Reports on Observance of Standards and Codes

Uruguay and the IMF

Uruguay ROSC
I.  Fiscal Transparency

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I. Fiscal Transparency

Prepared by the Fiscal Affairs Department

March 5, 2001


Executive Summary

  1. Introduction

  2. Description of Practice
    1. Clarity of Roles and Responsibilities
    2. Public Availability of Information
    3. Open Budget Preparation, Execution, and Reporting
    4. Independent Assurances of Integrity

  3. IMF Staff Commentary

Executive Summary

This report provides an assessment of fiscal transparency practices in Uruguay in relation to the requirements of the IMF Code of Good Practices on Fiscal Transparency—Declaration on Principles based on the authorities' response to the IMF fiscal transparency questionnaire and other documents provided by the authorities.

Progress is being made in improving the transparency of fiscal policy setting and budget management. The quality of fiscal data and public procurement procedures have substantially improved, performance of the operational units of the public sector is more closely monitored, and administrative regulations governing competition in the private sector are being revised.

However, in a number of important respects, the full requirements of the Code of Good Practices on Fiscal Transparency are not yet met. Some of these requirements could be relatively easily achieved by making information available internally more accessible to the public. However, some of the more fundamental improvements in fiscal transparency will require detailed study and will take some time to implement in full. Priority should be given to establishing a clear demarcation between commercial and noncommercial activities of the public financial institutions, nonfinancial public enterprises, and nongovernment public entities; preparing statements of tax expenditures and fiscal risks; initiating a medium-term expenditure framework; and reinforcing and external the internal audit system.

Abbreviations and Acronyms
AFAP Administradoras de Fondos de Ahorro Previsional
AFE Administración de los Ferrocarriles del Estado (railways)
ANCAP Administración Nacional de Combustibles, Alcohol y Portland (petroleum products, alcohol, and cement)
ANCO Administración Nacional de Correos (postal service)
ANP Administración Nacional de Puertos (ports)
ANTEL Administración Nacional de Telecomunicaciones (telephone)
BCU Banco Central del Uruguay (central bank)
BHU Banco Hipotecario del Uruguay (national mortgage bank)
BPS Banco de Previsión Social
BROU Banco de la República Oriental del Uruguay
BSE Banco de Seguros del Estado (national insurance company)
CND Corporación Nacional para el Desarrollo
EASDECI   Entes autónomos y servicios descentralizados de la esfera comercial e industrial del estado
IFIS Integrated Financial Information System
INC Instituto Nacional de Colonización
NFPE Nonfinancial public enterprise
OSE Administración de las Obras Sanitarias del Estado (water and sewerage)
PFI Public financial institution
PPNE Personas públicas no estatales
SDDS Special Data Dissemination Standard
TOCAF    Texto Ordenado de Contabilidad y Administración Financiera
UTE Usinas y Transmisiones Eléctricas (electricity)

I.  Introduction1

1.  This report provides an assessment of fiscal transparency practices in Uruguay. The assessment has two parts. The first part is a description of practices in relation to the requirements of the IMF Code of Good Practices on Fiscal Transparency—Declaration on Principles, prepared by IMF staff on the basis of the authorities' response to the IMF fiscal transparency questionnaire and additional information provided by the authorities. The second part is an IMF staff commentary on fiscal transparency in Uruguay.

II.  Description of Practice

A.  Clarity of Roles and Responsibilities

2.  General government is relatively well distinguished from the rest of the economy, but there are important areas where further clarity would be desirable. For fiscal policy purposes, general government is defined to include the central government, the social security agency (Banco de Previsión Social—BPS), and local governments (intendencias). Legally, however, a mixed group of agencies, los entes autónomos y servicios descentralizados de la esfera comercial e industrial del estado (EASDECI), are identified as a group under government control in the constitution (Article 221). This heterogeneous group covers both agencies performing mainly commercial activities (public financial institutions—PFIs2 —and nonfinancial public enterprises—NFPEs3) and two agencies that only perform noncommercial activities.4 Moreover, there are certain personas públicas no estatales (PPNEs) which are created by law, pursue public policy goals, but carry out their activities within the framework of private sector law. Most of them undertake noncommercial activities and are typically financed through direct grants from the national budget, earmarked taxes, or tax exemptions.5 Since 1996, several administrative units of the central government have been turned into PPNE.

3.  The government's equity participation in the private sector is small. The principal exception is in the case of two banks placed under public sector management. Government participation usually takes the form of investment in a private enterprise by a public enterprise. Generally speaking, such investments are published in the statements of accounts of public enterprises.

