IMF Executive Board Concludes 2023 Article IV Consultation with Uruguay
May 17, 2023
Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Uruguay on May 15, 2023.
After reaching pre-pandemic levels in mid-2021, real GDP grew by 4.9 percent in 2022 mainly driven by strong commodity exports and the service sector, including tourism. However, the economy decelerated in the second half of the year due to adverse external conditions and the effects of the most severe drought in forty years. Inflation remained above the target range in 2022 but, after peaking in September 2022 at 9.95 percent, it started to decline towards the end of the year, reaching 7.3 percent in March 2023.
In response to increased inflationary pressures, the Banco Central del Uruguay (BCU) appropriately tightened monetary policy during 2022. The BCU markedly raised the policy rate from 5.75 percent in December 2021 to 11.5 percent in December 2022. The BCU implemented an interest rate cut of 25 basis points in its April 2023 meeting, citing declining inflationary pressures. The fiscal deficit and government debt declined substantially over the last two years, reflecting the authorities’ efforts to stay within the targets of the fiscal rule, while protecting the most vulnerable. After peaking at 68.1 percent of GDP in 2020, gross non-financial public sector (NFPS) debt reached 59.3 percent of GDP at the end of 2022, below its pre-pandemic level amid historically low sovereign spreads. The health of the financial sector remains sound, and banks have weathered the pandemic well.
The economy is expected to decelerate in 2023, with real GDP growth projected at 2 percent. Despite external headwinds, tighter financial conditions, and the impact of the drought, growth would be supported by a strong tourism season, increased cellulose production and exports, and robust private consumption as real wages recover. The growth outlook after 2023 is positive, but subject to external and domestic risks. Main macroeconomic risks are derived from a worsening of external financial conditions, deterioration of international geopolitical tensions, and the impact of the drought. Inflation is expected to decline to 7 percent in 2023 and fall within the target range in 2024. The authorities’ strong track record of implementing sound macroeconomic policies in a challenging environment has improved the country’s resilience to shocks. Overall fiscal risks are low.
Executive Board Assessment[2]
Executive Directors commended Uruguay’s robust institutions and sound policies, which have supported the economy’s resilience to shocks. Directors noted that the outlook, while positive, is subject to downside risks, including related to the current drought. They emphasized the need to consolidate progress made in upgrading the fiscal, monetary, and financial frameworks and continue with ambitious structural reforms to maintain Uruguay’s strong resilience and support sustainable and inclusive growth.
Directors commended the authorities for meeting the fiscal rule targets for three consecutive years despite a challenging economic environment and concurred that the fiscal framework has strengthened policy credibility. They emphasized that continued strong compliance with the current fiscal rule is the priority in the current juncture. At the same time, many Directors considered that a more explicit debt objective could be a useful component of a medium-term fiscal strategy.
Directors agreed that a modest fiscal impulse is appropriate in 2023 and encouraged measures to put the debt on a downward path once the effect of the drought abates. They recommended measures to further rationalize tax expenditures, improve the targeting of subsidies, and reduce the wage bill, while continuing to take steps to preserve social cohesion. Directors also welcomed the recently approved pension reform, which should help to stabilize long-term pension spending.
Directors emphasized the need to maintain a tight monetary stance until price pressures and inflation expectations converge to the target band. They highlighted that this along with efforts to strengthen de jure central bank independence would help to further strengthen monetary policy credibility and support efforts to reduce dollarization. Directors agreed that the exchange rate should continue to act as a shock absorber and that FX interventions should be limited to responding to disorderly market conditions.
Directors welcomed that the financial sector remains resilient and healthy. They indicated that efforts to further enhance financial supervision are essential to bolster resilience to shocks and improve confidence in the financial system. Directors also encouraged steps to promote domestic capital market development and encouraged continued progress in implementing the recent FSAP recommendations and toward creating a comprehensive AML/CFT national plan.
Directors noted that structural reforms remain critical to improve productivity and reinvigorate growth. They welcomed the recent reforms in the education system and indicated the need for further efforts to address long-standing human capital erosion and skill gaps. Directors also supported efforts to improve the efficiency and productivity of state-owned enterprises and enhance trade integration.
