From the IMF to peripheral countries: it is time for adjustment | In the middle of the negotiation, message between the lines for Argentina

While the Argentine government tries to negotiate with the IMF an extension of the path of fiscal adjustment to avoid an abrupt brake on the economic recovery, the organization continues to show signs that it maintains its historical perspective on the role of austerity as a method to obtain the repayment of their credits.

The new global scenario dominated by the data of the highest US inflation in the last four decades, new waves of contagion and strains of the pandemic and bottlenecks in various global production chains is the ideal breeding ground for the Fund to go out and say that emerging countries tighten their belts. Especially those highly indebted in foreign currency, with high inflation and weakened institutions. Without saying so, the IMF referred to Argentina.

“Some emerging markets have already begun to adjust their monetary policy and are preparing to reduce fiscal support to deal with growing debt and inflation. Those countries with a credible policy on inflation can adjust their monetary policy more gradually, while others with higher inflation or weaker institutions must act quickly and comprehensively. In any case, the answer must include depreciating currencies and raising interest rates,” says the report “Emerging Economies Must Prepare for Fed Policy Tightening,” by Stephan Danninger, Kenneth Kang and Hélène Poirson, published in the IMF blog.

The path

The Argentine Government is in the middle of a discussion with the IMF due to the pace of the adjustment requested by the organization to close the credit agreement that allows paying the mega-debt package signed by Mauricio Macri in 2018.

According to the numbers shown by the Minister of Economy, Martín Guzmán, the Government’s intention is that in 2022 the deficit is somewhat lower than the 3 points of GDP registered in 2021, and then advance in a gradual reduction path of about half a point of the product per year. The primary balance would be reached around 2027.

However, The Fund would be looking for fiscal balance to be reached in 2024, which would require a harsh adjustment to begin this year. For the Government, this scenario would slow down the economic recovery.

“If the IMF pushes Argentina into a destabilizing situation, it will also have less legitimacy in the future, when other countries require multilateralism to be able to solve their problems together with the international community. If we want to protect each other and protect the functioning of multilateralism, it is important to agree on something that is credible. Y credible means implementable“, warned Guzmán, who is fine-tuning the numbers to see if he approaches positions.

Meanwhile, the Government is negotiating in Washington directly with the administration of Jhey Biden, who is ultimately the one with the last word because he pulls the strings of the Monetary Fund.

Regardless of how the brains of the creditor organization reason, what is certain is that They have interests that are very different from those of the government.: the drop in activity would allow greater foreign exchange slack through lower imports and thus It would free up dollars to pay off the debt, which is ultimately what the Fund is interested in.

Nobel laureate Joseph Stiglitz warned days ago that “everyone should know by now that austerity is counterproductive, although some influential member states in the IMF still push for it.” If “the old demands for austerity prosper, the consequences for the Fund itself would be serious, including the less willingness of other countries to engage with it. That, in turn, could threaten global political and financial stability. In the end, everyone would lose,” Stiglitz said.

“Hard Choices”

The world economic context of greater uncertainty due to the pandemic and the growing inflation in the central countries is the ideal scenario for the IMF to hammer with its cookbook.

“Wage-base inflation in the United States or larger supply bottlenecks may push prices higher than anticipated. Consequently, faster interest rate hikes by the Fed may tighten financial conditions around the world. This may be accompanied by a slowdown in US demand and may lead to capital flows against emerging economies and the depreciation of those currencies,” indicates the report.

“The actions that need to be taken may pose difficult choices for emerging economies, as they must choose between supporting a weak domestic market and taking care of price performance and external stability. Similarly, extending support to businesses can increase credit risks and weaken the long-term health of financial institutions. Although retracing these measures may weaken the recovery,” the document says.

“Countries with high levels of indebtedness in foreign currency must reduce the risks of the roll over of debt. The maturity of the obligations should be extended even if it implies higher costs. The most heavily indebted countries may need to start fiscal adjustment soon and quickly“, adds the work. There is not much doubt that Argentina is in the last group of countries.

Meanwhile, another article written by Sanjaya Panth and Ceyla Pazarbasioglu warns that “As the world emerges from the pandemic, short- and medium-term financial shocks will repeat themselves.. Sharper-than-expected monetary tightening in the face of inflationary pressures in advanced economies will, for example, have spillover effects on the balance of payments of emerging market countries.”