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Less than 10 days from José Mujica's inauguration as the second leftist president in Uruguayan history, the International Monetary Fund (IMF) attempts to discipline the next government with orthodox recommendations: to reduce public expenditure and lower fiscal deficit. According to the agency’s representatives, in the five-year budget to be adopted next year Uruguay should "return to more ambitious [fiscal] targets". To that end, it should "restrict" the rise in spending, as strong public wages increases are not sustainable.

Despite the proven failure of its prescriptions, the IMF does not miss an opportunity to discipline the developing countries members of the institution. The latest recommendations are contained in a report by the IMF staff that visited Uruguay between 3 and 17 September 2009. The visit is part of Article IV, which includes an annual assessment of member countries' economies.

Led by the Fund's representative for Uruguay Uruguayan-German Gaston Gelos, the agency's mission suggested that the deficit should return to 1% of gross domestic product (GDP) this year, compared to 2.1% of GDP recorded in 2009. It further advised an overall deficit of 0.4% of GDP starting in 2011 "in order to bring down gross debt to below 40% of GDP by 2014."

To achieve that little red in the public accounts would require "some restraining of nominal expenditure growth; this should be feasible as the recent sharp wage (and associated pension) growth is unlikely to be sustained."

According to the report "the authorities – led by outgoing Finance Minister Alvaro Garcia – agreed in principle that there could be some scope to contain expenditure growth looking forward, but did not see the need to keep expenditure increases systematically below those of potential output in the medium term."

The IMF also suggested that private investment could be promoted through public-private partnerships, and the development of a competitive spot market for electricity. And, in light of recurrent droughts in recent years, it recommended that the public power company (National Electric Power Generation and Transmission - UTE) should establish a countercyclical energy fund which could be drawn upon during drought years. Furthermore, it proposed that "the cost of such an insurance mechanism would, in turn, need to be translated to tariffs.” The report states that "the authorities agreed with the need to tackle this issue and are also exploring possibilities of insuring against extreme weather shocks."

The IMF stressed that "reforming the public sector remains a key element of the agenda" and highlighted "the need to streamline regulations and reduce the administrative burden on the private sector" in addition to the "importance of strengthening corporate governance in public enterprises."

Other advice

The IMF experts recommended "more transparent" Central Bank interventions in the foreign exchange market and argued that "exchange-rate interventions should remain consistent with and clearly subordinated to the inflation objective."

For the IMF, "Uruguay should aim for lower inflation rates." Despite achieving single-digit inflation over the last several years, Uruguay's inflation record still compares unfavourably with that of many other countries. Lower inflation levels would allow to promote de-dollarization.

According to the Fund, "reducing poverty further remains a challenge." While noting that it has made "significant progress" in the matter, "further fostering social inclusion of disadvantaged segments of society remains a key goal in Uruguay."

Source: Diario El Pais

Related information:

* Uruguay: 2009 Article IV Consultation (pdf format)

* Selected Issues Paper (pdf format)

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