4. Regulation of the private sector is complex, but is being reformed. Recently, the government, through its Executive Committee for State Reform, has been compiling all regulations relating to competition. A review process is underway, with the objective of amending or eliminating many of them.

5.  The constitution and the law establish a clear separation of the fiscal roles of the different branches and levels of government. The executive, legislative, and judicial branches are clearly distinguished in the constitution. There is also a clear constitutional distinction in the distribution of responsibilities between the central government and the local governments regarding public revenues and expenditures. Local governments (which account for 10 percent of general government expenditures) finance almost 90 percent of their expenditures with own revenues. The residual is partly covered by a transfer of the earmarked diesel fuel tax. In addition, investment grants for specific purposes are made to local governments. The total amount of these grants is determined for a five-year period, although annual increases may be negotiated. The allocation of grants among local governments is based on a formula determined by the law. The 1996 constitutional reform provides for the additional transfer, during the present administration, of a percentage of central government revenues. This is to be reflected in the next central government budget. Local governments are required in principle to balance their budgets. Since debt issue requirements are very stringent, and bank borrowing is also difficult, deficits arising during the budget execution stage are in practice financed mainly by supplier credits and arrears to public enterprises.6

6.  The BCU is legally an autonomous agency, but it is not independent of the government. Moreover, the BCU undertakes the management and servicing of part of the public debt and is directly responsible for interest payments on debt arising from past financial sector restructuring. As a result, the BCU incurs a quasi-fiscal loss.

7.  Public financial institutions and nonfinancial public enterprises are subject to common operating restrictions. On the one hand, their employees have the same legal status as civil servants, and procurement is made according to the same regulations as for the central government, but with more flexibility.7 On the other hand, they are required to purchase insurance from the Banco de Seguros del Estado (BSE), and to channel at least 20 percent of their advertising and public announcements through public radio and television.

8.  Public sector banks account for a large share of the financial market.8 They do not publish detailed information on their operations and financial situation, prudential regulations are less strictly applied to them, and they have an explicit governmental guarantee on their operations. Public sector banks are required to meet an unremunerated 100 percent reserve requirement on public agencies deposits. The BROU is partly a development bank and sometimes lends at below-market interest rates to priority sectors. It enjoys a de facto monopoly on the deposits of public entities and receives revenues from its monopoly status as trade tax collector. Recently, the BROU has refinanced nonperforming loans to the agricultural sector and to small and medium enterprises. Also, the BHU, the public mortgage bank, is responsible for stimulating construction and home-ownership and, as such, lends at favorable interest rates when considering the high risk profile of its clients and, recently, refinanced overdue loans. The interest on the mortgage loans made by the BHU and on the "social" loans made by the BROU are exempted of the VAT levied on the interests on loans. These two banks are being reformed to establish a more level playing field between public and private banks. Supervision and transparency of these banks is also being strengthened. They are being externally audited for the first time.

9.  Most of the NFPEs are monopolies and are subject to policy directives on pricing, investment, and employment. In recent years, steps have been taken to reduce some of the privileges they enjoy, particularly by introducing competition in certain sectors, but progress in this regard has not affected the core activities of NFPEs. Their tariffs are approved by the government, and there is cross-subsidization between different types of users. Moreover, for revenue-raising purposes, they are charged with taxes not levied on private enterprises—tax on the purchases of foreign exchange—or with tax rates higher than those paid by the private sector—a twice-as-high employer contribution to social security.

10.  The BSE accounts for a dominant share of the insurance market. It enjoys a monopoly on the insurance of working accidents and professional diseases as well as on the insurance contracts undertaken by the public sector. The BSE competes with private companies for the rest of the insurance market. However, a lower tax rate is levied on the premium revenues of the BSE.9

11.  The social security system is made up of several funds with different legal status. The main public social security fund is managed by the BPS, which is legally an EASDECI. The social security fund for the armed forces is administered by the Ministry of National Defense. There are three funds (for public notaries, bank employees, and university professionals) that are administered as PPNE. Some of them enjoy tax privileges. Published information on their financial situation is inadequate for financial assessment relative to their actuarial obligations. In addition, a private pillar of the social security system is provided by individual retirement accounts in Administradoras de Fondos de Ahorro Previsional (AFAPs) that are regulated by the BCU.

