Abstract
IMF Country Report No. 22/16
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IMF Country Report No. 22/16
URUGUAY
2021 ARTICLE IV CONSULTATION—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR URUGUAY
January 2022
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2021 Article IV consultation with Uruguay, the following documents have been released and are included in this package:
A Press Release summarizing the views of the Executive Board as expressed during its November 29, 2021 consideration of the staff report that concluded the Article IV consultation with Uruguay.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on November 29, 2021, following discussions that ended on October 5, 2021, 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 November 11, 2021.
An Informational Annex prepared by the IMF staff.
A Statement by the Executive Director for Uruguay.
The document listed below have been or will be separately released.
Selected Issues
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
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© 2022 International Monetary Fund
Press Release
PR21/355
IMF Executive Board Concludes 2021 Article IV Consultation with Uruguay
FOR IMMEDIATE RELEASE
Washington, DC – December 2, 2021: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation1 with Uruguay.
The economy is showing strong signs of recovery with growth expected to reach 3.4 percent in 2021 and 3.2 in 2022. After contracting by 5.9 percent in 2020 and suffering a strong COVID wave in the first half of 2021, economic activity is gaining strength following a fast vaccination campaign that allowed for the reopening of contact-intensive sectors. Elevated commodity prices are also supporting a broad-based recovery. Inflation is projected at 7.2 for end 2021 and 5.8 for end 2022. Inflation expectations remain above the target range, although they have been gradually converging to the upper band of the range.
Notwithstanding an effective policy response that mitigated the impact of the crisis, the pandemic amplified some pre-existing structural weaknesses. Public finances deteriorated further. High youth unemployment, and the skill mismatch in the labor force were magnified by the disproportionate impact of the pandemic on young and low-income workers as well as the leap in digitalization. Loss of schooling, although of relative short duration, also added to the pre-pandemic erosion of human capital.
The fiscal balance of the non-financial public sector (NFPS), excluding ‘cincuentones’, is projected to improve from -4.5 percent of GDP in 2021 to -3.4 in 2022, while targeted fiscal support remains in place. Near term fiscal risks are limited as financing needs are moderate, liquidity buffers are adequate and market access remains at favorable terms, reflecting its investment grade status. The authorities’ envisaged consolidation plan is expected to stabilize debt around 70 percent of GDP over the medium term. Monetary policy remains accommodative and is gradually tightening, responding to inflationary pressures and the economic recovery. The banking sector is well capitalized and financial risks remain contained, including because the overall exposure of the financial system to sectors most affected by the pandemic is low.
Executive Board Assessment2
Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities’ effective policy response to the pandemic, leveraging on solid health and social welfare systems, and noted that Uruguay has one of the most successful vaccination campaigns worldwide. Directors also positively noted the important enhancements to the country’s fiscal and monetary frameworks despite the pandemic. Moving forward and given the uncertain outlook and pre-existing structural weaknesses, Directors emphasized the importance of rebuilding fiscal space while supporting the recovery, addressing inflationary pressures, and moving ahead with structural reforms to achieve higher and inclusive growth.
Directors agreed that near-term policies should continue to support the recovery with targeted measures while shifting towards fiscal consolidation and debt reduction as the recovery takes hold. In that context, they welcomed the continued well-targeted fiscal measures to support employment and the most vulnerable. Directors noted that the introduction of the new fiscal rule would improve fiscal discipline and encouraged the authorities to consider some refinements to the fiscal framework to further strengthen it. The authorities’ resolve to reforming the pension system, which is key for fiscal sustainability and inter-generational equity, is commendable.
Directors noted that accommodative monetary policy and temporary regulatory forbearance were key to support firms and maintain financial stability through the downturn. They agreed that, as the economy recovers and uncertainty dissipates, support measures should be phased out. Monetary policy should focus on strengthening credibility by firmly steering inflation and inflation expectations towards the target as the economy recovers. Directors welcomed the ongoing enhancements to the monetary policy framework and noted that durably lowering inflation is key to reducing dollarization, developing domestic capital markets, and bolstering financial intermediation and investment. Efforts to enhance the Central Bank’s independence, accountability and transparency should continue.
