Press Release: IMF Executive Board Completes First Review of Uruguay's Stand-By Arrangement

September 28, 2005

The Executive Board of the International Monetary Fund (IMF) completed today the first review under the SDR 766.3 million (US$1.11 billion) Stand-By Arrangement for Uruguay. Completion of this first review makes SDR 30.7 million (about US$44.4 million) immediately available to Uruguay.

In completing the review, the Board also approved the modification of the structural performance criterion on the timeframe for submission of a comprehensive tax reform, of the net domestic assets of the central bank for end-September and end-December 2005, and of the adjustors for the net international reserves and nonfinancial public sector debt performance criteria. The Stand-By Arrangement was approved on June 8, 2005 for a three-year period, under the Fund's exceptional access policy (see Press Release No. 05/136). 1

In commenting on the Executive Board decision, Mr. Agustín Carstens, Deputy Managing Director and Acting Chair, said:

"Uruguay's economic program, supported by a new Stand-By Arrangement, is off to a good start. The authorities' strong macroeconomic policies, together with generally favorable external conditions, have resulted in rapid growth, low inflation, and renewed access to international capital markets. As a result, economic vulnerabilities have been reduced significantly, although important risks remain. In particular, the still high public debt, weaknesses in the banking system, and pressures to raise fiscal spending continue to pose important challenges to the government's reform program.

"The five-year budget submitted to Congress in August reaffirms the government's commitment to strong macroeconomic policies through its term in office. It is now important to implement the budget and associated fiscal reforms. In particular, the authorities' plans for comprehensive tax reform, improving revenue administration, and reforms of specialized pension funds are well placed.

"Uruguay's progressive return to international capital markets is an important achievement that, together with continued sound macroeconomic policies, underpins prospects for a lasting exit from Fund financial support. Uruguay has taken advantage of favorable external conditions to improve the structure of public debt. Debt management will be further improved through the establishment of a specialized unit at the Ministry of Finance.

"Monetary policy has been successful in bringing down inflation. However, potential inflationary pressures need to be monitored carefully, to make sure monetary policy can react if necessary to safeguard the inflation objective.

"The restructuring of the banking system has progressed well, but risks remain. The ongoing divestment of NBC, the bank created out of the good assets of the failed banks, is welcome, as is the progress made in strengthening the largest state bank and its asset resolution efforts. Key remaining challenges include stepping up reforms at the state mortgage bank and reducing high financial dollarization, which remains a major vulnerability. The authorities' plans for strengthening the central bank, the supervisory authority of banks, and the deposit insurance framework are important milestones ahead.

"Continued success of the program depends on sustaining rapid growth and social progress. The authorities' strategy for achieving these goals rightly focuses on raising private sector investment, while supporting vulnerable groups through well-targeted social assistance. Developing a clear action plan to improve the investment climate and effective implementation of the two-year Social Emergency Program are important planks of this strategy, complementing the authorities' commitment to sustained fiscal consolidation and financial stability. The good start made in implementing the government's program harbors favorable prospects for achieving the overarching goals of sustained growth, debt sustainability, and social progress," Mr. Cartsens said.

1 The staff report for the First Review of the Stand-By Arrangement with Uruguay may be made available at a later stage if the authorities consent.


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