Electoral politics may induce a default on IMF debt despite a significant improvement in the fiscal and external accounts
Unexpectedly, the fiscal accounts came in significantly better than projected in the 2021 budget. The primary deficit during the first four months was 192 billion pesos, which represents only 12% of the primary deficit budgeted for the year. This result was the consequence of an impressive 93% increase in tax revenues and an increase of only 29% in pensions and public sector salaries. Preliminary indicators show a similar result for May.
Additionally, in the first four months of 2021 the trade surplus was 4 billion dollars despite a significant increase in imports associated with the recovery in the level of economic activity. As a result, the Central Bank increased its foreign reserves by 2.4 billion dollars despite having sold FX reserves to reduce the gap between the official exchange rate and the CCL (bond swap) exchange rate.
These fiscal and external accounts could be a good initial argument for the Finance Minister to negotiate an Extended Fund Facility with the IMF if the government was prepared to agree on a medium-term program that would commit continuity on this fiscal path plus some structural reforms to encourage growth. The increase in reserves could have allowed the government to fulfill its obligation with the Paris Club, demonstrating willingness to comply with obligations and smooth the way for the negotiations with the IMF.
Unfortunately, politics is preventing the Finance Minister from following this course of action. The mistakes and inefficiencies that characterized the process of vaccination and the emergence of a new wave of Covid-19 infections and deaths has eroded the approval ratings of the President and his ability to fend off the influence of the Vice President on the foreign and micro-economic policies that are creating an unfavorable negotiation climate.
The Vice President is, in practice, much more powerful than the President. Last week, 500 hundred personalities, closely associated with the Vice President, published a manifesto declaring that foreign reserves should not be used to comply with the external obligations that come due over the coming months and years. In practice, they are advocating a default with the Paris Club and the IMF.
The manifesto argues that Macri's government and the pandemic, rather than the policies of the government, are responsible for the current situation. Clearly, the strategy that the Vice President has in mind to win the midterm elections includes confrontation with the IMF, emulating the confrontation with the holdouts during her terms as President. In such a political context, the task of the Finance Minister to normalize external financial relations with the IMF and the Paris Club may prove to be an impossible mission.
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