The Executive Board of the International Monetary Fund (IMF) completed today the second review under the three-year, SDR 766.3 million (US$1.11 billion) Stand-By Arrangement for Uruguay (see Press Release No. 05/136). Completion of this review makes SDR 30.7 million (about US$44.3 million) immediately available to Uruguay.

In completing the review, the Board granted waivers for the nonobservance of the end-November 2005 performance criterion on reform of the police pension system, the nonobservance of the end-December performance criterion on financial sector reform based on the decision to keep the supervisory authority within the central bank supported by Fund staff, and a waiver of applicability for the end-December quantitative performance criteria, for which data was not available.

The Executive Board also approved Uruguay’s request for extending repayment expectations arising between February and December 2006—in an amount equivalent to SDR 540.9 million (US$781.8 million)—to an obligation basis in 2007.

In commenting on the Board review, Mr. Agustín Carstens, Deputy Managing Director and Acting Chair, said:

“Uruguay’s performance under the Stand-By Arrangement continues to impress. Sound economic policies, adequate program ownership, and generally favorable external financial conditions have contributed to a strong recovery, low inflation, rising international reserves and an improved debt outlook. Still, some macroeconomic vulnerabilities persist, and continued focus on fiscal discipline, financial sector reforms, and strengthening the investment climate will be necessary to ensure sustained rapid growth and debt sustainability.

“The fiscal program is on track, and the medium-term fiscal outlook is anchored by the recently approved budget for 2005–09 which envisages sustained large primary surpluses. The authorities’ plans for deep fiscal reforms, both on the revenue and expenditure sides, are well placed. In particular, the planned tax reform and ongoing efforts to strengthen tax administration will be critical to ensure achievement of the ambitious revenue targets in the budget. The authorities’ renewed commitment to pension reform is equally welcome as an important pillar of long-term fiscal sustainability.

“Monetary policy has successfully contained inflation in the low single digits, and the central bank’s focus on achieving the program’s inflation objective is appropriate. Looking forward, incipient inflationary pressures need to be monitored carefully, and it will be important that the authorities follow up on their commitment to adjust policies if necessary to safeguard the inflation objectives.

“Financial sector reforms are progressing as programmed. Draft legislation submitted to congress to enhance the central bank’s autonomy, strengthen financial supervision, and improve the bank resolution and deposit insurance frameworks will further upgrade policy capabilities and reduce financial sector vulnerabilities. An action plan to improve the ailing housing bank (BHU) has been developed and the state bank (BROU) has continued to advance its restructuring efforts. An ongoing financial sector assessment program (FSAP) is taking stock of the reform process, to help identify the priorities for the future reform agenda.

“Uruguay has made a strong start under the Fund-supported program adopted in mid-2005. Executive Directors look forward to a continued strong program implementation to ensure sustained rapid growth and a lasting exit from Fund financial support,” Mr. Carstens said.