Uruguay
Seventh Review Under the Stand-By Arrangement and Request for Waiver of Nonobservance of Performance Criterion—Staff Report and Supplement; Press Release; and Statement by the Executive Director for Uruguay
Author:
International Monetary Fund
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Publication Date:
21 Mar 2005
eISBN:
9781451839296
Language:
English
Keywords:
ISCR; CR; government; interest expenditure; inflation expectation; banking reform; foreign currency; private sector; exchange rate; debt service; short-term debt; monetary policy
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This paper assesses Uruguay’s Seventh Review Under the Stand-By Arrangement and Request for Waiver of Nonobservance of Performance Criterion. The favorable program results reflect prudent macroeconomic policies and important banking reforms, although progress with other structural reforms was less satisfactory. The outlook for 2005 is favorable. Growth will likely exceed 5 percent, and inflation is expected to fall to 5½–6½ percent. A strong foundation has been laid for continued fiscal consolidation. The pending reforms under the current program will need to be taken up by the new government.

Abstract

This paper assesses Uruguay’s Seventh Review Under the Stand-By Arrangement and Request for Waiver of Nonobservance of Performance Criterion. The favorable program results reflect prudent macroeconomic policies and important banking reforms, although progress with other structural reforms was less satisfactory. The outlook for 2005 is favorable. Growth will likely exceed 5 percent, and inflation is expected to fall to 5½–6½ percent. A strong foundation has been laid for continued fiscal consolidation. The pending reforms under the current program will need to be taken up by the new government.

I. Background

A. Performance Under the 2002–04 SBA

1. The program supported by the SBA has been successful in stabilizing the banking system, strengthening the fiscal position, and thereby restoring strong economic growth. The program was designed against the background of a protracted recession, a rapidly deteriorating fiscal situation that raised doubts about fiscal and debt sustainability, an accelerating run on bank deposits, and a balance-of-payments crisis. The program, thus, focused on policies to return confidence to the financial system, contain capital flight, strengthen the fiscal and external positions, and achieve debt sustainability.

2. Important program achievements include:

  • Economic activity rebounded sharply beginning in 2003, and real GDP grew by an estimated 12 percent in 2004. Real GDP is now only about 6 percent below its prerecession peak of 1998, and the unemployment rate is almost half of its highest level during the crisis.

  • Inflation was quickly brought under control after the float of the currency in 2002. By end-2004, inflation was down to 7.6 percent (y/y), and the outlook is for a further reduction in 2005. Real wages fell sharply during the crisis, but began to recover somewhat in the second half of 2004.

  • The peso stabilized and then appreciated since the sharp depreciation that followed its float in mid-2002. After stabilizing at around U$29 per U.S. dollar in 2003 and the first half of 2004, the peso began to strengthen and stood at around U$26 per U.S. dollar by year’s end. Notwithstanding, the peso remains some 25 percent more depreciated in real effective terms than its pre-crisis level.

  • The external position has improved considerably. The external current account posted surpluses in 2002–03, and despite a steep rise in imports reflecting the recovery, it ended 2004 with only a modest deficit reflecting buoyant export growth. International reserves have recovered, with gross reserves up by US$2 billion from the mid-2002 low (net international reserves—NIR—have increased by over US$400 million).1 Nevertheless, official and banking system reserves as a ratio of short-term debt and dollar deposits are still relatively low compared with other dollarized economies in the region.

uA01fig01

Real GDP and Unemployment

Citation: IMF Staff Country Reports 2005, 109; 10.5089/9781451839296.002.A001

uA01fig02

Inflation and Real Wages

Citation: IMF Staff Country Reports 2005, 109; 10.5089/9781451839296.002.A001

uA01fig03

Exchange Rate

Citation: IMF Staff Country Reports 2005, 109; 10.5089/9781451839296.002.A001

Uruguay: Selected Macroeconomic Indicators

(12-month percentage change, unless otherwise indicated)

article image
Sources: BCU, and Fund staff estimates.

  • Capital flight was stopped and partially reversed, and bank credit to the private sector has begun to recover. Resident bank deposits of the nonfinancial private sector have recovered to about 80 percent of their pre-crisis level, although nonresident deposits have recovered only modestly. The level of dollarization remains very high, however, with over 90 percent of deposits in dollars. The growth of bank credit to the private sector turned positive in 2004.2

Uruguay: Nonfinancial Private Sector Deposits

(Flows in millions of each currency)

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Excludes Banco Galicia Uruguay.

The decline in time deposits during 2003 and 2004 is influenced by the return of reprogrammed deposits at BROU and the amortization of CDs at Nuevo Banco Comercial (NBC).

During September Nuevo Banco Comercial booked the exercise of its option to put back NPLs to the bank liquidation funds. This operation led to a decline in foreign currency time deposits to residents of US$ 102 million.

NBC booked the exercise of its option to put back NPLs to the bank liquidation funds, leading to a further decline of US$ 27 million in foreign currency time deposits. In addition NCB canceled US$24 million of its debt with the liquidation fund with a corresponding decline in foreign currency time deposits.

Does not reflect information on BHU for the December 2004.

  • The public debt has been set on a track toward sustainability. The debt structure and its net present value improved as a result of the debt exchange of May 2003, and Uruguay regained market access later that same year. Strong growth, the improved fiscal position, and currency appreciation have lowered the public debt-to-GDP ratio from 105 percent at end-2003 to 88 percent at end-2004, and sovereign spreads fell below 400 bps by end-2004.3

uA01fig04

Sovereign risk

(EMBIG Global)

Citation: IMF Staff Country Reports 2005, 109; 10.5089/9781451839296.002.A001

  • Substantial fiscal adjustment has taken place under the program. The primary balance moved from a deficit of 1.2 percent of GDP in 2001 to a surplus of around 3½ percent of GDP in 2004.4 The improvement reflected mainly strict control over spending and timely adjustments in public tariffs.

  • Monetary policy has been managed prudently. The real risk of losing control over monetary aggregates amidst the banking crisis, large peso depreciation, and steep recession was avoided. Inflationary expectations were quickly contained, and by June 2004 inflation was back down to single digits, and by end-2004, domestic interest rates reached historically low levels. In December, the central bank (BCU) announced an inflation target of 5½–7½ percent for December 2005 (½-percentage point lower than the September 2005 target).

uA01fig05

Public Sector Operations

(percent of GDP)

Citation: IMF Staff Country Reports 2005, 109; 10.5089/9781451839296.002.A001

3. Progress on structural reforms was mixed, with major advances in bank restructuring but less progress with fiscal reforms.

