Uruguay
Recent Economic Developments
Author: International Monetary Fund
Publication Date:
16 Sep 1996
ISBN:
9781451839197
Language:
English
Keywords:
ISCR; CR; foreign currency; Uruguayan peso; Uruguay; central bank; net; financial system; la República Oriental del Uruguay; long-term debt; GDP ratio; consumer goods
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This paper describes economic developments in Uruguay during the 1990s. Real GDP expanded on average by more than 4 percent a year in 1990–94 and fell by 2½ percent in 1995. The rapid growth of output during 1990–94 reflected buoyant external demand from Uruguay’s main trading partners (Argentina and Brazil), as well as progress in strengthening the public finances, reducing wage indexation, opening the economy, and curtailing government intervention. Consumer price inflation fell steadily from almost 130 percent during 1990 to 35 percent during 1995.

Abstract

This paper describes economic developments in Uruguay during the 1990s. Real GDP expanded on average by more than 4 percent a year in 1990–94 and fell by 2½ percent in 1995. The rapid growth of output during 1990–94 reflected buoyant external demand from Uruguay’s main trading partners (Argentina and Brazil), as well as progress in strengthening the public finances, reducing wage indexation, opening the economy, and curtailing government intervention. Consumer price inflation fell steadily from almost 130 percent during 1990 to 35 percent during 1995.

I. Economic Activity and Prices

Real GDP expanded on average by over 4 percent a year in 1990-94 and fell by 2 ½ percent in 1995. The rapid growth of output during 1990-94 reflected buoyant external demand from Uruguay’s main trading partners (Argentina and Brazil), as well as progress in strengthening the public finances, reducing wage indexation, opening the economy and curtailing government intervention. The significant output fall in 1995 resulted from a sharp fall in demand from Argentina in the aftermath of the Mexican financial crisis and its adverse effects on domestic private investment, as well as a decline in absorption associated with measures to adjust the public finances and maintain confidence. Consumer price inflation fell steadily from almost 130 percent during 1990 to 35 percent during 1995. At the same time, the external current account deficit/GDP ratio swung from a surplus of 2 percent in 1990 to a deficit of 2 percent in 1995 as gross domestic investment rose from 11 percent of GDP in 1990 to over 14 percent of GDP in 1995, while a strong decline in private saving in relation to GDP was offset only partly by higher public saving (Table 1 and Chart 1).

Table 1.

Uruguay: Selected Economic and Financial Indicators

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Sources: Data provided by the Uruguayan authorities; and Fund staff estimates.

Currency plus demand deposits in domestic currency.

M-1 plus time and saving deposits in domestic currency.

M-2 plus foreign currency deposits of residents (valued at end-of-period exchange rate) and deposits in the Mortgage Bank.

Flows of credit in foreign currency valued at end-of-period exchange rates.

Prime rate.

Until the third quarter of 1993, interest rate on central bank bills (Letras de Regulación Monetaria); thereafter, interest rate on peso-denominated treasury bills used in open market operations by the Central Bank.

Includes the current account surplus of state enterprises.

Includes changes in inventories.

Nonfinancial public sector savings plus operating losses of the financial public sector.

Includes imports of goods and services and gold at market prices.

CHART 1
CHART 1

URUGUAY: REAL SECTOR INDICATORS

Citation: IMF Staff Country Reports 1996, 094; 10.5089/9781451839197.002.A001

Sources: Central Bank of Uruguay; and Fund staff estimates.1/ Private savings are measured as gross national savings minus public sector savings.2/ Includes the operating losses of the financial public sector.3/ Average of public and private sector wages.

In real terms, in 1990-94 domestic expenditure expanded on average by over 7 percent a year financed by higher private capital inflows (Table 2). Real consumption demand increased by 6 ½ a year in 1990-94 reflecting trade liberalization in the context of significant pent-up demand for consumer durables, a strong appreciation of the peso in real effective terms, significant increases in real wages and a surge public sector current spending. In 1995, real domestic expenditure declined by 3 percent despite continuing strong private capital inflows. Real consumption demand fell by 3 ¾ percent as real economic activity contracted, employment and real wages declined, and rates of the value added tax and of the personal tax on wages and pensions and public prices and tariffs were raised.

Table 2.