12.  The legal framework for fiscal management is well established in law and has a traditional financial compliance emphasis.10 The legal framework establishes basic budgetary principles and a clear allocation of roles and responsibilities in the areas of budget preparation, execution, control, and submission of budgetary accounts. The budgetary process is similar for the central government and the local governments. The legal framework focuses mainly on financial control. Changes have recently been introduced, which emphasize goals and performance indicators for the administrative units of the central government. Central and regional governments can commit expenditure for which there are no appropriations in unforeseen circumstances up to a ceiling of 1 percent of the national or local budget. Any such commitments must be reported to congress or local assembly concerned. The central government can also reserve up to 12 percent of total expenditure—excluding personnel, debt service, and social benefits―to cover operating costs or for items without specifically appropriated funds.

13.  Taxes must be established by law. However, the tax laws provide the executive branch with some discretion to adjust certain basic elements of taxes within established limits. The tax law usually sets the maximum tax rate and authorizes the government to determine lesser or differentiated rates. There is no specific code of conduct for tax officials, other than the ethical standards of behavior for civil servants under the legislation governing their conduct. The tax code spells out taxpayer rights vis-à-vis the tax administration.

B.  Public Availability of Information

14.  The constitution provides for comprehensive coverage of the budget, but the coverage of fiscal activity in budget documents is not yet complete. The national government presents the central government budget for deliberation and approval by congress. Under the law, the budgets of the EASDECI are required to be submitted to parliament for information only. In practice, the budgets of the EASDECI are not tabled in congress, unless there are discrepancies between the government and the agency. The public social security budget, which represents a large share of public sector expenditure in Uruguay, is not presented to congress. Also excluded from the central government budget are the noncommercial activities performed by the PPNEs. These entities approve their own budgets and are obliged to provide their financial statements to the central government for later submission to congress. Taken together, this means that almost 50 percent of the noncommercial activities of the central government are off-budget, and subject to different timing and form of congressional scrutiny than budgetary activities. The 1996 five-year budget law provided that the "own revenues" (user fees and charges) of government entities, previously off-budget, were included in the central government budget.

15.  There are delays in providing general government fiscal information. Under the constitution, local governments prepare their own budgets, which are presented for deliberation and approval by the local assemblies. Local governments are not legally obliged to provide financial information to the central government. This results in difficulties and delays in producing general government financial information.

16.  Central government budget documents are not published in their entirety. According to the constitution, the national budget law should be accompanied by annexes covering revenues, current expenditures, investments, public employees' wages, and targets and performance indicators of budgetary programs. This complementary information is only provided to congress, except for the performance information, which is published by the Executive Committee for the Reform of the State and can be found on its website

17.  The central government budget contains little information about fiscal aggregates for past fiscal years, it does not include projections, nor estimates of contingent liabilities and quasi-fiscal activities, or information on tax expenditures. Every month, the BCU publishes information on the level and composition of public debt but not on total financial assets. The authorities publish comprehensive monthly fiscal data, except for the local governments, and are preparing to subscribe to the Special Data Dissemination Standard (SDDS) before end-2001.

C.  Open Budget Preparation, Execution, and Reporting

18.  The constitution establishes that the Central Government Budget Law will be prepared and approved for the five years in which the administration is in office. A statement annexed to the law identifies current expenditure for the first year of the quinquennium and annual investment expenditure for all five years. Annual and within-year adjustments may be made to current expenditure for expected inflation. Prior to the start of the second and subsequent budget years (the calendar year), a Budget Reporting Law and a Budget Execution Statement are submitted to congress. At this time, changes to the full five-year Central Government Budget Law may be presented for approval. It is neither mandatory nor standard practice to include in the budget documentation a statement of fiscal policy objectives and priorities, the macroeconomic forecasts serving as a basis for the budget, or a qualitative assessment of the sustainability of fiscal policy. The only forecast contained in the budget documentation relates to investment. It is also not the practice to prepare medium-term macroeconomic or expenditure frameworks or to report on fiscal risks. There are no fiscal rules, except for the establishment by law of a limit on the central government's indebtedness in the form of treasury bills or bonds. However, government entities included in the Central Government Budget Law are legally compelled to set annual performance targets. Actual performance is monitored twice a year by the Planning and Budget Office. This information is provided to congress along with the Budget Reporting Law. Local governments follow a similar budget process and report to their local assemblies.