Bank restructuring

  • State commercial bank (BROU). Restructuring of BROU has progressed well, and the bank is now making profits. Its asset management company (AMC) is making good progress in working out the nonperforming loan (NPL) portfolio, and it has continued to make repayments to BROU on its government-guaranteed note ahead of schedule. All remaining and new Category 4 and 5 loans were transferred to the AMC in December 2004 (an end-2004 structural performance criterion), leaving the bank with an NPL stock of about 4 percent of the total portfolio. The release of the third and final tranche of reprogrammed deposits (US$773 million, initiated in October 2004) is proceeding smoothly and is scheduled to be completed by April 2005.5 Almost all (94 percent) of the released deposits as of end-December (US$262 million) have been retained in BROU—with 64 percent remaining in time deposits. BROU continues to dominate the banking system, holding some 50 percent of total system deposits (fully guaranteed by the government), and the bank presents a continuing challenge for the reform strategy in this area.

  • Housing bank (BHU). Some progress has been made in converting the bank into a mortgage company,6 and it remains with important underlying weaknesses including a still-large nonperforming loan portfolio. BHU’s government-guaranteed note to BROU has been fully serviced to date (a continuous PC under the program), but the bank remains a key fiscal risk over the medium term.7

  • Liquidated banks. Insolvent banks were closed and put under liquidation, and while the process of asset recovery was significantly delayed, it is now well underway. The asset manager has exceeded the end-January 2005 target of having its creditor committee approve 700 payment agreements (structural benchmark). The bank created out of the good assets of the failed banks (NBC) is well capitalized and liquid, but its governance structure is weak and it has not adhered to its original business plan. An investment bank has been hired to seek a strategic investor.8

  • Financial system oversight. Bank supervision and regulation are being strengthened, especially in the areas of on- and off-site supervision. Credit risk assessment has been improved to reflect limits on loans to single borrowers, and work is in progress to capture exposure faced by banks from lending in dollars to firms that generate peso incomes. Country risk has been incorporated into loan analysis procedures. Staffing of the banking superintendency (SIIF) has increased, and a new organizational structure has been put in place. However, the incorporation into the credit registry of information on nonperforming borrowers of the liquidation funds has not been completed (structural PC for end-December). The authorities explained that more time was needed to ensure that the creditor information was accurate; completion of the measure is a prior action for this review.

  • Fiscal reforms

    • Tax reform. No progress was made in this area, as a tax reform submitted by the government in June 2003 (mainly to eliminate exemptions and loopholes) was not acted upon by congress. Uruguay’s tax burden remains unevenly distributed, with an excessive number of taxes (close to 30), high marginal rates, and widespread exemptions and loopholes.

    • Tax administration. Some steps were taken to strengthen tax administration, including upgrading the tax office’s (DGI) infrastructure, instituting electronic filing for large taxpayers, and increased inspections. However, creation of a large taxpayer’s unit (LTU, originally a structural benchmark for end-September 2004, rescheduled for end-December) and an internal audit unit at the DGI remain to be established; and key regulations to define working conditions and incentives for professional full-time staff of the DGI are still pending (to make operative the decision to end double employment). Revenue administration at customs remains weak, and there has been an unexpected weakening of collections by the social security bank (BPS) in the second half of 2004.

    • Specialized pension funds. Government reform proposals for the specialized pension funds of the police, military and bank workers were not acted upon by congress (all three reforms structural benchmarks under the program). The police and military pension systems cost the Treasury close to 2 percent of GDP a year in transfers to cover their deficits; the fund of bank employees is also running deficits and, on current trends, will become insolvent within a few years.

4. Economic vulnerabilities have been reduced, although risks remain.

  • The public debt is still very high (near 90 percent of GDP) and mostly denominated in foreign currency. Long-term fiscal discipline will be needed to bring it down to safer levels, even under favorable economic conditions, and the debt situation remains exposed to exchange rate and interest rate shocks.

  • Large amortization payments to the Fund, World Bank, and IDB are coming due over the next three years, at least part of which will likely need to be financed from new disbursements—requiring strong implementation of associated IFI-supported programs.

  • Dollarization remains widespread and currency mismatches persist in the balance sheets of households, corporations and the public sector. While gross international reserves of the BCU have recovered, reserves of the banking system cover only some 60 percent of short-term debt and dollar deposits, a lower rate of coverage than in most dollarized economies in the region.

Comparisons of Banking System Reserve Adequacy Indicators

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  • The social situation remains difficult and there are public spending pressures. Some measures of poverty put the rate at over 30 percent, and unemployment is still in double digits. The recent improvement in the fiscal position was achieved partly by compressing real wages and pensions (which are some 20 percent lower in real terms compared with pre-crisis levels), and additional structural fiscal reforms are needed to underpin the needed fiscal consolidation over the medium term.

B. Political Transition

5. President-elect Dr. Tabaré Vázquez has assembled a strong economic team. Senator Danilo Astori, a well-respected economist, has been designated Minister of Finance and head of the economic team that includes other well-known economists, including Mr. Walter Cancela, the designated central bank president. The new government takes office on March 1, 2005. In congress, Dr. Vázquez’ left-leaning coalition (FA-EP) will hold 52 seats (out of 99) in the lower house and 17 seats (out of 31) in the senate.

6. The overarching goal of the new government is to improve social conditions through sustained rapid growth, led by higher private investment. To achieve this, the incoming authorities have announced that macroeconomic stability will be a prime policy focus, along with policies to improve the investment climate. At the same time, they are committed to addressing the still tangible social dislocations from the recent crisis through a social emergency program (with an annual cost of around 0.7 percent of GDP). The incoming authorities are confident that they would be able to find budgetary space for the emergency program while maintaining a strong overall fiscal position.

7. Market reaction to the unfolding political transition has been generally favorable. Since the elections at end-October, the peso has appreciated by about 10 percent; sovereign spreads have fallen below 400 bps (in line with regional trends); and interest rates on Treasury—and central bank—securities have declined significantly (e.g., rates on five-year inflation-indexed notes now stand at 6 percent, some 180 bps lower than at the beginning of 2004).

II. Medium-Term Outlook and Capacity to Repay the Fund

8. The medium-term outlook depends importantly on Uruguay’s ability to generate higher growth rates and sustained primary surpluses. Historically, capital accumulation (including human capital) has been the main engine of growth in Uruguay, but total factor productivity needs to recover from the sharp decline in the recent recession. Several large-scale investment projects are planned for the next few years, but sustained growth will require further improvements in the investment climate.9 This should be bolstered by structural reforms aimed at reducing the role of the public sector in the economy and improving its efficiency; gradually opening to private sector competition sectors where public enterprises operate; broadening sources of financing for investment, which historically have relied almost exclusively on bank credit; and simplifying the regulatory environment to make it more investment friendly and competitive in the region. Downside risks to the growth outlook include weaker external demand conditions, higher oil prices, and a sharp rise in interest rates. Staff’s baseline scenario is based on relatively conservative growth assumptions, as it assumes growth converging to 2 percent over the medium term (after the current recovery from the recession and the impact of the large investment projects noted above). To be sure, successful implementation of an ambitious structural reform agenda should be able to boost growth beyond this level.

