## _cr06197 - 540.9 million, were extended to an obligations basis.

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---

### Economic developments — key findings
- Growth remains strong and is likely to have exceeded the 2005 target of 6 percent.
- Fiscal results: 2005 primary surplus of 3.8 percent of GDP compared to the 3.5 percent target.
- Inflation: edged up to 6.6 percent, but is within the central bank’s target range.
- International reserves have strengthened further reflecting significant capital inflows.
- Banking system: reacted calmly to the recent intervention of the credit cooperative COFAC; insured deposits have begun to be paid.
- Public debt: declined to 70 percent of GDP by end-2005; average maturity lengthened from 6 years at end-2004 to 7½ years at end-2005.
- Medium-term financing requirements average 8½ percent of GDP in 2007–08.

### Program status and review issues
- The program is on track.
- All performance criteria for this review are estimated to have been met except:
  - Submission of tax reform (prior action for this review) — expected to be met with a short delay; a waiver is requested.
- Final data will be reported prior to the Board meeting.
- Policy discussions focused on the macroeconomic framework and the structural reform agenda for 2006 (tax, financial sector, pro-growth reforms).
- A ¼ percent of GDP fiscal adjustor (up to US$50 million) is proposed for use of privatization revenue for infrastructure investment.
- Authorities request deferral of the June performance criterion on approval of tax reform to October; the new tax system will become effective in January 2007 as previously envisaged.

### Fund relations and mission
- Last Article IV consultation concluded on July 11, 2003; an Ex Post Assessment was considered on March 18, 2005.
- Next Article IV consultation planned for mid-2006.
- Mission visited Montevideo during February 10–23; met with Finance Minister Astori, Central Bank President Cancela, other senior officials, and private sector representatives.
- Mission team: M. Piñón (Head), J. Canales-Kriljenko, S. Eble (all WHD), A. Hajdenberg (FAD), H. Finger (PDR), G. Gelos (Resident Representative). R. Teja (WHD) and D. Vogel (OED) participated in some policy discussions.

### Background and macroeconomic outlook
- 2005: GDP growth likely exceeded the target of 6 percent; real GDP surpassed its pre-recession peak level of 1998.
- 2006 growth envisaged to reach at least 4 percent.
- Labor market: employment has risen; unemployment stable at 12 percent.
- Inflation details:
  - end-2005 inflation was 4.9 percent;
  - 12-month inflation edged up to 6.6 percent in February.
  - Central bank inflation target ranges: 5–7 percent for March 2006 and 4½–6½ percent for end-2006.
- External operations and reserves:
  - ministry placed US$500 million in January; central bank purchased some US$450 million between November and February 2006.
  - Official reserves (millions of U.S. dollars): 2,087 (2003), 2,512 (2004), 3,110 (2005), 3,438 (2006 est.), 3,255 (2006 rev.), 3,865 (2007 proj.), 4,015 (2008 proj.), 4,165 (2009 proj.).
- Risks: high public debt, the dollarized financial system, and pressures for public expenditure.
- Political risk: bridge blockings related to pulp mill protests could significantly affect trade and tourism if sustained.

### Policy discussions — Fiscal and debt management
- Revenue administration reforms progressing; social security agency and tax directorate exceeded their 2005 targets.
- Restructure of customs expected to be ready around mid-year (structural benchmark for end-August).
- Public enterprises expected to improve performance in 2006 after weather-related electricity generation cost overruns and rapid international oil price increases in 2005.
- Authorities encouraged to devote adequate efforts and resources to ensure tax reform is effective by 2007, especially administration of the new personal income tax.
- Fiscal adjustor detail:
  - up to US$50 million (¼ percent of GDP) proposed for projects during July 2006–June 2007, including:
    - up to US$25 million in railroad infrastructure;
    - about US$14 million in a dredging project in the port of Montevideo.
- Authorities reiterate primary surplus goals: 3.7 percent of GDP for 2006 and 4.0 percent for 2007.
- Draft tax reform package expected to be submitted to congress in March (slightly later than end-February performance criterion).
  - Key features: additional personal income tax bracket (estimated revenue neutral), limited deductions for health expenditures, and a smaller reduction in the top VAT rate (to 22 percent instead of 21 percent) until revenue targets are achieved.
- Authorities requested modification of the performance criterion to change beginning of implementation to end-October 2006 while working on implementing regulations so law can go into effect in January 2007.

### Policy discussions — Debt office and strategy
- New debt office began operations; objectives include reducing dollar debt and smoothing the repayment profile.
- Debt office activities: building a debt database; finalizing government financing plan; leading issuance of US$500 million on international capital markets.
- Debt strategy being prepared with Fund technical assistance: develop local capital market, increase share of peso and inflation-indexed debt, lengthen maturities, smooth amortization profile.

### Policy discussions — Monetary and exchange rate policy
- Recent exchange-rate stability viewed by authorities as temporary; nominal exchange rate vis-à-vis the U.S. dollar remained flat for over a month due to foreign exchange purchases by the authorities and Treasury forward operations.
- Staff advice: allow exchange rate to better reflect market conditions; avoid signaling a floor and the difficulties of multiple objectives with one instrument.
- Authorities’ rationale: interventions were opportunistic to build gross reserves and to break a cycle of appreciation expectations; inflation remains the overriding objective of monetary policy.
- Communication change: central bank has begun to deemphasize base money targets publicly and now announces the annual growth rate of intermediate target M1 instead of base money target ranges for the four quarters ahead, while maintaining base money as internal operational variable.
- Authorities aim to move gradually toward a fully-fledged inflation targeting framework; staff notes further analytical work needed on inflation forecasting and transmission channels.

### Monetary policy and inflation (authorities’ view)
- Authorities: strong increase in monetary aggregates toward the end of last year was necessary to satisfy money demand.
- Inflation status:
  - Inflation is well within their target range.
  - Recent pick-up in inflation partly explained by temporary factors, including the timing of tariff and salary adjustments.
  - Inflation expectations for 2006 were within the target range.
- Risks and stance:
  - Authorities acknowledged risks due to uncertainty about the evolution of money demand.
  - Staff and the authorities agreed that inflationary risks had increased and that pressures needed to be monitored carefully over the next months.
  - Authorities reaffirmed commitment to tighten policies as necessary to meet the inflation targets.
  - Decision: for now, it would be more prudent not to accommodate last year’s overrun in M0 and to maintain the agreed targets for 2006, implying a substantial slowdown in money growth in the remainder of 2006.
  - The appropriateness of this stance will be reassessed at the next review.
- End-2006 target for M1 growth announced in December: 12.3 percent.

### Financial sector and structural agenda
- Banking system indicators show steady improvement (capital adequacy, return on assets, nonperforming loans improved 2002–2005).
- Public bank restructuring continues:
  - Detailed implementation plan for BHU restructuring was adopted (structural benchmark for end-February).
  - Sale of Nuevo Banco Comercial (NBC) expected to be completed by April (structural benchmark for end-June).
  - Draft law on financial sector reform is being discussed in the Senate.
- BHU restructuring key elements:
  - Transform BHU into a residential mortgage lender operating on a commercial basis and cease social activities (to be transferred to the Ministry of Housing).
  - Transfer nonperforming loans to a fiduciary trust and recapitalize BHU by end-August (new performance criterion).
  - By November: transfer remaining problem assets, put regulatory measures in place, require BHU to meet prudential standards and submit a viable business plan (new performance criterion).
  - Business plan will include measures to further reduce overhead and other costs, improve managerial structure, corporate governance, and internal control systems.
  - BHU will refrain from lending until the Bank Superintendency considers that BHU has the systems in place to resume sound lending.
- COFAC intervention:
  - Intervention occurred before liquidity became solvency problem; majority of depositors fully protected within deposit insurance scheme; no use of government funds other than previously envisaged US$60 million for capital and loans to the deposit insurance agency (to be recovered).
  - Any newly created institution building on COFAC's assets would have to be well-capitalized and provide a viable business plan.
  - Discussions with the Venezuelan Development Bank (Bandes) for a purchase and assumption operation were underway.

### Growth agenda and structural reforms
- Tripartite business environment commission preparing to publish recommendations to boost growth and investment (end-March structural benchmark).
- Government actions underway: tax reform and private-public associations to improve public infrastructure.
- Draft law to prevent anticompetitive behavior recently sent to congress.
- Bankruptcy legislation reform: another expert seminar to inform the working group preparing a draft law, submission of which is an end-June structural benchmark.
- Box 2 — Key proposed reforms (summary of priorities):
  - Increase competition and strengthen legal framework: amend bankruptcy procedures to include a Chapter 11-type regime (to be submitted to congress by June); strengthen competition law (proposal currently with congress); improve disclosure requirements of corporate financial information.
  - Increase tax system efficiency and reduce inequities: eliminate exemptions, introduce a personal income tax, simplify and reduce corporate income taxation, and eliminate low revenue yielding taxes. A proposal including these changes has been submitted to congress.
  - Public enterprise reforms: improve governance, better link wages to productivity, and transparent tariff setting.
  - Simplify business start-up procedures: facilitate business registration and create an investor relations office.
  - Improve infrastructure: strengthen public investment framework; establish framework for private participation in PPPs; improve public expenditure management.

### Program financing and monitoring
- External bond placements: close to half of the external bond placements assumed under the program baseline for 2006 have already been secured.
  - January 2006 issuance: US$500 million international bond under high demand and favorable conditions; proceeds used, in part, to advance amortization payments to the World Bank and IDB (including US$237 million falling due in 2007).
- Expected World Bank and IDB disbursements: US$307 million (require firm implementation of associated conditionality).
- Uruguay: 2006 Public Sector Financing (Nonfinancial public sector, in US$ million) — selected figures as in source:
  - Amortization 2,032 2,303
  - Of which: World Bank/IDB 505 741
  - IMF 630 678
  - Gross Financing 2,399 2,623
  - Multilaterals — Of which: World Bank/IDB 432 307; IMF 543 543
  - Market financing — Long-term bond financing 916 1,262 — Of which: prefinancing for 2007 400 400
  - UI/Letras 496 455
  - Other 125 6
- Program adjustments:
  - Two new performance criteria on BHU restructuring.
  - Modification of the performance criterion on tax reform implementation.
  - New adjustor on public investment proposed.
  - All other quantitative performance criteria for 2006 remain as established at the time of the last review.

### Safeguards and oversight
- Authorities committed to implementing recommendations of the September 2005 safeguards assessment.
- Adopted recommendations include incorporation of all Fund liabilities in the BCU’s balance sheet and amending criteria for selection and appointment of the external audit firm.
- With implementation of the financial sector law (currently in congress), key safeguards recommendations would be in place.

### Staff appraisal — key assessments and recommendations
- Recent performance:
  - Sound policies and a supportive external environment have sustained strong economic performance.
  - Economy has grown at healthy rates; real wages recovering; inflation remains within the target range though increased.
  - Continued strong capital goods imports suggest positive activity this year.
- Structural reform momentum:
  - Maintaining the structural reform agenda is required to sustain medium-term growth.
  - Transforming commission recommendations into concrete policy will be a focus of the next review; decisive implementation thereafter is essential.
- Fiscal policy:
  - Fiscal performance should remain strong if administrative reforms continue forcefully.
  - Revenues in both the social security agency and the tax directorate continue to exceed expectations.
  - Critical to maintain cautious expenditure execution, adjust public tariffs as needed, and continue administrative reforms to ensure smooth implementation of the tax reform and attainment of ambitious revenue targets.
- Tax reform:
  - Draft tax reform is a major step: introduction of a personal income tax, reduction of rates and number of exemptions, and system simplification.
  - Staff supports the request to move the date for congressional approval of tax reform from June to October to preserve the January implementation date.
- Public investment and PPPs:
  - Staff supports proposed adjustor to fiscal targets if investments are well chosen and financed through privatization proceeds to avoid affecting debt sustainability.
- Monetary policy:
  - Monetary policy has been successful and needs to remain focused on achieving the inflation objective under a flexible exchange rate.
  - Staff supports deemphasizing base money targets in favor of the inflation objective, accompanied by strengthened public communication on central bank inflation projections.
  - Continued accumulation of reserves is welcome but maintain sufficient exchange flexibility and avoid signaling a floor on the exchange rate.
  - Decision to maintain end-2006 indicative monetary targets despite a higher-than-expected starting base is welcomed as prudent.
- Remaining vulnerabilities and priorities:
  - Debt levels remain high, reserves relatively low given high dollarization, and substantial fiscal contingencies in the financial system remain.
  - Important to accelerate debt reduction, improve debt composition, and strengthen the financial sector.
  - Further restructuring of public banks is key to containing contingent fiscal liabilities.
  - Strict adherence to BHU implementation plan is crucial to minimize fiscal risks.

