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Uruguay and the IMF
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IMF Concludes Article IV Consultation with Uruguay
On February 26, 2001, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Uruguay.1
After a recession in 1999, Uruguay continued to face difficult economic conditions in 2000. A number of strong adverse shocks plagued the economy, which were quantified as having caused a loss of national income equivalent to US$800 million, or 4 percent of GDP. Continued regional economic uncertainties negatively influenced expectations, contributing to a sharp drop in domestic demand; the devaluation of the Brazilian real and of the euro depressed export earnings from these markets, while weak agricultural commodity prices and the sharp jump in oil import costs implied a merchandise terms of trade drop of 7.5 percent (after dropping by 2.2 percent in 1999); international interest rates rose; and there were some interruptions of Uruguayan exports (rice, milk, bicycles, wines) as a result of trade actions in the neighboring countries. Also, toward the end of the year, meat exports were temporarily halted following a local outbreak of foot-and-mouth disease (since contained). With these adverse developments, the expansion in output in the first quarter of the year could not be sustained, and real GDP is estimated to have contracted for the second year in a row. The 12-month rate of consumer price inflation was contained at 5 percent, and unemployment increased to some 14½ percent.
However, Uruguay is showing clear signs of adjustment. Competitiveness is being addressed, unit labor costs are declining both in peso and U.S. dollar terms, and by end-2000 a significant share of the appreciation in the real effective exchange rate of early 1999 had been reversed. Moreover, to reduce their dependence on Mercosur, exporters have made good progress in diversifying their markets, while maintaining adequate volume growth in the traditional markets, albeit at moderate prices. Also, the structure of aggregate demand is changing, resulting in a strong contribution to growth from the foreign balance which offers prospects for sustainable growth.
With national income, and hence revenue, much weaker than expected, the government did not meet the fiscal objectives under the economic program for 2000. The overall deficit was reduced from 4.1 percent of GDP in 1999 to 3.7 percent of GDP in 2000. However, under these difficult circumstances, the primary, or noninterest, public sector deficit was still reduced substantially, by almost a percentage point of GDP. The larger-than-programmed deficit corresponded mainly to a drop in revenue for the central and local governments, and the government expenditure target for the year was observed. Nevertheless, the public sector enterprises turned in a weaker-than-expected performance. The government observed virtually all structural benchmarks under the program, except for the publication of annotated quarterly reports of the public enterprises and banks, which is now expected before end-March 2001.
The banking system saw some erosion in its soundness indicators, as was expected from the recession. The private banks saw their profitability ratios halved from previous years, and the ratio of nonperforming loans increased. The public banks had a more difficult time, especially the Banco Hipotecario (BHU). The public banks are undertaking an independent external audit of their operations which already has yielded important suggestions for improving the operations of the banks in the area of upgrading the computer systems, adhering closely to credit manuals, improving and enforcing the internal accounting systems, and lowering operating costs. Also, the BHU has taken steps to limit its losses which stem in part from a currency mismatch in the bank (mortgages are indexed to wages and deposits are in dollars, which, if these adjust at a different rate, can cause valuation fluctuations in the bank's capital). Recently, the BHU began granting new mortgages exclusively in dollars, thus eliminating the mismatch in currencies for new mortgages.
Exchange rate and interest rate policies held steady in 2000. The adjustable band exchange rate system continued to work well and, on average, the peso remained in the most appreciated half of the band. Once again, Uruguay received some deposits from abroad, and the regime has not been subject to major pressures. The Central Bank (BCU) lowered its call interest rate from 12 to 9½ percent in July 1999, in view of the slowing economy, and has maintained largely passive interest rate policies since then.
The external current account deficit widened slightly to 2.9 percent of GDP in 2000 (US$580 million). Merchandise exports increased by 8 percent in volume (3 percent in value) while imports were flat in volume (also some 3 percent increase in value). Oil import costs were more than 0.7 percent of GDP higher in 2000, and capital imports fell, reflecting the downturn in domestic investment. The services balance has held up well, generating a surplus of over US$500 million. The financial account of the balance of payments, and international reserves, turned out stronger than had been expected. However, foreign direct investment remained low.
The government restarted the structural reform agenda with a decree to cut red tape in the economy and remove some outdated regulatory restrictions; granted new concessions in water and sanitation works; created a regulatory agency for the deregulated electricity market; cleared for auction two wireless telecom frequencies; began to free up the distribution of fuels so that this sector can be opened up to competition; obtained legal authorization for private participation in the rail ways, and in the Container Wharf of Montevideo; and opened up to foreign investment the cable TV industry.
Executive Board Assessment
Executive Directors agreed with the thrust of the staff appraisal. They observed that Uruguay's economic performance has been generally sound over the past decade, although the economy has been hit by the economic downturn and prolonged recession of the past two years. Directors noted that notwithstanding the authorities' efforts, the economy has not yet recovered from the recession, largely owing to another round of adverse external shocks in 2000. At the same time, developments in the external sector generally, and the diversification of export markets in particular, as well as the moderation of labor costs and the containment of inflation in the context of a moderate real depreciation of the peso, have established a welcome basis for an economic recovery in 2001.
