## 1uryea2022001

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---

### PRE-PANDEMIC CONTEXT
- Institutional and macro strengths:
  - Well-functioning institutions, high social cohesion, solid financial sector, ample reserve buffers, investment grade status.
- Pre-2014 developments and imbalances:
  - Post-2014: weakening public finances, low economic growth, low investment, declining employment.
  - Labor market frictions: wage rigidities; skill mismatch rooted in poor basic education outcomes; persistently high youth unemployment.
  - Inflation: two years of overshooting the 3–7 percent target range; inflation spiked above 10 percent in mid-2020.
- Political/reform context:
  - New government began March 2020 with mandate to boost growth and restore fiscal sustainability.
  - Omnibus law (‘Ley de Urgente Consideracion’) passed July 2020 established a new fiscal framework, SOE reforms, pension reform, greater autonomy for regulatory agencies; implementation slowed by the pandemic and a 2022H1 referendum prospect.

### THE PANDEMIC — RECENT DEVELOPMENTS
- Epidemiology and activity:
  - Distinct pandemic phases: effective containment through most of 2020; sharp activity contraction at onset; strong rebound in 2020H2; loss of momentum in early 2021 during severe COVID wave; renewed recovery after a rapid vaccination campaign described as “one of the fastest in the world.”
- Sectoral and labor outcomes:
  - Primary activities and construction: rebounded rapidly and are above pre-pandemic levels.
  - Contact-intensive activities: highly affected, slower recovery; high-frequency indicators point to a speeding rebound after recent reopening.
  - Employment: plateaued below pre-pandemic levels in early 2021 after rebounding in 2020H2, with signs of further uptick in recent readings.
- Inflation and exchange rate:
  - Inflationary pressures subsided in early 2021 after peaking in 2020; new pressures from food and global inflation emerged.
  - Medium-term inflation expectations moved closer to the target range but remained above it.
  - Uruguayan peso: depreciated sizably in early 2020 and remained broadly stable thereafter; after some 2020 interventions the exchange rate floated and displayed some nominal and real appreciation—real appreciation vis-à-vis Brazil and Argentina poses challenges for export sectors.
- External sector:
  - Current account: shifted from a 1.6 percent of GDP surplus in 2019 to a 0.6 percent of GDP deficit in 2020.
  - 2021 prospects: current account deficit expected to widen further reflecting sharp drop in tourism receipts and large imports related to the UPM pulp mill project.
  - Financial flows: resilient, supported by large FDI inflows (driven by the pulp-mill project and inter-company loans).
- Key fiscal indicator:
  - NFPS overall balance excluding ‘cincuentones’ weakened from -3.8 percent of GDP in 2019 to -5.2 percent of GDP in 2020.

### POLICY RESPONSE TO THE PANDEMIC
- Fiscal policy:
  - Package of about 2.7 percent of GDP for 2020-21 for health, protecting vulnerable households, supporting employment and firms.
  - Revenue patterns: income tax revenues unchanged relative to GDP; fall in social security contributions partly offset by surge in VAT revenues.
  - Fiscal balance projected to improve to -4.5 percent of GDP in 2021 reflecting recovery and restraint on discretionary spending.
  - COVID-related fiscal costs earmarked and transparently reported through a COVID Fund (Fondo Solidario COVID).
  - Three indicative 2020 targets under the new fiscal framework were met.
- Monetary policy:
  - Liquidity and tools: BCU lowered reserve requirements and rapidly expanded the monetary base by a 40 percent increase from February to August 2020.
  - Policy instrument shift in September 2020 from M1+ growth to short-term interest rate; produced deeply negative short-term real rates and downward shift of the yield curve.
  - Subsequent tightening: policy rate increased by 125 basis points to 5.75 percent; stance remained accommodative with a real rate of about -1 percent.
- Financial sector measures:
  - Regulatory forbearance and lower reserve requirements to avoid financial stress and credit contraction.
  - Loan relief: extension of bank loan repayments up to 180 days for all non-financial corporations and individuals; measure benefited about 45 percent of private loan repayments up to August 2021.
  - SIGA guarantees: three lines for SMEs, heavily impacted sectors, and large companies with an average guarantee of about 70 percent (covering over 5 percent of private sector loans or 1.4 percent of GDP).
  - ANDE credit lines: loans for US$29 million (0.05 percent of GDP).

### BOX 1 — ENHANCED MONETARY POLICY FRAMEWORK (KEY CHANGES AND OBSERVATIONS)
- Objectives and instrument:
  - Reaffirmed price stability as primary objective.
  - Shift from growth rate of M1+ to the short-term interest rate as main policy instrument; the one-day money market rate is key.
- Disinflation path:
  - Announced reduction of the upper band of the inflation range from 7 to 6 percent, effective September 2022, with intention to converge to a target centered around 3 percent over the medium term.
- Institutional/transparency reforms:
  - Decoupling MCC and COPOM meetings: reduced frequency of MCC and doubled frequency of COPOM.
  - New communication practices: publishing minutes, linking policies and objectives, discussing expected future monetary actions, improving inflation-expectations surveys.
- De-dollarization and local currency markets:
  - Commitment to reducing dollarization and promoting local currency debt markets; goal of reaching 50 percent of total debt denominated in local currency by 2024.
- Credibility gains and indicators:
  - Post-change, interest rate on 1-month LRM converged to announced policy rate, reducing volatility.
  - Inflation and expectations moved closer to target range though remain above it; decreased dispersion of expectations suggests some gains in anchoring.

### SOCIAL IMPACT AND LABOR MARKET
- Social protection and employment:
  - Enhancements to unemployment insurance (notably partial unemployment benefit) contained employment losses and aided recovery; authorities expected ~70 percent of employment losses during the pandemic would be reverted by end-2021.
  - Uruguay displayed smaller employment losses than peers; young and low-earning workers disproportionately affected.
  - Digitalization increased skill mismatch; loss of schooling added to erosion of human capital and elevated school dropout rates.
- Targeted assistance:
  - Well-targeted social assistance offset loss of labor income for low-income groups; poverty rates hedged up moderately from a low base.

### OUTLOOK AND RISKS
- Growth and medium-term outlook:
  - Recovery expected to strengthen in late 2021 and 2022; growth expected to remain above pre-pandemic levels over the medium term and help close output gap by 2023.
  - Pandemic expected to have long-lasting effects preventing full return to pre-crisis trend levels mainly via human capital erosion and persistent exits from the labor force; productivity gains from digitalization and high commodity prices could offset some effects.
- Key risks:
  - Upside: partial rebound in tourism; sustained high commodity prices.
  - Downside: pandemic resurgence; weaker commodity prices; capital outflows linked to US inflation and sudden interest rate rise.
  - Inflation risks primarily from food and global inflation.
- Fiscal/financial stability risks:
  - NFPS gross debt path—½ denominated in foreign currency—highly dependent on fiscal efforts and stable macro conditions.
  - Under plausible scenarios—1 percent of GDP smaller fiscal effort, 15 percent real depreciation, or GDP growing at its pre-pandemic average—the debt-to-GDP ratio would continue to rise.
  - Short-term financing needs described as moderate; access to international markets remains at low rates with spreads below those of other investment grade countries in the region.

### SUPPORTING THE RECOVERY — POLICY RECOMMENDATIONS
A. Rebuilding policy space while supporting recovery
- Fiscal consolidation plan:
  - Authorities’ planned consolidation would reduce NFPS deficit by 2 percent of GDP over next two years—from about 4.5 percent of GDP in 2021 (excluding ‘cincuentones’) to about 2.5 in 2023—as COVID measures are unwound, growth strengthens, and restraint on real public sector wages and discretionary spending continues.
  - Scope exists to spread adjustment more evenly between 2022 and 2023 if recovery disappoints.
  - Underpin consolidation with structural measures: civil service reform, streamlining ministries/agencies, measures to raise spending efficiency.
  - Pension reform key to ensure fiscal sustainability; savings may take time to materialize.
- Labor market and monetary policy:
  - Emphasize policies that foster employment and labor reallocation; shift spending from preserving jobs to supporting job creation, including temporary employment subsidy and training programs.
  - Gradually phase out enhanced unemployment insurance to incentivize full return to work as uncertainty dissipates.
  - Maintain tightening bias in monetary policy; additional carefully-calibrated tightening likely needed to ensure inflation falls within target range in 2022.
  - Allow exchange rate to float; limit FX intervention to disorderly market conditions with clear communication.
- Financial support phasing:
  - Timely phasing out of credit support while monitoring financial risks; targeted extension of SIGA lines for still-affected sectors with tightening eligibility over time.
  - Identify and monitor significant exposures of specific banks to highly impacted sectors.

B. Boosting medium-term growth
- Priorities:
  - Ensure fiscal sustainability, address labor market frictions, and reform SOEs to boost potential growth.
- Fiscal framework refinements:
  - Move to 5-year rolling limits; introduce explicit medium-term debt target; formalize escape clauses with correction mechanisms.
  - Anchor fiscal targets on stochastic debt sustainability analysis.
- Labor market and human capital:
  - Decentralize wage negotiations; increase labor contract flexibility while protecting rights; implement effective (re)training programs; broad education reform to reduce school dropout rates; adapt formal education to IT-based economy.
- SOE reform:
  - Separate commercial and social objectives with explicit budget financing for social functions; improve SOE independence and governance; announce path for the fuel ‘x-factor’ and policies for cost reductions.

### FISCAL FRAMEWORK, TRANSPARENCY, AND RISK MANAGEMENT
- New fiscal framework and COVID Fund improved fiscal credibility and transparency; Fiscal Advisory Council expected to enhance methodologies.
- Recommendations include continuing de-dollarization, strengthening public finances to put public debt on downward trajectory, phasing out credit guarantee lines as uncertainty dissipates, and monitoring financial stability risks as regulatory forbearance is unwound.
- Risk disclosure: include comprehensive fiscal risk report and stochastic simulations in budget documentation.
- Auxiliary institutions: ensure independence, adequate data access, resources, and staggered member design.

