MercoPress. South Atlantic News Agency

Uruguay prepares for a tough accord with IMF

The new Uruguayan government inherits an improved economy with diminished vulnerability although still pending is an agenda of reforms “exceptionally long” to ensure a sustained rapid growth and financial stability, reports the latest International Monetary Fund review.

Prospects for this year are considered favourable with GDP expansion above 5%, inflation in the range of 5/6%, -below 2004-, and domestic consumption increasing 4,6% compared to 9,8% last year.

Uruguay's Central Bank reserves should remain in the 2,65 billion US dollars level. Financial requirements are estimated in 1,3 billion US dollars which will be supplied mainly by multilateral organizations such as the World Bank and Inter American Development Bank and 400 million US dollars in Treasury bonds floated in international money markets.

As to the budget the primary surplus for 2005 was agreed in 3,5%, including a "national emergency program" to aid the poorest segment of the population which is estimated will have an annual cost ranging 120/150 million US dollars.

However support for the emergency program is conditioned to the passing of several tough reforms in the social security area covering pension funds for the Police, Armed Forces plus restructuring the national Mortgage bank, all of which receive hefty financial support from central government.

IMF considers that Uruguay's economic vulnerabilities have diminished considerably but risks remain, because the overall debt/GDP ratio continues to be too high and over 90% is nominated in foreign currency. Uruguay's economy is one of the most dollarized in South America.

Uruguay must repay IMF 610 million US dollars this year; 770 million US dollars in 2006; 934 million US dollars in 2007, which will demand a strong financial support.

The agreement to be signed with the IMF probably at the end of May contemplates a 4% primary surplus from 2006 onwards with the objective of reducing to the Debt/GDP ratio to 50% by 2012.

To implement these targets the Uruguayan government must keep a lid on expenditure in 2005, says the IMF report although admitting that the "social situation" remains difficult and there are mounting pressures to increase public spending.

"Some assessments show poverty in Uruguay above 30% of the population and unemployment is still in two digits. The recent fiscal improvement was achieved by compressing real earnings and pensions, which are estimated to be 20% in purchasing power below the pre-crisis (2002/03) levels".

The new left wing coalition government in Uruguay took office March 1 and has expressed admiration for neighbouring Brazil's orthodox approach in financial affairs.