MercoPress. South Atlantic News Agency

Anti-inflation plan cost Uruguay 0.8% of GDP in 7 months

Public utilities rates subsidies which have been applied since September 2007 to help contain inflation have cost the Uruguayan treasury 185 million US dollars, equivalent to 0.8% of the country's GDP. Prices are estimated to have moderated 1.5% on an annual basis.

The estimates from the Center of Economic Investigations, CINVE, with close links to the Uruguayan government and Economy minister Danilo Astori, states that this "cost" is two tenths of a point less than the overall central government budget surplus, equivalent in March to 0.58% of GDP. The CINVE report also points out that the 2.4% fuel prices increase in March is equivalent to an annual fiscal cost of 50 million US dollars while last November the fiscal cost was 100 million US dollars. When the presentation the two economists involved in the report said they had doubts about the "transitory policy" of subsidizing public utilities rates and indicated they were inclined to believe they could become "permanent" since they are proving to be the "anchor" for the current inflationary process. This is particularly true for energy generation which in Uruguay is highly dependent on hydro and rainfall, and which given the current drought and lack of water in the dams' lakes is costing the country 3 million US dollars daily in thermal generation. Uruguay's electricity generating company, which is a government monopoly had earmarked, with Treasury support, 340 million US dollars for the whole of 2008 but has already spent 280 million. But in spite of these additional expenditures the CINVE report is confident that the 2008 budget targets and objectives are "not threatened" by an over demanding Congress, but admit there are still "several points to consider". Nevertheless the report underlined that most expenditure increases planned in the budget refer to "permanent" outlays which are difficult to revert in bad times. "Given the high degree of uncertainty it would be advisable to act with prudence in so far as the magnitude of expenditure increases, particularly, regarding permanent outlays", warns the report. CINVE also points out that the recent package of measures to further contain inflation is of "doubtful effectiveness in the long run" in combating inflation and stopping the depreciation of the US dollar against the Uruguayan peso. "Expectations are more significant and the latest pay agreements reached both with the private and government sectors "are not good news". The report is particularly critical of the decision to increase private banks reserves deposited in the Central Bank which will inevitably impact on "credit and interest rates for loan takers". Uruguay's Central Bank attempted for months to prevent the fast appreciation of the Uruguayan peso (and collapse of the US dollar) by purchasing growing volumes of greenbacks and issuing Monetary Regulation bills to absorb the excess liquidity in pesos. This approach generated a para-fiscal deficit in the Central Bank equivalent to 0.8% of GDP with a very high "short term vulnerability", which the government now is trying to address by "cutting into private banks profitability and dearer credit", underlines the report. Nevertheless CINVE finally argues that increasing bank reserves is "more effective" to attack inflation than manipulating interest rates and "cheaper" than buying US dollars and later sterilizing liquidity.