### Program assessment and Board action
- Staff recommends completion of the third review.
- All performance criteria have been observed, except:
  - Submission of the tax reform (expected to be completed as a prior action for the Board discussion); staff supports the associated waiver.
- Board action and waiver:
  - 85.8 million (about US$123.6 million) immediately available to Uruguay.
  - The Board granted a waiver for the non-observance of the performance criterion on the submission to Congress of a comprehensive tax reform bill, in view of the brief delay in submission.

### Deputy Managing Director / Acting Chair — Agustín Carstens: assessment and priorities
- Overall assessment:
  - Uruguay’s performance under the Stand-By Arrangement "continues to exceed expectations."
  - Outcomes: rapid growth, low inflation, a strengthened external position, and an improved debt structure.
  - Outlook: "continued strong performance in 2006," but macroeconomic vulnerabilities remain.
- Fiscal policy:
  - "Overperformance on fiscal policy" demonstrates authorities’ commitment.
  - Intent to establish an adjustor to the program’s fiscal targets to make room for additional, high-quality infrastructure investment.
- Monetary policy and reserves:
  - "Monetary policy has successfully contained inflation in the low single digits."
  - Recommendation: maintain exchange rate flexibility; monitor incipient inflationary pressures and adjust policies as necessary.
- Financial sector:
  - Financial sector reforms progressing; BHU restructuring to ensure sound mortgage lending and minimize fiscal costs.
  - COFAC being transformed into a new, financially sound institution.
- Exit and resilience:
  - Continued strong macroeconomic policies and structural reforms will support a lasting exit from Fund support, increase resilience to shocks, and raise growth prospects.
- Administrative note:
  - "The recent establishment of a debt management office is welcomed."

### Executive Director statement (Uruguay) — Hector Torres and David Vogel
- Macroeconomic performance and reforms:
  - Prudent macroeconomic policies and commitment to rule of law underpin robust economic evolution.
- Growth and external sector:
  - Economic growth exceeded program projections; market diversification increasing.
- Fiscal outcomes and employment:
  - Primary fiscal surplus of 3.8 percent of GDP in 2005, exceeding program target.
- Financial market access and debt prefinancing:
  - In 2006, Uruguay placed US$500 million of sixteen-year bond in January, and US$500 million of thirty-year bond in March.
  - Country closed the 2006 financial gap and prefinanced some portion of 2007, making advance payments to the World Bank and IDB.
- Infrastructure investment adjustor (July 2006 to June 2007):
  - One-time investment outlays may temporarily reduce the primary surplus "up to about a 1⁄4 percent of GDP."
  - Outlays will be fully financed by non-debt creating flows and used for high-quality projects meeting three pre-requisites (investment only; positive fiscal impact early; direct impact on competitiveness).
  - Projects selected only after comprehensive cost-benefit studies by recognized firms.
- Closing:
  - Authorities reiterate gratitude to staff, Management, and Executive Directors for support of Uruguay’s social and economic structural reforms.

*Source: IMF staff report (text provided).*

### 540.9 million, were extended to an obligations basis.

### _cr06197 - 540.9 million, were extended to an obligations basis.

### Economic developments — key findings
- Growth remains strong and is likely to have exceeded the 2005 target of 6 percent.  
- Fiscal results: 2005 primary surplus of 3.8 percent of GDP compared to the 3.5 percent target.  
- Inflation: edged up to 6.6 percent, but is within the central bank’s target range.  
- International reserves have strengthened further reflecting significant capital inflows.  
- Banking system: reacted calmly to the recent intervention of the credit cooperative COFAC; insured deposits have begun to be paid.  
- Public debt: declined to 70 percent of GDP by end-2005; average maturity lengthened from 6 years at end-2004 to 7½ years at end-2005.  
- Medium-term financing requirements average 8½ percent of GDP in 2007–08.

### Program status and review issues
- The program is on track.  
- All performance criteria for this review are estimated to have been met except:  
  - Submission of tax reform (prior action for this review) — expected to be met with a short delay; a waiver is requested.  
- Final data will be reported prior to the Board meeting.  
- Policy discussions focused on the macroeconomic framework and the structural reform agenda for 2006 (tax, financial sector, pro-growth reforms).  
- A ¼ percent of GDP fiscal adjustor (up to US$50 million) is proposed for use of privatization revenue for infrastructure investment.  
- Authorities request deferral of the June performance criterion on approval of tax reform to October; the new tax system will become effective in January 2007 as previously envisaged.

### Fund relations and mission
- Last Article IV consultation concluded on July 11, 2003; an Ex Post Assessment was considered on March 18, 2005.  
- Next Article IV consultation planned for mid-2006.  
- Mission visited Montevideo during February 10–23; met with Finance Minister Astori, Central Bank President Cancela, other senior officials, and private sector representatives.  
- Mission team: M. Piñón (Head), J. Canales-Kriljenko, S. Eble (all WHD), A. Hajdenberg (FAD), H. Finger (PDR), G. Gelos (Resident Representative). R. Teja (WHD) and D. Vogel (OED) participated in some policy discussions.

### Background and macroeconomic outlook
- 2005: GDP growth likely exceeded the target of 6 percent; real GDP surpassed its pre-recession peak level of 1998.  
- 2006 growth envisaged to reach at least 4 percent.  
- Labor market: employment has risen; unemployment stable at 12 percent.  
- Inflation details: end-2005 inflation was 4.9 percent; 12-month inflation edged up to 6.6 percent in February. Central bank inflation target ranges: 5–7 percent for March 2006 and 4½–6½ percent for end-2006.  
- External operations and reserves: ministry placed US$500 million in January; central bank purchased some US$450 million between November and February 2006. Official reserves (millions of U.S. dollars): 2,087 (2003), 2,512 (2004), 3,110 (2005), 3,438 (2006 est.), 3,255 (2006 rev.), 3,865 (2007 proj.), 4,015 (2008 proj.), 4,165 (2009 proj.).  
- External current account balance and projections (percent of GDP): shown for multiple years in source tables; overall vulnerability concerns include high public debt, the dollarized financial system, and pressures for public expenditure.  
- Political risk: bridge blockings related to pulp mill protests could significantly affect trade and tourism if sustained.

### Policy discussions — Fiscal and debt management
- Revenue administration reforms progressing; social security agency and tax directorate exceeded their 2005 targets.  
- Restructure of customs expected to be ready around mid-year (structural benchmark for end-August).  
- Public enterprises expected to improve performance in 2006 after weather-related electricity generation cost overruns and rapid international oil price increases in 2005.  
- Authorities encouraged to devote adequate efforts and resources to ensure tax reform is effective by 2007, especially administration of the new personal income tax.  
- Fiscal adjustor: up to US$50 million (¼ percent of GDP) proposed to accommodate higher investment financed with privatization proceeds for projects during July 2006–June 2007, including:  
  - up to US$25 million in railroad infrastructure;  
  - about US$14 million in a dredging project in the port of Montevideo.  
- Authorities reiterate primary surplus goals: 3.7 percent of GDP for 2006 and 4.0 percent for 2007; adjustor seen as a safety valve.  
- Draft tax reform package expected to be submitted to congress in March (slightly later than end-February performance criterion). Key features: additional personal income tax bracket (estimated revenue neutral), limited deductions for health expenditures, and a smaller reduction in the top VAT rate (to 22 percent instead of 21 percent) until revenue targets are achieved. Authorities requested modification of performance criterion to change beginning of implementation to end-October 2006 while working on implementing regulations so law can go into effect in January 2007.

### Policy discussions — Debt office and strategy
- New debt office began operations; objectives include reducing dollar debt and smoothing the repayment profile.  
- Debt office activities: building a debt database; finalizing government financing plan; leading issuance of US$500 million on international capital markets.  
- Debt strategy being prepared with Fund technical assistance: develop local capital market, increase share of peso and inflation-indexed debt, lengthen maturities, smooth amortization profile.

### Policy discussions — Monetary and exchange rate policy
- Recent exchange-rate stability viewed by authorities as temporary; nominal exchange rate vis-à-vis the U.S. dollar remained flat for over a month due to foreign exchange purchases by the authorities and Treasury forward operations.  
- Staff advice: allow exchange rate to better reflect market conditions; avoid signaling a floor and the difficulties of multiple objectives with one instrument.  
- Authorities’ rationale: interventions were opportunistic to build gross reserves and to break a cycle of appreciation expectations; inflation remains the overriding objective of monetary policy.  
- Communication change: central bank has begun to deemphasize base money targets publicly and now announces the annual growth rate of intermediate target M1 instead of base money target ranges for the four quarters ahead, while maintaining base money as internal operational variable.  
- Authorities aim to move gradually toward a fully-fledged inflation targeting framework; staff notes further analytical work needed on inflation forecasting and transmission channels.

### Financial sector and structural agenda
- Banking system indicators show steady improvement (capital adequacy, return on assets, nonperforming loans improved 2002–2005).  
- Public bank restructuring continues: a detailed implementation plan for BHU restructuring was adopted (structural benchmark for end-February).  
- Sale of Nuevo Banco Comercial (NBC) expected to be completed by April (structural benchmark for end-June).  
- Draft law on financial sector reform is being discussed in the Senate.  
- Structural agenda progress: growth commission proposals (structural benchmark for end-March); five-year spending plan enacted in December 2005 (structural benchmark for end-February); progress on pension, revenue administration, bankruptcy, and budget reforms.  
- Final data on all performance criteria will be provided ahead of the Board meeting.

*Source: IMF staff report (text provided).*

### 14. The authorities explained that the strong increase in monetary aggregates toward

### 14. The authorities explained that the strong increase in monetary aggregates toward

### Monetary policy and inflation
- Authorities: strong increase in monetary aggregates toward the end of last year was necessary to satisfy money demand.
- Inflation status:
  - Inflation is well within their target range.
  - Recent pick-up in inflation partly explained by temporary factors, including the timing of tariff and salary adjustments.
  - Inflation expectations for 2006 were within the target range.
- Risks and stance:
  - Authorities acknowledged risks due to uncertainty about the evolution of money demand.
  - Staff and the authorities agreed that inflationary risks had increased and that pressures needed to be monitored carefully over the next months.
  - Authorities reaffirmed commitment to tighten policies as necessary to meet the inflation targets.
  - Decision: for now, it would be more prudent not to accommodate last year’s overrun in M0 and to maintain the agreed targets for 2006, implying a substantial slowdown in money growth in the remainder of 2006.
  - The appropriateness of this stance will be reassessed at the next review.

### Financial Sector Reforms
- BHU restructuring implementation plan adopted; objectives:
  - Transform BHU into a residential mortgage lender operating on a commercial basis and cease social activities (to be transferred to the Ministry of Housing).
  - Transfer nonperforming loans to a fiduciary trust and recapitalize BHU by end-August (new performance criterion).
  - By November: transfer remaining problem assets, put in place regulatory measures to refocus BHU solely on residential mortgage lending on a commercial basis, require BHU to meet all prudential standards and submit a viable business plan (new performance criterion).
- COFAC intervention highlighted strengthening of oversight and financial system:
  - For the first time in recent Uruguayan history, a bank intervention occurred (i) before a liquidity problem became a solvency problem; (ii) with the majority of depositors fully protected within a deposit insurance scheme; and (iii) without the use of government funds (other than through the previously envisaged US$60 million for capital and loans to the deposit insurance agency, to be recovered through deposit insurance premia and asset recovery).
  - Any newly created institution building on COFAC's assets would have to be well-capitalized and provide a viable business plan.
  - Authorities noted discussions with the Venezuelan Development Bank (Bandes) for a purchase and assumption operation were underway.

