The Ministry of Economy and Finance (MEF) of Uruguay has communicated to the General Assembly that, just like during the pandemic covid-19 and in times of drought, has decided to activate the safeguard clause. This action allows the debt limit to be increased and responds to adverse economic conditions.
The legal limit for indebtedness in 2024 he set his sights on US$2.3 billionas indicated in the Accountability presented in 2023. However, as of November of this year, net debt reached US$2,287 millionwhich poses a risk of exceeding the limit established in December.
Justification of the safeguard clause
The safeguard clause provided in the tax rule may be activated under extraordinary circumstances. These include “situations of serious economic slowdown, substantial changes in relative prices, emergency situations or national-scale disasters,” according to the law. 19,924. This measure allows the government to increase up to a 30% additional amount of net debt allowed.
With this activation, the MEF has the ability to raise the net debt limit by 2024 to up to US$2.99 billion. This decision is based on the need to cover the fiscal imbalances generated by the current economic situation in the country.
Reasons behind the increase in debt
Among the causes cited by the MEF to activate the safeguard clause are “the substantial changes in relative prices” that have been observed in the Uruguayan economy in 2023 and 2024. A “strong decline” in tax revenues was reported, which has led to a significant decrease in the collection capacity.
According to the MEFthe country experienced “almost US$600 million less collection. This is in addition to a “lower level of economic activity”, estimated at US$160 millionwhich represents a 0.2% of the Gross Domestic Product (GDP), in addition to “other microeconomic causes” that have caused an additional loss of US$240 million.
Consequences of price changes
The MEF argued that “the price effect generated greater net debt than expected in June 2023,” when the debt limit for next year was established. This situation is related to the international raw material priceswhich have had a direct effect on the local economy, affecting price indices.
The government also mentioned that “the fall in international prices” and the strong price distortion compared to Argentina have led to a substantial change in relative prices in the country, especially between tradable and non-tradable products.
Impact on tax collection
This change in prices has resulted in “a reduction in inflation rates in the country, greater than previously estimated.” Although the decline in inflation has contributed to economic growth and increased household purchasing power, it has also led to a decrease in the central government’s net tax revenues for 2024.
According to the MEFthe recent reduction in inflation figures has led to a “decrease in nominal tax revenues.” This indicates that, despite some positive aspects, the country’s fiscal situation has become complicated.
According to the law of Budgetand specifically its article 699, the authorities of the MEF will be required to appear before the General Assembly within a period of no more than 30 calendar days after the safeguard clause is invoked. This aims to ensure transparency in the management of the necessary additional debt.
