Uruguay and the IMF
Press Release: IMF Executive Board Completes Sixth Review Under Uruguay's Stand-By Arrangement
November 29, 2004
Country's Policy Intentions Documents
Free Email Notification
of Intent and Technical Memorandum of Understanding
Mr. Rodrigo de Rato
1. Since completion of the fifth review under the Stand-By Arrangement last August, the Uruguayan economy has recovered faster than expected, financial indicators have continued to improve, and good progress is being made in implementing the program. In this letter, we update our economic program through the end of the Stand-By Arrangement (March 2005), maintain the end-December quantitative performance criteria (PCs) set at the fifth review, propose modification of the structural performance criterion on the completion of audits of the liquidation funds, and deletion of the monthly structural performance criterion on the submission of financial statements of the liquidation funds, which had been set at that same review. We have reached understandings on an additional structural performance criterion on the incorporation of debtor information from the liquidation funds into the credit registry of the Superintendency of Banks and a structural benchmark on the performance of the liquidation funds' asset manager. The liquidation funds will continue to submit monthly financial reports to the Ministry of Finance (MEF) and central bank (BCU), but we request eliminating the monthly structural performance criteria on this reporting. The end-September PCs on NIR, NDA, and general government noninterest expenditure were observed, as were the end-June PCs on the primary surplus of the combined public sector and the gross debt of the nonfinancial public sector. The last purchase under the arrangement is subject to a program review to be completed by mid-February 2005.
2. Real GDP grew by 13.6 percent during the first half of 2004. Inflation is under 9 percent, despite higher energy and electricity prices. Consistent with these developments, we have raised our projection for real GDP growth in 2004 to 11 percent, and we expect inflation to end the year at around 9 percent. The current account is expected to show a modest deficit, reflecting the strong pickup in imports that, in part, is being financed by foreign direct investment. Gross international reserves are expected to increase, raising the coverage of dollar liabilities in the banking system by official reserves and banks' foreign assets to about 62 percent.
3. The fiscal program is well on track, and we are aiming to exceed the primary surplus target of 3.4 percent of GDP in 2004. Expenditure restraint will be maintained, and public tariffs will continue to be adjusted in line with operational costs. No further tax reductions will be granted, and any overperformance of revenue will be saved. We will continue with the modernization of the tax administration, including by establishing a Large Taxpayers Unit by end-December (structural benchmark). To strengthen the budget process, we intend to submit with the expenditure authorization for the remainder of this administration, which will limit the increase in real expenditure in in the first quarter of 2005 (y/y) to 1.5 percent, supporting documentation that would include a discussion of the macroeconomic outlook and fiscal risks.
4. The strong growth and fiscal performance in 2004 has enabled Uruguay to achieve a larger reduction in public debt (as a percentage of GDP) than previously envisaged. Our debt sustainability analysis has been revised to reflect the latest developments and shows that with a primary surplus for the combined public sector of about 3¾ percent of GDP in 2005, rising to 4 percent in subsequent years, the debt-to-GDP ratio would decline to 48 percent by 2012.
5. The monetary program is on track, and we expect to meet the end-December program targets on NDA and NIR with comfortable margins. Base money growth targets have been maintained at the level announced in June, consistent with the attainment of a targeted inflation range of 6-8 percent by September 2005. The government will maintain the floating exchange rate policy.
6. The implementation of measures to reform the banking system is moving ahead.
7. An investment treaty has been signed with the United States, and several major foreign direct investment projects have started or will begin next year. Legislation has been passed, consistent with international best practice, to strengthen the framework for combating money laundering and the financing of terrorism. Consistent with the safeguards recommendations, one (of four) supplementary external audit of the FSBS has been completed, and we are working to implement International Financing Reporting Standards in published financial statements.
8. Financing needs are covered through June 2005 and we intend to make repurchases to the Fund on an expectations basis through end-May 2005. We request the conversion of all remaining repurchase expectations in 2005 to an obligations basis, in light of the balance of payments need arising from the large repurchase obligations in the second half of the year.
