Argentina Staff Report For 2022 Article Iv Consultation And Request For An Extended Arrangement Under The Extended Fund Facility Press Release Staff Report And Staff Supplements

Against the background of a decade of declining per-capita income and high inflation, the Article IV consultation focused on policies to begin to tackle Argentina’s underlying impediments to sustained growth and low and stable inflation. Avoiding boom-bust dynamics suggests the need for greater emphasis on policies to promote net exports and mobilize domestic saving to finance much-needed investment. Reversing the high degree of financial dollarization, however, will take time and will require a durable commitment to tackle fiscal dominance and strengthen debt sustainability. Meanwhile, addressing budget rigidities is essential to improve Argentina’s resilience to shocks, while reorienting public spending towards investment and innovation is critical to support productivity and reduce intergenerational inequities. Sustained political and social consensus is necessary for policy predictability and to balance demands from financing Argentina’s large social welfare system while also encouraging private investment and formal employment.

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Early decisive policy implementation by the new economic team was critical to stabilizing markets and begin rebuilding confidence in the run-up to the second review. Domestic demand has since slowed in response to tighter macroeconomic policies, with high frequency indicators pointing to a further moderation in inflation, a contraction in goods imports, and improvements in the trade balance. Nonetheless, and against a more challenging external and domestic backdrop, the situation remains fragile. Inflation is still high and unanchored, reserves are low, and confidence needs further strengthening. Moreover, social discontent has risen amid spending restraint and some decline in real wages. Review discussions focused on strengthening macroeconomic policies to safeguard stability and achieve program objectives, especially a durable reduction in inflation and improvement in reserve coverage.

Implementation of more prudent macroeconomic policies in the second half of 2022 supported a moderation in inflation and improvements of fiscal and external balances through end-2022. However, against the backdrop of still large macroeconomic imbalances and challenges from an increasingly severe drought, the nascent improvements in inflation and reserve coverage have proved evasive. Meanwhile, policy setbacks have contributed to recent underperformance and added to uncertainties about the political resolve to adhere to the program ahead of the elections. The authorities reaffirmed their commitments to implement the program, which they continue to view as the key anchor for policy making. In this context, the review discussions focused on strengthening policies to secure delivery of key underlying program objectives, and on how best to adapt to an increasingly complex environment, while avoiding building future vulnerabilities.

Argentina: First Review under the Extended Arrangement under the Extended Fund Facility, Request for Modification of Performance Criteria, and Financing Assurances Review

Episodes of domestic policy uncertainty and acute market pressures in mid- 2022, coupled with a more challenging global environment, necessitated firmer program implementation and stronger policy reaction to ensure macroeconomic stability, rebuild policy credibility, and safeguard program objectives. Initial decisive actions and strengthened commitments by the new economic team since early-August have started to stabilized markets, although the situation is fragile as reserve coverage remains low while inflation is unanchored and stands at multi-year highs. The review discussions focused on assessing recent progress, updating the macroeconomic framework, and reaching understandings on a solid policy package to durably restore stability and achieve the program objectives.

Decisive implementation of the stabilization plan—centered on a strong fiscal anchor with no new monetary financing, and relative price corrections—has led to twin fiscal and external surpluses, a marked turnaround in reserves, faster-than-expected disinflation, a bolstering of the BCRA’s balance sheet and a reduction in sovereign spreads to multi-year lows. Selected easing of FX restrictions and deregulatory efforts are improving resource allocation. Nevertheless, macroeconomic imbalances and growth bottlenecks remain sizable and a long and difficult adjustment process still lies ahead, where policies need to evolve to build on earlier gains and support a turnaround in activity. Efforts are also underway to build political and societal support for reforms, as well as to scale up social assistance to protect the most vulnerable and ensure the burden of the adjustment does not fall disproportionally on working families. That said, delays in securing key legislation in Congress have led to some market volatility.

Despite a difficult economic context, President Macri’s administration, over the past two and a half years, has taken bold steps to eliminate a wide range of distortions in the economy. Efforts were also made to strengthen institutions (including the complete reconstruction of the statistics agency, in an effort to restore credibility to Argentine data), as well as an assertive effort to tackle corruption. Despite these efforts, a gradual approach to fiscal consolidation, combined with a tightening of global financial conditions, a poor harvest, and the introduction of a tax on nonresident holdings of short-term central bank paper, generated significant anxiety among market participants. Starting in mid-April, Argentina came under abrupt balance of payments pressures as both domestic and foreign investors decided to liquidate their position in onshore peso assets. To stem the outflows, the authorities significantly increased short-term interest rates, tightened fiscal policy, and sold foreign exchange. Shortly after taking these steps the government announced its intention to approach the IMF for an exceptional access Stand-By Arrangement.

Since completion of the fourth review, Argentina’s economic situation has become increasingly fragile with episodes of heightened market volatility, reflecting more recently political uncertainties. While the historic drought has resulted in larger than expected losses to agricultural production, exports, and fiscal revenues, non-agricultural activity has been resilient, reflecting robust domestic demand, in part a result of policy slippages. Inflation and external pressures have intensified, with reserves falling to dangerously low levels on account of the drought and insufficient policy adjustment. Policy slippages reflected in part political constraints and electoral considerations. During the August 13 open primary elections (PASO), the libertarian party (Libertad Avanza) received the highest share of votes (30.0 percent), followed by the opposition coalition (Juntos por el Cambio, 28.3 percent) and the governing coalition (Unidos por la Patria, 27.3 percent). The general elections are scheduled to take place on October 22, with a run-off on November 19, if needed. A new administration will assume office in early December.