Uruguay and the IMF
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The International Monetary Fund (IMF) today approved a 12-month stand-by credit for Uruguay equivalent to SDR 70 million (about US$95 million), to support the government’s 1999 economic program. The government of Uruguay does not intend to make drawings under the stand-by credit, and will treat it as precautionary.
The Uruguayan economy has performed well in recent years. Real GDP growth averaged 3¾ percent a year during 1990-98, compared to a population growth of ½ of 1 percent; inflation continuously declined; and the external current account deficit remained modest. The government has implemented a gradual but sustained adjustment effort, combining cautious fiscal and monetary policies with domestic and external trade deregulation, and market-based reforms in the areas of education, social security, public enterprises, and the government apparatus, thereby improving the allocation of resources.
The authorities achieved all main objectives under the 1998 program. Inflation dropped to 8½ percent by year’s end, while real GDP growth was estimated at 4½ percent for the year, notwithstanding a sharp slowing of economic activity in the final quarter. The unemployment rate averaged just above 10 percent, compared with 11½ percent in 1997.
There was a significant slowing of economic activity in the first few months of 1999, following the Russian default in August 1998 and the incipient difficulties in Brazil. The depreciation of the Brazilian real last January posed a further challenge to the economy. The authorities responded quickly by taking some corrective fiscal measures and adapting slightly their exchange rate policy to face the more difficult external environment.
The 1999 Program
The 1999 program aims to bring 12-month inflation down to 4-6 percent by year’s end and envisages a 1 percent contraction in real GDP, assuming negative output growth in Brazil and a significant slowing of growth in Argentina. The consolidated public sector deficit is programmed to increase to 1¾ percent of GDP, mainly reflecting the impact of the economic downturn on revenue and a ¼ of 1 percent of GDP charge in one-time expenditures related to the administration of the general elections in October 1999.
Revenue is projected to remain almost unchanged relative to GDP. This results from lower VAT and excise tax receipts based on a projected reduction in spending for consumer durables, lower import taxes, and a cut in the bank asset tax. Profit taxes, however, are expected to be strong, based on substantial profit remittances from public enterprises in early 1999, and generally on the favorable business conditions during much of 1998, which affect corporate income tax revenues with a lag.
Given the adjustable band exchange rate regime and the freedom of capital flows, monetary policy is largely subordinated to exchange rate policy. Currency in circulation is projected to increase by 4 percent in 1999, slightly less than nominal GDP growth. Net international reserves are expected to decline by US$200 million from their level at the end of 1998 reflecting the drawing down during 1999 of some prefinancing that was obtained in late 1998.
The authorities do not anticipate launching major new structural reform initiatives in 1999, but instead will aim to consolidate programs already under way. These include a broadening of the list of instruments that private pension funds can invest in; a reduction in armed forces personnel; working with Congress to pass new bankruptcy legislation, and a law on factoring, discounting, and establishing a market for receivables. In the banking sector, the government-owned Bank of the Republic will extend its contract with a private consultant to continue reforms and improve its efficiency and profitability.
The Challenge Ahead
Despite the authorities’ overall careful fiscal management, indexation practices for social security benefits, and public sector wage determination policies, clearly limit the flexibility with which the government can respond to shocks. Moreover, the depreciation of the Brazilian real has affected Uruguayan competitiveness in a market absorbing about one-third of its merchandise trade. Moderating public wages could create room under the existing deficit ceiling to reduce labor taxes and assist the economy in recovering competitiveness.
Uruguay joined the IMF on March 11, 1946. Its quote1 is SDR 225.3 million (about US$307 million); and its outstanding use of IMF credit currently totals SDR 114 million (about US$155 million).
1 A member’s quota in the IMF determines, in particular, the amount of its subscription, its voting weight, its access to IMF financing, and its share in the allocation of SDRs.
IMF EXTERNAL RELATIONS DEPARTMENT