Public Information Notice: IMF Executive Board Concludes 2007 Article IV Consultation with Uruguay

September 10, 2007

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. 07/111
September 10, 2007

On August 29, 2007 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Uruguay.1


The Uruguayan economy continues to expand after the profound crisis experienced in 2002, poverty rates have declined considerably, and unemployment is at its lowest level in a decade. Growth has exceeded expectations supported by strong macroeconomic policies and renewed market confidence, and economic vulnerabilities have been sharply reduced. Nevertheless, a recent increase of inflation and the ongoing implementation of the structural reform agenda remain key challenges.

Real GDP grew by 7 percent in 2006, continuing the strong performance following the crisis in 2002. The growth momentum remains solid this year, led by foreign investment and consumption, and supported by an accommodative monetary policy stance. Inflation has increased, fueled by pass-through from oil and other commodity prices and strong domestic activity. Twelve-month inflation through July 2007 was 8 percent, above the upper limit of the central bank's target range (6.5 percent).

Fiscal performance has also been strong, with primary balances averaging near 4 percent of GDP since 2004. Higher revenue collection and declining debt service going forward should make room for priority social and capital expenditures while maintaining primary balances consistent with the five-year budget approved in December 2005. To this end, it will be important to continue to press ahead with the ongoing tax administration and customs reforms, and to monitor carefully the implementation of the landmark tax reform which became effective in July 2007. The public debt has declined from 110 percent of GDP in 2003 to a projected 62 percent of GDP by end 2007, with peso-denominated, inflation-indexed notes now representing approximately 30 percent of the outstanding public debt stock.

Uruguay's external sector remains strong, with buoyant exports and import growth driven by large foreign direct investment projects. Measures of exchange rate competitiveness indicate that the peso is broadly in line with fundamentals, while appreciation pressures may increase as high capital inflows persist. Sovereign spreads are below pre-crisis levels, and the central bank has accumulated US$3.6 billion in reserves to date, the equivalent of six months of imports or three times short-term debt, with financing needs remaining moderate in the next few years.

Financial indicators have improved considerably, although vulnerabilities persist due mainly to dollarization. Short-term debt has been sharply reduced through debt management operations. Financial system soundness indicators have also improved, showing a well-capitalized banking system, low non-performing-loan ratios, high liquidity levels, and improved profitability. In addition, nonresident deposits—a key vulnerability at the time of the crisis—are much lower than in 2002, and stress tests confirm the increased resilience of the financial system. State-dominance in the financial system remains large, and Uruguay remains one of the most dollarized economies in the world (70 percent of public debt and over 80 percent of total liabilities are denominated in dollars). Spillovers from regional shocks also remain a concern, particularly in an environment of increasing financial risk.

Strong economic performance and policy reforms have sharply reduced vulnerabilities and near-term risks since the 2002 crisis. Nevertheless, important structural reforms to the state housing bank, the central bank, and state pension funds included in the agenda remain unfinished. Also, the likelihood of less favorable global conditions has increased with the rapidly changing liquidity environment, although the recent financial turmoil had only a moderate impact on Uruguay.

Executive Board Assessment

Executive Directors commended the authorities for their sound policies and progress on structural reforms which, together with favorable external conditions, have led to a vigorous economic recovery since the 2002 crisis and greatly reduced economic vulnerabilities. Sound debt management has improved the debt structure, the financial sector has been strengthened, and international reserves have increased significantly. While prospects are favorable, inflation has risen above the target range and, together with the steadfast implementation of ongoing structural reforms, is among the key challenges facing policymakers.

The central bank has acted appropriately to address rising inflation by substantially lowering its monetary targets. Directors looked forward to continuing efforts to bring inflation and expectations within the target range, including by allowing interest rates to adjust freely to the monetary tightening. Directors generally saw scope for clarifying the objectives and instruments of monetary policy, including foreign exchange intervention, to help enhance the effectiveness of monetary policy in the face of large capital inflows. Directors recognized that with high financial dollarization and banks' liquidity likely to decline in the future, some additional reserve buildup would be helpful. At the same time, most Directors considered that purchases in the foreign exchange market should not hinder exchange rate movements and should be subordinated to the inflation objective by allowing the currency to adjust more freely in response to shocks. Directors agreed that the adoption of inflation targeting should proceed gradually, in particular given the still high dollarization. Steps to further enhance the credibility of the monetary framework should include capitalizing the central bank and strengthening its autonomy. Directors welcomed the authorities' assurances that inflation is the overriding objective of monetary policy.

Directors welcomed the significant increase in the banking system's resilience to shocks. To address the remaining challenges, they stressed the importance of deepening financial sector reforms and implementing the recommendations of the 2006 Financial Sector Assessment Program. These include further strengthening state banks and banking supervision, and completing the restructuring of the housing bank (BHU) to allow the resumption of sound mortgage lending. Swift approval of the financial sector law will be key to enhancing central bank independence and strengthening the supervisory and resolution frameworks. Several Directors welcomed the authorities' decision to join the Latin American Reserve Fund (FLAR).