Directors encouraged the authorities to move forward with structural reforms to address pandemic legacies and boost medium term growth prospects. Supporting young and low-skilled workers, which have been disproportionately impacted by the pandemic, through active labor market policies, retraining and education reform would be particularly important to bolster human capital accumulation. Directors also encouraged the authorities to address labor market rigidities and accelerate reforms of state-owned enterprises to help improve efficiency, reduce costs of doing business and boost investment and growth. Commenting on Uruguay’s strong commitment to tackling climate change, Directors noted that investment in green energy, digitalization and infrastructure will be key in sustaining strong growth over the medium to long term.
It is expected that the next Article IV consultation with Uruguay will be held on the standard 12-month cycle.
Selected Economic Indicators
Percent change of end-of-year data on one year ago.
Includes bank and non-bank credit.
Non-financial public sector (NFPS) includes the Central Government, Banco de Prevision Social, Banco de Seguros del Estado, and Non-Financial Public Enterprises.
Temporary proceeds resulting from the pension reform that allowed workers above 50 years old (and with certain income level) to voluntarily move back to the public pension system. Proceeds are projected to end in 2022.
Total public sector (PS). Includes the NFPS and Banco Central del Uruguay.
Public sector gross debt minus liquid assets. Liquid assets exclude central bank reserves held as counterpart of banks’ required reserves on foreign currency deposits.
Selected Economic Indicators
| Projections | ||||||
|---|---|---|---|---|---|---|
| 2019 | 2020 | 2021 | 2022 | 2023 | ||
| Output, prices, and employment | ||||||
| Real GDP (percent change) | 0.4 | -5.9 | 3.4 | 3.2 | 2.7 | |
| Unemployment (in percent, eop) | 8.9 | 10.4 | 10.2 | 9.0 | 8.5 | |
| CPI inflation (in percent, end of period)) | 8.8 | 9.4 | 7.2 | 5.8 | 5.0 | |
| Monetary and banking indicators 1/ | (Percent change, unless otherwise specified) | |||||
| M2 | 6.3 | 17.2 | ... | … | ... | |
| Bank assets (in percent of GDP) | 65.8 | 76.9 | ... | … | ... | |
| Private credit (in percent of GDP) 2/ | 25.7 | 27.8 | ... | ... | ... | |
| Fiscal sector indicators 3/ | (Percent of GDP, unless otherwise specified) | |||||
| Revenue NFPS | 28.3 | 28.0 | 27.4 | 27.5 | 27.7 | |
| excluding cincuentones transactions | 27.2 | 27.4 | 27.1 | 27.5 | 27.7 | |
| Primary expenditure NFPS | 28.8 | 30.2 | 29.4 | 28.6 | 27.8 | |
| Primary balance NFPS | -0.5 | -2.1 | -1.8 | -1.0 | 0.1 | |
| excluding cincuentones transactions | -1.6 | -2.7 | -2.2 | -1.0 | 0.1 | |
| Overall balance NFPS | -2.9 | -4.7 | -4.1 | -3.4 | -2.5 | |
| excluding cincuentones transactions | -4.0 | -5.2 | -4.5 | -3.4 | -2.5 | |
| Gross debt NFPS | 60.5 | 68.1 | 67.3 | 68.5 | 69.7 | |
| Gross debt PS | 64.3 | 74.9 | 81.1 | 82.3 | 83.2 | |
| Net debt NFPS | 51.2 | 57.8 | 57.2 | 58.5 | 59.8 | |
| PS debt net of liquid financial assets 6/ | 39.9 | 47.5 | 52.2 | 54.3 | 55.9 | |
| PS debt net of total financial assets | 32.3 | 36.8 | 41.2 | 43.9 | 45.5 | |
| External indicators | ||||||
| Merchandise exports, fob (US$ billions) | 11.7 | 9.9 | 13.0 | 14.6 | 16.0 | |
| Merchandise imports, fob (US$ billions) | 8.7 | 7.8 | 9.8 | 10.9 | 11.5 | |
| Terms of trade (percent change) | 3.8 | 7.4 | 3.3 | 1.8 | 0.2 | |
| Total external debt + non-resident deposits | 74.1 | 88.0 | 85.9 | 85.2 | 86.3 | |
| External debt service (in percent of exports of g&s) | 59.0 | 75.1 | 67.7 | 57.7 | 55.6 | |
| Gross official reserves (US$ billions) | 14.5 | 16.2 | 17.0 | 17.2 | 17.4 | |
| In months of imports of goods and services | 13.1 | 17.4 | 15.1 | 13.7 | 13.1 | |
| In percent of: | ||||||
| Short-term external (STE) debt | 227 | 250 | 298 | 289 | 285 | |
| STE debt plus banks’ non-resident deposits | 278 | 266 | 263 | 254 | 246 | |
Percent change of end-of-year data on one year ago.
