Uncertainties and challenges after approval of the agreement with the IMF

In February, according to the Ministry of Economy, we saw tax collection grow again, in real terms, for the eighteenth consecutive month. Something that has not been observed for a decade (2011-2012). In year-on-year terms, growth was 62.8% and reached $1,166,514 (in millions). These guarisms were basically driven by taxes on foreign trade (+70.3%), taxes associated with Social Security (+66.1%), taxes linked to economic activity (+56.5%) and income tax (+65.6%). However, compared to 2019 and taxes related to economic activity, they are still at a lower real level. In February, too, the trade balance with Brazil was deficit by US$215 million (imports accelerated again in their year-on-year comparison to 38%, reaching the highest figure for February since 2018, while exports showed a 12% drop to US$792 million).

For its part, the conflict between Russia and Ukraine persists with its consequent increases in international prices, which already came with high values. Due to inflation and concerns about the impact on domestic trade (both commodities and energy), in our country, the creation of a trust for wheat and maize was formalized, effective until 2024. The objective is to decouple domestic prices from international value and ensure supply. As with the oil trust, although the letter of the measure states that the tax will be charged to exporters, in practice exporters pass on the cost to producers. Considering maize and wheat, the impact is equivalent to a rise in retentions of the order of 12% to 13%.

In the midst of this international instability, the agreement with the IMF to refinance maturities and the project of law was passed last Thursday. What emerges from the “Memorandum on Economic and Financial Policies” is comparable to what was already known. What is worrying, beyond one document or another, is the ability to achieve goals. Taking into consideration energy and tariff policy, while the draft established a path to be defined, this whole paragraph has now been eliminated and the detail of how this key variable will evolve is subject to the different calculations that each one can make with little information. Perhaps the most important correction will fall in the real exchange rate. The draft spoke of a crawling peg policy aimed at keeping it at the January 2022 level, in the final document the January 2022 level was changed to “2021 levels”. Moreover, if it would be the level at the beginning of 2021 or the average of 2021, in any case, it would represent an increase in the current real exchange rate. For which it would not be enough with a crawling peg to accompany inflation, but there should be a jump in the official exchange rate before starting with the crawling peg. This is where this part of the complexity in compliance and the root of the agreement with the IMF lie in fiscal policy and the achievement of the path of reducing the primary deficit. The probability of fulfilling that path is very low. Indeed, debt holders are less likely to collect their papers today than they were before the agreement was known.

Looking specifically at fiscal policy, it is proposed to go from a primary deficit of 3.1% of GDP and reach 2.5%. How? Essentially, it is sought and proposed:

1. Have a 0.2% higher income GDP

2. Lower energy subsidies by 0.6% GDP

3. Limit current transfers to provinces and public enterprises by 0.3% GDP

4. Increase public works by 0.5% GDP

The difficulty in fiscal dynamics is presented by two strong constraints:

1. The starting deficit is more than 3.1% GDP because that ratio contains 0.5% of GDP of extraordinary tax resources for wealth tax (which apparently will not be there this year)

2. But, in addition, by action of the pension mobility formula, if inflation remained at 50% this year or fell, pension spending would increase by at least 0.3% GDP, leaving an inertial deficit to be corrected of 3.9% or 4%

Based on the proposed scheme, in the most optimistic scenario, subsidies would remain stable in real terms or grow very little. It seems quite challenging to reach 2.5% without a major inflation acceleration that liquefies other expenses and prevents (temporarily) the pension formula from increasing the deficit this year. Incidentally, it is not striking that, in the text of the memorandum itself, it begins by mentioning the risks related to the fulfillment of savings in energy subsidies as a result of the Russian war. Although saving subsidies is not feasible, even without war coming into the game. If the cost of energy increases similar to what it had in 2021 (67% in pesos), such savings are not achieved (and the distortion of relative prices continues).

In short, the famous “small print” did not bring a more consistent program, which reorders the structural imbalances of the macro. The reluctance to carry out a fiscal and monetary order is what jeopardizes compliance. It will have to be seen whether the Fund is likely to become more rigid in quarterly reviews. Otherwise, in a few years we will be in a similar instance to the present one.

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