### EXTERNAL SECTOR ASSESSMENT (ANNEX I) — KEY POINTS
- 2020 external position assessed "broadly in line with fundamentals" by EBA current account model and EBA external sustainability approach.
- EBA-Lite REER model points to a 3 percent gap described as "broadly-in-line" (2.9 percent reported).
- Trade and current account:
  - Exports contracted close to 20 percent in value during 2020; imports contracted around 15 percent in value during 2020.
  - Current account: 2019 surplus 1.3 percent of GDP; 2020 deficit 0.6 percent of GDP.
  - Medium-term: current account expected to deteriorate further in 2021 and hover around a 1.5-2.0 percent of GDP deficit; 2021 projection: widening to about 2.1 percent of GDP.
- Merchandise trade balance (selected series, in percent of GDP):
  - Trade balance: 2014 3.0; 2015 2.3; 2016 3.6; 2017 3.1; 2018 3.6; 2019 5.0; 2020 3.8
  - Exports: 2014 22.4; 2015 19.8; 2016 18.5; 2017 17.3; 2018 18.0; 2019 19.2; 2020 18.4
  - Imports: 2014 19.4; 2015 17.5; 2016 15.0; 2017 14.2; 2018 14.5; 2019 14.1; 2020 14.6
- External sustainability:
  - Projected CA deficit for 2026: -1.5 percent of GDP (CA balance required to stabilize NFA).
  - REER gap per ES approach: 0.0 percent; EBA-lite REER gap: 2.9 percent.
- Reserves and external stability:
  - Gross reserves increased by over 13 percent in 2020; remained above upper bound of IMF reserve adequacy metric; reserves about 30 percent of GDP at end-September 2021.

### PUBLIC DEBT, DSA, AND STRESS TESTS
- End-2020 levels:
  - Gross NFPS debt: 68 percent of GDP.
  - NFPS net debt: 58 percent of GDP in 2020.
  - Central government’s debt: 58 percent of GDP; about ½ denominated in local currency and ⅓ indexed to CPI; 13-year average maturity.
- Gross financing needs and composition:
  - Gross financing needs: 8.6 percent of GDP.
    - 2.2 percent corresponds to the primary deficit.
    - 2.3 percent corresponds to interest payments.
    - 2.8 corresponds to amortizations of loans and securities.
- Baseline NFPS projections (selected nominal gross public debt percent of GDP):
  - 2019 51.6; 2020 60.5; 2021 68.1; 2022 67.3; 2023 68.5; 2024 69.7; 2025 70.2; 2026 70.6; (follow-on) 70.4
- Standardized risk scenarios:
  - Debt dynamics most sensitive to growth and exchange rate shocks; sensitivity lower to interest-rate and primary balance shocks.
  - Gross debt would remain below 80 percent of GDP in 90 percent of cases under symmetric shocks, and 75 percent of cases with asymmetric shocks.
  - Nearly 50 percent probability debt under symmetric shocks (and 75 percent under asymmetric shocks) would hover above 70 percent of GDP.
- External debt:
  - External debt rose to 88 percent of GDP in 2020.
  - About 49 percent of external debt owed by public sector; 92 percent denominated in foreign currency.
  - Gross external debt projected to hover around 85-86 percent of GDP over medium term.
  - A one-time 30 percent real exchange rate depreciation would increase external debt-to-GDP ratio by 19 percentage points.

### PENSION REFORM (ANNEX VII)
- System coverage and finances:
  - Coverage: about 90 percent of the elderly and 80 percent of workers.
  - Average replacement rate: about 60 percent.
  - Public pension spending reached 10 percent of GDP or almost 40 percent of fiscal revenues.
  - Low retirement age: 60 years for both men and women.
  - Financing: Workers’ contributions finance about ½ of costs of BPS administration; about ¼ financed by earmarked taxes (7 percentage points of VAT revenues, lotteries, special tax) and ¼ from direct fiscal support.
- Commission of Experts draft recommendations include:
  - Introduce a base zero pillar guaranteeing minimum pension of about US$300 per month and complement up to maximum of about US$900 per month.
  - Maintain contribution rates; unify criteria across regimes for new workers.
  - Increase reference wage computation to best 25 years.
  - Lower accrual rates from 1.5 percent per year to range between 1.1-1.35 increasing with age.
  - Gradually raise retirement age and link to life expectancy.
  - Tighten disability pension qualification; create incentives for voluntary savings (e.g., automatic transfer of 2 percentage points of VAT for electronic payments).
  - For individually-funded pillar: change minimum profitability regulation, increase number of portfolios and allowable investment options to raise exposure to variable income and foreign investments.

### CLIMATE, ENERGY, AND SUSTAINABLE FINANCE
- Emissions and energy:
  - INGEI’s net GHGs value: 6.2 MeCO2e per capita for Uruguay for 2017.
  - GHG emissions concentrated in agriculture; sectoral 2017 values (MeCO2e): Agriculture and Livestock 24.1; Transportation 3.8; Energy 2.3; Waste 1.1; Industrial Processes 0.6; Aviation/Shipping 0.6; Land-Use Change and Forestry -12.3.
  - GHG per PPP $ of GDP: 0.4 thousand of CO2e per million US$ PPP-GDP noted.
- Energy generation mix (2020 chart labels/values):
  - Wind 40%; Hydro 30%; Biomass 20%; Solar 4%; Fossil fuel 6%.
  - Uruguay: 94 percent of electricity production generated using renewable sources (noted elsewhere in report).
- Climate policy and sustainable sovereign funding:
  - Creation of Ministry of the Environment; climate objectives incorporated in budget; modeling tools to assess macro impact; exploring climate-related tax incentives.
  - Exploring issuance of sustainability-linked sovereign bonds; designing framework and identifying indicators.
  - Aspirational goal of net-zero C02 emissions by 2050 under Paris Agreement.
  - Uruguay joined Network for Greening the Financial System (BCU) and other international climate initiatives.

### STAFF APPRAISAL AND RECOMMENDATIONS (SELECTED)
- Pandemic response assessed effective in mitigating impact while balancing fiscal sustainability.
- Medium-term guidance:
  - Continue normalizing policies while maintaining targeted support to lagging sectors and vulnerable groups; phase out support gradually.
  - Expand (re)training programs to address skill mismatch and high youth unemployment.
  - Ensure monetary tightening bias until inflation under control; maintain exchange rate flexibility.
  - Strengthen public finances and consider further structural measures to underpin consolidation.
- Next Article IV consultation proposed on the standard 12-month cycle.

*Source: 1uryea2022001 - 2021 (INTERNATIONAL MONETARY FUND).*

### 2021. The staff team comprised Gustavo Adler (head), Natasha Che,

### 1uryea2022001 - 2021. The staff team comprised Gustavo Adler (head), Natasha Che,

### PRE-PANDEMIC CONTEXT: SOLID INSTITUTIONS BUT GROWING IMBALANCES
- Uruguay entered the pandemic with:
  - Well-functioning institutions and a high degree of social cohesion.
  - A solid financial sector, ample reserve buffers, and investment grade status.
- Pre-2014 developments and ensuing imbalances:
  - After the end of the commodity boom in 2014, macroeconomic imbalances emerged, with weakening public finances and low economic growth amid low investment and declining employment.
  - Labor market frictions included wage rigidities and a growing labor force skill mismatch rooted in poor outcomes in basic education; these contributed to weak employment and persistently high youth unemployment.
  - Inflation remained consistently above the target range.
- Political and reform context:
  - A new government started in March 2020 with a mandate to boost growth and restore fiscal sustainability.
  - An omnibus law (‘Ley de Urgente Consideracion’) passed in July 2020 established a new fiscal framework, reforms for state-owned enterprises, pension reform, and greater autonomy for regulatory agencies (including setting utility rates). Implementation advanced slowly due to the pandemic and prospects of a 2022H1 referendum to unwind some elements.

### THE PANDEMIC — RECENT DEVELOPMENTS
- COVID-19 epidemiology and activity:
  - Uruguay experienced distinct pandemic phases: effective containment through most of 2020, a sharp activity contraction at onset, a strong rebound in 2020H2, loss of momentum in early 2021 during a severe COVID wave, and renewed recovery following a rapid vaccination campaign described as “one of the fastest in the world.”
- Sectoral and labor outcomes:
  - Primary activities and construction rebounded rapidly and are above pre-pandemic levels, helped by external demand and booming commodity prices.
  - Contact-intensive activities were highly affected and recovered more slowly; high-frequency indicators point to a speeding rebound after recent reopening.
  - Employment plateaued below pre-pandemic levels in early 2021 after rebounding in 2020H2, with signs of a further uptick in recent readings.
- Inflation and exchange rate:
  - Inflationary pressures subsided in early 2021 after peaking in 2020, but new pressures from food and global inflation emerged.
  - Inflation history: two years of overshooting the 3–7 percent target range; inflation spiked above 10 percent in mid-2020.
  - Medium-term inflation expectations moved closer to the target range but remained above it.
  - The Uruguayan peso depreciated sizably in early 2020 and remained broadly stable thereafter; after some 2020 interventions the exchange rate floated and displayed some nominal and real appreciation—real appreciation vis-à-vis Brazil and Argentina poses challenges for export sectors dependent on those markets.
- External sector:
  - Current account: shifted from a 1.6 percent of GDP surplus in 2019 to a 0.6 percent of GDP deficit in 2020.
  - Drivers: weak external demand, border closures, supply chain disruptions reducing exports; partially offset by lower imports and lower fuel import prices.
  - 2021 prospects: current account deficit expected to widen further reflecting a sharp drop in tourism receipts and large imports related to the UPM pulp mill project.
  - Financial flows: resilient, supported by large FDI inflows (driven by the pulp-mill project and inter-company loans) which more than offset domestic banks’ purchases of foreign assets.
  - Authorities intend to maintain the SDR allocation in international reserves.
- Key numeric indicators and observations:
  - NFPS overall balance excluding ‘cincuentones’ weakened from -3.8 percent of GDP in 2019 to -5.2 percent of GDP in 2020.
  - The cincuentones transactions are transitory cash payments; referenced for context in public finances.

### POLICY RESPONSE TO THE PANDEMIC
- Overview: comprehensive policy package across fiscal, monetary, and financial sector measures.
- Fiscal policy:
  - A package of about 2.7 percent of GDP for 2020-21 deployed for health spending, protecting vulnerable households, and supporting employment and firms.
  - Fiscal outcomes and composition:
    - Revenue resilience: income tax revenues remained unchanged relative to GDP; fall in social security contributions partly offset by a surge in VAT revenues.
    - Higher spending mainly reflected support measures; non-COVID spending contracted somewhat.
    - Fiscal balance projected to improve to -4.5 percent of GDP in 2021, reflecting recovery and restraint on discretionary spending.
  - Fiscal transparency: COVID-related fiscal costs were earmarked and transparently reported through a COVID Fund (Fondo Solidario COVID).
  - A new fiscal framework (introduced with the 2020 Urgent Consideration Law and further detailed in the 2020-24 Budget and the ‘Rendicion de Cuentas y Balance de Ejecucion Presupuestal’ for 2020) aimed at strengthening fiscal discipline and ensuring medium-term sustainability; three indicative targets set for 2020 were met.
- Monetary policy:
  - Liquidity and tools:
    - BCU lowered reserve requirements and rapidly expanded the monetary base by a 40 percent increase from February to August 2020.
    - In September 2020 the policy instrument shifted to the interest rate, confirming a highly accommodative stance and producing deeply negative short-term real rates and a downward shift of the yield curve.
  - Subsequent tightening:
    - Monetary policy rate increased by 125 basis points to 5.75 percent; stance remained accommodative with a real rate of about -1 percent.
    - Market expectations guided by BCU’s commitment to support the economy and increase rates as recovery progresses.
  - Framework changes and objectives (see Box 1 summary below).
- Financial sector policy:
  - Regulatory forbearance and lower reserve requirements helped avoid financial stress and a contraction of credit.
  - Loan relief:
    - Extension of bank loan repayments up to 180 days for all non-financial corporations and individuals; this measure benefited about 45 percent of private loan repayments up to August 2021.
  - Credit guarantee programs:
    - National System of Guarantees (SIGA) launched three lines of credit guarantees for SMEs, heavily impacted sectors, and large companies with an average guarantee of about 70 percent (covering over 5 percent of private sector loans or 1.4 percent of GDP).
    - National Development Agency (ANDE) launched credit lines for small and micro firms resulting in loans for US$29 million (0.05 percent of GDP).

