Two contrasting views have surfaced in the Uruguayan government regarding inflation which has been steadily climbing and seems so far immune to monetary tools, but is now the second highest in the region behind Argentina.
While Vice-president Danilo Astori and his team at the Ministry of Economy and Central Bank describe inflation as the main challenge for the Uruguayan economy, President Jose Mujica and the Planning and Budget Office have stated that there’s no need to be scared about inflation, it can be reined in.
“There’s no big deal with inflation, it can be reined in and we are going to fix it. I grew up in a country with 70% and 80% inflation”, said President Mujica on Wednesday when he arrived to the funeral of a former minister that gathered most of the cabinet, lawmakers and top officials.
In effect the head of the Planning and Budget Office, Gabriel Frugoni, his deputy Jeronimo Roca and advisor Pedro Buonomo insist that the main challenge for the Uruguayan economy is “competitiveness” because of the depreciation of the US dollar and strength of the Uruguayan Peso and its impact on non commodity exports with added value.
At the Executive Tower where the Planning and Budget Office is seated they are working on support measures and incentives for the exports with added value.
But at the Ministry of Economy, Fernando Lorenzo is pointing his guns to bringing down inflation which reached 8.72% in the last twelve months, and one of the options is drastically cutting consumer credit.
The other big issue in the discussion is the budget fiscal deficit which now stands at 2.8% of GDP, and probably with inertial growth.
“Uruguay in current circumstances must be particularly careful with expenditure which is feeding a deficit far higher than what it should be” said Vice-president Astori at the last cabinet meeting.
The head of the Macroeconomic Department at the Economy ministry Andres Masoller also called for ‘caution with expenses’ and advanced that this year’s budget would be ‘tight’ with no new outlays programmed.
He went further describing the situation as ‘delicate’ and suggesting ‘drastic cuts in outlays or an increase in taxes’.
However 24 hours later he had to back step denying any fiscal ‘adjustment’ was planned and even when budget outlays have increased “this does not imply a serious situation”. The target of cutting in half the deficit to 1.4% of GDP in the next twelve months as had been anticipated was brushed aside.
Furthermore the government will go ahead with its promise of cutting two percentage points of VAT (currently at 23%) for electronic transactions.
Another area of friction is implementing higher taxes on companies’ profits and luxury goods which is sponsored by the Planning and Budget Office and rejected at the Ministry of Economy since it would ‘discourage investments’.
But President Mujica’s advisors argue it is necessary “to keep advancing in wealth distribution” and to consolidate the achievements of the government ahead of 2014 presidential election.