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The Uruguayan government announced it will repay its $1.08 billion debt to the IMF ahead of schedule, thus cancelling the economic programme that was due in June 2008. The Economy Minister, Danilo Astori highlighted that rather than breaking off with the international institution this is a "friendly, cordial and neat way out". This historical announcement provoked the reactions of politicians, economist and civil society organizations.

The Uruguayan government, through Economy Minister Danilo Astori, announced it will repay its $1.08 billion debt to the International Monetary Fund (IMF) ahead of schedule, thus cancelling the economic programme that was due in June 2008. Astori highlighted that rather than breaking off with the international institution this is a “friendly, cordial and neat way out”.

The announcement was made on November 8, four days prior to the internal elections of the Broad Front – the ruling party – while payment was scheduled for November 14.

On the government’s side, emphasis was placed on the historical significance of the decision, since Uruguay has uninterruptedly maintained economic programmes with the IMF since 1960. As highlighted by Astori, this implies leaving aside IMF “conditionalities” and gaining “versatility” in terms of economic policy.

This decision is framed within the de-indebtedness and debt reprofiling policy the country has been implementing since early this year. Thus, successive placement of bonds in the international market have taken place, which are now enabling this operation.

However, it should be underscored that this decision does not imply a reduction in the country’s level of indebtedness, but rather a change in creditor composition with great political and symbolic significance.

Astori pointed out that the decision has the unconditional support of President Vázquez and of the government as a whole, which in practical terms will turn out to be essential for the economic future of the country since Uruguay is now left to the mercy of the credibility of its economic policy in the international market.

The minister also underlined that the commitments included in the agreement “are not part of the IMF programme” but of the government’s programme. On account of this, the government intends to further the structural reforms and economic guidelines set forth in the IMF letter of intent, but without deadlines now for their approval.

A primary surplus of 3.7 per cent of GDP is expected to be reached by 2006, while the goal (agreed with the IMF) for 2007 was of 4 per cent. The idea is not to increase public spending figures excessively, but everything will be defined by the middle of next year.

As an IMF member, Uruguay will continue to receive its technical assistance and will continue to be subject to its supervision under the requirements of Article IV.

Repercussions

Most legislators and leaders of the Broad Front considered the IMF debt cancellation as highly positive. Notwithstanding this, there were those who played down the success of the decision and even expressed their doubts about the opportunism of the announcement which was made on the eve of the internal election. Those sectors within the ruling party that are more critical of the economic policy also welcomed this measure in the belief that it provides increased “sovereignty” and “independence” to the country given the fact that they find it no longer necessary “to be accountable” to nobody.

Several ruling party legislators pointed out that it is time now to pour the benefits and savings to be obtained by the country into “education”, “public works” and “the productive country” (one of the electoral banners of the Broad Front upon winning the election).

The opposition, in turn, agreed with the decision but, as expected, no overly enthusiastic statements were made. On the contrary, many opposition legislators highlighted the contradiction brought about by this measure within the government, since until not too long ago the most radical sectors expressed themselves to be against the IMF and external debt payment, even considering it to be illegitimate.

The organization of unionized workers, the PIT-CNT, criticized the minister for giving priority to the IMF debt rather than to the “social debt”, making reference to the budget constraints advocated by the Economy Minister.

“We would like to know what is covered by the debt that is now being cancelled; PIT-CNT and other social organizations have posed the need for a citizen audit, so that people can finally become aware of how such debt was undertaken”, stressed Puig, a trade union leader.

However, the workers’ union was also divided in reactions since the most “conservative” sectors welcomed the government decision, highlighting the end of conditionalities.

At the international level, from the IMF, Rodrigo Rato welcomed the Uruguayan decision by means of a press release in which he underscored the economic recovery following the 2001-02 crisis.

Economic evaluation

Analysts agreed in asserting that the measure was both predictable and positive, although they pointed out that outcomes will be evaluated in the light of future government actions in terms of economic policy.

According to Mercedes Ramos, economist at the consulting firm PriceWaterhouseCoopers, "the announcement leaves the country with an increased relative importance of debt to private creditors and an increased relative importance of the long-term debt, the last issue of titles being due to expire in 2022 and 2036”. Therefore, this strategy modifies the composition of public indebtedness.

By end-2003, 46 per cent of the public debt was owed to international institutions, while in June of this year such rate had fallen to 32 per cent.