### BOX 1 — AN ENHANCED MONETARY POLICY FRAMEWORK (KEY CHANGES AND INTENT)
- Objectives and strategy:
  - Reaffirmation of price stability as primary monetary objective.
  - Clarification that smoothing short-term financial market volatility, including of the exchange rate, “will be carried out as long as it does not collide with the main targets of monetary policy.”
- Policy instrument:
  - Shift from growth rate of M1+ to the short-term interest rate as the main policy instrument.
  - The one-day interest rate in the money market is the key policy rate with standing facilities and remuneration of excess reserves aligned to it.
- Disinflation path:
  - Announced reduction of the upper band of the inflation range from 7 to 6 percent, effective September 2022, with intention to converge to a target centered around 3 percent over the medium term.
- Institutional and transparency enhancements:
  - Decoupling of Macroeconomic Coordination Committee (MCC) meetings from Monetary Policy Committee (COPOM) meetings: reduced frequency of MCC and doubled frequency of COPOM.
  - New communication and transparency practices: publishing minutes, strengthening reports to link policies and objectives, discussing expected future monetary policy actions, and improving survey of inflation expectations.
  - BCU underwent a Central Bank Transparency Review and is seeking technical assistance on central bank communications (a mission planned for late November 2021).
- De-dollarization and local currency markets:
  - Commitment to reducing dollarization and promoting local currency debt markets with initiatives to develop secondary markets for debt instruments and increase liquidity and depth along the yield curve.

*Source: 1uryea2022001 - 2021 (INTERNATIONAL MONETARY FUND).*

### Box 1. An Enhanced Monetary Policy Framework (concluded)

### Box 1. An Enhanced Monetary Policy Framework (concluded)

### Monetary framework reforms and credibility gains
- Policy actions and market access
  - Increase the issuance of peso sovereign debt, and allow for greater access by non-residents to peso instruments through Euroclear.
  - The government has set a goal of reaching 50 percent of total debt denominated in local currency by 2024.
  - Some measures to promote bank credit to the private sector in pesos have been deployed—like the recent reduction in reserve requirements on peso deposits—and others are under consideration.
  - The BCU is actively engaging key price-setting players to better understand and tackle the root causes of price dollarization.
- Observed gains in credibility
  - After the change in the policy instrument, the interest rate on 1-month monetary policy instruments (Letras de Regulación Monetaria) converged to the announced policy rate, reducing its volatility and indicating effective working of the new intermediate policy target.
  - Inflation and inflation expectations moved closer to the target range relative to pre-pandemic levels, though they remain above the range.
  - A decreased dispersion of inflation expectations across different actors points to some gains in anchoring expectations.
- Structural factors
  - Some structural features may also play a role in inflation outcomes in Uruguay: improving labor market flexibility, strengthening central bank institutions and fiscal responsibility can serve to lower equilibrium inflation.

### Social impact of the pandemic
- Labor market and social protection outcomes
  - The authorities’ response package was effective in mitigating the impact of the crisis, although pre-existing structural issues in the labor market were exacerbated by the pandemic.
  - Enhancements to unemployment insurance (especially the new partial unemployment benefit) were instrumental in containing employment losses and facilitating a quick recovery by maintaining employer-employee relationships.
  - Uruguay displayed smaller employment losses than peer countries.
  - Young and low-earning workers were disproportionately affected, reflecting their greater concentration in contact-intensive sectors.
  - The leap in digitalization increased skill mismatch as a significant share of unemployed workers lack highly-demanded IT skills.
  - Loss of schooling—although of relative short duration—added to pre-pandemic erosion of human capital and elevated school dropout rates.
- Social protection cushioning
  - Well-targeted social assistance—through unemployment benefits for formal workers and reinforced transfer programs for formal and informal ones—largely offset the loss of labor income for low-income groups.
  - Poverty rates hedged up moderately relative to other countries, from a low base.
- Authorities’ assessment
  - Authorities expected that approximately 70 percent of the employment losses during the pandemic would be reverted by end-2021.
  - Despite the pandemic, Uruguay advanced structural reforms including a new fiscal institution, environmental objectives in planning, a new mechanism for setting fuel prices, and creation of a commission studying social security reform.

### Outlook and risks
- Near-term and medium-term outlook
  - The recovery is expected to gain strength in late 2021 and 2022 as contact-intensive sectors rebound and elevated commodity prices support the recovery.
  - Growth is expected to remain above pre-pandemic levels over the medium term and help close the output gap by 2023.
  - The pandemic is expected to have some long-lasting effects on output—preventing a full return to pre-crisis trend levels—mainly due to further erosion of human capital and persistent exit of workers from the labor force.
  - Increase in labor productivity associated with digitalization and sustained high commodity prices could offset some negative effects.
- Risks to growth and inflation
  - Upside risks: partial rebound in tourism; sustained high commodity prices.
  - Downside risks: resurgence of the pandemic, weaker commodity prices, capital outflows linked to inflationary pressures in the US and a sudden rise in interest rates.
  - Risks to inflation stem primarily from food and global inflation.
- Fiscal and financial stability risks
  - The path of NFPS gross debt—½ of which is denominated in foreign-currency—is highly dependent on fiscal efforts and stable macroeconomic conditions.
  - Under plausible scenarios—1 percent of GDP smaller fiscal effort, 15 percent real depreciation, or GDP growing at its pre-pandemic average—the debt-to-GDP ratio would continue to rise over the medium term.
  - Short-term financing needs are moderate—reflecting a healthy maturity structure of public debt—and can be met with stable local funding, liquidity buffers and contingent credit lines from multilaterals.
  - Access to international markets remains at low rates, with spreads below those of other investment grade countries in the region.
  - Financial sector indicators and resilience:
    - Non-performing loans at 3.3 percent of total loans as of 2021Q2.
    - Exposure of the financial system to tourism and hospitality is about 2.5 percent of total private sector credit.
    - BCU estimates indicate about 7.8 percent of private sector loans could become problematic in an adverse scenario once support measures are withdrawn, and banks would remain viable.
    - Bank profitability has declined, but stress tests indicate the banking sector can withstand major recession scenarios.

### Supporting the recovery and boosting potential growth
A. Rebuilding policy space while supporting the recovery
- Fiscal consolidation plan
  - The authorities’ planned fiscal consolidation would reduce the NFPS deficit by 2 percent of GDP over the next two years—from about 4.5 percent of GDP in 2021 (excluding ‘cincuentones’) to about 2.5 in 2023—as COVID-related measures are unwound, growth strengthens, and restraint on real public sector wages and discretionary spending continues.
  - The plan focuses on rebuilding fiscal space while maintaining targeted support, including continued COVID-related health spending and extension of measures to support employment.
  - There is scope for spreading the adjustment more evenly between 2022 and 2023 if the recovery disappoints.
  - Underpinning consolidation with structural measures—civil service reform, streamlining ministries or agencies, measures to raise spending efficiency—would help ensure durability of the consolidation.
  - Once the economy has recovered, a greater fiscal effort will be needed to put debt on a firm downward path and restore fiscal space.
  - Pension reform is key to ensure fiscal sustainability, although associated fiscal savings may take time to materialize.
- Authorities’ stance
  - Authorities remain strongly committed to the fiscal consolidation plan and pension reform.
  - The Monitoring and Evaluation Office’s work was highlighted as helping to identify further areas to improve spending efficiency.
- Labor market and monetary policy
  - Greater emphasis on policies that foster employment and facilitate labor reallocation would bolster the recovery.
  - Spending is shifting from preserving jobs to supporting job creation, including a temporary employment subsidy for vulnerable groups and associated training programs.
  - Extension of enhanced unemployment insurance (especially partial unemployment benefit) is adequate but should be gradually phased out to incentivize full return to work and facilitate labor reallocation as uncertainty dissipates.
  - Wage increases should balance supporting recovery in employment and protecting workers’ purchasing power; differentiated wage-setting guidelines are welcome.
  - Maintaining a tightening bias in monetary policy will be key to solidify credibility gains; additional carefully-calibrated tightening will likely be needed to ensure inflation falls within the target range in 2022.
  - A well-communicated policy strategy should sustain re-anchoring of inflation expectations.
  - Continuing to allow the exchange rate to float would support disinflation; FX intervention should be limited to addressing disorderly market conditions and clearly communicated.
- Phasing out support and financial monitoring
  - Timely phasing out of credit support measures—while monitoring financial risks closely—is key to limiting capital misallocation and fiscal costs.
  - Targeted extension of SIGA guarantee lines will support companies in still-affected sectors; tightening eligibility and conditions as uncertainty dissipates is important to prevent misallocation and limit fiscal costs.
  - Significant exposures of specific banks to highly impacted sectors should be identified and monitored closely.
  - Authorities expect financial stability risks to remain limited given continuous monitoring and low NPL levels; even under very adverse scenarios the banking system would remain sufficiently capitalized.