Box 1 — BHU Restructuring (key elements reiterated)
- Background: 2002–2004 efforts included adopting a modified charter, transferring part of nonperforming loan portfolio (US$102 million book value) to a fiduciary trust (beneficiary: Ministry of Finance), and reducing BHU staff and labor costs by about 50 percent.
- By end 2005, BHU was not complying with prudential regulations, including reserve and capital requirements; BHU does not appear to pose a systemic liquidity risk.
- New plan focuses BHU’s mandate on commercial activities and transfers social housing policy to the Ministry of Housing.
- Plan calls for:
  - Transferring BHU’s nonperforming assets to a fiduciary trust with mandate, incentives, and resources to maximize the net present value of its assets.
  - Transferring to the Ministry of Finance BHU’s liabilities to BROU and the public sector in the amount needed to capitalize and restructure BHU, and with a view to reducing currency and maturity mismatches.
  - Adopting a business plan satisfactory to the Bank Superintendency that demonstrates BHU’s ability to generate positive cash flows and profits going forward.
- Business plan will include measures to further reduce overhead and other costs in line with the reduced size of its balance sheet, improve managerial structure, corporate governance, and internal control systems.
- BHU will refrain from lending until the Bank Superintendency considers that BHU has the systems in place to resume sound lending.

### Growth agenda and structural reforms
- Tripartite business environment commission preparing to publish recommendations to boost growth and investment (end-March structural benchmark); work will become part of a presidential growth initiative.
- Government actions already underway include tax reform and private-public associations to improve public infrastructure.
- Draft law to prevent anticompetitive behavior recently sent to congress.
- Bankruptcy legislation reform: another expert seminar to inform the working group preparing a draft law, submission of which is an end-June structural benchmark.
- Box 2 — Key proposed reforms (summary of priorities):
  - Increase competition and strengthen legal framework: amend bankruptcy procedures to include a Chapter 11-type regime (to be submitted to congress by June); strengthen competition law (proposal currently with congress); improve disclosure requirements of corporate financial information.
  - Increase tax system efficiency and reduce inequities: eliminate exemptions, introduce a personal income tax, simplify and reduce corporate income taxation, and eliminate low revenue yielding taxes. A proposal including these changes has been submitted to congress. Ongoing improvements in revenue administration are reducing tax evasion.
  - Public enterprise reforms: improve governance, better link wages to productivity, and transparent tariff setting to bring down high cost of services provision.
  - Simplify business start-up procedures: facilitate business registration and create an investor relations office.
  - Improve infrastructure: strengthen public investment framework; establish framework for private participation in PPPs; improve public expenditure management to make room for higher capital outlays in the budget.
- Labor relations:
  - Authorities emphasized labor-business relations were sound.
  - Staff concerned about reports of recent conflicts and facility takeovers by striking workers; authorities described these as isolated incidents and preparing legislation clarifying rights and responsibilities of striking workers.
  - Tripartite wage councils have helped stabilize labor relations.
- Pulp-mill projects:
  - Implementation proceeding as planned.
  - Once fully operational, plants will generate about 1.3 percent of GDP in additional exports.
  - Authorities confident projects will proceed smoothly despite disruptions (road blockings).

### Program financing and monitoring
- External bond placements: close to half of the external bond placements assumed under the program baseline for 2006 have already been secured.
  - January 2006 issuance: US$500 million international bond under high demand and favorable conditions; proceeds used, in part, to advance amortization payments to the World Bank and IDB (including US$237 million falling due in 2007).
- Expected disbursements and amortizations:
  - Expected World Bank and IDB disbursements: US$307 million (will require firm implementation of associated conditionality).
- Uruguay: 2006 Public Sector Financing (Nonfinancial public sector, in US$ million) — presented figures as in source:
  - Amortization2,0322,303
  - Of which: World Bank/IDB
    - 505741
  - IMF630678
  - Gross Financing2,3992,623
  - Multilaterals
    - Of which:World Bank/IDB 
      - 432307
    - IMF543543
  - Market financing
    - Long-term bond financing9161,262
      - Of which: prefinancing for 2007
        - 400400
    - UI/Letras496455
    - Other1256
  - Source: Fund staff estimates and projections.
- Program adjustments:
  - Two new performance criteria on BHU restructuring.
  - Modification of the performance criterion on tax reform implementation.
  - New adjustor on public investment proposed.
  - All other quantitative performance criteria for 2006 remain as established at the time of the last review.
  - Performance criteria, structural benchmarks, and indicative targets specified in the supplementary MEFP and TMU (Attachments II and III).

### Safeguards and oversight
- Authorities committed to implementing recommendations of the September 2005 safeguards assessment (Appendix II).
- Adopted recommendations include incorporation of all Fund liabilities in the BCU’s balance sheet and amending criteria for selection and appointment of the external audit firm.
- With implementation of the financial sector law (currently in congress), key safeguards recommendations would be in place.

### Staff appraisal — key assessments and recommendations
- Recent performance:
  - Sound policies and a supportive external environment have sustained strong economic performance.
  - Economy has grown at healthy rates; real wages recovering; inflation remains within the target range though increased.
  - Continued strong capital goods imports suggest positive activity this year.
- Structural reform momentum:
  - Maintaining the structural reform agenda is required to sustain medium-term growth.
  - Transforming commission recommendations into concrete policy will be a focus of the next review; decisive implementation thereafter is essential.
- Fiscal policy:
  - Fiscal performance should remain strong if administrative reforms continue forcefully.
  - Revenues in both the social security agency and the tax directorate continue to exceed expectations—reflecting increased economic activity, a larger formal sector, and improved tax administration.
  - Critical to maintain cautious expenditure execution, adjust public tariffs as needed, and continue administrative reforms to ensure smooth implementation of the tax reform and attainment of ambitious revenue targets.
- Tax reform:
  - Draft tax reform is a major step toward a more equitable and less distortionary tax system: introduction of a personal income tax, reduction of rates and number of exemptions, and system simplification.
  - Staff supports the request to move the date for congressional approval of tax reform from June to October to preserve the January implementation date for the new tax regime.
- Public investment and PPPs:
  - Government intention to attract private participation is welcome; projects must be carefully selected and monitored.
  - Staff supports proposed adjustor to fiscal targets if investments are well chosen and financed through privatization proceeds to avoid affecting debt sustainability.
- Monetary policy:
  - Monetary policy has been successful and needs to remain focused on achieving the inflation objective under a flexible exchange rate.
  - Staff supports deemphasizing base money targets in favor of the inflation objective, accompanied by strengthened public communication on central bank inflation projections.
  - Continued accumulation of reserves is welcome but maintain sufficient exchange flexibility and avoid signaling a floor on the exchange rate.
  - In light of recent upticks in inflation, monetary policy must remain vigilant; decision to maintain end-2006 indicative monetary targets despite a higher-than-expected starting base is welcomed as prudent.
- Remaining vulnerabilities and priorities:
  - Current environment offers opportunity to reduce risks: debt levels remain high, reserves relatively low given high dollarization, and substantial fiscal contingencies in the financial system remain.
  - Important to accelerate debt reduction, improve debt composition (lengthen maturities and increase share of domestic currency debt), and strengthen the financial sector.
  - Further restructuring of public banks is key to containing contingent fiscal liabilities.
  - Prudent actions regarding COFAC and payout of insured deposits helped maintain banking system confidence.
  - Approval of the financial sector reform package in congress will strengthen resilience.
  - Strict adherence to BHU implementation plan is crucial to minimize fiscal risks.

*Italic: IMF Country Report material excerpted from the supplied content unit.*

### 31. In light of the strong performance under the program, and the positive outlook

### 31. In light of the strong performance under the program, and the positive outlook

### Program assessment and recommendation
- Staff recommends completion of the third review.
- All performance criteria have been observed, except:
  - Submission of the tax reform (expected to be completed as a prior action for the Board discussion); staff supports the associated waiver.

### External sector: recent developments and trends
- Trade balance has weakened despite continued export growth.
- Exports:
  - Merchandise exports (annual percent change) show sustained healthy growth (series presented as Total and 3-month moving average).
  - Exports, f.o.b. (US$ millions): 1,922; 2,281; 3,021; 3,490; 3,484; 3,769; 3,760; 4,089; 4,443 (series across years).
- Imports:
  - Merchandise imports (annual percent change) are growing more strongly than exports.
  - Imports, f.o.b. (US$ millions): 1,874; 2,098; 2,990; 3,840; 3,797; 4,854; 4,767; 4,747; 5,015 (series across years).
  - Capital and intermediate goods imports are displaying particular strength.
- Exchange rates and competitiveness:
  - Real effective exchange rate (Dec. 2000=100) shows recent appreciation, but the real exchange rate "remains some 25 percent below pre-crisis levels."
  - REER (percentage depreciation -, e.o.p.): -20.3; -13.2; 9.3; ...; 11.9; ... (series as reported).
- Financial account:
  - Financial account has strengthened, helped by a rebound in portfolio investment.
  - Portfolio Investment, 4-quarter moving average and Direct Investment, 4-quarter moving average series show recovery.

### Vulnerability indicators and external buffers
- Currency composition and exposure:
  - Deposits and liabilities remain mainly in foreign currency (charts labeled: In dollars, In SDR, In pesos, Other).
  - Dollarization in the financial system remains widespread (Peso deposits; Dollar deposits; values in US$ billion shown over time).
- Interest rate and rollover risk:
  - Exposed to interest rate risk (Fixed; Libor; SDR; Other series in US$ million).
  - Some roll-over risk (maturity breakdown: More than 5-year; Between 1 and 5-year; Up to 1-year; series in US$ million).
- Reserves and coverage:
  - Gross official reserves (US$ millions): 772; 2,087; 2,512; 3,110; 3,438; 3,255; 3,865; 4,015; 4,165 (series).
  - Reserves are still low for a dollarized economy.
  - Reserves as percent of short-term debt and FX deposits: series presented (percent).
  - Net international reserves (stock): -1,088; -763; -2,218; -1,303; -1,166; -992; -843; -299; 197 (series).

### Macroeconomic and social indicators (selected)
- Population (estimate): 3.2 (unit implied in original table).
- Physicians per 1,000: 3.7
- Hospital beds per 1,000: 4.4
- Life expectancy at birth (years): 74.6
- Crude birth rate (per thousand): 9.7
- Access to safe water (percent of population): 98.0
- Infant mortality rate (per thousand live births): 14.0
- Income share held by highest 10 percent of households: 33.5
- Adult literacy rate: 97.7
- Income share held by lowest 20 percent of households: 4.8
- Gross enrollment rate (Primary/Secondary/Tertiary): 108.3; 101.5; 37.7
- Gini coefficient: 44.6
- Unemployment rate: 11.0
- Poverty rate: 31.0
- GDP per capita in 2004 (in US$): 4,300
- Human Development Index Rank: 46 (out of 177 countries)

### Key macroeconomic aggregates and projections (selected series as reported)
- Real GDP (percent change) and contributions to real growth (percent): series include values such as -11.0; 2.2; 12.3; 6.0; 6.0; 4.0; 4.0; 3.5; 3.0 (table series by year).
- GDP (Ur$ billions): 261; 315; 379; 406; 406; 448; 448; 487; 524 (series).
- GDP (US$ billions): 12.1; 11.2; 13.3; 16.5; 16.5; 18.3; 18.3; 19.5; 20.6 (series).
- Investment and consumption shares and changes are presented across years (series include values such as Investment: 3.9; 20.1; 18.9; 23.3; 16.0; 43.7; 40.3; ...; Consumption: -11.7; 32.1; 30.6; 6.2; 7.3; 8.0; ...).
- CPI inflation (average): 14.0; 19.4; 9.2; 4.9; 4.7; 6.2; 6.0; 4.9; 4.4 (series).
- CPI inflation (eop): 25.9; 10.2; 7.6; 5.9; 4.9; 5.5; 5.5; 4.7; 4.4 (series).
- Public sector operations (percent of GDP):
  - Revenue: 32.1; 32.0; 30.9; 32.0; 32.2; 33.0; 33.0; 33.5; 33.6 (series).
  - Non-interest expenditure (incl. discrepancy): 32.1; 29.3; 27.2; 28.4; 28.4; 29.3; 29.3; 29.5; 29.6 (series).
  - Primary balance: 0.0; 2.7; 3.8; 3.6; 3.8; 3.7; 3.7; 4.0; 4.0 (series).
  - Interest: 4.7; 6.0; 6.0; 4.8; 4.6; 4.8; 4.8; 4.6; 4.5 (series).
  - Overall balance: -4.6; -3.2; -2.2; -1.2; -0.8; -1.1; -1.1; -0.6; -0.5 (series).
- Public sector debt (percent of GDP): 96; 104; 92; 73; 70; 68; 65; 62; 59 (series).
- Public debt service (as percent of GDP): 13; 14; 18; 15; 16; 16; 17; 13; 11 (series).