9. We are confident that the policies we have set out will ensure the continuing success of the program and justify the requested waivers and completion of the review. In support of its program, the government requests: (i) completion of the sixth review under the Stand-By Arrangement, with availability of a purchase equivalent to SDR 139.8 million; (ii) waivers of applicability for the fiscal and debt PCs for end-September, for which data would not be available by the time of the Board meeting; and (iii) waivers for the nonobservance of the end-September structural performance criterion on the completion of financial statements of the liquidation funds since their inception, the end-October structural performance criterion on completion of external financial audits of the funds, and the monthly structural performance criteria on the submission of financial statements of the liquidation funds to the Central Bank and Ministry of Finance. The waivers of nonobservance are requested on the basis that the financial statements of the funds' since inception have been completed as a prior action for this review, audits for two of three funds have been completed and the third should be completed by the end of the year (completion of all three audits we request to reset as an end-December 2004 PC), and future semi-annual financial reports, beginning with end-December 2004, will be audited and published. The government stands ready, in consultation with the Fund, to take additional measures necessary to ensure the success of the program.
Technical Memorandum of Understanding
This memorandum presents the definitions of the variables included in the performance criteria and benchmarks annexed to the Memorandum of Economic and Financial Policies.
1. Cumulative primary balance of the combined public sector. The combined public sector comprises the central administration (including as defined in "Article 220" of the Constitution, Salto Grande, and the funds managed directly in the ministries (Fondos de Libre Disponibilidad), the social security system (Banco de Previsión Social, Caja Militar, and Caja Policial), the local governments (Intendencias), the public enterprises (ANCAP, ANTEL, UTE, OSE, AFE, ANP, INC, and ANCO), and the quasifiscal balance of the Central Bank (BCU). The public sector primary balance, excluding valuation adjustments, will be calculated as the overall balance measured from below the line minus interest payments measured from above the line.
2. Cumulative balance of the combined public sector (indicative target). The combined public sector balance is calculated as the sum of the primary balance of the combined public sector described in 1 and interest payments. Interest payments are defined to exclude commissions and fees.
3. The quasi-fiscal balance of the BCU is defined as interest earnings on gross international reserves, as defined below, and other earnings including those on other foreign and domestic assets minus operating expenses, commissions paid, and interest paid on domestic and foreign debt administered by the BCU.
4. Cumulative ceiling on general government expenditure applies to total (current and capital) noninterest expenditure of the central administration (includes Fondos de Libre Disponibilidad but excludes transfers to the social security system, automatic transfers to the private pension funds (AFAPs), and earmarked revenue) and the social security system (BPS). The ceiling on general government expenditure will be adjusted downward for any expenses arising from pension adjustments which exceed the increase in the legal minimum adjustment. The ceiling on general government expenditure will be adjusted upward (downward) by the amount by which the actual revenues from the Fondos de Libre Disponibildad (FLD) exceeds (falls short of) the projected amounts in the program, specified in Schedule B.
5. Cumulative changes in net domestic assets (NDA) of the BCU is defined as the difference between end-of-period monetary base and net international reserves (NIR) of the BCU as defined in paragraphs 6 and 7 below. The flow of NIR will be valued at the accounting exchange rate of Ur$31 pesos per US$1. The limit on the change in the NDA will be adjusted by the difference between actual program loan disbursements by the World Bank and IDB and scheduled loan disbursements as reflected in Schedule C:
6. Monetary base (indicative target) is defined as the sum of (i) currency issue; (ii) nonremunerated and remunerated peso sight deposits of BROU, BHU, private banks, and other institutions defined below at the BCU; and (iii) call deposits of BROU, BHU, private banks, and other institutions at the BCU. Other institutions include pension funds (AFAPs), local governments, public enterprises, trust funds of the liquidated banks (FRPB), investment funds, offshore institutions (IFEs), insurance companies, exchange houses, stock brokers, and the nonfinancial private sector. The monetary base excludes central government deposits held at BROU subject to a 100 percent reserve requirement. The indicative target is defined as the cumulative change calculated using the monthly averages relative to the base month average.