B. Boosting medium-term growth
- Key priorities
  - Ensuring fiscal sustainability, addressing labor market frictions, and reforming state-owned enterprises (SOEs) are key priorities to boost potential growth.
- Fiscal framework
  - Further strengthening the fiscal framework would bolster credibility of the medium-term fiscal plan.
  - The new fiscal rule and the independent Advisory Fiscal Council are important developments.
  - Suggested refinements: moving to 5-year rolling limits, introducing an explicit medium-term debt target, formalizing escape clauses with correction mechanisms.
  - Anchoring fiscal targets on stochastic debt sustainability analysis would help identify risks and calibrate targets.
- Labor market and human capital
  - Greater labor market flexibility and policies to foster human capital would boost employment and growth.
  - Durably decentralizing wage negotiations and reducing the government's role in tri-partite wage negotiations, in line with ILO recommendations, could align wages with firms’ conditions and productivity.
  - Increase flexibility in labor contracts while protecting workers’ rights—allow more flexible work schedules, wider definitions of job duties, and increased intra-company mobility.
  - Urgent policies to foster human capital: effective (re)training programs for rapid labor market reinsertion, broad education reform to tackle elevated school dropout rates, and adaptation of formal education to an increasingly IT-based economy.
- SOE reform
  - SOEs play an important role but are prone to inefficiencies due to simultaneous supervision by entities with conflicting objectives.
  - SOEs are required to be profitable but also pursue social policies and unprofitable investments without commensurate budget funding, creating inefficiencies and cross subsidies that raise the cost of doing business.
  - The new formula linking domestic fuel price to international oil price plus a gradually-falling ‘x-factor’ (to cover social programs and SOE inefficiency) is welcome; the path for the ‘x-factor’ and policies to generate necessary cost reductions should be announced.
  - Broader SOE reform is needed to separate commercial and social objectives (with explicit budget financing for the latter), and to improve SOE independence and governance with a clear separation between the state’s ownership and regulation functions.

*Source: Box 1. An Enhanced Monetary Policy Framework (concluded), 1uryea2022001.*

### 27.      The authorities stressed that the new fiscal framework significantly improves the

### 1uryea2022001 - 27.      The authorities stressed that the new fiscal framework significantly improves the

### Fiscal framework, pandemic response, and fiscal credibility
- The authorities stressed that the new fiscal framework significantly improves the credibility and sustainability of public finances.
- While other countries invoked escape clauses during the pandemic in 2020, they introduced a new fiscal framework and complied with it.
- All the necessary expenditures to address the health, social and economic situation were made available through the creation of the Covid-19 Solidarity Fund which allowed transparent accounting of resources.
- Authorities highlighted that the Fiscal Advisory Council will further help improve the methodologies and enhance the quality of the discussions.
- The envisaged withdrawal of fiscal support—"in line with the expected recovery"—and the shift from sustaining employment and income to fostering job creation are described as appropriate.
- Recommendations:
  - Continue promoting de-dollarization to encourage local currency savings, reduce dollarization, and foster local currency credit and investment.
  - Continue strengthening public finances to put public debt on a downward trajectory and preserve fiscal discipline over time and across administrations.
  - Phase out credit guarantee lines as uncertainty dissipates, and monitor financial stability risks as regulatory forbearance measures are unwound.

### Structural reforms, SOEs, and labor market policy
- Authorities concurred that an ambitious agenda of structural reforms is important to improve efficiency and bolster competitiveness.
- They highlighted the adoption of the new mechanism for setting fuel prices as a relevant advance.
- Reforms to improve the business climate are a key aspect of proposed advances.
- Reform priorities noted by staff appraisal:
  - Tackling labor market rigidities and addressing erosion of human capital and skill mismatch through retraining programs and education reform.
  - Providing greater flexibility in labor conditions and wage negotiations at the firm level to improve competitiveness and resilience.
  - Moving forward with SOE reforms to increase efficiency and reduce production costs.
  - Undertaking pension reform as a key element for intergenerational equity and fiscal sustainability.

### Financial sector, capital markets, and dollarization
- Given lack of dynamism of the banking system, developing domestic capital markets is a recent initiative that could help re-energize financial intermediation and contribute to boosting investment.
- The authorities’ policy agenda on capital markets, trade integration and climate change could help boost medium-term growth.
- Dollarization remains an obstacle to investment and growth:
  - "½ of private sector loans are in US dollars."
  - Private credit remains low, partly because financial intermediation remains highly dollarized and firms tend to be under-leveraged and under-invest because of the lack of peso credit.
- The authorities emphasized that the BCU is committed to maintaining the Uruguayan peso as a high-quality currency, and that durably lowering inflation is instrumental for de-dollarization.
- Monetary policy guidance:
  - As inflation remains above target, monetary policy will need to maintain a tightening bias to build further credibility.
  - A well-communicated policy strategy that clearly signals the path of monetary policy and the central bank’s objectives is key; the exchange rate should continue to float.

### Trade integration and growth strategy
- Given the relatively small size of its economy, access to external markets is key for Uruguay.
- Pursuing greater trade integration through new trade agreements is emphasized as essential to boost growth.
- The authorities noted initiatives to develop the domestic financial market, especially the capital market, as potentially helping to re-energize domestic credit and boost investment.

### Environmental and climate change policies (Box 2)
- The administration’s environmental agenda includes:
  - The recent creation of a new Ministry of the Environment.
  - Explicitly incorporating climate objectives and the assessment of the environmental impact of economic policies in the budget.
  - Developing modeling tools to assess the macroeconomic impact of climate change and environmental policies, and to estimate the economic value of the country’s grasslands and wetlands.
  - Introducing climate-related tax incentives and advancing the greening of public transport infrastructure; the government will modify the fuel excise (IMESI) and link it to carbon emissions; exploring tax incentives for purchasing electric cars and buses, and to discourage single-use plastic.
  - Exploring the issuance of sustainability-linked sovereign bonds; the government is currently designing the framework and identifying appropriate indicators that could serve as benchmarks.
  - Playing an active role in several international climate change initiatives: in 2020, the BCU joined the Network for Greening the Financial System; the Ministry of Economy and Finance joined the Coalition of Finance Ministers for Climate Action and the Regional Platform of Ministries of Finance for Climate Change.
  - Developing a strategy for producing green hydrogen; this public-private initiative is partially financed by the UN Sustainable Development Goals Fund.
  - Finalizing Uruguay’s Long Term Climate Strategy, with an aspirational goal of net-zero C02 emissions by 2050 under the Paris Agreement.

### Staff appraisal: past advice, pandemic response, and medium-term priorities
- Past Fund advice alignment:
  - Authorities limited the increase in current expenditures in real terms, introduced a consolidation plan and a new fiscal rule aimed at strengthening fiscal discipline and debt sustainability.
  - Pension reform proposal advanced; expected to be sent to Congress by 2022H1.
  - "Ley de Urgente Consideración" laid foundations for key SOE reforms and progress made to link domestic fuel prices to its international cost.
  - Improvements to the monetary framework included shifting to the use of the interest rate as policy instrument and introducing enhancements to central bank communications.
  - Differentiated wage guidelines during the pandemic constitute an important step toward wage flexibility.
- Assessment of pandemic response:
  - The response was effective in mitigating impact while prudently balancing fiscal sustainability objectives.
  - Strong existing health care and social protection systems, along with low poverty rates, limited the need for additional fiscal resources to directly address the health crisis.
  - Deployed fiscal resources were adequately targeted, helping to contain the impact on vulnerable groups and to sustain employment.
  - Monetary and financial sector policies prevented a credit contraction and financial stresses.
  - The pandemic exacerbated pre-existing imbalances and structural problems: weakening public finances, erosion of human capital, and labor market skill mismatch.
- Medium-term policy guidance:
  - Continue normalizing policies while maintaining targeted support to lagging sectors and vulnerable groups, phasing out support only gradually.
  - Expand supply of (re)training programs to address labor force skill mismatch and high youth unemployment.
  - Ensure monetary tightening bias until inflation is brought under control; maintain exchange rate flexibility.
  - Strengthen public finances and consider further structural measures to underpin consolidation efforts.

*Source: 1uryea2022001 - excerpt provided from the IMF country report content supplied above.*

### 38.      Staff proposes that the next Article IV consultation with Uruguay takes place on the

### Staff proposes that the next Article IV consultation with Uruguay takes place on the standard 12-month cycle.

### COVID-19 Developments
- Stringency Index and epidemiological indicators tracked across Mar-20 to Sep-21 show:
  - Initially, containment measures were less stringent than in other countries.
  - The COVID wave came to a near halt ... amid a marked worsening of the sanitary conditions.
  - ... and allowed for greater mobility, although conditions reversed in early 2021.
  - ... as the fast vaccination campaign reached most of the adult population.
- Mobility, new cases, cumulative cases, and cumulative deaths series (Mar-20 to Sep-21) display country comparisons labeled URY, ARG, BRA, CHL, COL, MEX, PER, USA.
- Vaccination progress: Fully Vaccinated (per hundred inhabitants) series up to Sep-21 indicate rapid uptake among adults.
- Sources: Google, OWID, John Hopkins University. IMF staff calculations.

### Real Activity
- Real GDP: sharp downturn in 2020 followed by rebound through 2021Q2.
- Contributions to Real GDP Growth (Percent change, y/y) indicate:
  - The downturn and rebound were driven by consumption, amid resilient investment.
  - Dynamics concentrated in contact-intensive service sectors.
- Real GDP growth in 2020: chart contrast shows Uruguay’s contraction was smaller than several peers (PRY, BRA, CHL, URY, COL, BOL, ECU, ARG, PER).
- Industrial indicators:
  - Industrial sales and investment series (2019Q2–2021Q2) show external demand for manufactures is supporting the recovery.
- Confidence:
  - Business and Consumer Confidence (3-month moving average) improved markedly.
  - Consumer confidence values above 50 indicate positive/optimistic expectations and values below 50 are negative/pessimistic expectations.
- Labor market recovery is lagging somewhat.

### Labor Market
- Employment (index Jan 2020=100, 3-month MA) through Aug-2021:
  - Employment losses were comparatively lower in Uruguay relative to peers.
  - Employment Losses (In percent, cumulative since Jan 2020, NSA) show modest cumulative impacts.
  - Employment rate and weekly hours worked remain below pre-pandemic levels (Last observation August 2021).
- Distributional impacts:
  - Social assistance played a significant role in mitigating the impact on vulnerable groups.
  - Change in Real Income, 2019 (by quintile) shows transfers and other income offset some labor income losses.
  - Change in Employment by Age, 2019 indicates young workers (age groups 15-24, 25-34) appear to have been affected disproportionately.

### External Accounts
- Current Account (In percent of GDP, 4Q sum):
  - The current account turned in deficit in 2020 driven by both weaker trade and income balances.
- Export Price (Y/Y growth, 4Q sum, in percent): rapid recovery in agricultural prices supported external accounts.
- Trade Balance (In percent of GDP, 4Q sum):
  - Contracting imports helped offset weaker export volumes; exports and imports series shown.
- Gross Travel Exports (In percent of GDP, 4Q sum): sharp fall in tourism revenues.
- Financial Account Balance (In percent of GDP, net 1/):
  - Financial flows proved resilient, with portfolio outflows fully offset by large FDI inflows.
- Direct Investment (In billions of US dollars): Outflow / Inflow / Total time series show boost from the large UPM pulp mill investment.

