Argentina and the IMF—Take Two

Amid a plunging peso and falling confidence in Argentine economic policy, President Macri turned to the International Monetary Fund (IMF) for the second time in only three months. The Macri government is working constructively with the Fund to implement a viable program, owned by Argentina. The IMF exists to help countries in these very circumstances and is no stranger to high stakes situations. Argentina’s revised IMF program merits the support of the international community.

With a newly revised program framework now at hand, many criticisms of Argentina and the IMF have been advanced. But they miss the bigger picture.

The revised program appears too tough . On paper, it is tough, and this may well be needed to restore confidence and achieve stabilization.

Macri’s economic strategy was founded upon sweeping liberalization to unleash productivity and eliminate the distortions of the Kirchner era and gradual fiscal consolidation to avoid austerity. He has done well on the liberalization front. Fiscal gradualism and associated large borrowings were tenable when market participants—defying credulity—were eager to snap up 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 likely become a de facto condition for ongoing IMF support later this year. This will send a strong signal to markets.

Argentina has been bedeviled by high inflation and vacillating monetary policy. The IMF program originally sought to restrain inflation through an inflation targeting regime. Given fiscal dominance and the lack of central bank follow through, the revised program makes a reasonable pivot to a more rule-based monetary policy framework. It allows broadly no growth in the monetary base through mid-2019.

The June program provided for exchange rate flexibility, allowing intervention only in disorderly markets. Argentina did not follow through. The revised program, coupled with central bank changes, should ensure that the peso really floats this time. Exchange rate flexibility is essential to adjustment and regaining investor confidence.

The revised program’s toughness will damage Macri’s electoral prospects. The June program assumed scant growth in 2018, a restoration of market confidence, and a return to growth of around 1.5 percent in 2019. Such outcomes are undoubtedly unlikely at this point—the 2019 budget optimistically assumes a 0.5 percent contraction. But absent stabilization and restored confidence, the situation would be far worse.

If so, the program should provide substantially more financing for Argentina. Some argue that external financing needs could amount to $70 billion plus in subsequent years, given assumptions about rollovers and capital flight. Hence, augmenting the $50 billion June program to $57 billion will not suffice.

The augmentation, while modest, is far more generous than it seems on its face. In June, Argentina drew the first tranche of $15 billion, with half for fiscal support, and stated that it intended to treat the remainder as precautionary.

The Fund has now upped 2019 disbursements by $19 billion, and Argentina intends to draw the full amount of the $57 billion program 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 program underappreciated a worsening external environment. The June program 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 clearly not implementing parts of the June program. Finally, it is unreasonable to expect infallible program design when done so amid volatility and unpredictable market psychology.

The Fund is no stranger to failing at first and then trying again and succeeding. The Korean program in 1997 achieved stabilization on the second try. Similarly, the Fund struggled with Indonesia throughout 1998 to rein in credit growth before stabilization 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 Fund argued that other non-Fund financing improved debt sustainability sufficiently to safeguard Fund resources.

The Fund has a long and justified history of providing exceptional access. This was clearly evident in the early 2000s, during the Global Financial Crisis, and in the European 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 Fund should avoid rigid rules and retain sufficient flexibility in its policy, rather than resorting to liberal interpretations or artful fudges should a situation arise which did not neatly mesh with the criteria. The Fund, stung by Greece, rejected this argument.

But it appears now that the clever IMF staff may not have lost its ability to craft liberal interpretations. 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 faces a time of need. Risks abound. The revised program is tough and poses significant challenges. If Argentina is prepared to implement the revised program, criticisms should be brushed aside for the greater good.

(This essay was also published by OMFIF on October 3, 2018.)

Mark Sobel is a senior adviser (non-resident) with the Simon Chair in Political Economy at the Center for Strategic and International Studies in Washington, D.C. and U.S. Chairman of OMFIF, an independent think tank for central banking, economic policy, and public investment with offices in London and Singapore. He was deputy assistant secretary for international monetary and financial policy at the U.S. Treasury from 2000 to 2014 and subsequently U.S. representative at the IMF through early 2018.

Commentary is produced by the Center for Strategic and International Studies (CSIS), a private, tax-exempt institution focusing on international public policy issues. Its research is nonpartisan and nonproprietary. CSIS does not take specific policy positions. Accordingly, all views, positions, and conclusions expressed in this publication should be understood to be solely those of the author(s).

© 2018 by the Center for Strategic and International Studies. All rights reserved.

Mark Sobel
Senior Adviser (Non-resident), Economics Program