The New Argentina-IMF Tango

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Context

Last Friday, Argentina reached a $20 billion agreement with the International Monetary Fund under a new Extended Fund Facility (EFF), marking a significant step in the country’s efforts to stabilize its fragile economy. The deal includes an immediate overhaul of the exchange rate regime, a loosening of capital controls (though some restrictions remain), and a commitment to broader structural reforms over the coming years. The Central Bank's announcement can be read [in Spanish] here.

The long-overdue rollback of capital controls is a major milestone toward normalizing Argentina’s financial system.

Argentina’s previous currency policy had become increasingly untenable. Upon taking office in December 2023, President Javier Milei’s administration sharply devalued the peso, moving the official rate from 350 to 800 pesos per U.S. dollar. The government then adopted a crawling peg, adjusting the rate by 2% per month. But with inflation running far higher, the peso quickly became overvalued.

By mid-2024, speculation over the sustainability of the crawling peg was mounting. Parallel exchange rate spreads widened sharply, crossing the 50% mark by July. The IMF had already flagged the issue of an appreciated peso in its eighth review of Argentina’s program in June (a mention the government did not like at the time).

Argentina managed to sustain the crawling peg through two key measures. First, in late July 2024, the government introduced changes to its monetary policy under the banner of "Phase 2" (a rebranding effort that framed a policy adjustment as a strategic success rather than a response to mounting pressures). Second, a tax amnesty on undeclared assets brought in a temporary influx of capital, helping to stabilize reserves through the end of 2024 and into early 2025.

On February 1, 2025, the government reduced the monthly devaluation rate to 1%, signaling a bold move toward tightening the peg. However, disinflation lagged behind expectations. In hindsight, Phase 2 was less a solution than a stopgap.

By November 2024, the real exchange rate had appreciated to the same level it held in December 2023, effectively erasing the initial correction. The trade balance began to deteriorate (particularly in sectors highly sensitive to an overvalued peso, such as tourism) while the Central Bank’s continued interventions in the currency market further strained international reserves.

As the temporary boost from the tax amnesty faded, the fragility of the 1% monthly crawling peg became increasingly clear. March 2025 brought a sharp reminder of those pressures, with inflation rising to 3.2%—the highest monthly rate since April 2024. It proved to be the final blow. The IMF loan might have arrived just in time to avert a deeper crisis.

Once again, the government framed the shift as part of a well-crafted master plan—an orderly transition from Phase 2 to the newly announced Phase 3. The rhetoric was euphoric, but two key indicators point to a more urgent motivation behind the IMF deal.

First, none of the government’s own stated conditions for lifting capital controls had been met. These included: inflation aligning with the pace of the crawling peg’s depreciation, a consolidation of broad base money to equal base money, and a stabilization of base money itself.¹ By the government’s own criteria, capital controls should have remained in place.

Second, the decision to significantly loosen capital controls came before the midterm elections scheduled for later this year. It’s a risky move that could trigger renewed pressure on the exchange rate and a fresh wave of inflation, raising questions about whether political timing outweighed economic prudence.

The New Exchange Rate Regime

As of Monday, April 14, 2025, Argentina has adopted a new exchange rate regime: a managed free float within pre-defined bounds. The band system sets an initial lower limit at 1,000 pesos per U.S. dollar, which will decrease by 1% per month. The upper limit is set at 1,400 pesos per dollar, increasing at the same monthly rate. In effect, the currency is allowed to float freely within this widening corridor.

If the peso reaches the upper bound, the Central Bank will intervene by selling dollars. If it hits the lower bound, it will step in to buy. Within the range, however, the Central Bank has committed not to intervene directly in the foreign exchange market to influence the rate.

There are two exceptions to this rule. The first is in cases of "excessive exchange rate volatility". The second is when purchasing dollars to meet the reserve accumulation targets outlined in the new IMF agreement.

While the Central Bank is barred from direct intervention within the new exchange rate bands, it still retains tools to influence the market indirectly, most notably through interest rates. Higher rates can attract short-term capital inflows by making peso-denominated assets more appealing, encouraging carry trade strategies that support the currency in the short term.

The new IMF agreement also notes that the Central Bank will begin monitoring the “dynamics of private M2” (page 19). The central bank states that it will observe if the evolution of M2 follows its money demand estimations.² The intention is to move to a monetary regime with tighter on the money supply and have more direct control over inflation.

It’s still too early to determine where the exchange rate will settle within the new corridor. Within the first two days, the exchange rate rose from 1107.96 to 1230.00 pesos per dollar. Today (third day), it fell back to 1160.00 pesos per dollar (some point out that the government is taking some steps intended to lower the exchange rate).

Other Loan Conditions

Argentina is also expected to advance long-overdue structural reforms as part of its agreement with the IMF. Two major commitments stand out:

• A revenue-neutral tax reform proposal, targeted for completion by December 2025

• A comprehensive revision of the pension system, expected by November 2025

These and other reforms outlined in the IMF agreement have long been postponed. Whether Argentina’s Congress will finally act remains uncertain. What is clear, however, is that these reforms are essential if the country hopes to break free from its recurring cycle of currency crises. What is also essential, given Argentina’s history, is that the irreversibility of these reforms must be credible.

Micro-level deregulation and the recent easing of capital controls are encouraging steps. But the path to long-term stability is far longer, and assuming that enough has already been done would be a dangerous miscalculation. The breathing room provided by the IMF and other international loans must be used wisely to push reforms forward.

President Milei may be committed to that goal, but commitment alone is not sufficient. Execution is necessary, and in Argentina, it cannot be taken for granted.

Mid-Term Risks: Going Back to Square One

The new exchange rate regime carries an important mid-term risk: that Argentina may end up right back where it started. If the peso hits the upper bound of the band, the Central Bank is required to intervene by selling dollars, effectively capping depreciation at 1% per month. In practice, this mirrors the dynamics of the old crawling peg, offering a predictable depreciation path.

This creates a similar incentive structure for carry-trade operations: investors sell dollars, convert to pesos to earn higher interest, then reconvert to dollars, knowing the Central Bank has effectively guaranteed the exit price. The important difference is that capital controls have been eased (facilitating exiting carry-trade positions). In this light, Phase 3 would look like a depreciated version of the crawling peg with an important part of the capital constraints removed.

It didn’t take long for local financial media to catch on. Within 24 hours, reports of renewed carry-trade strategies surfaced, highlighting investor optimism that the new regime has staying power. The fresh $20 billion IMF loan, along with additional support from other international institutions, has bolstered expectations that the Central Bank now has the reserves to defend the band for the foreseeable future. The market’s concern under the old crawling peg wasn’t just about policy—it was about whether the Central Bank had the firepower to back it up. With that question seemingly answered, a soft cap on peso depreciation remains in place.

Ironically, if the exchange rate doesn’t jump, it may signal not confidence in the peso as a store of value, but rather an uptick in speculative carry-trade activity. In that case, the demand for pesos wouldn’t reflect a vote of confidence in the currency—it would be driven by a new round of financial arbitrage.

If this dynamic gains momentum, the Central Bank could find itself facing a difficult choice:

• Spend reserves to defend what would effectively become a soft crawling peg

• Reimpose capital controls

• Allow the peso to depreciate further and transition to yet another exchange rate regime

1. In this context, broad base money is defined as (traditional) base money plus the financial liabilities inherited from the previous central bank administrations.

2. Private M2 (net of remunerated deposits) comprises payment systems, currency in circulation, checks, and non-remunerated sight peso deposits for the non-financial private sector.