IMF Executive Board Completes Third Review Under Uruguay's Stand-By Arrangement and Approves US$123.6 Million Disbursement

Press Release No. 06/61
March 27, 2006

The Executive Board of the International Monetary Fund (IMF) completed today the third review under the three-year, SDR 766.3 million (US$1.1 billion) Stand-By Arrangement for Uruguay (see Press Release No. 05/136). Completion of this review makes an additional SDR 85.8 million (about US$123.6 million) immediately available to Uruguay.

In completing the review, the Board granted a waiver for the non-observance of the performance criterion on the submission to Congress of a comprehensive tax reform bill, in view of the brief delay in submission.

In commenting on the Board review, Mr. Agustín Carstens, Deputy Managing Director and Acting Chair, said:

"Uruguay's performance under the Stand-By Arrangement continues to exceed expectations. Strong economic policies and a supportive external environment have contributed to rapid growth, low inflation, a strengthened external position, and an improved debt structure, and the outlook is for continued strong performance in 2006. Nevertheless, macroeconomic vulnerabilities remain and will require continued momentum in policy reform.

"The overperformance on fiscal policy is particularly welcomed, as it demonstrates the authorities'commitment to prudent fiscal policy. The ongoing efforts to strengthen tax administration and the recently submitted tax reform will be important to ensure that this continues. It is intended to establish an adjustor to the program's fiscal targets of a small margin to make room for additional, high-quality infrastructure investment, which should help to promote private investment and stimulate growth.

"Monetary policy has successfully contained inflation in the low single digits. The central bank's focus on building reserves and achieving the program's inflation objective is well placed, and appropriate exchange rate flexibility should be maintained. Incipient inflationary pressures need to be monitored carefully, and it will be important that the authorities follow up on their commitment to adjust policies as necessary to safeguard their objective of further lowering inflation. The recent establishment of a debt management office is welcomed.

"Financial sector reforms are progressing as envisaged. The recently adopted restructuring plan for the ailing housing bank BHU should help to ensure sound new mortgage lending and minimize fiscal costs, while the recently intervened cooperative COFAC is being transformed into a new, financially sound, institution. The draft financial sector legislation submitted to congress in December, once approved, should also reduce financial sector vulnerabilities and improve the policy framework of the central bank.

"Continued strong macroeconomic polices and further progress with structural reforms will lay the basis for a lasting exit from Fund financial support, increase the economy's resilience to shocks, and raise Uruguay's growth prospects. Measures to improve the investment climate and enhance productivity will be particularly important. Also, Uruguay should continue to take advantage of favorable external conditions to further improve its debt structure," Mr. Carstens said.



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