Press Release No. 04/32

Press Release: IMF Completes Fourth Review of Uruguay's Stand-By Arrangement and Grants Waivers

February 20, 2004

Further disbursements in four equal installments of SDR 139.8 million each (about US$211 million) are expected to be made following the completion of Executive Board reviews tentatively scheduled for May, August, and November 2004, and February 2005.

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, Agustín Carstens, Deputy Managing Director and Acting Chairman, said:

"Uruguay's performance under the Stand-By Arrangement continues to be favorable. The economic recovery is well under way, financial market conditions are improving, and economic indicators are pointing up this year. Prudent macroeconomic policies, skillful resolution of the 2002 banking crisis, and the successful debt exchange in early-2003 have been key to the economy's turnaround.

"Consolidating the recovery will require continued sound macroeconomic policy implementation, and redoubled efforts at structural reform, particularly in the fiscal and banking areas. The authorities' strong commitment to achieving the program targets for the primary fiscal surplus and sound management of monetary policy under the floating exchange rate, along with progress in banking sector reform, are key.

"The authorities are committed to attaining the fiscal primary surplus target in 2004, underpinned by the projected cyclical recovery of revenue, improvements in tax administration, continued expenditure restraint, and utility tariffs aligned with costs. Priority social expenditures will remain protected under the program. Progress on tax reform is essential to supporting a sustainable fiscal improvement, and along with reform of the specialized pension funds will help unlock multilateral financing and reduce reliance on short-term debt.

"Monetary policy will continue to target base money, under the floating exchange rate regime. Over the medium term, the authorities intend to move toward inflation targeting, and as part of the preparations for this, they have initiated a regular survey of inflation expectations.

"Restructuring of the public banks and swift disposal of the remaining assets of the liquidated banks are crucial for banking system stability and the revival of credit flows. The authorities have taken important steps to remove nonperforming loans from the balance sheet of the public bank, BROU, and to initiate its operational restructuring, and intend to carry forward with further reforms in the coming months to ensure the bank's viability. Progress is also being made in restructuring the state mortgage company, BHU, outsourcing the asset disposal of three liquidated banks, and strengthening banking regulations to align them with international best practices.

"The authorities need to build a consensus for reforms to enlarge the role of the private sector and increase competition. This will serve as a basis for supporting growth and economic diversification, and deepening Uruguay's global economic integration and reducing its vulnerability to regional developments.

"The authorities have set themselves an ambitious policy and reform agenda that will be a challenge to implement, especially during this election year. Nevertheless, there is no room for complacency, as the recovery is still fragile and continued strong program implementation will be necessary to boost growth in a lasting way, bolster market confidence, and ensure sustainable debt dynamics," Mr. Carstens said.