IMF Executive Board Concludes 2012 Article IV Consultation with Uruguay

Public Information Notice (PIN) No. 12/141
December 14, 2012

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On December 10, 2012, the Executive Board of the International Monetary Fund (IMF) concluded the 2012 Article IV consultation with Uruguay, and considered and endorsed the staff appraisal without a meeting.1


Uruguay has experienced a decade of record-strong growth since its 2002 crisis. This record is a result of prudent macroeconomic policies, institutional reforms, and favorable external factors, and it has resulted in significant welfare gains.

The economy is now slowing toward potential. Real gross domestic product (GDP) growth is projected at 3½ percent in 2012 and 4 percent in 2013. Annual inflation (9.1 percent in October) remains well above the target range (4-6 percent). Recently, the central bank tightened reserve requirements and notched up the policy interest rate, after a pause following significant monetary tightening in December 2011. At the same time, burgeoning portfolio inflows have created currency appreciation pressures. Effective October 2012, the central bank introduced a reserve requirement on foreign purchases of central bank securities. The fiscal deficit has widened in 2012 mostly due to one-off factors.

The baseline outlook is positive but with risks and challenges. Uruguay’s economic and financial vulnerabilities are relatively small, and the government has reduced debt vulnerabilities significantly and built important financial buffers. Still, policy space is limited by inflation and debt considerations, and the economy is exposed to the risk of a deteriorating global outlook and risks from domestic wage and cost pressures. The longer-term policy challenge is to bolster growth prospects and reduce output volatility.

Executive Board Assessment

In concluding the Article IV consultation with Uruguay, Executive Directors endorsed staff’s appraisal as follows:

Uruguay has experienced a decade of record-strong and inclusive growth. This record is a result of prudent macroeconomic policies, institutional reforms, and favorable external factors, and has resulted in significant welfare gains.

The outlook is favorable but with risks and challenges. Growth is slowing toward potential, but inflation remains well above target. Inflation reflects robust domestic demand, insufficiently tight monetary policy, extensive wage indexation, food price shocks, and an inflation targeting framework that is not anchoring expectations. Short-term capital inflows are presenting monetary policy with difficult choices between lowering inflation and avoiding a sharp appreciation. And the economy is being affected by global and regional headwinds and tailwinds. Risks to the outlook are two-sided and relate to further spillovers from abroad and domestic wage and cost developments.

Uruguay is in a reasonably good position to tackle these challenges but policy space is limited. The financial system is small, sound, and liquid, and there are no generalized credit or real estate bubbles in the economy. Deft debt management has reduced public debt vulnerabilities significantly. And the central bank and the government have substantial foreign exchange buffers to help cushion large shocks. While Uruguay has lost competitiveness vis-à-vis some trading partners over the last year, the peso still seems broadly in line with fundamentals, though a sharp and sustained real appreciation could alter this assessment.

Tackling inflation is a priority. Having inflation and inflation expectations stable at the mid-point of the target range would create room for monetary policy to respond to downturns and capital inflows, and help reduce dollarization and indexation.

Thus, staff supports the recent increases in the policy rate and reserve requirements. While this is not the time for aggressive monetary tightening, maintaining a tightening bias to lower actual and expected inflation toward the mid-point of target range is appropriate. However, the pace of tightening should depend on the evolution of the economy and risks. The target’s influence on inflation expectations could be strengthened with more explicit communication of the BCU’s likely direction of policy stance, its conditional inflation forecast, and how it would respond to shocks. More frequent policy meetings would also be useful.

But monetary policy cannot fight inflation alone, given capital inflow concerns; concerted efforts on other fronts are also necessary. In particular, fiscal policy could better support monetary policy. At the same time, recent initiatives to cut/freeze some consumer prices create distortions without addressing the root causes of inflation. In the view of the mission, extensive wage indexation is a key reason why price shocks feed into wages and core inflation.

Near-term fiscal policy could better support monetary policy. A neutral stance would in principle be appropriate given the cycle, but a stronger counter-cyclical stance should be considered to help monetary policy. While the larger deficit in 2012 is mostly on account of factors that do not imply fiscal impulse, there has also been a substantial increase in real spending. Slower spending would help moderate domestic demand, alleviate real appreciation pressures, and support disinflation. It would also help secure the authorities’ target of reducing public debt to 45 percent of GDP by 2015.

Prudent wage growth is also essential. The upcoming wage negotiation round is key given its wide coverage and its multi-year focus. The attempts to link real wage growth with sector productivity growth are welcome, even though it will be challenging in practice. Flexibility to reconsider wage agreements in case of an economic downturn will be important.

Staff acknowledges the circumstances in which the recent temporary capital flow management measure was introduced. The measure can be justified given the sharp spike in foreign demand for central bank paper. Though it remains to be seen how effective the measure will be in increasing monetary policy space, it would be important to use any additional space to tackle inflation.

The floating exchange rate is a crucial part of the policy framework and a key shock absorber. There is no clear need for further reserve accumulation for prudential reasons. However, occasional intervention may be appropriate to avoid excessive exchange rate swings. Sector-specific competitiveness problems are best handled through structural policies.

