Statement by Hector Torres, Executive Director for Uruguay and David Vogel, Advisor to Executive Director June 8, 2005

This paper examines Uruguay’s Request for a Stand-By Arrangement. Although the external current account shifted to a moderate deficit, mainly reflecting the recovery in imports, export performance has been robust, and gross international reserves are now about three-fourths their pre-crisis level. The authorities’ program appropriately focuses on fiscal consolidation keeping inflation low through prudent monetary policy, promoting sound credit flows in a strengthened financial system, and other growth-oriented reforms. Key to maintaining macrostability will be achieving sufficiently large primary surpluses over the medium term to keep the public debt on a firm downward path.


This paper examines Uruguay’s Request for a Stand-By Arrangement. Although the external current account shifted to a moderate deficit, mainly reflecting the recovery in imports, export performance has been robust, and gross international reserves are now about three-fourths their pre-crisis level. The authorities’ program appropriately focuses on fiscal consolidation keeping inflation low through prudent monetary policy, promoting sound credit flows in a strengthened financial system, and other growth-oriented reforms. Key to maintaining macrostability will be achieving sufficiently large primary surpluses over the medium term to keep the public debt on a firm downward path.

1. On behalf of the Uruguayan authorities, we would like to thank the Fund’s Management and staff for their hard work and constant support since the new government was elected, allowing the country to apply, just nearly three months after the new administration was positioned, for a strong IMF-supported program. Meanwhile, we would like to reiterate the government’s main objectives: to achieve higher and sustainable growth rates; to enhance the level and quality of employment; to significantly reduce poverty conditions; and to improve social equity.

2. Macroeconomic stability is a necessary condition to achieve our authorities’ objectives; thus, they are fully committed to undertake sound macroeconomic policies. In the fiscal area, the government’s program establishes important primary surpluses (3.5 percent of GDP in 2005, 3.7 percent in 2006, and 4 percent in 2007 and beyond) that are fully compatible with the Uruguayan authorities’ high priority in ensuring debt sustainability. It is important to note that Uruguay’s primary surplus targets have been set up in consistency with the efforts required by the interest burden and the objective to make the country’s debt sustainable. The aforementioned fiscal primary surplus targets will allow the country to reduce substantially and systematically the overall fiscal deficit. Likewise, debt-to-GDP ratio will be reduced from 92 percent in 2004 to 76 percent this year, and will continue falling to 62 percent in 2008 and 50 percent in 2012, according to the Staff’s Debt Sustainability Analysis presented in the current staff report. Beyond this, it is also important to note that, as stressed in the staff report, our authorities have agreed to save any revenue over performance under the program.

3. As previously mentioned, our authorities will follow strict expenditure policies, while reorienting expenditures, improving targeting, and undertaking comprehensive reforms of specialized pension funds. Furthermore, they are committed to avoid a procyclical fiscal policy, consequently recuperating in the medium-term the possibility of using fiscal policy to smooth economic fluctuations. Our authorities see the five-year budget law as an important opportunity to improve the efficiency of the public sector, reprioritize expenditure, and introduce proper incentives in public administration.

4. The Central Bank’s autonomy will be increased as a key component of our authorities’ plan to ensure its capacity to enforce prudent policies toward maintaining inflation rates in the targeted range -in a context of an appropriate exchange rate flexibility-, and progressing toward an inflation-targeting regime. Market’s confidence in the Central Bank’s capacity to keep inflation under control is reflected, among other things, by the fact that inflation expectations are in line with the Central Bank’s envisaged targets. Likewise, the nominal exchange rate has shown an appreciating trend over the last year, as it has been a common behavior around many regions of the world–even though, as noted in the staff report, the peso in real effective terms still remains about 25 percent below its pre-crisis level.

5. Taking advantage of the current level of the nominal exchange rate, in a context in which the inflation has been at the bottom of the inflation target range, the Central Bank has been buying dollars to further strengthen its reserve position, thus allowing to meet the related quantitative performance criteria. Regarding the external current accounts, as noted in the staff report, Uruguay has shifted to a moderate deficit. While exports have continued showing a robust expansion (20 percent in the first quarter of 2005, compared to the same period of 2004), imports have increased at an even higher rate (42 percent), reflecting to a large extent a strong increase of imports of capital goods (70 percent).

6. Productive investment, which has historically been the Achilles’ heel for the country, is critical in spurring Uruguay’ growth. Given that currently the country has limited scope for increasing public investment, the government is aware that domestic and foreign private investment must have a predominant role in the next years. Taking into account Uruguay’s comparative advantages in some sectors–among others, food industry, forestry, tourism, communications, information technology-, the government’s policies will pursue the promotion of value-added production. Consequently, along with the necessary condition of macroeconomic stability, the government will implement pending structural reforms aimed at strengthening institutional frameworks affecting private investment. In order to attain that, our authorities firmly believe that Uruguay has an important platform, consisting of its long tradition of respecting property rights and making the rules of the game predictable.

7. Financial infrastructure and financing availability is key for investment. To this end, it is crucial to continue improving market confidence by, among other things, enhancing institutions in the banking supervision area. For instance, the authorities are further strengthening bank supervisory and prudential regulations, while continuing with the restructuring of public banks. Among the expected reforms of the financial sector is the establishment of a suitable bank resolution framework–including a refined deposit insurance scheme-, whose necessity was clearly demonstrated during the 2002 crisis. At the same time, improving governance structure, risk management, and credit policies at the public banks is critical for the stability of the system. Since widespread financial dollarization remains an important vulnerability, the authorities will make significant efforts to diminish it, not only through prudential regulations, but also by promoting the development of financial products and instruments in local currency. Our authorities are aware that de-dollarizing the economy involves cultural issues, thus it will take time to promote a sustainable change.

