MercoPress. South Atlantic News Agency

Uruguay combats inflation with price agreements and reducing taxes on public utilities rates

Minister Bergara was present at the final meeting which sealed the agreement

The Uruguayan government finalized on Friday a prices agreement with commerce and trade organizations to help bring down the third highest inflation of the region which is advancing at an almost two-digit pace. The package is to be completed with government fiscal 'sacrifice' such as the elimination of taxes on some public utilities rates.

 The sixty day agreement with the supermarkets, small stores, importers and meat suppliers means a basket of 200 to 300 items from the basic food basket will keep prices unchanged, and the list could be increased to even 1.000 items 'if the dollar exchange remains stable during the coming months'.

The agreement was sealed in a meeting of representatives from the different organizations with Economy minister Mario Bergara, and is expected to become effective next April first with an evaluation meeting in May.

However fruit and vegetables are excluded of the deal because of price volatility linked to climate conditions. Nevertheless the government has promised that it will eliminate VAT from these items.

"We have worked on a group of items that make up the family basic basket, which depending of the size and kind of business could start with 200 to 300 items and climb to 1.000", said Hugo Avegno, chairman of the Supermarkets association. He added that in May, early June "we will hold an evaluation meeting with the government to assess how things are running".

The previous week Minister Bergara met with organized labor, PIT-CNT where he announced that public utilities (in Uruguay government monopolies) such as power, drinking water, communications will eliminate fixed charges and VAT, a 'fiscal sacrifice' which will be the government's contribution to try and contain inflation, the highest in Latam behind Venezuela and Argentina.

The agreement was relatively easy to reach since all sides are well aware that a two digits inflation means all long term labor contracts with the main unions, fall and in an election year nobody wants to face a round of disturbing tough negotiations. This includes organized labor which in Uruguay is dominated by the Communist party that also happens to be part of the ruling coalition.

Furthermore Uruguay has experience in the matter since this is not the first time the government appeals to these instruments, (2012 and 2013) to keep the annual index below 10%, both appealing to price agreements and reduction of public utilities rates. Even when this meant an increase in the budget's deficit.

Inflation in Uruguay last year ended at 8.52% with a significant drop in the months of November and December, precisely because the government applied the device of lowering power rates considerably with the excuse that it had rained more than sufficient helping hydropower, and even contributing to export to neighboring Argentina.

But in the first two months of 2014, inflation added up to 4.14% and in February 1.66%, at an annualized 9.82% when all alarms started to ring. This was partly because of adverse climate conditions, from drought to flooding but also because of the post-2013 readjustment of public utilities rates to balance the accounts of the government owned and managed power and drinking water companies.

The government also revealed that it is prepared to suspend for a few months if necessary the VAT on fuel at the pump. Likewise the monthly cost of health care in the private sector (a regulated price), will be frozen and so will the price of milk.

With this battery of resources the Uruguayan government believes it can contain the surging prices, although as some critics have pointed out, Uruguay has a long term structural problem with inflation (successive budget deficits despite ten years of sustained growth) and sooner than later these gimmicks will show up.

Uruguay is holding presidential and legislative elections next October, and polls show the ruling coalition has very good chances or repeating. But much of its success has been based on a strong economy, domestic demand and accessible consumer credit, which could be imperiled if efforts to contain inflation also include a more stringent monetary policy.

In effect to dry up some liquidity from the market the Uruguayan central bank has had to pay over 15% interest rate, the highest since 2009.