Uruguay: Selected Macroeconomic Indicators

(percent of GDP, unless otherwise indicated)

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Sources: BCU; and Fund staff estimates.

Includes debt of the nonfinancial public sector and outstanding obligations to the IMF.

9. The debt outlook has improved markedly since the height of the crisis, although it remains vulnerable given the large financing requirements over the medium term. Staff’s updated DSA (using cautious economic assumptions) suggests that primary surpluses of around 4 percent of GDP are needed to bring the public debt down below 50 percent of GDP by 2012. The key challenges for the incoming government will thus be to implement structural fiscal reforms to facilitate sustained fiscal discipline, and to create an environment conducive to investment and durable high growth. Contingent liabilities from bank restructuring, pressures for rapid recovery of public wages and pensions to pre-crisis levels, and potentially adverse interest rate and demand shocks pose important risks to the outlook.

Uruguay: Sensitivity of Nonfinancial Public Sector Debt 1/

(In percent of GDP)

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Sources: Ministry of Finance; Banco Central del Uruguay; and Fund staff estimates.

Framework covers the nonfinancial public sector (including obligations to the Fund) and debt is measured in gross terms.

10. Fund exposure to Uruguay is likely to remain high for some time. Fund credit outstanding would reach 605 percent of quota (over 20 percent of 2004 GDP) with the final disbursement under the current program. Although the external position has strengthened in recent years, gross reserves remain well below their pre-crisis level. Also, large amortization payments fall due over the medium term,10 implying projected financing needs averaging 8 percent of GDP a year.11 Meeting these financing needs will require a sustained fiscal effort, growing access to domestic and international financial markets, and continued IFI support.

Uruguay: Payments to the Fund, 2005–10

(In millions of SDRs)

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Expectation basis through May 05 (Country Report No. 05/14).

III. Policy Discussions

With the current program winding down, the review focused on: (i) recent macroeconomic performance; (ii) progress in key structural reforms in the banking and fiscal areas; and (iii) how best to preserve the stabilization and reform gains through the political transition.

11. The authorities were satisfied that they are leaving behind a strong economy and a solid policy framework for the next administration. While they recognized that significant challenges remain, and some important reforms were not implemented as planned, they pointed to the strong ongoing recovery, fiscal adjustment, the successful debt exchange, and stability in the banking system as major achievements on which the new government can build. They expected real GDP growth to exceed 5 percent in 2005, and are aiming at a further reduction of inflation to between 5½–6½ percent (the lower half of the central bank’s target range for December 2005).

A. Fiscal Policy and Debt Management

12. Fiscal performance in 2004 was stronger than programmed, but the margin of overperformance eroded in the second half of the year. Staff encouraged the authorities to aim at as strong a fiscal position as possible before leaving office, taking advantage of the growth dividend for revenues and laying the basis for sustained fiscal discipline in 2005 and beyond. Staff also urged the authorities to press ahead with fiscal reforms, especially on tax administration, which can be done without congressional involvement. The authorities explained that the decline in the fiscal margin in the second half of the year reflected mainly an unexpected shortfall in collections at the social security institute (BPS)—a priority issue to be addressed by the new government. They also noted that work was continuing to establish a large taxpayers unit and other administrative improvements at the DGI. While the primary balance fell short of expectations a few months ago, it was still higher than programmed, and the overall fiscal deficit in 2004 was significantly smaller than programmed (2.3 percent of GDP, compared with 3.1 percent in the program)—mainly reflecting a lower interest bill.

13. Further fiscal consolidation in 2005 will require efforts to improve revenue collections and continued expenditure control. The authorities’ spending authorization for the first quarter of 2005 caps real spending growth at 1.5 percent (y/y), including limited wage and pension increases in January of 3.5 and 5 percent, respectively. The authorities reaffirmed their intention to refrain from any further tax cuts or tax exemptions, and to adjust public tariffs in a timely manner in line with cost developments. Based on current trends and policies, the primary surplus for the first half of 2005 is projected to remain at about its 2004 level of 3½ percent of GDP. Given the incoming authorities’ plan for a social emergency spending program, further fiscal consolidation in 2005 will depend, in large part, on their ability to quickly implement pending tax administration measures and tighten collections at the social security bank.

14. Looking ahead, structural fiscal reforms will be crucial to underpin the needed sustained fiscal consolidation. The mission expressed disappointment that tax reform and reform of the specialized pension funds of the police, military, and bank workers were not approved by congress. The authorities agreed that these reforms were important, noting that reaching a consensus on these reforms will continue to be a challenge. The authorities also agreed with staff that Uruguay’s institutional budgetary framework needs to be strengthened, including by incorporating a medium-term macroeconomic framework and tax expenditure analysis in the 5-year budget plan as well as annual budget revisions. In addition, the authorities underscored the need to shift the collection of social security contributions to the DGI, as the BPS presently has little incentive to collect in light of the constitutional requirement for the government to close any financing gap in the social security system.12

15. While the debt profile has improved further in 2004, Uruguay has not taken advantage of the recent favorable conditions in international capital markets. The mission welcomed the authorities’ stepped up efforts to implement policies linked to World Bank and IDB disbursements, and their successful efforts in securing new lending commitments (about US$250 million for 2005). The mission also welcomed the gradual extension of the maturity of dollar-denominated T-bills from 125 days at end-2003 to 242 days by end-2004, and the issuance of inflation-indexed T-notes that took place during 2004. Short-term debt rollover needs are covered through June 2005. The mission encouraged the authorities to work closely with the incoming government to explore the possibility of an early placement in international capital markets (to prefinance part of the remaining financing needs for 2005, which totals about US$500 million). The authorities saw merit in this recommendation, but noted that an international placement would require a fairly detailed economic plan of the incoming government that was not yet available.

Uruguay: Scheduled Disbursements from Multilateral Development Banks, 2004–06

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Country Report No. 04/172.

B. Monetary and Exchange Rate Policies

16. Monetary policy was eased in December in light of the sharp decline in inflationary expectations toward the bottom of the 2005-target range. Staff supported the inflation target range of 5.5–7.5 percent for end-2005, and commended the cooperation between the incoming and outgoing economic teams evidenced by the participation of the incoming central bank president at the December monetary policy meeting.