Includes bank and non-bank credit.
Non-financial public sector (NFPS) includes the Central Government, Banco de Prevision Social, Banco de Seguros del Estado, and Non-Financial Public Enterprises.
Temporary proceeds resulting from the pension reform that allowed workers above 50 years old (and with certain income level) to voluntarily move back to the public pension system. Proceeds are projected to end in 2022.
Total public sector (PS). Includes the NFPS and Banco Central del Uruguay.
Public sector gross debt minus liquid assets. Liquid assets exclude central bank reserves held as counterpart of banks’ required reserves on foreign currency deposits.
Selected Economic Indicators
| Projections | ||||||
|---|---|---|---|---|---|---|
| 2019 | 2020 | 2021 | 2022 | 2023 | ||
| Output, prices, and employment | ||||||
| Real GDP (percent change) | 0.4 | -5.9 | 3.4 | 3.2 | 2.7 | |
| Unemployment (in percent, eop) | 8.9 | 10.4 | 10.2 | 9.0 | 8.5 | |
| CPI inflation (in percent, end of period)) | 8.8 | 9.4 | 7.2 | 5.8 | 5.0 | |
| Monetary and banking indicators 1/ | (Percent change, unless otherwise specified) | |||||
| M2 | 6.3 | 17.2 | ... | … | ... | |
| Bank assets (in percent of GDP) | 65.8 | 76.9 | ... | … | ... | |
| Private credit (in percent of GDP) 2/ | 25.7 | 27.8 | ... | ... | ... | |
| Fiscal sector indicators 3/ | (Percent of GDP, unless otherwise specified) | |||||
| Revenue NFPS | 28.3 | 28.0 | 27.4 | 27.5 | 27.7 | |
| excluding cincuentones transactions | 27.2 | 27.4 | 27.1 | 27.5 | 27.7 | |
| Primary expenditure NFPS | 28.8 | 30.2 | 29.4 | 28.6 | 27.8 | |
| Primary balance NFPS | -0.5 | -2.1 | -1.8 | -1.0 | 0.1 | |
| excluding cincuentones transactions | -1.6 | -2.7 | -2.2 | -1.0 | 0.1 | |
| Overall balance NFPS | -2.9 | -4.7 | -4.1 | -3.4 | -2.5 | |
| excluding cincuentones transactions | -4.0 | -5.2 | -4.5 | -3.4 | -2.5 | |
| Gross debt NFPS | 60.5 | 68.1 | 67.3 | 68.5 | 69.7 | |
| Gross debt PS | 64.3 | 74.9 | 81.1 | 82.3 | 83.2 | |
| Net debt NFPS | 51.2 | 57.8 | 57.2 | 58.5 | 59.8 | |
| PS debt net of liquid financial assets 6/ | 39.9 | 47.5 | 52.2 | 54.3 | 55.9 | |
| PS debt net of total financial assets | 32.3 | 36.8 | 41.2 | 43.9 | 45.5 | |
| External indicators | ||||||
| Merchandise exports, fob (US$ billions) | 11.7 | 9.9 | 13.0 | 14.6 | 16.0 | |
| Merchandise imports, fob (US$ billions) | 8.7 | 7.8 | 9.8 | 10.9 | 11.5 | |
| Terms of trade (percent change) | 3.8 | 7.4 | 3.3 | 1.8 | 0.2 | |
| Total external debt + non-resident deposits | 74.1 | 88.0 | 85.9 | 85.2 | 86.3 | |
| External debt service (in percent of exports of g&s) | 59.0 | 75.1 | 67.7 | 57.7 | 55.6 | |
| Gross official reserves (US$ billions) | 14.5 | 16.2 | 17.0 | 17.2 | 17.4 | |
| In months of imports of goods and services | 13.1 | 17.4 | 15.1 | 13.7 | 13.1 | |
| In percent of: | ||||||
| Short-term external (STE) debt | 227 | 250 | 298 | 289 | 285 | |
| STE debt plus banks’ non-resident deposits | 278 | 266 | 263 | 254 | 246 | |
Percent change of end-of-year data on one year ago.
