Argentina's latest IMF trial
Macri must pursue enhanced fund programme
by Desmond Lachman in Washington
Thu 17 May 2018
If ever there was a country in need of an International Monetary Fund-supported adjustment programme, it is Argentina. Whether the country will have the political will to comply with the IMF's conditions is another matter. Argentina's previous painful experience with the fund and its presidential election in 18 months further complicate matters.
Argentina is suffering from a twin budget deficit and external current account deficit crisis. The peso is in free fall. There is a serious inflation problem. The government's credibility has been undermined by its attempts to curb the central bank's independence.
IMF involvement could be highly beneficial. The fund's seal of approval and monitoring of an adjustment programme could restore the government's market credibility. In addition, the IMF's financing could stabilise the peso and rescue Argentina from an inflationary spiral.
On a positive note, Argentina is in a much better position to implement an IMF programme than it was in the late 1990s. Argentina is not stuck in a 'convertibility plan' straitjacket, as when it pegged the peso to the dollar between 1991-2002. That plan precluded the use of monetary and exchange rate policy to offset the impact of budget belt-tightening on economic growth. Now, with a freely floating exchange rate, that is no longer the case.
The greatest obstacle is a question of political will. The government may not be prepared to undertake the degree of budget adjustment that the IMF is likely to demand.
Already before the present crisis, Argentina was running a primary budget deficit of around 3% of GDP and an overall budget deficit of around 6% of GDP. In the absence of new budget measures, the country's deficit is bound to increase appreciably. The decision of Argentina's central bank on 4 May to raise interest rates to 40%, an attempt to defend the peso, is likely to have tipped the country into economic recession. This would depress the government's tax revenue collections.
High interest rates are bound to lead quickly to increased government interest payments. This is especially worrying, as Argentina relies heavily on short-term borrowing to finance its budget deficit.
Approaching the IMF has probably hurt President Mauricio Macri's popularity ahead of the presidential elections scheduled for October 2019. Regardless, he will hopefully find support for the implementation of an enhanced IMF adjustment programme, for the sake of Argentina and other emerging markets. Monetary tightening by the Federal Reserve is already leading to a more taxing global liquidity environment, and elections in Mexico and Brazil could increase political instability in Latin America. The last thing the region needs is for Argentina to spiral out of control.
Fortunately, both the IMF and US Treasury seem to appreciate the gravity of the situation and have indicated that they are willing to help stabilise the Argentine economy. Hopefully Macri's government will seize the opportunity and drum up support for more disciplined economic policies.
Desmond Lachman is a Resident Fellow at the American Enterprise Institute. He was formerly a Deputy Director in the International Monetary Fund's Policy Development and Review Department and the Chief Emerging Market Economic Strategist at Salomon Smith Barney.
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