‘The IMF Preferred a Lukewarm Deal With Argentina that Solves Nothing’

Economist Miguel Kiguel says the fiscal deficit goals set out in the IMF’s “light” deal with Argentina were achievable before the outbreak of the war in Ukraine

Miguel Kiguel. El economista y director de EconViews.
By Belén Escobar (EN)
March 11, 2022 | 12:45 PM

Buenos Aires — As Argentina’s Congress approves the latest deal struck with the International Monetary Fund (IMF) in the renegotiation of its debt, the deal has come in for criticism from a leading economic analyst, who says the deal is a “light” one that will not prove effective.

The fiscal deficit goal set forth in the agreement between Argentina and the IMF was attainable, but before the war between Russia and Ukraine broke out, Miguel Kiguel, director of the EconViews consulting firm, said in an interview with Bloomberg Línea.

The former chief of advisors and undersecretary of financing at Argentina’s Economy Ministry also predicted that energy tariffs will have an increase of around 100% for those who stop receiving subsidies, and warned that “the price of oil will continue to be high”, and which “generates a veil of uncertainty”.

Kiguel, who has also held deputy management positions at the Central Bank (BCRA), added that annual inflation could be around 56% this year, above the range stipulated by the IMF, which was between 38% and 48%.


However, he said that “does not affect disbursements” from the IMF.

The following conversation was edited for brevity and clarity.

How do you see the agreement that the government is about to close with the IMF?

It is a ‘light’ agreement that does not satisfy anyone. From the political point of view, the government finds it hard to swallow because it implies a reduction of the fiscal deficit, a more aggressive target of reserves, and there are sectors that are strongly opposed to tariff increases. The opposition is not happy either because they perceive that it does not solve any of the problems. The major imbalances such as country risk, inflation and exchange rate gap are not solved. In addition, there is the debt in pesos. The IMF is not satisfied either because it always talked about an integral program to attack all the imbalances, and this is not achieved either. It is a program that seeks to keep Argentina in a dialogue. There is not much more because they are not the typical measures that the IMF signs in an agreement. From the economic point of view, it basically seeks to limit the damage, so that, as far as possible, the economy starts to get back on track and the existing imbalances do not deteriorate and so that they improve marginally. Clearly, in Washington they do not see this as a program that would make the debt sustainable, bring back growth, reduce poverty, make Argentina a credible country. It’s just a question of hanging in there.


Why do you think the conditions are different from those that were negotiated this time?

I think the IMF wanted a program that was realistic, credible and achievable. I think it looked for and thought that at this moment there was no political base on which to be able to have more ambitious objectives. There is an issue with which the IMF somehow had a very bad experience in Argentina, which is when it let the exchange rate float and made a bad mistake. The exchange rate policy of the program with [former president] Mauricio Macri was completely wrong, and they entered into that part of the agreement without getting to the heart of it. They tolerated a very large gap. In this context, knowing that there was not much room to negotiate, they preferred to go for a very lukewarm program that does not solve anything. However, I believe that the result was what was possible. Between nothing and a possible option that did not convince, they preferred a possible option, but which did not convince them.

And in relation to what is possible, how do you see the possibility of meeting the deficit target?

The deficit goal, although it does not seem too ambitious because it is lowering it by a little more than half a point, had its challenges because this year there would be no wealth tax applied. It is challenging because they have to lower a deficit, having lost income, but it is a goal that, in spite of everything, was possible to reach with a little growth, controlling some expenses such as transfers to provinces, and controlling social plans a little more. This year there is no electoral spending. It seems to me that it was possible before the war in Ukraine. We have to import a lot of oil and gas due to the energy issue. In this line, the fiscal deficit goal is complicated, but in general terms it was neither too ambitious nor too difficult to meet. All in all, it was a goal that could be met with efforts.

And regarding goals, how do you see the growth of the economy for this year? There are quite disparate forecasts among private consulting firms.