### Inflation
- Consumer Prices (year-on-year percent change) through Sep-21:
  - After a sharp increase at the onset of the pandemic, inflation is again around the upper band of the range.
  - Headline, Headline excl meat, and Core inflation series plotted; target range shown.
- Contributions to Inflation (In percentage points): recent fluctuations mostly driven by tradable good prices.
- Inflation and Depreciation (YoY percentage change): non-fruit/veg inflation and depreciation series suggest exchange rate pass-through effects.
- Wage Growth and Inflation (Yoy percentage change): wages have grown below inflation.
- Inflation Expectations (12-month ahead) through 2022–2023:
  - Expectations have converged towards the target ceiling, though considerable heterogeneity among agents remains.

### Fiscal Developments
- Overall Balance NFPS 1/ (In percent of GDP):
  - ... led to a further deterioration of fiscal accounts.
- NFPS Debt (In percent of GDP): gross and net series show an increase in indebtedness.
- NFPS Revenues and Spending 1/ (In percent of GDP): the economic downturn and stimulus measures increased expenditures; COVID Fund shown (RHS).
- NFPS Primary Spending (In percent of GDP), Mar-20 to Sep-21:
  - Despite some restraint in non-pandemic spending, primary spending increased.
- Primary Balance Public Enterprises (In percent of GDP): Water, Oil, Telecom, Electricity balances remain healthy despite pandemic-induced volatility.
- Public employment and wage dynamics:
  - The wage bill has started to moderate thanks to a slight reduction in public employment and moderate wage increases.
  - Employment and real wage indexes and wage bill in percent of GDP series presented.

### Monetary Policy
- Yield on Monetary Policy Instruments and M1 1/ (In percent, and y/y percentage change) Sep-19 to Sep-21:
  - Expansionary monetary policy helped ease domestic financial conditions during the pandemic.
  - Change to interest rate as policy instrument; M1+ target range indicated.
- Average Peso Interest Rates 2/ (In percent): transmission to credit loan rates was gradual.
- Real Interest Rate (In percent): 1 month and 12 month real rates moved further into negative territory.
- Interest Rates By Currency (In percent): deposit rates in pesos and in U.S. dollars series show more rapid transmission to deposits.
- Nominal Yields (In percent) across maturities: marked effects throughout the yield curve from Feb-20 to Sep-21.
- FX operations:
  - Spot and derivative FX purchases and Integration of LRM with FX series indicate limited FX intervention.
  - Last observation Sep 2021. FX Purchases, 2016-21 (In percent of GDP).

### Credit and Banking
- Credits by Sector (In USD billion, Thousands) Jan-18 to May-21:
  - Credit to households and, especially, corporates has been slowly recovering (Last observation August 2021).
- Credit to Private Sector, end-2020 2/ (In percent of GDP): Uruguay shows low financial intermediation relative to peers (CHL, BRA, PER, COL, MEX, URY).
- Non-Performing Loans (In percent): NPLs remained low, amid increased provisioning; provisions (In percent of NPLs) shown for 2019Q1–2021Q1.
- Dollarization and Share of FX Loans (In percent): dollarization, especially for deposits, remains high.
- Return on Assets and Regulatory Capital to Risk-Weighted Assets (In percent): banks remain well-capitalized and profitable (although partly reflecting regulatory forbearance).
- Credits through SIGA Guarantee Funds (In USD):
  - SIGA Emergency 782mn (89.7%,)
  - SIGA Plus 75mn (8.6%,)
  - SIGA Impulse 15mn (1.7%)
  - ... supported by the SIGA guarantee programs.

### Climate
- Figure 9 sources: UNFCCC, WRI CAIT, Ministerio de Industria, Energía y Minería, WEO, IEA, INGEI.
- Notes:
  - 1/ GHG emissions including LUCF for 2018 or latest available year as reported by source.
  - 2/ The INGEI reports GHGs emissions for Uruguay net of carbon absorption from grasslands and wetlands. For 2017, the value is [figure truncated in source].

*International Monetary Fund. Uruguay: Staff report and figures through Sep-2021.*

### 0.4 thousand of CO2e per million US$ PPP-GDP. This metric is not comprehensively available across countries.

### 1uryea2022001 - 0.4 thousand of CO2e per million US$ PPP-GDP. This metric is not comprehensively available across countries.

### Greenhouse gas (GHG) emissions — levels and intensity
- GHG per capita (In MeCO2e): URY 4/LACEMEMNOE 3/ — values shown in chart: 9.8; 6.3; 5.4; 5.2; 1.4; 3.9; 3.8; 3.7.  
- Total GHG Co2 (chart label).  
- GHG per PPP $ of GDP (In thousands of CO2e/million $GDP): URY 2/LACEMEMNOE 3/ — values shown in chart: 0.4; 0.3; 0.7; 0.7; 0.1; 0.9; 1.1; 1.2; 0.1; 0.1; 0.4; 0.4; 0.0; 0.5.  
- Note: "0.4 thousand of CO2e per million US$ PPP-GDP. This metric is not comprehensively available across countries."  
- INGEI’s net GHGs value: 6.2 MeCO2e per capita for Uruguay for 2017.

### Emissions composition and sectoral sources
- GHG emissions by sector, 2017 (in MeCO2e) — values from chart:  
  - Agriculture and Livestock: 24.1  
  - Transportation: 3.8  
  - Energy: 2.3  
  - Waste: 1.1  
  - Industrial Processes: 0.6  
  - Aviation/Shipping: 0.6  
  - Land-Use Change and Forestry: -12.3  
- Key finding statements from source text:  
  - "GHG emissions are concentrated in agriculture."  
  - "GHG emissions are lower than in peers in terms of per GDP unit ... although higher in per capita terms."

### Greenhouse gases by type (chart labels / shares)
- Chart shows gas composition (labels): N2O, F-GAS, CO2, CH4. (Percent shares implied by chart: 40%, 30%, 20%, 4%, 6% shown visually; preserve these numbers as chart labels.)

### Energy production, generation mix, and trends
- "Most Uruguay's energy production comes from renewable sources..."  
- Electric generation by source (In percent of 2020 generation) — chart labels and values: Wind; Hydro; Biomass; Solar; Fossil fuel. (Percent shares shown visually: 40%; 30%; 20%; 4%; 6%.)  
- Wind energy production (in percent of total production, 12 mont MA) — plotted series with values on vertical axis and dates Jan-11, Jul-12, Jan-14, Jul-15, Jan-17, Jul-18, Jan-20, Jul-21; maximum chart label shown: 41.9.  
- "… partly reflecting the fast progress with wind energy, ..."  
- Energy consumption (In Mtoe) time series from 1990 to 2018 with stacked components: Coal; Oil products; Biofuels and waste; Electricity; Natural gas. (Chart axis labels 0,1,2,3,4,5,6 Mtoe.)

### Macroeconomic and fiscal context (selected figures and projections)
- Real GDP (percent change) series 2016–2026: 1.7; 1.6; 0.5; 0.4; -5.9; 3.4; 3.2; 2.7; 2.5; 2.2; 2.2.  
- GDP (US$ billions) 2016–2026: 57.2; 64.2; 64.5; 61.2; 53.6; 60.1; 63.9; 65.8; 68.5; 71.5; 74.4.  
- CPI inflation (end of period) 2016–2026: 8.1; 6.6; 8.0; 8.8; 9.4; 7.2; 5.8; 5.0; 4.5; 4.5; 4.5.  
- Unemployment (in percent, eop) 2016–2026: 7.8; 7.9; 8.3; 8.9; 10.4; 10.2; 9.0; 8.5; 8.2; 8.0; 8.0.  
- Gross official reserves (US$ billions) 2016–2026: 13.5; 15.9; 14.4; 14.5; 16.2; 17.0; 17.2; 17.4; 17.6; 17.8; 18.0.  
- Current account balance (percent of GDP) 2016–2026: 0.8; 0.0; -0.4; 1.6; -0.6; -2.1; -1.8; -1.8; -1.8; -1.7; -1.5.

### Public finances and debt (selected figures)
- Revenue NFPS (percent of GDP) 2016–2026: 27.0; 27.6; 28.9; 28.3; 28.0; 27.4; 27.5; 27.7; 27.8; 27.9; 27.9.  
- Primary balance NFPS (percent of GDP) 2016–2026: -0.2; -0.1; 0.5; 0.6; -0.5; -2.1; -1.8; -1.0; 0.1; 0.4; 0.5.  
- Overall balance of the PS (percent of GDP) 2016–2026: -3.4; -3.2; -2.7; -3.2; -5.2; -5.0; -4.0; -3.0; -2.8; -2.8; -3.0.  
- Gross NFPS debt (percent of GDP) 2016–2026: 56.8; 56.5; 58.6; 60.5; 68.1; 67.3; 68.3; 69.7; 70.2; 70.6; 70.4.  
- Net PS debt (gross debt minus liquid financial assets) 2016–2026 (Table 4, percent of GDP): 32.9; 33.6; 36.4; 39.9; 47.5; 52.2; 54.3; 55.9; 56.4; 56.8; 56.5.

### External sector indicators (selected figures)
- Exports of goods (US$ billions) 2016–2026: 10.6; 11.1; 11.6; 11.7; 9.9; 13.0; 14.6; 16.0; 17.0; 18.2; 19.5.  
- Imports of goods (US$ billions) 2016–2026: 8.6; 9.1; 9.3; 8.7; 7.8; 9.8; 10.9; 11.5; 12.5; 13.5; 14.5.  
- Total external debt + non-resident deposits (percent of GDP) 2016–2026: 72.5; 66.9; 67.1; 74.1; 88.0; 85.9; 85.2; 86.3; 86.5; 86.0; 85.8.  
- External debt service (in percent of exports of g&s) 2016–2026: 82.8; 66.8; 62.7; 59.0; 75.0; 75.1; 67.7; 57.7; 57.7; 56.4; 52.2; 50.2 (values appear in table rows).

### Financial sector indicators (selected figures)
- Dollar loans in percent of total loans (2013–2021): 56.3; 55.5; 57.9; 54.4; 51.9; 50.5; 49.1; 49.2; 50.5 (2021 data as of April).  
- Dollar deposits in percent of total deposits (2013–2021): 69.6; 72.7; 76.5; 72.9; 68.8; 69.2; 71.9; 73.6; 74.6.  
- Private sector credit in percent of GDP (2013–2021Q1): 20.8; 22.7; 24.8; 25.5; 23.3; 23.4; 24.1; 26.6; 25.7.  
- Non-performing loans in percent of total loans (2013–2021): 1.5; 1.6; 2.1; 3.5; 3.9; 3.7; 3.4; 3.1; 2.7.  
- Regulatory capital in percent of risk-weighted assets (2013–2021): 13.2; 13.4; 12.8; 14.6; 15.5; 17.0; 17.0; 18.1; 17.3.  
- Liquidity ratio (2013–2021): 49.3; 51.8; 54.5; 51.3; 48.5; 73.0; 75.9; 78.7; 79.7.

