The International Monetary Fund (IMF) continues to praise the program implemented by the Argentine authorities — but is making observations and recommendations, too. Among them are the need to remove exchange controls, increase exchange rate flexibility, maintain positive interest rates, and introduce automatic tariff adjustments.
This stems from the document released over the weekend, in which the Fund’s executive board announced the approval of the Ex Post evaluation of the program agreed upon in 2022 during Alberto Fernández’s administration. As required by the IMF’s statutes, all assistance exceeding a country’s quota must undergo evaluation.
“Paving the way toward regaining market access will hinge on a credible strategy to unwind FX controls, greater exchange rate flexibility and a more meaningful role for monetary policy,” the document states.
President Javier Milei has publicly expressed his intention to lift exchange controls and move toward exchange rate unification once conditions are met, including restoring the Central Bank’s reserves.
The IMF assessed that the strong accumulation of foreign currency reserves during 2024 reflected the December 2023 devaluation, relief from drought conditions, and the tax amnesty.
“At the same time, the presence of extensive FX controls—which will need to be unwound to ease distortions and regain access to capital markets—and appreciation of the real exchange as a result of preserving a slowly crawling peg, could make continued FX reserve accumulation challenging,” the document warns.
‘Challenging’ balance of payments
The government has reaffirmed its intention to slow the “crawling peg” to 1% per month, provided inflation remains at or below 2.5% monthly.
Furthermore, the IMF states: “With fiscal policy anchored by a fixed target (budget balance), maintaining external competitiveness and smoothing fluctuations in response to shocks would require both a more effective mechanism for external adjustment, notably greater exchange rate flexibility, and a stronger role for monetary policy—specifically, ensuring a positive policy real interest rate that appropriately responds to inflation developments to ensure internal balance while supporting the external stability goals.
“These considerations suggest that, despite achieving strong progress in recent months, the path to resolving Argentina’s balance of payment problem remains challenging.”
This reflects differences between the IMF and the policies implemented by the Economy Ministry. Such tensions are not new to Minister Luis Caputo, who resigned as Central Bank president on September 25, 2018, after intervening in the foreign exchange market against IMF advice at the time.
The IMF praised Argentina’s fiscal policy, stating that “establishment of a strong fiscal anchor, which eliminated deficit financing by the Central Bank, put in place the key element that was missing in the original program,” in reference to the 2022 agreement.
One-off measures
However, the IMF notes that sustaining and consolidating initial stabilization gains will likely require expanding fiscal reform efforts and improving social conditions to strengthen public acceptance.
The IMF acknowledged that, in addition to high-quality fiscal measures, such as improving personal income tax progressivity and reducing subsidies, “a sizable part of the initial fiscal turnaround was achieved through deep cuts to discretionary spending, including public investment and wages, as well as temporary or one-off revenue measures” like the elimination of the PAIS tax and the tax amnesty.
“As macroeconomic stability takes hold, policies would need to shift toward making fiscal gains more durable by addressing the structural fiscal rigidities: making energy tariffs’ cost-recovery automatic, improving sustainability of the pension system and public wage bill, reducing the distortive nature and complexity of the tax system, and improving flexibility in fiscal relations with provinces.”
The government has announced plans to submit a tax reform bill to parliament, reducing the number of taxes to around six. Other proposals destined for Congress include labor and pension reforms.
Argentina’s poverty falls to 38.9%?
The IMF also states that “sustainability of fiscal consolidation will also hinge critically on its social acceptance.” While recognizing efforts to increase social benefits and protect wages and pensions from inflation, the IMF highlights rising poverty levels, noting that “further strengthening of social support may be needed absent a reversal of this trend.”
The report notes that poverty exceeded 50% of the population at the start of last year. However, a recent calculation by the Ministry of Human Capital estimates that poverty fell to 38.9% in the third quarter of 2024.
These considerations gain significance as Argentina negotiates a new agreement with the IMF. Analysts argue that the IMF has limited authority to make suggestions due to past policy recommendation failures, as the previous administration’s unsuccessful program demonstrated.
Economic authorities appear to hold a favorable position in negotiations, supported by the success of the economic program — developed without IMF technical assistance — and reduced external pressures, along with access to alternative funding sources, according to Milei.
Despite this, analysts believe it is highly likely that a short-term agreement will be reached between the IMF and the government. Discussions center on a potential US$11 billion disbursement, which would be the equivalent of the unused portion of the original agreement signed during Mauricio Macri’s presidency.
It is speculated that the Executive Branch could bypass Congress to approve this borrowing, though some officials question whether avoiding legislative approval is feasible.
