IMF Executive Board Concludes 2010 Article IV Consultation with Uruguay

Public Information Notice (PIN) No. 11/20
February 4, 2011

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 January 28, 2011, the Executive Board of the International Monetary Fund (IMF) concluded the 2010 Article IV consultation with Uruguay, and considered and endorsed the staff appraisal without a meeting.1


Uruguay’s growth performance over the last seven years has been very strong. Domestic and external factors have contributed to this economic revival, not least the consistent implementation of important reforms and prudent policies across administrations. Though not immune to the global crisis when it hit emerging markets in 2009, Uruguay’s rebound has been quick and robust. In 2010, Uruguay’s economy has been booming with vigorous growth in domestic demand and exports in the context of strong growth in partner countries, high commodity prices, ample global liquidity, and low international interest rates. The banking sector is well-capitalized and highly liquid, and nonperforming loans are record low under a regulatory regime in line with international best practices.

Unemployment has fallen to record lows, and inflationary pressures have risen. Headline inflation was 6.9 percent in December, close to the upper end of the current inflation band. Staff’s estimate of core inflation (which excludes some food items and administratively set prices) has been edging up and was 7.7 percent. Some sectors are experiencing shortages, in particular for skilled labor. The external current account remained in surplus on the back of buoyant exports, resilient terms of trade, and a bumper tourism season. Economic activity slowed in the third quarter of 2010 and the economy is expected to growth 8–8.5 percent in 2010 as a whole. In 2011, a continued moderation of the economic activity rate is expected, with growth performing around 5 percent.

The authorities’ policy response has sought to balance different tradeoffs. Concerns about the real effective exchange rate appreciation amid external inflows and buoyant demand conditions led to intervention and sterilization operations. The risk of inflation above the target range triggered a policy rate increase in late September, but the rate was left on hold in December.

On fiscal policy, the budget for 2010–14 aims to reduce the level of debt while focusing outlays on infrastructure, education, security, and social programs. Also, the government has taken advantage of external inflows to continue de-dollarize the public debt helping to moderate their impact. Staff projects the public sector primary surplus to improve to 1.8 percent of GDP (from 1.1 percent in 2009) owing to the rebound in the state electricity company’s performance following normalization of weather conditions. Despite strong economic growth, there was some worsening in the balance of the central government (reflecting robust growth in real primary expenditures and somewhat sluggish tax revenue).

Executive Board Assessment

In concluding the 2010 Article IV consultation with Uruguay, Executive Directors endorsed staff’s appraisal, as follows:

Uruguay’s growth performance since the country’s own crisis in 2002 has been very strong. Domestic and external factors have contributed to this economic revival, not least the implementation of major reforms (e.g., to financial regulations and supervision, and the tax system) and prudent macroeconomic policies across administrations.

The outlook for the coming years is good, but with challenges. The most immediate challenge is to secure a soft landing of the economy in the context of ample global liquidity, low interest rates, and high commodity prices. At the same time, there is a risk of spillovers from a worse global or regional outlook. The medium-term macroeconomic challenge is to sustain rapid growth with less volatility than in the past.

The macroeconomic policy requirements to deal with these challenges go in the same direction. They involve fiscal and monetary policies to temper domestic demand growth to help steer the economy away from a boom/bust path and create policy space (lower debt and inflation) to respond to future shocks. Given the full employment for skilled labor and slow growth in the labor force, sustaining growth at 4 percent over the longer term is feasible but will require efforts to overcome gaps in infrastructure and in the skills of the labor force. The government’s policy agenda reflects these challenges and priorities.

The budget for 2010–14 includes many important improvements. Notably: the focus on reducing the public debt while increasing spending on infrastructure, education, security, and social program, and the creation of the Energy Stabilization Fund. Staff supports the efforts to get a better handle on the costs of tax exemptions, which risk undermining the impressive gains in tax efficiency in recent years. The plan to publish cyclically-adjusted fiscal balances will help improve the budget framework and fiscal policy. Staff suggests more transparent mechanisms for intra-year changes in the budget.

The budget seeks to sustain the fiscal improvement in 2010, but even more ambitious fiscal targets for 2011–14 would be feasible and desirable. The fiscal position is robust. But more conservative fiscal targets for 2011–P14 would better support a soft landing, reduce appreciation pressures, and achieve a faster reduction in the public debt. The fiscal impulse is admittedly difficult to calculate with precision, but this uncertainty together with the state of the cycle and the risks to the outlook reinforce the case to err on the side of caution. This would also include saving cyclical revenue over-performance. Staff cautions against cutting the Value Added Tax (VAT) in the near term. Of course, if growth falters, the more ambitious fiscal targets should be reconsidered so as to allow automatic stabilizers to operate.

The increase in the monetary policy rate last September was a welcome step but a continued tightening is warranted in light of the inflationary pressures. Strong domestic demand and the risk of inflation expectations becoming stuck above official targets call for a continued measured normalization of the monetary stance. The narrowing of the inflation target band in late 2009 was a welcome signal of commitment to inflation but it also raised the stakes for the Central Bank of Uruguay (BCU). Staff suggests that the BCU aim for the middle of the inflation target range to ensure space for countercyclical responses. Further, stability in the target band is important for the targets to serve as an anchor for expectations. Finally, staff would caution against using administrative measures to contain inflation.

