IMF Executive Board Concludes 2024 Article IV Consultation with Uruguay

IMF News, July 11, 2024

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Uruguay faced a once-in-a-century severe drought and external headwinds in 2023 but showed resilience due to sound macroeconomic policies, political stability, and strong institutions.
From October 2022 to April 2023, rainfall was about 47 percent below historical averages, affecting key agricultural areas.
Real GDP growth slowed to 0.4 percent in 2023.
Employment rose by 37,000 to 1.7 million in 2023.
The unemployment rate continued to hover around 8 percent.
Inflation fell within the target range in mid-2023, reaching its lowest level in the last eighteen years.
The financial sector remained resilient; the banking system is described as well capitalized, highly liquid, and profitable.

The Banco Central del Uruguay (BCU) began an easing cycle in April 2023 as inflationary pressures cooled.
The Monetary Policy Committee of the BCU gradually lowered the monetary policy rate from 11.5 percent at the start of 2023 to 8.5 percent in April 2024.
At the end of 2023, authorities reaffirmed that the BCU inflation target is the center of the target band (4.5 percent).
Executive Board view:
- Monetary policy should remain contractionary to ensure that inflation and inflation expectations stay within the target range in a sustained manner.
- Sustained monetary policy vigilance is crucial to build credibility and support de-dollarization by delivering low and stable inflation rates.
- Authorities should continue emphasizing that the inflation target is the mid-point of the target band (4.5 percent) in their public communications.
- Enhancing de jure central bank independence would further improve credibility and support policy continuity.

The deficit and debt outcomes were consistent with the targets of the fiscal rule in 2023.
Adherence to the fiscal rule for four consecutive years helped stabilize the debt-to-GDP ratio under a sequence of negative shocks.
The pension system reform approved in May 2023 is expected to stabilize spending over the medium-term.
The projected NFPS deficit, excluding cincuentones, is 3.1 percent of GDP in 2024.
Executive Board recommendations:
- Further efforts are needed to ensure a sustained downward path for the debt-to-GDP ratio over the medium term.
- Rebuilding fiscal buffers over the medium term requires lower targets for the structural balance and net indebtedness pillars of the fiscal rule.
- Refinements to the fiscal framework would help consolidate recent credibility gains.

Growth projections:
- Growth rate of 3.4 percent in 2024.
- Growth rate of 3 percent in 2025.
Drivers of the 2024 rebound:
- Recovery of agricultural exports.
- Increased cellulose production.
- Easing of financial conditions.
- Robust private consumption as real wages recover and the price differential with Argentina normalizes.
Inflation outlook:
- Inflation is projected to pick up in the second half of 2024 but stay within the target range, following gradual easing of monetary policy and robust wage growth.
Risks:
- Downside risks: worsening of external financial conditions, deterioration of international geopolitical tensions, potential for further extreme climate events.
- Upside risks: higher-than-expected agricultural export prices or lower fuel import prices.

The banking system is well capitalized, highly liquid, and profitable.
Amid higher international interest rates and a more stable exchange rate, profitability increased.
Despite the economic slowdown and agricultural sector losses in 2023, non-performing loans remained low with adequate loan loss provisions.
Executive Board recommendations and notes:
- The SSF should continue upgrading its risk-based supervision framework, enhancing stress-testing and closing data gaps, in line with past FSAP recommendations.
- Operationalizing the Pillar II capital add-ons will help address the adverse effect on capital buffers from the bank wealth tax.

The current administration (in office since 2020) implemented an upgrade of fiscal and monetary frameworks and advanced decisive structural reforms.
Reforms noted:
- Pension reform approved in May 2023.
- Ongoing implementation of an education reform.
Executive Board advice:
- Consolidating recent gains should be the priority to preserve macroeconomic policy space to confront risks and support long-term growth.
- Continuing structural reforms is key to unlocking potential growth; education reform implementation is critical to provide needed human capital over the medium term.
- Deepening global integration should focus on trade facilitation, addressing non-tariff barriers and red tape, and reducing logistics costs.
- Reducing backward-looking indexation and introducing more sectoral differentiation in wage negotiations would support disinflation and competitiveness.
- Climate-related advice: enhance water resource management, promote sustainability, and increase resilience to droughts given recurrent fiscal interventions and output losses in agriculture.
- Uruguay has been highlighted as being at the forefront of climate finance innovation.

Press Release No. 24/265 — IMF, July 11, 2024.