IMF on Uruguay: “Conditions are appropriate for a greater fiscal effort”

RIO DE JANEIRO, BRAZIL – The International Monetary Fund (IMF) concluded a technical mission to Uruguay in which the IMF staff concluded that “the economic recovery continues at a steady pace”.

But, at the same time, it pointed out that “conditions are appropriate for a greater fiscal consolidation effort” and an “additional tightening” of monetary policy, according to a statement released by the organization.

It also warned that it expects inflationary pressures to gradually “dissipate”.

“Given the consolidated recovery, conditions are appropriate for further fiscal consolidation efforts while supporting the most vulnerable to mitigate the impact on them of the sharp rise in food and energy prices. At the same time, additional monetary policy tightening is needed to bring inflation within the target range,” the statement said.

The Ministry of Economy and Finance (MEF) projection for 2022 is a fiscal deficit of 3.1% of GDP. In the last 12 months ended in April, the fiscal deficit was 3.6% of GDP.

The IMF mission headed by Gustavo Adler visited Montevideo from May 30 to June 3, 2022, where it discussed the evolution of the economy with the authorities.

Adler highlighted in a statement “the authorities’ intention to continue with fiscal responsibility efforts to rebuild policy space to address future challenges, together with well-targeted and temporary measures to mitigate the inflationary and pandemic impact on the most vulnerable”.

In this sense, he highlighted the establishment of a Fiscal Advisory Council and “the intention of the authorities to reform the pension system and promote educational improvements”.

The Executive Branch is in the middle of the discussion of the Accountability. For this instance, the economic team promoted that there should be no increase in spending.

However, after complaints from his political partners, President Luis Lacalle Pou affirmed on May 26 that there would be an increase in spending on education, although he stated that “the situation is not such as to open the faucet”.

INFLATION AND MONETARY POLICY

Inflation in Uruguay in May remained stable at 9.37% but still far from the target range of the Central Bank of Uruguay (BCU), which from September will be between 3% and 6%.

Indeed, the official’s statement noted that the Consumer Price Index (CPI) “has moved further away from the target range in recent months” and at the same time predicted “that it will remain above the central bank’s target range for some time”.

“Further monetary policy tightening will be key to re-anchoring inflation expectations, strengthening the central bank’s credibility, and durably controlling inflation over the monetary policy horizon,” it added.

The BCU decided on May 17 to raise the benchmark rate by 75 basis points to 9.25%.

The decision marked a seventh consecutive hike, while the institution anticipated at least two further 50 basis point increases at upcoming meetings.

It also signaled the “gradual” entry into a “contractionary phase” of monetary policy.

ECONOMIC GROWTH

In the statement, the IMF official also highlighted the 4.4% growth of the Gross Domestic Product (GDP) and that for this year, he expects the pace to continue “at a steady pace”.

According to figures presented in February, the last projection of the Ministry of Economy and Finance for this year was 3.8%.

Last month, the Minister of Economy Azucena Arbeleche said the next projection would be presented at the end of June when the government presents the Accountability project.

The BCU has already stated that it expects growth similar to that of 2021, and the median of analysts consulted in the regulator’s latest survey of expectations pointed to 4.23% in 2022.

“In the base scenario, the economy would close 2022 with a growth rate similar to that recorded in 2021 and would grow around 3% in 2023″, the BCU’s Economic Policy Report for the first quarter of the year stated.

The official predicted a “limited impact” in Uruguay of the war in Ukraine due to the “low” level of trade with Russia and Ukraine.

“The negative impact on the Uruguayan economy from high oil prices is expected to be more than offset by the positive effects of high agricultural commodity prices,” she added, even though she noted that in the short term, the global slowdown should be a risk to consider.

With information from Bloomberg

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