The recapitalization of the BCU is welcome although two design features could be improved: ensuring sufficient real cash flow to the BCU and allowing the 30 year bonds to be traded in the secondary market.

There is scope to strengthen the monetary policy framework and its credibility further. A practical step would be to separate clearly the Monetary Policy Committee from the Macroeconomic Coordination Committee in public communications and by de-linking their meeting schedules. The BCU can also strengthen its influence over inflation and inflation expectations through improved communication of the inflation outlook and risks, and how it sees inflation reaching the official targets.

Staff supports the flexible exchange rate and does not consider the real effective exchange rate to be out of line with long-run fundamentals. The BCU’s level of international reserves is comfortable and further intervention can be limited and subordinated to the inflation target. Continued pro-active debt management is a good way to absorb capital inflows to improve the public debt structure. A further slowdown in government expenditure would be appropriate if appreciation pressures intensify. And the limits on investments abroad for pension funds could be relaxed.

A well-functioning labor market with prudent wage agreements is essential for maintaining a vibrant economy and avoiding erosion in competitiveness. The reform to take into account sectoral productivity growth in the wage setting framework for the private sector is a welcome step forward.

There are no major vulnerabilities in the financial system at this time. Banks are well-capitalized and highly liquid, and nonperforming loans are at record low. Staff welcomes the extension of the limits on banks’ credits to their parent banks and the creation of a Financial Risk Committee to monitor systemic risks. Banks’ low profitability remains a concern and calls for efforts to strengthen productivity in the sector. In supervision, the design of the loan-loss provisioning system may need to be modified given the persistently high provisioning of impaired loans. The growing lending by nonbank financial institutions warrants close supervision. Staff welcomes the authorities’ readiness to adapt the macro-prudential framework as needed to contain credit growth if the rapid expansion continues unabated.

Staff welcomes the initiatives to boost long-term growth prospects including via Public-Private Partnerships (PPPs). It will be important for the PPP framework to ensure an appropriate balance of risk between the private and public sector, establish limits on the liabilities generated by the PPPs, and ensure their appropriate reporting.

Uruguay: Basic Data
          Prel. Est. Proj.
  2005 2006 2007 2008 2009 2010 2011
(Annual percent change, unless otherwise specified)

Real GDP

6.8 4.3 7.5 8.5 2.9 8.3 5.0

Real consumption

5.2 5.9 7.1 8.1 2.0 6.3 7.0

Real investment

4.2 16.8 6.3 27.5 -10.7 12.4 9.7



CPI inflation (average)

4.7 6.4 8.1 7.9 7.1 6.7 6.6

CPI inflation (eop)

4.9 6.4 8.5 9.2 5.9 6.9 6.5

Terms of trade

-6.1 1.6 2.3 -1.9 6.6 -0.3 1.1
(In percent of GDP)

Public sector finances


Total revenues

28.0 28.0 28.0 26.2 27.7 28.0 28.1

Non-interest expenditure

24.2 24.6 24.7 25.1 27.0 26.5 26.5

Primary balance

3.8 3.5 3.4 1.3 1.1 1.8 2.0

Overall balance

-0.5 -0.5 0.0 -1.5 -1.7 -1.2 1.1

Gross public sector debt

77.6 70.3 63.0 61.6 60.7 54.2 52.3

   Of Which: Public external debt

56.7 47.9 42.8 40.1 35.4 31.9 31.2
Annual percent change, unless otherwise specified)

Money and Credit 1/


Base Money (eop)

55.4 10.3 16.4 29.3 6.5 32.3


33.5 20.1 29.4 18.6 12.2 29.2


26.7 21.7 30.6 17.1 15.0 29.9


0.0 11.6 3.8 28.6 -2.6 16.1

Credit to the private sector (constant exchange rate)

6.3 17.3 22.1 28.0 -7.5 14.1
(In percent of GDP, unless otherwise indicated)

Balance of payments


Current account balance

0.2 -2.0 -0.9 -4.7 0.6 0.5 -0.7

Merchandise exports, fob

21.7 22.2 21.3 22.8 20.3 19.7 21.2

Merchandise imports, fob

21.6 24.7 23.6 28.3 21.1 19.8 22.7

Services, income, and transfers (net)

2.1 2.1 2.9 2.6 3.1 2.7 2.8

Capital and financial account

4.3 2.7 6.3 9.0 1.4 -1.2 1.1

Foreign direct investment

4.9 7.5 5.6 5.8 4.0 3.2 3.2

Overall balance of payments (In millions of U.S. dollars)

620.3 -15.4 1,005.4 2,232.4 1,588.3 -295.8 206.0

Gross official reserves (In millions of U.S. dollars) 2/

3,079 3,085 4,124 6,362 8,040 7,744 7,950

In percent of short-term debt

137.8 491.2 471.8 797.2 772.3 494.6 586.3

In percent of short-term debt and FX deposits

67.9 101.3 117.2 151.4 162.6 138.3 143.7

Outstanding external debt

63.6 54.3 47.2 44.9 39.1 34.8 34.1

External debt service (percent of exports of goods and services)

40.1 83.6 26.1 19.8 20.2 27.0 17.8

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

1/ October data for 2010.

2/ Includes reserves 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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