IMF Concludes 2021 Article IV Consultation with Uruguay

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation[1]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 Assessment[2]

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.


[1]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.

[2]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:https://www.IMF.org/external/np/sec/misc/qualifiers.htm.

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

(Percent change, unless otherwise specified)

Monetary and banking indicators 1/

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 … …

(Percent of

GDP, unless otherwise specified)

Fiscal sector indicators 3/

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

Sources: Banco Central del Uruguay, Ministerio de Economía y Finanzas, Instituto Nacional de Estadística, and Fund staff calculations.

1/ Percent change of end-of-year data on one year ago.

2/ Includes bank and non-bank credit.

3/ Non-financial public sector (NFPS) includes the Central Government, Banco de Prevision Social, Banco de Seguros del Estado, and Non-Financial Public Enterprises.

4/ 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.

5/ Total public sector (PS). Includes the NFPS and Banco Central del Uruguay.

6/ Public sector gross debt minus liquid assets. Liquid assets exclude central bank reserves held as counterpart of banks’ required reserves on foreign currency deposits.

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