MercoPress. South Atlantic News Agency

Uruguay will appeal to a cut in state-run utilities rates, if necessary, to keep inflation under control

Mujica blamed inflation on the success of the Uruguayan development model

Uruguayan President Jose Mujica admitted that annual inflation would likely remain between 7 and 9% for the rest of his administration, above the government's target maximum, but he will appeal to a cut in state-run utilities rates if necessary to keep the index under control.

 The rise in consumer prices, one of the biggest headaches for Uruguay, reached 8.5% last year, the third year in a row it has been above the target range of 4 to 6% and the third highest on the continent, after Venezuela and Argentina.

“I don't think we can return to 4 or 5%” Mujica admitted to a foreign news agency with immediate echo in the local media. “But neither will we pass the current limit,” said Mujica, whose term ends in March 2015.

Inflation will be “between 7 and 9%,” he added. “I think we can be there, pivoting, because we have resources we can use” and then mentioned appealing to a cut in state-run utilities rates a mechanism which his government implemented in 2012 and 2013.

This basically meant reducing power rates (a government monopoly) in November and December, allegedly benefiting the 'good clients' who during the last twelve months helped by saving and keeping their bill's consumption on average.

Half of Uruguay's electricity is hydro and thus much dependent on rainfall, and when insufficient must appeal to thermal generation which is extremely expensive because the country has no oil or gas.

Ultimately the government's power company, UTE, deficit is absorbed by the treasury, but the mechanism helps keep the inflation index below the double figure and ensuring an only annual salaries bargaining round, in a country where unions are particularly strong.

The government also manages fuel, drinking water and sewage prices and rates. so these are usually 'adjusted' in January, February, helping November and December to register a strong fall in the annual inflation growth tendency. In these cases the treasury also absorbs the deficit which many times is soaked into the accountancy item 'investment'.

“I'm not saying we will do that, but I am saying that we have those tools, and have used them in the past. We are not a government that is unarmed in that way. If we need to we can throw all we've got at it”, said Mujica who also anticipated that his administration is planning to widen its target range on inflation to between 3 and 7% later this year.

Inflationary pressure was “a consequence of the success” of the Uruguayan model, he said, pointing to “strong domestic demand, improved salaries, full employment and formalizing jobs in the underground economy”.

“Maybe the increase in our productivity and other factors at play are not moving at the same speed. But I think it's manageable”

Finally Mujica also mentioned that neighboring Argentina, struggling with an inflation in the range of 30% is also a problem for Uruguay.

“The difficulties of our relationship with Argentina hurt us,” said Mujica. “Argentina is a very important country for Uruguay, not just for our exports but for everything put together, which includes services, tourism, ports' activities”.