During the period of the arrangement, the authorities of Uruguay will maintain close relations
with the Fund and consult on the adoption of any measures that may be needed, in accordance
with the Fund's practices on such consultations. Semi-annual reviews of the program will be
carried out with the Fund no later than December 2000, and June and
Memorandum of Economic
1. The Uruguayan economy achieved substantial progress during
the 1990s. After stagnating during the first half of the 1980s, output growth per
capita increased to an average of almost 3 percent per annum since then, and inflation was
brought down from 133 percent in 1990 to below 5 percent by end-1999. All
Uruguayan citizens benefited from this progress, as the country maintained one of the most equal
income distributions and best overall social indicators among the Latin American countries.
During this period, economic policies have emphasized cautious fiscal management combined
with moderate incomes policies; international trade and payments liberalization; domestic market
deregulation; fundamental reforms in the areas of social security and education; and a gradual
reduction in the rate of depreciation of the exchange rate band to help lower inflation
2. However, important macroeconomic challenges remain.
Competitiveness was adversely affected by the Brazilian devaluation in early 1999,
unemployment is high, and structural inefficiencies, including in the fiscal area, need to be
addressed to support saving and private investment in the economy. Indeed, actions to streamline
public sector activities are necessary as, through its ownership of the largest financial and
nonfinancial enterprises, the public sector remains a dominant player in the economy. Society is
searching for an appropriate balance of policies to help deliver a flexible and dynamic economy
while generating equitable opportunities for all Uruguayans.
3. The year 1999 was difficult for Uruguay. The economy
suffered from the combined impact of the sudden devaluation of the Brazilian real early in
the year, the growth slump in Mercosur partner countries, a sharp deterioration in the terms of
trade, and uncertainties associated with presidential elections toward the end of the year. As a
result, real GDP is estimated to have declined by 3.4 percent (from growth of
nearly 5 percent in 1998). Economic activity touched bottom in the third
quarter of 1999 but the recovery has been hampered by a drought which reduced
agricultural output, a slow summer tourist season, and the impact of the increase in oil prices on
energy costs. The unemployment rate increased from 10 percent in
mid-1998 to 11.4 percent in December 1999, but inflation was cut in half
to 4.2 percent.
4. The public finances weakened significantly, with the overall deficit rising
from 0.9 percent of GDP in 1998 to one of 3.8 percent (nearly
US$800 million) in 1999. A significant part of the fiscal slippage resulted from
the economic downturn, but the Government also granted special assistance to sectors most
affected by the recession and the drought, and incurred one-time election expenses and some
unforeseen capital and interest outlays. In the public sector enterprises, the National Petroleum
Company faced higher than expected oil import costs, and the National Electricity Company used
expensive oil-fired generators since the drought reduced water pressure in the reservoirs. The
local governments ran an unanticipated deficit of 0.3 percent of GDP in 1999,
reflecting the impact of the recession, general elections at end-1999, and their own elections in
5. The Government did not experience difficulties in financing the deficit
in 1999. While access to international capital markets remained open (government
bonds have an investment grade credit rating from international rating agencies), the government
chose to place only one ten-year US$250 million Eurobond (issued in April 1999 at
an interest rate spread of 225 basis points over the comparable U.S. Treasury instrument).
Instead, as credit demand from the private sector was weak during 1999, while deposits
continued to flow in, the government financed its remaining borrowing needs from domestic
sources. The private banks appear to have weathered the recession
of 1999 reasonably well, with adequate profitability and no substantial deterioration in their
loan portfolio. However, the public sector banks assisted some sectors of the economy
most affected by the recession and adverse terms-of-trade developments by refinancing loans and
stretching out payment periods, and their ratio of nonperforming loans increased relative to that in
private banks. Nevertheless, the public sector banks are substantially more capitalized than private
banks and they can withstand additional provisioning for any amounts that may prove
irrecoverable. The banks are closely monitoring the refinanced loans.
6. The external current account deficit widened from 2.1 percent of
GDP in 1998 to 2.9 percent (or US$600 million) in 1999.
Merchandise exports contracted by more than 18 percent in U.S. dollar terms (over
7 percent in volume), while imports dropped by nearly 12 percent (also about
7 percent in volume). Exports to Brazil were particularly hard hit by weak demand and the
appreciation of the bilateral real exchange rate. Consequently, export prices for selected
commodities were deeply discounted and the merchandise terms of trade declined by nearly
8 percent in the year. Foreign direct investment was boosted by a few large
operations in the hotel and retail sectors and covered nearly a third of the current account deficit,
and was supplemented by continued substantial private deposit inflows. Net international
reserves remained about unchanged, following substantial increases in recent years.