17. The strong external environment has allowed the BCU to exceed the program target for NIR, but a further build-up of reserves is needed given the system’s high short-term dollar liabilities. The mission underscored that a further reserve build-up is desirable in light of the still relatively low level of coverage of deposits and short-term debt compared with other dollarized economies in the region. The authorities agreed, but noted that a significant buildup would require the issuance of additional central bank debt, raising further its quasi-fiscal deficit.13 The authorities reiterated their commitment to reducing financial dollarization, noting that the required strengthening of confidence in the peso would take time. The mission supported the recent strategy of the government to step up its purchases of foreign exchange, in light of the large debt service payments coming due. Importantly, the mission welcomed that this policy is being done in a transparent manner through announcements of the government’s purchasing plans and while still allowing appropriate exchange rate flexibility.

C. Banking Reforms

18. Progress in bank restructuring needs to continue to restore sound new credit flows and minimize contingent fiscal costs. The mission welcomed the progress made in outsourcing the management of the liquidation funds’ assets, examining the financial history of the funds’ operations, restructuring the public banks, and strengthening bank supervision, but highlighted the need to improve governance at NBC, accelerate BHU restructuring, and ensure that the reform of BROU remains on track.

  • BROU. The authorities were satisfied about the imminent completion of the (advanced) release of reprogrammed deposits, noting that most of the released deposits have stayed at the bank. Looking forward, the authorities agreed with staff that the reform of the large government-owned bank was crucial to the future of the economy. In particular, the bank’s risk management and credit policies and practices need further strengthening to prevent a resurgence of NPLs, and the AMC’s asset recovery process needs to be carried through expeditiously and transparently, with appropriate oversight to ensure managers resist pressures to soften the terms of loan workouts. Staff also noted that the long-term future and governance structure of the bank is an important issue to be addressed, given the large risks inherent in having a government-owned bank control half of the banking system.

  • BHU. There was broad agreement between staff and the authorities that continued progress in converting BHU to a nonbank mortgage lender is essential to minimize contingent fiscal costs. While its loan with BROU has been fully serviced this year, the bank remains in a weak financial position and its own projections suggest that it could have problems meeting its debt service obligations (which are government guaranteed) starting next year.

  • Liquidation funds. Staff noted the progress made in the asset recovery process and in increasing the transparency of their operations. The authorities shared the mission’s view on the importance of following up on the missing cash and credit files that the recent audits had revealed, and reaffirmed their commitment to begin publishing semi-annual audited financial statements of the funds, starting with the end-December 2004 statements.

  • NBC. The authorities agreed with the mission’s assessment that weak governance at the bank needed to be addressed expeditiously, including by appointing a CEO and board members with necessary qualifications and by expanding the size of the Board. The authorities reaffirmed their intention to sell the bank, noting that this would require a reduction in staffing that could complicate the privatization process; given the little time left, they said that the sale would probably need to be taken up by the next government.

  • Superintendency of Banks (SIIF). Staff pointed to the hiring of additional staff this year, but noted that further increases were needed to ensure that the SIIF can carry out its responsibilities in line with international standards. The authorities remain fully committed to the transfer of creditor information from the liquidated banks to the credit registry, but stressed that it was equally important to make sure the transferred information is accurate. Staff noted, and the authorities agreed, that the very high reserve requirements for the public banks and NBC should be gradually phased out once strengthened internal procedures for credit evaluation are in place.14

IV. Staff Appraisal

19. The authorities’ Fund-supported program has been successful in overcoming the 2002 financial crisis, bringing about a strong recovery of growth, and significantly strengthening the outlook for debt sustainability. This was achieved through sound macroeconomic policies, difficult reforms in the banking sector, and the debt exchange in early 2003, while a supportive external environment also contributed. The new authorities taking office next month can build on these achievements, although the challenges it still faces are by no means small. The key will be to sustain the virtuous cycle of strong policies, growth and social progress, and domestic consensus on reforms. The new government’s emerging policy framework is reassuring in its emphasis on macro stability, growth, and social equity as the main anchors of its economic strategy.

20. The outgoing government is leaving a solid foundation for fiscal policy in 2005. Staff commends the decision to limit real spending growth in the first quarter of 2005 to 1.5 percent (y/y), and recommends that the incoming authorities maintain this stance for the rest of the year to provide for further fiscal consolidation in 2005. This will be challenging given their plans for increasing (temporarily) social spending by some 0.4 percent of GDP in 2005, and will likely require additional effort on the revenue side.

21. While fiscal performance under the program was strong, a further increase in the primary surplus is needed in 2005 and beyond to ensure medium-term fiscal sustainabilty. To achieve this goal, the sizable revenue shortfall at the social security bank must be addressed urgently, as part of a comprehensive effort to strengthen tax administration. The new government will also need to build domestic consensus on important structural fiscal reforms that unfortunately could not be implemented as planned under the current program. In particular, tax and specialized pension reform will be crucial to strengthen further the fiscal accounts, in a lasting way, in order to bring down the public debt to sustainable levels.

22. Monetary policy has been managed prudently, and the recent easing is well-placed in view of the benign inflation outlook. Staff supports the 5.5—7.5 percent target range for inflation in 2005, and welcomes the collaborative spirit between outgoing and incoming monetary authorities with which it was set. While the international reserve position of the central bank has improved, staff encourages the incoming authorities to take advantage of the favorable external situation to bolster Uruguay’s reserves further, given the large short-term dollar liabilities in the banking system and substantial medium-term debt service obligations. The incoming government will need to address the financial weakness of the central bank to bolster its ability to pursue appropriate monetary policies.

23. Maintaining the momentum in bank restructuring is essential to provide for a resumption of sound credit flows and limit quasi-fiscal costs. Staff welcomes the smooth release of the final tranche of reprogrammed deposits, and the efforts made in the restructuring of BROU, BHU and NBC. The framework and reform priorities are well set: resolve the bad asset overhang from the crisis transparently and rigorously; further strengthen the BROU; accelerate the BHU’s transformation; and strengthen governance at the NBC. Staff welcomes the intention to publish semi-annual audited financial statements of the liquidation funds, beginning with the end-December statements. Continued close monitoring of the liquidation funds’ activities is necessary to ensure that the asset disposal proceeds steadfast and in line with the terms under the contract with the asset manager. Also, ongoing efforts to strengthen banking supervision are well placed, and staff encourages the authorities to bring financial system regulations in line with international standards.

