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Last Wednesday, the International Monetary Fund's (IMF) Executive Board approved a three-year stand-by arrangement (SBA) for Argentina amounting to $50 billion, or 1,100 percent of the country’s quota.
This time, however, Argentina has come to its doorstep with a coherent reform package that the government was already in the process of implementing.
It not only lends credibility and ownership to the deal, but crucially, it provides the political legitimacy that has always been lacking in IMF-Argentina relations. This is a different Argentina dealing with a different IMF.
Typically, SBAs are limited to 475 percent of a country’s IMF quota for the duration of the program—high access such as that of Argentina’s newly minted agreement is only granted when specific conditions are met, and the board feels confident that Argentina will meet the terms of the arrangement, as well as be able to repay the loan.
Quick review: How did Argentina find itself again at the fund’s doorstep? Argentina has a long and troubled history with the international organization, most notably exemplified by the fallout from the 2001 financial crisis, which led to a lengthy stand-off between the government and the IMF. Prior to the current SBA, Argentina had not requested a fund program in nearly two decades.
The Macri administration inherited severe economic challenges from its predecessor, Cristina Kirchner. When Mauricio Macri came into office in 2015, inflation was well above 25 percent, and a number of ill-devised subsidies had pushed the fiscal deficit to about 6 percent of GDP.
Given the severity of Argentina’s problems, the new administration decided on a “gradualist” approach to economic adjustment, which meant adopting corrective measures over the course of several years while holding social spending steady and avoiding harsh measures that might increase the risk of recession.
The evaluation at the time, including by market participants, was that gradualism was the only politically viable option in a country that had seen much social unrest over the failure of past economic programs.
This said, there was a fundamental issue within Macri’s economic policies: While the central bank adopted contractionary monetary policy to bring down inflation rapidly, the executive, concerned with social protections, was much less conservative on the fiscal side, allowing sizable deficits that were funded through external debt issuance, including the famous 100-year bond issued in 2017.
Argentina’s positive tide turned in April, when skittish investors, fearful of the global repercussions of a potential US-China trade war combined with expansionary fiscal policy in the United States likely raising US inflation and interest rates, started to pull their money out of emerging markets.
Soon, Argentina’s underlying macroeconomic challenges came to the fore, accelerating the run on the peso. Attempts by the central bank to stem currency pressure proved unsuccessful, and ultimately the government was forced to turn to the fund for financial support.
The recently approved program tries to address many issues that contributed to failure in producing the right amount of adjustment in the past.
On one hand, the program frontloads a significant amount of financial support: $15 billion, or 333 percent of Argentina’s quota, was made immediately available, contrasting with past programs when disbursements were directly tied with having achieved agreed targets.
The Macri government has insisted that it does not intend to draw on the remaining funds, thus treating the remainder of the arrangement as “precautionary," i.e., as a credit line that they could draw upon if needed at a future date.
On the other hand, recognizing the political sensitivity of a Fund program with Argentina, the IMF has placed great emphasis on protecting the more vulnerable segments of the population by supporting well-designed social programs and spending.
Previous IMF programs with Argentina largely ignored the effects of fiscal consolidation on social spending and the inevitable political backlash that they ultimately faced.
Most importantly, however, is the fact that this time Argentina already had its own adjustment plan, rather than having to accept one devised by the IMF. That plan, prior to the turbulence that led Argentina to seek financial support, had received wide praise and support from the international community, notably from the IMF itself.
It is hard to exaggerate how important—and unlike past programs—it is to have the adjustment and reform package designed by the country authorities themselves.
Looking ahead, Argentina faces significant challenges. President Macri has endured substantial criticism following his decision to request IMF assistance. It is also noteworthy that he is up for reelection in 2019, and his political fortunes may lie in the success of the current program.
But, when all is said and done, Argentina and the IMF in the 21st century have a much better chance of getting it right than they ever did during much of the latter half of the 20th century. Let that be a cause for hope.
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