Due to drought, IMF will require less reserves from Argentina this year and allow a new disbursement

The International Monetary Fund formalized on Monday that it had agreed with the national government on a modification of the objective scheme from the program Extended Fund Facility (EFF), according to agency staff in a statement. So the point of view accumulation of reserves it will be less demanding in the rest of the year due to the macroeconomic impact that the severe drought which affects agricultural production. As reported by Economía, the quarterly reserve target will be reduced by approximately $3 billion and the annual, in about $2 billion.

“As stronger macroeconomic policies and efforts to ensure better reserve coverage and reverse recent exchange rate losses are expected, a change in reserve building target net international by 2023,” the staff said.

“This will partly take into account the increasingly serious impact of the droughtwhile taking into account the offsetting effects fall in import prices energy and agreed policy measures. It is requested that the majority of this accommodation be made early 2023in line with the anticipated impact of the drought,” the IMF technical team said.

On the other hand, with regard to inflation, the Fund estimated that “picked up in recent months” and affirmed that “the authorities intend to to stay positive official interest rates in real terms. “In the meantime, efforts will continue to ensure external competitiveness and strengthen reserve coverage, which the authorities plan to complement with the timely rationalization of the exchange rate policy,” the statement continued.

The agency, meanwhile, pointed out that it had reached an agreement with the Central Bank so that do not use reserves to intervene in “cash with liquid” or in MEP dollars.

There was a paragraph specifically devoted to the tax issue, the delay in the implementation of the segmentation scheme for subsidies and the new cost that the retirement moratorium recently passed by Congress.

“The authorities are committed to achieving the primary fiscal deficit of 1.9% of GDP in 2023 through continued spending controls, better targeting of energy subsidies and social assistance, and better prioritization of government spending. investment, while protecting priority social and infrastructure spending,” said the IMF introducing the topic.

“To achieve deficit reduction targets and enhance the progressivity of energy subsidies, the authorities plan to continue implementing andl agreed segmentation schemeeliminating subsidies for high-income residential users starting in May and for commercial users by the end of 2023,” staff said.

And finally, he underlined, concerning the moratorium. “Early and determined action will be taken to sustainably address the fiscal costs of the unexpected approval of the pension moratorium to secure fiscal targets for this year and beyond,” he continued.

According to a summary made by the Ministry of Economy, the terms of communication of Fund staff agreed with the Government include:

-The disbursement of 4,000 million SDRs which represent 5,300 million dollars

-Mark drought as main reason for reviewing program objectives

-2022 over-compliance in fiscal matters, 2.3% of GDP and in terms of reserves, USD 5.4 billion, above planned targets

-It maintains the budget deficit target at 1.9% of GDP for this year. In this regard, the IMF stressed: continue to control spending in search of order; prioritize investments in infrastructure and social spending; the acceleration of segmentation to put an end to the regressivity of subsidies and on the moratorium on retirements recalls the importance of “being fair, it must be aimed at the most vulnerable and without overspending” .

-Positive interest rates

-Mechanisms to increase external competitiveness through export promotion to strengthen reserve coverage (which includes temporary exchange rate policy measures) as well as the expansion of treasury system instruments with liquidation.

-Proposes the non-use of reserves in interventions on the parallel foreign exchange market.

-He argues that swapping the debt of the bonds into pesos, which is equivalent to $16 billion, allows “to generate intrastate exchanges to improve maturity profiles”. Likewise, it promotes greater recourse to multilaterals for financing.

-Maintains the target for transitional advances from the Central Bank at 0.6% of GDP

-Establishes a new reserve accumulation floor for March, June, September and December, reducing by more than $3 billion to accumulate in March and in almost 2 billion dollars in 2023.

-Flexibility of the program for the year due to the impact of the drought, in particular in the first quarter

The Monetary Fund’s statement comes after several weeks of discussions since early 2023 between Buenos Aires and Washington. Along the way, there was a visit by technicians from the organization over several days to the offices of the Ministry of Economy and a mission by a group of civil servants from Sergio Massa in the American capital.

In parallel, Massa had a one-on-one meeting with the general manager of the organization Kristalina Georgieva within the framework of the G20 ministers’ summit in India. After this initial political approval, the parties engaged in a final round of negotiations, which lasted two weeks until Sunday evening.

The initial quarterly target stipulated that the Central Bank should have, by March 31, approximately, $7.8 billion. This is composed of $2,277 million with which the BCRA already had in December 2021 -according to IMF calculation- plus the $5.5 billion which were planned for this first quarter.

The next exhalation – which borders the $2.7 billion– approaches in the payment schedule. This proceeding will take place on March 21 and 22, in two separate installments. The staff, after today’s statement that the foreign exchange collection target at the Central Bank would be changed, is to prepare the technical report which will be turned to the directory a few days later. With the final green light, there will be a disbursement of some $5.3 billion.

The need to rethink the objectives of the reserve has been addressed by various consultant reports in recent days. For PxQ, led by Emmanuel Alvarez Agis“during the first two months of the year, net international reserves fell $3.3 billion“, they estimated. “In January, the main reason was the payment of interest to private creditors, while in February, the net sale of foreign exchange to the private sector generated an output of almost $900 million“, he added.

“To achieve the agreed net international reserve target for the first quarter of the year, the BCRA should accumulate net $3.7 billion during the month of March. The month of March with the best result for the BCRA in the foreign exchange market was 2007when $1,627 million was purchased net, less than half of what is needed to achieve the goal with the IMF,” PxQ said.

Por eso, continued la consultora, “the combination between sequía and expectativa por un nuevo dólar soy generó that the input of divisions of this sector sea el más bajo para a primer bimestre desde 2005. there restriction it faces and how that creates obstacles for, in an election year, activity to pick up and inflation to slow,” he said.

For LCG, “without accumulation of international reserves, the country finds itself in a very unfavorable position to regain access to international debt markets. Something that even closing the fiscal gap will be needed to refinance debt in years to come,” the consultant remarked in a recent report.

For its part, Analytica estimated in a recent report that the drought was not the only one to exert pressure on the reserve accumulation front. “The increase in the commitments of debt payments and the greatest incentives to store grain“, he mentioned.

“The strong exchange time (the multilateral real exchange rate has appreciated by 30% since December 2019), the high spread with the parallel prices (by more than 80% currently) and the speculation on a possible reduction of the Export dutiesif the opposition wins the elections, could lead to a lower settlement of the agro-export sector,” says Analytica.

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