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Press Release No. 00/35
May 31, 2000
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves Stand-By Credit for Uruguay

The International Monetary Fund (IMF) today approved a 22-month stand-by credit for Uruguay in an amount equivalent to SDR 150 million (about US$197 million) to support the government's economic program for 2000-01. The government of Uruguay will treat the stand-by credit as precautionary and does not intend to make any drawings for the time being.

In commenting on the Executive Board discussion, Eduardo Aninat, Deputy Managing Director said:

"Executive Directors noted that 1999 had been a difficult year for Uruguay, but they were pleased that there were signs the economy was now emerging from the recession. The authorities had prepared an appropriate economic program of macroeconomic policies and structural reforms that would place Uruguay in a favorable position as the regional economic recovery gained strength. It would be particularly important to accelerate the momentum of structural reform in the coming year. Given the high degree of dollarization of the economy, the focus of economic management needed to be on fiscal and incomes policies.

"The fiscal objectives of the program struck an appropriate balance between the need to solidify confidence and gradually improve the medium-term debt indicators, and the need to allow the incipient economic recovery to build further strength. Directors were especially supportive of the authorities' efforts to focus on expenditure restraint and cost control in the economy, including through targeted reduction in taxes, where these are most distortive. These efforts would need to be sustained over the medium term. Restrained incomes policies were an important complement to the fiscal effort, to help contain social security costs, which are indexed to wages, and which comprise the single largest expenditure component for the public sector.

"The authorities are making progress in improving efficiency and strengthening competitiveness of the financial system, including through stepped-up supervision, stronger capital regulations, and better disclosure and transparency for all banks. Uruguayan banks enjoy a good reputation in the region, but there are increasing competitive pressures in this sector from neighboring countries.

"The Fund supports the authorities' crawling band exchange rate regime, which has served Uruguay well and which continues to guide inflation expectations downward in the medium term.

"The authorities are embarking on a number of important reform measures under the program, including measures to prepare the public enterprises for the early removal of their monopoly status; to improve efficiency and disclosure in the public sector banks and to strengthen the financial system in general; to reform further the social security system; and to bolster transparency and disclosure of fiscal developments," Aninat said.

ANNEX

Program Summary

The Uruguayan economy has performed well during the 1990s. Output growth averaged 3% a year, and inflation was brought down from triple digits to 4% at end-1999. The average unemployment rate however remained high, at nearly 10% a year, and in 1999 the economy suffered a severe contraction in output resulting from an unusual coincidence of adverse shocks, including the devaluation of the Brazilian real, a severe drought, and sharply adverse developments in the terms of trade.

As Uruguay emerges from the recession, the government that took office on March 1, 2000, intends to reinvigorate economic policies and restore growth while maintaining low inflation. The macroeconomic setting for the program in 2000 envisages real GDP growth of 2% led by a strengthening in the external position and private investment. With the economy still recovering from the drought and adjusting to higher energy prices, output growth remained subdued in the first half of 2000, but should accelerate during the second semester. Improved public sector saving, gradual but steady gains in competitiveness, and the recovery in foreign demand are expected to narrow the external current account deficit to 2% of GDP, while inflation is expected to be in the 4%-6% range, partly on account of the pass-through of the recent rise in energy prices.

The program provides for a two-pronged fiscal strategy, combining an overall consolidation of public finances to strengthen confidence and limit the rise in public debt indicators, with selective tax cuts to help reduce costs in the economy and foster competitiveness. For 2000 the program aims at halving the public sector deficit to 1.8% of GDP, led by expenditure restraint, which will remain the focus of fiscal policy over the medium term. On the revenue side, the intended selective tax cuts would help lower labor costs and assist those sectors most affected by the recession.

The program includes a number of structural reforms that are key to productivity enhancement, competitiveness gains, and faster output growth. These reforms focus on improving efficiency in the large nonfinancial public sector enterprises and in the public banks, strengthening further the social security system, and promoting disclosure and transparency in public and private sector finances and policies. The authorities will also seek to streamline the state corporate sector and gradually place these enterprises in a competitive environment.

Uruguay joined the IMF on March 11, 1946. Its quota1 is SDR 306.5 million (about US$402 million), and its outstanding use of IMF credit currently totals SDR 114 million (about US$150 million).

Uruguay: Economic and Financial Indicators

                 
 

Average

     

1999

 

Prog.

Prog.

 

1986-95

1996

1997

1998

Prog. 1/

Prel.

