IMF and Argentina finalise new $44bn programme

Directors of the IMF’s board have sealed a fresh $44bn plan with Argentina that unlocks fresh funds and removes the threat of an imminent clash with the lender, after nearly two years of talks.

Buenos Aires and Washington have been anxious to finalise the terms of a 30-month extended fund facility arrangement outlined earlier this month. The agreement in principle refinances $44bn in debt outstanding from a record $57bn that Argentina borrowed from the IMF in 2018, a loan that quickly veered off track.

Kristalina Georgieva, managing director of the IMF, underscored the “exceptional economic and social challenges” that Argentina continues to face and cautioned that the risks to the programme were “exceptionally high”, particularly in light of the war in Ukraine.

“Against this backdrop . . . the programme contains a carefully calibrated set of economic policies,” she said in a statement announcing the executive board’s decision on Friday.

Argentina is due to receive $9.7bn of funds now that the programme has been approved by both sides. Full details of the exact terms are yet to be made public.

Additional amounts will be dispersed subject to quarterly reviews by the organisation’s staff, and debt payments to the IMF due this year and next will be postponed until 2026.

The agreement is the culmination of weeks of talks and will avert an immediate fiscal and political crisis for the government of Alberto Fernández. It will also attempt to rectify the embarrassing failure of the IMF’s biggest bailout as it tries to help emerging market economies rebuild post-pandemic.

But the conditions outlined have been dismissed as unrealistic by some analysts because they do not address the distortions imperilling the Argentine economy and fail to tackle fundamental structural problems.

Investors are sceptical that a divided and unpopular government facing elections in 2023 — as well as Russia’s invasion of Ukraine, which will affect Argentina’s already depleted foreign currency reserves — can keep the new arrangement on track and comply with the terms. They see default as a matter of time.

Ignacio Labaqui at Medley Global Advisors described the new deal as “a bridge” to get to 2023 without Argentina falling behind with the organisation: “The IMF apparently prefers to wait and see if the next government is more willing to implement real reforms”.

Buenos Aires has agreed to gradually reduce the budget deficit over three years and curb central bank money-printing in exchange for a four-and-a-half-year grace period on IMF payments, with full repayment by 2034.

Economic projections underpinning the programme will be tough to meet, economists warn. The official forecast outlined in the IMF agreement is for annual inflation, currently at 52 per cent, to decline this year to between 38 and 48 per cent.

However, prices in February increased 4.7 per cent, the fastest monthly rise in nearly 12 months. Some banks predict annual inflation could accelerate to 60 per cent by the end of 2022.

Pressure on the local exchange rate is building, dollar reserves are low and poverty is high and climbing higher. Net central bank reserves have fallen into negative territory, by some calculations.

Gerry Rice, the IMF’s director of communications, last week said staff were assessing the broader impact of the war in Ukraine on Argentina’s growth and external and fiscal balances, raising the question of whether the programme will prove more durable than the country’s 21 previous agreements with the fund since it joined in 1956.

“The government doesn’t have a plan to deal with inflation,” wrote Daniel Kerner, senior analyst at risk consultancy Eurasia. The Peronists will probably introduce a new round of price controls to keep prices low, but not make the serious adjustments needed to stabilise them, he said.

Reducing energy subsidies and raising borrowing costs above inflation are other pillars of the pending IMF deal.

Given the belt-tightening envisaged in the deal, maintaining political support will be a challenge. Many voters are critical or weary of the fund after decades of unsuccessful bailouts. Fernandez’s predecessor, Mauricio Macri, was voted out in large part because he handcuffed Argentina to a giant IMF loan programme.

Tensions within the ruling party over the deal have escalated in recent weeks, with Cristina Fernández de Kirchner, the powerful vice-president, suggesting she is unhappy with the deal. Constant infighting poses further risks that the conditions set out will not be met, analysts warn.

“This [deal] is prolonging the agony, we’ll suffer a default sooner or later,” senator María Inés Pilatti Vergara said on casting her vote against the agreement last week.