DESPITE the fanfare with which Argentina’s new EFF program was launched, there are growing signs that the authorities are already reneging on program commitments. Does this matter?
In particular, the program assumed considerable reserve accumulation over the next 5 years, with gross reserves increasing to nearly USD90 billion by 2030 and net international reserves to about USD80 billion.
For 2025, this meant gross reserves increasing USD19.7bn. Since IMF purchases of USD15.5bn are pencilled in, this is an increase of USD4.2bn. But since net international reserves (NIR) were down by about USD5bn through end-March, this implies accumulation through intervention of roughly USD9bn in the final three-quarters of the year.
This target is expressed in the quantitive performance criteria in the Letter of Intent at the end of the program document as one of the monetary targets (the other being zero central bank financing of the government.)
The table is copied below. The target is expressed as a cumulative floor on the change in NIR from end-2024 adjusted for IMF and other official financing.
As noted, the first quarter saw NIR reduced by USD4.9 billion. Yet by June 13th, the central bank was supposed to accumulate USD4.4 billion in reserves (adjusted for program financing) to cumulate from end-2024 to only minus USD0.5bn. This is followed by a lull in Q3 before a further USD4.6bn in NIR is accumulated in Q4 to reach USD4.0bn by end-December.
Adding the IMF program financing of USD15.5bn, this roughly gives the gross reserves increase noted above.
Where to we stand since the program was agreed?
Well, gross international reserves are above USD38bn (which compares with below USD30bn at the start of the year.) But the cumulative change since December, net of the IMF program disbursement in April, is still about minus USD4bn. And this is not adjusted for other possible multilateral disbursements which are adjusted for in achieving the programs NIR targets.
So Argentina is at least USD3.5bn behind their mid-June NIR target.
The “problem” being, the authorities have decided to renege on their reserve targets to allow for greater exchange rate strength.
This is because another feature of the program was a shift to wide exchange rate bands with infra-marginal intervention consistent with program targets. Indeed, the supplement to the program document explained their FX policy as follows:
FX intervention rules. The BCRA will enforce adherence to the band by purchasing FX offered at the floor of the band and selling FX at the ceiling of the band. Within the band, the BCRA will purchase FX at its discretion, including when facing large FX liquidations, and in line with program objectives, including reserve accumulation goals. FX sales within the band are not envisaged. More generally, FX interventions will be unsterilized and consistent with the authorities’ monetary program and objective of ensuring a smooth functioning of markets.
So BCRA was supposed to purchase within the banks to meet reserve accumulation goals.
But the surprising feature of Argentina’s recent band widening is how strong within the band the currency has been trading—especially considering the real exchange rate is thought to be overvalued.
In fact, ARS traded as low as 1,200 per dollar immediately after the widening and has been volatile since.
This is presumably because, rather than accumulating international reserves with the seasonally strong exports, the authorities are content to see a stronger exchange rate which will held contain inflation into the mid-term elections later this year.
A stronger currency also means greater imports and a weaker external balance, of course.
The authorities would rather consume now for political reasons than accumulate the reserves needed to exit the IMF program.
Does any of this matter? Yes.
The Fund set a rather optimistic path for reserve accumulation over the next 5 years—shades of the 2018 failed program. But the authorities need to start saving rather than spending any foreign exchange surplus—something successive governments have failed to do.
Why would the authorities negotiate the accumulation of net international reserves this quarter if they had no intention of engaging in infra-marginal intervention? Are we witnessing the beginning of an overvaluation and deterioration of Argentina’s external accounts that will make a program exit impossible? It feels like that.
Perhaps ongoing effort of the authorities to entice dollars out from under mattresses will plug any FX gap—though Milei’s recent claim this would allow them to shut the central bank is hardly in keeping with program commitments!
The only thing that is certain is that the latest program document was so wildly unrealistic that the future will not pan out as planned.
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