Argentina's last-ditch effort to secure International Monetary Fund (IMF) cash with measures that will weaken the peso risks pushing triple-digit inflation even higher and angering voters just three months before national elections.
Economists said steps unveiled on Monday by Economy Minister Sergio Massa, himself a presidential hopeful, were unlikely to dampen inflation that is already running at over 115% a year.
"The government was pointing at the two slight declines in monthly inflation as a sign of success, but that is likely to change," said Buenos Aires-based economist Eduardo Levy Yeyati.
Eyeing October's elections for a new president, Congress and some provincial governors, the ruling Peronist party is trying to secure funds from its $44 billion IMF agreement while avoiding a big currency devaluation or sharper price rises.
As part of that tricky balancing act, it announced this week a raft of new and weaker trade-related exchange rates, while keeping the peso's official rate stable.
With some 40% of the population plunged below the poverty line by an economic crisis that has worsened over the past year, the cost of living will be a key issue for voters in polls which start with presidential primaries on Aug. 13.
"August inflation will accelerate," economist Marina dal Poggetto from local consultancy firm EcoGo said, primarily because of the preferential dollar exchange rate being extended to corn. That will make animal feed more expensive for meat producers, she said, and raise production costs.
The government hopes this week's new measures will satisfy demands made by the IMF and help Argentina unlock $4 billion of funding at a pending review.
It needs the money to repay $3.4 billion in July and August on an IMF loan approved in 2022 to refinance a failed 2018 program with the Washington-based lender. If it cannot secure fresh funds before an approaching deadline, Argentina risks defaulting on repayments to the IMF.
Give and take
The tension between Buenos Aires and the Fund has been building as Argentina repeatedly fails to meet targets set out in the loan program, including narrowing the fiscal deficit and the accumulation of central bank reserves.
"The current administration is bending over backward to cross the finish line (the October elections) without major economic hiccups," said Alejo Czerwonko, Chief Investment Officer for Emerging Markets Americas at UBS.
Analysts say the central aim of these economic adjustments is to signal to the IMF that Buenos Aires is committed to the program. "The risk (for the government) is that the measures create pressure on prices when it is still unclear whether the IMF will release disbursements," Yeyati added.
The left-wing administration has been locked in negotiations with the IMF for months over whether to front-load tranches of the $44 billion program. Both parties said on Sunday that an agreement on the fifth IMF review was close, but not yet completed.
An economy ministry source told Reuters the disbursement program for the second half of 2023 has been agreed, and that a staff-level agreement could be sealed on Wednesday or Thursday.
An acute dollar shortage saw Buenos Aires resorting to making its end-June $2.7 billion payment to the Fund with Chinese yuan from a swap line with Beijing and IMF reserve assets, known as special drawing rights (SDRs).
Critics say the debt restructuring deal has been off track since it was first signed in March last year and is unlikely to last until its current expiration date, which is 2026.
"They're both playing this 'extend and pretend' game with the goal of making it to October, November, and once we have knowledge of who will be in power, they'll sit down again, and negotiate," said Czerwonko at UBS.