The IMF targets cannot be met

The Argentine government submitted the memorandum of the agreement with the IMF to the Argentine Congress. The document contains what is colloquially called the “details”. The government states that it aspires to lower the fiscal deficit with a public expenditure that will continue to grow in real terms, i.e., above inflation. This implies that the emphasis will be on increasing public revenues. In this sense, it is projected to increase tax pressure and reduce evasion. 

From the side of the expenditure, the most important aspect is energy subsidies. The agreement states that electricity and gas subsidies will be eliminated for the 10% of high-income users. Those who currently benefit from social tariffs will be adjusted by 40% of the increase in salaries and those who do not have social tariffs and are not in the top 10% of high income will be adjusted by 80% of the increase in salaries. Since salaries grow at approximately the same rate as inflation, tariff adjustments will be lower than inflation. This implies that energy subsidies will rise above inflation, not decrease. 

The implementation of these policies is expected to meet fiscal and monetary commitments. According to the memorandum, the national government shall:

• To have a primary fiscal deficit of $1.76 billion (equivalent to about 2.5% of GDP) in 2022.
• The Treasury will not be able to receive from the Central Bank more than $705 billion (equivalent to about 1% of GDP) in 2022.
• This implies increasing the debt by 3.5% of GDP, which results from 1.5% to cover the deficit for the fiscal year and 2% of GDP to pay interest on the current stock of debt.  

These data show that the agreement contemplates challenging goals. Not only because it implies lowering the deficit (from 3% to 2.5% of GDP) and money printing (from 4.6% to 1% of GDP) with a significant increase in debt. But also, because the targets were not established in terms of GDP, as it is generally done, but in nominal pesos. This simplifies monitoring but imposes a hard constraint on the government.

There are strong inconsistencies between the committed targets and the instruments proposed to meet them. In 2021, the primary deficit was $1.4 billion, which means that by 2022 a nominal increase of only 25% is committed, i.e., half the inflation rate. Money printing to assist the Treasury in 2021 was $2,1 billion, by 2022 it will have to be reduced nominally to one third. The reduction must be covered with government debt. This arises in a context in which the financial market does not give much credit to the Argentine government and the plan to reduce the fiscal deficit is too weak to make it change its mind.

The improved performance of the AFIP would contribute 0.3% of GDP. The increase in Personal Assets tax, also subject to the improvement in the management of the AFIP and the provincial governments, would contribute only 0.2% of the GDP. The savings from eliminating subsidies to 10% of the users will contribute 0.06% of the GDP, a very low level. Meanwhile, subsidies will continue to rise due to the fact that 90% of electricity and gas users will have adjustments below inflation. But the most important thing is that since the targets have been set in nominal values, the government loses the main tool it has been using to reduce the fiscal deficit: which is reduce spending in real value through inflation. With high inflation it could show deficit reductions in terms of GDP, but not in nominal numbers. 

Unless there is an increase in the tax burden (increase in export duties and/or reintroduction of the wealth tax), the agreement cannot be complied with. It will be useful for national officials saying that it is the first “agreement in history without adjustment” and for the IMF’s staff to delimit their responsibility because the non-compliances will be objectively made explicit. But it will be the IMF Board of Directors that will have to give the “pardons” that the Argentine government will ask for so that the agreement does not collapse.