8. The tax system reform is a central component of our authorities’ structural reform agenda. This reform will be oriented by efficiency as well as vertical and horizontal equity considerations, and it will be fully compatible with our authorities’ objective of boosting private investment. As stressed in the Fund paper on Investment Climate 1, “while tax incentives may, at the margin, attract investment to certain industries (particularly, capital intensive sectors), a stable and transparent corporate tax regime is more important for enhancing the level and stability of investment flows”. Our authorities agree with this comment, and have proceeded to promote a simplification of the tax system, with lower yet more efficient and effective taxes. While preparing for the introduction of a comprehensive personal income tax for the first time2, the Uruguayan authorities will make a profound review of the current tax regime’s exemptions and subsidies, several of which probably do not have an economic rationality. The authorities are committed to introduce a comprehensive reform of the revenue administration, which they see as crucial to accompany the tax system reform.

9. Our authorities are fully committed to maintain an open trade regime, so as to fully integrate Uruguay in the global economy. The government’s commitment to Mercosur is absolutely compatible with its intention to continue diversifying the country’s export base and external markets. In this regard, our authorities see Mercosur as an open region; a launching platform rather than an ending point. Our authorities have a firm decision on carrying out other needed reforms to further improve the investment climate such as those related to regulatory and legal frameworks–for instance, by amending the current bankruptcy legislation. Clearly, while some activities need further deregulations to create a more competitive environment, others–particularly, those related to public utilities-need to have better regulations. In this regard, it is important to stress that our authorities see the role of state run public services as complements rather than alternatives to market-oriented policies. Our authorities are committed to improve governance at public enterprises, and to seek associations in joint ventures with private or public capital partners, thus preparing the public enterprises for competition with the private sector. Meanwhile, private initiative is a core engine in any economy, and small and medium enterprises are important instruments to reduce poverty, therefore simplifying business start-up procedures is an important issue for our authorities. 3

10. As underscored in a recent issue of IMF’s Finance & Development4, “managing the tension between creating a favorable investment climate for firms and achieving other social goals is a major challenge for governments at all levels”. In this regard, the Uruguayan government is absolutely committed to making its growth and social objectives fully compatible and synergetic. For instance, in May, the authorities launched a national agreement on employment, income and responsibilities (Compromiso Nacional para el Empleo, los Ingresos y las Responsabilidades)5, for which some European models were considered, such as Ireland’s, which is based on agreements among the government, employers and trade unions. Indeed, the aforementioned national agreement is oriented toward achieving common objectives to all economy’s actors, and creates a framework of rights, obligations and responsibilities. This common framework will be expanding to include social and community issues. Therefore, consensus should now play a positive role in the decision-making process to enact the needed reforms and to make them long-lasting and less subject to reversals.

11. In the same direction, a two-year social emergency program is being carried out. This temporary program is being implemented in a transparent manner, providing appropriate incentives, aimed at reinserting into the economic and community activities people who were expelled from the system during the economic crisis. By providing, among other things, support in education, nutrition, and primary health, these people (particularly children) will be better prepared to reinsert into the system. Meanwhile, this program is regarded critical in building up ownership to complete the pending structural reforms. It is clear that reducing exclusion and inequity improves the capacity of a government to push ahead with changes without affecting stability. Hence, our authorities’ efforts aimed at integrating people and objectives are also an important contribution to a better investment climate.

12. Our authorities would like to express their firm willingness to establish a well-articulated exit strategy from the Fund’s financial support, which has been beneficial for the Uruguayan people to the extent that it allowed the country to overcome one of the most severe crisis in Uruguay’s history. Clearly, Uruguay’s new program, supported by the Fund, will continue to increase market confidence in the country, resulting in Uruguay’s increasing access to the external financial markets. Indeed, the strong possibility to reach a new Stand-By Arrangement with the Fund has been key in allowing Uruguay to place in international markets US$ 300 million of 12-year bonds in early May, and US$ 200 million in bonds with the same maturity in late May. Finally, we would like to reiterate that our authorities are strongly committed in making Uruguay a successful case for the benefit of the Uruguayan people and also for the Fund.


Investment Climate–Concept and Selected Issues for Fund Surveillance (IMF document).


As Mr. Tanzi and Mr. Zee (“Tax Policy for Emerging Markets: Developing Countries”, IMF WP/00/35) underline, personal income taxes and property taxes have been very little exploited in developing countries. Consequently, according to the authors, tax incidence studies of developing countries have found that tax systems rarely achieve effective progressitivity.


Although there was some improvement over the last few years, “Doing Business” from the World Bank underscores that much remains to be done, particularly regarding the number of procedures to start a business and its cost, areas in which Uruguay shows relatively poor indicators. The IDB is supporting the authorities on a restructuring of business start-up procedures.


Smith, Warrick, and Mary Hallward-Driemeier, “Understanding the Investment Climate”, Finance & Development, March 2005.


On May 19, the Uruguayan government called employers and workers to join in this agreement aimed at having a national strategic project, which contributes to fulfill the above-referred objectives established by the administration. More details could be found in the Uruguayan Presidency’s web site (

Uruguay: Request for Stand-By Arrangement—Staff Report; Staff Supplements; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Uruguay
Author: International Monetary Fund