Looking ahead, Directors considered that the main challenges facing the authorities are to promote sustainable growth with low inflation and high employment. This will require fiscal discipline, improved competitiveness, and measures to strengthen the performance of public enterprises.
On fiscal policy, Directors noted that the public sector revenue for 2000 fell short of initial expectations, as automatic stabilizers were allowed to operate partially. They considered that the revised fiscal deficit objective for 2001, relative to the initial, and much tighter, indicative target is warranted by the delay in economic recovery. At the same time, Directors cautioned that further sustained increases in the public debt-to-GDP ratio should be contained. Accordingly, they generally agreed that the revised target for 2001 should be seen as part of a medium-term plan to begin progressively lowering the debt-to-GDP ratio from 2003-2004, thereby helping to preserve Uruguay's good standing in international capital markets. Directors noted the authorities' emphasis on current expenditure restraint as the backbone of the medium-term fiscal strategy, which is designed to allow gradual increase in public investment spending, while leaving some room for targeted tax cuts, including those to lower labor costs and strengthen competitiveness.
Directors noted the importance of wage moderation to help Uruguay revive exports and investment-led growth. In this context, while the special wage increases granted by the central government were dedicated to important areas in the public sector, including education and the judiciary, Directors cautioned that such special increases are best kept to a minimum, and preferably offset with cuts elsewhere in the budget, so as to reinforce the public sector contribution to overall cost containment. In general, Directors emphasized the importance of preserving fiscal discipline at all levels of government.
Some Directors noted the weakness in financial soundness indicators of the public sector banks and called for further efforts to improve their efficiency and profitability. Directors urged the authorities to clean the balance sheets of the banks by recognizing those assets that cannot be recovered while collecting collateral where this exists; to strengthen the soundness of public banks by fully enforcing the prudential regulations in place; and to improve the allocation of credit in the economy. Directors welcomed the authorities' intention to participate in the Financial Sector Assessment Program (FSAP) exercise prior to the next Article IV consultation, which should help the authorities identify additional ways of improving efficiency in public sector banks.
On the external sector, Directors welcomed Uruguay's continued commitment to trade liberalization, both in a regional and multilateral context. They welcomed the projected narrowing of the current account deficit to 2.5 percent of GDP in 2001. Directors noted that Uruguay is one of the few emerging market economies to be given an investment grade rating by the main credit rating agencies, and that it should have little difficulty in meeting its external financing needs. Continued perseverance with the structural reform and fiscal consolidation agenda will be essential in this regard.
Directors noted that the adjustable band exchange rate system experienced little pressure during 2000. Directors generally supported the authorities' policy to maintain, in the short run, the rate of depreciation of the band, and in the medium term to facilitate convergence of the rate of inflation to international levels. For the longer term, some Directors considered that further reflection on exchange rate policies for small, open and highly dollarized economies, such as Uruguay's, would be helpful.
Directors considered that an acceleration of structural reforms is essential to improve productivity and supply-side conditions in the economy, so as to boost economic efficiency, competitiveness, private sector activity, and employment. They encouraged the authorities to forge ahead quickly with their plans to remove the monopoly status of public sector enterprises, to increase disclosure with the publication of quarterly financial reports for state enterprises and banks, and to support transparency and market-based discipline with annual audits and the disclosure of independent corporate credit ratings. Directors welcomed the reform of the social security system.
Directors observed that Uruguay's economic statistics are generally adequate for the assessment and monitoring of macroeconomic policies. They welcomed the substantial progress that has been made in the timely publication of fiscal and monetary accounts on the internet, and considered that these efforts should now be extended to the budgetary performance of the local governments as well. Directors welcomed the authorities' intention to subscribe to the SDDS by the end of 2001.
|Uruguay: Selected Economic Indicators|
|Real GDP (change in percent)||4.9||4.6||-3.2||-1.0||2.0|
|Inflation (CPI, end-of-period)||15.2||8.6||4.2||5.1||4.7|
|Unemployment (in percent)||10.3||10.3||11.4||14.2||...|
|Fiscal balance (percent of GDP)||-1.4||-1.0||-4.1||-3.7||-2.6|
|Primary fiscal balance (percent of GDP)||0.5||0.9||-2.1||-1.2||0.0|
|Gross domestic investment (percent of GDP)||15.1||15.6||15.2||14.5||15.2|
|Gross national saving (percent of GDP)||13.7||13.5||12.7||11.6||12.7|
|External current account deficit (percent of GDP)||1.4||2.1||2.5||2.9||2.5|
|External current account (In millions of US$)||-298||-476||-528||-576||-504|
|Change in NIR (+ increase) (In millions of US$)||314||362||13||171||-60|
|GDP (In billions of Ur$)
GDP (In billions of US$)
|Sources: Data provided by the Uruguayan authorities; and Fund staff calculations|
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. This PIN summarizes the views of the Executive Board as expressed during the February 26, 2001 Executive Board discussion based on the staff report.
IMF EXTERNAL RELATIONS DEPARTMENT