19.  Central government budget preparation is a joint responsibility of the Planning and Budget Office and the Ministry of Economy and Finance. The director and staff of the Planning and Budget Office propose basic guidelines, evaluate programs and projects from the efficiency point of view, make performance evaluations of the administrative units included in the budget, and prepare the quinquennial investment program. The Ministry of Economy and Finance, through the General Accounting Office (Contaduría General de la Nación), designs the budget preparation process and the current budget. This sharing of responsibilities means that no single office is clearly accountable for the budget, and this makes it difficult to coordinate public investment and current expenditures.

20.  Uruguay possesses a complete budget classification system, which identifies expenditure by economic category, by executing agency, and by program. The indicator most used to analyze the fiscal position is the overall balance, although the budget documentation does not show how this indicator is derived from the budget estimates. Modified cash accounting is used, and international accounting standards are followed. However, the ongoing implementation of an Integrated Financial Information System (IFIS) already provides some information on expenditures on an accrual basis. The accounting standards are set out in accounting manuals but are not stated in the budget documentation or final accounts. However, changes in accounting policies, as well as their impact on fiscal aggregates, are explained in the Budget Reporting Law and Budget Execution Statement.

21.  There has been considerable progress in improving the budget control and execution systems of agencies covered by the central government budget. The introduction of an IFIS means that there are now adequate real time data available on the various stages of the expenditure process. The revenue module of the IFIS is expected to come on line before the start of FY 2002. The General Accounting Office prepares monthly budget execution data covering changes in appropriations to the agencies included in the central government budget, commitments, and liabilities. With the same periodicity, the National Treasury produces data on cash revenues and payments, and differences with respect to the programmed figures. This information is not published. The General Accounting Office is also responsible for preparing the annual Budget Execution Statement that has to be tabled in congress six months after the end of the fiscal year. The accounting reports are reconciled with the bank accounts monthly and with the budget appropriations annually.

22.  The government is improving the system of public procurement to increase accountability while permitting increased flexibility. It is introducing centralized monitoring systems and an information system on government procurement supply and demand. Civil service recruitment has been frozen for the past five years and it is established by law that it will remain so for a further five years, with certain exceptions for such groups as the police, health workers, and highly specialized personnel. There is full legislation on hiring staff and setting pay levels, with considerable discretion in the former and excessive complexity in the latter.

23.  The National Internal Audit Office (Auditoría Interna de la Nación) is responsible for the legality and financial conformity of internal audit. Its operational capacity has been reduced in the last few years because of a recruitment freeze. It undertakes selective operational audits, the conclusions of which are published semiannually. However, there are no institutional procedures to ensure that the recommendations from these audits are implemented. The Central Accounting Offices (Contadurías Generales) in the ministries and agencies are in charge of ex ante internal control. They have to report on every act that gives rise to a commitment, the recognition of a liability or a payment, and the legality of that act.

D.  Independent Assurances of Integrity

24.  The Tribunal de Cuentas de la República is the supreme audit institution and is independent of the executive branch of government. The president of the Tribunal is appointed by the legislative branch. The Tribunal annually audits the accounts of all public sector agencies for legality and financial conformity. There is no institutional mechanism for enforcing compliance with its findings.

25.  Macroeconomic forecasts are debated publicly. However, the assumptions and methods of preparation are not presented in detail.

26.  The National Statistics Office enjoys technical independence in collection and preparation of statistics. Budget execution statistics are prepared by the General Accounting Office and the National Treasury. The BCU has the responsibility of preparing the national accounts.

III.  IMF Staff Commentary

27.  Significant progress is being made in improving the transparency of fiscal policy setting and budget management. Through the implementation of the IFIS, the quality of fiscal data has substantially improved. Other important advances in transparency are the improved public procurement procedures, the revision of the administrative regulations governing competition in the private sector, setting targets for and monitoring performance of the operational units of the public services, and the inclusion of own revenues of public agencies in the budget.

28.  In a number of important respects, however, the full requirements of the Code of Good Practices on Fiscal Transparency are not yet met in Uruguay. Some improvements in fiscal transparency can be relatively easily achieved by making information already available internally more accessible to the public. Immediate priority should, in particular, be given to making public the following information on fiscal policy and budget plans:

  • The objectives, priorities, and sustainability of fiscal policy, and a definition of the basic indicators that are being used to monitor the fiscal position.

  • The macroeconomic forecasts that have been used as a basis for estimating fiscal aggregates, as well as the assumptions and methods used in their preparation, so that the public can evaluate the viability and consistency of fiscal policy objectives.

