Argentina: New Staff Level Agreement with IMF Reached
Due to the severe droughts faced in rural areas, the IMF has revised its current deal with Argentina, lowering the reserve accumulation targets for end 2023 and allowing Argentina to access USD 7.5 billion in the upcoming months. Due to the low level of FX reserves we believe severe import restriction will need to be adopted which will likely affect Argentina’s economic activity.
Figure 1: Argentina Gross International Reserves (USD Bn)
Source: BCRA
Argentina has reached a new agreement with the IMF concerning their existing deal. The recent severe droughts have made it evident that the quantitative targets of the previous agreement would not be achieved, necessitating negotiations to enable BCAR (Central Bank of Argentina) to access the USD 7.5 billion in the coming days. Furthermore, Argentina is obligated to repay the IMF a USD 3.5 billion amortization quota, which is likely to be repaid using backed loans from other multilateral institutions.
The agreement is contingent on Argentina implementing several measures to strengthen its dollar reserves. To curb the outflow of dollars, the government has introduced an additional tax on individuals seeking to acquire dollars and new import taxes and announced a new “Soybean Dollars” program. Additionally, they have imposed new tariffs on electricity services to bolster fiscal revenues.
As per the revised deal, the quantitative target for net FX reserve accumulations has been reduced from USD 8 billion to USD 1 billion by the end of 2023. However, the fiscal target of 1.9% primary deficit and the ceiling of USD 800 million for monetary financing in 2023 remain unchanged. While we believe that all three targets can be achieved, it will require significant efforts from the Argentine government. The new deal also recommended that exchange rate interventions, which have recently been used to influence the value of the Peso, should only be used to address disorderly conditions.
The revision of the deal is expected to prevent any new default from Argentina, enabling Minister of Economy Sergio Massa to concentrate on his presidential campaign. Although, some improvement related to the droughts is anticipated in the second half of the year, Argentina remains in a delicate situation due to low reserves and high inflation. Regardless of the election outcome in October, the winning government will likely need to impose stringent import restrictions during their initial months in office, potentially impacting Argentina's economic activity.
The last disbursement with the IMF is scheduled for the first quarter of 2024, then, after a gap year of the deal in 2025, the repayment of the current deal will begin in 2026, with annual amortizations gradually growing and reaching its peak at USD 6 billion in 2028. Consequently, the next government must implement sound reforms over the next few years to achieve a healthy financial condition to repay the IMF loan.