The International Monetary Fund (IMF) has agreed to increase a lending package with Argentina by 7.1 billion US dollars (£5.3 billion), seeking to calm markets over the country’s ability to meet its debt amid growing economic turmoil.
Argentina had secured 50 billion dollars (£38 billion) in financing as part of a deal worked out with the IMF in June after South America’s second-largest economy was battered by a run on the Argentine peso amid double-digit inflation.
IMF director Christine Lagarde said on Wednesday that Argentina’s central bank had agreed as part of the deal to intervene in currency markets only in case of extreme circumstances and that the new amount of 57.1 billion dollars (£43.4 billion) would help Argentina’s government face its challenges.
“The Central Bank of Argentina has decided to adopt a floating exchange rate regime without intervention,” Ms Lagarde said at a joint news conference with Argentine economy minister Nicolas Dujovne in New York.
“In the event of extreme overshooting of the exchange rate, the (bank) may conduct limited intervention in foreign exchange markets to prevent disorderly market conditions.”
Argentine Central Bank chief Guido Sandleris later told reporters that under the revised deal, the central bank would initially intervene only by selling 150 million dollars (£114 million) worth of pesos a day when the currency drops below 34 pesos or rises above 44 pesos per US dollar.
Argentina has been badly hit by a severe drought that has damaged crop yields in the world’s third-largest exporter of soybean and corn.
The situation worsened in the first quarter of 2018 as world oil prices rose, and then interest rate hikes in the United States led investors to pull dollars out of Argentina.
That caused panic among Argentinians, who have stashed away dollars as a cushion since the country’s worst crisis in 2001 when banks froze deposits and the currency tumbled.
The rush to buy dollars led to the collapse of the peso’s value. Despite several interest rate hikes by the Central Bank, the peso has lost more than half its value this year, making it one of the world’s worst-performing currencies.
Following the run on the peso, president Mauricio Macri began pushing for early IMF disbursements under a revised deal. He aimed to restore investor confidence and ease concerns that Argentina would not be able to meet its debt obligations next year.
Most Argentinians blame the international lending institution for encouraging policies that led to the country’s economic implosion in 2001. It resulted in one of every five Argentinians being unemployed and millions sliding into poverty.
The IMF has admitted it made a string of mistakes that contributed to the economic implosion. A 2004 report by the IMF’s internal audit unit concluded it failed to provide enough oversight and overestimated growth and the success of economic reforms, while it continued to lend Argentina money when its debt burden had turned unsustainable.
Without further IMF support, the government was forced to declare a record 100 billion dollar (£78 billion) sovereign debt default.