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Milei’s 2025 challenges: Between Argentina's mid-term elections and the IMF

Javier Milei with his good friend Donald Trump

By Alejandro Werner (*) - The author thanks Ignacio Albe, Olivier Blanchard, Martina Copelman, Joseph Gagnon, José de Gregorio, Patrick Honohan, Douglas Irwin, Maurice Obstfeld, and other PIIE colleagues for their comments and suggestions.

The year 2024 was transformative for both President Javier Milei and Argentina. After just one year in office, Milei has achieved significant milestones: eliminating the fiscal deficit, bringing inflation to moderate levels, reducing the gap between the official and the parallel exchange rate (a free but illiquid market), and implementing the most ambitious liberalization and deregulation program Argentina has seen this century. These accomplishments are even more striking given his outsider status and limited congressional representation. Milei’s approval ratings have held steady at around 50 percent, notwithstanding an economy contracting at an expected rate of approximately 3.5 percent (with a nonagricultural GDP contraction larger than 5 percent) and poverty surpassing 50 percent at one point during the year.

As 2025 begins, Milei's administration faces two pivotal challenges that will determine the sustainability of his stabilization program.

The upcoming mid-term elections in October will be a test of his political strength, so the first challenge is securing a strong performance in these elections. With half of the seats in the lower house of Argentina’s Congress and a third of the Senate up for renewal, the stakes are high. Currently, Milei's political party, La Libertad Avanza, has minimal representation in Congress. A favorable mid-term outcome, buoyed by Milei's consistent approval ratings, could cement his party as the dominant political force ahead of the 2027 presidential elections. This result would not only strengthen governance but also solidify positive economic expectations, paving the way for the continuation of Milei’s economic reforms should he be reelected.

The second challenge lies in addressing the overvaluation of the Argentine peso. Over the past year, inflation was 117 percent, yet the peso depreciated by less than 30 percent, leaving it at one of its strongest levels in decades. This overvaluation poses a significant risk to Milei's exchange rate-based stabilization program, especially given the central bank’s negative net reserves and the slow accumulation of international reserves. The authorities question this assessment arguing that the government’s structural reforms and an improving energy balance justify a stronger equilibrium real exchange rate. Latin America’s history with exchange rate-based stabilizations is filled with similar stories of early disinflation victories coupled with overvalued exchange rates and the build-up of external disequilibria and financial fragilities associated with foreign exchange mismatches. Some salient examples are Mexico’s tequila crisis, Argentina’s multiple attempts with exchange rate-based stabilization, and Chile’s 1982 currency crisis. In every case there was also an important argument to be made for an equilibrium strengthening of the currency backed by important structural reforms. However, the productivity gains were neither large nor fast enough to sustain the exchange rate commitments. Argentina’s stabilization effort is still in its early days, and many of these disequilibria and fragilities have not accumulated, so a move to a more flexible and sustainable currency regime will not face the challenging negative feedback loops that triggered severe crises in other experiences.

Without sufficient reserves, the peso cannot float freely, nor can capital controls be lifted. However, adjusting the exchange rate risks triggering a temporary spike in inflation and a loss of purchasing power—both potential threats to Milei’s electoral prospects.

Faced with this dilemma, Milei’s economic team is prioritizing disinflation, exchange rate stability, and electoral success, even if focusing on these priorities exacerbates reserve and overvaluation issues. To this end, the government announced that it is halving the crawl rate of the exchange rate, a strategy designed to accelerate disinflation and appeal to voters concerned about inflation.

A few weeks ago the second program in the current era of Argentina-IMF relations concluded. The first was signed by President Mauricio Macri in 2018, and the second by President Alberto Fernández in 2022. For expediency, Milei’s administration retained the 2022 agreement, knowing that his policies were going to outperform the program’s targets. However, Argentina now needs a third IMF program—not only to refinance debt service due to the Fund over the next several years but also to access fresh resources to strengthen its reserves.

Key sticking points in negotiations include Argentina's exchange rate and interest rate policies, which have failed to generate sufficient reserve accumulation, and the lack of Congressional support for Milei’s budgets. While a successful mid-term election could resolve the latter, addressing the former will require policy adjustments that might threaten electoral stability.

An IMF program offering substantial upfront financial resources to bolster reserves could mitigate the risk of a disorderly exchange rate adjustment. However, with the mid-terms approaching fast, Milei is unlikely to risk deviating from his current disinflation trajectory.

Argentina’s negotiations with the IMF may follow one of three paths. Argentina could avoid politically costly exchange rate and interest rate conditionality imposed by the IMF and seek expensive international market financing and run net international reserves to even more negative territory to cover its 2025 external needs, postponing a comprehensive IMF agreement until after the mid-term elections.

Alternatively, the IMF might accept Argentina’s argument that questions the overvaluation of the currency and agree to a new program with significant upfront financial resources and cosmetic changes to current exchange rate and monetary policies. Argentinean optimism regarding their leverage in these negotiations and, therefore, the possibility of this scenario materializing has improved since the election of Donald Trump and the good rapport that both presidents seem to have.

However, the most likely outcome is a phased approach. The IMF could provide short-term support to cover Argentina’s 2025 obligations to the Fund through a one-year Stand-By Arrangement (SBA), which will also allow other international financial institutions (IFIs) to roll over Argentina’s debt service. After the elections, a more robust program (most likely an Extended Fund Facility) will follow. This second stage would likely involve greater financial backing, with positive net disbursements from the IMF during 2026, conditioned on correcting currency overvaluation and accelerating the dismantling of exchange rate controls. Such a strategy would relieve immediate financial pressures while delaying significant IMF support until after Argentina resolves its political and economic uncertainties.

Not signing a new agreement would put Argentina in a very delicate financing situation as its debt service to the IMF and other IFIs in 2025 is close to US$8 billion, which market participants would be unlikely to lend to Argentina to pay the international organizations. In addition, Argentina’s stabilization effort is the most serious and comprehensive one in more than a decade, regardless of the questionable decision of the exchange rate regime. Therefore, it would be unwise for the Fund to sit the election year out. Going for the second option would allow Argentina to broaden its external disequilibria financed with IMF resources and leave the country in a weaker financial position once the exchange rate correction happens. The third option seems to correctly balance domestic political objectives with sound policies, taking care in the design of the SBA that during 2025 financial fragilities and external imbalances are not built up.

Successfully navigating these intertwined political and economic challenges will require deft strategy and execution from both Argentinean authorities and the IMF. For Milei, the balance between electoral imperatives and the demands of stabilization and reform will not only shape 2025 but also define the long-term trajectory of his presidency and Argentina’s economic future.

(*) Alejandro Werner was born in Buenos Aires 1967 and grew up in Mexico City, 1977. He has a PhD in Economics from MIT, US, and from Mexico’s Technological Institute. Currently he is head of the Institute for the Americas at Georgetown University in Wahsingto DC, Previously and for several years Werner was head of the IMF’s Western Hemisphere Department, and also held several important posts in Mexico’s Finance Ministry and head of the Mexican Central Bank Studies Center.