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Ears tug

Ears tug

IMF warned of “a lot of uncertainty” in the Uruguayan economy due to the “effect of the drought”



The International Monetary Fund (IMF) disclosed the conclusions of the visit of an Article IV consultation mission to Uruguay for the year 2023. A team from the agency, which visited Montevideo between March 6 and 17 for meetings with authorities, highlighted the fiscal situation and monetary policy, although he warned about the slowdown of the economy “with risks biased to the downside”, and placed special emphasis on the uncertainty generated by the drought.

“A real growth of 2% is projected in 2023, although with a lot of uncertainty due to the effect of the drought. Despite an adverse external context, more restrictive financial conditions, and the impact of the drought, growth would be supported by a strong tourist season, an increase in pulp production and exports, and robust private consumption given the recovery of real wages. ”, pointed out the report, which anticipated a growth of 4.9% of the Gross Domestic Product (GDP) by 2022.

Although in general terms the agency highlighted the direction of public accounts, the document stated that “the main short-term risk for fiscal policy is how the intensity and duration of the current drought will affect economic activity, although there is fiscal space available If necessary”.

“The recently announced tax cut (0.2 percent of GDP) implies a permanent drop in collection that will require lower growth in real primary spending, as already contemplated in the authorities’ plan,” added the IMF.


The level of the dollar and monetary policy


The multilateral mission headed by Pau Rabanal also vindicated the direction of monetary policy, which it considered to have an “adequate bias.”

“Given the greater inflationary pressures, the Central Bank of Uruguay (BCU) responded appropriately with a contractive monetary policy during 2022, while the peso appreciated,” said the IMF, which also highlighted that the regulator has not intervened in the market of exchange rates, which provides “clarity” to the objectives of monetary policy.

Along these lines, the agency encourages the BCU to maintain the contractionary bias “until inflation and inflationary expectations have converged in a sustained manner within the target range.”

“The exchange rate should continue to serve as a shock absorber, with FX interventions limited to responding to disorderly market conditions,” the document said.

Reforms, tariffs and subsidies

The IMF also highlighted the social security reform that the government seeks to implement, as well as education, but noted that the government must “redouble efforts” to improve efficiency and productivity in public companies.

“Their tariffs should reflect costs and be set by independent regulators, while the cost of social programs should be financed transparently from the budget (and not through the current practice of cross-subsidies),” the IMF said.

Inflation, fiscal deficit and debt


Regarding inflation, the IMF pointed out that the Consumer Price Index reached a maximum of 9.95% in September 2022 and fell to 7.5% in February 2023. “The increase in inflation was less pronounced than in other countries, due to the determined response of monetary policy, the appreciation of the Uruguayan peso and the limited adjustment of administered prices”, he pointed out.

In addition, it foresees that inflation will moderate to 7% in 2023 and that it will be within the target range in 2024. For its part, according to the document, the main macroeconomic risks are those that derive from “a worsening of external conditions, the exacerbation of international geopolitical tensions and the intensity and duration of the current drought,” the agency said.

“The fiscal deficit and the public debt decreased substantially during the last two years, thanks to the efforts of the authorities to meet the objectives of the fiscal rule, without neglecting the protection of the most vulnerable,” added the report in other articles. their sections.

Meanwhile, the IMF warned about the level of debt in relation to GDP.

“Under difficult external conditions, the authorities’ efforts to reduce post-pandemic debt are commendable, even though the debt-to-GDP ratio is at historically high levels. The IMF technical staff estimates that bringing the Non-Financial Public Sector debt to a range between 50% and 55% of GDP in the medium term would generate sufficient policy margins to respond to shocks”, he pointed out.

“Going forward, and consistent with previous IMF staff recommendations, a properly calibrated explicit debt anchor would help stabilize the debt-to-GDP ratio at a lower level over the medium term,” he added.


The response to the pandemic


The IMF mission also highlighted the “political response of the authorities” to the pandemic, with “an adequate design”, which “mitigated the long-term negative impact on economic activity and the labor market, through transparent support to the households and businesses affected through the Covid-19 Solidarity Fund”.

“Uruguay showed great resilience during the Covid-19 pandemic, due to its institutional strength, its solid governance and the policy responses of the authorities. Thanks to the strength of its institutions and an adequate social protection network, Uruguay was able to respond extremely effectively to the health emergency resulting from the Covid-19 pandemic,” the document said. (Montevideo Portal)


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