Public Information Notice: IMF Concludes Article IV Consultation with Uruguay

September 18, 1998

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On September 3, 1998, the Executive Board concluded the Article IV consultation with Uruguay1.


In the 1990s, Uruguay has been implementing a gradual anti-inflation strategy based on de-indexing the economy, strengthening the public finances, liberalizing foreign trade, reforming the social security system, and privatizing certain public services. This effort, which has been sustained by two successive administrations, reduced inflation from nearly 140 percent in 1990 to 10 percent in the 12 months through June 1998, while average yearly output growth increased from ½ percent during the 1980s to nearly 4 percent between 1990 and 1997. The external current account deficit remained moderate and international reserves at the Central Bank of Uruguay increased steadily.

The fiscal deficit in 1997 was 1.4 percent of GDP, down slightly from 1996, despite a doubling of certain state and social security reform costs. For 1998, fiscal policies remain on track. Tax revenues during the first half of 1998 were 8 percent above the same period last year while expenditures were in line with the programmed level. The first half operating result of the public enterprises was stronger than envisaged owing to lower energy costs and strong demand for public sector goods and services.

Nonresident deposits (in U.S. dollars) increased after the international capital market turbulence of October 1997, and deposit flows remained strong in the first half of 1998. Credit to the private sector (in real terms) increased by 13 percent in 1997 and about 15 percent in the 12–month period through March 1998.

Uruguay’s balance of payments has been strong in recent years. The external current account deficit was the equivalent of 1.6 percent of GDP in 1997, with broadly-based export growth reaching 14 percent in U.S. dollar terms, and imports increasing by 12 percent. The growth in exports and imports slowed to about 7½ and 5½ percent, respectively, in the period January-May 1998 (year-on-year), reflecting both lower agricultural export prices and a drop in energy import prices. Tourism receipts were somewhat lower than expected in the early months of 1998, due to effect of the El Niño rains on tourist activity.

Net capital inflows nearly doubled to US$650 million (3 percent of GDP) in 1997, with foreign direct investment covering about half of the current account deficit. In June 1997, Uruguay’s sovereign credit rating was raised to investment grade, facilitating two long-term Eurobond issues of US$300 million and US$250 million in July 1997 and April 1998, respectively, each with spreads of roughly 135 basis points over the comparable U.S. Treasury bond. Net international reserves increased by US$330 million in 1997, and a further US$200 million in the first six months of 1998. In June 1998, international reserves stood at US$2.3 billion, or six months of imports.

Uruguay made substantial progress with structural reforms during 1997 and early 1998. In the social security reform, some 500,000 individuals have shifted to the new private pension system, far exceeding initial expectations. The reduction in personnel and offices in government and state enterprises under the reform of the state is expected to be completed this year. Seventy percent of the resulting cost reductions will be allocated to improve wages of public employees making them more competitive with the private sector, and the remainder will be saved.

Efficiency-enhancing reforms in the public enterprises are gaining momentum. State-owned enterprises are increasing their scale of operations and preparing for more open competition after the deregulation of markets expected for early next century under the Mercosur. The national oil company (with large stakes in cement and alcohol production) has started to upgrade and expand domestic refining facilities and service stations, and has begun several joint ventures with foreign companies in the areas of cement, alcohol, and gasoline distribution. In the electricity sector, deregulation will permit privately generated energy to be sold on the publicly-owned grid. The telephone company is expanding its operations through concessions and lease-back arrangements with multinational equipment suppliers.

The IMF is supporting the authorities’ program with a 21– month stand-by arrangement through March 1999, which the authorities are treating as precautionary. The program objectives include achieving single-digit inflation by end-1998, and an output growth in the range of 3 to 4 percent per annum; it also aims at a reduction of the budget deficit to 1 percent of GDP. The quantitative targets under the program were met for both 1997 (except for a smalloverrun in government expenditures at end year) and for the first half of 1998. Regarding structural reform, public sector employment was reduced by 7 percent in 1997, and in December 1997, the authorities obtained approval of the new de-indexation law, which adjusts public sector wages and tariffs on a six-month basis (January and July), rather than at the previous four-month interval. In 1998, a new bankruptcy law was submitted to Congress in June, and the government is slated to implement several measures aimed at improving disclosure and transparency in financial markets and issue a new law strengthening Central Bank supervision of the financial markets.