7. Developments in interest rate policy and the exchange rate band
mechanism evolved broadly as had been envisaged in the program for 1999.
Confidence in overall economic policies and in the exchange rate regime remained strong,
and in July the Central Bank (BCU) eased its benchmark short-term interest rate from 12½
to 9½ percent, where it remains today. Meanwhile, the rate of depreciation of the
exchange rate band was maintained at 7½ percent a year. While the external
environment was unfavorable and Uruguay suffered a competitiveness shock with the devaluation
of the Brazilian real, the pressures on the exchange rate band were limited to those
normally seen during an election year. The exchange rate drifted gradually from the lower, and
most appreciated, limit of the band at mid-year, to the upper, and most depreciated, limit of the
band just prior to the elections in October/November. However, the peso quickly returned to the
most appreciated limit of the band after the elections.
II. The Economic Program
8. The new Government, which took office on March 1, 2000, is
determined to build on the economic progress achieved in the 1990s, and is committed to
addressing the difficulties and challenges that remain present in the economy. In Uruguay's
consensus-oriented society, the Government is seeking broad-based social and political support
for this effort. The Government is also seeking support from the international financial
community, including the International Monetary Fund, and therefore it requests from the Fund a
22-month stand-by arrangement.
9. The Government's first priority is to create the conditions for a
sustainable recovery in output growth while preserving price stability. The resumption in
output growth is needed to reduce unemployment. The policy measures will focus on
strengthening the public sector finances and structural reform. There is a need to increase
saving in the economy which, in turn, will stimulate investment while limiting the country's
overall indebtedness. Simultaneously, structural reforms are crucial to improve
competitiveness of domestic production, within the framework of the adjustable-band
exchange rate system, and in the course of efforts at regional economic integration. This will
require cost containment, deregulation and increased competition, improved disclosure, and other
structural reforms for the private and public sector.
III. The Macroeconomic Framework
10. Uruguay is gradually emerging from the recession and the
rebound in output growth is expected to gain strength towards the middle of 2000. The
Government is confident that with a recovery of economic activity in Argentina and Brazil, the
international economic environment has already turned more favorable than that prevailing
during 1999. Nevertheless, the region still faces risks, as international interest rates are
rising, and Uruguay will confront, for now, continued soft commodity prices and higher energy
costs. Accordingly, the Government expects real GDP growth of between
2–2½ percent in 2000, led by a turnaround in the foreign balance
and a gradual recovery in private investment and consumption. The rate of inflation is likely
to pause in the range of 4–6 percent, about the same as in 1999, before
resuming its downward trend in 2001. Employment is expected to begin a recovery, but the
unemployment rate initially is expected to drop only moderately as participation rates
typically also rebound with a recovery. With improved external conditions and lower overall
domestic costs in U.S. dollars, the external current account deficit is projected to narrow to
between 2–2½ percent of GDP in 2000.
IV. Economic Policies
11. The Government believes that its economic program
for 2000–01 is best seen as part of a medium-term effort to restore competitiveness
and resume high output growth. In this context, it intends to follow a two-pronged fiscal
strategy, combining a consolidation of the public finances to strengthen confidence and
lower the national debt ratio, with gradual tax cuts to help reduce costs in the economy and foster
competitiveness. Both objectives require expenditure restraint and structural reform.
The Government is preparing a five-year budget plan for the course of the new Presidential term.
This budget plan will aim at bringing the fiscal deficit down to below 1 percent of GDP
over the medium term, and will be presented to Congress prior to end-August 2000. The
structural fiscal objectives cannot be reached all at once, but the government will significantly
reduce the deficit in 2000–01, and is committed to seeking a turnaround, over the
medium-term, in the public sector gross debt-GDP ratio, which has risen sharply recently as it
includes the costs of the social security reform (over 1 percent of GDP a year)
12. In 2000, the Government aims to cut the fiscal deficit in half to
1.8 percent of GDP. Some 40 percent of the implied adjustment is the result of
the non-recurrence of the one-time expenditures that affected the deficit in 1999. The
remainder reflects improved tax receipts in response to the recovery in economic activity, and
planned cuts in noninterest discretionary expenditures.