### Performance under the 2005-06 Economic Program: quantitative and structural conditionality (summary)
- Quantitative performance criteria (selected, in millions):
  - Combined public sector primary balance (floor): table shows multiple entries and margins.
  - General government non-interest expenditure (ceiling): table entries and margins provided (series in Uruguayan pesos and US$ as in table).
  - Net domestic assets of the BCU (ceiling): values presented (e.g., 74,079; 3,983; ...).
  - Net international reserves of the BCU (floor): values include -2,218; -130; ...; 601 (series).
  - Nonfinancial public sector gross debt (ceiling): values include 12,189; 12,510; 12,495; 12,229; ... (series).
  - Accumulation of external payment arrears of the public sector: monitored on a continuous basis.
  - Combined public sector overall balance (floor): values include -5,086; -5,186; -2,794; ... (series).
  - Monetary base (ceiling): values include 15,648; 557; ... (series).
  - Floating debt of the central government (ceiling): values include 3,081; 3,081; ... (series).
- Structural conditionality (selected status updates):
  - Prior action: Tax reform — Submit to congress a comprehensive tax reform as described in paragraph 7. (Not observed by Feb 28, 2006; reset as prior action; expected as a prior action for Board discussion.)
  - Fiscal: Submit to congress a five-year spending plan (August 31, 2005) — Observed.
  - Fiscal: Have in place a five-year spending plan (February 28, 2006) — Observed.
  - Central Bank: Submit simultaneously three laws to congress to give autonomy to the central bank, strengthen financial regulation, and provide a bank resolution framework (December 31, 2005) — Not observed. Footnote: Nonobservance due to authorities' decision to keep the financial sector supervisory authority within the BCU. Fund staff supports this decision.
  - BROU & BHU: Government to ensure timely service of BHU note and BROU fiduciary notes to BROU in accordance with the current payment schedules — Continuous — Observed.
  - BHU: Adopt action plan to address the financial situation of BHU — December 31, 2005 — Observed.
  - Various structural benchmarks on tax administration, debt management, budget legislation improvements, growth-enhancing reforms, bankruptcy law submission, BHU implementation schedule, NBC share sales, and central bank finance strengthening are listed with dates and statuses (Observed or with future deadlines as indicated).

### Balance of payments and external financing (selected)
- Current account (US$ millions): 382; -56; -98; -399; -342; -1,100; -1,063; -729; -652 (series).
- Trade balance (US$ millions): 481; 833; 1; -351; -313; -1,084; -1,007; -658; -572 (series).
- Financial and capital account (US$ millions): -2,234; 1,039; 163; 650; 869; 1,296; 1,489; 879; 802 (series).
- Foreign direct investment (US$ millions): 180; 401; 337; 429; 618; 1,250; 1,174; 840; 838 (series).
- Overall balance (US$ millions): -2,328; 1,380; 454; 620; 951; 145; 426; 150; 150 (series).
- Reserve assets change and gross official reserves series reported (see Gross official reserves above).
- External debt indicators:
  - External debt (percent of GDP): 87.5; 98.2; 87.4; 71.0; 68.4; 62.9; 61.2; 57.3; 53.7 (series).
  - External public debt (percent of GDP): 68.9; 85.3; 76.9; 63.1; 61.1; 55.9; 54.7; 51.3; 47.9 (series).
  - Short-term debt (residual maturity) (percent of GDP): 25.5; 21.4; 12.0; 13.7; 13.1; 13.7; 14.9; 10.2; 8.5 (series).
  - External debt service (percent of exports of goods and services): 55.0; 52.3; 40.9; 50.6; 51.0; 53.7; 60.3; 45.4; 37.6 (series).
- Trade volumes and prices (annual percent changes) reported, including export volume: -2.1; 9.4; 23.6; 12.3; 12.2; 9.5; 8.6; 7.0; 7.2 (series); import volume: -26.9; 6.2; 29.0; 11.9; 8.5; 6.6; 8.2; 8.3; 8.1 (series).

*Sources: Central Bank of Uruguay; Ministry of Economy and Finance; and Fund staff estimates.*

### 2. Reserve Adequacy and External Indicators

### 2. Reserve Adequacy and External Indicators

### Public Sector Operations (levels, in millions of pesos)
- Revenue
  - 2002: 83,891
  - 2003: 101,081
  - 2004: 117,367
  - Report 06/123 (Prel. 2005): 129,840
  - Report 06/123 (Prel. 2006): 130,665
  - Proj. 2007: 146,832
  - Proj. 2008: 147,041
  - Proj. 2009: 161,857
  - Proj. 2010: 174,186
  - Proj. 2011: 187,414
- Taxes (component of revenue)
  - 2002: 57,832
  - 2003: 70,096
  - 2004: 83,002
  - Report 06/123 (2005): 91,787
  - Report 06/123 (2006): 92,118
  - Proj. 2007: 101,770
  - Proj. 2008: 101,843
  - Proj. 2009: 113,093
  - Proj. 2010: 121,263
  - Proj. 2011: 129,714
- Tax subcomponents (levels)
  - VAT and excise taxes: 2002: 29,708; 2003: 37,667; 2004: 47,200; 2005: 53,015; 2006: 53,124; 2007: 60,444; 2008: 60,468; 2009: 65,541; 2010: 70,316; 2011: 74,976
  - On income and profits: 2002: 14,302; 2003: 15,621; 2004: 17,683; 2005: 19,873; 2006: 20,124; 2007: 21,280; 2008: 21,336; 2009: 26,707; 2010: 29,831; 2011: 32,321
  - On foreign trade: 2002: 2,730; 2003: 3,780; 2004: 4,958; 2005: 5,099; 2006: 5,181; 2007: 5,090; 2008: 5,108; 2009: 4,195; 2010: 3,829; 2011: 4,103
  - On property and other: 2002: 11,091; 2003: 13,028; 2004: 13,161; 2005: 13,800; 2006: 13,689; 2007: 14,955; 2008: 14,931; 2009: 16,650; 2010: 17,287; 2011: 18,314
- Social security contributions 1/
  - 2002: 15,589; 2003: 14,696; 2004: 16,657; 2005: 20,941; 2006: 21,532; 2007: 23,192; 2008: 23,289; 2009: 25,067; 2010: 27,027; 2011: 28,918
- Nontax revenue
  - 2002: 5,274; 2003: 6,200; 2004: 7,831; 2005: 8,259; 2006: 8,402; 2007: 9,818; 2008: 9,857; 2009: 10,339; 2010: 11,050; 2011: 11,742
- Current surplus of public enterprises
  - 2002: 5,196; 2003: 10,090; 2004: 9,876; 2005: 8,854; 2006: 8,614; 2007: 12,052; 2008: 12,052; 2009: 13,359; 2010: 14,846; 2011: 17,041
- Noninterest expenditure (levels)
  - 2002: 83,819; 2003: 92,431; 2004: 103,082; 2005: 115,179; 2006: 115,187; 2007: 130,360; 2008: 130,401; 2009: 142,547; 2010: 153,437; 2011: 165,262
- Current (component of noninterest expenditure)
  - 2002: 77,405; 2003: 84,623; 2004: 93,780; 2005: 105,757; 2006: 105,766; 2007: 117,243; 2008: 117,284; 2009: 126,156; 2010: 135,935; 2011: 146,250
  - Wages: 2002: 18,158; 2003: 19,701; 2004: 23,409; 2005: 25,768; 2006: 25,454; 2007: 28,722; 2008: 28,722; 2009: 31,869; 2010: 34,941; 2011: 38,141
  - Goods and services: 2002: 12,057; 2003: 15,031; 2004: 17,015; 2005: 19,319; 2006: 19,464; 2007: 22,642; 2008: 22,642; 2009: 23,359; 2010: 24,703; 2011: 26,645
  - SEP (of which): 2005: 879; 2006: 780; 2007: 2,553; 2008: 2,553; 2009: 1,548; 2010: 0; 2011: 0
  - Social security benefits 1/: 2002: 42,818; 2003: 44,218; 2004: 47,702; 2005: 53,019; 2006: 53,057; 2007: 57,626; 2008: 57,667; 2009: 62,558; 2010: 67,236; 2011: 71,781
  - Other 1/: 2002: 4,371; 2003: 5,673; 2004: 5,654; 2005: 7,651; 2006: 7,640; 2007: 8,254; 2008: 8,254; 2009: 8,369; 2010: 9,055; 2011: 9,684
- Capital (Government and enterprises)
  - 2002: 6,413; 2003: 7,808; 2004: 9,303; 2005: 9,422; 2006: 9,572; 2007: 13,117; 2008: 13,117; 2009: 16,391; 2010: 17,502; 2011: 19,011
- Primary balance (levels)
  - 2002: 72; 2003: 8,651; 2004: 14,284; 2005: 14,662; 2006: 15,477; 2007: 16,473; 2008: 16,640; 2009: 19,311; 2010: 20,748; 2011: 22,152
- Interest (levels)
  - 2002: 12,163; 2003: 18,881; 2004: 22,666; 2005: 19,402; 2006: 18,747; 2007: 21,455; 2008: 21,455; 2009: 22,276; 2010: 23,285; 2011: 24,293
- Overall balance (levels)
  - 2002: -12,091; 2003: -10,231; 2004: -8,382; 2005: -4,741; 2006: -3,269; 2007: -4,983; 2008: -4,815; 2009: -2,966; 2010: -2,537; 2011: -2,141

### Public Sector Operations (shares of GDP, in percent)
- Revenue (% of GDP)
  - 2002: 32.1; 2003: 32.0; 2004: 30.9; 2005: 32.0; 2006: 32.2; 2007: 33.0; 2008: 33.0; 2009: 33.5; 2010: 33.6; 2011: 33.8
- Taxes (% of GDP)
  - 2002: 22.2; 2003: 22.2; 2004: 21.9; 2005: 22.6; 2006: 22.7; 2007: 22.8; 2008: 22.9; 2009: 23.4; 2010: 23.4; 2011: 23.4
- VAT and excise taxes (% of GDP)
  - 2002: 11.4; 2003: 11.9; 2004: 12.4; 2005: 13.1; 2006: 13.1; 2007: 13.6; 2008: 13.6; 2009: 13.6; 2010: 13.6; 2011: 13.5
- On income and profits (% of GDP)
  - 2002: 5.5; 2003: 5.0; 2004: 4.7; 2005: 4.9; 2006: 5.0; 2007: 4.8; 2008: 4.8; 2009: 5.5; 2010: 5.8; 2011: 5.8
- On foreign trade (% of GDP)
  - 2002: 1.0; 2003: 1.2; 2004: 1.3; 2005: 1.3; 2006: 1.3; 2007: 1.1; 2008: 1.1; 2009: 0.9; 2010: 0.7; 2011: 0.7
- On property and other (% of GDP)
  - 2002: 4.3; 2003: 4.1; 2004: 3.5; 2005: 3.4; 2006: 3.4; 2007: 3.4; 2008: 3.4; 2009: 3.45; 2010: 3.33; 2011: 3.31
- Social security contributions 1/ (% of GDP)
  - 2002: 6.0; 2003: 4.7; 2004: 4.4; 2005: 5.2; 2006: 5.3; 2007: 5.2; 2008: 5.2; 2009: 5.2; 2010: 5.2; 2011: 5.2
- Nontax revenue (% of GDP)
  - 2002: 2.0; 2003: 2.0; 2004: 2.1; 2005: 2.0; 2006: 2.1; 2007: 2.2; 2008: 2.2; 2009: 2.1; 2010: 2.1; 2011: 2.1
- Current surplus of public enterprises (% of GDP)
  - 2002: 2.0; 2003: 3.2; 2004: 2.6; 2005: 2.2; 2006: 2.1; 2007: 2.7; 2008: 2.7; 2009: 2.8; 2010: 2.9; 2011: 3.1
- Noninterest expenditure (% of GDP)
  - 2002: 32.1; 2003: 29.3; 2004: 27.2; 2005: 28.4; 2006: 28.4; 2007: 29.3; 2008: 29.3; 2009: 29.5; 2010: 29.6; 2011: 29.8
- Current (% of GDP)
  - 2002: 29.7; 2003: 26.8; 2004: 24.7; 2005: 26.0; 2006: 26.0; 2007: 26.3; 2008: 26.3; 2009: 26.1; 2010: 26.2; 2011: 26.4
- Wages (% of GDP)
  - 2002: 7.0; 2003: 6.2; 2004: 6.2; 2005: 6.3; 2006: 6.3; 2007: 6.4; 2008: 6.4; 2009: 6.6; 2010: 6.7; 2011: 6.9
- Goods and services (% of GDP)
  - 2002: 4.6; 2003: 4.8; 2004: 4.5; 2005: 4.8; 2006: 4.8; 2007: 5.1; 2008: 5.1; 2009: 4.8; 2010: 4.8; 2011: 4.8
- Social security benefits 1/ (% of GDP)
  - 2002: 16.4; 2003: 14.0; 2004: 12.6; 2005: 13.1; 2006: 13.1; 2007: 12.9; 2008: 12.9; 2009: 13.0; 2010: 13.0; 2011: 13.0
- Capital (government and enterprises) (% of GDP)
  - 2002: 2.5; 2003: 2.5; 2004: 2.5; 2005: 2.3; 2006: 2.4; 2007: 2.9; 2008: 2.9; 2009: 3.4; 2010: 3.4; 2011: 3.4
- Primary balance (% of GDP)
  - 2002: 0.0; 2003: 2.7; 2004: 3.8; 2005: 3.6; 2006: 3.8; 2007: 3.7; 2008: 3.7; 2009: 4.0; 2010: 4.0; 2011: 4.0
- Interest (% of GDP)
  - 2002: 4.7; 2003: 6.0; 2004: 6.0; 2005: 4.8; 2006: 4.6; 2007: 4.8; 2008: 4.8; 2009: 4.6; 2010: 4.5; 2011: 4.4
- Overall balance (% of GDP)
  - 2002: -4.6; 2003: -3.2; 2004: -2.2; 2005: -1.2; 2006: -0.8; 2007: -1.1; 2008: -1.1; 2009: -0.6; 2010: -0.5; 2011: -0.4

