IMF Executive Board Concludes 2008 Article IV Consultation with Uruguay

Public Information Notice (PIN) No. 08/141
November 11, 2008

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.

On October, 24, 2008, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Uruguay.1


Uruguay has further consolidated economic gains, supported by strong macroeconomic policies and a broadly favorable external environment. Growth has exceeded expectations, unemployment has reached record lows and poverty has continued to fall, while economic vulnerabilities have been significantly reduced. Nevertheless, persistent inflationary pressures, together with a deteriorating global economy pose key challenges. Moreover, despite significant advances, the government's reform agenda is still ongoing. Since the intensification of the global financial turbulence, Uruguay has experienced a peso-depreciation, higher interest rates, and an increase in country risk.

Real GDP grew by 7.5 percent in 2007, continuing the strong performance following the crisis in 2002. Growth momentum has been exceptionally strong this year, with real GDP growth reaching 13 percent during the first semester, led by domestic demand. Together with food and oil commodity prices increases, this has fueled persistent inflationary pressures. Twelve-month inflation through September 2008 was 7.5 percent, above the upper limit of the central bank's target range (7 percent). Core inflation has risen steadily, and remains in the 9-10 percent range.

The authorities took measures to contain price increases, but pressures remain. The policy rate was raised by 275 basis points to 7¼ percent in 2007 and, more recently by 50 basis points in October; in May, reserve requirements were increased. Moreover, the exchange-rate channel has been allowed to operate more freely, with, until this September, the peso appreciating against the U.S. dollar. In addition, in 2007, tax measures were implemented to prevent headline inflation from reaching double-digits, which would have triggered more frequent pension and wage adjustments. Nonetheless, while headline inflation has come down by 1½ percentage points since its peak in 2007, both core and headline inflation remain above the central bank's target range.

While the overall deficit has been below target, fiscal policy has been somewhat expansionary. The headline primary balance declined from 3¾ percent of GDP in 2006 to an estimated 2.7 percent of GDP in 2008. Adjusting for the economic cycle and excluding drought-related costs, both the primary and overall balances may imply a positive impulse in 2008-09. Still, with lower interest payments, the overall deficit is expected to remain between 0-0.3 percent of GDP. Moreover, the gross debt-to-GDP ratio has continued to fall, to about 65 percent of GDP and 55 percent of GDP (net of Net International Reserves - NIR). Nonetheless, looking ahead, more ambitious fiscal targets would help ease domestic demand pressures and reduce the burden on monetary policy in its fight against inflation, as well as help in achieving faster debt reduction.

Uruguay's external sector remains strong, with buoyant exports, and import growth driven by large foreign direct investment projects. The central bank has accumulated US$6 billion in reserves to date. Short-term debt has been sharply reduced through debt management operations, including by de-dollarizing through swaps with support from the World Bank. The debt structure has improved, and financing needs are covered through end-2009.

Financial indicators have improved considerably. Despite strong credit growth, financial system soundness indicators have improved, showing a well-capitalized banking system, low non-performing-loan ratios and high liquidity levels. However, bank profitability has declined of late reflecting in part declining yields and the strong peso appreciation until August. Still, Uruguay remains one of the most dollarized economies in the world.

Despite significant advances, various structural reforms are still pending. Progress has been made in restructuring the housing bank BHU, but the process remains to be completed.

Executive Board Assessment

The Executive Directors noted that prudent macroeconomic policies and deep-rooted structural reforms over the past few years, aided by favorable external conditions until mid-2008, have enabled Uruguay to maintain vigorous export and economic growth, lower unemployment and poverty rates, and significantly reduce vulnerability to shocks. High levels of international reserves and commercial bank liquidity are providing important buffers against deteriorating external conditions. Moreover, debt management operations have reduced short-term government financing needs, lowered the debt-to-GDP ratio, and substantially improved the debt profile. As a result, the effects of the recent turmoil in global financial markets have been relatively contained.

Notwithstanding these achievements, Directors noted that the Uruguayan economy remains vulnerable. In particular, deteriorating global financial and economic conditions pose downside risks to Uruguay's small, open, and dollarized economy. A main macroeconomic challenge will be to contain inflation in the face of food and fuel price increases and domestic demand and wage pressures. Directors also noted the recent sharp increase in Uruguay's country risk premium. They accordingly underlined the importance of continued vigilance by policymakers, and of steadfast pursuit of the government's reform agenda to help maintain macroeconomic stability and sustain robust economic growth.

Directors welcomed the measures the authorities have taken to reduce inflationary pressures, including increases in the policy rate and banks' reserve requirements and tax administrative measures. With core and headline inflation still above the central bank's target range and bank credit growing rapidly, Directors saw merit in some additional monetary tightening. A few Directors cautioned, however, that reliance on the interest rate channel could intensify capital inflows. Directors generally noted that administrative measures should be relied on to control prices only in exceptional circumstances. Directors also emphasized the importance of making price stability the core objective of monetary policy in order to strengthen the credibility of the monetary policy framework, and of securing central bank independence irrespective of the electoral cycle.