Includes bank and non-bank credit.
Non-financial public sector (NFPS) includes the Central Government, Banco de Prevision Social, Banco de Seguros del Estado, and Non-Financial Public Enterprises.
Temporary proceeds resulting from the pension reform that allowed workers above 50 years old (and with certain income level) to voluntarily move back to the public pension system. Proceeds are projected to end in 2022.
Total public sector (PS). Includes the NFPS and Banco Central del Uruguay.
Public sector gross debt minus liquid assets. Liquid assets exclude central bank reserves held as counterpart of banks’ required reserves on foreign currency deposits.
Title page
URUGUAY
STAFF REPORT FOR THE 2021 ARTICLE IV CONSULTATION
November 11, 2021
KEY ISSUES
Context. Uruguay entered the pandemic with solid institutions and social cohesion but growing macroeconomic imbalances—especially slow economic growth and weak public finances—as the end of the last commodity price boom in 2014 uncovered structural weaknesses. A new government came to power in March 2020 with a mandate to boost growth and restore fiscal sustainability. Legislation setting the foundations for many of the reforms has been passed and implementation is advancing––including on a new fiscal rule, and state-owned enterprise (SOE) and pension reforms.
Recent developments. Activity contracted markedly in 2020—in the context of an already weak economy—reflecting the impact of social distancing on contact-intensive sectors. Leveraging on sound existing social protection and health care systems, and low poverty rates, the authorities deployed an effective policy response, using available policy space while balancing fiscal sustainability objectives. A package of fiscal measures, credit support, highly accommodative monetary policy and regulatory forbearance helped keep firms afloat, sustain employment and mitigate the impact on vulnerable groups. The recovery in early 2021 was sluggish—reflecting the strong COVID wave—and uneven, with primary activities and construction growing robustly while contact intensive sectors lagged. Following a fast vaccination campaign, however, COVID cases slowed to a near halt, allowing the economy to gradually reopen and contact-intensive sectors to accelerate their recovery.
Impact of the pandemic. Young and low-skilled workers were disproportionately affected by the crisis, adding to the pre-existing challenges of high youth unemployment. Skill mismatches in the labor force were also amplified by the leap in digitalization.
Outlook and risks. The recovery is expected to strengthen in late 2021 and 2022 as contact-intensive sectors rebound and elevated commodity prices continue to provide broad support. Near-term risks stem mainly from a resurgence of the virus and weaker commodity prices. Over the medium term, growth will also hinge on whether the effects of the pandemic—especially the amplified skill mismatch in the labor force—are long-lasting, and on progress with fiscal consolidation and the reform agenda.
