Amid a plunging peso and falling confidence in Argentine economic policy, President Mauricio Macri turned to the International Monetary Fund for the second time in three months. His government, in power since December 2015, is working with the Fund to implement a viable programme, owned by Argentina. The IMF exists to help countries in these circumstances and is no stranger to high-stakes situations.
With a revised framework at hand, some commentators have advanced criticisms of Argentina and the IMF, which I highlight below. They miss the bigger picture. Argentina’s revised IMF programme merits the support of the international community.
- The revised programme appears too tough.
On paper, the programme is tough. This may be needed to restore confidence and achieve stabilisation.
Macri’s economic strategy focused on sweeping liberalisation to unleash productivity and eliminate the distortions of the Kirchner era (Néstor Kirchner was president from 2003-07, followed by his wife Cristina Fernández de Kirchner until 2015). Marci also advocates gradual fiscal consolidation to avoid austerity. He has done well on liberalisation. Fiscal gradualism and associated large borrowings were tenable in June 2017 when market participants eagerly purchased 100-year Argentine bonds, but not at a time of tightening global financial conditions.
Achieving primary balance in 2019 will be painful and passage of a supporting budget will probably be a condition for ongoing IMF support later this year. This will send a strong signal to markets.
High inflation and a vacillating monetary policy have bedevilled Argentina. The IMF programme originally sought to restrain inflation through an inflation-targeting regime. In the light of fiscal dominance and the lack of central bank follow through, the revised programme makes a reasonable pivot to a more rules-based monetary policy framework. Broadly, it allows no growth in the monetary base through mid-2019.
The June programme provided for exchange rate flexibility, allowing intervention only in disorderly markets. Argentina did not follow through. The revised programme, coupled with central bank changes, should ensure that the peso really floats this time. Foreign exchange flexibility is essential to adjustment and regaining investor confidence.
- The revised programme’s toughness will damage Macri’s electoral prospects.
The June programme assumed scant growth in 2018, a restoration of market confidence and a return to growth of around 1.5% in 2019. This is unlikely to occur – the 2019 budget optimistically assumes a 0.5% contraction. But absent stabilisation and restored confidence, the situation would be far worse.
- If so, the programme should provide substantially more financing for Argentina.
Some argue that external financing needs could amount to more than $70bn in subsequent years, given assumptions about rollovers and capital flight. Hence, augmenting the $50bn June programme to $57bn will not suffice.
The augmentation, while modest, is far more generous than it seems on its face. In June, Argentina drew a first tranche of $15bn, with half for fiscal support, and stated it intended to treat the remainder as precautionary.
The Fund has raised 2019 disbursements by $19bn, and Argentina intends to draw the full amount of the $57bn programme for fiscal support.
The focus on larger scale financing misses a key point – policy implementation is perhaps more important than the financing. The bazooka is already big, and a bigger bazooka is not necessarily the answer.
- The initial June programme underappreciated a worsening external environment.
The June programme was designed amid a different external financing environment. Even if Buenos Aires is 7,754 miles from Ankara, market conditions worsened for Argentina following the Turkish crisis. Additionally, Argentina was not implementing parts of the June programme. Finally, it is unreasonable to expect infallible programme design amid volatility and unpredictable market psychology.
The Fund is no stranger to failing at first and then trying again and succeeding. The Korean programme in 1997 achieved stabilisation on the second attempt. Similarly, the IMF struggled with Indonesia throughout 1998 to rein in credit growth before stabilisation took hold.
- IMF exceptional access criteria are not met.
In June, the Fund argued the criteria were met, but it could not assert that Argentina’s debt was sustainable with a high probability. Thus, the IMF argued that other non-Fund financing improved debt sustainability sufficiently to safeguard Fund resources.
The IMF has a long and justified history of providing exceptional access. This was clear in the early 2000s, during the 2008 financial crisis and in the euro area debt crisis.
In early 2016, the Fund adopted a more rigid interpretation of the exceptional access criteria pursuant to its revamped sovereign debt lending framework. At the time, some argued the IMF should avoid rigid rules and retain sufficient flexibility in its policy, rather than resorting to liberal interpretations or artful fudges should a situation arise that did not neatly mesh with the criteria. The Fund, stung by Greece, rejected this argument.
But it appears the IMF staff may not have lost their ability to craft liberal interpretations of the criteria that countries must meet to receive exceptional assistance. Even if such interpretations are inferior to a more measured policy, given the imperative of supporting Argentina, liberal interpretations are to be commended at this time.
Argentina is in a time of need. The revised programme is tough and poses significant challenges. If the Macri government is prepared to implement the revised programme, criticisms should be brushed aside for the greater good.
Mark Sobel is US Chairman of OMFIF. This essay was jointly published with the Washington-based Center for Strategic and International Studies, where Sobel is a Senior Adviser (Non-Resident) with the Simon Chair in Political Economy.