Argentina’s peso to weaken as part of anticipated IMF loan review

By Hernan Nessi and Jorgelina do Rosario

BUENOS AIRES/LONDON (Reuters) -Argentina’s government unveiled tax and currency measures on Monday that will effectively devalue the peso, as talks continue with the International Monetary Fund on the fifth review of a 2022 loan program.

The IMF should in the coming days finalize the basis for a staff level agreement with Argentina over a review of the South American nation’s $44 billion loan with the IMF, the Washington-based global lender said on Sunday.

Argentina’s ruling Peronist party has promised to avoid a devaluation prior to general elections in October, in which Economy Minister Sergio Massa heads the ticket.

“The teams of the Economy Ministry and Central Bank of Argentina and the IMF staff have finished the core aspects of the technical work of the next review,” the IMF said on Twitter.

“The central objectives and parameters that will be the basis for a ‘staff level agreement’ have been agreed, which is expected to be finalized in the next few days before moving towards the review of the Argentina program,” it added.

On top of tax and currency measures that will in effect devalue the peso as part of the deal, according to an Argentine official, the government announced a new preferential exchange rate for agricultural exports and levies on imports.

Corn exporters will be able to sell their goods abroad at 340 pesos per U.S. dollar, according to a government decree, a temporary rate to bolster exports until Aug. 31. That is about 27% weaker than the current rate of 268 pesos per dollar.

The government will also introduce a 7.5% tax on some goods imports and a 25% levy on imports of most services, with new FX rates at around 288 and 335 pesos per dollar, respectively.

The measure is a “half-way point between the devaluation requested by the IMF and the political order not to devalue during an election year,” said Roberto Geretto, an economist at Fundcorp.

“The fiscal devaluation improves Treasury revenues and helps save reserves,” Geretto added, but there are still “points to resolve” in negotiations. Both parties have said a deal is close, but an agreement is not finalized yet.

“For the fund, it is difficult to give a technical endorsement to measures that add distortions and do not resolve underlying macro imbalances,” he said.

‘BIG PACKAGE OF DISBURSEMENTS’

Argentina faces maturities with the IMF worth some $3.4 billion between July and August, at a time when the central bank’s net reserves are about $6.5 billion in the red.

Buenos Aires is hoping to alter the economic goals it had agreed with the global lender and bring forward some IMF disbursements scheduled for this year as it battles a severe financial crisis which a lack of reserves could exacerbate.

An economy ministry source told Reuters the disbursement program for the second half of 2023 has been agreed and the staff level agreement could be sealed on Wednesday or Thursday.

Massa, speaking on Sunday during an interview on the C5N television network, said there is a “big package of disbursements” in August and November under the IMF program, without providing any further details.

Under the current program, the country is expected to get $4 billion in July, more than $3.3 billion in September and another $3.3 billion in December. These disbursements will be mainly used to repay a failed 2018 bailout.

Argentina, which is also struggling with high inflation and a significant fiscal deficit, has suffered a considerable hit to its foreign currency income due to a severe drought which crimped agriculture, its principal source of exports.

The IMF said the agreement seeks to consolidate “fiscal order and strengthen reserves,” acknowledging the impact of the drought, as well as the damage to exports and tax revenues.