2000

2001

                 

(Percentage change)

                 

Output, prices, and wages

           

Real GDP

3.8

5.6

4.8

4.9

-2.0

-3.4

2.0

4.0

Consumer prices (average)

72.0

28.3

19.8

10.8

6.1

5.7

5.2

4.5

(end of period)

72.9

24.3

15.2

8.6

4.7

4.2

5.8

4.0

Public sector wages (end of period)

72.7

28.8

18.7

11.7

7.5

6.9

3.2

6.0

Unemployment rate (percent, end of period)

9.0

11.9

10.3

10.0

...

11.4

...

...

GDP (Ur$ billions)

21.2

163.6

203.3

234.1

245.3

237.0

255.8

277.8

GDP (US$ billions)

9.5

20.5

21.5

22.4

21.9

20.9

21.2

21.7

                 

Monetary indicators

               

Currency issued

73.1

26.6

22.0

13.8

4.7

6.9

9.0

7.7

M-2 2/

71.0

26.9

23.0

9.1

4.0

5.6

9.2

7.7

M-4* 3/

68.9

33.6

27.1

16.9

5.8

13.2

9.5

9.5

Credit to the private sector 4/

59.8

33.2

29.7

22.3

4.5

5.7

10.7

9.5

Prime interest rates (percent, average)

               

Foreign currency loans

10.1

8.5

8.5

8.5

...

8.2

...

...

Domestic currency loans

79.8

48.2

39.2

30.6

...

21.6

...

...

                 

(In percent of GDP, unless otherwise indicated)

                 

Public sector operations

               

Revenue

26.2

30.0

30.6

31.4

30.9

30.9

31.4

31.3

Noninterest expenditure

25.5

29.7

29.9

30.4

30.8

32.7

31.0

30.3

Primary balance

0.7

0.3

0.6

1.0

0.1

-1.8

0.4

1.0

Interest bill

1.8

1.9

2.0

1.9

2.0

2.1

2.2

2.2

Overall balance

-1.1

-1.6

-1.3

-0.9

-1.9

-3.8

-1.8

-1.2

Public sector total debt

28.0

27.9

28.7

31.1

34.1

35.9

38.1

38.6

                 

Savings and investment

               

Gross domestic investment

13.1

14.6

13.9

15.0

14.4

14.1

14.4

14.9

Public

3.8

3.1

3.1

3.6

3.9

4.0

3.8

3.9

Private 5/

9.3

11.5

10.8

11.4

10.5

10.1

10.5

11.0

Gross national savings

12.5

13.5

12.6

12.9

12.1

11.2

11.9

12.9

Public 6/

2.4

1.9

2.3

3.1

1.8

0.2

2.0

2.7

Private

10.1

11.6

10.3

9.7

10.3

11.1

9.9

10.2

Foreign savings

0.6

1.1

1.3

2.1

2.3

2.9

2.5

2.0

                 

External indicators

               

Merchandise exports, f.o.b. (US$ millions)

1,426

2,449

2,793

2,829

2,504

2,305

2,627

2,948

Merchandise imports, f.o.b. (US$ millions)

1,524

3,135

3,498

3,588

-3,276

3,173

3,424

3,715

Current account balance

-0.6

-1.1

-1.3

-2.1

-2.3

-2.9

-2.5

-2.0

Overall balance of payments

0.8

0.7

1.5

1.6

-0.9

0.1

0.0

0.2

Public sector external debt

25.0

23.3

22.6

24.7

25.2

27.0

28.8

30.1

Gross official reserves (US$ millions)

1,162

1,909

2,068

2,589

2,389

2,602

2,587

2,637

In months of imports of goods and services

4.9

5.8

5.7

6.9

6.4

7.7

7.2

6.8

Ratio of official reserves to short-term debt 7/

...

0.3

0.3

0.3

0.3

0.3

0.3

0.3

Ratio of financial system foreign assets to short-term debt

...

0.8

0.7

0.7

0.9

0.9

0.9

0.9

Central bank short-term foreign liab. (US$ millions)

...

34

3

162

162

159

159

159

Central bank external debt (US$ millions) 8/

...

861

858

801

944

652

611

611

Real effective exchange rate

               

(percentage
depreciation -, end of period)

2.9

-0.5

1.8

1.3

...

10.2

...

...

                 

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

         
                 

1/ The national accounts were recently revised, leading to an increase in GDP of about 9 percent. For comparability, ratios to GDP are based here on the new national accounts series.

2/ Currency plus demand and savings deposits in domestic currency.

           

3/ M-2 plus foreign currency deposits of residents (valued at end-of-period exchange rate) and deposits in the Mortgage Bank.

 

4/ Flows of credit in foreign currency are valued at end-of-period exchange rates.

         

5/ Includes changes in inventories.

               

6/ Public sector total revenue minus current expenditure.

             

7/ Remaining maturity including nonresident deposits in the banking system.

         

8/ Medium-and long-term.

               

1A 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.




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