## 1uryea2023002

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---

### Context and recent fiscal/sovereign developments
- Uruguay strengthened its fiscal framework during the pandemic by:
  - establishing a new fiscal rule based on three pillars (structural deficit, real primary spending growth, and net indebtedness),
  - creating a Fiscal Council and Committee of Experts,
  - starting to preset rolling 5-year projections on an annual basis,
  - introducing stochastic debt sustainability analysis.
- Public debt and fiscal outturns:
  - NFPS debt: 68.1 percent of GDP in 2020; 59.3 percent of GDP in 2022.
  - NFPS primary balance: deficit of 2.7 percent of GDP (without cincuentones) historically to deficit of 0.6 percent of GDP in 2022; expected to reach balance in 2028.
  - Debt maturity: 12.9 years.
  - Liquid buffers and contingent lines: contingent lines with IFIs amount to USD 1.5 billion.
  - Share of non-resident holdings: around 50 percent of total.
  - Share of FX debt: around 50 percent of total.
- Sovereign ratings: Fitch improved outlook to stable in December 2021; S&P increased the rating to BBB+ with stable outlook in April 2023.
- Historical trajectory: debt fell to about 40 percent of GDP in 2010 after the 2002 crisis, rose to about 60 percent of GDP in 2019, and was brought down post-pandemic to pre-pandemic levels.

### Rationale for a prudent medium-term public debt range and fiscal-anchor design
- Complementing the current fiscal framework with a medium-term debt anchor could further support medium-term sustainability.
- Fiscal-framework design principles:
  - two pillars: a medium-term fiscal anchor linked to the final objective, and operational target(s) on fiscal aggregates;
  - use correction mechanisms and state-dependent transition periods to preserve credibility while allowing responses to large adverse shocks.
- Implementation suggestions:
  - Short-term: explicitly link authorities’ fiscal objective and projections in the annual “Rendición de Cuentas y Exposición de Motivos”; maintain the current framework for a few years before formal modifications.
  - Longer-term: consider formally adding a debt anchor to the fiscal rule once more experience with the current rule has been accumulated.

### Risk-based approach: definitions, coverage, and estimation approaches
- Definitions:
  - Debt limit: level beyond which government solvency or liquidity is put into question.
  - Debt anchor: level set such that there is a low probability of reaching the threshold over a given time horizon; consistent with safeguarding medium-term sustainability.
  - Unsustainable debt: no politically and economically feasible policies stabilize debt-to-GDP and deliver acceptable low rollover risk without restructuring and/or exceptional bilateral support.
- Coverage recommendation:
  - A debt anchor should ideally cover broad public sector vulnerabilities; for Uruguay, NFPS is the most appropriate coverage.
  - For implementation ease, start with Central Government (CG) coverage and transition to NFPS.
- Estimation approaches:
  - If debt limit known: set anchor so probability of breaching limit in medium term is low (usually 5-10 percent).
  - If debt limit unknown: identify debt levels associated with policy limits given politically/economically feasible primary surpluses (evidence suggests feasible maximum primary surplus around 2-4 percent of GDP).

### Quantitative calibration, simulations, and alternative approaches
- PBmax candidates and r-g under stress:
  - PBmax based on historical outturns: 3.5 percent of GDP (average primary balance for NFPS 2003-2007).
  - Alternative PBmax for emerging markets: 2 percent of GDP.
  - r-g under stress for a sample of emerging markets: up to 4 to 5 percent.
- Implied debt limits and approaches:
  - Using PBmax = 3.5 percent and stress r-g assumptions → debt limit of 70 percent.
  - Using PBmax = 2 percent → implied lower debt limit of 50 percent.
  - Signal approach (previous IMF DSA): indicative threshold of 70 percent for emerging markets.
  - Growth-maximizing debt approach (Checherita-Westphal and others, 2014) → maximum debt-to-GDP ratio of 63 percent for Uruguay (elasticity 0.2765).
- Simulation exercise:
  - Estimate distribution of macroeconomic and fiscal shocks for Uruguay.
  - Generate 1,000 simulations of these shocks over a six-year horizon.
  - Compute debt trajectories using a fiscal reaction function and the debt accumulation equation.
  - Present results in a fan chart where the initial point is the debt anchor.

### Baseline debt-anchor estimation and sensitivity analysis
- Baseline:
  - Under the baseline estimation, a debt anchor for Uruguay would be between 50 to 55 percent of GDP.
  - Baseline assumes a debt limit of 70 percent and that the probability debt surpasses that limit is lower than 10 percent.
  - With PBmax = 3.5 percent, the calibrated debt anchor is 54 percent of GDP.
  - Under staff’s baseline, the probability that debt is higher than 70 percent of GDP is above 10 percent; this is reflected in both the debt anchor estimates and the fan chart.
- Robustness / alternative scenarios:
  - Including contingent liabilities, lowering policymaker risk tolerance, or lowering the debt limit yields a lower estimated debt anchor.
  - Examples:
    - Increasing contingent liabilities → debt anchor 47 percent of GDP.
    - Lowering the allowed probability of breaching the debt limit → debt anchor 51 percent of GDP.
    - Lower debt limit of 65 percent of GDP → estimated debt anchor ranges between 38 and 47 percent of GDP.
- Reported parameter table (as presented):
  - Debt limit 70 70 70 65 65 65
  - Contingent liabilities 0 5 0 0 5 0
  - Likelihood of exceeding the debt limit 10 10 5 10 10 5
  - Debt anchor 54.0 46.8 50.7 46.8 38.4 42.6

### Primary-balance requirements, transition timing, and stabilizing efforts
- Fiscal effort to reach anchors:
  - To reach debt reference level of 54 percent of GDP by 2032 requires increasing and maintaining the primary balance by 1.3 percentage point.
  - Reaching debt level of 38.4 percent of GDP in 5 years would require a primary balance of 4 percent of GDP.
  - If debt limit unknown, primary surpluses between 0.6 and 1.7 percent of GDP would allow stabilizing debt between 50 and 55 percent of GDP.
- Policy-effort examples:
  - Constant primary surplus of 0.6 → reach debt/GDP = 55 percent by 2032.
  - Primary surplus of 1.1 percent of GDP → reach debt/GDP = 50 percent by 2032.
- Alternative macro assumptions:
  - If average growth = 1.8 percent (average 2013-19) instead of 2.2 percent:
    - Primary surplus 0.9 percent → reach debt ratio 55 percent.
    - Primary surplus 1.4 percent → reach debt ratio 50 percent.
  - If real interest rates are higher by 1 percentage point throughout 2023-2032:
    - Primary surplus 1.3 percent → reach debt ratio 55 percent.
    - Primary surplus 1.7 percent → reach debt ratio 50 percent.
- Reference stabilizing efforts:
  - Primary surplus 0.2 → stabilize debt at 60 percent of GDP (current level).
  - Under lower growth scenario, effort increases to 0.5 percent of GDP.
  - Under higher interest rate scenario, effort increases to 0.9 percent of GDP.
- Staff estimate: a 2-percentage point increase in the effective marginal interest rate would add 0.8 percent of GDP to the deficit, and about 2.4 percent of GDP to debt in 2028.

