IMF Executive Board Concludes 2023 Article IV Consultation with Uruguay

IMF News, May 17, 2023

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The Executive Board concluded the Article IV consultation with Uruguay on May 15, 2023 (Press Release No. 23/157; May 17, 2023).
Real GDP:
- After reaching pre-pandemic levels in mid-2021, real GDP grew by 4.9 percent in 2022 driven by strong commodity exports and the service sector, including tourism.
Growth dynamics in 2022:
- The economy decelerated in the second half of 2022 due to adverse external conditions and the effects of the most severe drought in forty years.
Inflation:
- Inflation remained above the target range in 2022.
- Inflation peaked in September 2022 at 9.95 percent and declined towards the end of the year, reaching 7.3 percent in March 2023.

Banco Central del Uruguay (BCU) actions:
- Policy rate raised from 5.75 percent in December 2021 to 11.5 percent in December 2022.
- BCU implemented an interest rate cut of 25 basis points in its April 2023 meeting, citing declining inflationary pressures.
Policy guidance from Directors:
- Maintain a tight monetary stance until price pressures and inflation expectations converge to the target band.
- Strengthen de jure central bank independence to bolster monetary policy credibility and support efforts to reduce dollarization.
- Exchange rate should act as a shock absorber; FX interventions should be limited to responding to disorderly market conditions.

Fiscal trends:
- Fiscal deficit and government debt declined substantially over the last two years, reflecting adherence to the fiscal rule while protecting the most vulnerable.
- Gross non-financial public sector (NFPS) debt: peaked at 68.1 percent of GDP in 2020 and reached 59.3 percent of GDP at the end of 2022.
- Overall fiscal risks are assessed as low.
Directors’ recommendations:
- Priority: continued strong compliance with the current fiscal rule.
- A more explicit debt objective could be a useful component of a medium-term fiscal strategy.
- A modest fiscal impulse in 2023 is appropriate, with measures to put debt on a downward path once drought effects abate.
- Recommended measures: further rationalize tax expenditures, improve targeting of subsidies, reduce the wage bill, and preserve social cohesion.
- Directors welcomed the recently approved pension reform as supportive of stabilizing long-term pension spending.

Financial sector status:
- The health of the financial sector remains sound; banks have weathered the pandemic well.
- Directors welcomed that the financial sector remains resilient and healthy.
Recommended actions:
- Enhance financial supervision to bolster resilience to shocks and improve confidence.
- Promote domestic capital market development.
- Continue implementation of recent FSAP recommendations and progress toward creating a comprehensive AML/CFT national plan.

Structural reform priorities:
- Continue ambitious structural reforms to maintain resilience and support sustainable and inclusive growth.
- Address long-standing human capital erosion and skill gaps; further efforts needed following recent education reforms.
- Improve efficiency and productivity of state-owned enterprises and enhance trade integration.
Climate leadership:
- Directors commended Uruguay’s leadership in climate change policy and integration of climate policies into the overall policy agenda.
- Noted the successful issuance of a Sovereign Sustainability-Linked Bond and significant progress in reducing greenhouse gas emissions intensity.
- Encouraged continued efforts to transform Uruguay into a climate-resilient, green, and sustainable economy.

Growth projections and near-term outlook:
- The economy is expected to decelerate in 2023, with real GDP growth projected at 2 percent.
- Growth drivers in 2023: strong tourism season, increased cellulose production and exports, and robust private consumption as real wages recover.
- Growth outlook after 2023 is positive but subject to external and domestic risks.
Inflation outlook:
- Inflation is expected to decline to 7 percent in 2023 and fall within the target range in 2024.
Main macroeconomic risks:
- Worsening of external financial conditions.
- Deterioration of international geopolitical tensions.
- Continued impact of the drought.

Real GDP (percent change): 2021: 5.3; 2022: 4.9; 2023: 2.0; 2024: 3.0
GDP (US$ billions): 2021: 61.4; 2022: 71.2; 2023: 76.5; 2024: 80.5
Unemployment (in percent, pa): 2021: 9.4; 2022: 7.9; 2023: 8.2; 2024: 8.1
Output gap (percent of potential output): 2021: -2.0; 2022: -0.4; 2023: -0.6; 2024: -0.2
CPI inflation (in percent, end of period)): 2021: 8.0; 2022: 8.3; 2023: 7.0; 2024: 5.7
Policy rate evolution: 5.75 percent (December 2021) → 11.5 percent (December 2022); April 2023: cut of 25 basis points
Gross debt NFPS: 2021: 63.4; 2022: 59.3; 2023: 61.6; 2024: 61.9 (percent of GDP)
Net debt NFPS: 2021: 53.3; 2022: 50.5; 2023: 52.9
Merchandise exports, fob (US$ billions): 2021: 15.7; 2022: 17.2; 2023: 15.5; 2024: 16.6
Merchandise imports, fob (US$ billions): 2021: 11.2; 2022: 13.6; 2023: 13.3; 2024: 14.5
Gross official reserves (US$ billions): 2021: 17.0; 2022: 15.1; 2023: 16.1; 2024: 16.3
In months of imports of goods and services: 2021: 13.7; 2022: 9.7; 2023: 10.4; 2024: 9.8
External debt service (in percent of exports of g&s): 2021: 57.7; 2022: 53.7; 2023: 61.8; 2024: 52.7
Total external debt + non-resident deposits (percent of GDP): 2021: 79.4; 2022: 78.0; 2023: 79.1; 2024: 77.4
Of which: External public debt (percent of GDP): 2021: 34.7; 2022: 29.1; 2023: 33.6; 2024: 32.4

Source: Press Release No. 23/157, IMF Communications Department (May 17, 2023).