Directors commended Uruguay’s leadership in climate change policy and recognized the authorities’ efforts to integrate climate policies into their overall policy agenda, noting the successful issuance of a Sovereign Sustainability-Linked Bond. They recognized the significant progress in reducing greenhouse gas emissions intensity and encouraged the authorities to continue their efforts to transform Uruguay into a climate-resilient, green, and sustainable economy.
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Uruguay: Selected Economic Indicators |
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Projections |
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2021 |
2022 |
2023 |
2024 |
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Output, prices, and employment |
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Real GDP (percent change) |
5.3 |
4.9 |
2.0 |
3.0 |
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GDP (US$ billions) |
61.4 |
71.2 |
76.5 |
80.5 |
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Unemployment (in percent, pa) |
9.4 |
7.9 |
8.2 |
8.1 |
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Output gap (percent of potential output) |
-2.0 |
-0.4 |
-0.6 |
-0.2 |
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CPI inflation (in percent, end of period)) |
8.0 |
8.3 |
7.0 |
5.7 |
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(Percent change, unless otherwise specified) |
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Monetary and banking indicators 1/ |
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Base money |
9.1 |
1.7 |
... |
... |
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M2 |
16.2 |
1.7 |
... |
... |
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Growth of credit to households (in real pesos) |
4.4 |
6.4 |
... |
... |
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Growth of credit to firms (in US$) |
7.0 |
19.1 |
... |
... |
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Bank assets (in percent of GDP) |
74.2 |
67.1 |
... |
... |
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Private credit (in percent of GDP) 2/ |
27.0 |
26.1 |
... |
... |
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(Percent of GDP, unless otherwise specified) |
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Fiscal sector indicators 3/ |
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Revenue CG-BPS (A) |
27.0 |
27.1 |
26.1 |
26.5 |
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excluding cincuentones |
26.7 |
27.0 |
26.1 |
26.5 |
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Primary expenditure CG-BPS (B) |
27.9 |
27.8 |
27.3 |
27.5 |
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Primary balance of local governments (C) |
0.1 |
0.1 |
0.1 |
0.1 |
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Primary balance of BSE (D) |
0.1 |
0.0 |
0.2 |
0.2 |
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Primary balance NFPS (A-B+C+D) |
-0.6 |
-0.5 |
-1.0 |
-0.7 |
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excluding cincuentones 4/ |
-0.9 |
-0.6 |
-1.0 |
-0.7 |
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Interest NFPS |
2.0 |
2.0 |
1.9 |
2.0 |
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Overall balance NFPS |
-2.6 |
-2.5 |
-2.9 |
-2.7 |
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excluding cincuentones 4/ |
-3.0 |
-2.7 |
-3.0 |
-2.8 |
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Gross debt NFPS |
63.4 |
59.3 |
61.6 |
61.9 |
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Net debt NFPS |
53.3 |
50.5 |
52.9 |
53.3 |
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External indicators |
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Merchandise exports, fob (US$ billions) |
15.7 |
17.2 |
15.5 |
16.6 |
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Merchandise imports, fob (US$ billions) |
11.2 |
13.6 |
13.3 |
14.5 |
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Terms of trade (percent change) |
1.9 |
-4.7 |
1.0 |
0.7 |
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Current account balance |
-2.5 |
-3.2 |
-3.2 |
-3.0 |
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Total external debt + non-resident deposits |
79.4 |
78.0 |
79.1 |
77.4 |
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Of which: External public debt |
34.7 |
29.1 |
33.6 |
32.4 |
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External debt service (in percent of exports of g&s) |
57.7 |
53.7 |
61.8 |
52.7 |
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Gross official reserves (US$ billions) |
17.0 |
15.1 |
16.1 |
16.3 |
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In months of imports of goods and services |
13.7 |
9.7 |
10.4 |
9.8 |
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In percent of: |
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Short-term external (STE) debt |
221 |
169 |
221 |
215 |
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STE debt plus banks' non-resident deposits |
298 |
265 |
249 |
243 |
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Sources: Banco Central del Uruguay, Ministerio de Economia y Finanzas, Instituto Nacional de Estadistica, and Fund staff calculations. |
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1/ Percent change of end-of-year data on one year ago. |
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2/ Includes bank and non-bank credit. |
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3/ Non-financial public sector (NFPS) includes the Central Government, Banco de Prevision Social, Banco de Seguros del Estado, and Non-Financial Public Enterprises. |
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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. |
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[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: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .
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