Argentina received a $4.7 billion disbursement from the International Monetary Fund on Wednesday as part of a review of its $44 billion loan program, a key for the cash-strapped country to keep on top of its loan payments with the multilateral lender, rebuild international reserves, restore economic growth and balance the budget.
The IMF’s executive board of directors said it approved the disbursement after a preliminary agreement was reached with Argentina on January 10 for reviving the loan program and unlocking the funds.
The libertarian government of Javier Milei plans to use $2 billion of the funds to cover maturity payments on the loan in January and February, leaving the rest in the central bank’s coffers, according to local media reports.
Data from the central bank show that the country’s reserves shot up by nearly $2.5 billion to $27.6 billion on Wednesday from Tuesday thanks to the disbursement.
The deposit allowed the central bank to sell $10 million in US dollars for the first time in more than a month, helping to reduce the parallel exchange rate to ARS1,195/dollar on Wednesday from ARS1,215/dollar on Tuesday. The parallel rate, commonly called the blue rate, is a thermometer of people’s confidence in the government and its monetary policies.
The central bank has been amassing dollars this year, boosting them by nearly 18% from $23.5 billion at the start of the year. That comes after reserves tumbled 53% to $20.9 billion on December 12, 2023, two days after Milei took power, from $44.6 billion at the start of that year.
In a press release, IMF managing director Kristalina Georgieva said Argentina is making advances in restoring economic stability.
“The new administration is taking bold actions to restore macroeconomic stability and begin to address long-standing impediments to growth,” she said in a press release. “These initial actions averted a balance of payments crisis, although the path to stabilization will be challenging.”
PLENTY OF CHALLENGES AHEAD
There are plenty of challenges. As part of the latest revision of the loan program, Argentina has agreed to build international reserves by $10 billion this year. It also vowed to reach a primary surplus of 2% of GDP this year, up from a 2.9% deficit at the end of 2023.
The Milei administration has said that it will seek to achieve this surplus thanks to an expected increase in agricultural export revenue and a reduction in administrative costs, energy and transport subsidies, discretionary transfers to provinces and state-owned enterprises, and lower-priority infrastructure spending.
Another challenge is to pull the economy out of recession. On Tuesday, the IMF said it expects Argentina’s economy to contract 2.8% this year, far worse than the 2.8% expansion it had expected in its October forecast. Growth is not expected to resume until 2025, but at a robust 5%, according to the lender.
In press conference on Tuesday, IMF chief economist Pierre-Olivier Gourinchas warned that this “fairly strong rebound in growth” in 2025 is “conditional on the delivery of the fiscal consolidation that is actually beginning to take place in the country under the new administration.”
The government has rolled out a series of austerity measures, including a 118% devaluation of the peso and cuts in administrative expenses. It is now seeking congressional approval for a package of bills designed to reduce state spending by even more.
Inflation, however, will take time and effort to slash. Gourinchas warned that after surpassing 211% in 2023, inflation likely will continue to rise at around 25% per month through the middle of this year before returning to the single digits and leaving the rise at 150% in 2024.
Gourinchas said monetary expansion has been fueling the inflation, meaning that a key to contain this is to achieve “a very sizable fiscal consolidation.”
The pursuit of a 2% of GDP primary surplus this year is key for getting this under control, he said.
“This is something that we consider is absolutely needed in the context of Argentina because the root cause of the inflation process there is, of course, that there’s been quite a bit of monetary financing,” he said. “So for that monetary financing of the government to stop, the government accounts have to be consolidated and stabilized. So that’s very important.”