MercoPress. South Atlantic News Agency

Uruguay prepares for the worse

Two days after the International Monetary Fund, IMF, approved a massive support package, Uruguay announced the free flotation of its currency.

Uruguay, locked between its two powerful Mercosur partners, Argentina and Brazil, has been suffering the direct consequences of the regional financial instability, particularly when Argentines fearing a contagion flocked to withdraw deposits from Uruguayan banks.

Similarly, the constant depreciation of the Brazilian currency, since the unexpected devaluation of January '99, and the final collapse of the fixed exchange rate in Argentina during 2001, originated a competitiveness disadvantage for Uruguay with its two main trade partners who absorb (ed) almost 50% of overseas sales.

Faced with this situation the Uruguayan government accelerated the depreciation of its currency, in a pre fixed band system, targeted to gradually help overcome the situation.

However this seems to have been insufficient given the political scenario of both neighbors. In spite of the four years recession and growing poverty, Argentina's ruling coalition has been unable to come up with a sustainable long term economic program, therefore delaying financial aid from the IMF; Brazil with presidential elections next October and a Socialist candidate comfortably leading in the polls is in the midst of an investors confidence crisis that has sky rocketed the country risk rating and is eroding the local currency.

Under this circumstance the IMF, World Bank and the Interamerican Bank came up with an assistance package close to 3 billion US dollars conditioned to tough fiscal decisions and a more open monetary and exchange rate policy, with the purpose of stopping the drain in foreign reserves and propping the banking system.

IMF officials and Uruguayan authorities believe the 3 billion aid package should be enough to revert current uncertainties. The free flotation of the currency should encourage exports and stop the bleeding of reserves.

Nevertheless the magnitude of Uruguay's plight is easily extracted from the figures involved. In 1999 the country's GDP was estimated in 22 billion US dollars. Although there are no official estimates at the moment, analysts are inclined to believe the country's GDP is now below 18/17 billion US dollars. (During the first quarter of 2002 Uruguay recorded a 10% retraction).

This means Uruguay is receiving assistance equivalent to one sixth of its current GDP.