Public Information Notice: IMF Executive Board Concludes 2006 Article IV Consultation Uruguay

July 31, 2006

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

Public Information Notice (PIN) No. 06/85
July 31, 2006

On June 28, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Uruguay.1


Since the 2002 financial crisis, the Uruguayan economy has significantly recovered in the context of a supportive external environment, strong macroeconomic policies and implementation of an ambitious structural reform agenda that have resulted in impressive economic and financial outturns and a return in market confidence in Uruguay's prospects.

Real GDP is now above pre-recession level, and expected to continue to grow at 4½ percent in 2006. Cautious monetary management within a flexible exchange rate regime has contributed to a rapid decline in inflation, but—after falling below the central bank's target range of 5½-7½ percent in 2005—inflation has recently picked up, particularly reflecting a full pass-through of oil prices and drought related food price increases.

Uruguay's combined public sector primary balance has strengthened rapidly and in 2005 reached 3.9 percent of GDP, well above the 3.5 percent of GDP target. In December 2005, congress approved a five-year budget consistent with the 4 percent of GDP medium-term primary surplus target. The strong fiscal performance, combined with a recovery of the peso and strong growth, has helped Uruguay to bring down its public debt from 105 at end-2003 to 70 percent of GDP at end-2005.

Uruguay's external position has also strengthened considerably. Sovereign spreads have dropped significantly, and faster than emerging market trends. With strong exports, the current account only posed a modest deficit in 2005, despite a sharp increase in imports. Favorable global market conditions and the return of capital have contributed to an appreciation of the peso, and the central bank has started to intervene to build reserves, which reached US$3.4 billion in May 2006. The government has also taken advantage of these favorable external conditions to improve the public debt structure by increasing the share of domestic currency debt and lengthening maturities, and has already started to prefinance some of its 2007 external financing needs.

Financial soundness indicators have strengthened significantly. The government has made good strides in restructuring the domestic banking system and enhancing supervision. Overall, banks are well-capitalized and have excess liquidity, and profitability has started to return, but state-dominance in the financial system remains large. A Financial Sector Assessment Program was carried out for Uruguay, the results of which were discussed at the Board.

Notwithstanding these strong performances, which have helped in the context of the favorable global environment to reduce near-term risks, significant underlying vulnerabilities remain, including the still high and dollarized public debt, large gross financing needs, as well as regional dependencies. Also, the banking system remains highly dollarized, banking intermediation is still well below pre-crisis level and deposits are overwhelmingly at short maturities. Addressing those vulnerabilities was the focus of the Article IV consultation.

Executive Board Assessment

Executive Directors commended the Uruguayan authorities for their strong policies which, supported by generally favorable external conditions, have led to a vigorous economic recovery from the 2002 financial crisis and a considerable decline in short-term risks. Directors were reassured by the authorities' continued commitment to implement strong macroeconomic policies in order to help reduce, over time, the declining though still high public debt and financial dollarization, and thereby address the remaining medium-term vulnerabilities.

Directors stressed that strong primary fiscal surpluses have been central to the authorities' success in helping to reduce the public debt to GDP ratio and boost market confidence. Continuation of these efforts will be needed to lower the still high debt ratio to more comfortable levels. Directors stressed the importance of the impending tax reform, which will improve the fairness and efficiency of the tax system, and called on the authorities to continue improving tax administration to meet their ambitious revenue targets in the years ahead.

The decline in inflation to single digits is a major achievement. Directors considered that the pursuit of a prudent monetary policy within a flexible exchange rate regime has allowed the authorities to manage successfully the remonetization of the economy and the large capital inflows. They cautioned, however, that inflation risks have increased in 2006, and urged the authorities to adjust monetary policy as needed to meet inflation objectives. Many Directors welcomed the proposed new central bank law aimed at increasing its autonomy as a significant step toward the medium-term introduction of an inflation-targeting framework that would underpin the commitment to low inflation and thus anchor expectations. More broadly, Directors encouraged the authorities to increase further the transparency of the monetary and exchange rate policy framework in order to help the market better understand the actions of the central bank.

Directors welcomed the restored exchange rate flexibility after periods of rigidity in early 2006. They regarded some intervention to take advantage of capital inflows as appropriate, as it allows for an increase in international reserves, which are still low for a dollarized economy. However, building up reserves should not sacrifice exchange rate flexibility.

Directors stressed that sustaining high growth will be critical to improve social conditions, ensure fiscal and debt sustainability, and support a healthy financial system. They welcomed the authorities' pro-growth agenda and encouraged them to continue improving the investment climate. Directors supported the authorities' policies aimed at furthering the expansion and diversification of trade.

Directors highlighted the significant progress made in the financial sector. They welcomed that banks have increased their liquidity and capitalization buffers and are significantly more resilient to market risks. Directors urged the authorities to create a level playing field between state and private banks, and to develop further their reform agenda in consultation with the Fund and the World Bank. They looked forward to the early approval of the financial sector reform law, which would address a number of the vulnerabilities identified by the staff. Directors also welcomed the passage of AML/CFT legislation.

