Press Release No. 03/37

Press Release: IMF Completes Second Review, Extends and Modifies Uruguay's Stand-By Credit Arrangement

March 18, 2003

The Executive Board of the International Monetary Fund (IMF) has completed the second review under the Stand-By Arrangement with Uruguay, approved a one-year extension through end-March 2005, and rephased projected disbursements over the extension period. Upon completion of the review, a disbursement of SDR 218.5 million (about US$303 million) became immediately available. The Executive Board also approved the authorities' request to shift repayments expectations under the Supplemental Reserve Facility arising in 2003 to an obligations basis, which shifts SDR 128.7 million (about US$178 million) in payments to 2004.

The current Stand-By Arrangement was initially approved on March 25, 2002 in an amount of SDR 594.1 million (about US$823 million) for a 24-month period (see Press Release No. 02/14). The arrangement was augmented by SDR 1.16 billion (about US$1.6 billion) on June 25, 2002 (see News brief No. 02 /54), and by SDR 376 million (about US$521 million) on August 8, 2002 (see News Brief. No. 02/87).

In commenting on the Executive Board decision on March 17, 2003, Eduardo Aninat, Deputy Managing Director and Acting Chairman, stated:

"Since Uruguay was hit by financial crisis and a deep recession last year, the authorities have implemented a series of measures designed to stabilize the economy and create the conditions for sustained recovery. In particular, fiscal and monetary policy have been adjusted and important steps have been taken to restructure the banking system. Although the economy remains in recession, there are signs that it will bottom out this year, and financial indicators have stabilized after the severe strains of last year.

"Nevertheless, the economic and financial situation is still challenging, reflecting, in particular, the high level of public debt, the remaining fragilities in depositor confidence, and the uncertain external environment. To address these vulnerabilities, the government has reinforced its economic program, with focus on the critical areas of fiscal policy, banking reforms, and financing and debt management.

"The fiscal program for 2003 aims at raising the primary surplus to 3.2 percent of GDP, a strong signal of the authorities' commitment to prudent macroeconomic policies. Achieving this target will require strict control over public sector wages and pensions, while essential social outlays are appropriately being protected. The authorities are committed to raising the primary surplus further to around 4 percent of GDP over the medium term in order to ensure sustainable debt dynamics. Structural fiscal reforms will be critical to this goal, including comprehensive tax reform which is part of the agenda for this year.

"Restoring a viable banking system is key to Uruguay's growth prospects. The resolution of the four banks suspended in mid-2002 is moving into a decisive phase, and the authorities will make sure that any new or reopened bank is viable and complies with all prudential requirements. The authorities are proceeding with the reform of the mortgage bank (BHU), and steps have been taken to strengthen the regulatory powers of the central bank.

"The authorities are preparing a comprehensive and voluntary government debt exchange designed to eliminate residual financing needs during 2003-05 and to achieve a sustainable debt and debt service profile over the medium term. This proposal is welcomed as an appropriate step to address Uruguay's financing needs and debt sustainability in a cooperative approach with creditors. To meet its objectives and assure the financing of the program, the debt exchange will need to be completed on a timely basis and with sufficiently high participation of bondholders.

"The authorities' strengthened program for 2003 represents a strong and balanced effort to create the conditions for the resumption of economic growth that merits the support of the international community," Mr. Aninat said.