MercoPress. South Atlantic News Agency

IMF suggests Uruguay returns to “fiscal objectives” and creates “energy fund”

Economy Minister García, partly convinced by IMF’s report

The International Monetary Fund, IMF suggested Uruguay should retake its most ambitious “fiscal objectives” in the coming five-year budget to be discussed this year by the new parliament. The emphasis should be in “restricting” outlays since the current level of salary increases for civil service is “not sustainable”.

The recommendations are part of the IMF report, based on data collected by a delegation that visited the country last September in the framework of the IMF Article IV annual consultation process with member countries.

“It is recommendable that the five-year budget returns to its most ambitious fiscal objectives because it is important to reduce the level of government debt to more comfortable levels”. Specifically it suggests a fiscal deficit of 1% of GDP for 2010, compared to the 2.2% deficit last year and that in 2011 and following years it should remain in the range of 0.4% of GDP. This would mean a budget primary surplus of 2.3% of GDP.

Following on this it can be expected that the gross debt could be down to 40% of GDP by 2014. But to achieve these goals a reduction in government nominal spending growth is needed, which should be feasible because the recent and significant jump in salaries and pensions, is hardly sustainable in time, adds the document released this week.

According to the report Economy Minister Alvaro García accepted, in principle, that there could be, looking ahead, some margin to contain the growth of outlays, “but did not agree that it was necessary to keep government expenditure systematically below the potential expansion of GDP in the mid term”.
The IMF report also points out that “the expenditure structure of the Uruguayan budget is relatively inflexible” and therefore a greater accumulation of “budget rigidities” must be avoided.

Another point underlined by IMF was the need to boost power generation, be it through alliances with the private sector to promote investment in energy and since the repeat of the drought cycle has become shorter, a counter-cycle fund should be created to address those periods when appealing to thermal power becomes unavoidable and much dearer.

“Until the structural energy problem is not solved, the government should consider an energy fund that could be the basis for the drought years”, and this insurance mechanism cost should be included in the rates.

IMF says Uruguayan authorities agreed with these suggestions and are planning for an “extreme climate” situation thus avoiding bottle necks in power generation. For this end and the expansion of generation an array of traditional and alternative sources, connecting with the Brazilian grid and exploring for hydrocarbons in Uruguay’s continental shelf are currently been undertaken.

IMF suggested the development of a competitive spot market for energy once the private sector has moved with its investments to the sector.
The report also suggests the Central Bank should be more transparent in its money exchange operations and policies should be consistent and clearly submitted to the goal of combating inflation.

IMF understands that Uruguay’s inflation, although below two digits, is still “too high” compared with other countries of the region. “Lower inflation would also help to further eliminate the US dollar from the Uruguayan economy”, where still 80% of deposits are held in the greenback.

Finally reducing poverty and vulnerable sectors of the population remains a challenge, and in spite of significant strides, “inclusion of these groups into the overall community remains a key target for Uruguay”.

Similarly the private sector should be given more leeway by having a lesser overweight government bureaucracy over it. (The complete report at IMF’ website)