In the case of downside external shocks, the policy response should be prudent and pragmatic (as in the past). The floating exchange rate should be the first defense. Monetary easing could proceed so long as inflation expectations have become reasonably anchored. As in the past, reserve requirements could be cut to mitigate the risk of a credit crunch. Automatic fiscal stabilizers should be allowed to operate, though in a lasting downturn the fiscal space would be limited by the need to preserve prudent debt dynamics. The sizable liquidity buffers can be used in a sudden stop.

A long-term policy challenge is to bolster growth prospects and reduce output volatility. Actions on many fronts will be needed. Infrastructure plans in the energy and transportation sectors are welcome. Ensuring a dynamic labor market is also important for fostering productivity growth and facilitating adjustment to shocks, while ensuring appropriate protection for workers.

The prudent fiscal policy management could be enhanced further in view of medium-term challenges. The budget could usefully be cast on a rolling five-year horizon and include even longer horizons for certain items (e.g., social spending). In this context, it is appropriate that the contingent liabilities in Banco de Seguros del Estado are receiving attention.

There is scope to strengthen financial sector resilience further and bolster medium-term growth by building on recent progress, drawing on the recent FSAP Update. A strategy to develop a capital market that promotes efficient allocation of financial resources is needed. In the area of pensions, it would be opportune to review the foreign investment mandate for pension funds, and to start providing pension savers with different portfolio options tailored to their needs. It will also be important to enhance financial crisis preparedness and contingency planning, and ensure adequate funding for supervision. Finally, a dynamic, yet sound, banking system would benefit from a more level playing field among banks.

Uruguay: Basic Data
  2007 2008 2009 2010 2011 2012 2013
(Annual percent change, unless otherwise specified)

Real GDP

6.5 7.2 2.4 8.9 5.7 3.5 4.0

Real consumption

6.8 9.1 0.1 12.0 7.6 6.1 3.4

Real investment

7.4 25.0 -8.5 10.1 7.0 6.5 11.3



CPI inflation (average)

8.1 7.9 7.1 6.7 8.1 8.0 8.0

CPI inflation (eop)

8.5 9.2 5.9 6.9 8.6 8.0 7.9

Terms of trade

2.3 -1.2 5.7 -3.0 0.1 3.1 2.9
(In percent of GDP)

Public sector finances


Total revenues

28.6 26.9 28.7 29.4 28.9 29.0 30.3

Non-interest expenditure

25.3 25.7 27.9 27.7 27.1 28.8 29.2

Primary balance

3.6 1.4 1.1 1.9 2.0 0.5 1.3

Overall balance

0.0 -1.6 -1.8 -1.1 -0.9 -2.3 -1.7

Gross public sector debt

64.4 63.3 62.7 58.0 57.8 52.3 52.1

Outstanding external debt

48.3 46.1 40.4 35.4 32.9 30.5 28.7

Of which: Public external debt

43.7 41.1 36.6 32.4 29.8 25.9 23.4
(Annual percent change, unless otherwise specified)

Money and credit


Base money (eop) 1/

16.4 29.3 6.5 16.2 17.3 27.4 ...

M-1 1/

29.4 18.6 12.2 28.9 21.3 20.4 ...

M-2 1/

30.6 17.1 15.0 30.3 21.4 17.4 ...

M-3 1/

3.8 28.6 -2.6 22.1 17.2 27.0 ...

Credit to the private sector (constant exch. rate) 1/

22.1 28.0 -7.5 21.3 20.3 20.8 ...
(In percent of GDP, unless otherwise indicated)

Balance of payments


Current account balance

-0.9 -5.7 -1.5 -2.2 -3.1 -3.0 -2.4

Merchandise exports, fob

21.8 23.4 21.0 20.4 19.9 20.0 19.0

Merchandise imports, fob

24.1 29.0 22.6 21.7 22.9 22.8 21.0

Services, income, and transfers (net)

1.4 0.0 0.2 -0.9 -0.1 -0.3 -0.5

Capital and financial account

6.4 10.2 3.9 2.7 7.3 7.8 2.8

Foreign direct investment

5.7 6.9 5.0 5.8 4.7 6.8 5.1

Overall balance of payments (In millions of U.S. dollars)

1,005.4 2,232.4 1,588.3 -360.8 2,564.4 2,385.0 192.0

Gross official reserves (In millions of U.S. dollars) 2/

4,124 6,362 8,040 7,655 10,274 12,659 12,851

In percent of short-term debt

471.8 797.2 772.3 517.1 447.9 512.8 445.1

In percent of short-term debt and FX deposits

117.2 151.4 162.6 129.5 151.4 179.7 152.0

External debt service (percent of exports of goods and services)

26.1 21.7 23.8 29.7 21.2 26.9 20.1

Sources: Banco Central del Uruguay, Ministerio de Economia y Finanzas, Instituto Nacional de Estadistica, and IMF staff calculations.

1/ 1/ In 2012 corresponds to the change between June 2011 and June 2012.

2/ Includes reserves buildup through reserve requirements of resident financial institutions.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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