(Bloomberg) -- The International Monetary Fund said Monday that Argentina will move real interest rates into positive territory and ease currency controls as the crisis-prone nation seeks to continue a slowdown in price increases and protect its foreign exchange reserves.

The country also aims to eliminate by the end of this month a mechanism that allows exporters to sell 20% of their dollars in the parallel market at higher exchange rates, the IMF said in a staff report following the latest review of the country’s $44 billion loan.

To achieve a positive real rate — which is the benchmark interest rate after adjusting for inflation —  the central bank would need to raise its key rate beyond the current 40% or for inflation to cool dramatically. The latest market survey of inflation expectations from the country’s central bank pegs it at 69% for the next 12 months. 

The fund also said it forecasts Argentina’s economy to contract 3.5% this year — deeper than its previous forecast for a 2.8% drop — with inflation to end the year at nearly 140% and the country to post a primary fiscal surplus of 1.7%. Argentine President Javier Milei‘s spending cuts have eased monthly inflation for five straight months, albeit as another recession punishes the country.

Milei is eying a new IMF loan that he says will help lift currency controls and scrap capital restrictions. Those policy steps are needed for the country to eventually return to international debt markets for the first time since a sovereign debt restructuring in 2020. Milei met with IMF Managing Director Kristalina Georgieva on the sidelines of the Group of Seven summit in Italy last week. 

(Updates to add background on interest rates and inflation expectations in third paragraph.)

©2024 Bloomberg L.P.