Economy goes to Parliament for debt clause: what is it about?

Economy goes to Parliament for debt clause: what is it about?

Authorities of the Ministry of Economy and Finance (MEF), will attend Parliament this Thursday to inform the General Assembly of the reasons why it was decided to activate the safeguard clause relating to public indebtedness.

What is it about?

For the year 2023 the government has projected a net indebtedness of US$ 2,370 million according to the financial plan. This is the total issuance of public debt securities and loan disbursements, deducting amortizations.

The new fiscal framework (fiscal rule) included in the five-year Budget law established a legal limit to the maximum annual indebtednesswhich for this year was set at $2.2 billion.

This new debt framework also provides for a safeguard clause that can be activated only in extraordinary circumstances such as “situations of serious economic slowdown, substantial changes in relative prices, emergency situations or disasters on a national scale,” says Law 19,924.

The clause allows the government to extend up to a additional 30% the base amount of net indebtedness authorized for the year, without altering the ceiling for the following year.

Taking into account the emergency caused by the water deficit, the government plans to make use of the safeguard clause and extend the ceiling in US$660 million up to US$2,860 million.

Article 699 of the Budget Law establishes that the MEF authorities must appear before the General Assembly within a period of no more than 30 calendar days after the safeguard clause is invoked. The decision to use the clause was expressed on June 28.

The context

Given the prolonged absence of rainfall in the center-south zone of the country that has generated “a situation of extraordinary water deficit”, President Luis Lacalle Pou declared at the end of June the water emergency in the metropolitan area.

The government considers that the current water deficit emergency configures the conditions foreseen for the extension of the legal limit of net indebtedness.

“It is expected that the impact of the water deficit, together with the economic and social measures to support the social fabric and productive fabric in the face of this emergency, will lead to a deterioration in fiscal accounts in 2023, greater than expected. As a consequence of this, the projected net indebtedness of the Central Government for the year 2023 will exceed the limit established in article 500 of law 20,075”, says the Accountability project.

“From the management point of view, we want to convey that the approach we are making to this emergency situation is similar to that of the pandemic,” said Minister Azucena Arbeleche weeks ago. This is in reference to the creation of the Water Emergency Fund approved in Parliament.

It is not the first time that the Executive Power decides to make use of the safeguard clause. This was already done in 2021 during the pandemic when the ceiling was increased by US$ 690 million for that year, up to US$ 2,990 million.

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