### Revenues: structure, magnitudes, and reform options
- Revenue levels and composition:
  - Revenues increased from around 20 percent in the early 2000s to around 27 percent in recent years following reforms introduced in 2007 (Law 18.083).
  - Revenue composition (2017-2019): VAT and other consumption taxes account for 40 percent of total tax revenue (compared to 46 percent in LA6 and 50 percent in LAC).
  - High share of revenues from social security contributions (SSC) and low share of corporate income tax (CIT) are similar to OECD countries; Uruguay has relatively high collection via personal income taxes (PIT).
- Statutory tax rates: generally higher than LA6 countries except for CIT; compared to OECD, rates are higher except for the top marginal PIT rate.
- Tax expenditures:
  - Uruguay’s tax expenditures are relatively high at 6 percent (compared to 3 percent in the average LA6 country).
  - Largest tax expenditures: VAT, followed by CIT and wealth.
- Policy measures suggested:
  - Focus VAT exemptions and reduce rates to recipients of social programs (“IVA personalizado”) to reduce tax expenditures and VAT regressivity.
  - Consider unifying VAT rates while increasing progressivity through targeted rebates.
  - Extend number of recipients of social programs to receive transfers via “tuapp” (virtual wallet) rather than cash.
  - Conduct impact evaluation of tax benefits to promote investment (e.g., COMAP, free-trade zones).
  - Review tax regime to broaden base: extend VAT to digital services between domestic consumers and global companies; reform VAT on agricultural transactions (eliminate “IVA en suspenso”) which would cause a one-time price increase but could substantially increase revenues.

### Expenditures: rigidity, composition, and reform options
- Expenditure structure and rigidity:
  - Only 20 percent of the budget’s total expenditures are discretionary (including operating expenditures, social transfers, and investment).
  - Recent composition of spending: about 24 percent of total spending were transfers to social security, 10 percent were interest payments, and 26 percent were transfers to Article 220 entities; wages about 18 percent of total spending.
- Public wages and employment:
  - Wage bill: 5.2 percent of GDP in 2020 → 4.5 percent of GDP in 2022.
  - Average annual increase in real public sector wages: 2 percent between Dec-2009 and Dec-2019.
  - Authorities’ commitment to recover real wages to pre-pandemic level (December 2019) could erode some savings.
  - Public employees grew almost 30 percent during 2003-2014 (from 241,000 to 308,000); vacancy replacement decree in 2020 limited replacements, reducing public employees by about 2 percent in 2020-2021.
  - If public employees declined to 2003 level, potential savings would amount to 1.3 percentage points of GDP (not necessarily feasible or desirable).
- Pensions and social spending:
  - Pensions: single largest spending item; increase over last 15 years explained by wage growth and more flexible retirement access requirements.
  - Recently approved reform would stabilize pension spending over the medium term.
  - Most social public spending goes to pensions and social security; about 5 percent of total spending allocated to programs such as Plan Equidad and Tarjeta Uruguay Social.
  - LNG subsidy averaged US$90 million in the last two years; redesigning LNG subsidy could lead to large savings.
  - Since 2022, beneficiaries of social plans pay half the price paid by all other consumers.
- SOEs and public investment:
  - SOEs are profitable but contribution to fiscal accounts has declined on average; required to pursue social policies implying cross-subsidies not funded transparently.
  - Suggested steps: optimize shareholder value while achieving socioeconomic goals; improve governance; allow cost-reflective tariffs; grant operational independence.
  - Public investment has remained relatively low since 2015; stock of public capital has remained constant while private capital increased.
- Fiscal-framework fragmentation:
  - Article 220 entities have greater budget flexibility and present independent budget proposals; spending by Article 220 entities represents a significant share of total spending and complicates coordinated national policies in education and health.
  - Reducing fragmentation could increase spending efficiency and improve control over critical areas.

### Conclusions and prioritized policy recommendations
- Debt-anchor conclusion:
  - A risk-based approach yields a debt anchor between 50-55 percent of GDP by combining stochastic analysis of historical macro-fiscal shocks and assessment of feasible sustainable primary balances.
- Recommended measures to reduce fiscal deficit and increase efficiency:
  - Reduce energy (LNG) subsidies and fully implement targeted VAT to improve spending efficiency and generate non-negligible savings.
  - Conduct impact analysis of tax benefits used to promote investment to assess cost-effectiveness and scope for savings.
  - Deepen SOE reforms to capture efficiencies and transparently account for cross-subsidies.
  - Reduce budget fragmentation, especially related to Article 220 entities, to improve coordination in education and health and support fiscal sustainability.
  - Preserve savings in wages achieved in recent years and use public employment attrition rules to control spending until civil service reform can be implemented.
  - Preserve spending on public investment, which is already at low levels.
- Implementation sequencing for a formal debt anchor:
  - Consider adding a formal debt anchor to the fiscal rule when sufficient experience with the current rule has been accumulated.
  - Sequence implementation: set the anchor first, then calibrate operational variables consistent with achieving that anchor over a specified period.
  - Ensure calibration is comprehensive, sequenced, prudent, and updated regularly but not too frequently.
  - Use correction mechanisms and state-dependent transition periods to allow responses to large adverse shocks while preserving framework credibility.

### Annex highlights: Drivers of financial dollarization and MVP model
- Stylized facts and magnitudes:
  - About 75 percent of total deposits in the banking system are in dollars.
  - Households account for 72 percent of private sector FX deposits; corporations 28 percent.
  - Approximately 50 percent of the central government's market debt is denominated in foreign currency.
  - More than 75 percent of corporate debt is in dollars.
  - Around 25 percent of FX loans are estimated to be unhedged (ratio of FX loans granted to firms in the non-tradable sector).
  - Uruguay's average inflation is about 8 percent.
- Empirical drivers and key quantitative estimates:
  - Reserve requirement differential: a one percentage point increase in the differential between reserve requirements in dollars and pesos would reduce deposit dollarization by around 0.8 percentage points (monthly model: 0.75 percentage points).
  - Inflation: a 1 percentage point reduction in inflation → about 3.5 percentage points lower dollarization.
  - Reserve requirement differential on FX credit: a one percentage point increase could reduce FX credit share by approximately 0.5 percentage points.
  - De-dollarization policy pillars: strengthen monetary credibility to deliver low/stable inflation; maintain exchange rate flexibility; deploy currency-differentiated reserve requirements; complement with differentiated provisions and risk weights; coordinate structural policies with short-term instruments.
- MVP Model (Annex II) summary:
  - MVP-implied dollarization share (λ*) equals the estimated pass-through coefficient (β̂) from nominal exchange rate to inflation under the approximation s = e − π.
  - MVP formula (as presented): λ* = σπ,π2 + σπ,s2  /  (σπ,π2 + σs,s2 + 2σπ,s2) — dollarization driven by variances/covariances of inflation and real exchange rate depreciation.