13. On the revenue side, the Government will not seek tax increases
during its term in office. Indeed, for 2000, there will be a tax reduction on land and a cut in
the employer social security contributions in the farm sector to help lower costs and assist in
absorbing the effects of the drought. Notwithstanding these tax cuts, the ratio of overall revenue
to GDP is expected to recover in 2000 from its drop in 1999. There are three
reasons: firstly, with the return of output growth, purchases of durable consumer goods are
expected to recover from the sharp decline experienced during the recession, and such products
are among the strongest value added and excise tax revenue sources. Secondly, imports are
projected to recover as well, boosting import tax receipts. And thirdly, the (public enterprise)
tariffs for petroleum products and derivatives are being adjusted to reflect higher energy import
14. Noninterest expenditures are programmed to drop in real terms,
thereby reducing their share in GDP by 1¾ percentage points, and helping to lower
costs in the economy. Wages in the central government (which account for some 5 percent
of GDP) were adjusted by 1½ percent in January 2000 and will not be adjusted
further this year (see below). Moreover, social security outlays (nearly 17 percent of GDP
in 1999) are indexed to average private and public sector wages in the economy and are
expected to fall in relation to GDP as well. Lastly, reflecting discretionary expenditure
containment and the effects of the nonrecurrence of some one-time outlays noted above,
purchases of goods and services, other discretionary outlays, and capital spending will all be cut in
relation to GDP. The bulk of the programmed reductions in expenditure (and the deficit)
for 2000 will take place in the central government and public sector enterprises, whereas
local governments, which have virtually no access to financing, will need to eliminate their deficit
recorded in 1999.
15. Moderating wage growth is critical to help bolster competitiveness and
improve prospects for employment growth. The public sector indexation law that was
adopted in Congress at end-1998 stipulates that if 12-month inflation remains below
10 percent since the last public sector general wage adjustment, the Government has the
option to reduce the frequency of indexation from twice to once a year. With the drop in inflation
in 1999, this condition has been satisfied and wages in the central government will be
limited to the increase in January noted above. Police and military personnel will receive an
additional pre-committed adjustment later this year, effective from March 2000. Together
with moderate wage adjustments in the public enterprises and local governments, wages for the
public sector combined are expected to drop slightly in real terms in 2000, following a real
wage increase exceeding 3 percent in 1999. Wage pressures in the private sector
were weak in 1999 and are expected to remain so for this year. There have been some
instances of wage settlements that favored jobs over wage increases and there are downward
pressures from the high rate of unemployment.
16. Monetary policy is subordinated to the exchange rate regime.
During 2000, currency in circulation is projected to rise about in line with nominal
GDP, while the BCU's net international reserves are programmed to remain unchanged from their
level at end-1999. The program envisages that broad money will increase by
8–10 percent, reflecting increasing deposits, and that a significant share of the
government borrowing needs will be satisfied from abroad (see below). This will permit banking
system credit to the private sector to increase by 4–6 percent in real terms.
17. Sound financial intermediation is critical for a vibrant and healthy
economy, and the Government will pay special attention to fostering a competitive banking
system. The Uruguayan banking system enjoys a good reputation in the region and
confidence in the banks is strong. At the same time, the Government is aware of the emergence of
new banking technologies and financial system reforms in our neighboring countries that are
slowly eroding our traditional comparative advantages, such as our central geographic location
and macroeconomic stability. As a result, the efficiency of the banking sector in Uruguay needs to
be improved, while the need for sound prudential norms and regulations, close supervision, and
market-based credit allocations is becoming increasingly important. At end-February 2000,
the Government obtained approval in the Board of the World Bank for a US$81 million
financial sector adjustment loan in support of steps to remove gradually some privileged treatment
of the public sector banks; to improve prudential and statistical compliance; to equate reserve
requirements across all private and public sector banks; to open up to competition from private
banks some activities now reserved for the public sector banks; and to strengthen supervision
from the Central Bank (i.e., through the establishment of regular in-situ inspections). The
objective of these reforms is to place public sector banks on a level playing field with the private
banks in all aspects of financial intermediation. The Government will work closely with the staff of
the World Bank to administer this program, and keep Fund staff informed of progress in this
18. In recent years, and consistent with the financial and wage policies
described above, the government has slowed gradually the pace of adjustment of the exchange
rate band in line with the targeted decline in inflation. The Government maintains these
policy intentions for the medium term until inflation has been brought down further and an even
firmer inflation anchor can be considered. However, this year there is a need to support a gradual
decrease in the real effective exchange rate of the peso, reinforced with domestic cost reductions.
To this end, the Government will proceed cautiously and maintain the pace of depreciation of
the band at its current rate of 7½ percent a year. The foreign exchange market
remained calm after the devaluation of the real and despite the increased uncertainties
related to the electoral cycle, and the Government has responded to temporary pressures by
permitting the exchange rate some flexibility within the band. In view of the absence of wage
pressures in the economy, continued moderate inflation, and the lack of supply constraints, this
policy will be continued in 2000.
