MercoPress. South Atlantic News Agency

IMF praises Uruguay but insists with structural reforms

In a positive report on the Uruguayan economy, the International Monetary Fund praised the country's robust growth and inflation control but also recommended the implementation of “crucial” structural reforms, sustained macroeconomic policies and strengthening labour market flexibility

Following the fourth review of the three year Stand by arrangement, (involving 1.13 billion US dollars) with the IMF, an additional 126 million US dollars was made immediately available to Uruguay. However several waivers were extended for the non-observance of the performance criterion on police pension reform; for the modification of the performance criterion on tax reform and for modification of the end-June monetary performance criteria and targets.

"Uruguay's recent economic performance under the Stand-By Arrangement, and the outlook for 2006, remain strong. Sound economic policies and market confidence in Uruguay's prospects, a strengthened external position, and an improved debt structure have helped the economy weather well the recent volatility in international financial markets. The authorities remain committed to continue implementing forward-looking policies to address medium-term vulnerabilities, including the high public debt and widespread financial dollarization", said Agustin Carstens IMF Deputy Managing Director and Acting Chair.

"Robust growth provides Uruguay an opportunity to strengthen further its fiscal position. Exceeding the 2006 fiscal target is desirable, as it would help further lower the high public debt, control inflation, and moderate appreciation pressures. Efforts to strengthen tax administration and fully pass through international oil prices will also be important in this regard. In addition, approval of the tax reform, with its revenue-neutral and base-broadening elements, will be a key step toward improving the efficiency and equity of Uruguay's tax system.

"Monetary policy has successfully brought inflation to single digits in an environment complicated by re-monetization and large capital inflows. The central bank's focus on building up reserves, while maintaining appropriate exchange rate flexibility, is well placed. The recent pickup in inflationary pressures is being monitored carefully, and the authorities stand ready to tighten monetary policies should developments suggest that the end-2006 target range could be missed.

"Financial sector reforms are progressing well. A financial sector bill currently under the Congress' consideration will, once approved, address several improvements identified by the government in consultation with the Fund and the World Bank.

"Looking ahead, Uruguay's key challenge will be to implement crucial structural reforms over the next months?including the tax, financial sector, and pension reforms currently before Congress. Over the medium term, the authorities should continue with the sustained implementation of strong macroeconomic polices, while persevering with steps to improve the business climate and strengthen labour market flexibility. Together, these will reduce vulnerabilities further and lay the basis for lasting growth" concluded Mr. Carstens.