### Climate, disaster risk preparedness, and structural green transition
- Disaster risk preparedness and contingency mechanisms:
  - 2020: National Policy for Disaster and Emergency Integrated Risk Management enacted (Decree 66/020 (2020)).
  - 2014: pioneered an 18-month weather hedge with the World Bank for 450 million dollars.
  - Central Bank objectives: assess incorporation of climate risks into financial sector regulations; increase data collection and exposure modelling capacity (BCU’s Hoja de Ruta de Sostenibilidad (2022)).
- Energy transition and decarbonization:
  - Energy Policy 2005-2030 guided investments of US$8 billion during 2010-2016.
  - By 2018, over 98 percent of electricity from renewable sources.
  - More than a third of electricity comes from wind farms; Uruguay exports energy to Argentina and Brazil.
  - Transition estimated to have reduced CO2 emissions by 10 million tonnes (2014-20).
  - Green Hydrogen Roadmap: by 2030 production costs between 1.2 and 1.5 USD/kgH2 for scale above 500 MW.
- Transport decarbonization:
  - Transport: two thirds of oil consumption and 56 percent of total CO2 emissions.
  - Since 2020: pilot program with 32 electric buses in Montevideo and Canelones; procurement costs higher but investment recovery in 4 to 8 years when electricity from renewables is low-cost.
- Carbon pricing and fiscal incentives:
  - 2022 pricing mechanism enacted (Ley de Rendición de Cuentas 19,996): initial price set at 137 dollars per ton of carbon dioxide.
  - Excise tax differentials:
    - Electric vehicles: average excise tax 0 percent.
    - Hybrid electric vehicles: average excise tax 4 percent.
    - Traditional gasoline vehicles: average excise tax 29 percent.
- Climate-smart agriculture:
  - Livestock productivity: 78 kg per hectare in 1995-98 → 93 kg per hectare in 2015-18.
  - Total emissions increased but emissions intensity fell as productivity rose.
  - National livestock traceability system (since 2011) achieved 100 percent traceability of cattle.
- Road ahead — priorities:
  - Strengthen adaptation, disaster risk management and macro-fiscal modelling; scale up risk transfer instruments (agricultural insurance); broaden integrated water resources management.
  - Align financing with environmental outcomes: seek MDB financing aligned with national commitments; tap innovative sovereign financing (e.g., Sustainability-Linked Loans) embedding climate/nature indicators.
  - Deepen decarbonization and strengthen export competitiveness: mainstream climate-smart agriculture; promote e-mobility and charging infrastructure; plan energy/logistics infrastructure and regulatory framework for green hydrogen.

*Source: IMF staff calculations and analysis as presented in the provided content.*

### References ____________________________________________________________________________ 15

### 1uryea2023002 - References ____________________________________________________________________________ 15

### Context
- Uruguay strengthened its fiscal framework during the pandemic by: (i) establishing a new fiscal rule based on three pillars (structural deficit, real primary spending growth, and net indebtedness), (ii) creating a Fiscal Council and Committee of Experts, (iii) starting to preset rolling 5-year projections on an annual basis, and (iv) introducing stochastic debt sustainability analysis.
- Public debt and fiscal outturns:
  - NFPS debt peaked at 68.1 percent of GDP in 2020 and declined to 59.3 percent of GDP in 2022.
  - NFPS primary balance moved from a deficit of 2.7 percent of GDP without cincuentones to a deficit of 0.6 percent of GDP in 2022 and is expected to reach balance in 2028.
  - Debt maturity is long at 12.9 years.
  - Liquid buffers are high and contingent lines with IFIs amount to USD 1.5 billion.
  - The share of non-resident holdings and the share of FX debt are both around 50 percent of the total.
- Recent sovereign ratings changes: Fitch improved the outlook to stable in December 2021; S&P increased the rating to BBB+ with stable outlook in April 2023.
- Historical context:
  - Debt fell to about 40 percent of GDP in 2010 after the 2002 crisis, rose to about 60 percent of GDP in 2019, and was brought down post-pandemic to pre-pandemic levels.

### Prudent Medium-Term Range for Public Debt — Rationale
- Complementing the current fiscal framework with a medium-term debt anchor could further support medium-term sustainability.
- A fiscal framework should include two pillars: a medium-term fiscal anchor linked to the final objective, and one (or several) operational target(s) on fiscal aggregates.
- Short-term implementation suggestion:
  - Make an explicit link between the authorities’ fiscal objective and their projections in the annual “Rendición de Cuentas y Exposición de Motivos.”
  - Maintain the current framework for a few years to evaluate performance before introducing formal modifications.
- Longer-term suggestion:
  - Consider formally adding a debt anchor to the fiscal rule once more experience with the current rule has been accumulated.
  - Use correction mechanisms and state-dependent transition periods to preserve credibility while allowing responses to large adverse shocks.

### Risk-Based Approach to Setting a Prudent Debt Level — Methodology and Concepts
- Definitions used:
  - Debt limit: level beyond which government solvency or liquidity is put into question.
  - Debt anchor: level set such that there is a low probability of reaching the threshold over a given time horizon; consistent with safeguarding medium-term sustainability.
  - Unsustainable debt: no politically and economically feasible policies stabilize the debt-to-GDP ratio and deliver acceptable low rollover risk without restructuring and/or exceptional bilateral support.
- Coverage recommendation:
  - A debt anchor should ideally cover broad public sector vulnerabilities; for Uruguay, NFPS is the most appropriate level of coverage.
  - For implementation ease, start with Central Government (CG) coverage and transition to NFPS.
- Approaches to estimate a debt anchor:
  - When the debt limit is known: set the debt anchor so that the probability of breaching the debt limit in the medium term is low (usually 5-10 percent).
  - When the debt limit is unknown: identify debt levels associated with policy limits given politically/economically feasible primary surpluses (evidence suggests feasible maximum primary surplus around 2-4 percent of GDP).

### Quantitative Calibration and Simulations
- Methods and parameters discussed:
  - Estimating a debt limit via highest achievable primary balance (PBmax) relative to the interest-growth differential (r-g) under stress. For Uruguay:
    - PBmax based on historical outturns could be 3.5 percent of GDP (average primary balance for the NFPS was 3.5 percent of GDP between 2003-2007).
    - Evidence for emerging markets suggests lower PBmax around 2 percent of GDP.
    - The r-g under stress for a sample of emerging markets could be as high as 4 to 5 percent.
    - These assumptions yield a debt limit of 70 percent using Uruguay’s historical outturns; using PBmax = 2 percent would imply a lower debt limit of 50 percent.
  - Alternative approaches:
    - Signal approach used in previous IMF DSA had an indicative threshold of 70 percent for emerging markets.
    - Growth-maximizing debt approach (Checherita-Westphal and others, 2014) yields a maximum debt-to-GDP ratio of 63 percent for Uruguay (using estimated elasticity 0.2765).
- Simulation exercise:
  - Estimate a distribution of macroeconomic and fiscal shocks for Uruguay.
  - Generate 1,000 simulations of these shocks over a six-year horizon.
  - Compute debt trajectories using a fiscal reaction function and the debt accumulation equation.
  - Present results in a fan chart where the initial point is the debt anchor.