19. The Government continues to make efforts to strengthen confidence in
the overall financial position of Uruguay. The 2000 financing plan envisages net
lending from the Inter-American Development Bank and the World Bank of some
US$125 million, and the net placement of around US$300 million in long-term U.S.
dollar denominated bonds. Most of these bonds will be placed abroad but a part can also be
placed with the domestic private pension funds (AFAPs) which receive some
US$220 million in inflows of contributions every year. To preserve an average maturity
structure of at least seven years, the Government will not issue any net short-term debt, and with
this financing schedule, Uruguay will have virtually no short-term public sector debt.
20. The Government is committed to structural reform as an essential
instrument to help improve productivity and competitiveness. Structural reform measures
require ample discussion and participation by political representatives and the public alike, and the
Government believes that the best incentives for increasing productivity, lowering costs, and
strengthening competition, are provided by improving the flow of information to the public and
seeking greater disclosure on public and private sector activities. The attached annex describes a number of structural reform benchmarks that may be
grouped in three broad categories: (1) those that improve transparency and disclosure,
such as preparing quarterly and (audited) annual reports on corporate activities; a release calendar
for information on the public sector's monthly fiscal position; external independent audits for
financial and nonfinancial public enterprises; and the undertaking of a study to document and
quantify all quasi-fiscal activities presently carried out through the public banks and entities; (2)
those that reduce costs specific to public enterprises, to prepare them for deregulation
and a competitive market, such as the elimination of the tax on foreign exchange operations, and
the gradual removal of the social security surcharge that is also unique to public enterprises; and
(3) those specific to securing a strong and competitive banking system, such as the
independent external analysis of the loan portfolios of the public sector banks, and the
requirement for all banks to place debentures in the capital market equivalent to at least
2 percent of their deposit base.
21. The Government intends to maintain Uruguay's exchange rate system
free of restrictions on payments and transfers for international transactions. Uruguay has
implemented on schedule all customs tariff reductions as agreed under the Mercosur convention,
and the Government will continue to argue for the removal at end-2000 of the 3 percent
surcharge on the common external tariff as it believes that this surcharge hinders the
competitiveness of the economy.
22. The Government continues its efforts to improve the accuracy,
timeliness, and comprehensiveness of statistical data on the economy. A two-year project to
revise and expand national accounts statistics is on track to be finalized by mid-2001. Also, the
BCU is implementing a revised system for the compilation and structure of the monetary
statistics, for which it has received technical assistance from the Fund. In this context, the
Government will ensure that by September 2000, the Bank of the Republic (BROU) and
the National Mortgage Bank (BHU) reduce their reporting lag of monetary data to the BCU to
that of the private banks, as included among the structural reform benchmarks reported in Annex I. The statistical efforts and measures described above are preparatory
steps for Uruguay's subscription to the Fund's SDDS.
23. The economic program for 2000–01 contains indicative
quantitative targets for 2001. With a steady reduction in domestic production costs,
and assuming the dissipation of recent shocks, Uruguay will be in a position to benefit fully from
the recovery in the region and real GDP growth should be picking up to at least 4 percent.
In those circumstances, the Government intends to bring the consolidated fiscal deficit down to
1.2 percent of GDP, and the more favorable export conditions are expected to allow for
some renewed accumulation of net international reserves. Also, the total public sector gross
debt-GDP ratio will then be close to its inflection point after which it can begin to drop in the
medium term. The Government will consult with the Fund on the economic outlook and policy
options for 2001, and determine the quarterly distribution of the indicative annual targets
on the occasion of the discussions for the first review of the program toward the end
|Table 1. Uruguay: Quantitative Limits and Targets for the
2000–01 Economic Program
|(Cumulative flows from the end of the previous
year; millions of Uruguayan pesos)|
|1. Combined public sector balance (floor)1
|2. General government expenditure (ceiling)2
|3. Change in the net domestic assets of the
|(Cumulative flows from the end of the previous
year; millions of U.S. dollars)
|4. Net international reserves of the BCU (-
|(Stock of debt at the end of the period; in
millions of U.S. dollars)
|5. Public sector debt denominated in foreign
currency and UR (ceiling)5
| a. All
| b. Less than one year
Sources: Ministry of Economy and Finance, and Central
Bank of Uruguay.
1The combined public sector comprises the central government, the social security
system, the municipalities, the public enterprises, and the quasi-fiscal result of the central bank.