Fiscal performance in recent years has been commendable. Directors underscored that it will be essential to maintain large primary surpluses to further reduce the public debt ratio, which is still at a high level. A number of Directors suggested that exceeding the medium-term targets to help ease the burden on monetary policy would be appropriate if inflation concerns persist. Directors also looked forward to continuing efforts to reduce debt dollarization in order to further reduce vulnerabilities.

Directors welcomed the recent implementation of the tax reform and progress in the area of customs and tax administration. Freeing up resources for public investment, among the lowest in the region, will require gradually reducing nondiscretionary spending. To this end, Directors encouraged the authorities to press ahead with the reform of specialized pension funds. They supported the authorities' interest in public-private partnerships (PPPs) as a vehicle for upgrading infrastructure, while emphasizing the importance of carefully assessing the criterion to undertake PPPs, minimizing contingent liabilities, and strengthening the legal and accounting framework for these operations.

Directors praised the authorities' commitment to further improve the business climate. The creation of a private investment office, the passage of the competition law, and the expected approval of the bankruptcy law, are important steps to further enhance the business environment. A few Directors also noted the need to enhance competition in labor markets and reduce bureaucratic impediments to investment.

Directors welcomed the opportunity to review Uruguay's experience under the 2005-06 Stand-By Arrangement. They noted that the arrangement was highly successful in helping strengthen the economy, thereby paving the way for Uruguay's exit from Fund financial support. Directors supported the key messages of the ex post evaluation report, highlighting the important role that the authorities' steadfast pursuit of prudent macroeconomic policies and strong ownership had played in contributing to the program's success. Directors endorsed the report's conclusion that a further reduction of Uruguay's vulnerabilities, building on the significant progress already made, will hinge on the implementation of pending structural reforms to strengthen macroeconomic and financial stability and maintain high growth over the medium term. They welcomed the authorities' commitment in this regard, including to ensure the sustainability of structural reforms.

Uruguay: Selected Economic Indicators

            Prel. Proj.
  2001 2002 2003 2004 2005 2006 2007

(Annual percentage changes, unless otherwise indicated)

Real GDP

-3.4 -11.0 2.2 11.8 6.6 7.0 5.2

Contributions to growth


Domestic demand (percent)

-3.6 -20.2 2.9 11.3 4.2 10.9 7.0

Foreign balance (percent)

0.3 9.1 -0.7 0.5 2.4 -3.9 -1.8

Exports of GNFS (percent)

-3.2 -3.8 1.5 10.9 6.8 3.5 3.3

Imports of GNFS (percent)

3.5 12.9 -2.2 -10.4 -4.5 -7.3 -5.1



Consumer price index (period average)

4.4 14.0 19.4 9.2 4.7 6.4 7.4

Consumer price index (eop)

3.6 25.9 10.2 7.6 4.9 6.4 7.0

Terms of trade

-0.4 3.5 2.2 -2.4 -6.3 -1.4 -0.1
(In percent of GDP)

Public sector finances


Total revenues

33.8 32.1 32.0 30.9 32.2 31.8 32.5

Expenditure (incl. discrepancy)

37.9 36.8 35.3 33.2 32.8 32.4 32.7

Primary balance

-1.2 0.0 2.7 3.9 4.1 3.9 4.0

Overall balance

-4.2 -4.6 -3.2 -2.2 -0.7 -0.6 -0.1

Public sector debt 1/

43.0 96.0 110.0 97.0 75.0 66.0 62.0

Outstanding external debt

48.1 87.5 98.2 87.4 68.3 54.7 50.1

Of which: Public external debt

31.4 68.9 85.3 76.9 60.8 48.2 44.5
(Annual percentage change)

Money and credit


Base money (eop)

-2.2 22.1 24.9 11.1 34.1 13.0 8.0


-2.8 1.7 34.6 13.4 29.4 21.8 11.3


19.6 15.8 21.7 -2.0 0.1 12.6 11.3

Credit to the private sector (constant exchange rate)

-3.8 -17.6 -23.9 -11.2 2.7 9.1 13.8

Gross official reserves (US$ million) 2/

3,099 772 2,087 2,512 3,438 3,091 3,776

In percent of short-term debt

100.4 32.3 131.3 112.4 153.8 492.1 290.6

In percent of short-term debt and FX deposits

42.4 7.0 20.0 27.7 32.9 34.1 34.5
(In percent of GDP, unless otherwise indicated)

Balance of payments


Current account

-2.9 3.2 -0.5 0.3 0.0 -2.4 -2.8

Merchandise exports, f.o.b.

11.5 15.9 20.3 23.7 22.5 22.7 22.2

Merchandise imports, f.o.b.

15.7 15.5 18.7 22.6 22.3 25.2 25.5

Services, income, and transfers (net)

1.3 2.8 -2.1 -0.8 -0.2 0.1 0.5

Capital and financial account

4.3 -18.5 9.3 0.5 6.1 1.0 5.9

Foreign direct investment

1.7 1.5 3.6 2.4 4.3 7.1 5.2

Overall balance of payments (US$ millions)

302 -2,328 1,380 454 951 -337 685

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

43.6 55.0 52.3 44.8 53.1 92.5 24.4

Sources: Data provided by the Uruguayan authorities; and Fund staff estimates.

1/ Debt of the NFPS, net of free reserves of the Central Bank of Uruguay.

2/ Includes reserve buildup through reserve requirements of resident financial institutions.

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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