### Findings and Key Statistics
- Exact historical and projection figures noted in the text:
  - NFPS debt: 68.1 percent of GDP in 2020; 59.3 percent of GDP in 2022.
  - NFPS primary balance: deficit of 2.7 percent of GDP (without cincuentones) historically to deficit of 0.6 percent of GDP in 2022; expected to reach balance in 2028.
  - Debt maturity: 12.9 years.
  - Contingent line size: USD 1.5 billion.
  - Share of non-resident holdings and FX debt: around 50 percent each.
  - PBmax candidate: 3.5 percent of GDP (historical average 2003-2007); alternative PBmax around 2 percent of GDP for emerging markets.
  - r-g under stress: up to 4 to 5 percent (sample of emerging markets).
  - Implied debt limits: 70 percent (using PBmax = 3.5 percent); 50 percent (using PBmax = 2 percent).
  - Growth-maximizing debt estimate: 63 percent (elasticity 0.2765).
  - Simulation details: 1,000 simulations over a six-year horizon.

### Policy Recommendations
- Short-term:
  - Link annual budget presentations explicitly to the medium-term fiscal objective (currently keeping debt stable at its current level) and calibrate the three pillars of the fiscal rule accordingly.
  - Allow the revamped 2020 framework to operate for a few years before formalizing further changes.
- Medium-term:
  - Consider adding a formal debt anchor to the fiscal rule when sufficient experience with the current rule has been accumulated.
  - Sequence implementation: set the anchor first, then calibrate operational variables consistent with achieving that anchor over a specified period.
  - Ensure calibration is comprehensive, sequenced, prudent, and updated regularly but not too frequently.
  - Use correction mechanisms and state-dependent transition periods to allow responses to large adverse shocks while preserving framework credibility.

*April 26, 2023 — Extracted from the Uruguay country report content provided in the source PDF.*

### 14.      Under the baseline estimation, a debt anchor for Uruguay would be between 50 to 55

### 1uryea2023002 - 14.      Under the baseline estimation, a debt anchor for Uruguay would be between 50 to 55

### Debt anchor: baseline estimation
- Under the baseline estimation, a debt anchor for Uruguay would be between 50 to 55 percent of GDP.
- Baseline estimations assume a debt limit of 70 percent and that the probability that debt surpasses that limit is lower than 10 percent.
- The maximum feasible primary balance is set at 3.5 percent considering the strong fiscal performance in the early 2000s.
- In that scenario, the calibrated debt anchor is 54 percent of GDP.
- Under staff’s baseline, the probability that debt is higher than 70 percent of GDP is above 10 percent; this is reflected in both the estimates for the debt anchor and the fan chart.

### Alternative scenarios and sensitivity analysis
- Including contingent liabilities, lowering policymaker risk tolerance, or lowering the debt limit yields a lower estimated debt anchor.
- Examples from the robustness scenario:
  - Increasing the size of contingent liabilities results in a debt anchor of 47 percent of GDP.
  - Lowering the probability in which the debt limit is breached lowers the debt anchor to 51 percent.
  - With a lower debt limit of 65 percent of GDP, the estimated debt anchor ranges between 38 and 47 percent of GDP.
- Parameters table (as reported):
  - Debt limit 70 70 70 65 65 65
  - Contingent liabilities 0 5 0 0 5 0
  - Likelihood of exceeding the debt limit 10 10 5 10 10 5
  - Debt anchor 54.0 46.8 50.7 46.8 38.4 42.6

### Primary balance requirements and transition timing
- Reaching the debt anchor earlier requires higher fiscal effort; transition time matters.
- To reach a debt reference level of 54 percent of GDP (average value between 2012-16) by 2032 would require increasing and maintaining the primary balance by 1.3 percentage point.
- Reaching a debt level of 38.4 percent of GDP in 5 years would require a primary balance of 4 percent of GDP.
- Some calibrations could be too ambitious and possibly counterproductive because a too large fiscal adjustment could have negative output implications and make consolidation self-defeating.
- If the debt limit is unknown, primary surpluses between 0.6 and 1.7 percent of GDP would allow stabilizing debt between 50 and 55 percent of GDP.
- Examples of policy-effort mappings:
  - A constant primary surplus of 0.6 would allow reaching a debt to GDP ratio of 55 percent by 2032.
  - A primary surplus of 1.1 percent of GDP would allow reaching a debt to GDP ratio of 50 percent by 2032.
- Alternative macroeconomic assumptions:
  - If average growth = 1.8 percent (average 2013-19) instead of 2.2 percent, then:
    - Primary surplus of 0.9 percent of GDP consistent with reaching debt ratio of 55 percent.
    - Primary surplus of 1.4 percent of GDP consistent with reaching debt ratio of 50 percent.
  - If real interest rates are higher by 1 percentage point throughout 2023-2032:
    - Primary surplus of 1.3 percent of GDP would allow reaching debt ratio of 55 percent.
    - Primary surplus of 1.7 percent of GDP would allow reaching debt ratio of 50 percent.
- Reference stabilizing efforts:
  - A primary surplus of 0.2 would allow stabilizing debt at 60 percent of GDP (current level).
  - Under lower growth scenario, that effort would increase to 0.5 percent of GDP.
  - Under higher interest rate scenario, that effort would increase to 0.9 percent of GDP.
- Staff estimate: a 2-percentage point increase in the effective marginal interest rate would add 0.8 percent of GDP to the deficit, and about 2.4 percent of GDP to debt in 2028.

### Revenues: structure and reform options
- Revenues increased from around 20 percent in the early 2000s to around 27 percent in recent years following reforms introduced in 2007 (Law 18.083).
- Revenue composition (2017-2019): VAT and other consumption taxes account for 40 percent of total tax revenue (compared to 46 percent in LA6 and 50 percent in LAC); high share of revenues from social security contributions (SSC) and low share of corporate income tax (CIT) are similar to OECD countries; Uruguay has relatively high collection via personal income taxes (PIT).
- Statutory tax rates: generally higher than LA6 countries except for CIT; compared to OECD, rates are higher except for the top marginal PIT rate.
- Tax expenditures:
  - Uruguay’s tax expenditures are relatively high at 6 percent (compared to 3 percent in the average LA6 country).
  - Largest tax expenditures: VAT, followed by CIT and wealth.
- Policy measures and suggestions:
  - Focus VAT exemptions and reduce rates to recipients of social programs (“IVA personalizado”) to reduce tax expenditures and VAT regressivity.
  - Consider unifying VAT rates while increasing progressivity through targeted rebates.
  - Extend number of recipients of social programs to receive transfers via “tuapp” (virtual wallet) rather than cash.
  - Conduct impact evaluation of tax benefits to promote investment (e.g., COMAP, free-trade zones).
  - Review tax regime to broaden base: extend VAT to digital services between domestic consumers and global companies; reform VAT on agricultural transactions (eliminate “IVA en suspenso”) which would cause a one-time price increase but could substantially increase revenues.