This limit will be adjusted by the difference between the actual and projected social security
contributions transferred to the private pension system.
2Defined as total expenditure by the central administration and social security
system, excluding outlays on interest, pensions and internal transfers. This limit will be adjusted by
any difference between projected and actual social security contributions transferred to the private
3The net domestic assets of the Central Bank are defined as the difference
between currency in circulation and the net international reserves of the BCU as defined in
footnote 4 below. The changes in NIR are to be valued at the average exchange rate (projected in
the program) for the corresponding quarter. The limit on NDA will be adjusted by the equivalent
in Uruguayan pesos of the adjustments made to the limit on the NIR of the BCU.
4The NIR of the BCU are defined as the difference between the foreign assets of
the BCU and its reserve liabilities including swaps and outstanding purchases from the Fund. The
gold holdings of the BCU will be valued at the accounting rate of US$42 per troy ounce. Gains or
losses from gold-swaps and other operations are to be excluded from the calculation of NIR (also
from the debt). Non-U.S. dollar denominated foreign assets and liabilities are to be converted into
U.S. dollars at the market exchange rates of the respective currencies as of December 31, 1999.
The targets for NIR will be adjusted: (1) upwards by the amount in which free foreign currency
deposits of the BROU, the BHU and the private commercial banks exceed their level of
December 31, 1999; and (2) downwards (by up to US$150 million) by the amount in which those
deposits fall short of their level of December 31, 1999.
5Refers to the stock of public sector debt denominated in foreign currency,
external debt guaranteed by the public sector, and debt in UR ("Unidades
Reajustables"). Excludes reserve liabilities of the BCU and short-term liabilities of the
BROU and the BHU; and foreign currency deposits of nonresidents in the local banking system.
The overall limit will be adjusted by (1) the difference between projected and actual debt at
end-1999; (2) the difference between the projected and actual amount of social security
contributions that are transferred to private pension funds; (3) the overperformance with respect
to the targets on the BCU's net international reserves up to a limit of US$250 million; (4) any
changes in the amount of export prefinancing in the BCU in relation to the level of December 31,
1999 (also for short-term debt); and (5) by an amount equivalent to the reduction (in excess of
US$150 million) in free foreign currency deposits of the BROU, HBU and a the private banks in
the BCU from their level of December 31, 1999. Certificates of deposit issued by the BCU to
banks and/or their substitute Treasury instrument (treasury bills > one year) are included in
medium and long-term debt.
Structural Reform Benchmarks
Before end-September 2000
1. Complete external independent analysis of the loan portfolio of the BROU and the
2. Submit law to Congress to revoke ICOME by January 1, 2001.
3. Submit law to Congress to eliminate the social security surcharge for public enterprises
(12 percentage points) in 12 quarterly steps of 1 percentage point each. The first reduction
to take effect in January 2001.
4. Initiate a study of the quasi-fiscal operations of all public sector financial institutions and
other entities. This study to be completed before end-June 2001.
5. Start release calendar for monthly data on the public sector finances: government to publish
results of (a) tax collections (DGI table), (b) central government operations, (c) social security
operations (BPS), (d) public enterprise results, and (e) quasi-fiscal balance (BCU), for July 2000.
Subsequent monthly data to be published with a lag not exceeding 60 calendar days.
6. Reduce the BROU and BHU reporting lags of monetary data to the Central Bank of
Uruguay to that equivalent of the reporting lag of private banks.
Before end-December 2000
7. Publish quarterly reports for the three-month period ending September 31, 2000, for the
public sector financial and nonfinancial enterprises (BROU, BHU, BSE, ANCAP, UTE, ANTEL,
OSE, AFE, ANP). The reports to include annotated summary tables of the results of operations,
cash flow, and balance sheet. Subsequent quarterly reports to be published with a lag not
exceeding 10 weeks from the end of the relevant calendar quarter.
Before end-March 2001
8. Submit law to Congress to reform special pension funds (Cajas Especiales) for the banking
sector, university professionals, notaries, police, and the military.
9. Complete independent external audit of BROU, BHU, and BSE.
10. Complete independent external audit of ANCAP, UTE, ANTEL, OSE, AFE, and
Before end-June 2001
11. Publish annual reports of BROU, BHU, BSE, ANCAP, UTE, ANTEL, OSE, AFE, and
ANP, approved by independent external auditors. The reports to include summary tables of
results of operations, cash flow, and balance sheet. Subsequent audited annual reports to be
published with a lag not exceeding four months.
12. Private and public sector banks to place debentures in the capital market equivalent to a
minimum of two percent of their deposit base.