Uruguay: Staff Concluding Statement of the 2021 Article IV Mission
IMF News, October 6, 2021
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- Published: October 6, 2021
Overview
- Uruguay entered the pandemic with "solid institutions" but pre-existing macroeconomic imbalances, including stagnant growth since 2015, low investment, a weak manufacturing sector, secular fall in employment, poor education outcomes, and high and persistent youth unemployment.
- Public finances had weakened pre-pandemic, with a "10 percent of GDP increase in non-financial public sector debt between 2013 and 2019."
- A new administration took office in early 2020 and launched an "ambitious program of reforms to boost growth and strengthen public finances."
Impact of the COVID-19 shock and recovery dynamics
- The economy contracted in 2020 but "less than other countries in the region"; activity fell sharply in Q2 2020 and the year ended with a "5.9 decline in output."
- Employment followed the activity cycle, disproportionately affecting young and low-earning workers and increasing poverty from a relatively low base.
- About "50 percent of the losses in employment have already been recovered" after the 2020 rebound.
- The recovery in early 2021 was uneven: primary activities and construction reached pre-pandemic levels while contact-intensive sectors remained subdued due to a late but strong COVID wave.
- Vaccination progress: "about 77 percent of people are fully vaccinated," contributing to near halt in virus spread and reopening.
Policy response during the pandemic
- Fiscal: A fiscal package of "about 2.7 percent of GDP for 2020-21" provided targeted support to firms, employment and the most vulnerable; creation of the "Covid-19 Solidarity Fund" to record temporary measures; a new fiscal framework signaled commitment to medium-term sustainability.
- Labor: Introduction of a "partial unemployment benefit" helped contain employment losses by maintaining employer-employee relationships.
- Monetary and financial: The Banco Central del Uruguay (BCU) loosened monetary policy to provide liquidity, signaled renewed commitment to bringing down inflation, returned to the interest rate as operational instrument, and implemented regulatory forbearance (loan repayment extensions). Credit guarantee lines via SIGA supported small and medium-size enterprises.
- The report notes BCU stress-tests do not point to significant risks but emphasizes continued close monitoring as support measures are unwound.
Outlook and official projections
- Growth projections:
- Real GDP (percent change): 2019: "0.4"; 2020: "-5.9"; 2021: "3.4"; 2022: "3.2"; 2023: "2.7".
- Labor and inflation:
- Unemployment (in percent, eop): 2019: "8.9"; 2020: "10.4"; 2021: "10.2"; 2022: "9.0"; 2023: "8.5".
- CPI inflation (in percent, end of period): 2019: "8.8"; 2020: "9.4"; 2021: "7.2"; 2022: "5.8"; 2023: "5.0".
- The economy is "projected to grow by 3.4 percent in 2021 and 3.2 in 2022." Inflation is "projected to end 2021 around 7.2 percent, to continue on its downward path to reach 5.8 by end-2022."
- External and reserves:
- Merchandise exports, fob (US$ billions): 2019: "11.7"; 2020: "9.9"; 2021: "13.5"; 2022: "14.3"; 2023: "15.0".
- Merchandise imports, fob (US$ billions): 2019: "8.7"; 2020: "7.8"; 2021: "10.3"; 2022: "11.2".
- Gross official reserves (US$ billions): 2019: "14.5"; 2020: "16.2"; 2021: "17.0"; 2022: "17.4".
- Reserves in months of imports of goods and services: 2019: "13.1"; 2020: "17.1"; 2021: "14.1"; 2022: "13.0"; 2023: "12.5".
Fiscal and debt outlook (selected indicators)
- Revenue NFPS: 2019: "28.3"; 2020: "28.0"; 2021: "27.5".
- Primary expenditure NFPS: 2019: "28.8"; 2020: "30.2"; 2021: "29.4".
- Primary balance NFPS: 2019: "-0.5"; 2020: "-2.1"; 2021: "-1.8"; 2022: "-0.9"; 2023: "0.1".
- Overall balance NFPS: 2019: "-2.9"; 2020: "-4.7"; 2021: "-4.1"; 2022: "-3.4"; 2023: "-2.4".
- Gross debt NFPS: 2019: "60.5"; 2020: "68.1"; 2021: "67.5"; 2022: "68.7"; 2023: "70.0".
- Gross debt PS: 2019: "64.3"; 2020: "74.9"; 2021: "79.0"; 2022: "80.3"; 2023: "81.2".
- Net debt NFPS: 2019: "51.2"; 2020: "57.8"; 2021: "57.4"; 2022: "58.7"; 2023: "60.1".
- Total external debt + non-resident deposits (percent of GDP): 2019: "72.8"; 2020: "88.3"; 2021: "87.7"; 2022: "87.6"; 2023: "89.1".
- External debt service (in percent of exports of g&s): 2019: "59.4"; 2020: "73.7"; 2021: "65.6"; 2022: "70.3"; 2023: "69.9".
Main economic challenges identified
- Pandemic exacerbated pre-existing structural imbalances: weaker public finances and heightened medium-term sustainability risks.
- Human capital losses from school disruptions likely concentrated in the lowest income deciles, compounding pre-existing education problems and high dropout rates.
- Accelerated digitalization and teleworking risk accelerating obsolescence of low-skilled jobs and widening skill mismatches.
Policy recommendations and priorities
- Near term:
- Shift policy focus to rebuilding policy space while providing targeted support to still-affected sectors.
- The authorities' consolidation plan for 2022 is "welcome"; a "targeted extension of the partial unemployment benefit" should support affected workers, with gradual phasing out to incentivize return to work and facilitate labor reallocation.
- Medium term:
- Additional fiscal consolidation is needed to "put public debt on a firm downward path" and rebuild policy space, as current debt trajectory "leaves limited space to respond to future shocks."
- Refine the fiscal framework: consider "moving to 5-year rolling limits, introducing an explicit debt target, and formalizing an escape clause with correction mechanisms."
- Advance pension reform to secure fiscal sustainability, recognizing savings may materialize with delay.
- Monetary and financial:
- Monetary policy may need a "tightening bias" to bring inflation within the target range as the economy recovers; a well communicated policy strategy is recommended.
- Phase out credit support measures in a timely manner; tighten SIGA eligibility and conditions as uncertainty dissipates to avoid misallocation and fiscal costs.
- Continue close monitoring of financial stability risks, especially exposures in sectors highly affected by the pandemic.
- Labor and education:
- Policies to foster employment and address skill mismatches are welcomed: employment subsidy for vulnerable groups, differentiated wage-setting guidelines, and further decentralizing wage negotiations.
- Implement a multi-dimensional strategy for human capital: effective (re)training programs for low-skilled workers and speedy education reform to tackle high dropout rates and adapt formal education to an increasingly IT-based economy.
- Structural reforms and governance:
- Continue reforms to state-owned enterprises (SOEs): separate commercial and social objectives, rein in inefficient activities and unprofitable investments, and improve SOE independence and governance.
- Develop domestic capital markets to boost investment and pursue trade integration through new agreements.
- Continue incorporating environmental objectives into economic and fiscal policy design.
Mission conclusion
- The mission "praises the authorities for their prudent macroeconomic management of the crisis" and "encourages them to press ahead with their reform agenda as the pandemic is overcome."
- The team thanks Uruguay’s authorities and stakeholders "for their hospitality, constructive policy dialogue, and productive collaboration."
Source: Uruguay: Staff Concluding Statement of the 2021 Article IV Mission (October 6, 2021).