Executive Board Assessment

Directors observed that the gradual anti-inflation strategy continues to work well for Uruguay and the economy is performing well. Inflation has declined as envisaged, while real GDP growth has exceeded expectations, unemployment has been reduced from the high level reached in the mid–1990s, and the external current account deficit remains modest. All the targets under the 1998 program supported by the current stand-by arrangement were met. At the same time, the uncertainties in the international economic environment called for the authorities to continue with cautious policies to minimize risks to the program.

Directors welcomed the approval at end–1997 of the new de-indexation law for public sector wages and tariffs, and recommend shifting to a system of annual adjustments for public sector wages and prices from the current six-month adjustment period, as soon as permitted under the new law. They emphasized the importance that the progress made on this and other broad-based structural reform has had for bolstering confidence, improving the allocation of resources, and helping to sustain national savings to preserve the underlying strength of the balance of payments.

Directors welcomed the authorities’ commitment to reduce the overall public sector deficit to 1 percent of GDP in 1998 (and in 1999), and supported the government’s emphasis on expenditure restraint as the level of public spending is high in Uruguay. They were of the view that firm control over expenditure also will be essential to permit a cut in distortionary taxes, and to reduce the dependency of the budget on monopoly revenue from the public sector enterprises.

While emphasizing that the deepening of financial intermediation in a more competitive market will have significant benefits for the economy, some Directors noted that it also would bring risks, and that it will be important for the authorities to step up bank supervision to ensure that the banks do not overextend themselves, and to increase transparency and disclosure in the financial market to help ensure that financial saving is allocated efficiently. In this regard, they welcomed the authorities’ far-reaching plans to improve the information infrastructure in the economy and the efforts to grant the Central Bank new powers to enforce its supervision of the financial system. At the same time, they pointed to the need to proceed rapidly with reforms in the state-owned banks, particularly in view of their low profitability, notwithstanding their high market share.

Directors noted that the adjustable exchange-rate band has provided a valuable guide for inflation expectations. However, they stressed that wage and other policies will need to remain sufficiently restrictive to deliver the inflation objective and preserve Uruguay’s competitiveness. Directors shared the authorities’ concerns about the temporary increase in the common external tariff in Mercosur and welcomed their efforts to roll back this increase at an early date.

Uruguay: Selected Economic Indicators

  1993 1994 1995 1996 1997

Real economy (change in percent)  
GDP 3.0 6.3 -1.8 5.3 5.1
Domestic expenditure (current prices) 54.1 50.9 38.8 33.2 23.7
CPI (end of period) 52.9 44.1 35.4 24.3 15.2
Unemployment rate (end year, in percent) 8.0 9.8 11.1 11.9 10.3
Gross national savings (percent of GDP) 12.0 11.1 11.7 11.4 11.2
Gross domestic investment (percent of GDP) 14.6 13.8 12.9 12.6 12.8
Public finance (percent of GDP)  
Federal government balance -1.0 -2.2 -2.1 -2.0 -1.7
Overall public sector balance -1.9 -3.0 -1.7 -1.8 -1.4
Money and interest rates  
Net domestic credit (change in percent) 39.5 25.3 35.0 33.5 23.6
Banking system deposits (change in percent) 33.0 36.7 32.3 38.7 28.0
Foreign Currency 48.3 19.4 44.6 35.3 21.0
Local Currency 31.1 39.2 30.8 39.2 28.9
Interest rates (average, in percent per annum)  
Foreign currency deposits1 3.1 3.4 4.5 4.9 4.8
Foreign currency loans2 11.2 11.7 14.0 13.2 12.7
Domestic currency deposits1 39.4 37.0 38.1 28.2 19.6
Domestic currency loans2 97.3 95.1 61.1 48.2 39.2
Balance of Payments (in millions of US$)  
Trade balance -680 -873 -719 -874 -936
Exports (f.o.b.) 1,645 1,913 2,148 2,449 2,781
Imports (c.i.f.) -2,326 -2,786 -2,867 -3,323 -3,716
Current account -353 -439 -213 -234 -321
As percent of GDP -2.6 -2.6 -1.2 -1.2 -1.6
External debt (percent of GDP) 37.6 36.5 34.9 35.3 36.9
External public debt (percent of GDP) 28.2 28.1 26.6 25.9 26.1

Sources: Central Bank of Uruguay, National Institute of Statistics.

1 Interest rates on deposits of 30 to 180 day maturity.
2 Representative

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


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