### Expenditures: rigidity, composition, and reform options
- Expenditure structure and rigidity:
  - Only 20 percent of the budget’s total expenditures are discretionary (including operating expenditures, social transfers, and investment).
  - Recent composition of spending: about 24 percent of total spending were transfers to social security, 10 percent were interest payments, and 26 percent were transfers to Article 220 entities; wages about 18 percent of total spending.
- Public wage developments:
  - Wage bill as percent of GDP fell from 5.2 percent of GDP in 2020 to 4.5 percent of GDP in 2022.
  - Average annual increase in real public sector wages was 2 percent between Dec-2009 and Dec-2019.
  - Authorities’ commitment to recover real wages to pre-pandemic level (December 2019) could erode some savings.
- Public employment:
  - Number of public employees grew by almost 30 percent during 2003-2014 (from 241,000 to 308,000); growth stabilized more recently.
  - Vacancy replacement decree in 2020: only one out of every three public sector vacancies to be replaced in non-essential sectors (also in 2021), yielding a reduction in public employees in 2020-2021 of about 2 percent.
  - If public employees declined to 2003 level, potential savings would amount to 1.3 percentage points of GDP (not necessarily feasible or desirable).
- Pensions:
  - Pensions are the single largest spending item.
  - Increase in pension spending in the last 15 years explained by wage growth and more flexible retirement access requirements.
  - Recently approved reform would stabilize spending over the medium term.
- Subsidies and social programs:
  - Most social public spending goes to pensions and social security; about 5 percent of total spending allocated to programs such as Plan Equidad and Tarjeta Uruguay Social.
  - Reductions in amount allocated to social programs are not feasible nor desirable, but redesigning LNG subsidy would lead to large savings.
  - Reference: LNG subsidy averaged US$90 million in the last two years.
  - Since 2022, beneficiaries of social plans pay half the price paid by all other consumers.
- State-owned enterprises (SOEs) and public investment:
  - SOEs are profitable but contribution to fiscal accounts has declined on average over time; required to pursue social policies that imply cross-subsidies not funded transparently.
  - Suggested steps: optimize shareholder value while achieving socioeconomic goals; improve governance; allow cost-reflective tariffs; grant operational independence.
  - Public investment has remained relatively low since 2015; stock of public capital has remained constant while private capital increased.
- Fiscal framework fragmentation:
  - Article 220 entities have greater budget flexibility and present independent budget proposals; spending by Article 220 entities represents a significant share of total spending and complicates coordinated national policies in education and health.
  - Reducing fragmentation could increase spending efficiency and improve control over critical areas.

### Conclusions and policy recommendations
- Uruguay has strengthened its fiscal framework and used it effectively during shocks such as the pandemic.
- Adding a medium-term anchor (explicit debt anchor) would bolster credibility and support reducing debt to increase fiscal space for future shocks, public investment, and climate transition costs.
- A risk-based approach yields a debt anchor between 50-55 percent of GDP by combining stochastic analysis of historical macro-fiscal shocks and assessment of feasible sustainable primary balances.
- Recommended measures to reduce fiscal deficit and increase efficiency:
  - Reduce energy (LNG) subsidies and fully implement targeted VAT to improve spending efficiency and generate non-negligible savings.
  - Conduct impact analysis of tax benefits used to promote investment to assess cost-effectiveness and scope for savings.
  - Deepen SOE reforms to capture efficiencies and transparently account for cross-subsidies.
  - Reduce budget fragmentation, especially related to Article 220 entities, to improve coordination in education and health and support fiscal sustainability.
  - Preserve savings in wages achieved in recent years and use public employment attrition rules to control spending until civil service reform can be implemented.
  - Preserve spending on public investment, which is already at low levels.

*Source: IMF staff calculations and analysis as presented in the provided content.*

### References

### References

### Literature Cited
- Acosta Ormaechea and Martinez, 2021 “A Guide and Tool for Projecting Public Debt and Fiscal Adjustment Paths with Local and Foreign Debt” International Monetary Fund Technical Note No. 2021/005.
- Caselli, Francesca, Hamid Davoodi, Carlos Goncalves, Gee Hee Hong, Andresa Lagerborg, Medas, Paulo, Anh Dinh Minh Nguyen, and Jiae Yoo, 2022, “The Return of Fiscal Rules”, IMF Staff Discussion Notes
- Checherita-Westphal  C., A. H. Hallett, and P. Rother, 2014, “Fiscal Sustainability Using Growth maximizing Debt Targets,” Applied Economics, 46, 638-647.
- Chudik A., K. Mohaddes, M. Pesaran, and M. Raissi. 2015. “Is There a Debt-Threshold Effect on Output Growth?” IMF Working Paper No.2015/197.
- Cordella, T., L. Ricci, and M. Ruiz-Arranz. 2010 “Debt Overhang or Debt Irrelevance?”, IMF Staff Papers 57(1), October 2010.
- Davoodi, H., P. Elger, A. Fotiou, D. Garcia-Macia, X. Han, A. Lagerborg, R. Lam, and P. Medas, 2022. "Fiscal Rules and Fiscal Councils: Recent Trends and Performance during the COVID-19 Pandemic." IMF Working Paper No. 22/11, International Monetary Fund, Washington, DC.
- Escolano, J., L. Jaramillo, C. Mulas-Granados, and G. Terrier, 2014, “How Much is a Lot? Historical Evidence on the Size of Fiscal Adjustments,” IMF Working Paper 14/179.
- Eyraud, Luc, Xavier Debrun, Andrew Hodge, Victor Duarte Lledo, Catherine A Pattillo, 2018, “Second-Generation Fiscal Rules: Balancing Simplicity, Flexibility, and Enforceability”, IMF Staff Discussion Notes
- Grau Pérez, Lorenzo and Viñales Guillama (2022) “Aportes para una reforma tributaria de segunda generación” Laboratorio Fiscal y Tributario
- International Monetary Fund, 2018, “How to Calibrate Fiscal Rules; a Primer” How-to -Notes 18/08, March 2018.
- International Monetary Fund, 2021, Fiscal Monitor. Washington, DC, October
- Pattillo, C., H. Poirson, and L. Ricci. 2011. “External Debt and Growth”, Review of Economics and Institutions, 2011, vol.2, issue 3.
- Pelaez, Fernando, 2022, “Devolución del IVA a hogares y personas en situación de vulnerabilidad”
- Vammalle and Rivadeneira (2019) “Budgeting in Uruguay: Towards modern budgeting practices in Uruguay” OECD Journal on Budgeting
- World Bank, 2021, “Uruguay Country-level institutional assessment”

### Chapter: Drivers of Financial Dollarization and the Role of Prudential Policies (Uruguay) — Key Findings and Analysis
- Long-standing features and historical context
  - Dollarization has been a long-standing feature of the Uruguayan economy, with wide acceptance of the dollar dating back to the 1960s and a peak after the 2002 crisis.
  - An inflation targeting regime has been in place since 2005.