We have a growth rate that is quite close to what is in the program, between 3.5% and 4%, closer to 4%. Almost half of what is in the program with the IMF is intention or a forecast. I believe that those who were more pessimistic about growth expected much more economic adjustment, more rate hikes, more devaluation, more inflation, which does not seem to be the case, given the characteristics of the program, which is not going to have so much adjustment, it is not going to be so dramatic. I believe that the economy can grow a little more. Don’t forget that you have more than three points of statistical drag from last year, so a little bit of growth already puts you at 4 points, which I think is what is going to happen. The statistical drag was very important to see this year’s number. GDP is measured in annual average, which is the number that is published. I think a lot of that part is statistical drag, and a little bit of genuine growth this year, which is going to be a very small part of what is published in this year’s GDP.

What can we expect inflationary wise? This is another concern that the government has not been able to solve.

Inflation will obviously depend in part on how much the increase in tariffs and the exchange rate will be. To the extent that it does not reach the levels we expected in a program with the IMF, it may be much lower. In any case, inflation is going to be higher than last year. It is very difficult for it to be lower than last year because in 2021 there was no rate increase, it was almost 9%. This year, when all is said and done, it will be closer to between 40% and 50%. Last year, the exchange rate devaluated 21% and this year, as a minimum, it will probably be 45%, and probably more. Therefore, I believe that inflation is going to be very difficult compared to last year. The consensus of economists is 55%. We are a little bit higher, at 56%. I believe that if there is any good news about the program with the IMF, it is that inflation will not shoot up. There is no indication that inflation will get out of hand, but it will hardly go down, and it will probably be a little bit higher than last year.


Within the range that was made public of what is about to be signed with the IMF, there is talk of between 38% and 48%. What happens if that target is not met?

There are different goals. There are program targets and targets that are indicative. The goals that are measured in the program are only three: deficit, accumulation of reserves and the financing given by the BCRA to the Treasury. Those are the three goals that are going to be measured much more. After that, they measure other things. If inflation gets out of hand, there are going to be talks. If it gets out of hand just a little bit, the IMF will ask, ‘what are you going to do to correct that deviation?’, but it does not affect IMF disbursements.

Regarding the energy tariff issue, how much increase can be expected for that 10% of the population that will stop receiving subsidies?

It could be 100%. I do not think it will be 300%, because it would be very unbalanced with respect to the rest of the economy. It is going to be in the triple digits, but it will be low triple digits. Anyway, we think that this is not going to be enough. If you have the problem of the increase in liquefied natural gas which, as is public knowledge, has multiplied since last year five-, six- or seven-fold, we do not know. We do not know how much gas we will be able to buy from Bolivia. I think it will be much more difficult to comply with or eliminate subsidies as was set out in the program. This is going to be a huge challenge for the government and I am already anticipating that it will ask for a waiver due to the deterioration of external conditions. At most, they will be high for some people, but I believe that in most cases they will be higher than what is budgeted in the program, because the conditions have deteriorated quite a lot compared to when the program was designed.

Are you anticipating that before the agreement is signed, certain revisions are going to have to be made amid the war between Russia and Ukraine?

I think the revisions are going to come in the first review, which is going to be done in June or July. That’s when we will see how things stand. That is where the bulk of the gas purchases that Argentina has to make will be, and almost all those purchases are made in cash, with dollars. Then, depending on how the accounts are, there will be a better diagnosis and we will see what will be decided.


Another important point you mentioned is the international reserves and the objective of accumulation that gives firepower to the Central Bank. Do you see the possibility of increasing net reserves?

By net reserves it is necessary to see what is defined. To begin with, I believe that what the IMF is going to lend to the Treasury, which are the Special Drawing Rights, will eventually be added to the reserves because the Treasury is going to sell it to the Central Bank. That is an important part of the increase in reserves that is in the target. The goal is to increase reserves by $5.8 billion. Some $4.2 billion came from the IMF, but the problem is that in the first two months of the year about $2.5 billion were lost. The target is annual. The Central Bank will have to buy those $1.6 billion that are missing to reach $5.8 billion, and it also has to buy the $2.5 billion that were lost in the first two months. This has to be done in a context in which the price of oil is going to remain high, so this generates a veil of uncertainty that we will see throughout the year. And the other big question is the exchange rate and the gap. If the gap remains at these levels, increasing the reserves by $5.8 billion is going to be a great challenge.

Translated from the Spanish by Adam Critchley

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