In most of the world, the International Monetary Fund is just a multilateral financial institution. In Argentina, on the other hand, the fund is a fundamental and highly controversial element of economic and political life. As if to underline this, the country’s ruling Peronist coalition is currently in the process of unraveling its internal divisions following a recent agreement between the government and the IMF, approved only a few weeks ago.
The Peronists returned to power in 2019 thanks to a smart political move by former President Cristina Fernandez. Aware that she herself was too polarizing, she nominated Alberto Fernandez – an unrelated moderate – as her presidential candidate, when she ran for vice president instead. The experiment proved fruitful, as they handily beat pro-market incumbent Mauricio Macri.
They were helped by Macri’s unpopular decision a year earlier to turn to the IMF for help amid a severe economic crisis. Although the fund disbursed $44 billion, its largest loan ever, the package did little to prevent the crisis from deteriorating, which was a major factor in the defeat. by Macri. The Fernandez-Fernandez ticket entered office promising to revive the economy, put the poor first and avoid IMF-imposed austerity. It was easier said than done.
Even before the pandemic, Argentina’s economic situation was dire. The economy has stagnated since the end of the commodity boom in 2011. Chronically high inflation hit 50% by the end of Macri’s term and the value of the peso plunged. Additionally, the country has suffered from a constant current account deficit resulting in a lack of hard currency, which is the root of the stop-and-go cycles that have plagued Argentina’s economy since the 1970s.
All of these problems have been compounded by the prolonged lockdown imposed by Alberto Fernandez, which has done little to protect Argentines from the impact of COVID-19, while plunging the economy into an even worse crisis. GDP collapsed by 10% in 2020. Poverty rate soared to over 40%. And the Central Bank’s reserves were almost exhausted. When the ruling coalition lost the 2021 midterm legislative elections, divisions between the president and his mentor and vice president exploded and engulfed the government.
One of the main challenges Alberto faced when he took office was public debt. In 2020, Finance Minister Martin Guzman, a disciple of heterodox economist Joseph Stiglitz, successfully restructured the country’s debt held by private sector creditors. But the biggest hurdle remained: the $44 billion Argentina owed the IMF, most of which was to be repaid in 2022 and 2023. After lengthy negotiations, Guzman struck a deal with the fund in March to refinance the loan from Macri in 2018, just in time. to avoid a potentially devastating fault.
The terms of the deal were relatively lax by IMF standards: Argentina will not begin repaying interest or principal until 2026, and the deal lacks the fund’s typically strict conditionality in terms of structural reforms. But it quickly became clear that Alberto and Guzman had gone overboard when they promised Cristina and her left-leaning supporters a deal that would not include any austerity measures. Among other things, they agreed to reduce the primary budget deficit from 3.5% today to zero by 2025, drastically reduce Central Bank funding of the Treasury and raise interest rates to contain inflation.
As it has done many times before, the Argentine government is focused on surviving until the next election, rather than finding ways to overcome the country’s chronic crises.
Each of these goals involves inflicting more pain on the middle class and poorer Argentines, Cristina’s traditional constituency. Reductions in electricity and gas subsidies, essential to reduce budgetary expenditure, will be particularly sensitive. Cristina is convinced that the government is headed for economic disaster and defeat in the next presidential election in 2023, and she is trying to distance herself from the IMF deal and the government of her own creation that spawned it. While his supporters still hold key positions in the federal bureaucracy, his allies in Congress rejected the deal, which only passed thanks to opposition support.
Tensions within the coalition are rising day by day. Alberto and Cristina would not be on good terms, a sign of deep irresponsibility in the midst of a very serious economic context. Inflation, which could reach 60% in 2022, is accelerating and all the “easy” public spending cuts have already been made. Social tolerance for further tax increases is limited. Moreover, the war in Ukraine shattered Guzman’s projections. Commodity prices have soared, which is good news for Argentine wheat exports, but puts upward pressure on food prices and will lead to more spending on oil and gas imports.
If the coalition hasn’t broken up, it’s probably because the two Fernandez still need each other. Alberto is convinced that respecting the agreement with the IMF is the only way to restore long-term economic stability and growth, much like what Macri argued when he was president. He is backed by most Peronist governors and lawmakers, some of whom want the president to show some strength and break with his vice president and former mentor. Alberto, however, knows he cannot replace the leadership exercised by Cristina over large swaths of the poor who constitute the electoral base of the Peronists.
Cristina would rather fight the fund and continue printing money to cover the deficit and maintain the subsidies no matter what the consequences. Its only recipe for fighting inflation is even tighter import restrictions and price controls. History shows that such crusades end in economic chaos and even harsher stabilization plans. As long as Alberto is in office, however, Cristina can indulge her delusions.
Despite their very public differences, the polls of the two Fernandezes have fallen in tandem: Argentines see them as a team even if they themselves don’t. The most optimistic scenario is that Alberto and Cristina postpone a final showdown until the presidential primaries scheduled for August 2023, when the president is likely to face a challenge for the Peronist candidacy from Cristina’s hard core of the governing coalition. .
Maintaining even a fictitious coalition until then will not be easy. Each quarterly IMF staff visit to monitor Argentina’s compliance with the recent deal could force Alberto to choose between breaking with the fund and risking a default, or imposing more austerity and seeing his public image and coalition crumble. . Even if Argentina’s long-term outlook is good, which the president repeats like a mantra, the short term will be plagued by bad economic news and rising prices.
At the same time, a Peronist defeat next year is far from certain. The primaries for the largest opposition coalition are also shaping up to be intense, with a potential clash between Macri, who feels vindicated by the Peronist debacle, and the more moderate Buenos Aires mayor, Horacio Rodriguez Larreta. Moreover, a rising libertarian right could take away votes from the centre-right opposition, indirectly benefiting the Peronists.
As it has done many times before, the Argentine government is focused on surviving until the next election, rather than finding ways to overcome the country’s chronic crises. Achieving macroeconomic stability is a requirement for sustained growth, but it is also politically and socially inaccessible, as the cost of reforms would be immediate and unbearable for most of the population, while its benefits are uncertain and distant. How this story unfolds will partly depend on the relationship between three clumsy partners: Alberto, Cristina and the IMF.
Bruno Binetti is a non-resident researcher at the Inter-American Dialogue and a doctoral student at the London School of Economics.