Front Matter Page
© 2004 International Monetary Fund
October 2004
IMF Country Report No. 04/327
Uruguay: Fifth Review Under the Stand-By Arrangement and Requests for Modification of the Arrangement and Waiver of Nonobservance and Applicability of Performance Criteria—Staff Report; Staff Supplement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Uruguay
In the context of the fifth review under the Stand-By Arrangement and requests for modification of the Arrangement and waiver of nonobservance and applicability of performance criteria with Uruguay, the following documents have been released and are included in this package:
the staff report for the fifth review under the Stand-By Arrangement and requests for modification of the Arrangement and waiver of nonobservance and applicability of performance criteria, prepared by a staff team of the IMF, following discussions that ended on May 21, 2004, with the officials of Uruguay on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on August 13, 2004. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.
a staff supplement of August 25, 2004 updating information on recent developments.
a Press Release summarizing the views of the Executive Board as expressed during its August 27, 2004 discussion of the staff report that completed the review and requests.
a statement by the Executive Director for Uruguay.
The documents listed below have been separately released.
Letter of Intent sent to the IMF by the authorities of Uruguay*
Memorandum of Economic and Financial Policies by the authorities of Uruguay*
Technical Memorandum of Understanding*
*May also be included in the Staff Report.
The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.
To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to publicationpolicy@imf.org.
Copies of this report are available to the public from
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Front Matter Page
INTERNATIONAL MONETARY FUND
URUGUAY
Fifth Review Under the Stand-By Arrangement and Requests for Modification of the Arrangement and Waiver of Nonobservance and Applicability of Performance Criteria
Prepared by the Western Hemisphere Department (In collaboration with other Departments)
Approved by Markus Rodlauer and Liam P. Ebrill
August 13, 2004
Stand-By Arrangement. The current arrangement (SDR 2,128.3 million, 694.4 percent of quota) runs through March 2005. SDR 559.2 million remains to be disbursed, and a purchase of SDR 139.8 million will become available upon completion of this review. On February 20, 2004, the Executive Board concluded the fourth review, five months behind schedule. Directors welcomed the recovery of the economy but expressed concern at the slow pace of banking and other structural reforms.
Economic developments. The economic recovery is stronger than expected, and inflation has fallen to 10 percent (with core inflation in single digits). Indicators of financial and banking sector soundness continue to recover. While these developments have reduced near-term program risks, important vulnerabilities persist, leaving little room for policy slippage.
Review. Discussions focused on implementation of the fiscal and monetary program; pending steps to strengthen the banking system; and prospects for other key structural reforms.
Program status. The macroeconomic framework remains on track, and a new effort is being made at this review to accelerate (delayed) banking sector reforms, but progress in other structural reforms has been mostly disappointing. End-June quantitative performance criteria (PCs) for NIR, NDA, and general government noninterest expenditure were observed, as were the end-March PCs on the public sector primary surplus and public sector debt, but there have been delays in the restructuring of public banks and asset disposal of liquidated banks.
Access and phasing. In light of the strengthened external position and the delays with this review, the authorities are requesting a reduction in total access (by SDR 139.8 million, 45.6 percent of quota) and a rephasing of the remaining purchases.
Mission. Discussions were held in Montevideo during May 10–21. The mission met with Minister of Economy and Finance Alfie, Central Bank President de Brun, Budget Director Davrieux, other senior officials, representatives of the bank employees’ union and the private sector, and the economic advisors of the presidential candidates. The staff team comprised A. Wolfe (Head), O. Adedeji, and H. Ma (all WHD), J. Kozack (PDR), and E. Ley (FAD). An MFD team (C. Lee and S. Seelig) overlapped with the mission, which was also assisted by A. Bauer (Resident Representative). G. Le Fort (Executive Director) and D. Vogel (OED) participated in some of the meetings.
Publication. In line with the new exceptional access guidelines, the authorities have consented to the publication of this report.