24. While the economy has recovered well from the 2002 crisis, important vulnerabilities remain, leaving important challenges for the incoming government and no room for policy slippages. Risks remain from the still high public debt, the high degree of financial dollarization, remaining (albeit reduced) weaknesses in the banking system, large medium-term financing needs, and potential domestic spending pressures. Public debt should be brought down at a rapid pace, and structural fiscal reforms are needed to bolster the public finances’ resilience to adverse shocks. Continued efforts will be needed to strengthen the banking system to ensure its role of channeling financial resources to support economic growth. To help manage these risks, the incoming authorities’ emphasis on reforming the state (including tax and pension reforms) and strengthening the institutional foundations of sound macro policies are well placed.

25. In summary, Uruguay has performed well under the SBA-supported program, and staff supports the authorities’ request for a waiver and completion of the seventh review. All quantitative and structural PCs for this review were observed, except for that on the transfer of loan information in the liquidation funds to the credit registry of the banking superintendency; completion of this measure is expected before completion of this review.

Table 1.

Uruguay: Selected Economic and Social Indicators

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

Country Report No. 05/14.

Fiscal projections based on current policies.

Evaluated at program exchange rates for 2004.

Part of the sharp drop in 2003 is due to the removal of the three liquidated banks from the database in May 2003. Correcting for loan write-offs, private credit growth turned positive in 2004.

Defined as changes in reserve assets.

Defined for combined public sector.

Excludes nonresident deposits.

As of end-November.

Table 2.

Uruguay: Summary Balance of Payments

(In millions of U.S. dollars)

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

Preliminary.

Including nonresident deposits.

Table 3.

Uruguay: Quantitative Performance Criteria, Indicative Targets, and Structural Conditionality Under the 2004–05 Economic Program 1/

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Sources: Ministry of Economy and Finance; and Central Bank of Uruguay.

As defined in the Technical Memorandum of Understanding.

Cumulative changes from end-December 2003.

Adjusted upward/downward for changes in social security contributions, as defined in the TMU.

Adjusted upward/downward for changes in collections of the Fondos de Libre Disponibilidad (FLD), as defined in the TMU.

Adjusted upward/downward for changes in program disbursements from the World Bank and IDB, as defined in the TMU.

All maturities. The 2003 base includes all loans guaranteed by the government. For December 2003, the debt ceiling has been adjusted upwards to reflect the transfer of Brady bonds from the central bank to the government.

Adjusted upward/downward for changes in interest payments, as defined in the TMU.

Cumulative change from December 2003 average.

Table 4.

Uruguay: Public Sector Operations

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Sources: Ministry of Finance; and Fund staff estimates.

Country Report No. 05/14.

Preliminary.

Excludes contributions that are transferred to the private pension funds.

Includes extrabudgetary operations.

Includes the following bank-restructuring costs: US$33 million of capital transfers for bank recapitalization, US$564 million of liquidity supplied by BCU, US$444 million for the Fondo de Fortalezimiento del Sistema Bancario (FFSB), and US$993 million for the FSBS.

Table 5.

Uruguay: Cash Flow of the Nonfinancial Public Sector

(In millions of U.S. dollars)

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

Preliminary.

Table 6.

Uruguay: Summary Accounts of the Banking System 1/

(In millions of Uruguayan pesos, unless otherwise indicated)

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Sources: Banco Central del Uruguay; and Fund staff estimates.

Presentation used for program monitoring. May differ from presentation and definitions used in IFS.

The Banco de la Republica Oriental de Uruguay (BROU), Banco Hipotecario de Uruguay (BHU; mortgage institution), private banks, and cooperatives.

Excludes nonresident deposits.

Table 7.

Uruguay: Medium-Term Outlook

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

Combined public sector includes nonfinancial public sector and central bank.

Table 8.

Uruguay: Projected Payments to the Fund and Indicators of Capacity to Repay the Fund

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Sources: Finance Department; and Fund staff estimates and projections.

Assuming (i) that last purchase of SDR 139.8 million is made following the Seventh Review in 02/05, and (ii) repurchases during Jan.-May 2005 on expectations basis and on obligations basis thereafter (Country Report No. 05/14).

Projections are based on current rates of charge, including burden-sharing where applicable, for purchases in the GRA. The current SDR interest rate is assumed for net use of SDRs.

Table 9.

Uruguay: Vulnerability Indicators

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

Includes obligations to the IMF.

For 2004, end-November.

By remaining maturity.

Figure 1.
Figure 1.

Uruguay: Activity and Prices

Citation: IMF Staff Country Reports 2005, 109; 10.5089/9781451839296.002.A001

Sources: Central Bank of Uruguay; Ministry of Economy and Finance; CERES; and Fund staff estimates.
Figure 2.
Figure 2.

Uruguay: External Sector Indicators

Citation: IMF Staff Country Reports 2005, 109; 10.5089/9781451839296.002.A001

Sources: Central Bank of Uruguay; Ministry of Economy and Finance; CERES; and Fund staff estimates.
Figure 3.
Figure 3.

Uruguay: Financial and Vulnerability Indicators

Citation: IMF Staff Country Reports 2005, 109; 10.5089/9781451839296.002.A001

Sources: Central Bank of Uruguay; Ministry of Economy and Finance; and Fund Staff estimates.
Figure 4.
Figure 4.

Uruguay: Fiscal and Monetary Indicators

Citation: IMF Staff Country Reports 2005, 109; 10.5089/9781451839296.002.A001

Sources: Central Bank of Uruguay; Ministry of Economy and Finance; and Fund Staff estimates.1/ Includes the write-offs of non-performing loans. Growth has turned positive in 2004, excluding these write-offs.

APPENDIX I

Table 1.

Uruguay: Nonfinancial Public Sector Debt Sustainability 1/

(excludes costs of Bank restructuring)

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Sources: Ministry of Finance; Banco Central del Uruguay; and Fund staff estimates.

Framework covers the nonfinancial public sector (including obligations to the Fund) and debt is measured in gross terms

Assumes that Fund repayments in 2005-07 would be fully financed by commercial bonds; previous DSA versions assumed that a new Fund arrangement would cover half the amortizations.

Table 2.

Uruguay: Nonfinancial Public Sector Debt Sustainability 1/

(includes costs of Bank restructuring)

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Sources: Ministry of Finance; Banco Central del Uruguay; and Fund staff estimates.

Framework covers the nonfinancial public sector (including obligations to the Fund) and debt is measured in gross terms

Assumes that Fund repayments in 2005-07 would be fully-financed by commercial bonds; previous DSA versions assumed that a new Fund arrangement would cover half the amortizations.

Government guarantees on payments to BROU by BHU, assumed to be invoked fully.

Government guarantees of notes of the asset management company of BROU to BROU, assumed to be invoked fully.

Contingent liability from the government’s arbitration with the former owners of Banco de Credito.

