An IMF mission recently visited Uruguay to discuss with local authorities economic developments, including recovery from the pandemic, the war in Ukraine and the country's policy priorities. The report released on return of the IMF mission to Wahsington pointed out that the economic recovery continues at a firm pace supported by high agricultural commodity prices and strong investment.
However inflationary pressures driven by external and domestic factors are expected to dissipate only graducally, and in the overall recovery scenario conditions are appropriate for fiscal consolidation plus additionaly tightening is needed to bring inflation within the target range. The mission was headed by economist Gustavo Adler and his report follows,
The recovery from the pandemic continues on a strong footing. After growing 4.4% in 2021, Uruguay’s GDP reached pre-pandemic levels in late 2021 and is poised to continue growing at a firm pace in 2022 on the back of strong meat and grain exports and recovering service sectors. While the war in Ukraine has exacerbated global uncertainty, its impact on the Uruguayan economy is expected to be limited as direct trade with Russia and Ukraine is low, and the drag on the Uruguayan economy from high oil prices is expected to be more than offset by the expansionary effects of high agricultural commodity prices. However, potential disruptions in global fertilizers’ markets and a marked deceleration of global growth—amid high energy costs, tightening global financial conditions and COVID-related dislocations—are key short-term risks to Uruguay’s growth.
Inflation has drifted further away from the target range in recent months, driven both by external inflationary pressures related to the global food and energy shock and domestic factors. With price pressures broadening beyond food and energy items, and inflation expectations remaining above the target range, inflation is expected to exceed the central bank’s target range for some time.
Following the gradual withdrawal of monetary policy stimulus since mid-2021, the latest interest rate hikes have turned monetary policy moderately contractionary. Further monetary tightening will be key to re-anchor inflation expectations, continue strengthening central bank credibility and durably reining in inflation over the monetary policy horizon.
The authorities’ intentions to continue with prudent fiscal policy to rebuild buffers that would allow to address future shocks, along well-targeted temporary measures to mitigate the impact of the inflationary shock and the pandemic on the most vulnerable, are welcome. Progress made in recent months on the fiscal framework, including the implementation of the Fiscal Council, is commendable.
The authorities’ intention to reform the pension system and pursue improvements in education are welcome, as these changes are key to boost medium-term growth, safeguard fiscal sustainability and ensure inter-generational equity and social cohesion.