R ESTRI CT E D Report No. W.H. 51- This document was prepared for internal use in the Bank. In making it available to others, the Bank assumes no responsibility to them for the accuracy or completeness of the information contained herein. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT CURRENT ECONOMIC POSITION AND PROSPECTS OF URUGUAY September 28, 1956 separtment of Operations Western Hemisphere CURRENCY EQUIVALENTS Official Basic Selling Rate (essential imports) U.S. $1 . 2.10 pesos 1 peso = U.S. $0.48 1 million pesos = U.S. $476,190 Official basic buying rate U.S. $ 1 a 1.519 pesos Free commercial rate 1/ - No data available Free financial rate 2/ - 4.30 pesos per dollar (June 1956) 1 / For non-essential imports; market extablished August 1956. Exports are made at various rates, resulting from mixing of the basic buying rate with the free commercial rate in differing proportions. 2/ For invisibles. TABLE OF CONTENTS Page No. BASIC DATA SUM2At.RY AND CONCLUSlSIONS I. The Uruguayan Economy II. Recent Economic Events 2 A. External Trade and Finance 2 B. Prices and Money 3 C. Public Finance D. Domestic Goverrnment Bonds TII. Ti'he General Outlook 5 IV. The Export Position and Prospects 7 .h. Pastoral Products 7 13. Crop Agriculture 9 C. Future Export Earnings 10 D. Fluctuation of Export Earnings 10 E. Direction cf Trade 11 V. Creditworthiness 11 STATISTICAL APPEDNDIX Table 1 - Suumnary of External Public Debt 13 Table 2 - External Debt Service 1 Table 3 - External Trade and Foreign Exchange 15 Table 4 - Main Exports 16 Table 5 - Destination of Pastoral Exports 16 Table 6 - Raw Wool Exports 17 Table 7 - Trade Balances by Area 1'1 Table 8 - Wool Production, Prices and Exports 18 Table 9 - Export Prices 19 Table 10- Composition of Imports 20 Table 11- iVioneyr, Credit and Prices 21 Table 12- Public Finance 22 Table 13- Net Visible Governmient Borrowing 23 BASIC DATA Area 72,153 square miles (86% arable and pasture) Population 2.6 million (1955) National Income Roughly 0380 per head 1953 1955 Exports p270 million W184 mill_on of which: wool 61 jo 57% meat 16/0 4% Imports 4193 million 0225 million ofL which: foods 15% 1 4' fuels 12% 12% raw materials 26% 23% capital goods 40% 41% Gold and Foreign Exchange (End of year: net) 4234 million v141 million Fiscal Revenues Ps.395 million Ps.515 million Fiscal 1xpenditures-/ Ps.449 million Ps.560 million Total Deficitsl/ 2/ Ps. 76 million Ps. 71 million Cost of living (1°49= 100) 133 171 .ages 139 179 1/ Excluding debt amortization. 2/ Including extra-budgetary accounts. SULEWARY AND CONCLUSIONS 1. Uruguay has good natural resources, with the basic potential for further substantial economic growth. Her income per head is already almost two and one half times that of Brazil and 30% larger than Colombia's, with a similarly high level of exports per head. 2. The balance of payments nosition was difficult during 1954 and 1955. Net gold and exchange holdings almost $100 million in those two years, and then began recovering in December 1955. In part this was due to visible trade deficits (466 million) and in part to repatriation of foreign capital which had previously sought refuge in Montevideo. 3. Imports were reduced 17/O (4P48 million) in 1955, but exports fell 26"5 ($65 million) This drop in export earnings was mainly due to lower export volumes; export prices fell, but only by 10%. Uruguay's balance of payments difficulties are generated domestically, and are basically due to a rise of money incomes whlich has not been matched by a corresponding increase of pro- ductivity and real earnings. 4. This in turn is due to a slow but steady wage-cost inflation which has reached the point where at "traditional" exchange rates Uruguayan rural and urban industries are becoming non-competitive. At the same time, frequent changes in the exchange structure have introduced new uncertainties for pro- ducers and traders, which in turn discourage longer-range private planning and productive investment. The fiscal sector has not so far directly contributed much to fivian- cial inflation, since the greater part of sizeable deficits has been covered without recourse to the banking system. The placing of government bonds to consolidate deficits has, however, diminished the flow of capital funds devoted to public works, with a resulting impairment of public investment. 6. These matters are the subject of lively and well-informed debate in Uruguay, but it has not yet proved politically possible to take decisive reme- dial action. It may take some time for public opinicn to harden sufficiently to permit the Administration to adopt new economic policies intended as reme- dies rather than short-term expedients. In the meantime, Uruguay's economic position, and particularly her balance of payments position, will remain difficult with a deteriorating tendency. 