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Info Service on Finance and Development (Mar21/01) Geneva/New York, 3 Mar (Alexander Kozul-Wright and Bhumika Muchhala) – After successfully restructuring $65 billion of foreign debt with private creditors last summer, Argentina’s attention has turned to talks with the International Monetary Fund (IMF), which kicked off in November 2020. Market analysts expect that a new lending programme will support the peso’s recent devaluation and allow Argentina to re-enter international debt markets. Negotiations over Argentina’s $44 billion debt with the IMF will probably entail extending payment maturities and agreeing to new lending programmes. While finance minister, Martin Guzman, recently noted that he’d like to wrap up negotiations by May – originally scheduled for March – powerful voices inside President Alberto Fernandez’s government have called for a longer delay. Argentina’s vice-president, Cristina Fernandez de Kirchner, is keen to postpone any IMF programme until the pandemic has abated, thereby avoiding painful spending cuts before October’s mid-term elections. Ms Kirchner has consistently supported state interventions in the economy to support low-income workers, a policy platform which marked her two terms as president from 2007 to 2015. Although the bulk of Argentina’s repayments to the IMF are due in 2022-23, Fund officials are understood to be concerned that talks have stalled in recent months. Bond holders, concerned with repayment prospects, have also questioned government measures to freeze prices, employ capital controls, and raise taxes on wealthy households. GUZMAN’S RETORT As Argentina prepares to embark on its 22nd IMF Programme over the past six decades, Guzman recently insisted that austerity – the bedrock of most IMF programmes – is not the answer to the country’s woes. “The 2018 programme was based on that same tenet and it didn’t work … fiscal adjustments in recessions don’t work, and it’s not what we’re going to do,” he said. Instead, Mr. Guzman’s programme is based on gradual fiscal consolidation in the context of moderate growth and affordable debt repayments; his plan would allow Argentina to extend IMF repayments for as much as a decade, including some $5 billion due later this year. In turn, he said that Argentina would narrow the budget deficit to roughly 4.5% of annual output, down from 8.5% in 2020. An IMF deal, by contrast, would probably include a primary fiscal deficit target of 3.5% of GDP in 2021, followed thereafter by a return to primary surpluses (i.e. net government spending before interest payments). As such, Mr Guzman’s gradual approach is intended to lift growth slowly whilst simultaneously addressing runaway inflation. Plans to increase government revenue in a measured way would also halt the need for central bank deficit financing, which typically triggers price rises. Indeed, inflation reached 36% in Argentina last year. The government has consistently noted that restoring order to Argentina’s budget may require policy concessions from the IMF. Earlier this month, President Fernandez stated that the Fund should grant more “flexible” terms to Argentina. In addition, he noted it would be “beneficial” to secure more funding from multilateral institutions such as the World Bank and the Inter-American Development Bank (IADB), especially to finance public infrastructure projects. “MACRI-ECONOMICS” Due to the fallout from COVID-19, Argentina’s economy contracted by more than 10 per cent in 2020, its third consecutive year of recession. The downturn began after a currency crisis in 2018 which prompted the IMF to extend a record-breaking $57 billion programme – making Argentina the institution’s biggest debtor by far. At the start of his pro-market presidency in 2015, Mauricio Macri inherited a combination of declining commodity prices and exchange rate pressures, along with welfare spending pressures and expensive legal battles with vulture funds over unpaid debts. His predecessor’s defence of the peso virtually exhausted foreign exchange reserves and all but forced Macri into a currency devaluation. Still, the IMF’s politically motivated bid to shore up Argentina’s currency proved ill-timed and ill-fated. The Fund, with Macri’s full-throated support, insisted on a free-floating exchange rate, which quickly resulted in devaluations and forced the central bank to raise interest rates up to 70 percent, choking business and raising unemployment. The crisis sent poverty skyrocketing, along with the country`s debt-to-GDP ratio. The groundswell of mistrust between Argentina and the Fund goes back even further than the misguided 2018 agreement. Almost two decades earlier, the collapse of another IMF program tipped the economy into a deep slump. Within five years, the left-wing government which came to power after that crisis repaid the IMF and afterwards severed ties with the organisation. In 2012, the IMF shut down its office in Buenos Aires. Argentina’s multi-year recession was made worse in 2020 by COVID-19, which prompted the government to implement one of the longest and strictest lock-downs in the world. With more than 50,000 coronavirus deaths to date, the country is finally beginning to ease restrictions. Looking ahead, the IMF’s role as Argentina’s largest creditor will remain critical in helping to overcome the current crisis. Last year, the IMF worked closely with the government to assess the level of private creditor relief needed to secure a restructuring deal. This year, many hope the Fund will offer similarly accommodating terms to avoid the excessive costs of previous IMF arrangements. IMF SUPPORTS FISCAL STIMULUS, BUT NOT FOR EVERYONE In its January 2021 Fiscal Monitor Outlook update, the IMF expressed concern over a return to economic austerity, stating that “without additional fiscal support beyond that included in 2021 budgetary plans, projected fiscal contractions this year could slow recoveries.” Debt distress, exchange rate risks and fear of credit rating downgrades have recently prompted austerity measures in many developing countries. For rich countries, however, the rules are different. In an interview with the Financial Times earlier this year, head of the Fund’s Fiscal Affairs Department, Vitor Gaspar, noted that advanced economies should learn to live with higher debt burdens rather than rush to reduce liabilities, especially in a record low interest rate environment. In stark contrast, the Fund has consistently pressured developing countries to reduce external debt levels and maintain tight fiscal rules, especially in the wake of the 2008 global financial crisis. These policy inconsistencies will leave most emerging market economies (and the majority of the world’s population) with inadequate fiscal space to combat the fallout from COVID-19. This differentiated reality is further accentuated where the ability to raise domestic revenue has been restricted by the effects of lock-down measures on tourism, trade and commodity price declines. Where financial assistance for low-income countries will come from, amidst what the IMF describes as “tight financing constraints”, remains unclear.
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