Press Release No. 24/265

IMF Executive Board Concludes 2024 Article IV Consultation with Uruguay

July 11, 2024

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation[1] with Uruguay and endorsed the staff appraisal without a meeting on a lapse-of-time basis.

The 2024 Article IV Consultation for Uruguay met the established Executive Board criteria for lapse-of-time consideration, including the following conditions: (i) there are no acute or significant risks, or general policy issues requiring Board discussion; (ii) policies or circumstances are unlikely to have a significant regional or global impact in the near term; and (iii) the use of Fund resources is not under discussion or anticipated.

Recent Developments

In 2023, Uruguay confronted the impact of a once-in-a-century severe drought and external headwinds, but the economy remained resilient, owing to the authorities’ sound macroeconomic policies, the country’s political stability, and strong institutions. From October 2022 to April 2023, rainfall was about 47 percent below historical averages, affecting key agricultural areas. Real GDP growth slowed to 0.4 percent in 2023. Employment rose by 37,000 to 1.7 million in 2023, while the unemployment rate continued to hover around 8 percent. Inflation fell within the target range in mid-2023, reaching its lowest level in the last eighteen years. The financial sector remained resilient, and the banking system is well capitalized, highly liquid, and profitable.

As inflationary pressures cooled off, the Banco Central del Uruguay (BCU) started its easing cycle in April 2023. The Monetary Policy Committee of the BCU gradually lowered the monetary policy rate from 11.5 percent at the start of 2023 to 8.5 percent in April 2024 as headline inflation reverted within the target range and inflation expectations gradually declined. At the end of 2023, the authorities reaffirmed that the BCU inflation target is the center of the target band (4.5 percent).

The deficit and debt outcomes were consistent with the targets of the fiscal rule in 2023. Adherence to the fiscal rule for four consecutive years has helped stabilize the debt-to-GDP ratio under a sequence of negative shocks. The pension system reform, that was approved in May 2023, is expected to stabilize spending over the medium-term. The improved fiscal outlook is being reflected in historically low sovereign spreads, including the lowest EMBI (emerging markets bond index) spread in Latin America.

The economy is expected to strongly rebound in 2024, while macroeconomic risks are broadly balanced. The recovery of agricultural exports, increased cellulose production, easing of financial conditions and robust private consumption, as real wages recover and the price differential with Argentina normalizes, are expected to support a growth rate of 3.4 percent in 2024 and 3 percent in 2025. Inflation is projected to pick up in the second half of 2024, but stay within the target range, following a gradual easing of monetary policy and robust wage growth. Downside risks are derived from a worsening of external financial conditions, deterioration of international geopolitical tensions and the potential for further extreme climate events. Upside risks draw from events that could bring higher-than-expected agricultural export prices or lower fuel import prices.

Executive Board Assessment[2]

In concluding the 2024 Article IV Consultation with Uruguay, Executive Directors endorsed staff’s appraisal, as follows:

In 2023, Uruguay confronted the impact of a once-in-a-century severe drought and external headwinds, but the economy remained resilient, owing to the authorities’ sound macroeconomic policies, the country’s political stability, and strong institutions. Despite the challenging environment, Uruguay maintained favorable market access with improved sovereign debt ratings and sovereign spreads at historically low levels, including the lowest spreads in the region. The current administration, in office since 2020, has implemented a significant upgrade of the fiscal and monetary policy frameworks and has advanced decisive structural reforms. In 2023, the authorities approved a key pension reform, placing medium-term public finances on a more sustainable path, and started implementing an education reform. Consolidating these gains should be the most important priority, as they provide the necessary macroeconomic policy space to confront domestic and external risks and support long-term growth.

While the 2024 revised budget is aligned with the net indebtedness target of the fiscal rule and social protection objectives, further efforts are needed to ensure a sustained downward path for the debt-to-GDP ratio over the medium term. The projected NFPS deficit, excluding cincuentones, of 3.1 percent of GDP in 2024 balances deficit reduction with safeguarding social spending, a sizeable share of total expenditures. While the current fiscal rule has been successful at stabilizing the debt-to-GDP ratio under challenging circumstances, further efforts are needed to ensure a sustained downward path for the debt-to-GDP ratio and rebuild fiscal buffers over the medium term, requiring lower targets for the structural balance and net indebtedness pillars of the fiscal rule. Refinements to the fiscal framework would help consolidate recent credibility gains.

Monetary policy should remain contractionary to ensure that inflation and inflation expectations stay within the target range in a sustained manner. Sustained monetary policy vigilance is crucial for continuing to build credibility and supporting de-dollarization efforts by delivering low and stable inflation rates. The authorities should continue emphasizing that the inflation target is the mid-point of the target band (4.5 percent) in their public communications, to help anchor expectations. Enhancing de jure central bank independence would further improve credibility and support policy continuity.

The financial sector remained resilient. The banking system is well capitalized, highly liquid, and profitable. Amid higher international interest rates and a more stable exchange rate, profitability increased. Despite last year’s economic slowdown and losses in the agricultural sector, non-performing loans remained low with adequate loan loss provisions. In line with past FSAP recommendations, the SSF should continue pursuing efforts to upgrade its risk-based supervision framework, by enhancing its stress-testing framework and closing data gaps. Operationalizing the Pillar II capital add-ons will create an opportunity to address the adverse effect on capital buffers from the bank wealth tax.

Efforts to continue implementing structural reforms are key to unlock potential growth, while climate adaptation efforts need to be intensified. The implementation of the education reform is critical to provide the human capital Uruguay needs in the medium-term to foster the adoption of innovative technologies and increase productivity. The deepening of Uruguay’s global integration should focus on pursuing efforts for trade facilitation, addressing non-tariff barriers and red tape, and reducing logistics costs. Reducing backward-looking indexation and introducing more sectoral differentiation in wage negotiations would support the disinflation process and competitiveness. Uruguay has been at the forefront of climate finance innovation. Droughts are becoming particularly relevant considering the output losses to the agricultural sector and the required recurrent fiscal interventions. Against this backdrop, it is critical to enhance water resource management, promote sustainability, and increase resilience to droughts.

[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] The Executive Board takes decisions under its lapse-of-time procedure when the Board agrees that a proposal can be considered without convening formal discussions.