### Memorandum and GDP
- Memorandum item: Augmented balance 2 (levels)
  - 2003: -56,106; 2004: -10,231; 2005: -1,229; 2006: -7,072; 2007: -3,269; 2008: -6,399; 2009: -5,759; 2010: -2,966; 2011: -2,537; 2012: -2,141
- Augmented balance (percent of GDP)
  - 2003: -21.5; 2004: -3.2; 2005: -0.3; 2006: -1.7; 2007: -0.8; 2008: -1.4; 2009: -1.3; 2010: -0.6; 2011: -0.5; 2012: -0.4
- GDP (billions of pesos)
  - 2002: 261; 2003: 315; 2004: 379; 2005: 406; 2006: 406; 2007: 445; 2008: 445; 2009: 483; 2010: 519; 2011: 554

Notes included in source:
- 1/ Line amended at time of second review to incorporate contributions collected by the BPS transferred to the AFAPs previously excluded.
- 2/ 2002 includes specified bank-restructuring costs: US$33 million of capital transfers for bank recapitalization, US$564 million of liquidity supplied by BCU, US$444 million for the Fondo de Fortalecimiento del Sistema Bancario (FFSB), and US$993 million for the FSBS. Asset recoveries are credited in 2004. In 2005 and 2006 this includes US$60 million for the financing of the deposit insurance scheme. Contingent liabilities of BHU will be included once the estimates are finalized.

### Summary Accounts of the Banking System (Table 5, in millions of US dollars)
- Net foreign assets (selected entries)
  - 2002: -689
  - 2003: -52
  - 2004: -51
  - Report 06/123 (2005 Est.): 1,005
  - Report 06/123 (2006 Est.): 1,307
  - Proj. (later years): 1,244; 1,382
- Net international reserves 2/
  - 2002: -1,014
  - 2003: -321
  - 2004: -164
  - Report 06/123 (2005 Est.): 766
  - Report 06/123 (2006 Est.): 1,135
  - Proj.: 995; 1,176
  - Gross international reserves (component): 772; 2,087; 2,512; 3,110; 3,439; 3,255; 3,491
  - Reserve liabilities 2/: -1,786; -2,407; -2,675; -2,344; -2,304; -2,260; -2,315
- Other net foreign assets (selected)
  - 2002: 325; 2003: 269; 2004: 113; 2005: 239; 2006: 172; 2007: 249; 2008: 206
- Net domestic assets (selected)
  - 2002: 1,123; 2003: 532; 2004: 652; 2005: -295; 2006: -287; 2007: -455; 2008: -505
- Net credit to the public sector (selected)
  - 2002: 1,541; 2003: 2,464; 2004: 2,626; 2005: 2,023; 2006: 1,969; 2007: 1,777; 2008: 1,755
- Net credit to the financial system (selected)
  - 2002: -340; 2003: -2,112; 2004: -1,905; 2005: -1,879; 2006: -1,975; 2007: -1,865; 2008: -2,054
- Credit to the private sector (selected)
  - 2002: 807; 2003: 162; 2004: 566; 2005: 5; 2006: 466; 2007: 6
- Securities issued by the BCU (selected)
  - 2002: -34; 2003: -243; 2004: -563; 2005: -667; 2006: -904; 2007: -663; 2008: -1,079
- Peso monetary liabilities (selected)
  - 2002: 434; 2003: 480; 2004: 600; 2005: 710; 2006: 1,020; 2007: 789; 2008: 877

### Banking System Memoranda and Monetary Aggregates
- Monetary base (average) 4/ (selected)
  - ......594; 725; 763; 880; 880
- Monetary base (end of period) 4/
  - 594; 714; 784; 866; 866
- NIR program definition (selected)
  - ...... -2,218; -1,316; -1,166; -992; -843
- NDA program definition (selected)
  - ...... 2,811; 2,030; 1,950; 1,858; 1,709
- NIR flows (selected)
  - ... 1,052 ...243
- NDA flows (selected)
  - ... -852 ... -241
- Net foreign assets (alternate presentation, selected)
  - 551; 1,213; 1,887; 2,271; 2,030; 2,413; 2,090
- Net domestic assets (alternate presentation, selected)
  - 5,254; 5,331; 5,090; 5,272; 5,397; 5,699; 5,839
- Net credit to the public sector 1/ (alternate)
  - 399; 219; 437; 345; 0; 222; -124
- Net credit to the financial system (alternate)
  - 947; 2,612; 2,256; 2,317; 2,602; 2,553; 2,756
- Credit to the private sector (alternate)
  - 6,319; 4,726; 4,307; 4,527; 4,533; 4,892; 4,996
- Other (alternate)
  - -2,411; -2,226; -1,909; -1,918; -1,738; -1,968; -1,788
- Liabilities to the private sector (residents)
  - 5,805; 6,544; 6,977; 7,543; 7,426; 8,112; 7,930
- Public banks (liabilities) (selected)
  - 3,140; 3,409; 3,670; 3,896; 3,842; 4,156; 4,070
  - Local currency: 339; 394; 520; 598; 682; 663; 727
  - Foreign currency: 2,801; 3,016; 3,149; 3,299; 3,160; 3,494; 3,343
- Private banks (liabilities) (selected)
  - 2,666; 3,135; 3,307; 3,647; 3,584; 3,956; 3,860
  - Local currency: 357; 349; 405; 477; 574; 531; 583
  - Foreign currency: 2,309; 2,785; 2,902; 3,169; 3,010; 3,424; 3,276
- Broad money (M3) (selected)
  - 6,150; 6,949; 7,573; 8,030; 8,288; 8,750; 8,524

Notes included in source:
- 1/ Presentation used for program monitoring. May differ from presentation and definitions used in IFS.
- 2/ Includes all outstanding liabilities to the IMF, but excludes liabilities to resident financial institutions.
- 3/ Program figures for 2005 are estimated at December 2004 exchange rates, while those for 2006 are estimated at September 2005 exchange rates.
- 4/ Monetary base excludes from peso monetary liabilities the net government and BPS deposits with BROU, which are subject to 100 percent requirements.
- 5/ The Banco de la Republica Oriental de Uruguay (BROU), Banco Hipotecario de Uruguay (BHU; mortgage institution), private banks, and cooperatives.

*Source: _cr06197 - 2. Reserve Adequacy and External Indicators (tables and notes in provided PDF content).*

### 1. Banco Central del Uruguay

### 1. Banco Central del Uruguay

### Financial sector indicators (selected)
- Broad money: 21.3 (2002), 24.2 (2003), -9.5 (2004), 0.1 (2006 Est./Proj.), 0.8 (2006)
- Credit to the private sector (const. exch. rate): -17.6 (2002), -23.9 (2003), -11.2 (2004), 2.7 (2006 Est./Proj.), 10.0 (2006)
- Share of nonperforming loans in total loans (in percent): 31.5 (2002), 8.6 (2003), 3.8 (2004), 2.5 (2006)
- Provisions to nonperforming loans: 56.2 (2003), 50.8 (2004)
- Capital adequacy ratio (in percent): -9.6 (2002), 9.2 (2003), 10.9 (2004), 11.2 (2006)
- Return on assets: -25.6 (2002), -1.1 (2003), -0.2 (2004), 0.7 (2006)
- Interbank interest rates (percent, end-of-period): 45.0 (2002), 2.5 (2003), 1.3 (2004), 1.0 (2006)
- FX deposits held by residents (percent of total deposits): 88.3 (2002), 88.8 (2003), 87.6 (2004), 83.7 (2006), 85.0 (2006)
- FX loans to residents (percent of total loans): 80.4 (2002), 77.6 (2003), 73.3 (2004), 70.0 (2006), 70.0 (2006)

### Public debt indicators
- Public sector gross debt (PSGD, in percent of GDP): 95.5 (2002), 104.5 (2003), 92.5 (2004), 69.9 (2005), 65.3 (2006)
  - Exposed to rollover risk (percent of total PSGD): 17.2 (2002), 12.1 (2003), 13.5 (2004), 16.0 (2005)
  - Exposed to exchange rate risk (percent of total PSGD): 96.0 (2002), 94.3 (2003), 90.2 (2004), 87.0 (2005)
  - Exposed to interest rate risk (percent of total PSGD): 57.0 (2002), 45.5 (2003), 44.6 (2004), 40.0 (2005)

### External indicators and reserves
- Merchandise exports (percent change): -10.2 (2002), 18.7 (2003), 32.4 (2004), 15.3 (2005), 7.9 (2006)
- Merchandise imports (percent change): -35.7 (2002), 12.0 (2003), 42.5 (2004), 27.0 (2005), 25.5 (2006)
- Merchandise terms of trade (percent change): 4.3 (2002), 2.9 (2003), -3.1 (2004), -9.9 (2005), -3.0 (2006)
- REER appreciation (+): -20.3 (2002), -13.2 (2003), 9.3 (2004), 11.9 (2005)
- Current account balance (percent of GDP): 3.2 (2002), -0.5 (2003), -0.7 (2004), -2.0 (2005), -5.6 (2006)
- Capital and financial account balance (percent of GDP): -18.5 (2002), 9.3 (2003), 1.2 (2004), 5.2 (2005), 7.9 (2006)
  - Net foreign direct investment: 1.5 (2002), 3.6 (2003), 2.5 (2004), 3.7 (2005), 6.2 (2006)
  - Government securities: 1.4 (2002), 0.0 (2003), 2.0 (2004), 3.3 (2005), 3.6 (2006)
  - Other net inflows: -21.4 (2002), 5.7 (2003), -3.3 (2004), -1.9 (2005), -2.0 (2006)

- Total gross external debt (ED) in percent of GDP: 87.5 (2002), 98.2 (2003), 87.4 (2004), 68.4 (2005), 61.2 (2006)
  - Short-term ED (original maturity, percent of total ED): 12.5 (2002), 6.7 (2003), 7.6 (2004), 4.6 (2005), 5.2 (2006)
  - ED to foreign official sector (percent of total ED): 44.9 (2002), 51.1 (2003), 50.7 (2004), 49.4 (2005), 44.0 (2006)
- External interest payments (percent of exports of GNFS): 24.5 (2002), 19.2 (2003), 18.0 (2004), 18.2 (2005), 20.5 (2006)
- External amortization payments (percent of exports of GNFS): 30.5 (2002), 33.1 (2003), 22.8 (2004), 32.8 (2005), 39.8 (2006)