7. It would therefore not be prudent for Uruguay to add significantly to her present level of debt service until the policies which are hampering investment from her own resources are remedied. Uruguay is scheduled to repay present public external debt at a rapid rate; present long-term debt will be reduced $30 million, and medium-term debt 45 million in the 5-year period 1956- 1960. Repayment of the proposed loan for the Baygorria hydroelectric plant would not begin until 1961. Total service on public external debt (including the proposed loan) would then be about i11.4 million annually (about the same as in 1957 and 1958), or around 6% of the probable export level; even assuming that improved economic policies, and the transition towards improved pastoral methods, will be slow of realization, this level of service should not strain Urnguay's payment capacity. I. THE URUi-U±YAN ECONCOY 1. By Latin American standards, the bruguayan economy is well ad- vanced. The people (2.6 million) are homogenous, predominantly European, and elementary education is w-idespread. There is a widely-based electorate, with no revolutions wTithin living memory. The national area is compact, and all usable. There are no mountains or wastelands, and no forests. There are no domestic fuels, and major hydro sites within the national territory are limited to one river, the -io Negro. Transport facilities are quite well developed, and roads are simple. to construct and maintain. 2. The basis of the economy, and the principal exchange earner, is pastoral agriculture, producing wool, meat and tides. The bulk of pastoral lands are still managed by traditional methods, although isolated cases of transition to more intensive utilization, with notable increases in output per hectare, are occurring. Both the arable area and the area devoted to milk production for domestic consumption have been expanding at the expense of land used for meat and wool. industry is increasing, but it is doubtful whether all the growth in this sector has been sound. 3. Export values per head of total population have varied from about US $5100 in good years to about US 07O per head in bad years, compared wiFth a range of about 437 to 2L4 in Brazil and 053 to 40 in Colombia, or from around 25% to 18W of national income. National income per head is probably around US 4380, or aLmost two and one half times that of Brazil and about 30% larger than that of Colombia. There is no doubt that the basic poten- tial for further substantial economic growth is good. It is more doubtful whether this potential will be realized quickiy, because, as explained later, present policies, and the tendencies tney are inducing, are reducing incen- tives to produce, to work, and to invest. 4. As detailed later, bruguayan domestic financial affairs have been progressively falling into a state of increasing confusion and imbalance. On the othier nand, the past record is one of prudence and restraint in the management of external financial affairs. Over the ten-year post-war period 1946-1955, total imports exceeded total exports (of US 42087 million) by only $90 million, a deficit which was almost equal to the draw-down of cx- change reserves over the same period. Lhe years of large imports have been characterized by increased imports of capital equipment rather than a spend- ing outbreak on consumer goods. External public debt was US 4131 million at the end of 1947 and was at the same level in December 1955, when IBi3l) loans contracted since 1950 totalled 038.5 million. - 2 - II. RECENT ECONO1KIC EVENTS A. Externnl Trade and Finance 5. During 1954 and 1955 Uruguay showed large trade deficits and drew down her exchange reserves about 4lOO million. The low point of +l27 million in net gold and foreign exchange was reached in November 1955; since then holdings have increased, reaching 4p172 million in Miarch 1956 (latest avail- able data). The sequence of increased export earnings and trade surplus followed next year by increased imports and trade deficit was experiJenced both in 1950-1951 and 1953-1954. On both occasions export earnings fell in each of the two years following the "good" year, so that, despite reduced imports in the third year (to 2. level equal to or below the previous year's exports) trade deficit persisted. Net Gold Change and in N,et Exports Imports Balance Exchange Exchange (millions of US dollars) 1949 191.6 181.2 /10.4 216 - 25 1950 254.3 