Abstract
Uruguay's performance under the Stand-By Arrangement (SBA) has been favorable, and commendable progress has been achieved in containing the crisis and stabilizing the economy. Executive Directors welcomed this development, and stressed the need to implement policies in the fiscal, banking, and structural areas. They commended the floating exchange rate regime, and the efforts of political and legal institutions in dealing with the financial crisis. They agreed that Uruguay has successfully completed the third review under the SBA, and approved waiver.
Since the issuance of the staff reports, the following information on recent developments and policy measures has become available. This information does not alter the thrust of the appraisal.
Macroeconomic developments. In May, the index of leading indicators rose by 1.7 percent (seasonally adjusted, month-on-month), its fourth consecutive increase, and unemployment fell to 18.3 percent. Exports have continued to recover, growing by 17 percent year-on-year in April. Inflation remains in line with program projections and, in June, the CPI rose by 0.2 percent, bringing the 12-month rate to 24.6 percent.
Financial indicators. Since end-May, peso interest rates on government Treasury bills have declined from above 40 percent to below 20 percent, and the Uruguayan peso has appreciated by 4½ percent against the U.S. dollar. Sovereign risk spreads have continued to fall, to a range of 700–750 basis points in recent weeks.
Performance criteria. Data for end-June indicate that the performance criteria on NIR and NDA, as well as the indicative target on the monetary base, were observed with comfortable margins. Gross reserves have risen to about US$1.2 billion in early July, equivalent to almost 6 months of imports of goods and services.
Tax reform. At end-June, the authorities submitted to congress revised tax reform legislation (structural performance criterion). The revised legislation is broadly consistent with staff’s recommendations. It no longer contains a calendar for reducing VAT rates, but would instead make such reductions conditional upon achieving the program’s fiscal objectives. The draft law also envisages extending the base of the current income tax on industrial and commercial enterprises to other productive sectors (including services).
Asset disposal. The authorities have completed a strategy document providing for disposal of the remaining assets of liquidated banks (a prior action for completion of the third review). They have also established a committee to oversee implementation of the plan.
Reprogrammed deposits. The release of the first tranche of reprogrammed deposits by the public bank BROU has been advanced from August to June. So far, US$140 million have been repaid (out of a total first tranche of US$560 million), and virtually all of these deposits have remained with BROU.
Other banking developments. Total deposits with the banking system have continued to increase (US$100 million since end-May). In coordination with the government and in recognition of borrowers’ impaired ability to repay foreign-currency denominated bank loans, banks have recently started renegotiating these loans, on a voluntary and case-by-case basis, by lowering monthly payments and extending repayment periods.