*Source: 1uryea2022001 - 0.4 thousand of CO2e per million US$ PPP-GDP. This metric is not comprehensively available across countries. (PDF content provided).*

### Annex I. External Sector Assessment

### Annex I. External Sector Assessment

### 2020 external position — overall assessment
- The 2020 external position was "broadly in line with fundamentals and desirable medium-term policies" according to the External Balance Assessment (EBA) current account model and the EBA external sustainability approach.
- The EBA-Lite real effective exchange rate (REER) model points to a 3 percent gap, described as "broadly-in-line".
- External stability risks are assessed as contained given Uruguay’s broadly-in-line external position and sizable reserve buffers.

### Current account and trade developments (2020–medium term)
- 2020: rapid contraction in external demand and transportation disruptions adversely affected goods exports; tourism proceeds came to a near halt with border closures.
- 2020 value changes:
  - Exports contracted close to 20 percent in value during 2020.
  - Imports contracted around 15 percent in value during 2020.
- Current account balance:
  - 2019: 1.3 percent of GDP surplus.
  - 2020: 0.6 percent of GDP deficit.
- Medium-term outlook:
  - The current account is expected to deteriorate further in 2021 and hover around a 1.5-2.0 percent of GDP deficit over the medium term.
  - Drivers: recovery of exports and imports as global demand rebounds and economy reopens; service exports (tourism) remain severely impacted; imports supported by UPM pulp plant construction and strong demand for tradable goods.
  - 2021 projection: widening of the current account deficit to about 2.1 percent of GDP.
  - Bilateral trade balance with Argentina expected to weaken towards the previous long-run equilibrium (around 1.5 percent of GDP deficit) as tourism exports normalize.
  - Exports and primary income outflows expected to be boosted by the new paper pulp project from UPM.
  - Risks:
    - Upside: strong demand and prices of commodities (especially meat).
    - Downside: greater deterioration of the trade balance with Argentina.

### Merchandise trade balance (selected series, in percent of GDP)
- Trade balance: 2014 3.0; 2015 2.3; 2016 3.6; 2017 3.1; 2018 3.6; 2019 5.0; 2020 3.8
- Exports: 2014 22.4; 2015 19.8; 2016 18.5; 2017 17.3; 2018 18.0; 2019 19.2; 2020 18.4
- Imports: 2014 19.4; 2015 17.5; 2016 15.0; 2017 14.2; 2018 14.5; 2019 14.1; 2020 14.6
- Fuel imports: 2014 2.8; 2015 1.8; 2016 1.3; 2017 1.4; 2018 1.8; 2019 1.6; 2020 1.4
- Non-fuel imports: 2014 16.6; 2015 15.7; 2016 13.7; 2017 12.8; 2018 12.7; 2019 12.5; 2020 13.2
- Capital imports: 2014 3.4; 2015 3.1; 2016 2.7; 2017 1.7; 2018 1.7; 2019 1.7; 2020 1.8
- Consumption imports: 2014 4.7; 2015 4.6; 2016 4.4; 2017 4.4; 2018 4.4; 2019 4.3; 2020 4.6
- Intermediary imports: 2014 7.6; 2015 6.8; 2016 5.8; 2017 5.5; 2018 5.5; 2019 5.4; 2020 5.7

Sources noted in original: Banco Central del Uruguay; and Fund staff calculations.

### EBA current account model and adjustments
- Baseline EBA current account model results (cyclically adjusted):
  - CA norm: -2.2 percent of GDP
  - CA proj.: -0.7 percent of GDP
  - Proj - Norm: 1.5 percent of GDP (implying a current account gap of about 1.5 percent of GDP)
- COVID-19 temporary adjustments to 2020 cyclically-adjusted current account:
  - Fuel imports estimated 0.4 percent of GDP lower than expected due to COVID-related drop in fuel prices and quantities.
  - Shift in consumption toward tradable goods increased goods imports by an estimated 0.2 percent of GDP.
  - Exports of medical supplies higher than usual, adjustor of 0.1 percent of GDP.
  - Applying these adjustments brings the cyclically-adjusted CA balance to -0.9 percent of GDP (Proj - Norm = 1.3 percent of GDP).
- Adjustment for expected normalization of bilateral trade with Argentina:
  - Considering trade normalization, cyclically-adjusted CA balance estimated at -1.7 percent of GDP, implying a staff-assessed CA gap of about 0.5 percent of GDP.
- Methodological note: EBA REER models do not include Uruguay.

### External sustainability (ES) and REER assessments
- EBA external sustainability approach:
  - Projected current account deficit for 2026: -1.5 percent of GDP (CA balance required to stabilize NFA in the medium-term).
  - ES approach assesses the REER as in line with fundamentals (0.0 percent REER gap).
- EBA-Lite REER model:
  - Assesses REER to be in line with fundamentals, pointing to a 3 percent gap (2.9 reported in table).
  - 2020 REER movements: overall REER appreciation of 3 percent noted in prose; specifics:
    - Real exchange rate vis-à-vis Brazil appreciated by 16 percent.
    - Real exchange rate vis-à-vis Argentina depreciated by 1.5 percent.
    - Real exchange rate vis-à-vis the US depreciated by 4 percent.
- Summary table excerpts:
  - I. EBA - Current Account model (Baseline): CA norm -2.2; CA proj. -0.7; Proj - Norm 1.5
  - I. EBA - Applying COVID-19 adjustments: CA norm -2.2; CA proj. -0.9; Proj - Norm 1.3
  - I. EBA - Adjusting for trade with Argentina: CA norm -2.2; CA proj. -1.7; Proj - Norm 0.5; REER gap -2.3
  - II. External Sustainability (ES) approach: CA (required to stabilize NFA) -1.5 (2026 projection -1.5); REER gap 0.0
  - III. EBA-lite REER model: REER gap 2.9
- CA elasticity used: 0.20 (see RES EBA CA and EBA ES results for Uruguay).

### Sectoral patterns and REER implications
- Over the past 15 years, agricultural commodities have taken up the lion’s share of Uruguay’s exports following the commodity price boom that ended in 2014.
- The REER appreciated significantly during the commodity price boom and has not seen significant downward adjustment since then.
- Non-commodity tradable sectors have remained stagnant over this period and are typically more sensitive to REER movements than commodities.

### External stability and reserves
- Gross reserves increased by over 13 percent in 2020, boosted by the authority’s international bond issuance and the policy to allow for purchases of monetary policy instruments with foreign currency.
- Reserves remain above the upper bound of the IMF reserve adequacy metric range.
- Reserve buffers are also adequate when considering prudential indicators accounting for Uruguay’s high degree of deposit dollarization and commercial banks’ foreign currency exposure.
- Given the level of reserves, external stability risks are assessed as contained.

*Source: IMF staff calculations and reporting in Annex I. External Sector Assessment.*

### introduction of an offsetting mechanism for slippages, which could have similar stabilization

### introduction of an offsetting mechanism for slippages, which could have similar stabilization

### Fiscal anchors, escape clause, and corrective mechanisms
- Offsetting mechanism: Introduction of an offsetting mechanism for slippages could have similar stabilization properties as a debt anchor.
- Alternative anchors mentioned:
  - Path and medium-term objective for the primary surplus.
  - A cap to the debt service (would need to carefully estimate the effective interest cost of public debt, taking into consideration the heterogeneity of debt instruments and liability-management operations that affect cash flows).
- Escape clause:
  - The current escape clause for the net indebtedness ceiling allows for a temporary suspension under exceptional circumstances without weakening fiscal credibility.
  - Exceptional circumstances are determined in advance and include events beyond government control (e.g., sharp recessions, large natural disasters, or national emergency).
  - The clause specifies activation procedures for triggering the temporary suspension.
  - Limitations: It does not specify subsequent procedures to return to the rule and there is no requirement to introduce offsetting mechanisms to recoup fiscal space.
  - The current escape clause does apply to deviations from the structural balance and/or spending limits (provided that the net indebtedness ceiling is met).

### Structural adjustment (Cyclically-adjusted balance)
- The cyclically-adjusted balance (CAB) rule:
  - Has great theoretical appeal because it allows countercyclical policy and provides guidance on fiscal stance.
  - Practical challenges:
    - Real-time estimates of the output gap are often unreliable, especially in countries experiencing structural changes, and often lead to overestimation of potential output.
    - For commodity-exporting countries, distinguishing temporary vs. permanent changes in commodity prices is highly uncertain.
  - Mitigants:
    - Rigorous and transparent methodologies for estimating potential output.
    - Methodologies may need to explicitly err on the conservative side and contemplate correction mechanisms.
  - Empirical note: Eyraud and Wu (2015) estimate that the CAB rule allowed EU countries to run deficits that were 0.5 percent of GDP higher than their ex-post estimates.

### Risk disclosure and fiscal transparency
- 2021 Budget: Included a sensitivity analysis for public debt projections to changes in the exchange rate and growth assumptions, as a first step towards producing stochastic simulations for the debt path that take into account the historical correlation of macroeconomic shocks.
  - Such simulations provide valuable information on the probability of deviating from the projected path and should be taken into account in fiscal plans (and fiscal rule limits).
  - The results show that relatively small changes to growth or exchange rate projections lead to non-stationary debt trajectories.
- Recommendation: Introduce a comprehensive fiscal risk report (as an annex to the budget) that discloses all possible risks (including state contingencies, guarantees, PPP contracts, etc.) to ensure these risks are correctly identified, quantified, and managed.
  - This would be in line with the third pillar of the IMF’s Fiscal Transparency Code.
- Disclosure practices: Once auxiliary institutions become operational, disclosing details of the rule (including making Excel files with necessary inputs and estimations publicly available) would improve communication and replicability.

### Auxiliary institutions
- Roles:
  - The Advisory Council and Committee of Experts should help monitor implementation of the rule, elevate the quality of discussions, explain policy tradeoffs, alert biases or inconsistencies in projections, and advocate improved policy decisions.
- Conditions for effectiveness:
  - Institutions must be delinked from political discussions.
  - They must have adequate access to data and resources, including adequate remuneration of members to ensure true independence.
  - The staggered design of members of the Advisory Council seems appropriate to isolate it from the political cycle.

### Conclusions and recommended refinements
- The new fiscal framework:
  - Is an important step towards ensuring fiscal discipline, providing key elements and infrastructure for a rules-based full system.
- Recommended refinements to reap greater benefits:
  - Shift from single- to multi-year targets.
  - Establish a debt (or related) anchor.
  - Define corrective actions in case of deviations (including offsetting mechanisms to recoup fiscal space).
  - Ensure auxiliary institutions become well-functioning and independent.
- Expected outcome: These changes would bolster Uruguay’s fiscal framework and help ensure fiscal discipline is maintained over time and across administrations.

