IMF Tasks Uruguay on Strong Economic Reforms for Long Term Growth

The IMF’s recommendations were based on the outcome of a 12-day working visit to Uruguay by IMF team lead by Ms. Oya Celasun .

“Following a decade of strong and inclusive growth, Uruguay’s economy is cooling off gradually. We project growth at about 3 percent in 2014 and 2.5 in 2015, with both external and domestic demand decelerating. While Uruguay’s economy has weathered the regional slowdown quite well so far and growth has remained robust, inflation persists above the central bank’s target and the fiscal and current account deficits have widened.

“Although near term risks to the outlook seem manageable given Uruguay’s strong liquidity cushions, a less supportive external environment calls for maintaining a long-term vision in conducting macroeconomic management. Acting now to fortify the economy’s fundamentals would help cement Uruguay’s attractiveness as an FDI destination and bolster longer-term growth prospects. The aftermath of the elections is an auspicious time to enact key reforms”, IMF said.

According to the team, bringing inflation to the mid-point of the central bank’s target range remains a key priority.

“The mission recommends a comprehensive disinflation effort that includes maintaining a tight monetary policy stance, a strategy to reduce the backward indexation of wages, and steps to strengthen the central bank’s influence on inflation expectations through forward-looking communication. Enhancing central bank autonomy would also be beneficial.

“In order to maintain net public debt on a declining path, the mission recommends tightening the fiscal balance by at least 2.5 percent of GDP over the next five years. The improvement in the fiscal position could come from a mix of expenditure restraint and revenue enhancing-measures”, the IMF team added.

According to the team, deepening the financial system and making it more inclusive also remains a key objective but noted that authorities have taken important steps in this area. It however warned that vigilant supervision of the financial system remains essential given the unsettled external environment.

“In order to continue deepening Uruguay’s social gains through the medium-term, policy makers will need to enact supply-enhancing reforms in several areas”, the team noted just as it welcomes the commitment of the incoming government to boost investments in infrastructure and human capital, and support an innovation-friendly business environment,” the team noted.