Argentina, IMF agree to create two new exchange rates

After weeks of rumors and negotiations, Argentina and the International Monetary Fund (IMF) reached a preliminary agreement yesterday that could allow presidential candidate and Economy Minister Sergio Massa to get through the election season without an unpopular mass currency devaluation.

Argentina needed an emergency loan from China to meet a June deadline and faced payments of an additional USD 8 billion in the second half of the year, an amount the country simply does not have.

With the threat of an unprecedented default looming, and in exchange for postponing the payments, the Fund demanded that Argentina stop subsidizing its official exchange rate (currently at ARS 270 to the U.S. dollar, versus a parallel market rate of ARS 530 to USD 1), which allows cheap imports at the cost of depleting the Central Bank’s foreign exchange reserves.

These reserves are needed to repay the nearly USD 45 million loan Argentina took out from the Fund in 2018. But ending import subsidies would have amounted to a devaluation at the worst possible time for Mr. Massa, who faces a presidential primary on August 13, a general election on October 22, and a potential runoff in November.

Instead, the sides agreed that Argentina will add a 7.5 percent tax on imports of non-basic goods, and a 25 percent tax on service imports — a de facto mini-devaluation that still excludes key products such as food and energy.

In essence, the agreement creates two new (slightly more competitive) exchange rates in a country that already had a dozen or so, adding a new layer of bureaucracy to what is perhaps the most convoluted foreign exchange system in the world. 

With the newly added 7.5 percent surcharge, it will take 290 Argentinian pesos to purchase a dollar worth of non-basic foreign goods, while the rate to import services will be ARS 340 to USD 1. Basic imports will remain at ARS 270 per peso.

In exchange for these and other minor reforms, the IMF is expected to advance a series of disbursements that will allow Argentina to meet its maturities in the coming months. The country had argued that the special treatment was justified by the unprecedented drought it suffered this year, which damaged a quarter of its exports.

Mr. Massa all but confirmed the deal on Argentinian television yesterday, although he said he did not want to go into specifics about the new disbursement program until the Fund approves it internally. The IMF also said that the “fundamental technical aspects of the next review” had been agreed, suggesting that some fine print still needs to be ironed out.

The agreement still amounts to a stopgap measure, and a new round of negotiations will inevitably be needed after election season, when more maturities will kick in.

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