Uruguay: Output and Expenditure in Constant 1983 Prices

(Annual percentage change)

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Source: Central Bank of Uruguay.

The strong increase consumption that took place during 1990-94 was reflected in a decline in gross domestic saving from 17 percent of GDP in 1990 to 13 ¾ percent of GDP in 1994 (Table 3). At the same time, national saving only fell by 1 percentage point of GDP to 12 percent of GDP in 1994 as the decline in gross domestic saving was almost offset by declining factor payments relative to GDP associated with lower international interest rates, the decline in net external debt relative to GDP owing to the 1991 debt reduction agreement with foreign bank creditors and the real appreciation of the peso during this period. Between 1990 and 1994, private saving fell by about 3 ½ percentage points of GDP, while public saving increased by 2 ½ percentage points of GDP. In 1995, gross domestic saving relative to GDP fell to 13 ¼ percent, while national saving remained about unchanged.

Table 3.

Uruguay: Savings and Investment

(As percent of GDP at current market prices)

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Sources: Central Bank of Uruguay; and Fund staff estimates.

Due to accounting methodologies, it may differ from the figures reported by Treasury and the Office of Planning.

Computed from figures reported by Treasury and the Office of Planning. Includes operating losses of the Central Bank, the Mortgage Bank, and the intervened banks.

Gross domestic investment increased from 11 percent of GDP in 1990 to 14 ½ percent of GDP in 1994, before falling back to slightly over 14 percent of GDP in 1995, notwithstanding substantial inventory accumulation in that year (Tables 4 and 5). In real terms, gross fixed investment rose on average by 10 percent a year during 1990-94. At the same time, private investment in machinery and equipment increased on average by 11 percent a year, while construction of housing and commercial real estate rose on average by 13 percent a year bolstered by the beneficial prospects for the tourism sector from the improved economic outlook in the region. Fixed capital formation by the public sector increased on average by 10 ½ percent a year, with a marked acceleration in 1993-94 during the runup to the 1994 national elections.

Table 4.

Uruguay: National Accounts

(In millions of Uruguayan pesos)

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Source: Central Bank of Uruguay.
Table 5.

Uruguay: National Accounts at Constant Prices

(In millions of Uruguayan pesos at 1983 prices)

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Source: Central Bank of Uruguay.

In 1995, real fixed investment contracted by about 7 ½ percent as capital formation in construction fell by 17 percent and in machinery and equipment increased by over 3 percent. Fixed investment by the public sector was scaled back by about 30 percent to about its long-term average level. At the same time, fixed capital formation by the private sector rose by almost 4 percent as a 14 percent decline in investment in construction was more than offset by increases of over 20 percent in investment in both land improvements, and in machinery and equipment. To an important extent, this appears to have reflected higher international agricultural commodity prices, as well as improved prospects for Uruguay’s exports of agricultural products and related manufactures to the region.

As domestic saving declined and gross investment increased, between 1990 and 1994 Uruguay’s net use of external saving increased by almost 5 percentage points of GDP and its balance of trade on goods and nonfactor services declined by over 7 percentage points of GDP. Slightly over ¾ of the former decline reflected increased investment and the remainder increased consumption. In 1995, Uruguay’s net use of external saving fell by ¾ percentage points of GDP, slightly above the decline in gross domestic investment.

In 1990-94, the expansion of real GDP varied widely among sectors (Table 6). Value added in agriculture and other primary activities, which accounted for over 10 percent of GDP in 1994, grew on average by about 4 percent a year largely reflecting increases of planted acreages of cereals and the recovery of output of beef and beef products (Tables 7-11). Despite the sustained expansion of domestic and external demand during this period, value added in manufacturing, which accounted for over 20 percent of GDP, on average declined by about 1 percent a year in this period (Tables 12-14). Output in food processing, beverages and transportation equipment expanded slowly, while output declined in other sectors largely reflecting increased competition from abroad and the closure of the oil refinery in 1993-94. At the same time, construction; commerce, restaurants and hotels; and transport and communications expanded vigorously under the stimulus of increased domestic demand and rising tourism from the region. In 1995, sharp contractions in construction; commerce, restaurants and hotels; and manufacturing output were partly offset by increased activity in the primary sectors and other service sectors.

Table 6.

Uruguay: Gross Domestic Product by Origin

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Source: Central Bank of Uruguay.