- Stylized facts and magnitudes
  - About 75 percent of total deposits in the banking system are in dollars.
  - Households account for 72 percent of private sector foreign exchange deposits; corporations account for 28 percent.
  - Price dollarization is prevalent in housing and durable goods; real estate, appliances, jewelry, livestock, and other high-value items show significant dollar pricing.
  - Approximately 50 percent of the central government's market debt is denominated in foreign currency.
  - More than 75 percent of corporate debt is in dollars.
  - Around 25 percent of FX loans are estimated to be unhedged (measured as the ratio of FX loans granted to firms in the non-tradable sector).
  - Uruguay's average inflation is about 8 percent.
  - Uruguay's exchange rate depreciation volatility is among the highest among other Latin American dollarized economies.
  - Uruguay has relatively high GDP per capita in the region, low financial account restrictiveness (IMF FARI), low trade openness, and financial development similar to less developed countries.

- Mechanisms and empirical findings
  - Dollarization affects monetary policy transmission: a significant share of loans and deposits in dollars links interest rates to international rates and weakens the domestic interest rate channel.
  - The Minimum Variance Portfolio (MVP) model explains dollarization partly; staff calculations show MVP dollarization ratio only partially explains observed Uruguay levels.
  - Uncovered Interest Parity (UIP) analysis:
    - For 12-month deposits, the UIP condition holds on average (no systematic compensation for risk).
    - Volatility of the 12-month deposit UIP premium is primarily driven by changes in exchange rate expectations; interest rate differentials were generally stable over the last two decades.
  - Empirical VEC model (monthly data 2003–2020) — Cointegrating equation results:
    - Log of Share of Deposit Dollarization: baseline variable.
    - Deposit Interest Rate Differential (i-i*): coefficient 0.047*** (0.00656)
    - Log of ER (eop): coefficient 1.94*** (0.78075)
    - Log of ER 12-month expectations: coefficient -1.74*** (0.72554)
    - Error Correction Term: -0.0023
    - Johansen cointegration test indicates existence of a cointegrating vector.
  - Regression results indicate:
    - Higher interest rate differentials (domestic minus dollar deposits) are associated with lower dollarization.
    - Higher spot exchange rate (peso depreciation level) is associated with lower dollarization.
    - Expectations of future depreciation are associated with higher dollarization.

- Prudential tools and cross-country experience
  - Marginal reserve requirements for foreign currency (FC) deposits can discourage deposit dollarization by raising banks' cost of holding dollar deposits.
  - Peru is cited as a successful example where marginal reserve requirements, together with higher provisions for FC loans, helped reduce financial dollarization.
  - Uruguay had a relatively low level of marginal reserve requirement for foreign currency deposits until recently; only in the last year did it reach comparable levels.

### Policy Recommendations and Strategy
- Core elements of a comprehensive de-dollarization strategy:
  - Improve and enhance the monetary policy framework to deliver low and stable inflation.
  - Implement long-term structural policies aimed at reducing structural drivers of dollarization (e.g., strengthening monetary credibility, financial development, governance).
  - Deploy currency-differentiated reserve requirements (raise reserve requirements on dollar deposits relative to peso deposits) as a targeted prudential instrument to de-dollarize deposits.
  - Complement reserve requirement differentials with other prudential measures:
    - Differentiated provisions for loan losses by currency.
    - Currency-differentiated risk weights for loans in pesos and dollars.
  - Calibrate prudential measures recognizing country-specific characteristics and possible complementarities across policies.
  - Design measures to mitigate financial stability risks stemming from high shares of unhedged borrowers and high FX public and corporate debt.

*Prepared by Jesús Sánchez and Mauricio Vargas (WHD); sources and figures as presented in the original chapter.*

### 17.      The baseline regression analysis is based on annual data between 1999 and 2019 and

### The baseline regression analysis is based on annual data between 1999 and 2019

### Methodology and data
- Sample: 10 countries — Bolivia, Chile, Costa Rica, Dominican Republic, Guatemala, Honduras, Nicaragua, Paraguay, Peru, and Uruguay.
- Period: annual data between 1999 and 2019.
- Approach: panel regression to explain financial dollarization; country-specific time-series regressions for Uruguay (including monthly specifications).
- Key explanatory variables included:
  - Economic size (population and real GDP per capita)
  - Trade openness (as a percentage of GDP)
  - Capital account openness (proxied by the IMF's Financial Account Restrictiveness Index (FARI))
  - Net remittances
  - Governance indicators
  - Monetary and external performance variables: MVP estimates, exchange rate, inflation
  - In country-specific (monthly) models: FX and LCU deposit interest rates, reserve requirement differential, monetary policy instrument dummy, external factors (VIX, US inflation, US Treasury yields), and interest rate spreads.

### Main empirical findings (panel estimates and aggregate results)
- Most macroeconomic determinants are statistically significant and have the expected sign in preferred panel estimates.
- Positive and statistically significant correlations:
  - Dollarization is positively correlated with the exchange rate (log of exchange rate index) and the MVP term.
  - Higher net remittances are positively associated with higher dollarization.
- Inverse relationships:
  - Dollarization is inversely related to financial development (financial development index), financial account restrictiveness (FARI), and trade openness (as a percentage of GDP).
- Notes on trade openness:
  - The negative relationship between trade openness and dollarization here contradicts evidence in Della Valle et al. (2018) for a broader country set; the effect may depend on exports vs. imports dynamics.
- MVP interpretation:
  - The positive relationship between the MVP variable and dollarization supports the MVP model's theoretical framework (MVP accounts for the relative impact of exchange rate and inflation variance, and their covariance).

