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Press Release No. 02/14
March 25, 2002
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Completes Third Review and Approves New Stand-By Credit for Uruguay

The Executive Board of the International Monetary Fund today completed the third and final review of Uruguay's performance under the SDR 150 million (about US$188 million) stand-by credit approved on May 31, 2000 (see Press Release 00/35), which expires on March 31, 2002. To date, Uruguay has not drawn from this arrangement. The decision, therefore, allows the country to draw, before March 31, 2002, the total amount of SRD 150 million (about US$188 million).

In addition, the Executive Board also approved a new SDR 594.1 million (about US$743 million) stand-by credit intended to support the country's economic program during 2002-04. This decision allows Uruguay to draw SDR 122.6 million (about US$153 million) from April 1, 2002, the starting date of the program.

In commenting on the Executive Board discussion, Horst Köhler, Managing Director and Acting Chairman said:

"The Fund welcomes the Uruguayan authorities' energetic response to the challenges affecting the economy by strengthening the macroeconomic framework and pursuing a comprehensive structural reform agenda. Implementation of this program will help Uruguay deal with contagion effects from the Argentine crisis, place the economy on a sounder footing, and create the conditions for a resumption of sustainable growth. This effort, which is supported by the Fund, will help strengthen public confidence in the sustainability of economic policies and the public debt, thereby underpinning Uruguay's continued access to international capital markets.

"The authorities' program is based on a more flexible exchange rate policy, supported by monetary restraint and fiscal consolidation, with a view to reaching fiscal balance in 2004.

"To achieve the fiscal objectives, the authorities are focusing on expenditure restraint, including in the areas of wages and pensions, along with additional steps on the revenue side. The recent approval by congress of a tax package that is projected to yield nearly one percent of GDP is helpful. Looking ahead, structural reforms in the fiscal area will help ensure further deficit reductions in the years ahead, including a comprehensive reform of the VAT and other taxes, and a deepening of the reform of the state. A reform of the public sector, through the divestiture of public sector assets, including a program of partnerships with the private sector in many areas until now reserved for public sector activity, will also play an important role.

"The strength of the financial system has been one of the pillars of macroeconomic stability in Uruguay. Following the deposit outflows triggered by the Argentine crisis and problems in two Uruguayan banks, private banks have confirmed their commitment to ensure that the system remains liquid and well capitalized. In addition, the authorities' program seeks to enhance depositors' confidence through a strengthening of prudential regulations and the reinforcement of the supervisory role of the Superintendency of Banks. The authorities will also speed up the restructuring of public banks, especially the Mortgage Bank, with the assistance of the World Bank.

"The authorities are committed to making further progress in improving the conditions for a quick resumption of sustained growth. The recovery of the meat sector from the effects of the 2001 outbreak of the foot-and-mouth disease and the gains in competitiveness associated with the more flexible exchange rate policy will help boost real GDP growth in the immediate future. At the same time, it will be important to continue with the efforts to deregulate the economy, reduce red tape, and open up to the private sector areas previously reserved for the public sector, so as to foster productivity increases and economic growth over the medium term," Mr. Köhler said.

Program summary

Following two years of recession, Uruguay continued to face difficult economic conditions in 2001 due to a severe outbreak of foot-and-mouth disease, the worsening of the crisis in Argentina, and the slowing of growth in Brazil. In 2001 real GDP contracted by 2 percent, unemployment increased to 14.9 percent from 14.4 percent in 2000, and the external current account deficit widened to 3.1 percent from 2.6 percent in 2000.

The program seeks to create the conditions for a resumption of economic growth over the medium term. It envisages a rebound of output growth to 3 percent in 2003, following a decline of nearly 2 percent in 2002. The external current account deficit is projected to narrow to 2 percent of GDP in 2002-03.

On fiscal policy, the authorities are committed to a process of consolidation as a means to ensure debt sustainability and buttress confidence over the medium term. The program aims at reducing the public sector deficit by 1½ percent of GDP to 2½ percent in 2002, and to no more that 1½ percent in 2003, with a view to achieving fiscal balance in 2004. Expenditure is programmed to drop in 2002 and 2003, while revenues are projected to increase by 0.9 percent in 2002.

The monetary program assumes that currency in circulation will remain broadly unchanged in 2002. Total deposits are projected to grow by 21 percent this year, and a gradual recovery of net international reserves will start in the second half of 2002.

Since developments in Argentina may continue to put pressure on the banking system, the authorities are addressing the liquidity issues arising in the system and dealing decisively with ailing banks. At the same time, they are intensifying the supervisory work of the Superintendency of Banks, as well as strengthening the regulatory framework. Aside from the banking sector, the reform agenda envisages the continuation of efforts to open up to the private sector areas previously reserved for the public sector, in order to foster productivity increases and economic growth in the medium term. The authorities have adopted a gradual strategy under which state monopolies in a number of critical areas, such as the energy sector, railroad, telecommunication, and oil activities are opened to private sector participation during the program period. In addition, the government is granting in 2002 concessions to the private sector in a number of areas, speeding up the process of deregulation of the economy and continuing the downsizing of the state.


Uruguay: Selected Economic Indicators


     

Prel.

Proj.

Proj.

 

1999

2000

2001

2002

2003


(Percentage change)

           

Output, prices, and wages

Real GDP

-2.8

-1.3

-2.0

-1.7

3.0

Consumer prices (end of period)

4.2

5.1

3.6

10.1

8.1

Exchange rate Ur$/US$ (end of period)

11.6

12.5

14.8

...

...

Merchandise terms of trade

-4.7

-6.6

2.2

4.4

0.7

REER (percentage depreciation -, e.o.p.)

10.2

-0.7

-5.4

...

...

           

Monetary indicators

         

Currency issued

6.9

-3.9

-0.2

-0.3

11.8

M-2 1/

4.7

3.5

0.8

1.8

6.2

M-3 2/

13.2

10.2

19.4

28.9

11.2

Credit to the private sector 3/

10.1

5.0

8.1

24.5

9.3

           

(In percent of GDP, unless otherwise indicated)

           

Public sector operations 4/

Revenue

32.3

31.5

31.8

32.7

32.6

Noninterest expenditure

34.4

32.9

32.9

31.7

29.9

Primary balance

-2.0

-1.4

-1.1

0.9

2.7

Overall balance

-4.1

-4.0

-4.0

-2.5

-1.5

           

Savings and investment

         

Gross domestic investment

15.1

13.9

12.9

13.7

15.1

Gross national savings

12.6

11.3

9.8

12.0

13.2

Foreign savings

2.5

2.6

3.1

1.7

1.9

           

External indicators

         

Current account balance

-2.5

-2.6

-3.1

-1.7

-1.9

Financial account (incl. errors and omission)

2.6

3.5

4.7

-5.0

3.1

Public sector external debt 5/

25.9

28.4

32.7

38.6

40.9

Gross official reserves (US$ millions)

2,606

2,742

3,069

2,380

2,824

In months of imports of goods and services

7.8

7.8

9.9

8.3

9.1

Ratio to short-term debt

1.1

1.1

1.2

0.9

1.1

 

 

 

 

 

 


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

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

2/ M-2 plus foreign currency deposits of residents (valued at end-of-period exchange rate).

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

4/ Includes extrabudgetary operations (Fondos de Libre Disponabilidad) from 1998.

5/ Excludes the IMF.




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