Includes mining and quarrying.

Includes commercial and personal services.

Subtracts imputed earnings of financial intermediaries and adds import duties.

Table 7.

Uruguay: Agricultural and Livestock Production 1/

(Percentage change)

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Source: Central Bank of Uruguay.

Calendar year estimates.

Table 8.

Uruguay: Selected Data on Acreage, Production, and Yield of Agricultural Products

(Production in thousand metric tons: acreate in thousand hectares: yield in metric tons per hectare)

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Sources: Central Bank of Uruguay; and Ministry of Agriculture and Fishing.
Table 9.

Uruguay: Production and Exports of Wool 1/

(In thousands of metric tons)

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Source: Central Bank of Uruguay.

Greasy wool aquivelent.

The negative values since 1989/90 possibly reflect an error in the original estimated stock, cumulative errors in the flows, or unregistered border trade in wool.

Table 10.

Uruguay: Fishing Production and Exports

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Source: Central Bank of Uruguay.
Table 11.

Uruguay: Production and Consumption of Beef

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Source: Central Bank of Uruguay.
Table 12.

Uruguay: Manufacturing Output

(Percentage change)

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Source: Central Bank of Uruguay.

Excludes mining and quarrying.

Reflects the closure of the oil refinery for refurbishment.

Reflects the reopening of the oil refinery.

Table 13.

Uruguay: Index of Manufacturing Production

(Physical output: quarterly average 1983=100)

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Source: Central Bank of Uruguay.
Table 14.

Uruguay: Output and Output per Hour in Manufacturing

(Percentage change over corresponding period of previous year)

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Source: Central Bank of Uruguay.

Despite the rapid growth of economic activity between 1991 and 1994, labor demand grew slowly as the opening of the economy and the decline in the price of capital relative to labor led enterprises to improve productivity and shed labor (Tables 15 and 16). The slow growth of employment, combined with increased labor force participation, particularly of women, left the unemployment rate virtually unchanged at about 9 ¼ percent between 1990 and 1994. In 1995, the decline in demand and economic activity resulted in a contraction in employment towards the end of the year. This, together with further increases in labor force participation, caused the unemployment rate to surge to almost 11 percent in 1995.

Table 15.

Uruguay: Labor Force and Employment 1/

(As a percentage of population 14 years of age and older)

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Source: General Directorate of Statistics.

For Montevideo.

Table 16.

Uruguay: Unemployment Rate 1/

(As a percentage of the labor force)

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Source: General Directorate of Statistics.

For Montevideo.

Inflation in consumer prices, which was about 130 percent during 1990, was reduced steadily to 35 percent during 1995 (Table 17). Inflation was relatively high in the nontradeable sectors, such as education, utilities and housing, and health services. Despite the steady 2 percent monthly depreciation of the exchange rate band vis-à-vis the U.S. dollar since 1992 and the gradual opening of the economy during this period, inflation declined relatively slowly in certain tradeable sectors-- such as food—possibly reflecting the sharp increase in domestic demand and higher retail margins, as well as higher demand for these products from Brazil in 1994. Strong competition from abroad, however, put strong downward pressures on increases of clothing prices. Inflation in prices at the wholesale level declined from over 120 percent in 1990 to nearly 28 percent in 1995, with price inflation of industrial products declining sharply between 1990 and 1993 and falling more slowly since then.

Table 17.

Uruguay: Price Movements

(Annual percentage change) 1/

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Source: General Directorate of Statistics.

End of period indices.

Real wages increased by a cumulative 4 ½ percent during 1990-94, despite the high level of unemployment and pressures to cut rising labor costs in certain sectors facing increased competition from abroad (Table 19). During this period, public sector real wages declined by a cumulative 1 ¾ percent, while private sector real wages increased by 8 ½ percent in real terms and more than doubled in U.S. dollars. In contrast, in 1995 real wages are estimated to have declined by almost 3 percent reflecting restrained wage adjustments in the public sector, as well as slack conditions in the labor market.

Table 18.

Uruguay: Public Utility and Petroleum Prices

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Source: Central Bank of Uruguay.
Table 19.

Uruguay: Wage Developments

(Percentage change over the corresponding period the previous years: period average)

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Sources: Central Bank of Uruguay; and Fund staff estimates.

Deflated by the consumer price index.