On June 7, a month after requesting a lifeline to prop up its plunging currency, Argentina declared that it had reached an agreement with the International Monetary Fund (IMF) for a three-year, $50bn standby lending arrangement.
The financial deal was aimed at providing breathing space for the government and reassuring nervous investors in the face of deepening concerns over a gaping fiscal deficit, skyrocketing inflation and pressing debt obligations.
Yet, things don’t seem to have gone as hoped.
In August, the peso dropped more than 25 percent against the US dollar and has now lost more than half its value since the start of the year.
In response, Argentina’s central bank raised interest rates to a world record 60 percent, while President Mauricio Macri announced a series of “emergency” measures to eliminate the primary fiscal deficit, including cutting the number of government ministries and raising export taxes.
The belt-tightening measures have seen Argentinians, many of whom blame the IMF’s policies for a devastating economic collapse in the early 2000s, take to the streets in recent weeks amid growing anger over spending cuts and rising consumer prices.
So how did Argentina reach this point? Al Jazeera takes a look.
Macri took office in 2015 on the back of promises to reverse the interventionist policies of his predecessor, Cristina Fernandez de Kirchner, and get the country’s stalled economy moving again.
Kirchner’s government had implemented a controlled exchange rate, which limited the buying or selling of foreign currencies. It also restricted access to US dollars in a bid to protect the central bank’s depleting reserves, which had been used for years to prop up the peso.
“Cristina left the economy in default without access to financial markets, a very high inflation and one of the most regulated and least free economies on the planet,” Nicolas Cachanosky, author of Reflections on the Argentine economy, told Al Jazeera.
“The central bank was also left with very low reserves and little legal security. This resulted in frightening investors instead of attracting them,” he added.
A week after assuming office, Macri lifted the currency controls and introduced a series of pro-market reforms with the aim of countering years of protectionism and high levels of government spending, as well as tackling double-digit inflation, boosting exports and spurring economic growth.
During his first year, he also began slashing utility subsidies in a bid to reduce the fiscal deficit, which resulted in Argentinians paying more for gas and electricity.
But the moves did not go far enough, according to some analysts.
“At some point, the government said he couldn’t make more changes because he had political restrictions. This might be true, but not being able to do more does not mean he did enough,” Cachanosky said.
“His government received an economic time bomb; the problem is that the reforms it made were slower than the countdown.”
‘Crisis of trust and credibility’
In 2016, inflation surged to 40 percent, before falling down to 25 percent last year.
During these two years, Macri’s government spent beyond its means and kept borrowing dollars to finance the budget shortfall. This generated pressure on the central bank to print more money in order to finance budget deficits, which eventually led to consumer prices rising.
In his efforts to tackle the crisis, Macri opted to avoid drastic changes that would have further destabilised a country with 29 percent of its population living in poverty at the start of his term.
However, by April 2016, the poverty rate in the country had increased to 32.6 percent.
Amid this climate, investor concerns about the government’s ability to tackle the country’s economic challenges lingered and the long-awaited foreign investments did not materialise.
“This was a crisis of trust and credibility with Macri,” Sergio Berensztein, president and CEO at Berensztein consultancy group in Argentina’s capital, Buenos Aires, told Al Jazeera.
To make matters worse, Argentina this year experienced one of its worst droughts in decades which crippled its agriculture sector.
As the same time, the struggling peso’s woes continued with investors pulling their money from the currencies of emerging markets into the US dollar to benefit from a series of interest rate increases by the US Federal Reserve.
“When conditions change in the international system, countries like Turkey, Argentina, South Africa, and all emerging economies suffer this kind of market corrections,” Berensztein said.
“In Argentina, there was a fall in the price of commodities, plus the drought, which also ended up affecting exports,” he added.
“All this complicated the situation, and eventually triggered a devaluation … these are internal distortions that are difficult to solve when the transnational scenario changes.”
Interest rates and IMF
Along with cutting spending and increasing reserve requirements for lenders, Argentina’s government also changed leadership at the central bank, which responded to the peso’s rapid depreciation by increasing interest rates first to 45 and then to 60 percent.
Argentina has also agreed with the IMF to cut its fiscal deficit to 1.3 percent of gross domestic product (GDP) by 2019, down from 3.9 percent last year. The current fiscal target for 2018 is 2.7 percent of GDP.
But the moves have failed to ease investor worries, exacerbated by the fact that about 70 percent of Argentina’s debt is dollar-denominated. This makes repayment much more expensive in the face of a stronger dollar.
After turning to the IMF for the $50bn assistance, the government said it would use the funds to boost its dwindling reserves.
“There was no better option, [the] IMF’s mission is to sort the problem of the government’s liquidity and ability to pay, and our crisis is a crisis of trust due to the fiscal balance,” Berensztein said.
“Given the circumstances, this was the only option.”
Argentina has a mixed, if not troubled, history with the IMF that stretches back several decades.
The global body’s involvement in the economy is a political minefield, with echoes of its role in the disastrous 2001-2002 economic crisis – which thrust millions into poverty – still vivid in many ordinary Argentinians’ memories.
In May, a survey of more than 1,000 people by Argentine pollsters D’Alessio Irol/Berensztein revealed that 75 percent of respondents felt seeking assistance from the Washington, DC-based IMF was problematic.
While the IMF loan has given reserves a boost, Macri has also requested an early reimbursement to deal with the continued pressure on the peso. However, a $3bn tranche that Argentina was expecting to receive has reportedly been put on hold as talks with the IMF over the negotiated agreement continue.
The government, meanwhile, is expected to continue its efforts to reduce spending as part of its attempt to cut its budget deficit under the IMF deal.
But the outlook remains negative, with analysts predicting that the economy will shrink by two percent this year and unemployment will rise.
The government had set a target of a 15 percent inflation this year, but analysts now estimate that it will exceed 40 percent by the end of 2018.
“The IMF called for conditions, but these conditions are not different to what Argentina should have done earlier,” said Alejandro Collar, an economist from Buenos Aires.
“The government did much less than it was expected to do; both the macroeconomic deficits and the dollar rate are a reflection of that,” he added.
“This is the result of a heavy inheritance that he [Macri] did not want to solve.”
Argentinians will head to the polls on October 27, 2019, to elect their next president, as well as members of the national Congress and provincial governors.