### Uruguay-specific quantitative results and drivers
- Country-specific regressions (annual and monthly) confirm panel findings and identify the most significant contributors to Uruguay’s dollarization levels:
  - Exchange rate
  - Financial development
  - Trade openness
- Contribution decomposition (Uruguay): exchange rate flexibility and appreciation are associated with lower dollarization; improvements in financial development have helped reduce financial dollarization; trade openness variations are influential.
- Prudential and interest-rate variables:
  - Reserve requirement differential (USD dep. req. minus peso dep. req.) negatively affects financial dollarization.
  - A one percent increase in the differential between reserve requirements in dollars and pesos would contribute to reduce financial dollarization levels by around 0.8 percentage points.
  - High-frequency (monthly) results: a one percentage increase in the reserve requirement differential between dollar and peso deposits decreases deposit dollarization 0.75 percentage points (Column 9, Table 3).
- Monetary policy instrument:
  - Implementation of inflation targeting with a short-term rate policy instrument (2007–2013, and again since late 2020) contributed to reducing financial dollarization.
- Inflation effect:
  - A reduction of inflation of 1 percentage point would lower dollarization by about 3.5 percentage points.
- External factors (monthly frequency):
  - Higher interest rate spreads between peso and dollar deposits reduce dollarization.
  - Higher US interest rates increase dollarization.
  - Lower US inflation increases dollarization (quantitatively small effect).
  - Increased global financial market volatility (VIX) encourages deposit dollarization (flight-to-safety effect).
- Credit dollarization:
  - Most findings hold for credit dollarization; monetary policy and prudential policies show consistent roles.
  - Some determinants differ in sign between deposit and credit dollarization (e.g., local currency vs. FX interest rates).

### Quantitative coefficients and notable estimates (high-level, as reported)
- Reserve requirement differential:
  - ~0.8 percentage points reduction in FX deposit share per one percentage point increase in differential (annual/country-specific interpretation).
  - 0.75 percentage points reduction in deposit dollarization per one percentage point increase in differential (monthly model, Column 9).
- Inflation:
  - 1 percentage point reduction in inflation → about 3.5 percentage points lower dollarization.
- Reserve requirement differential on FX credit:
  - An increase of one percentage point in the reserve requirement differential could result in a reduction of approximately 0.5 p.p. in the share of FX credit.
- Table-based coefficients (selected, reported significance as in source):
  - FD: Financial development index coefficients around -1.70, -1.65, -1.84, etc., with varying significance (examples in Table 3).
  - Trade Openness (perc. of GDP) coefficients around -0.33, -0.38, -0.31, etc.
  - Financial Account Restrictiveness coefficients around -0.43, -0.49, -0.50, etc.
  - Net Remittances (perc. of GDP) coefficients around 2.31, 1.85, 2.31, etc.
  - Log of Exchange Rate Index (eop, 2005=100) coefficients around 16.72, 13.03, 14.49, 14.57, 15.01, etc.
  - FX Deposits Interest Rates and other interest-rate related coefficients reported with statistical significance in Table 3.
- Model performance:
  - Panel R-squared reported as 0.65 in one specification; monthly-frequency specifications report higher R-squared in some cases (e.g., 0.94 for a monthly model reported).

### Policy implications and recommendations
- Core message: de-dollarization requires a comprehensive strategy combining structural improvements, macroeconomic stability, and prudential regulation.
- Recommended policy pillars:
  - Strengthen the monetary policy framework to deliver low and stable inflation (inflation credibility reduces financial dollarization).
  - Maintain sustained exchange rate flexibility, especially in periods of appreciation, to support de-dollarization.
  - Re-calibrate prudential policies, notably currency-differentiated reserve requirements, to reduce FX deposit and credit shares.
  - Coordinate long-term structural policies (financial development, market deepening) with short-term instruments (reserve requirement differentials, short-term interest rate policy instrument).
- Quantified policy impacts cited:
  - One percentage point increase in the reserve requirement differential between local currency and US dollar deposits: ~0.8 p.p. reduction in the share of FX deposits and ~0.5 p.p. reduction in the share of FX credit.
  - Use of the short-term interest rate as monetary policy instrument has a positive impact on de-dollarization.
- Further research:
  - Examination of additional prudential regulation instruments is needed; analysis of other prudential measures on price dollarization is beyond the scope of the paper.
  - Financial account restrictions materially affect dollarization in other economies; their role merits further exploration.

*Source: Authors’ calculations based on IMF and WB data.*

### Annex II. The MVP Model

### Annex II. The MVP Model

### Model setup and assumptions
- Currency choice is determined by hedging decisions on both sides of a bank’s balance sheet.
- Domestic depositors’ portfolios comprise three assets with real returns in terms of the domestic price index:
  - domestically held home currency deposits (HCD),
  - domestically held foreign currency deposits (FCD),
  - cross-border foreign currency deposits (CBD).
- Due to foreign exchange rate risk, dollar deposits (at home or abroad) are imperfect substitutes for home currency deposits.
- Deposits held locally are imperfect substitutes for deposits held abroad.

### MVP estimate for the level of dollarization
- In its simplest version, the MVP estimate for the levels of dollarization depends on ER depreciation and inflation volatilities only.
- The share of deposits in dollars predicted by the MVP is defined as:
  - 휆휆∗ = 휎휎휋휋,휋휋2 + 휎휎휋휋,푠푠2
    휎휎휋휋,휋휋2 + 휎휎푠푠,푠푠2 + 2휎휎휋휋,푠푠2
- Definitions of variance and covariance terms:
  - 흈흈흅흅,흅흅ퟐퟐ is the variance of inflation.
  - 흈흈흅흅,풔풔ퟐퟐ is the covariance between inflation and real exchange rate depreciation.
  - 흈흈풔풔,풔풔ퟐퟐ is the variance of real exchange rate depreciation.
- The dollarization level implied by the MVP model is equivalent to the coefficient of the pass-through from nominal exchange rate to inflation.

### Equivalence between MVP and pass-through coefficient (proof summary)
- Define identity S = E P⁄, where S is the real exchange rate, E is the nominal exchange rate (local currency per dollar), and P is the level of domestic prices.
- Expressed in percentage changes (approximation): s = e − π, where s is the real depreciation rate, e is the nominal depreciation rate, and π is inflation. (The approximation assumes that the term (s∙π) is small.)
- The common measure of pass-through is the coefficient β from:
  - π = α + β·e + ε
- The estimated coefficient 훽̂ corresponds to:
  - 훽̂ = 휎휎휋휋,푒푒2 휎휎푒푒,푒푒2
    = 휎휎휋휋,(푠푠+휋휋)2 휎휎(푠푠+휋휋),(푠푠+휋휋)2
    = 휎휎푠푠,휋휋2 + 휎휎휋휋,휋휋2 휎휎푠푠,푠푠2 + 휎휎휋휋,휋휋2 + 2휎휎휋휋,푠푠2
    = 휆휆∗
- Therefore, the MVP-implied dollarization share (휆휆∗) equals the estimated pass-through coefficient (훽̂).

### Key implications and interpretation
- Dollarization (share of deposits denominated in dollars) is driven by relative variances and covariances of inflation and real exchange rate depreciation; specifically, higher variance of real ER depreciation and higher covariance between inflation and ER depreciation increase the predicted dollar share.
- The MVP provides a theoretical link between statistical estimates of exchange rate pass-through and observed currency composition of deposits: the MVP dollarization level equals the pass-through coefficient from nominal exchange rate to inflation.
- The approximation used (s = e − π) requires that the product (s∙π) is small.

