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Abu Dhabi, UAEWednesday 24 October 2018

IMF swells Argentina bailout plan to $57bn  

New plan adds $19bn through 2019, as the country struggles to avert economic and currency crisis 

Argentinian president Mauricio Macri and other government officials reached a deal with the IMF to bolster its bailout package and stem fiscal woes. Bloomberg
Argentinian president Mauricio Macri and other government officials reached a deal with the IMF to bolster its bailout package and stem fiscal woes. Bloomberg

The International Monetary Fund will increase Argentina's bailout package by 14 per cent to $57 billion to the end of 2021, bolstering economic sentiment after the unexpected resignation of the country's central bank governor on Tuesday.

“At the core of the new plan is a fiscal policy aimed at strengthening [Argentina’s] fiscal position and having a sustainable, appropriately financed budget, a strong monetary policy focused on reducing inflation, and a floating exchange rate policy without intervention,” IMF managing director Christine Lagarde said on Thursday.

Under the new financing plan, which is subject to approval from the IMF’s executive board, the fund will increase available resources to the 36-month package by $19bn through to the end of 2019, bringing the total amount to $57.1bn through to 2021.

The country has seen its national currency the peso lose more than 50 per cent of its value this year, while concerns abound over the government’s ability to pay its foreign debts.

Argentinian central bank governor Luis Caputo resigned on Tuesday while bailout talks were still ongoing with the IMF, months after nationwide protests at government austerity and high inflation, which is expected to top 40 per cent this year.

President Mauricio Macri’s government has struggled to reduce inflation as the peso tumbled, and Argentina’s economic woes were exacerbated by a severe drought this year that hit the country’s crucial grain export sector.

The new framework is intended to contain the supply of money, and keep short-term interest rates at their currently high levels, aiming to rapidly bring down inflation, the IMF said.

The resources available under the IMF programme would no longer be treated as precautionary and the Argentinian authorities intend to use financing from the package for budget support, the Washington-based lender said.

“A central element of the authorities’ plan will be to reach budgetary balance by 2019, one year earlier than previously intended, and to move to a 1 per cent primary surplus in 2020,” Ms Lagarde said. “These decisive steps will reduce the government’s financing needs and bring down public debt.”

Congressional approval of the 2019 budget will be an essential next step to tackle persistently high inflation that “continues to erode the foundation of economic prosperity in Argentina”, she added.

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Read more:

Argentina's $50bn loan talks with IMF on right track

IMF and Argentina to meet on Tuesday in hope of averting economic collapse

Argentina hikes interest rate to one of the world's highest amid falling peso

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“Earlier and more access to cash means Argentina has covered nearly all its financing needs until the end of next year, though that still depends on it successfully rolling over some of the debt maturing next year,” said Alejandro Hardziej, fixed income analyst at Julius Baer.

“Importantly, the central bank will stop using reserves to defend the currency as part of the new accord with the IMF.” The Central Bank of Argentina has decided to adopt a floating exchange rate regime without intervention, according to the IMF.

“In the event of extreme overshooting of the exchange rate, the bank may conduct limited intervention in foreign exchange markets to prevent disorderly market conditions,” it said. Argentina is due to announce more details of the revised framework later on Thursday.

However, the fiscal crisis continues to hit the poorest and most vulnerable in society, the IMF added. So the Argentina will need to maintain social assistance spending above a certain level and expand coverage of universal child allowances and health plans for lower income households.

The lender said it would further increase the budget allocation for social priorities in the bailout package should conditions worsen.

“The [new plan] will be instrumental to restoring market confidence in the government’s ambitious economic agenda and protecting the most vulnerable from the burden of the needed policy adjustment,” Ms Lagarde said.