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30 December 2019 Share

Analysis of the IMF personal technical report after its visit to Uruguay



As summarized in the evaluation carried out in Uruguay, our country is in an "enviable position", but "a credible adjustment plan" is necessary.

The IMF performs an analysis of each economy of the member countries, whether they have loans or not. Currently, Uruguay has no loan granted by the IMF, but has been a member of the institution since 1946.

The evaluations were published after the mission of the agency, in the so-called "Article IV Framework" where it is emphasized that: "Uruguay is in an enviable position in many ways", has full democracy, political stability and governmental strength, accompanied of an important degree of social cohesion, that is, the feeling of belonging of the members to common projects.

To these beneficial characteristics, there is also the “high income per capita and low rates of poverty, inequality and informality, as well as the soundness of the financial system despite‘ financial volatility in the region”.

However, the report also warns that some obstacles have emerged in this last period. The external situation has not been beneficial and not only globally, but also regionally. The uncertainty in the neighboring country, political and social crises of the continent, as well as the disappearance of the “tail winds”, that is, favorable economic contexts that now do not persist, bring up a slower, late growth, low prices in raw materials (remember that our country still depends largely on the primary sector) as well as "volatility in capital flows".

Internally, “Growth, investment and labor participation were in a decreasing trend in recent years, and imbalances accumulated. The debt increased and inflation remains outside the target range”.

The fiscal deficit is being high, private investment does not grow or only has some specific investments, and unemployment is having problems. For this year, it was estimated that it would be around 8.5% when in previous years, it did not reach 7%. This data indicates a loss in the jobs of our economy. Inflation (purchasing power in relation to the basic basket) is still exceeding the proposed margins.

Having this information on the table, what can we expect?

The IMF analysis understands that our country, despite the current problems that have been increasing, can overcome these barriers and better yet, take advantage of the consolidated political environment, which is added by a new government that will assume in March 2020 and that You can take advantage of “the momentum of the construction of the new UPM plant and the private public partnership (PPP) projects that are on the agenda

It is already historical that in our country, it starts from the base of an annual GDP growth between 2 and 5%, but finally, it ends up being around 1% due to the difficulties mentioned. The IMF in this regard, projects a recovery of growth that would increase from 0.5% in 2019 to 2.1% in 2020 and 2.5% in 2021, as investment projects move forward. Growth would be reduced after 2021, once these investments were completed.

Therefore, it suggests that one of the most important measures to apply will be to maintain fiscal sustainability. We must expect an improvement in fiscal balances, but ideally, at the same time, an increase in debt is not projected. Efforts should aim to generate a “credible” adjustment plan from next 2020, to direct the debt towards a downward trajectory. If we continue as before, our country could undermine its sustainability and, in addition, begin to lose the confidence of investors.

Restrict the increase in current spending, preserve public investment at low levels, and reduce tax expenditure (exemptions, reduced rates and tax credits) estimated to represent almost 7% of GDP". "A cost-benefit analysis could help streamline some exemptions, particularly those that benefit high-income groups or have not achieved the desired results", the report said.

The need for comprehensive reform must include a re-evaluation of the social security system to have sufficient sustainability and income for future generations. All these measures must be effective, but fundamentally credible and precise, guaranteeing transparency to the citizen and the perception of palpable improvement. The projection should be - according to the report - from three to five years.

The private sector has to support growth, and if we take future generations back into account: Uruguay needs to improve its educational results and the business environment. In addition, "corporate governance reform would improve the management and efficiency of public companies, which have a key role in the Uruguayan onomy”.

Finally, in the sphere of the labor market, efforts should aim at the creation of quality and stable jobs, while still protecting the worker. The report argues that some of the changes in the last round of salary negotiation introduced productivity considerations and greater flexibility, thus representing "a step in the right direction". In this way, granting more flexibility to small or low productivity companies, and having greater emphasis on times of deceleration are items that help preserve rights and incentives for the creation of jobs that are not only stable, but also designed to bet on The capacity of the workers.

Information generated from the site material: Crónicas.com.uy

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