Deal or no deal

Argentina strikes an accord with the IMF; it is unlikely to be its last.

Last month, Argentina and the International Monetary Fund (“IMF”) reached an agreement to restructure the country’s eyewatering USD 44.5 billion debt. Among a raft of reforms insisted on by the IMF are a commitment that Argentina will reduce its fiscal deficit – currently 2.5% of GDP – and implement a more hawkish monetary policy. Such measures are necessary. They will help to tame inflationary pressures – currently hovering at around 50% – and reassure cautious markets that Argentina can demonstrate a mature approach to fiscal discipline.

The deal is yet to be ratified by congress and the IMF’s board.

An economist based in Argentina said, “Multiple factors are holding the ratification of the deal back. The administration knows that it will be extremely challenging for the IMF adjustments to be agreed by the Kirchnerist wing of government.”

“The administration knows that it will be extremely challenging for the IMF adjustments to be agreed by the Kirchnerist wing of government.”

Economist, Argentina

Indeed, was it not for the resistance of this wing, led by leftist vice president Cristina Kirchner, it is likely that congress would already have ratified the deal. For the IMF, its terms are non-negotiable. The impetus to get a deal done is in no small part due to the fact that Argentina no longer has the reserves available to meet the next repayment due dates.

The IMF is sticking by its guns exactly because it knows that without a tighter monetary policy and looser fiscal policy – and crucially, without extra liquidity from the IMF – the country will continue its downward spiral, unable to ever accumulate enough reserves to keep up with its repayment obligations.

Too often in Argentina however, politics gets in the way of common sense. An international political analyst based in the country said, “Every time an agreement is reached with the IMF there is hope that it will provide impetus to meaningful economic reforms. Too often, these are kicked into the long grass due to political considerations.”

“Every time an agreement is reached with the IMF there is hope that it will provide impetus to meaningful economic reforms. Too often, these are kicked into the long grass.”

International political analyst, Argentina

Of course, adjustments are long overdue. They should focus on things like labour reform, tax reform and an overhaul of the cumbersome pensions system. The administration of Alberto Fernández (“Fernández”) does not have the time nor political will to implement electorally unpalatable reforms including an increase to the tax burden. Martín Guzmán, the economy minister, finds himself in the unenviable position of balancing the two sides.

The political analyst stated, “The government knows very well that, after having lost the 2021 elections, starting 2022 with a tariff adjustment would in practice mean losing the 2023 presidential elections.” If congressional approval comes through, a deal could be signed in the coming days given that the government may soon be faced with a looming default.

Unlike in most of its debt restructuring programmes in Latin America, the IMF did not demand drastic cuts in fiscal spending. While the deal is a positive development for the government, Fernández’s administration is yet to present a detailed plan by which it will achieve its goals.

The political analyst said, “Argentina today has practically no reserves. Ratifying the deal is not only a financial issue. From a productive point of view, it would be increasingly difficult to import inputs for production, which would obviously fall, exports would fall and the possibility of paying dividends by companies diminishes too.” Ultimately, however politically unpalatable its terms may be, Argentina cannot afford no deal.

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