Analysis-IMF has a tough call on Argentina: force major reforms or pull the plug

By Jorgelina do Rosario

LONDON (Reuters) – Argentina and the International Monetary Fund share a rocky history spanning seven decades – and it looks as if things could get worse.

Just five years ago, Argentina became the Washington-based global lender’s biggest single debtor, receiving a $57 billion bailout to help then-President Mauricio Macri’s market-friendly government steer out of an economic crisis marked by high inflation and a gaping budget deficit. But that programme failed to put South America’s second-largest economy back on its feet.

Fast forward and Argentina is about to enter a recession, with inflation running at more than 100% and its dollar reserves deep in the red. Meanwhile, the Peronist-led government that took over in late 2019 has missed the modest economic targets mandated by a 2022 IMF loan tailored to refinance $44 billion still owed from the previous programme.

Although the current programme is off track, the IMF is pushing ahead with reviews and disbursements because it does not want to force Argentina into a default that would likely worsen the country’s grim economic circumstances.

Pressure, however, is building inside and outside the IMF to ensure Argentina’s treatment is in line with those of other countries. Analysts said the IMF needs to take a harder stance when a new government takes power after elections in October.

“No matter who wins after the vote, the IMF should insist that the government either bite the bullet – or otherwise the Fund should pull the plug on its support,” said Mark Sobel, a former U.S. representative at the IMF.

“Even if that means huge arrears.”

NEW GOVERNMENT AHEAD

The next government might feel the heat quickly.

Javier Milei, a far-right outsider who vaulted into the front-runner’s position after primary elections last month, wants to dollarise the economy and said the Fund should encourage Argentina to more quickly reduce its primary fiscal deficit, which is targeted at 1.9% of gross domestic product for 2023.

Even if he wins the Oct. 22 election and takes power in December, Milei would need alliances in Congress to push through reforms and a new IMF programme – Argentina’s 23rd.

Sobel said the country will require sweeping fiscal consolidation, a halt on reserve money creation, and an extensive and sequenced liberalisation of multiple foreign exchange rates, capital controls and other restrictions.

Economy Minister Sergio Massa, the center-left Peronist coalition’s presidential candidate, promised this week to exempt millions of workers from paying income taxes shortly after a fresh IMF disbursement.

Stricter conditions and deeper structural reforms for Buenos Aires should come with a “very strong social component,” said Martin Muehleisen, the former director of the IMF’s Strategy, Policy and Review Department (SPR), adding that a new programme “can’t mean more people living on the streets.”

Four out of 10 Argentines live below the poverty line.

“The message to Argentina from the IMF but also from G7 shareholders needs to be clear: You fix your economy for real or there is just not more money,” Muehleisen said.

A top soybean meal and oil exporter, Argentina is at the mercy of boom-and-bust cycles. Its economic policies have gyrated between protectionism – capital controls, export quotas and tariffs – and market-friendly reforms, leading to a topsy-turvy relationship with the Fund.

In the 1990s, the global lender was a continuous feature in Argentina, providing financing and technical assistance while the government fixed the peso to the U.S. dollar. But quick IMF disengagement in 2001 worsened an economic crisis as the country’s overseas debt bulged.

The rise of leftist Nestor Kirchner to the presidency in 2003 opened a new chapter, as his government took a hostile view of the IMF and repaid some $10 billion owed to the Fund before cutting ties.

Following 15 years with no programmes, Argentina returned to the IMF in 2018 to request a record bailout. That effort paved the way for the $57 billion programme, which ultimately failed and was replaced by the current one.

“The shadow of that failed programme will linger on both the new administration and the IMF, as there is an institutional memory on how this programme didn’t help”, said Stephen Nelson, an associate professor of political science at Northwestern (NASDAQ:) University in Chicago.

PREFERENTIAL TREATMENT

The current programme could end before its expiration in September 2024, but Argentina will still require funds.

“Argentina needs a big liquidity boost. The pressure from IMF members to tighten conditions will get amplified when negotiations turn to a new lending arrangement,” said Nelson, who specializes in the politics shaping IMF lending policies.

Dollar-strapped Argentina maintains a complicated currency scheme of multiple rates that worsened after a recent 18% devaluation. Capital controls are still in place.

Some IMF executive board members have complained in Argentina-related meetings that the country has received preferential treatment, three sources close to the matter said on condition of anonymity.

The lack of “evenhandedness” has come up with countries such as Zambia, Sri Lanka and Ghana facing strict requirements under IMF-led debt reworks.

“How can the worst serial defaulter in the emerging markets asset class continue to receive preferential treatment compared to other EM nations with macroeconomic troubles?” said Walter Stoeppelwerth, chief strategist at financial firm Gletir SA.

Economists have pointed to Egypt and Burundi, which devalued their currencies by more than 40% and more than 30%, respectively, as examples of countries that have had to take harsh medicine under IMF programmes.

Simon Quijano-Evans, chief economist at asset manager Gemcorp Capital, noted that Argentina has more outstanding IMF debt than the $38 billion combined from sub-Saharan Africa nations at a time when many of the latter face “debt restructuring delays due to the G20 Common Framework process.”

Without mentioning Argentina, the U.S. – holding the largest voting power in the Fund – recently raised its concerns.

“In some cases, a country will require a follow-on program to resolve its balance of payments problems,” said Jay Shambaugh, the U.S. Treasury’s undersecretary for international affairs.

“But it cannot be the policy of the IMF to roll over programs, or approve reviews, only to avoid arrears without sound policy reforms in place.”

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