- Central Bank reserve liabilities (U.S. million): 1,786 (2002), 2,407 (2003), 2,675 (2004), 2,334 (2005), 2,260 (2006)
- Short-term foreign assets of the banking system (U.S. million): 3,140 (2002), 4,989 (2003), 5,988 (2004), 6,604 (2005), 6,919 (2006)
- Short-term foreign liabilities of the banking system (U.S. million): 4,916 (2002), 4,597 (2003), 4,389 (2004), 4,504 (2005), 4,517 (2006)
- Gross official reserves (U.S. million): 772 (2002), 2,087 (2003), 2,512 (2004), 3,438 (2005), 3,865 (2006)
  - In months of imports GNFS: 3.7 (2002), 9.2 (2003), 8.2 (2004), 8.9 (2005), 8.1 (2006)
  - Gross reserves as percent of short-term external debt excl. nonres FX deposits: 25.1 (2002), 86.8 (2003), 158.0 (2004), 156.7 (2005), 137.5 (2006)
  - Gross reserves as percent of broad money: 12.2 (2002), 28.7 (2003), 34.4 (2004), 37.9 (2005), 38.0 (2006)
  - Gross reserves as percent of base money: 175.4 (2002), 427.3 (2003), 418.1 (2004), 386.3 (2005), 372.9 (2006)

### Financial market indicators
- Foreign currency debt rating (Moody's): 4/B3 (2002 onward), B3 (2003–2006)
- Foreign currency debt rating (S&P): 4/B- (2002), B- (2003), B (2004), BB+ (2005)
- EMBI secondary market spread (bps, end of period, as of March 6, 2006): 1,228 (2002), 624 (2003), 388 (2004), 298 (2005), 214 (2006)
- Exchange rate (per U.S. dollar, period average): 21.6 (2002), 28.2 (2003), 28.6 (2004), 24.4 (2005)
- Exchange rate (per U.S. dollar, end-of-period): 27.2 (2002), 29.3 (2003), 26.4 (2004), 24.1 (2005)

### Public sector financing outlook (2006) — selected flows
- Public sector gross borrowing requirements (quarterly and year): Q1 1,049; Q2 530; Q3 317; Q4 727; Year total 2,623 (2006)
  - Of which: IMF repurchases (quarterly): 48 (Q1), 113 (Q2), 245 (Q3), 271 (Q4); Year total 678
  - Of which: World Bank/IDB net flows (quarterly): 55 (Q1), 67 (Q2), 74 (Q3), 36 (Q4); Year total 241
  - Of which: Bond placements (year total): 1,716
  - 10 year maturity international issuances: 657 (Q1), 194 (Q2), 163 (Q3), 951 (Q4), Year total 1,262
  - UI bonds, Letras, and short-term debt lines reported in table

### IMF Stand-By Arrangement — schedule and access
- Schedule of purchases under the Stand-By Arrangement, 2005–08 (select entries):
  - June 8, 2005: SDR 30.65 (10.0 percent quota) — Program approval
  - September 28, 2005: SDR 30.65 (10.0 percent quota) — Completion of first review
  - January 18, 2006: SDR 30.65 (10.0 percent quota) — Completion of second review
  - March 27, 2006: SDR 85.82 (28.0 percent quota) — Completion of third review
  - Subsequent scheduled purchases through May 31, 2008 with amounts listed per review
- Total access under the arrangement: 766.25 SDR million
- Percent of quota: 250.0

### Projected payments to the Fund (selected)
- Fund disbursements (existing and prospective) principal (U.S. million): 364.2 (2003), 372.8 (2004), 201.1 (2005), 373.9 (2006), 269.7 (2007)
- Fund repurchases and charges (existing and prospective) — total payments to Fund (U.S. million): 144.3 (2003), 495.2 (2004), 584.0 (2005), 800.8 (2006), 887.7 (2007)
- Fund credit outstanding (SDR millions, end-of-period): 1,625.9 (2003), 1,728.4 (2004), 1,612.2 (2005), 1,518.2 (2006), 1,247.1 (2007)
- Fund credit outstanding (U.S. dollars, end-of-period): 2,385.9 (2003), 2,662.3 (2004), 2,307.5 (2005), 2,175.7 (2006), 1,788.6 (2007)
- Projected payments to Fund (obligation basis, SDR millions forthcoming): Principal 434.33 (2006), 540.86 (2007), 332.27 (2008), 246.02 (2009), 51.96 (2010); Charges/interest 86.04 (2006), 49.91 (2007), 24.73 (2008), 10.89 (2009), 2.37 (2010)

### Public sector debt sustainability (baseline dynamics, selected)
- Baseline public sector debt (PSGD, percent of GDP): 46.0 (2001), 95.5 (2002), 104.4 (2003), 92.5 (2004), 69.9 (2005), 65.3 (2006), 62.0 (2007), 59.1 (2008), 56.6 (2009), 54.0 (2010), 51.3 (2011)
- Change in public sector debt (percent of GDP): 7.5 (2001), 49.5 (2002), 8.9 (2003), -11.9 (2004), -22.6 (2005), -4.6 (2006)
- Identified debt-creating flows (sum, percent of GDP): 10.3 (2001), 57.5 (2002), -8.3 (2003), -14.0 (2004), -17.8 (2005), -5.1 (2006)
- Primary deficit (percent of GDP): 1.2 (2001), -0.1 (2002), -2.7 (2003), -3.8 (2004), -3.8 (2005), -3.7 (2006)
- Automatic debt dynamics (percent of GDP): 9.2 (2001), 40.7 (2002), -5.6 (2003), -10.3 (2004), -14.0 (2005), -1.4 (2006)
- Public sector debt-to-revenue ratio (percent): 138.5 (2001), 306.9 (2002), 336.2 (2003), 307.6 (2004), 229.3 (2005), 223.0 (2006)

### Gross financing needs and stress tests (public and external)
- Gross financing need (percent of GDP): 7.3 (2001), 12.0 (2002), 14.0 (2003), 13.8 (2004), 11.7 (2005), 13.5 (2006), 8.6 (2007)
- Gross external financing need (U.S. billion / percent of GDP): 3.5 (2001) / 19.0, 3.8 (2002) / 31.3, 3.0 (2003) / 26.4, 2.0 (2004) / 14.8, 2.7 (2005) / 16.3, 3.4 (2006) / 18.1, 2.6 (2007) / 12.7
- Stress test scenarios (gross public sector financing need percent of GDP, selected):
  - A1 (key variables at historical averages in 2006–10): 13.5 (2006), 7.9 (2007), 6.0 (2008), 5.3 (2009), 6.2 (2010), 7.0 (2011)
  - B5 (one-time 30 percent real depreciation in 2006): 13.5 (2006), 12.4 (2007), 12.3 (2008), 12.2 (2009), 14.2 (2010), 15.9 (2011)
- External stress tests (gross external financing need in billions U.S. dollars, selected):
  - Baseline 2006: 3.4 (2006)
  - B5 (one time 30 percent nominal depreciation in 2007): 3.4 (2006), 2.6 (2007), 2.2 (2008), 2.0 (2009), 2.4 (2010), 2.6 (2011)

### Macroeconomic and fiscal assumptions underlying baseline (selected)
- Real GDP growth (percent): -3.4 (2001), -11.0 (2002), 2.2 (2003), 12.3 (2004), 6.0 (2005), 4.0 (2006), 3.5 (2007), 3.0 (2008–2011)
- Inflation rate (GDP deflator, percent): 5.3 (2001), 18.7 (2002), 18.4 (2003), 7.0 (2004), 1.0 (2005), 5.5 (2006)
- Average nominal interest rate on public debt (percent): 7.8 (2001), 10.7 (2002), 7.5 (2003), 6.8 (2004), 5.3 (2005), 7.5 (2006)
- Average real interest rate (percent): 2.5 (2001), -8.0 (2002), -10.9 (2003), -0.2 (2004), 4.3 (2005), 2.0 (2006)

### IMF relations and safeguards (selected)
- IMF Stand-By Arrangements outstanding and access: Stand-By approved 6/08/05 (amount approved 766.25 SDR million; drawn 91.95 SDR million); prior Stand-By arrangements approved 4/01/02 and 5/31/00
- Projected payments to Fund (obligation and expectation bases) included for 2006–2010 (SDR millions) with principal and charges/interest totals listed in tables
- Safeguards assessment: authorities have implemented many recommendations completed September 2005, including inclusion of Uruguay's total obligations to the Fund in BCU financial statements; periodic review of data submitted to the Fund against the TMU; amended criteria for selection and appointment of BCU external audit firm
- Exchange rate arrangement: independently floating exchange rate regime since July 29, 2002; interbank USD buying/selling rates on March 13, 2005 were Ur$24.25 and Ur$24.30
- Resident Representative: Mr. Gaston Gelos

### Relations with the World Bank and Inter-American Development Bank (selected)
- World Bank CAS approved June 9, 2005 envisaging up to US$800 million new lending over FY05–10; DPL1 of US$75 million fully disbursed
- World Bank current investment portfolio as of December 31, 2005: eight projects totaling US$389.5 million in commitments, undisbursed US$158.4 million
- IDB preparing Country Strategy for 2005–2009 with likely lending scenario of about US$950 million over 2005–2009
- IDB lending program includes: social sector loan US$250 million approved August 3, 2005; other sectoral and investment projects in preparation/approval
- IDB portfolio as of February 27, 2006: loans for 15 investment projects and two sector loans; lending portfolio US$1,188.66 million, undisbursed US$526.4 million

*Source: IMF staff report content for “1. Banco Central del Uruguay” (tables and appendices as provided).*

### 1. Economic performance remains strong. Growth in 2005 is likely to have exceeded the

### _cr06197 - 1. Economic performance remains strong. Growth in 2005 is likely to have exceeded the

### Economic performance — headline outcomes
- Growth in 2005 is likely to have exceeded the 6 percent target, led by strong consumption and exports.
- Inflation increased to 6.6 percent in February 2006, and it is now within the central bank’s (BCU) target range for March (5–7 percent).
- The 2005 fiscal primary surplus reached 3.8 percent of GDP and the overall deficit fell below 1 percent of GDP, both better than programmed.
- All quantitative performance criteria (PCs) for end-2005 are expected to have been met, some with large margins, and the end-March 2006 PCs are well within reach.
- The indicative end-December base money target was exceeded due to temporary liquidity needs.

### Risks and vulnerabilities
- Near-term vulnerabilities have declined with a significant strengthening of the international reserve position, reflecting buoyant exports and improved capital market access.
- The BCU has intervened in the foreign exchange market, taking advantage of appreciation pressures on the peso.
- Medium-term vulnerabilities remain high because of still high public debt, mainly in foreign currency and at floating rate, and large public financing needs averaging 8 percent of GDP over the next three years.

### Fiscal policies and medium-term debt sustainability
- Core objective: achieve debt sustainability through continued fiscal consolidation and sustained growth.
- Planned July 2006–June 2007 measures:
  - Undertake additional and carefully selected one-time investment outlays to catalyze private investment in key infrastructure bottlenecks and foster higher growth.
  - These outlays could temporarily reduce the primary surplus slightly (by up to about a ¼ percent of GDP) but would be fully financed by non-debt creating flows (i.e., privatization proceeds from the sale of NBC).
  - Government will adequately share risks with private partners and record any government guarantees or fiscal contingencies in the fiscal accounts; guarantees are not expected to be issued.
  - Projects identified include investments in the railroad system and dredging of the port of Montevideo.
- 2006 fiscal program targets:
  - Target an increase in revenues of about one percent of GDP to ensure priority spending (including the social emergency plan) and meeting the primary surplus target.
  - Administrative reforms expected to yield at least ½ percent of GDP in 2006.
  - The remaining ½ percent of GDP in additional revenue expected to come from recovery in public enterprise primary surplus (post-drought), lower transfers to the central government, and tariff adjustments.
- Commitment to closely monitor fiscal developments, execute expenditure cautiously, and save any overperformance toward achieving the medium-term primary surplus target of 4 percent of GDP as soon as possible.
- Privatization proceeds cap for adjustment: up to a limit of Ur$1,200 million (see Technical Memorandum of Understanding adjustment provision).

