June 6, 2018 / 5:05 PM / a year ago

IMF talks may push Argentina to more central bank independence

BUENOS AIRES, June 6 (Reuters) - Argentina’s financing deal with the International Monetary Fund (IMF) will likely include measures strengthening the central bank’s independence, which has been questioned since the government changed inflation targets last year, economists said.

While details of the conditions of Argentina’s exceptional access stand-by agreement with the Fund are not yet known, Central Bank Governor Federico Sturzenegger said they would fall into “two tracks”: one dealing with fiscal policy, and another with institutional issues such as central bank independence.

“They want to strengthen the institutional framework for monetary policy,” Sturzenegger said in an interview with specialist publication Central Banking published over the weekend, when asked if central bank independence would be included in the deal.

“I would not be against more assertive and positive actions in favor of a more independent central bank moving forward.”

A central bank spokesman confirmed Sturzenegger was accurately quoted and said the bank could not go into details about ongoing negotiations.

The government and the lender are a month into talks for a deal that could include more than $20 billion in funding and was expected to take six weeks or less to negotiate. With the government also saying more belt-tightening is needed to hit tougher fiscal targets, the move has been controversial domestically. Many Argentines blame the IMF for worsening its devastating 2001-2002 economic collapse.

Under former populist President Cristina Fernandez, the central bank largely obeyed the executive’s requests to print money to finance deficits and fork over foreign reserves to prop up the peso currency.

Since taking office in December 2015, President Mauricio Macri has emphasized the importance of an independent central bank. But high interest rates meant to combat double-digit inflation have at times prompted grumbling from officials and businesses concerned about the impact on economic growth.

Last December, Treasury Minister Nicolas Dujovne announced the 2018 inflation target would be loosened to 15 percent, from 8-12 percent previously, at a news conference alongside Sturzenegger. The bank followed with two interest rate cuts in January, despite stubbornly high inflation of 25 percent.

“The events of December 28 clearly showed a central bank with little independence,” said Marcos Buscaglia, founding partner at Buenos Aires political and economic consultancy Alberdi Partners, on Tuesday.

He called the inflation target change the “origin” of the run on the peso currency that prompted Argentina to turn to the IMF. The peso has weakened more than 25 percent this year.

“It would not surprise me if the negotiations with the Fund end with the government proposing a law to give more independence to the central bank,” said Buscaglia, who attended a meeting of private sector economists with Dujovne last week.


Argentina’s central bank charter already says the entity is “not subject to orders, indications or instructions from the national Executive Branch.” Treasury Ministry officials say that while they decide inflation targets, the bank is free to use whatever tools it wants to meet them.

During the Dec. 28 news conference, the government also outlined a plan to drastically reduce central bank transfers to the Treasury to finance the fiscal deficit.

But last year, the Organization for Economic Co-Operation and Development (OECD) recommended that Argentina “give the central bank greater autonomy,” arguing the executive branch had too much leeway to fire governors and that the mandate to prioritize price stability should be clearer.

“The charter asserts and the laws guarantee it, but the problem in Argentina is sometimes the law is passed over,” said Maria Castiglioni, director of C&T Asesores Economicos, who also attended the meeting with Dujovne.

“That reputational cost must be recovered through clear signals.”

Asked for comment, a Treasury Ministry spokesman told Reuters the central bank was already independent. Marcos Pena, Macri’s cabinet chief, said last month that changing the inflation targets “may have damaged the perception of an autonomous central bank.”

Dujovne said he had complete confidence in the central bank after it raised rates to 40 percent, the highest in the world, to support the peso last month.

IMF spokesman Raphael Anspach declined to comment on the negotiations. Previous bailout deals with countries such as Ukraine have been conditioned on reforms to grant central banks greater autonomy.

“The central bank’s charter gives it a very tenuous independence,” Buscaglia said. “A change in the charter, agreed with the opposition, would be a very good step.” (Reporting by Luc Cohen; Editing by Caroline Stauffer and Rosalba O’Brien)

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