_Source: 1uryea2023002 - Annex II. The MVP Model (https://www.imf.org/-/media/files/publications/cr/2023/english/1uryea2023002.pdf)_

### 9. Uruguay has made great strides in enhancing its disaster risk preparedness and

### 9. Uruguay has made great strides in enhancing its disaster risk preparedness and 

### Disaster risk preparedness and contingency mechanisms
- 2020: National Policy for Disaster and Emergency Integrated Risk Management enacted to identify risks, mainstream risk management across public policies and minimize disaster impacts. (Decree 66/020 (2020))
- Uruguay has designed contingency mechanisms to mitigate fiscal impacts of disasters:
  - 2014: Pioneered a global-first weather hedge with the World Bank: an 18-month weather coverage agreement for 450 million dollars with payouts triggered by drought impacts on hydropower reservoirs and determined by drought severity and oil price levels.
- Central Bank of Uruguay (BCU) objectives:
  - Assess incorporation of climate risks into financial sector regulations.
  - Increase data collection and exposure modelling capacity in coordination with relevant public agencies. (BCU’s Hoja de Ruta de Sostenibilidad (2022))

_Sources: Ministry of Environment, IMF staff calculations._

### Policies supporting climate change mitigation — structural transformation and outcomes
- Uruguay adopted structural transformations to shape a resilient, low-carbon development model and gained strategic advantages for markets with tighter environmental regulations.
- Energy transition results and figures:
  - Energy Policy 2005-2030 guided investments of US$8 billion during 2010-2016.
  - By 2018, Uruguay generated over 98 percent of all its electricity from renewable sources, primarily wind and hydropower.
  - More than a third of electricity comes from wind farms; Uruguay generates a surplus and exports energy to Argentina and Brazil.
  - Transition to renewable electricity is estimated to have reduced CO2 emissions by 10 million tonnes (2014-20).
  - 2021: Foundations set for National Green Hydrogen Strategy.

### Transport decarbonization
- Transport accounts for two thirds of the country’s oil consumption and constitutes 56 percent of total CO2 emissions.
- Electric mobility initiatives:
  - Since 2020: Pilot program with 32 electric buses in Montevideo and Canelones.
  - Electric buses: higher procurement costs but allow investment recovery in 4 to 8 years when electricity from renewables is low-cost.
  - Night recharging helps reduce day-night demand imbalance from high renewable penetration.
  - E-mobility measures integrated in the Sustainable Urban Mobility Strategy.

### Green hydrogen strategy and prospects
- Green hydrogen relevance: target sectors where direct electrification is complex/costly (long-distance heavy transport, thermal energy, industrial energy, raw).
- Green Hydrogen Roadmap projections:
  - By 2030: production costs between 1.2 and 1.5 USD/kgH2 for a scale above 500 MW.
  - Competitive positioning among net exporters (Chile, Saudi Arabia, Oman, Namibia, Australia) is feasible at these costs.
- ANCAP-led actions:
  - Preparing tender rounds to create a maritime hydrogen production hub powered by offshore wind; winning bidders will have up to 10 years to explore and assess, with the option to present a full development plan.
  - Short-term (early 2023): seeking expressions of interest from firms to produce e-fuels using carbon captured from biofuel subsidiary ALUR’s bioethanol plant.
  - Availability of biogenic CO2 at constant rate and ANCAP’s logistics/midstream infrastructure could facilitate onshore green hydrogen projects.

### Carbon pricing and fiscal incentives
- 2022: New pricing mechanism enacted (Ley de Rendición de Cuentas 19,996).
  - Initial price set at 137 dollars per ton of carbon dioxide.
  - Excise tax on gasolines modified to include a CO2-linked component, covering around 80 percent of Uruguay’s vehicle fleet.
- Excise tax differentials for vehicle types:
  - Electric vehicles: average excise tax of 0 percent.
  - Hybrid electric vehicles: average excise tax of 4 percent.
  - Traditional gasoline vehicles: average excise tax of 29 percent.
- Other incentives include no import tariffs and discounts on electricity rates for charging stations.

### Climate-smart agriculture and productivity gains
- Holistic approach addressing food security, human health, export competitiveness and environmental sustainability.
- Productivity trends and emissions intensity:
  - Livestock productivity increased from an average of 78 kg per hectare in 1995-98 to 93 kg per hectare in 2015-18.
  - Total emissions associated with agricultural production increased, but productivity rose faster, yielding lower emissions intensity.
- Climate-smart measures and multisectoral impacts:
  - Integrated pasture management: adaptation (forage availability), mitigation (reduced emissions, improved fodder quality), productivity gains.
  - Water management/supply techniques: adaptation (water availability), mitigation (lower emissions through pasture management), productivity stabilization.
  - Use of concentrate feeds and feed reserves: adaptation (food availability in extremes), mitigation (reduced emissions per unit), productivity maintenance/improvement.
- Traceability and global public goods:
  - Since 2011: National system for livestock information achieved 100 percent traceability of cattle, first in the Americas, enabling consumers to know origin of beef.

### The road ahead — priorities and policy recommendations
- Strengthen adaptation, disaster risk management and macro-fiscal modelling:
  - Supplement risk retention instruments with contingency-specific products for weather-related catastrophes.
  - Scale up risk transfer instruments (e.g., agricultural insurance) using improved climate information services and geo-referenced crop yields and soil management data.
  - Broaden agro-ecological watershed management and advance integrated water resources management to sustain drinking water quality and supply.
  - Identify priority adaptation investments and policy reforms to attract private sector resources based on national adaptation plans.
  - Enhance institutional capacity to model fiscal impacts from climate hazards (coastal floods, excessive rainfall, droughts) and integrate these into the national budget.
- Align financing strategies with environmental outcomes:
  - Advocate for multilateral development bank financing instruments aligned with national/global climate commitments.
  - Tap innovative sovereign financing instruments (such as Sustainability-Linked Loans) that i) embed climate and nature-based indicators and ii) link financial terms to performance against climate commitments to reduce transition costs and incentivize sustainable policymaking.
  - Use innovative financing to alter risk-return profiles and scale up private climate finance.
- Deepen decarbonization and strengthen export competitiveness:
  - Mainstream climate-smart agriculture to consolidate Uruguay’s brand and bolster export competitiveness ahead of tighter environmental regulations in export markets.
  - Promote e-mobility transition and expand charging infrastructure, leveraging the green electricity matrix.
  - For green hydrogen: plan new energy and logistics infrastructures, develop local human capital, and establish the required regulatory framework to encourage private investment and mobilize resources.

*Sources: Ministry of Environment; IMF staff calculations.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1uryea2023002.pdf_