Prospects for Argentina under IMF Surveillance

Since the end of “Convertibility” in January 2002 Argentina has suffered from persistently rising inflation. From 5% in 2004, annual inflation increased to 40% p.a. by the end of 2014. The underlying source of the problem has been excessive fiscal deficits funded from the Central Bank of Argentina’s (BCRA’s) balance sheet by successive governments. This paper starts with the key abuses of the BCRA’s balance sheet which have undermined monetary stability and proceeds to a wider view of the ingredients of Argentina’s current crisis. Despite the accession of the market-friendly President Mauricio Macri in December 2015, the situation has continued to deteriorate. After two and a half years in office, the administration had made little progress in solving the country’s macroeconomic problems. Faced with another episode of currency depreciation in May 2018 and rising inflation, the Argentine authorities appealed to the IMF in June for a $50 billion loan which they were successful in obtaining. The IMF’s Stand-By Agreement (SBA) comes with numerous conditions attached: the SBA proposes to strengthen the BCRA’s autonomy, stop the direct financing of the government by the BCRA, while maintaining an inflation targeting regime and a freely floating peso. Will the IMF’s SBA be enough? The problem is that the IMF’s SBA document implies the inflation targets and other reforms can be achieved by means of a gradual reduction of the fiscal deficit -- without pain and without a deep recession. Meantime the growth of the monetary base and M3 growth are still far too high. In my view the current fiscal and inflation targets in the IMF plan are unattainable, and the plan will fail. More likely, either the current plan will fail and Argentina will once again default on all foreign-denominated debt held by the private sector (the IMF will again be exempted as they were in 2002), or under a tougher version of the IMF plan Argentina will again face financial collapse and high unemployment, causing President Macri to lose the next election, and virtually ensuring a return to populism for another decade.