Uruguay’s recovery “has exceeded all expectations”

The recovery of the Uruguayan economy from the 2002 crisis “has exceeded all expectations” but continued efforts are needed “to entrench macroeconomic stability, deepen structural reforms and reduce vulnerabilities”, reports the IMF in the last reviews of a stand by arrangement with Uruguay.

The Executive Board of the IMF completed last week the fifth and sixth reviews under the three-year, SDR 766.25 million (about 1.15 billion US dollars) Stand-By Arrangement for Uruguay and praised Uruguay’s performance which “has paved the way for an early exit from IMF financial support”.

“Sound policies and a supportive external environment have delivered a sharp economic recovery and low inflation, a declining debt ratio and rollover risk, and a vastly improved external position”, said Murilo Portugal, IMF Deputy Managing Director and Acting Chair, adding that “the banking system, once at the centre of the Uruguayan crisis, is now substantially stronger-better capitalized and with tighter prudential regulations to internalize risks from high financial dollarization”.

On November 8, 2006, the Uruguayan authorities announced that they would shortly repay all outstanding obligations to the Fund and cancel the current Stand-By Arrangement. Full repayment of the equivalent of SDR 727 million (about 1.1 billion US dollars) was made on November 30, 2006 and the authorities indicated that they wanted the arrangement to be cancelled shortly after the completion of the fifth and sixth reviews. Therefore, there was no disbursement associated with the reviews.

Insisting on issues still to be addressed, Mr. Portugal said that, “continued policy efforts are needed to entrench macroeconomic stability, deepen structural reforms, and further reduce vulnerabilities. In the fiscal policy area, the intention to pursue policies in 2007 consistent with the medium-term primary surplus target of 4% of GDP, while maintaining appropriate levels of investment and social spending, is welcomed, as high primary surpluses should remain at the core of the strategy to reduce the debt burden and anchor policy credibility”.

"With the recent passage of the tax reform, a major milestone in the reform agenda, preparations for its implementation in July 2007 need to proceed vigorously. It will also be important to move ahead with reform plans for the budget, customs, the social security bank, and the specialized pension schemes.

"While inflation is relatively low, the authorities should stand ready to adjust policies should inflation pressures emerge. Continued central bank build-up of foreign exchange reserves, consistent with exchange rate flexibility and the inflation objectives, would help increase reserve coverage, which is not as high as in other dollarized economies.

"In the financial sector, vulnerabilities need to be reduced further. Passage and implementation of the financial sector law in 2007 will be crucial to enhance central bank independence and strengthen the supervisory and bank resolution frameworks. Completing the restructuring of the housing bank (BHU) into a viable institution in the near term will also be important" underlined Mr. Portugal.

In a supplementary letter of intent, dated December 7, Uruguayan authorities admitted to some of the structural reforms pending which will be addressed in 2007, among which: autonomy for the Central Bank; strengthen regulation of the financial system and provide a suitable bank resolution; restructuring of the Housing & Mortgage bank, BHU, by moving non performing loans to a fideicomiso and make the bank into a viable business institution; reforms to the Police, military and bank employees pensions funds.