The Argentina-IMF saga starts a new season

Global economists can be forgiven for feeling like they were watching the start of a new season in the long-running financial docudrama on Argentina's debt when the International Monetary Fund (IMF) approved a new loan program for country on April 11, 2025—its 23rd since 1958.

This time, the IMF agreed to provide Argentina with $20 billion over four years while the country’s president, Javier Milei, continues to overhaul the economy. The deal marked a crucial victory for Milei and drew cheers from financial markets. But successful implementation faces several challenges.

Over the decades, Argentina and the IMF have endured a turbulent relationship, marked by repeated debt crises and financial rescues. Long-time viewers will recall dramatic story arcs including the 2001 collapse of the country’s peso-dollar convertibility regime, then-president Mauricio Macri negotiating the 21st IMF program in 2018, and the chaotic 22nd season starring then-president Alberto Fernández and former vice president Cristina Fernández de Kirchner. With Milei, a new chapter has begun, and markets are watching with optimism, wondering if Argentina might finally break the cycle.

By the time of the latest IMF agreement, Argentina had already addressed the root cause of its chronic macroeconomic instability: the fiscal deficit. In his first year in office, Milei achieved remarkable fiscal consolidation, turning a deficit worth 5 percent of GDP in 2023 into a small surplus in 2024. After confronting a minefield of financial ticking bombs inherited from the Fernández administration, Milei’s government managed to bring quarterly inflation down from 52 percent in the first quarter of 2024 to 8.7 percent in the first quarter of this year. Alongside this adjustment, the government has launched an ambitious economic liberalization agenda, including sweeping deregulation, widespread privatizations, and a significant downsizing of the state’s role in the economy.

This new IMF program rests on two key pillars: first, strengthening the sustainability and quality of the fiscal adjustment through structural reforms in pensions, taxation, and efficiency of public expenditure; and second, moving away from an exchange rate–based stabilization model toward a more sophisticated framework featuring a floating exchange rate within a wide band, a more traditional monetary policy based on monetary aggregates with accumulation targets for international reserves, and an open capital account.

The announcement of the new IMF program came with three notable surprises. First, a wider-than-expected exchange-rate band, offering greater currency flexibility, was introduced. At the time of the announcement, the official exchange rate for the peso was 1,100 pesos to the dollar, and the band limits were set at 1,000 and 1,400 pesos to the dollar. Second, the easing of capital controls was boldly accelerated, as restrictions on individuals have been lifted and those on firms are being adjusted. And third, the initial IMF disbursement of $12 billion was larger than anticipated and will be followed by an additional $3 billion over the rest of the year, from the total four-year program envelope of $20 billion. More funding from other international development banks is also expected, and the recent refinancing of the $5 billion activated portion of the swap line from the People’s Bank of China will also support this financing package.

Some observers have questioned the prudence of increasing IMF exposure to Argentina, the Fund’s largest debtor. But it is worth noting that the financial exposure that the Fund will have with this new program in real dollars will be equal to the peak level left by Macri—$44 billion in 2018 dollars. Also, even though the IMF continues to assess Argentina’s debt as sustainable but without high probability of repayment and enterprise risks as high, debt servicing capacity indicators have improved compared with levels during the previous program, and the new program's policies are significantly stronger. Thus, at the margin, Argentina’s probability of repaying the IMF has improved. Finally, as a share of the country’s IMF quota, this program is significantly smaller than the European programs implemented during the global financial crisis of 2008–10.

Markets have responded enthusiastically. The country’s risk spreads fell by almost 200 basis points, and the peso, after a modest depreciation, began to appreciate toward the stronger end of the newly defined band. Investors clearly see short-term peso assets as attractive, given current interest rates and exchange rate dynamics. Markets also expect Argentina’s central bank to defend the band, potentially intervening preemptively if speculative pressures arise. Moreover, the recent injection of multilateral resources into central bank reserves plus the remaining capital controls provide the central bank with additional tools to manage domestic volatility, reinforcing short-term confidence.

Yet significant challenges persist. First, Argentina needs to learn to accept the exchange rate volatility that is inherent to the wide band exchange rate regime, and it needs to try not to recreate a de facto peg to the dollar as it had before the announcement. Many analysts believe that at current levels the peso is overvalued, as the large real exchange rate depreciation that took place at the beginning of the stabilization program has disappeared. While short-term currency movements over time are often dictated by capital flows, and those are driving the current appreciation, signals from the current account could reverse the trend, pushing the peso toward the weaker—more depreciated—limit of the band. In such a scenario, a test of wills could emerge between the market, the central bank, and the IMF—particularly over whether Argentina should be allowed to deploy precious reserves to defend the band at the risk of jeopardizing its ability to meet future external debt obligations. In the next three years, Argentina’s government must pay more than $45 billion of foreign debt service, including more than $15 billion to the IMF. The IMF program also establishes that the central bank needs to accumulate more than $30 billion of international reserves versus the pre-program level and estimates that the current account balance will move from a small surplus to a manageable deficit. If the market perceives that the defense of the weaker—more depreciated—edge of the band comes at a cost of weakening the country’s capacity to meet its debt obligations, interventions might become destabilizing.

Second, there are countless examples of exchange rate–based stabilizations that failed because of delays in exiting this currency regime, a problem that may happen again in this case, as the authorities have mentioned that they will only buy dollars once the currency reaches the strong—more appreciated—edge of the band. Given that this edge was set at a very strong real exchange rate level from a historical perspective, and it is adjusted by appreciating it by 1 percent per month, it is unlikely that the central bank will accumulate a significant level of foreign exchange through this channel. In the short run, without visibility on how reserves are going to be built up, it will be harder for Argentina’scountry risk spreads to decline further, especially with over $4 billion in payments due to bondholders in July. Therefore, it will be important to establish a mechanism to buy reserves inside the band in the next review of the IMF program.

A further challenge is inflation. In March, inflation was surprisingly high at 3.7 percent, rekindling concerns and raising the temptation to maintain an overvalued peso in hopes of nudging inflation down toward 1 percent ahead of the next midterm election, which takes place in October. Such disinflation would be harder to achieve if the exchange rate were to move to the more depreciated edge of the band before the elections. This might complicate the campaign narrative, as inflation stabilization is one of the major achievements of Milei’s government. However, postponing this adjustment through heavy interventions will only postpone this inflationary hump, which should be temporary because of the government’s strong commitments to the tight fiscal and monetary anchors.

Lastly, perhaps the most critical structural reform for Argentina is eradicating the extreme Peronist model of economic mismanagement as a political alternative. The upcoming midterm elections will serve as a de facto referendum on Milei’s government. A weak performance by his party could revive fears of a return to the erratic, heterodox economic policies that have plagued Argentina for decades, decreasing confidence in the sustainability of Milei’s program.

Argentina and the IMF have the complex task of sustaining disinflation, building a flexible exchange rate regime and the new monetary framework, regaining market access, starting to build up reserves, and consolidating the political strength of those sectors that support rational economic policies in the midterm elections. The new policy framework together with the renewed IMF support provide Argentina with the necessary tools to maximize the probability of success. Argentina’s history, the current backdrop of exceptional uncertainty in the world economy, and volatility in financial markets will conspire against the country’s success. This new season promises plenty of drama—including market volatility, political uncertainty, and, for the first time in history, an Argentine president obsessed with fiscal consolidation, downsizing the state, and deregulating the economy to reestablish stability and growth.