Includes additional financing for bank restructuring costs, which could also come from other resources (such as additional bond placements).

Table 3.

Uruguay: Public Sector Debt Sustainability Framework, 1999-2009

(In percent of GDP, unless otherwise indicated)

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Framework covers the nonfinancial public sector (including obligations to the Fund) and debt is measured in gross terms.

Derived as [(r - p(1+g) -g+ ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the denominator in footnote 2/ as r - p (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r).

For projections, this line includes exchange rate changes.

Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period.

Derived as nominal interest expenditure divided by previous period debt stock.

The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP.

The implied change in other key variables under this scenario is discussed in the text.

Real depreciation is defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator).

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Table 4.

Uruguay: External Debt Sustainability Framework, 1999-2009

(In percent of GDP, unless otherwise indicated)

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Derived as [r - g - p(1+g) + ea(1+r)]/(1+g+p+gp) times previous period debt stock, with r = nominal effective interest rate on external debt; p = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-p(1+g) + ea (1+r)]/(1+g+p+gp) times previous period debt stock, r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

The implied change in other key variables under this scenario is discussed in the text.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

APPENDIX II Fund Relations

(As of December 31, 2004)

I. Membership Status: Joined March 11, 1946; Article VIII

A. Financial Relations

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans:

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V. Financial Arrangements:

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VI. Projected Obligations to Fund: (Expectation basis through May 2004 (Country Report No. 05/14) and Obligation basis thereafter) (SDR millions; based on existing use of resources and present holdings of SDRs):

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B. Nonfinancial Relations

VII. Safeguards Assessment: An on-site assessment of the BCU was conducted in July 2002, and the final safeguards assessment report was approved by Fund Management in January 2003. The assessment identified a need to strengthen the control and oversight framework within the BCU, in particular in the external audit area. To this end, staff recommended the establishment of an audit committee, the hiring of a private audit firm with international affiliation to perform a financial audit of the BCU, and the establishment of similar external audit procedures for the FSBS. The authorities committed to the implementation of all the safeguards recommendations. An external audit of the BCU’s 2003 accounts and two of four supplementary external audits of each bank’s FSBS have been completed, with the remaining two audits near completion. The BCU has created an independent audit committee to oversee the bank’s financial reporting practices. Limited action has been taken to implement International Financial Reporting Standards in published financial statements. The recommendation to publish by end-April the audited financial statements of the central bank of the previous year cannot be guaranteed as this depends on the approval of the national audit office.

VIII. Exchange Rate Arrangement: The currency is the Uruguayan peso (Ur$). Uruguay has followed an independently floating exchange rate regime since July 29, 2002. On February 1, 2005, buying and selling interbank rates for the U.S. dollar, the intervention currency, were Ur$24.35 and Ur$24.40, respectively. Uruguay’s exchange system is mostly free of restrictions on payments and transfers for current international transactions. However, reprogrammed time deposits at BROU and BHU gives rise to an exchange restriction under Article VIII, as it prevents nonresidents affected by the reprogramming from transferring abroad proceeds of recent current international transactions. Staff has recommended approval of the exchange restriction, given it is temporary and does not discriminate among Fund members.

IX. Article IV Consultation: The 2003 Article IV consultation was concluded by the Executive Board on July 11 (Country Report No. 03/247). Uruguay is on the standard consultation cycle governed by the provisions approved by the Executive Board on July 15, 2002.

X. FSAP participation and ROSCs: The ROSC-module on fiscal transparency was published on March 5, 2000. A ROSC-module on data dissemination practices was published on October 18, 2001. An FSAP exercise was started in November 2001, but was subsequently suspended on account of the financial crisis in 2002.

XI. Technical Assistance: Technical assistance in tax policy and tax administration was provided by FAD in May and July 2003. In April 2003, STA provided technical assistance on adequate recording of loans funded by the FSBS. MFD has been providing substantial technical assistance since 2002 in the resolution of intervened banks and the restructuring of the public bank BROU.

XII. Resident Representative: Mr. Andreas Bauer.

APPENDIX III Relations with the World Bank Group

(As of January 31, 2005)

The Board considered the last Country Assistance Strategy (CAS) on May 5, 2000 and a CAS Progress Report on July 25, 2002. The Bank increased its financial support, shifting to a high case lending scenario of US$550 million for fiscal years 2002-04, concentrated in adjustment lending. A Structural Adjustment Loan (SAL 1) and a Special Structural Adjustment Loan (SSAL 1) were approved with the CAS Progress Report, totaling US$303 million, to assist Uruguay in addressing structural weaknesses and in managing the economic crisis. On April 8, 2003, another structural adjustment package (SAL 2 and SSAL 2) was approved totaling US$252.5 million, focusing on improving public services and human development policies. Progress in implementation of SAL 1 and SSAL 1 has been satisfactory, and the last tranche in the amount of US$100 million (US$50 of SAL 1 and US$50 of SSAL 1) was released in October 2004. Second tranche release for a total amount of US$75 million of SAL 2 (US$50 million) and SSAL 2 (US$25 million) has been delayed. Although substantial progress towards compliance with conditions for second tranche release of SSAL 2 (Social Sectors) has been achieved, this operation is linked to SAL 2 (Utilities Sector) for which progress has been delayed due to the Government’s lack of support to pass key legislation during the transition period following the general elections and prior to the new administration taking office on March 1, 2005. Approval of new investment operations has been postponed until a new CAS will be prepared with the new administration. It is expected that the new CAS will be approved by end-May 2004.

The investment portfolio comprises six projects totaling US$289.5 million in commitments, with an undisbursed amount of US$113.8 million as of January 30, 2005. Of the two structural adjustment packages, a total of US$175 million remains to be disbursed. The performance of the investment portfolio has improved significantly in CY04, with disbursements for investment operations aggregating to US$43.8 million. This is a reflection of the substantially improved economic situation, as well closer portfolio monitoring, with portfolio performance reviews being conducted on a semi-yearly basis.

Financial Relations with the World Bank Group

(In millions of U.S. dollars)

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APPENDIX IV Relations with the Inter-American Development Bank

(As of January 12, 2005)

The most recent IDB Country Strategy for Uruguay focuses on the following priority areas: (i) enhancing the regional and international competitiveness of domestic output and encouraging private investment, in order to foster healthy competition and allow for integration with both the regional and international markets; (ii) deepening the reform of the State, with a view to rationalizing expenditure, targeting interventions, and reducing its role in the production of domestic goods and services; and (iii) improving social welfare and increasing equity, particularly to those families and children living in poverty. The IDB is currently preparing a new Country Strategy for Uruguay for 2005–09.