### Risk Assessment Matrix (selected entries)
- External risks and policy advice:
  - Global resurgence of the Covid-19 pandemic
    - Likelihood: Medium
    - Impact: High
    - Horizon: ST
    - Policy advice: Maintain accommodative monetary policy stance and, if necessary, use fiscal policy space to delay the consolidation, to continue supporting the most vulnerable, limit scarring and bolster the recovery.
  - De-anchoring of U.S. inflation expectations leads to rising core yields and risk premia
    - Likelihood: Medium
    - Impact: Medium
    - Horizon: ST
    - Policy advice: Allow the exchange rate to act as a shock absorber; provide liquidity to support credit to SMEs.
  - Widespread social discontent and political instability
    - Likelihood: Medium
    - Impact: Medium
    - Horizon: ST, MT
    - Policy advice: Continue supporting the most vulnerable, limit scarring and bolster the recovery. Implement envisaged structural reforms to increase potential growth.
  - Rising commodity prices amid bouts of volatility
    - Likelihood: Medium
    - Impact: Medium
    - Horizon: ST
    - Policy advice: Allow the exchange rate to act as shock absorber. Maintaining fiscal policy within the boundaries of the fiscal rule.
- Domestic risks and policy advice:
  - Insufficient fiscal adjustment or lack of credibility of plan to regain fiscal sustainability (leading to sovereign-rating downgrade and higher yields)
    - Likelihood: Medium
    - Impact: Medium
    - Horizon: ST, MT
    - Policy advice: Recalibrate plans to introduce a credible adjustment plan underpinned by concrete fiscal measures.
  - Delayed progress in structural reforms; growth remains anemic amid competitiveness problems
    - Likelihood: Medium
    - Impact: Medium
    - Horizon: ST, MT
    - Policy advice: Implement envisaged structural reforms (to education, labor market, business environment, SOEs) which are urgently needed to raise potential growth.

### Public Sector Debt Sustainability Analysis — key statistics and scenarios
- At end-2020:
  - Gross NFPS debt: 68 percent of GDP.
  - NFPS net debt: 58 percent of GDP in 2020.
- Composition of debt:
  - Central government’s debt: 58 percent of GDP, with 13-year average maturity, and about ½ denominated in local currency and ⅓ indexed to CPI.
  - Debt from other public corporations: 4 percent of GDP.
  - Central bank capitalization bonds: 6 percent of GDP.
- NFPS assets and contingent lines:
  - NFPS holds assets amounting to 10 percent of GDP.
  - Access to contingent credit lines from multilateral institutions for about 3 percent of GDP.
  - Financial assets of the central government: 5 percent of GDP.
  - Contingent credit lines: 3 percent of GDP, with World Bank, IDB, FLAR and CAF.
  - Holdings of BCU bonds and deposits at the BCU: About 5 percent of GDP.
- Gross financing needs and components:
  - Gross financing needs: 8.6 percent of GDP.
    - 2.2 percent corresponds to the primary deficit.
    - 2.3 percent corresponds to interest payments.
    - 2.8 corresponds to amortizations of loans and securities.
- Baseline scenario:
  - Gross debt ratio is expected to gradually increase over the projection period and stabilize over the medium run.
  - If real GDP growth, real interest rates, and other debt-creating flows remain at their projected level for 2026, the debt-stabilizing primary balance is estimated at 0.9 percent of GDP compared to a projected primary balance of 0.5 percent of GDP.
- Historical scenario:
  - Yields a slightly higher debt ratio mainly because GDP growth was weaker, on average, in the previous decade.
  - Historical context: Until 2014 very high growth and exchange rate appreciation due to positive terms-of-trade (TOT) shock; 2014–2019 TOT shock unraveled and growth was stagnant; 2020 saw a sizeable downturn due to the pandemic.

*URUGUAY — INTERNATIONAL MONETARY FUND*

### 7.      Standardized risk scenarios show that debt dynamics are sensitive to shocks,

### 7.      Standardized risk scenarios show that debt dynamics are sensitive to shocks, 

### Key findings
- Debt dynamics are most sensitive to shocks to growth and the exchange rate; sensitivity is lower to interest rate changes and the primary balance.
- Fan charts of the projected debt distribution indicate debt dynamics remain manageable under historical statistical distributions of combined shocks.
- Gross debt would remain below 80 percent of GDP in 90 percent of cases under symmetric shocks, and 75 percent of cases with asymmetric shocks.
- With nearly 50 percent probability debt under symmetric shocks (and 75 percent probability under asymmetric shocks) would hover above 70 percent of GDP, a level that could potentially raise market concerns, affecting sovereign spreads and the ability to roll over debt.

### Baseline NFPS (Nonfinancial Public Sector) projections (selected series, 2019–2026)
- Nominal gross public debt (percent of GDP):
  - 2019: 51.6
  - 2020: 60.5
  - 2021: 68.1
  - 2022: 67.3
  - 2023: 68.5
  - 2024: 69.7
  - 2025: 70.2
  - 2026: 70.6
  - (follow-on value): 70.4
- Real GDP growth (in percent):
  - 2019: 3.2
  - 2020: 0.4
  - 2021: -5.9
  - 2022: 3.4
  - 2023: 3.2
  - 2024: 2.7
  - 2025: 2.5
  - 2026: 2.2
  - (follow-on value): 2.2
- Primary balance (percent of GDP):
  - 2019: -0.3
  - 2020: 1.6
  - 2021: 2.7
  - 2022: 2.5
  - 2023: 1.0
  - 2024: -0.1
  - 2025: -0.4
  - 2026: -0.4
  - (cumulative): -0.5 (then 2.1 cumulative figure shown)
- Effective interest rate (in percent):
  - 2019: 4.5
  - 2020: 3.6
  - 2021: 3.4
  - 2022: 3.9
  - 2023: 4.1
  - 2024: 4.1
  - 2025: 4.2
  - 2026: 4.4
  - (follow-on value): 4.7
- EMBIG (basis points): 142 (as shown)
- Public gross financing needs (percent of GDP, selected projection values shown as sequence):
  - 2019: 4.8
  - 2020: 6.1
  - 2021: 9.2
  - 2022: 8.6
  - 2023: 7.0
  - 2024: 6.3
  - 2025: 8.1
  - 2026: 8.6
  - (follow-on value): 9.5
- Composition notes:
  - Public debt composition by maturity and currency shows continued presence of medium/long-term and short-term tranches and both local and foreign-currency denominated debt (figures presented across 2010–2026).

### Stress test outcomes and scenario results
- Macro-fiscal stress tests considered: Primary Balance Shock; Real GDP Growth Shock; Real Interest Rate Shock; Real Exchange Rate Shock; Combined Macro-Fiscal Shock.
- Selected stress-test parameter paths (2021–2026) shown in stress panel:
  - Baseline Real GDP growth: 3.4, 3.2, 2.7, 2.5, 2.2, 2.2
  - Real GDP growth under Real GDP Growth Shock: 3.4, 0.1, -0.4, 2.5, 2.2, 2.2
  - Effective interest rate under Combined Shock: 3.9, 4.7, 4.3, 4.7, 5.1, 5.5
  - Inflation trajectories are provided for each stress scenario (e.g., Baseline inflation: 10.3, 5.6, 3.0, 3.7, 4.2, 4.0)
- Stress-test summary outcomes (illustrative):
  - Under interest-rate shock alone, impact on external debt is limited.
  - Shocks to growth, the non-interest current account, and a combined shock have greater, but still moderate, impacts on external debt.
  - A counterfactual one-time 30 percent real exchange rate depreciation would increase the external debt-to-GDP ratio by 19 percentage points.

### External debt sustainability (Annex VI highlights)
- External debt rose to 88 percent of GDP in 2020, reversing a prior downward trend.
- About 49 percent of external debt is owed by the public sector.
- 92 percent of external debt is denominated in foreign currency.
- Gross external debt is projected to hover around 85-86 percent of GDP over the medium term.
- Gross external financing requirements (in billions of US dollars, selected historical/projection sequence): 12.7, 12.5, 11.1, 10.0, 9.6, 7.8, 9.1, 10.9, 10.1, 10.5, 10.9, 11.2, 11.3
- Gross external financing needs in percent of GDP (selected values shown): 20.5, 21.7, 19.4, 15.6, 14.8, 12.7, 17.0, 18.1, 15.8, 16.0, 15.9, 15.6, 15.2
- Main external-debt risk: exchange rate depreciation (see 30 percent depreciation → +19 percentage points to external debt-to-GDP).
- Mitigating factors: relatively positive non-interest current account surpluses, favorable automatic debt dynamics, sizeable gross international reserves and liquidity buffers, and that about 75 percent of non-financial external private debt are inter-company loans.

### Policy-relevant implications and considerations
- Monitor and manage growth and exchange rate vulnerabilities given high sensitivity of debt dynamics to these shocks.
- Maintain liquidity buffers and reserve adequacy to mitigate risks from exchange rate and market-perception shocks.
- Recognize that a nontrivial probability exists of debt hovering above 70 percent of GDP under plausible shock distributions (near 50 percent under symmetric shocks; 75 percent under asymmetric shocks), which could affect sovereign spreads and rollover conditions.
- Continue tracking external financing needs carefully, acknowledging uncertainty around private external debt residual maturities and composition.

*Source: IMF staff.*

### Annex VII. Pension Reform in Uruguay

### Annex VII. Pension Reform in Uruguay

### Overview and performance
- The system provides coverage to about 90 percent of the elderly and 80 percent of workers.
- The average replacement rate is about 60 percent.
- Elderly poverty rate is only about 2 percent, compared to a child poverty rate of 20 percent.
- The pension system is highly fragmented. It includes:
  - a universal defined-benefit public pillar (which covers more than 90 percent of contributors and pensioners);
  - a complementary mandatory individual savings accounts pillar (for monthly earnings above US$1,500 managed by AFAPs);
  - a public insurance company (BSE) that provided lifetime annuities;
  - five separate special regimes for banking employees, university professionals, public notaries, the military, and the police, with vastly different rules and benefits.

### Fiscal pressures and financing
- Public pension spending has risen rapidly over the last decade, reaching 10 percent of GDP or almost 40 percent of fiscal revenues.
- Low retirement age: 60 years for both men and women.
- Constitutional mandate to index pensions to average wages.
- Workers’ contributions finance about ½ of costs of the social security administration (BPS). About ¾ of these costs correspond to pensions.
- About ¼ of financing comes from earmarked taxes (7 percentage points of VAT revenues, revenues from lotteries and a special tax to support pensions) and ¼ from direct fiscal support (transfers from general taxation).
- Further increases in revenues are unlikely given an already elevated tax burden and competing spending needs (in health, education, and infrastructure).
- Demographic and labor pressures:
  - Population aging and technological change are expected to put further pressure on the system.
  - The old-age dependency ratio (based on the current retirement age of 60) is expected to increase from below 33 percent in 2015 to 50 percent in 2050.
- Contribution rates vary across sub-systems and sectors. In the manufacturing and retail sectors, contribution reach 15 percent for workers and 7.5 percent for employers. This is considerably higher than in other countries in the region and the 18 percent average mandatory pension contribution rate across OECD countries.