Policy Recommendations. Near-term policies are appropriately shifting towards rebuilding policy space, while maintaining targeted support for vulnerable groups and the economy. Sustaining growth in the medium term will require moving forward with reforms to address pandemic legacies and lift pre-existing structural barriers to growth. Specifically:
• Fiscal policy. The envisaged fiscal consolidation plan is appropriate as the recovery is expected to strengthen in the coming quarters. If downside risks materialize, there is scope for spreading the adjustment over time to limit potential long-lasting effects of the pandemic. As the economy fully recovers, greater fiscal efforts will be needed to place debt on a firm downward path and rebuild fiscal space. Identifying structural measures to underpin the fiscal consolidation would also help ensure its durability. The new fiscal rule is an important step toward securing fiscal discipline, although some refinements would help fully reap the benefits of a rules-based system. Plans to move forward with pension reform—key to fiscal sustainability—are welcome. Accelerating SOE reforms—to improve efficiency and reduce production costs—would support post-pandemic investment.
• Labor Markets. The extension of enhanced unemployment benefits and subsidies for employment of vulnerable workers is welcome. Greater offer of (re)training programs is urgently needed to revert the impact of the pandemic on young and low-skill workers. Education reform is also needed to address the pre-pandemic erosion of human capital and adapt the labor force to the demands of the labor market. Decentralizing wage negotiations—including to ensure that wages are aligned with productivity—would support the recovery of lagging sectors and bolster growth of non-commodity sectors.
• Monetary Policy. Accommodative monetary policy remains appropriate to support the recovery, although a tightening bias, in line with the recovery, is needed to help solidify credibility gains. Bringing inflation down durably is essential to tackle dollarization and boost investment going forward.
• Financial Sector. Financial stability risks appear contained and should continue to be monitored, especially as regulatory forbearance measures are unwound. Credit guarantee programs should be phased out as uncertainty dissipates.
Approved By:
Patricia Alonso-Gamo (WHD) and Anna Ilyina (SPR)
Discussions took place virtually during September 23–October 5, 2021. The staff team comprised Gustavo Adler (head), Natasha Che, Chiara Fratto, M. Belen Sbrancia and Jose Torres (all WHD). Ines Bustillo (OED) participated in key meetings. Patricia Alonso-Gamo (WHD) participated in the concluding meeting. Luis Omar Herrera Prada (WHD) provided research assistance. Staff met with Minister of Economy and Finance Arbeleche, Minister of Labor Mieres, Director of the Office of Planning and Budget Alfie, Central Bank President Labat, other senior government officials, as well as representatives of public enterprises, the private sector, unions, and members of other political parties.
Contents
PRE-PANDEMIC CONTEXT: SOLID INSTITUTIONS BUT GROWING IMBALANCES
THE PANDEMIC
A. Recent Developments
B. Policy Response to the Pandemic
C. Social Impact of the Pandemic
OUTLOOK AND RISKS
SUPPORTING THE RECOVERY AND BOOSTING POTENTIAL GROWTH
A. Rebuilding Policy Space while Supporting the Recovery
B. Boosting Medium-Term Growth
STAFF APPRAISAL
BOXES
1. An Enhanced Monetary Policy Framework
2. Environmental and Climate Change Policies
FIGURES
1. COVID-19 Developments
2. Real Activity
3. Labor Market
4. External Accounts
5. Inflation
6. Fiscal Developments
7. Monetary Policy
8. Credit and Banking
9. Climate
TABLES
1. Selected Economic Indicators
2. Balance of Payments and External Sector Indicators
3. Main Fiscal Aggregates
4. Public Sector Debt and Financial Assets
5. Statement of Operation of the Central Government
6. Central Government Stock Positions
7. Monetary Survey
8. Medium-Term Macroeconomic Framework
9. Selected Financial Soundness Indicators
ANNEXES
I. External Sector Assessment
II. Main COVID-Related Policy Measures
III. Uruguay’s New Fiscal Rule
IV. Risk Assessment Matrix
V. Public Sector Debt Sustainability Analysis
VI. External Debt Sustainability Analysis
VII. Pension Reform in Uruguay
Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country’s economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.
At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country’s authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.