### Structural fiscal reforms and debt management
- Tax reform:
  - A comprehensive tax reform will be submitted to congress (slight delay to envisaged congressional approval by October instead of June).
  - Implementation work on regulations and procedures to make reform effective in January 2007.
  - Draft bill elements: (i) introducing a personal income tax; (ii) revamping the corporate income tax; (iii) lowering VAT rates and broadening its base; (iv) eliminating sectoral exemptions and unifying rates for employers’ social security contributions; and (v) streamlining number of taxes.
  - Proposal designed to be at least revenue neutral and envisages a more gradual VAT rate reduction to safeguard fiscal targets.
- Revenue administration:
  - Continue 2005 reforms, ensure adequate human resources.
  - Social security agency (BPS) making good progress with its action plan.
  - Customs reform task group on schedule to have a comprehensive reform plan by August 2006.
- Budget process reform:
  - Established a committee to prepare a comprehensive reform plan (structural benchmark for August 2006), including a draft organic budget law.
- Debt management:
  - Newly established debt management unit at the MEF to prepare a detailed debt strategy.
  - Already begun improving debt profile, including replacing more expensive IDB/World Bank debt due next year by cheaper long-term market financing.

### Monetary and exchange rate policies
- Monetary framework:
  - Continue targeting preannounced one-year-ahead inflation objectives within a flexible exchange rate regime.
  - Commit to a 4½–6½ percent inflation in 2006.
  - Shifted public communication: replaced announcements of quarterly base money target ranges by indicative one-year M1 targets.
  - End-2006 target for M1 growth announced in December: 12.3 percent (in line with aggregate demand).
  - Because inflationary pressures may have somewhat increased since that announcement, the program maintains more conservative indicative 2006 monetary targets and will reassess policies as needed.
  - Requesting TA from the Fund to improve forecasting and policy analysis models to advance toward full-fledged inflation targeting.
- Foreign exchange operations and reserves:
  - Continued foreign exchange purchases by the BCU, and a recent US$500 million bond issue, have contributed to a significant strengthening in the reserve position.
  - Exchange rate temporarily relatively constant vis-à-vis the US dollar, but has since moved in line with market conditions, consistent with flexible exchange rate commitment.
  - Reserves still relatively low compared with other dollarized economies; will continue to take advantage of favorable conditions to build reserves, including additional purchases in the foreign exchange market, while sterilizing monetary impact and ensuring consistency with the inflation objective.

### Central bank and financial sector reforms
- Housing bank BHU:
  - Adopted action plan to create a fully capitalized and commercially run housing bank.
  - Key steps:
    - (i) Shift nonperforming loans and their management responsibility to a fiduciary trust and adequately capitalize the bank (new PC for end-August 2006).
    - (ii) Transfer remaining nonperforming assets in BHU and their management responsibility to a fiduciary trust, review regulatory framework, and adopt changes if needed to ensure BHU limits activities to residential mortgage lending on a commercial basis.
  - Plan to have restructuring implemented by year’s end, with BHU meeting prudential limits and demonstrating ability to generate profits and positive cash flows (new PC for end-November 2006).
  - Interim restriction: BHU will not resume lending unless Superintendency for Banking Supervision concludes sufficient progress has been made.
  - BHU will continue to service the note to BROU on schedule; government will honor its guarantee if necessary.
- COFAC:
  - Small cooperative intervened in early 2006 following large deposit withdrawals; no negative impact on rest of financial system.
  - Authorities announced full payout of insured deposits in early March.
  - Firm retained to find a possible buyer; if sale does not materialize, will follow legal procedures; will not involve government guarantees or public funds.

### Improving the investment climate and competitiveness
- Tripartite growth commission reform agenda expected to be published at end-March (structural benchmark).
- Proposals include measures to:
  - Increase competition;
  - Enhance corporate transparency;
  - Improve bankruptcy legislation;
  - Strengthen judiciary functioning;
  - Simplify tax and investment promotion regimes;
  - Improve public infrastructure and public enterprise efficiency;
  - Reduce red tape and regulatory burden.
- Program already contemplates measures in several areas, including tax reform, and new competition and bankruptcy laws.
- Additional measures to improve investment climate will be incorporated into program conditionality as a focus of the next review.

### Program financing and safeguards — key financing operations and amounts
- Substantial portion of 2006 capital market financing already secured; 2006 financing described as well in hand.
- Advanced repayments to the World Bank and IDB of some US$400 million for 2006–07 to lock in favorable market terms.
- Expect significant new disbursements from the World Bank and IDB of about US$300 million this year, conditional on implementing associated reforms to ensure timely disbursements.

### Quantitative performance criteria and structural conditionality — selected points
- Program quantitative outcomes and targets are specified in detail in Table 1 (Quantitative Performance Criteria and Indicative Targets for the 2005-08 program).
- Selected numerical program commitments and dates from the structural conditionality matrix:
  - Prior action: Submit to congress a comprehensive tax reform as described in paragraph 7 of the MEFP.
  - Structural performance criteria examples and target dates:
    - Have in place a five-year spending plan with revenue projections consistent with program fiscal targets — February 28, 2006 (Observed).
    - Submit comprehensive tax reform to congress — February 28, 2006 (Not observed; reset as PA).
    - Begin to implement comprehensive tax reform — October 31, 2006 (modification requested to move approval date from June 30, 2006 to October 31, 2006).
    - Begin to implement laws providing central bank autonomy, strengthening financial regulation, and a bank resolution framework — June 30, 2006.
    - BHU actions: move nonperforming loans into a fideicomiso and adequately capitalize BHU — August 31, 2006 (new PC); transform BHU into an institution with a viable business plan and strong regulatory framework — November 30, 2006 (new PC).
  - Structural benchmarks include, inter alia:
    - Publish agenda of growth-enhancing reforms prepared by the business environment commission — March 31, 2006.
    - Finalize comprehensive reform plan for customs agency — August 31, 2006.
    - Prepare recommendations to improve budget process legislation and transparency — August 31, 2006.
    - Submit to Congress a bankruptcy law (including Chapter-11 type corporate restructuring) — June 30, 2006.
    - Adopt a detailed schedule for implementation of BHU action plan — February 28, 2006 (Observed).
    - Sell shares of NBC so that managerial control goes to private sector — June 30, 2006.
    - Adopt plan to strengthen central bank finances (outright capitalization or interest payment on government paper) — September 30, 2006.

*Source: Memorandum of Economic and Financial Policies and Technical Memorandum of Understanding (excerpt)._cr06197*

### 2. Cumulative floor on the primary balance of the combined public sector. The

### 2. Cumulative floor on the primary balance of the combined public sector. The

### Primary balance: definition and adjustments
- The combined public sector primary balance is calculated as the overall balance measured from below the line plus interest payments.
- Interest payments are defined to exclude commissions and fees.
- Adjustment for capital expenditure:
  - The floor on the primary balance of the combined public sector will be adjusted downward (higher deficit) for capital expenditure on identified projects in the period July 2006-June 2007.
  - The downward adjustment will be limited to the amount of gross revenues (net of any associated fees and commissions) from the sale of NBC (up to a limit of Ur$1,200 million).

### Extended primary balance: definition and adjustments
- The combined public sector extended primary balance = primary balance (paragraph 2) minus the change in the stock of floating debt of the central government.
- Floating debt of the central government is defined as expenditures from:
  - the general treasury account (“Rentas Generales”),
  - “Rentas de Afectación Específica”,
  - payment obligations with domestic suppliers for which external and domestic debt has been earmarked,
  - investment funds of the Ministry of Transportation and Public Works,
  - own funds from agencies outside the budget (Casinos).
- Floating debt includes debt registered in the integrated information system (SIIF), authorized for execution and confirmed by central accountants, for which no checks for payment have yet been issued.
- Exclusions from floating debt: obligations for utilities, obligations related to subsidies (except for the forestry fund), judiciary debt and obligations falling under “Inciso 24” of the accounting plan of the “Contaduria General de la Nacion” (excluding debt with international organizations), domestic suppliers’ credits of the Ministry of Housing, and overdue payments for wages and salaries of public sector contractual and permanent employees, provided such overdue payments do not exceed 10 days following the date on which payments are due.
- Adjustment for capital expenditure:
  - The floor on the extended primary balance will be adjusted downward for capital expenditure on identified projects in the period July 2006-June 2007.
  - The downward adjustment will be limited to the amount of gross revenues (net of any associated fees and commissions) from the sale of NBC (up to a limit of Ur$1,200 million).

### Identified projects
- Already identified projects include railway construction and dredging in the port of Montevideo.
- Further projects will be identified over the next few months and the TMU amended at the time of the next review to incorporate them.

*Italic line: Attachment III (page references in source).*

### Cumulative ceiling on general government expenditure
- Scope: total (current and capital) non-interest expenditure of the central administration and the social security system (BPS) as recorded in the accounting system at the time that checks are delivered, a bank transfer is made, or the BCU notifies the receipt of a payment order.
- The non-interest expenditure of BPS excludes benefit payments.
- The non-interest expenditure of the central administration includes Fondos de Libre Disponibilidad but excludes transfers to the social security system, automatic transfers to the private pension funds (AFAPs), and earmarked revenue as of December 31, 2004.
- Adjustments:
  - The ceiling will be adjusted downward for any expenses arising from pension adjustments which exceed the increase in the legal minimum adjustment.
  - The ceiling will be adjusted upward for capital expenditure on identified projects in July 2006-June 2007, if those expenditures fall under this ceiling; the upward adjustment limited to gross revenues (net of fees and commissions) from the sale of NBC (up to Ur$1,200 million).

### Cumulative ceiling on the monetary base (indicative target)
- Monetary base components:
  - (i) currency issue;
  - (ii) nonremunerated and remunerated peso sight deposits of BROU, BHU, private banks, and other institutions at the BCU;
  - (iii) call peso deposits of BROU, BHU, private banks, and other institutions at the BCU.
- Other institutions include: pension funds (AFAPs), local governments, public enterprises, trust funds of the liquidated banks (FRPB), investment funds, offshore institutions (IFEs), insurance companies, exchange houses, stock brokers, and the nonfinancial private sector.
- Exclusions: central government and BPS peso deposits held at BROU subject to a 100 percent reserve requirement.
- Indicative target: the cumulative change calculated using the monthly averages relative to the base month average.

### Cumulative floor on net international reserves (NIR) of the BCU
- NIR definition: difference between gross international reserves and BCU reserve liabilities.
- Gross international reserves include foreign exchange assets that are claims on non-residents, under the direct effective control of the BCU and readily available for intervention or direct financing of payment imbalances. Acceptable forms include currency, bank deposits in nonresident institutions, government securities and other bonds and notes issued by nonresidents with ratings not below “A” (Fitch and IBCA and Standard and Poor’s) or “A2” (Moody’s). Holdings of SDRs, monetary gold, reserve position in the IMF, and liquid foreign assets set aside for government use may be included if they meet effective control and ready availability tests.
- Exclusions from gross international reserves:
  - All foreign currency claims arising from off-balance sheet transactions (such as derivatives instruments),
  - capital subscriptions to international financial institutions,
  - any assets in nonconvertible currencies,
  - claims on any nonresident Uruguay-owned institutions,
  - any amounts (in all components of assets, including gold) that have been pledged in a direct or contingent way.
- BCU reserve liabilities include:
  - (i) all foreign currency-denominated liabilities of the BCU with original maturity of one year or less to residents and nonresidents (excluding government deposits);
  - (ii) all certificates of deposit used to constitute reserve requirements against bank deposits;
  - (iii) the total use of Fund credit by Uruguay;
  - (iv) any net position on foreign exchange derivatives vis-à-vis the peso with either residents or nonresidents undertaken directly by the BCU or by other financial institutions on behalf of the BCU, as measured in items II.2 and III.4 of the IMF’s Data Template on International Reserves and Foreign Currency Liquidity.
- Valuation rules for NIR calculation:
  - Gold holdings valued at US$42 per troy ounce.
  - Liabilities to the IMF valued at US$1.44946 per SDR.
  - Gains or losses from gold swaps and other operations will be excluded.
  - Non-U.S. dollar denominated foreign assets and liabilities converted into U.S. dollars at market exchange rates of the respective currencies as of September 30, 2005.
- Adjustment to NIR floor:
  - The NIR floor will be adjusted upward (downward) by any excess (shortfalls in) net financing of the NFPS defined as the difference between the stock of debt of the NFPS (as defined in para. 8 but excluding central government foreign currency deposits in domestic commercial banks and excluding any liabilities to the Fund, and schedule A below) and which is not explained by the adjustments specified in para. 8, bullet 1 (i-ix).
  - The downward adjustment of the NIR floor will be limited to US$400 million.