### Commission of Experts: draft proposal — main recommendations
- The government has appointed a Commission of Experts and is committed to presenting a bill to Congress based on the Commission’s recommendations.
- The main recommendations from the draft proposal currently under consideration by the Commission include:
  a. Introducing a base zero pillar, to be financed from general taxation, that guarantees a minimum pension (of about US$300 per month) and complements the years of contributions up to a maximum pension (of about US$900 per month).
  b. Maintaining contribution rates as they are considered to be relatively high.
  c. Unifying the criteria across regimes for new workers (although allowing for an earlier retirement age for activities with an elevated physical toll). For existing workers, benefits would be computed as a weighted average that considers the number of years of contributions under the old and new (unified) regimes.
  d. Increasing the number of years considered in the computation of the reference wage to the best 25 years, instead of the last ten or the best twenty.
  e. Lowering accrual rates from 1.5 percent per year to a range between 1.1-1.35 which increases with age.
  f. Gradually raising the retirement age and linking it to life expectancy, while protecting rights of workers close to retirement age (noting that fiscal savings will take considerable time to materialize).
  g. Tightening qualification criteria for disability pensions and of the use of witnesses for missing contribution records.
  h. Creating incentives to foster voluntary savings, such as the possibility of automatically transferring 2 percentage points of VAT for electronic payments.
  i. For the individually-funded pillar, changing the minimum profitability regulation, increasing the number of portfolios and allowable investment options (to raise exposure to variable income and foreign investments, to prevent excessive bunching into government bonds while increasing the risk exposure of young workers to increase average returns during the accumulation phase).

### Additional desirable reforms (staff suggestions)
- Equalize the contribution rates for all regimes and sectors of the economy.
- Revisit the indexation formula to inflation (to preserve real purchasing power) instead of the average wage (which allows retirees to benefit from economy-wide productivity increases).
- Lower AFAPs’ fees by translating the book-keeping function to the BPS.

*Source: Annex VII. Pension Reform in Uruguay (from the IMF staff report).*

### 2021. Unemployment insurance and measures introduced by the authorities in support of

### 2021. Unemployment insurance and measures introduced by the authorities in support of workers during the pandemic have cushioned the loss of employment. Moreover, the partial modality of unemployment insurance has enabled workers to return to their jobs once activity picks up.

### Unemployment support and economic exposure
- Unemployment insurance and pandemic-era measures cushioned employment losses and the partial modality of unemployment insurance enabled worker reattachment once activity recovered.
- Uruguay is a small, highly open economy exposed to downside external risks, including weaker commodity prices and tightening global financial conditions.
- Authorities stand ready to bolster the economy with additional support as needed and agree with staff that sustaining medium-term growth requires actions on multiple fronts, including strengthening fiscal and monetary frameworks.

### Fiscal policy and debt management
- Pandemic-related measures to protect household income and human capital included social transfers, enhanced unemployment and health insurance, tax credits, and regulatory forbearance; measures for credit preservation and loan guarantees targeted micro, small and medium-sized enterprises.
- The COVID-19 Solidarity Fund (Coronavirus Fund) was created by law in April 2020 to distinguish and report pandemic-related budgetary expenditures with strict earmarking and timely disclosure.
- Budgetary resources tied to the COVID-19 response:
  - 1.4 percent of GDP in 2020
  - 1.7 percent of GDP in 2021
- Credit guarantees:
  - 1.3 percent of GDP in 2020
  - 0.3 percent of GDP in 2021 (estimated)
- The 5-year Budget Law 2020-2024 (approved December 2020) established a new fiscal rule with three pillars:
  - structural balance targets to account for the business cycle and one-off/temporary items
  - a cap on real growth in primary expenditures aligned with potential real growth
  - a limit to central government net indebtedness (effectively capping the observed fiscal deficit)
- During 2020, the government met all three pillars of the new fiscal rule, restoring fiscal credibility amid the pandemic.
- Fiscal management changes and fiscal transparency:
  - Reduction of inefficient non-pandemic public spending, restrictions on public sector hiring, and spending oversight contained fiscal deterioration.
  - Fiscal estimates in the annual budget law are now made over a rolling five-year period.
  - Public debt sensitivity analysis is now included in the budget analysis.
- Financing strategy and market access:
  - Disbursement of multilateral credit lines and bond issuance in both international and domestic markets, mostly in local currency.
  - Despite increasing debt burden, Uruguay retained investment grade status across all credit rating agencies and access to international capital markets.
  - May 2021 debt issuance equivalent to US$1.7 billion, of which almost US$1.2 billion correspond to a new global bond denominated in fixed-rate nominal pesos.
- Policy stance on taxes and spending:
  - Government prefers improving fiscal accounts through greater efficiency in structural spending rather than increasing taxes on the private sector.
  - Broad tax incentives under the General Investment Promotion Regime (COMAP) were provided for construction projects and other activities to underpin investment and formal employment.
- Fiscal governance institutions:
  - Fiscal Advisory Council held its first meeting on September 29, 2021; mandate to assess Ministry of Finance structural fiscal estimates and fiscal rule implementation.
  - Committee of Experts is in final formation and will provide macroeconomic assumptions to calculate potential GDP growth.

### Monetary policy
- Crisis response:
  - Central Bank of Uruguay (BCU) pivoted to an accommodative stance: lowered interest rates; decreased reserve requirements conditional on credit expansion; authorized automatic maturity extensions and loan payment deferrals; and implemented other liquidity injections.
- Exit from expansionary stance:
  - Monetary policy rate raised by 125 basis points to 5.75 percent since August 2021.
  - Gradual tightening expected to continue provided no setbacks in the pandemic or recovery.
- Institutional and operational reforms:
  - Enhanced monetary policy framework reaffirms price stability as primary mandate while allowing emergency support.
  - Main policy instrument changed from targeting money supply growth to the short-term interest rate.
  - Inflation target range to be reduced from 3-7 percent to 3-6 percent starting in September 2022.
  - New communication practices: doubled frequency of monetary policy meetings; publication of minutes with forward-looking statements; publishing official inflation projections and firm inflation-expectation surveys; improved communication with forecasters and the press.
  - In May 2021 the BCU requested the Fund to assess its monetary policy communication.
- De-dollarization objective:
  - BCU made explicit the objective of de-dollarizing the economy and rebuilding Uruguayan peso currency markets to enhance monetary transmission; recognizes de-dollarization is a long-term process requiring regulatory and behavioral changes and has launched broad dialogue with stakeholders.
- Inflation and credibility:
  - Inflation had been declining after peaking in mid-2020 but temporarily increased to 7.89 percent year-on-year in October 2021 (above the upper ceiling of the target range), driven by commodity and tradable price pressures.
  - Convergence of inflation expectations to target has slowed and remains slightly out of range.
  - Priority is to drive inflation and inflation expectations to the center of the target range over the monetary policy horizon.
- Exchange rate and reserves:
  - BCU committed to preserving exchange rate flexibility while avoiding non-fundamental volatility; intervenes to prevent disorderly conditions.
  - International reserves are well above the upper bound of the IMF reserve adequacy benchmark.
  - International reserves amounted to 30 percent of GDP at end-September 2021.

### Financial sector
- Resilience indicators (as of mid-2021):
  - Capital structure of financial institutions almost doubled the minimum regulatory requirement as of end-June 2021.
  - Ratio of liquid assets to total assets: 60 percent.
  - Bank profitability in Q2 2021: return on assets of 1.6 percent and return on equity of 15.1 percent.
  - General credit delinquency: 2.4 percent (down from 2.7 percent in March 2021 and from 3.1 percent a year earlier).
- Stress tests indicated the banking system would withstand a severe recession scenario.
- Authorities are working on deepening capital markets based on international best practices.
- Authorities requested an FSAP assessment in February 2021 and look forward to its policy recommendations.

### Reform agenda and human capital
- Structural reform priorities include:
  - strengthening fiscal discipline through the new fiscal framework
  - pension system reform
  - new governance to increase efficiency of state-owned enterprises
  - capital markets development
  - promoting trade openness and integration
- Social and labor priorities:
  - Improve business environment, generate jobs, and promote human capital.
  - Increase investments in education, health care, and housing to reduce poverty among children aged three and under (noted as considerably higher than in the rest of the population and worsened during the pandemic).
  - Incentives and subsidies to facilitate labor market entry or reintegration for young people aged 15 to 29, workers over 45, people with disabilities, and women.
  - Efforts to increase permanence and graduation rates in basic and higher secondary education and improve curriculum quality; early childhood action plan underway.
- Pension reform progress:
  - Committee of Experts on Social Security (CESS) concluded its diagnosis and reform proposals in November 2021 after broad consultation.
  - Next steps: Executive Power drafts a bill for subsequent parliamentary debate and process.

### Climate change, climate finance, and sustainable sovereign funding
- Energy transition and climate goals:
  - Uruguay transformed its energy matrix over the past decade; 94 percent of its electricity production is generated using renewables sources.
  - Authorities aim for a growth path consistent with low greenhouse gas emissions and climate resilience.
  - Helsinki Principles incorporated into the 2020-2024 Budget Law to center climate mitigation and adaptation in economic policy and fiscal management.
  - Launching second-generation renewable energy transformation and decarbonization of heavy transport and industry via a national green hydrogen strategy and promotion of electric mobility.
  - Aspirational goal of becoming net C02- zero by 2050.
  - Uruguay ranks first among emerging market countries in MIT’s Green Future Index.
- Sovereign debt and sustainability linkage:
  - Ministry of Finance, together with Ministries of Environment, Industry and Energy, and Agriculture and Livestock, is working on a Sustainability-Linked Sovereign Bond that embeds Uruguay’s forward-looking environmental targets as set out in its Nationally Determined Contributions (NDCs) under the Paris Agreement.
  - Authorities view that borrowing costs should be increasingly linked to environmental performance and contribution to global public goods.

### Final remarks
- Amid pandemic challenges, authorities advanced reforms to build credible macroeconomic policy frameworks and a structural reform agenda to achieve higher and inclusive growth.
- Uruguay’s institutional strengths—democracy, solid institutions, freedom, judicial independence, and political stability—remain important sources of resilience in an uncertain global landscape.

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1uryea2022001.pdf_