal path assumes no additional reliance on direct monetary financing of the fiscal deficit. The recent and successful voluntary debt exchanges have significantly reduced rollover risks and are expected to support the mobilization of additional net domestic financing during the rest of the year. Interventions in the secondary bond markets will focus on securing normal market functioning, while protecting the central bank balance sheet.

Reserves. The agreed policy package should boost reserves during the remainder of this year, consistent with a cumulative net international reserves accumulation target of around US$1 billion by end-2023 (compared to a target of US$8 billion at the time of fourth review). Reserve accumulation is also expected to be supported by improvements in the energy balance (resulting from completion of the first phase of the gas pipeline) and by the expected recovery from the drought starting in the latter part of this year.

Given the economic challenges, the authorities have agreed to firmly implement the policy package in the weeks and months ahead, and to adapt proactively to evolving external and domestic conditions. They also underscored once again their continued commitment to remain current on their financial obligations to the Fund, in line with their external sustainability objectives.

We thank the Argentine authorities for the ongoing open and constructive discussions. We also welcome their commitment to strengthen the program and take the actions necessary to secure Argentina’s macroeconomic stability during this challenging period, marked by the unprecedented drought as a central factor.”

[1] Argentina’s EFF arrangement, with access of SDR 31.914 billion (equivalent to US$[44] billion, or about 1000 percent of quota), was approved on March 25, 2022.