Contents
Executive Summary
I. Background
II. Policy Issues
A. Fiscal Policy and Debt Management
B. Monetary and Exchange Rate Policies
C. Banking Reforms
III. Vulnerabilities and Program Risks
IV. Program Financing, Monitoring, and Safeguards
V. Staff Appraisal
Boxes
1. Election Modalities and Outlook
2. Fiscal Implications of the Regional Energy Shortage and Higher World Oil Prices
3. Bank Liquidation Funds
4. Progress under BROU’s Restructuring Plan
5. Public Debt Sustainability Analysis
Figures
1. Activity and Prices
2. External Sector Indicators
3. Financial and Vulnerability Indicators
4. Fiscal and Monetary Indicators
Tables
1. Selected Economic and Financial Indicators
2. Summary Balance of Payments
3. Performance Under the 2004 Economic Program
4. Public Sector Operations
5. Cash Flow of the Nonfinancial Public Sector
6. Summary Accounts of the Banking System
7. Medium-Term Outlook
8. Proposed Schedule of Purchases
9. Projected Payments to the Fund and Indicators of Capacity to Repay the Fund
10. Vulnerability Indicators
Appendices
I. Fund Relations
II. Relations with the World Bank Group
III. Relations with the Inter-American Development Bank
IV. Statistical Issues
V. Public Debt Sustainability Analysis
Attachments
I. Letter of Intent and Supplement to the Memorandum of Economic and Financial Policies
II. Technical Memorandum of Understanding
Executive Summary
Background
Uruguay’s recent recovery from its long recession has been faster than expected, reflecting implementation of prudent policies and a favorable external environment. Since bottoming out at end-2002, growth has accelerated, unemployment has declined, and inflation has fallen to 10 percent (with core inflation in single digits). Financial indicators have mostly improved since the last review, and the exchange rate has been relatively stable. Nonetheless, the economy remains vulnerable from the high public debt, including a significant short-term component, and the still fragile banking system.
The macro framework is broadly on track, but progress with structural reform remains uneven. Fiscal performance has been better than programmed, reflecting buoyant revenues, and the monetary and balance of payments targets of the program have been met. The restructuring of the public banks is now moving ahead, but little progress has been made on the disposal of assets of liquidated banks, and the government’s proposals for tax reform and reform of the specialized pension funds have not been acted on by Congress.
Policy discussions and staff appraisal
GDP growth is now forecast at 7 percent in 2004. Inflation at year’s end is projected to be at the upper end of the BCU’s target band of 7–9 percent. The net international reserve target under the program has been raised, in light of the strong overperformance with respect to the program target in the first half of the year.
The primary surplus target for 2004 has also been raised, from 3.2 to 3.4 percent of GDP, reflecting the stronger-than-envisaged revenue performance. Spending remains restrained and public utility prices are being adjusted in line with operating costs. Achieving the primary surplus target will be key to foster market confidence and lay the basis for the required additional medium-term fiscal consolidation.
The restructuring of the public banks is now moving forward, but the disposal of assets in the bank liquidation funds needs to be accelerated. Successful implementation of the program’s bank restructuring strategy is essential to limit fiscal costs, strengthen creditor discipline, and help normalize credit conditions.
While program risks have diminished further since the last review, important vulnerabilities remain, leaving no room for policy slippages. Public sector debt service will remain high for a significant period of time.
Front Matter Page
INTERNATIONAL MONETARY FUND
URUGUAY
Fifth Review Under the Stand-By Arrangement and Requests for Modification of the Arrangement and Waiver of Nonobservance and Applicability of Performance Criteria
Supplementary Information
Prepared by the Western Hemisphere Department (In collaboration with other Departments)
Approved by Markus Rodlauer and Martin Fetherston
August 25, 2004
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Press Release No. 04/180
FOR IMMEDIATE RELEASE
August 27, 2004
International Monetary Fund
Washington, D.C. 20431 USA