Schedule A (In millions of U.S. dollars) — Stock of debt of the NFPS, excl. CG FX deposits in domestic commercial banks and Fund liabilities:
- Sept.-05: 10,136
- Mar.-06: 10,530
- Jun.-06: 10,706
- Sept. 06: 10,828
- Dec.-06: 10,884

### Cumulative ceiling on net domestic assets (NDA) of the BCU
- NDA definition: difference between end-of-period monetary base and net international reserves (NIR) of the BCU as defined in paragraphs 5 and 6.
- The flow of NIR will be valued at the accounting exchange rate of Ur$23.9 per US$1.
- Adjustment rule:
  - The NDA ceiling will be adjusted downward (upward) by the Ur$ equivalent of any upward (downward) adjustment in the NIR target of the BCU.

### Overall nonfinancial public sector (NFPS) debt ceiling: definition and valuation
- The NFPS debt ceiling refers to the outstanding stock of external debt and domestic debt measured on a gross basis in domestic and foreign currency owed or guaranteed by the NFPS, valued in U.S. dollars at the accounting rates:
  - Ur$23.9 per U.S. dollar,
  - U.S. dollar 1.2026 per Euro,
  - Yen113.46 per U.S. dollar,
  - U.S. dollar 1.44946 per SDR,
  - Ur$1.4882 per UI.
- UI valuation rule:
  - If the Ur$ to UI rate exceeds 1.5916 the UI debt will be valued at Ur$1.4882 plus the difference between the actual rate and Ur$1.5916.
- Exclusions and inclusions:
  - The debt ceiling will exclude (i) the government guaranteed note of BHU to BROU (with outstanding obligations estimated at US$500.8 million at end-September 2005) and the government guaranteed notes issued by the fiduciary trusts associated with the transfer of BROU’s nonperforming loans (with outstanding obligations estimated at US$400 million at end-September 2005); and (ii) net debt of the NFPS with the BCU.
  - It will include the total stock of Fund credit outstanding to Uruguay.
- Adjustments to the NFPS debt ceiling (numeric limits preserved exactly):
  - (i) upward (downward) by revisions made to the actual nonfinancial public sector gross debt stock at end-September 2005;
  - (ii) upward by a maximum of US$500 million for the amount of debt issued to recapitalize the BCU;
  - (iii) upward by a maximum of US$133 million (downward) for the cumulative reduction (increase) in the net credit position of public enterprises with the BCU;
  - (iv) upward by a maximum of US$150 million for the costs associated with the final outcome of the arbitration/litigation to the former shareholders of Banco Comercial;
  - (v) upward by a maximum of US$82 million for debt issued to finance below-the-line operations of public enterprises (such as recapitalization of ANCAP’s subsidiary abroad);
  - (vi) upward by BHU restructuring costs related to the assumption of financial liabilities or capitalization up to a limit of US$1 billion;
  - (vii) upward by a maximum of US$40 million for the amount of debt issued to onlend to the deposit insurance scheme;
  - (viii) for capital expenditure on identified projects in the period July 2006-June 2007, up to a limit of US$50 million;
  - (ix) downward by the amount of gross revenues (net of any associated fees and commissions) (excluding receipts in form of shares) from the sale of NBC;
  - (x) upward (downward) by the amount that the unadjusted NIR floor is exceeded (falls short) with the upward adjustment limited to the amount of the upward revision of the NIR target, up to a limit of US$500 million.

### External payments arrears
- External payments arrears of the public sector are defined on the residency principle and relate to public sector debt with foreign creditors.
- This performance criterion is monitored on a continuous basis.

### Structural performance criteria: bank debt service and BHU restructuring
- Continuous performance criterion on timely service of bank restructuring debt to BROU:
  - Includes notes to BROU guaranteed by the government and issued by the BHU and the fiduciary trusts that own and manage the nonperforming loans formerly on the books of BROU.
  - Timely service defined as payment of agreed principal and interest by the BHU, the trusts, or the government in accordance with the timetable (and no later than the 10th of the subsequent month) and terms presented in Schedule B.
- Schedule B (Scheduled Service of Bank Restructuring Debt to BROU) presents monthly principal, interest, total service, and estimated balance entries for 2005–2008 (tabulated in source).
  - Contractual interest rate: the 60-day U.S. dollar-denominated time deposit rate of BROU plus 50 basis points, revised on June 30 and December 31 every year based on the rate prevailing on that date.
- Restructuring and recapitalization of BHU:
  - The government will transfer ownership and management responsibility of nonperforming loans in BHU to a fideicomiso (fiduciary trust).
  - The MEF will assume sufficient liabilities from BHU to recapitalize it to a level satisfactory to the Superintendency of Banks (August 31, 2006).
- Transform BHU into an institution with a viable business plan and a strong regulatory framework:
  - The government will transfer ownership and management responsibility of remaining problem assets in BHU to a fideicomiso.
  - The government will review the regulatory framework, and modify it if needed, to ensure BHU’s business is limited to residential mortgage lending on a commercial basis.
  - BHU will meet all prudential limits and adapt a business plan satisfactory to the Bank Superintendency demonstrating ability to generate positive cash flows and profits, maintain prudential capital and meet prudential regulations going forward (November 30, 2006).

*Italic line: Statement by IMF Staff Representative, March 24, 2006 (additional information and program performance notes included in source).*

### 85.8 million (about US$123.6 million) immediately available to Uruguay.

### _cr06197 - 85.8 million (about US$123.6 million) immediately available to Uruguay.

### Board action and waiver
- 85.8 million (about US$123.6 million) immediately available to Uruguay.
- The Board granted a waiver for the non-observance of the performance criterion on the submission to Congress of a comprehensive tax reform bill, in view of the brief delay in submission.

### Deputy Managing Director / Acting Chair — Agustín Carstens: assessment and priorities
- Overall assessment:
  - Uruguay’s performance under the Stand-By Arrangement "continues to exceed expectations."
  - Contributing factors: strong economic policies and a supportive external environment.
  - Outcomes: rapid growth, low inflation, a strengthened external position, and an improved debt structure.
  - Outlook: "continued strong performance in 2006," but macroeconomic vulnerabilities remain and require continued policy reform momentum.
- Fiscal policy:
  - "Overperformance on fiscal policy" demonstrates authorities’ commitment to prudent fiscal policy.
  - Ongoing efforts: strengthen tax administration; recently submitted tax reform.
  - Intent to establish an adjustor to the program’s fiscal targets of a small margin to make room for additional, high-quality infrastructure investment to promote private investment and stimulate growth.
- Monetary policy and reserves:
  - "Monetary policy has successfully contained inflation in the low single digits."
  - Central bank focus: building reserves and achieving the program’s inflation objective.
  - Recommendation: maintain appropriate exchange rate flexibility; monitor incipient inflationary pressures and adjust policies as necessary to further lower inflation.
- Financial sector:
  - Financial sector reforms progressing as envisaged.
  - Restructuring plan for the housing bank BHU to ensure sound new mortgage lending and minimize fiscal costs.
  - Cooperative COFAC being transformed into a new, financially sound institution.
  - Draft financial sector legislation submitted to Congress in December expected to reduce vulnerabilities and improve the central bank’s policy framework.
- Exit and resilience:
  - Continued strong macroeconomic policies and structural reforms will support a lasting exit from Fund support, increase resilience to shocks, and raise growth prospects.
  - Policy focus: improve the investment climate and enhance productivity; take advantage of favorable external conditions to further improve debt structure.
- Administrative note:
  - "The recent establishment of a debt management office is welcomed."

*International Monetary Fund  
Washington, D.C. 20431 USA*

### Statement by Hector Torres, Executive Director for Uruguay and David Vogel, Advisor to Executive Director (March 27, 2006)
- Macroeconomic performance and reforms:
  - Prudent macroeconomic policies and commitment to rule of law underpin robust economic evolution over the past year.
  - Authorities developing critical structural reforms: fiscal, monetary, financial, poverty reduction, competition, and rule-of-the-game improvements.
- Growth and external sector:
  - Economic growth exceeded the program’s original projection, with boosts to private consumption, investment, and exports.
  - Market diversification in external sales is increasing; authorities negotiating new trade agreements.
- Fiscal outcomes and employment:
  - Primary fiscal surplus of 3.8 percent of GDP in 2005, exceeding the program’s target.
  - Employment rate increased; unemployment figures not yet fully reflecting increased formal labor market entry.
- Financial market access and debt prefinancing:
  - In 2006, Uruguay placed in international markets US$ 500 million of sixteen-year bond in January, and US$ 500 million of thirty-year bond in March; yields showed a downward trend compared to previous issuances.
  - Country closed the 2006 financial gap and prefinanced some portion of 2007, making advance payments (some due in 2007) to the World Bank and Inter-American Development Bank.
- Tax reform and revenue administration:
  - Comprehensive tax reform submitted to Congress to be effective by 2007; aims to improve equity and efficiency and attract productive investment while avoiding revenue losses.
  - Tax administration agency (DGI) displaying very good performance; BPS and customs administration collections attaining significant increases.
  - Measures to reduce evasion: simplify tax system, strengthen revenue administrations, increase audits and penalties, and implement educational campaigns with medium-term effects.
- Expenditure ownership and budget priorities:
  - Five-year budget approved reflects priorities in education, health care, and infrastructure while showing a downward trend in public spending with little or negligible incidence on growth and social development.
- Debt reduction and management:
  - Debt-to-GDP fell to 70 percent in 2005 from 92 the year before.
  - Debt Management Office aims to further reduce debt cost, lengthen maturity (6 years at end-2004 to 7 1⁄2 years at end-2005), progressively de-dollarize, and substitute part of multilateral debt.
- Infrastructure investment adjustor (July 2006 to June 2007):
  - Authorities intend one-time investment outlays which may temporarily reduce the primary surplus "up to about a 1⁄4 percent of GDP."
  - Outlays will be fully financed by non-debt creating flows and used for high-quality projects meeting three pre-requisites:
    - Purely investment in infrastructure;
    - Positive fiscal impact by reducing recurrent spending and/or increasing public revenues from an early stage;
    - Direct impact on competitiveness.
  - Projects selected only after comprehensive cost-benefit studies by recognized firms; contingent fiscal risks minimized following best international practices.
  - Authorities committed to pursue primary surplus goals and to save any revenue overperformance to reach medium-term goal; the one-time adjustor is a "safety valve."
- Monetary policy stance:
  - Inflation (y/y) rose in the last two months but is "now in line with the Central Bank target range."
  - Main objective: keep inflation low and stable; in a flexible exchange regime, monetary policy will follow the same approach with modifications to progress towards a full-fledged inflation target regime.
  - Central Bank committed to use instruments flexibly to meet inflation objective.
- Reserves and exchange rate:
  - Authorities continued to build international reserves taking advantage of U.S. dollar inflows; this has prevented excessive peso appreciation.
  - Real effective exchange rate in line with fundamentals; authorities monitoring nominal exchange rate to avoid misalignment and agree on the need to avoid signaling a floor for the exchange rate.
- Competitiveness and business climate:
  - Authorities working to reduce fiscal burden on production, alleviate cost of doing business, and build consensus on a growth agenda involving government, investors, and workers to improve the business climate.
- Financial sector confidence and recent episodes:
  - Structural reforms in the financial sector aim to increase availability and lower cost of credit to spur investment.
  - Cofac episode: institutions (Superintendency of the Financial Sector and the newly created deposit insurance agency) worked efficiently; episode was isolated and did not affect the rest of the financial sector.
  - Government message: no government guarantees or public funds to bail out private creditors, establishing a sound precedent.
  - BHU: comprehensive restructuring plan adopted to create a sound institution with clear mandate, good governance, and proper incentives.
- Closing:
  - Authorities reiterate gratitude to staff, Management, and Executive Directors for support of Uruguay’s social and economic structural reforms.

*Source: Statement by Hector Torres, Executive Director for Uruguay and David Vogel, Advisor to Executive Director, March 27, 2006.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2006/_cr06197.pdf_