Directors supported the authorities' reprioritization of reforms, and encouraged them to undertake further reforms to improve the effectiveness of public spending and public enterprise performance. While Uruguayan demographics rule out large declines in pension outlays, Directors saw scope for increasing the efficiency of the general pension scheme. Some Directors expressed concern about slippages in reforming the specialized pension funds schemes. Directors supported the authorities' plan to improve infrastructure through public-private partnerships, while recommending that the authorities start with small projects to build expertise in managing the associated risks. Directors urged the authorities to continue with public enterprise reforms to improve service delivery. They commended the authorities on the steps they have taken to improve public debt management.

Table 1. Uruguay: Basic Data

            Prel. Proj.
  2000 2001 2002 2003 2004 2005 2006

(Annual percentage changes, unless otherwise indicated)

Real GDP

-1.4 -3.4 -11.0 2.2 11.8 6.6 4.6

Contributions to growth


Domestic demand (percent)

-1.3 -2.2 -15.2 1.0 9.6 2.2 5.7

Private consumption (percent)

-1.3 -1.9 -14.0 1.6 9.3 1.9 5.9

Public consumption (percent)

0.0 -0.4 -1.2 -0.6 0.3 0.3 -0.2

Investment (percent)

-2.2 -1.4 -5.0 1.9 2.7 1.4 4.5

Foreign balance (percent)

2.2 0.3 9.1 -0.7 -0.4 3.0 -5.6

Exports of GNFS (percent)

2.2 -3.2 -3.8 1.5 9.9 6.9 3.2

Imports of GNFS (percent) 0.0

0.0 3.5 12.9 -2.2 -10.3 -3.9 -8.8



Consumer price index (period average)

4.8 4.4 14.0 19.4 9.2 4.7 6.1

Consumer price index (eop)

5.1 3.6 25.9 10.2 7.6 4.9 5.5

GDP deflator

4.0 5.3 18.7 18.4 7.5 1.7 5.1

Terms of trade

-5.2 -0.4 3.5 2.2 -2.4 -6.3 -2.9

Exchange rate (UR$/US$, eop)

6.7 10.1 84.2 7.3 -9.9 -8.3 ...

Real effective exchange rate (UR$/US$, eop)

0.2 -5.9 -20.6 -13.2 9.2 12.0 ...
(In percent of GDP)

Public sector finances


Total revenues

32.3 33.8 32.1 32.0 30.9 31.8 32.7

Non-interest expenditure (incl. discrepancy)

33.8 35.0 32.1 29.3 27.2 27.9 29.0

Primary balance

-1.5 -1.2 0.0 2.7 3.8 3.9 3.7


2.6 2.9 4.7 6.0 6.0 4.6 4.6

Overall balance

-4.1 -4.2 -4.6 -3.2 -2.2 -0.7 -0.9

Public sector debt 1/

37 43 96 104 92 69 66
(Annual percentage change)

Money and credit


Base money (eop)

-8.9 -2.2 22.1 24.9 11.1 34.1 22.7


-5.2 -2.8 1.7 34.6 13.4 29.4 28.0


10.2 19.6 15.8 21.7 -2.0 0.1 7.7

Credit to the private sector (constant exchange rate)

0.3 -3.8 -17.6 -23.9 -11.2 2.7 9.9
(In percent of GDP, unless otherwise indicated)

Balance of payments


Current account

-2.8 -2.9 3.2 -0.5 0.3 -0.5 -4.3

Merchandise exports, fob

11.9 11.5 15.9 20.3 23.7 22.3 22.3

Merchandise imports, fob

16.5 15.7 15.5 18.7 22.6 22.7 26.6

Services, income, and transfers (net)

1.8 1.3 2.8 -2.1 -0.8 -0.1 0.0

Capital and financial account

3.8 4.3 -18.5 9.3 0.5 5.1 7.1

Foreign direct investment

1.4 1.7 1.5 3.6 2.4 3.6 6.9

Overall balance of payments (US$ millions)

166 302 -2,328 1,380 454 951 525

Outstanding external debt

44.2 48.1 87.5 98.2 87.4 67.8 61.9

Of which: Public external debt

30.3 31.4 68.9 85.3 76.9 60.4 55.2

Debt service ratio (in percent of exports of goods & services)

35.7 43.6 55 52.3 44.8 47 54.8

Gross official reserves (US$ million)

2,779 3,099 772 2,087 2,512 3,438 3,963

In percent of short-term debt

82.1 85.2 25.1 86.8 158.0 153.5 139.7

In percent of short-term debt and FX deposits

45.8 42.4 7.0 20.0 27.7 32.9 35.2

Net international reserves (stock)

... ... -1,088 -763 -2,218 -1,166 -257

Sources: Central Bank of Uruguay; Ministry of Finance; and IMF staff estimates.
1/ Covers debt of the NFPS and the central bank (excluding monetary policy instruments and free reserves).

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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