As of January 12, 2005 the Bank’s active portfolio in Uruguay included 17 loans for the financing of investment projects; one sector loan, for strengthening the banking sector; and 29 nonreimbursable technical cooperation operations for US$16.7 million. The lending portfolio amounts to US$991.3 million, of which US$512.6 million are pending disbursement. The IDB’s lending program for 2005 includes financing for a program to support livestock competitiveness for US$25 million and a social sector program (policy-based loan) for an estimated US$250 million. The preliminary lending program for 2006 includes financing for the modernization of the Montevideo Port for US$85 million as well as for the fourth stage of the sanitation plan in Montevideo for US$48 million.

Financial Relations with the Inter-American Development Bank

(In millions of U.S. dollars)

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Source: Inter-American Development Bank.

As of November 30, 2004.

IDB estimates, as of December 10, 2004.

APPENDIX V: Statistical Issues

The statistical database in Uruguay is generally adequate for the assessment and monitoring of macroeconomic policies, but important weaknesses exist, especially in the fiscal sector. A multisector mission of November 10–24, 1999 developed an action plan for bringing Uruguay’s data dissemination policies and practices into line with the Fund’s Special Data Dissemination Standard (SDDS). To improve the provision of fiscal data for program monitoring purposes, the government established recently a committee to bolster coordination between the MEF, the BCU, BROU, and BHU.

Real sector

National account statistics have a number of shortcomings, including the use of an outdated benchmark year 1983, limited coverage of the enterprise survey, long publication lags, inadequate information on the informal economy, and incomplete quarterly accounts. The BCU compiles and disseminates annual GDP estimates in current and constant prices by production and expenditure approach, as well as quarterly constant price GDP estimates by production and expenditure approach. Gross national income, gross disposable income and gross savings are also available annually. The November 1999 multisector mission recommended a range of improvements including the completion of the revision of data and methods that had already been partially carried out, introduction of annually chained volume measures, incorporation of new benchmark survey data, and compilation of quarterly estimates of GDP at current prices.

The authorities do not provide trade price and volume indices for publication in the International Financial Statistics (IFS).

Both the consumer and wholesale price indices are reported on a regular and timely basis for publication in the IFS. The consumer price index has a base period of March 1997 =100, and the wholesale price index’s base has been updated to 2001. The coverage of the CPI is limited to the capital city.

Government finances

Official data on the central administration, the state enterprises and the social security system are complete and current, but there are problems with the timeliness of the data on local governments; there are also problems with the timeliness of financing and debt data reported for inclusion in the Fund’s statistical publications. However, the reporting lag on central government operations has been reduced by one month and the authorities have started the publication of information on the stock of floating debt. The multisector mission that visited Uruguay in November 1999 reviewed the sources used for the compilation of central government financing data and identified sources of information for local governments. The mission made recommendations for the compilation of this data and its reporting to STA. The information reported for publication in the Government Finance Statistics Yearbook includes data on the central government; however, complete annual central government debt data have not been reported for periods after 1994 and data on local governments have not been reported for periods after 1997. Following the recommendations of the multisector mission, however, significant improvements have been made in the compilation and dissemination of financing and debt data. Information on a monthly and quarterly basis for financing and debt data respectively, are disseminated on the Central Bank’s website from 1999 onwards for the central government and total public sector.

Monetary accounts

Two STA money and banking statistics missions visited Montevideo in July 1998 and March 1999. The missions reviewed the timeliness, coverage, and classification of the monetary accounts for the banking system and developed a unified system for reporting data to the Fund. The 1999 multisector mission continued work on improving the basic source data and the methodology for compiling monetary statistics, and recommended a new reporting system, which has since been adopted by the Central Bank. The mission developed a database that contains the data needs for publication in IFS and for operational use by WHD.

The STA mission that visited Montevideo in April 2003 provided recommendations for the adequate recording of the loans funded from the Fund for the Stabilization of the Banking System (FSBS) in the Central Bank’s balance sheet. The mission’s recommendations have been implemented and were reflected in the IFS June 2003 issue.

Balance of payments

Balance of payments statements are compiled and published on a quarterly basis. Data are compiled following the recommendations of the fifth edition of the Balance of Payments Manual (BPM5). The authorities have made significant progress in implementing the multisector mission recommendations in order to improve the coverage and quality of balance of payments estimates. The directory of direct investment enterprises has been updated and measures have been introduced to improve the survey on inward investment; quarterly surveys have been introduced in the case of services, and other activities not currently covered; the coverage of reserve assets has been revised to exclude certain assets that are not available to finance balance of payments needs. Uruguay compiles and reports to STA quarterly data on balance of payments and annual data on the international investment position (IIP) for publication in the IFS and the Balance of Payments Statistics Yearbook. The new surveys would also allow for improved coverage of the private sector in the IIP.

In October 2003, Uruguay disseminated the international reserves and foreign currency liquidity data template on the Central Bank’s website for the first time. Monthly information on the data template is currently available for August 2003–September 2004. Uruguay also disseminates quarterly external debt statistics.

Uruguay: Core Statistical Indicators

(As of February 1, 2005)

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Montevideo, Uruguay

February 9, 2005

Dear Mr. de Rato:

1. Uruguay’s economic program, which has been supported by a three-year stand-by arrangement (SBA) approved on April 1, 2002, and modified in August of that year, has yielded excellent results. The economy is recovering sharply; inflation has been well contained; the external position has strengthened significantly; and the successful debt restructuring has lengthened significantly the maturity profile of the public debt (which has fallen from 105 percent of GDP in 2002 to 89 percent of GDP by 2004). Supported by a favorable external environment, these results were achieved through sound macroeconomic policy management, particularly by strengthening the public finances and in implementing a cautious monetary policy with a floating exchange rate.

2. In addition, implementation of a comprehensive banking sector reform program, supported by close technical cooperation with the Fund’s Monetary and Financial Systems Department, has substantially strengthened the health of the banking system—the public commercial bank (BROU) is now showing profits, its balance sheet shows very low nonperforming loans, and its risk and credit management practices have been bolstered. The banking system has been streamlined, with four domestic banks and one savings & loan liquidated, and a new bank formed with the performing assets of three of these banks. The asset recovery of the liquidated banks is well underway (and the asset manager has met its end-January target of 700 approved payment agreements, a structural benchmark under the program). Moreover, we have made significant progress in improving the transparency of the liquidation process, with externally-audited semi-annual reports to begin being published in the first quarter of this year.

3. We are working for a smooth transition with the new government, which takes office on March 1. In particular, consistent with our commitment during the last review, spending authorization for the first quarter of 2005 limit expenditure growth to 1.5 percent in real terms (y/y), and we have secured funding of the public finances through June of this year. The incoming central bank president attended the December 2004 monetary policy meeting, at which time the 12-month target range for inflation was established at 5.5–7.5 percent.

