Uruguay: Staff Concluding Statement of the 2023 Article IV Mission
IMF News, March 20, 2023
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- Published: March 20, 2023
Mission and context
- IMF staff team, led by Mr. Pau Rabanal, visited Montevideo and held discussions during March 6–17.
- Mission issued summary of main conclusions and recommendations at end of the consultation.
Economic recovery and pandemic response
- Uruguay showed strong resilience during the Covid-19 pandemic, attributed to high institutional quality, strong governance, and authorities’ policy responses.
- Key pandemic outcomes:
- Two severe infection waves in 2021; containment measures relaxed in 2022.
- Successful vaccination campaigns, including for boosters.
- Covid-19 Solidarity Fund used to provide transparent support to affected households and corporate sectors.
- Labor market informality declined during the pandemic and has remained at a lower level.
Macroeconomic performance (recent outcomes)
- Real GDP and growth:
- Real GDP reached pre-pandemic levels in mid-2021 and grew at a healthy pace in 2022.
- Growth is expected to reach 4.9 percent in 2022, driven by strong exports of agricultural products and recovering service sectors, including tourism.
- The economy decelerated in the second half of 2022 due to the global slowdown and the effects of the drought.
- Employment and unemployment:
- Employment creation rebounded in 2022, although uneven across sectors.
- Unemployment has hovered at around 8 percent.
- Inflation and monetary conditions:
- Inflation peaked at 9.95 percent in September 2022 and declined to 7.5 percent in February 2023.
- Increase in inflation was less pronounced than in other countries due to a strong monetary policy response, appreciation of the Uruguayan peso, and limited increase in administered prices.
- External and fiscal indicators:
- Russia’s war in Ukraine had limited direct impact but boosted agricultural export demand and global prices.
- Uruguay maintained favorable market access and historically low spreads despite multiple shocks.
- The overall deficit of the non-financial public sector (NFPS), excluding cincuentones1, reached 2.8 percent of GDP in 2022, compared to 3.1 percent in 2021.
- After peaking at 69 percent of GDP in 2020, gross NFPS debt declined to 61 percent of GDP at the end of 2022.
Monetary policy and exchange rate
- Banco Central del Uruguay (BCU) actions in 2022:
- Policy rate raised from 5.75 percent in December 2021 to 11.5 percent in December 2022, turning the stance contractionary.
- Ceiling of the target range reduced from 7 to 6 percent effective September 2022.
- Inflation expectations remained outside the target band in 2022 but have recently declined, particularly two-year ahead expectations.
- Peso appreciation in 2022: 13 percent against the US dollar in nominal terms, and 20 percent in real effective terms.
- BCU refrained from FX market intervention to support clarity on monetary policy objectives.
Fiscal stance and recent fiscal developments
- Fiscal outcomes and actions:
- COVID-related spending was gradually unwound while deploying funds to protect vulnerable groups from high food and energy prices.
- Improvement in fiscal indicators since 2020 reflects authorities’ efforts, higher-than-expected GDP growth and inflation, and peso appreciation.
- Recently announced tax cut equals 0.2 percent of GDP and represents a structural reduction in revenues.
- Fiscal projections and assessments:
- NFPS fiscal deficit is projected at 2.3 percent of GDP in 2023.
- Current fiscal plans would keep NFPS debt largely stable in the near term; financing needs are manageable and market financing remains at favorable terms.
- IMF staff estimates that bringing NFPS debt to a range between 50-55 percent of GDP over the medium term would provide large enough buffers to respond to shocks.
- Recommendation to more explicitly link the calibration of the three pillars of the fiscal rule to authorities’ efforts to stabilize the debt-to-GDP ratio in annual fiscal reports to Parliament (“Rendición de Cuentas y Exposición de Motivos”).
- Recommendation for a well-calibrated explicit debt anchor to help stabilize debt-to-GDP at a lower level over the medium term.
Outlook and risks
- Baseline projections:
- Real GDP growth is projected at 2 percent in 2023 amid high uncertainty due to the current drought.
- Inflation is expected to decline to 7 percent in 2023 and fall within the target range in 2024.
- Downside risk factors:
- Worsening of external conditions and deterioration of international geopolitical tensions.
- Severity and duration of the current drought represent a key downside risk.
Policy recommendations and priorities
- Fiscal policy:
- Near term: Authorities’ plan is consistent with achieving fiscal rule targets while safeguarding social cohesion.
- If drought effects persist, some fiscal space is available, but additional fiscal efforts will be needed after the drought abates to put debt on a firm downward path.
- Real spending should grow at a slower pace to offset the structural revenue reduction from the announced 0.2 percent of GDP tax cut.
- Monetary and exchange rate policy:
- Maintain current contractionary monetary stance until inflation and inflation expectations have converged within the target range in a sustained manner.
- Enhancing de jure central bank independence would further improve credibility and support policy continuity.
- Exchange rate should continue to act as a shock absorber; FX interventions should be limited to respond to disorderly market conditions.
- Financial sector:
- Financial sector health is sound: low and stable non-performing loan ratios, high profitability, and strong liquidity indicators.
- Remaining challenges include high dollarization, which hampers monetary policy transmission and increases FX credit and systemic liquidity risks.
- Priorities:
- Further enhance macroprudential framework.
- Close large data gaps to assess system-wide FX liquidity risk and recalibrate de-dollarization measures.
- Address solvency risks for some private banks via Pillar 2 capital add-ons and restrictions on dividend distribution.
- Reform the bank wealth tax to incentivize private banks to raise additional capital.
- Update the crisis management framework.
- Ensure state-owned banks face strengthened supervision, governance, crisis management, and competition safeguards.
- Structural policies:
- Continue reforms to increase productivity, educational attainment, investment, and growth, including pension sustainability and education improvements.
- Further efficiency and productivity gains in state-owned enterprises: tariffs should be cost reflective and set by independent regulators; social program costs should be transparently financed from the budget rather than cross-subsidies.
- State-owned banks should be subject to the same resolution arrangements and corporate governance rules as private banks.
- Support initiatives to foster access to finance, promote capital market development, strengthen the innovation ecosystem, and modernize the digital payments system to boost investment and growth.
- New trade agreements under study could advance trade integration.
- Climate and sustainability:
- Maintain priority on transforming Uruguay into a climate-resilient, green, and sustainable economy.
- Uruguay is vulnerable to excessive rainfall and droughts, and rising sea levels.
- Successful issuance of a sustainability-linked sovereign bond highlights authorities’ commitment to environmentally sustainable policies and institutional coordination.
- To achieve carbon dioxide neutrality by 2050, prioritize decarbonization efforts focused on e-mobility and green hydrogen production.
- Promote climate-smart agricultural and livestock practices to reduce methane emissions intensity while raising agricultural production, preserving grassland ecosystems, and protecting native forests.
Institutional and cross-cutting notes
- Improvements since 2020:
- Progress on fiscal framework, including solid track record of achieving fiscal rule targets and creation of the Fiscal Council, strengthened credibility for fiscal prudence.
- Enhancements to the monetary policy framework should improve policy transmission and help reduce dollarization over time.
- The mission thanks Uruguay’s authorities and stakeholders for hospitality and constructive policy dialogue during March 6-17, 2023.
Source: IMF staff concluding statement of the 2023 Article IV mission to Uruguay.