This improves payment possibilities for those amortizations, although the country’s debt levels are still high and suppose the annual payment of $800 million in interest.

Pablo Rosselli, economist at the consulting firm Tea Deloitte & Touche, warned about the fact that “Uruguay needs to maintain a strong primary surplus – so strong as the one agreed with the IMF”.

According to Roselli, the key lies in maintaining fiscal discipline. In theory, this IMF debt cancellation operation can be regarded as a sign of strength but it could also bring doubts about the future of the fiscal and monetary policies, provided that in the absence of IMF requirements these became more flexible.

On the other hand, the economist also underscored that the cancellation of this programme leaves Uruguay in very good standing in case it might need certain financial support from the IMF in the future, for instance, in the event of a very strong deterioration of the international context.

Uruguay’s debt

The debt to the IMF is expressed in Special Drawing Rights (SDRs) which are determined on the basis of a basket of currencies and have a variable interest rate according to the amount of indebtedness and their relationship with the quota corresponding to each IMF member country. In the case of Uruguay, the quota amounts to SDR 308 million, on account of which the Uruguayan debt stands at about 270 per cent of its quota.

As a result of this decision, the Central Bank saved $11.4 million, according to the difference in interest rates between the amount that is being paid to the IMF and the debt that has been undertaken by means of debt-swap operations. The amount being saved by Uruguay accounts for the difference in weighted average rates of 6.79 per cent (IMF) and 5.86 per cent (holders of Uruguayan titles).

At the present time, the Uruguayan public debt stands at 75 per cent of GDP (approximately 65 per cent accounts for external debt), while following the 2001-02 crisis the debt stood at 100 per cent of GDP - the world’s second highest rate. Given the fact that a 40 per cent debt level is considered to be acceptable at international level, the country is still far from reaching that rate. Upon taking office in March 2005, the government set de-indebtedness as goal, thus favoring the concept of “sovereign debt”.

The regional and international context

Nowadays, the regional context is completely favorable to the cancellation of debts owed to the IMF and the legitimacy of the institution is in many cases in crisis.

The list of countries that have early cancelled their debt to the IMF includes Pakistan, Serbia and Ukraine. In 2003, Thailand repaid its debt two years ahead of the expiration date, while by the end of 2004 Russia cancelled a $3.3 billion debt. Finally, in December 2005, Brazil ($15.5 billion) and Argentina ($9.81 billion) announced the same decision as an economic and political victory against the institution. Both countries cancelled their debts owing to an important accumulation of international reserves.

However, this does not imply that those governments that cancelled their IMF agreements have implemented very different policies from those carried out under IMF rule; rather, the governments of Brazil and Argentina, for example, had to be even more careful about their finance in order to maintain a primary surplus that may allow them to recover reserves and keep their economy stable.

The decision made by Brazil and Argentina and their subsequent economic performance have strengthened their position vis-à-vis the IMF. In this way, both countries have taken a strong leadership role within the G-24, which resulted in the presentation of an alternative proposal for reform of the institution during the last IMF-World Bank annual meeting in Singapore.

With regards to the IMF, the loss of its main clients has aggravated the budget and operational deficit of the institution, which this year will be reaching the amount of $116 million. This situation has also its counterpart in terms of legitimacy since IMF “recipes” have lost credibility in Latin American countries being ruled by left or center-left parties.

Future prospects

Once the regional context and the country’s political and economic situation have been evaluated, it is necessary to play down the consequences of the Uruguayan decision. Not to depend on a rigorous programme supposes a less conditioned although not a less methodical economic management. The problem for the government will be to handle sectoral pressure in favor of increased public spending, which will not certainly be an easy task.

The availability of an increased “versatility” and the loss of IMF conditionalities are still a double-edged sword. A programme with the IMF can be used by the Economy Minister as a shield against local sectoral pressure and as a quality stamp before investors.

So long as Economy minister Danilo Astori remains in his post and manages to impose his economic policy guidelines, things will go along the same path. However, a question would be left open if the ministry was headed by somebody else.

For social groups demanding more resources for education and health care – among other “pending” debts – this decision supposes a symbolic act and just another step in a long search for greater social justice.

Related information:

IMF welcomes Uruguay's decision to repay early its outstanding obligations - IMF press release

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