  • A consolidated budget should be prepared for the central government and the public social security system. The consolidated budget should include all central government entities that undertake noncommercial activities, regardless of the legal nature of these entities, with as detailed a comparison as possible between the budget estimates and the actual outturn of two previous years.

  • The budgets of the commercial and industrial autonomous entities and decentralized agencies, as well as their balance sheets, profit and loss accounts, and audit reports for the preceding fiscal year, should be presented annually to parliament.

  • A consolidated general government budget execution report for the previous year should be prepared, notwithstanding possible delays in submission of local government accounts.

It would also be desirable to strengthen the legal framework that regulates public budgetary and accounting practices (TOCAF). In particular, clarifying the regulation of virements and the detailed regulations governing the use of contingency funds.

29.  Some of the more fundamental improvements in fiscal transparency will require detailed study and will take some time to implement in full. In this area, priority should be given to the following activities:

  • Initiate a preliminary statement of tax expenditures at least listing all the exemptions currently in place and aiming to produce assessments of their fiscal costs in the future.

  • Establish a clear demarcation between commercial and noncommercial activities of the PFIs, NFPEs, and PPNEs. This would enable the identification and an assessment of the costs of all major quasi-fiscal activities.

  • Develop a statement of fiscal risks, which would give an analysis of the sensitivity of fiscal aggregates to changes in the basic macroeconomic parameters. The main contingent liabilities should be listed as well as their potential full costs, and an assessment should be made of the probability that contingent expenditures will be incurred.

  • Prepare and publish a medium-term expenditure scenario for the budget year plus two or three years on a rolling basis which is set in the context of a macroeconomic forecast and public revenue scenario, and which at least captures the impact on spending of policies in effect at the time the budget is prepared and the implications for future current spending of programmed investments. This will make it possible to provide information on the policy commitments already made for future years and on the margin available for incorporating new spending policies compatible with the existing budgetary constraints.

  • Reduce the government's discretion to change tax rates, increase the legal security of taxpayers regarding their tax obligations, provide a clearer definition of the taxpayers' rights, and enforce control mechanisms over tax administration officials.

  • Reinforce the internal and external audit system by gradually increasing the capacity to carry out performance audits. Institutional procedures should be established to encourage the implementation of the recommendations of the National Internal Audit Office and the Tribunal de Cuentas de la República.

1 Discussions on fiscal transparency were held in Montevideo during February 7-18, 2000. The staff team, comprising Mr. Viñuela and Ms. Dabán, met with officials from the Ministry of Economy and Finance; the Planning and Budget Office; the Banco Central del Uruguay (BCU), central bank; the two public banks: the Banco de la República Oriental del Uruguay (BROU)-the largest commercial bank in the country, and the Banco Hipotecario del Uruguay (BHU)-national mortgage bank; and the Court of Accounts.
2The BCU, the BROU, the BHU, and the Banco de Seguros del Estado (BSE)-national insurance company.
3The Administración de los Ferrocarriles del Estado (AFE)-railways; the Administración Nacional de Puertos (ANP)-ports; the Administración Nacional de Correos (ANCO)-postal service; the Administración Nacional de Telecomunicaciones (ANTEL)-telephone; the Administración Nacional de Combustibles, Alcohol y Portland (ANCAP)-petroleum products, alcohol, and cement; the Usinas y Transmisiones Eléctricas (UTE)-electricity; and the Administración de las Obras Sanitarias del Estado (OSE)-water and sewerage.
4The Instituto Nacional de Colonización (INC) and the BPS.
5One of them, the Corporación Nacional para el Desarrollo (CND), invests risk capital in private companies and lends to micro and small enterprises at below-market interest rates, but is also the co-owner of the Banco de Crédito and the Banco la Caja Obrera-two banks placed under public sector management.
6To issue public debt, local governments are required to get authorization from the local assembly and then from congress, with the approval of an absolute majority of its members. In the case of bank borrowing, the local assembly has to authorize the loans by absolute majority or a majority of two-thirds depending on the loan terms.
7From the efficiency point of view, these restrictions do not seem to be the most appropriate for entities undertaking commercial activities.
8The BROU and the BHU represent 40 percent of the loans and 37 percent of the deposits of the banking system.
9The BSE market share in this segment of the market is 72 percent.
10Public Financial Management is regulated in the constitution and the Texto Ordenado de Contabilidad y Administración Financiera (TOCAF). The TOCAF is not a complete, systematic law, but a compilation of provisions on public financial management contained in different laws.

Uruguay ROSC