7. Cumulative changes in net international reserves (NIR) of the BCU. NIR is defined as the difference between the gross international reserves and BCU reserve liabilities. Gross international reserves include all foreign exchange assets that are in the direct effective control of the BCU and are readily available for such purposes of the BCU as intervention or direct financing of payment imbalances. Such assets may be in any of the following forms, provided that they meet the test of effective control and ready availability for use: currency, bank deposits in nonresident institutions and government securities and other bonds and notes issued by nonresidents (with a rating not below "A" in the classification of Fitch and IBCA and Standard and Poor's or "A2" in the classification of Moody's). In addition, holdings of SDRs or of monetary gold would be included under gross international reserves (provided they meet the test of effective control and ready availability of use) as would the reserve position in the IMF.
8. The NIR floor will be adjusted by the difference between actual program loan disbursements by the World Bank and IDB, and scheduled loan disbursements by the World Bank and IDB as reflected in Schedule C, in the following manner:
9. The nonfinancial public sector gross debt refers to the outstanding stock of gross debt in domestic and foreign currency owed or guaranteed by the nonfinancial public sector, excluding the BCU.1 Debt in the form of leases will be calculated as the present value (at the inception of the lease) of all lease payments expected to be made during the period of the agreement excluding those payments that cover the operation, repair or maintenance of the property.2 The nonfinancial public sector debt ceiling will exclude the government guaranteed BHU note (estimated at US$610 million at end-December 2003) and the government guarantee covering notes issued by the fiduciary trust associated with the transfer of BROU's NPLs (estimated at US$370 million at end-December 2003). It will include debt issued by the Megaconcesión that has a guarantee of the government.
10. The overall nonfinancial public sector debt ceiling will be adjusted upward (downward) by (i) the upward (downward) revisions made to the actual nonfinancial public sector gross debt stock at end-2003; (ii) the difference between the actual and projected amount of social security contributions that are transferred to private pension funds according to Schedule A, i.e., the debt ceiling will be adjusted upward (downward) by the amount that social security contributions exceed (fall short of) those specified in Schedule A; (iii) the difference between the actual and projected interest payments, specified in Schedule D for end-March, end-June, and end-September, and end-December, i.e. the debt ceiling would be adjusted upward (downward) by the amount that interest payments exceed (fall short of) those specified in Schedule D; (iv) the difference between actual and scheduled program disbursements by the World Bank and IDB as reflected in Schedule C above, i.e., the debt ceiling will be adjusted upward (downward) by the amount that program loan disbursements exceed (fall short of) those in Schedule C, and any downward adjustment will be limited to US$50 million; (v) the amount of the government guarantee on the BHU note that is called in 2004, excluding the clearance of existing arrears of BHU to BROU, i.e., the debt ceiling will be adjusted upward by the amount of new debt issued by the government to cover its guarantee (principal plus interest) on the BHU note; and (vi) the amount of the government guarantee on the transfer of BROU's NPLs to the fiduciary trust that is called in 2004, i.e., the debt ceiling will be adjusted upward by the amount of new debt issued by the government to cover its guarantee on the schedule of principal and interest payments owed by the trust to BROU; and (vii) the debt ceiling will be adjusted upward to reflect overperformance with respect to the targets on the BCU's net international reserves up to a limit of US$250 million.
11. The data for assessing observance of the quantitative performance criterion on net international reserves will be provided by the BCU no later than one week after each test date. The data for the assessment of all other quantitative performance criteria and indicative targets will be provided by the BCU no later than two months after each test date.
12. Data, reports, and other relevant information for assessing progress on bank restructuring will be provided to staff in a timely manner; in particular, financial audits and associated management letters will be shared with the Fund.
13. The structural performance criteria for the transfer of BROU's Category 4 and 5 loans (end-June and end-December 2004 performance criteria) are defined to mean the transfer of nonperforming Category 4 and 5 loans.
1 The term "debt" has the meaning set forth in point No. 9 of the Fund's Guidelines on Performance Criteria with Respect to Foreign Debt (Decision No. 6230-(79/140, August 3, 1979), as amended).
2 The suppliers' contracts of ANTEL with equipment providers Ericsson and NEC, which predate the Fund's consideration of lease contracts for programming purposes, are expensed under goods and services as rental outlays and, therefore, excluded from the definition of nonfinancial public sector gross debt for program purposes.