Directors noted that capital flows have complicated monetary management. Until August 2008, strong inflows and sterilized intervention to contain the appreciation of the currency led to a sharp rise in reserves and central bank debt. More recently, the deteriorating global financial conditions have created new challenges, as inflows have abated and the exchange rate has depreciated.

Most Directors considered that fiscal policy has been expansionary, particularly in non-drought years. They noted that the primary balance has deteriorated since 2006, and the structural primary and overall balances may imply a positive impulse in 2008-09. Directors stressed that, with the gross public debt ratio still relatively high, it will be essential to maintain high primary surpluses to further reduce the debt burden. Most Directors encouraged the authorities to maintain an ambitious fiscal stance to help avoid increasing the burden on monetary policy, while supporting well-targeted measures to alleviate the impact of the food and fuel price shocks on vulnerable groups. At the same time, some Directors cautioned that in the current changing economic environment, the case for a tighter fiscal stance is debatable. Most Directors also saw merit in moving to cyclically-adjusted fiscal targets—and a few suggested the adoption of a fiscal rule—which they felt would enhance the effectiveness of fiscal policy and reduce medium-term vulnerabilities. Directors welcomed the operations carried out recently to improve the debt profile and to reduce debt dollarization.

Directors noted that the banking system is well-capitalized and liquid, with low non-performing loans. They welcomed the system's increased resilience to shocks, and called for further strengthening of the financial sector, particularly in the context of declining bank profitability, global financial volatility, and dollarization of the economy. The recent rapid growth of bank credit and an increase in non-resident deposits point to the need for continued proactive bank supervision. Directors stressed the importance of deepening financial sector reforms and completing the implementation of the 2006 Financial Sector Assessment Program (FSAP) recommendations. These include further strengthening state banks and banking supervision, and completing the restructuring of the housing bank. Directors welcomed the important progress made so far in this regard. They regarded swift approval of the financial sector law to be key to enhancing central bank independence and strengthening the supervisory and resolution frameworks.

Directors noted that Uruguay's favorable business climate has led to strong foreign direct investment inflows and a diversification of exports and export markets. They welcomed the efforts being made to further improve the business climate, including the reform of competition and bankruptcy legislation.

Uruguay: Basic Data

            Prel. Prel.
  2003 2004 2005 2006 2007 2008 2009
(Annual percentage changes, unless otherwise indicated)

Real GDP

2.2 11.8 6.6 7.0 7.4 9.5 5.5

Real consumption

1.1 9.5 2.8 8.6 9.7 9.8 7.8

Real investment

18.0 22.0 12.7 24.7 2.6 16.5 8.0



Consumer price index (period average)

19.4 9.2 4.7 6.4 8.1 7.6 7.4

Consumer price index (eop)

10.2 7.6 4.9 6.4 8.5 8.5 7.5

Terms of trade

2.2 -2.4 -6.3 -1.6 0.6 -0.3 0.2
(In percent of GDP)

Public sector finances


Total revenues

32.0 30.9 31.8 31.8 33.8 32.4 33.8

Expenditure (incl. discrepancy)

35.3 33.2 32.5 32.5 33.8 32.7 33.9

Primary balance

2.7 3.8 3.9 3.8 3.6 2.7 3.1

Overall balance

-3.2 -2.2 -0.7 -0.6 0.0 -0.3 -0.1

Public sector debt 1/

110 97 75 66 62 58 53

Outstanding external debt

98.2 87.4 68.3 54.7 52.3 41.3 36.2

Of which: Public external debt

85.3 76.9 60.8 48.2 47.3 36.3 31.3
(Annual percentage change)

Money and credit


Base money (eop)

24.9 11.1 34.1 13.0 16.4 29.9 ...


34.6 13.4 29.4 21.8 29.4 22.7 ...


21.7 -2.0 0.4 12.3 3.8 2.6 ...

Credit to the private sector (constant exchange rate)

-23.9 -11.2 2.7 9.1 22.1 28.6 ...

Gross official reserves (US$ million) 2/

2,087 2,512 3,438 3,091 4,096 6,371 6,926

In percent of short-term debt

131.3 112.4 153.8 492.1 495.3 648.3 597.7

In percent of short-term debt and FX deposits

20.0 27.7 32.9 32.8 40.2 61.7 61.1
(In percent of GDP, unless otherwise indicated)

Balance of payments


Current account

-0.5 0.3 0.0 -2.4 -0.8 -1.7 -2.4

Merchandise exports, f.o.b.

20.3 23.7 22.5 22.7 21.8 22.4 20.6

Merchandise imports, f.o.b.

18.7 22.6 22.3 25.2 23.9 24.3 23.2

Services, income, and transfers (net)

-2.1 -0.8 -0.2 0.1 1.3 0.3 0.2

Capital and financial account

9.3 0.5 6.1 1.0 6.1 8.7 4.0

Foreign direct investment

3.6 2.4 4.3 7.1 3.8 3.3 2.8

Overall balance of payments (US$ millions)

1,380 454 951 -337 1,005 2,275 555

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

52.3 44.8 53.1 92.5 25.0 16.5 15.9

Sources: Data provided by the Uruguayan authorities; and IMF staff estimates.
1/ Public sector debt, 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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