4. Performance under the 2004 program was favorable. GDP growth was about 12 percent, inflation ended the year at 7.6 percent, and gross international reserves rose by around US$500 million to about US$2.5 billion. Preliminary data show that all end-December quantitative performance criteria (PCs) were observed (provision of final data on the primary fiscal balance and gross debt of the nonfinancial public sector is a prior action for this review). Also observed were structural PCs on completing the transfer of all new and remaining non-performing loans of BROU to its fiduciary trust (end-December 2004), completing semiannual financial reports of the liquidation funds for end-December 2004 (end-January 2005), and on ensuring the timely service of the BHU (housing bank) note to BROU.

5. Some reforms envisaged under the program took longer than expected, although the government has remained firmly committed to them. Incorporation of the information on nonperforming borrowers in the liquidation funds (whose loans were held by the liquidation funds) into the credit registry of the Banking Superintendency could not be finished by end-December (PC), owing to the need to ensure the accuracy of the information; this action will be implemented before February 17, 2005 as a prior action for completion of this review. Structural benchmarks for end-December were not observed on establishing a large taxpayers unit (LTU) at the tax administration department (DGI) and on congressional approval of reforms of the pension funds of the police, military, and bank employees. These reforms will need to be completed by the new government. Overall, however, our structural reform program (focused on banking and fiscal reforms) has been broadly successful.

6. Based on the progress made under the program, we request: (i) completion of the Seventh Review under the Stand-By Arrangement, with availability of a purchase equivalent to SDR 139.8 million; and (ii) a waiver on nonobservance of the end-December structural performance criterion on transferring loan information in the liquidated banks to the credit registry of the Banking Superintendency, on the basis that it will be implemented before completion of this review.

7. As this is the last review under the Fund arrangement, which expires on March 31, 2005, we would like to take the opportunity to thank the Fund for its crucial support in dealing with the 2002 financial crisis and its aftermath. With that support, the government of Uruguay put in place an economic program that has allowed the country to overcome the difficulties posed at the height of the crisis and to recover in a strong manner, leaving the incoming government with a solid basis on which to build. No doubt, Uruguay continues to face important challenges to ensure sustained rapid growth, reduce the public debt, and strengthen further the banking system. Nevertheless, we are convinced that with the improved fiscal position, the successful debt exchange of May 2003, and the good progress made in restructuring the financial system, the country is on the right path to managing these challenges.

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Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

700 19th Street NW

Washington DC 20431

Table 1.

Uruguay: Quantitative Performance Criteria and Indicative Targets Under the 2004-05 Economic Program 1/

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Sources: Ministry of Economy and Finance; and Central Bank of Uruguay.

As defined in the Technical Memorandum of Understanding.

Cumulative changes from end-December 2003.

Adjusted upward/downward for changes in social security contributions, as defined in the TMU.

Adjusted upward/downward for changes in collections of the Fondos de Libre Disponibilidad (FLD), as defined in the TMU.

Adjusted upward/downward for changes in program disbursements from the World Bank and IDB, as defined in the TMU.

All maturities. The 2003 base includes all loans guaranteed by the government. For December 2003, the debt ceiling has been adjusted upwards to reflect the transfer of Brady bonds from the central bank to the government.

Adjusted upward/downward for changes in interest payments, as defined in the TMU.

Cumulative change from December 2003 average.

Table 2.

Uruguay: Structural Conditionality Under the 2004-05 Economic Program 1/

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As defined in the Technical Memorandum of Understanding.
1

However, NIR are still negative in the program definition, which considers banking system dollar deposits as a reserve liability.

2

Based on bank balance sheets, excluding write-offs of nonperforming loans.

3

Data is for debt of the nonfinancial public sector and obligations to the Fund.

4

Preliminary data indicate that the end-December PC on the primary surplus of the combined public sector was observed with some margin. Provision of final data is a prior action for completion of the review. The large overperformance through the third quarter was reduced by year’s end, mainly owing to sharply lower-than-programmed collections at the social security bank (BPS).

5

The release of the third tranche was originally scheduled to begin in August 2005.

6

This reform has been supported by the World Bank under its SAL I, which has been fully disbursed.

7

As of end-2004, the outstanding balance on the note was US$508.5 million. The precise debt service schedule through 2012 is in Appendix I, Table 2.

8

In late 2004, the former owners of one of the liquidated banks won an arbitration decision in New York requiring the government to compensate them for losses of some US$100 million. Final resolution of the case, however, could take several years, owing to pending lawsuits in Montevideo against these same owners by creditors of the bank.

9

Two large projects to build wood pulp mills with a combined investment of US$1.5 billion (12 percent of GDP) are well-advanced. Other sectors where significant investment is underway include agroindustry and tourism.

10

Including annual payments to the Fund averaging about SDR 440 million during 2005-07 (4 percent of GDP), and private debt amortizations (after the 2003 debt exchange) coming due beginning in 2008.

11

Amortizations to the Fund assume repayment on an expectations basis through May 2005 and on an obligations basis thereafter (as set out at the time of the sixth program review).

12

Until such time that the DGI is ready to undertake social security contribution collections, coordination between the DGI and BPS needs to be strengthened and inspections by the BPS and DGI stepped up.

13

The quasi-fiscal deficit is expected to stabilize over the next few years at around 0.4 percent of GDP. These deficits reflect the fact that the BCU’s assets are mostly non-interest bearing claims on the government and public enterprises (about 12 percent of GDP), while its liabilities are mostly interest-bearing bank deposits, IMF lending, and BCU securities.

14

Reserve requirements on sight and savings deposits are 65 percent at BROU and 100 percent at NBC.

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Cover IMF Staff Country Reports
Uruguay: Seventh Review Under the Stand-By Arrangement and Request for Waiver of Nonobservance of Performance Criterion—Staff Report and Supplement; Press Release; and Statement by the Executive Director for Uruguay
Author:
International Monetary Fund
Volume/Issue:
Volume 2005: Issue 109
Publisher:
International Monetary Fund
ISBN:
9781451839296
ISSN:
1934-7685
Pages:
62
DOI:
https://doi.org/10.5089/9781451839296.002

Real GDP and Unemployment

Inflation and Real Wages

Exchange Rate

Sovereign risk

(EMBIG Global)

Public Sector Operations

(percent of GDP)
Figure 1.

Uruguay: Activity and Prices
Figure 2.

Uruguay: External Sector Indicators
Figure 3.

Uruguay: Financial and Vulnerability Indicators
Figure 4.

Uruguay: Fiscal and Monetary Indicators