200.8 /53.5 312 / 96 1951 236.3 309.4 -73.1 199 -113 1952 208.8 236.6 -27.8 216 / 17 1953 269.5 193.4 /76.1 234 / 18 1954 248.9 273.1 -24.2 178 - 56 1955 183.7 225.0 -41.3 141 - 37 6. The 1954-55 experience was, however, more serious in itself and in its implications than that of 1951-52. (a) Gold and exchange reserves were much smaller at the end of 1953 than in December 1950. Although the loss of exchange was about the same in the two periods, the strain was greater in the second, particularly as almost all gold is held as legal cover for the note issue. (b) In 1952 there was a considerable inflow of private capital, while in 1954 there was almost certainly an exodus of private capital, particularly of refugee funds. (c) During 1954 and increasingly during 1955 bruguay experienced difficulties in moving her exports, and resorted on a growing scale to "bonus" exchange rates. In both 1949 and 1952 there were three export rates, but by the end of 1955 there were 12, with "bonus" rates for even the basic exports of wool and meat. The rates applicable to various individual exports were changed 15 times in 1954 and 15 times in 1955. During those two years, the exchange rate treatment accorded to raw wool was changed 3 times, wool tops 3 times, and meat 4 times. 7. Early in Auugust 1956 the Government introduced a new exchange rate system which in effect partially devalued the peso. A new free commercial market was established, tradirig in exchange certificates; exchange originatint in the free financial market (for invisibles) is not qualified for import payments. Mll exchange originz'ing from exports is surrendered to the Bank of the Republic, which purchases part at the basic rate of 1519, and for the remainder issues negotiable "free exchange" certificates which the ex- porter may sell to iritporters. Eleven export rates were established by vary- ing the proportions pernmitted to be sold on the free commercial market, and the Bank of the Republic was directed to submit to the IMlinister of Finance a listing of export products classified in eleven groupings. it is reported that 10% of exchange arising from greasy wool would be negotiated on the free mark,et, while frozen mutton and lamb would be 100%o on the free market. At the same time, certain special rates continue until the end of 1956, namely 3.80 pesos per dollar for canned meat and salted hides, 3.20 for chilled or frozen meat, and 2.48 for manufacture-type meat. 8. Although import licenses are still required, they will be freely granted under the so-called "sworn declaration" system. Certain essential imports may be imported without quota restrictions; these are raw materials (up to half a manufacturer's annual requirements), fuels, lumber and build- ing materials, and essential foods. Bananas, seed potatoes and refined sugar may also be irriported within authorized limits at the 2.10 rates. All other imports are at the free commercial rate, plus, for second and third category goods, surcharges to be fixed by the Bank of the Republic, which will also determine the quotas of exchange which will be made available for those categories. B. Prices and Money 9. The cost-of-living index for I1iontevideo rose a little more than 11% in both 1954 and 1955, while wages increased by the same amount. iMloney supply, however, increased only 8% in 1954 and 3.5% in 1955. From Mlarch through October 1955, money supply actually fell by 8,3%. 10. While statistics are fragmentary, all observers agree that prices and costs have been rising, due principally to steady increases of wages. Wage rates are set on an industry-by-industry basis by tribunals; although each tribunal includes a Government representative, it cannot be said that there is an official wage policy. This in part reflects the fact that voting power is heavily concentrated in union-conscious workers in Montevideo, where more than one third of the population lives. 11. The principal source of increased money supply has been bank credit to the private sector, which increased 19/ in 1954 and 13% in 1955, offset- ting the deflationary effect of foreign exchange outflow in those years. The effect of this credit expansion upon money supply was, however, in its turn partly offset by growth of saving deposits, which absorbed between one third and one half of the credit expansion. C. Public Finance 12. Fiscal operations have not directly contributed to increased money supply, since the Government has so far been able to finance sizeable defi- cits iLthout serious recourse to the banking system. But they have had damaging consequences for Urugua-yan economic development, because they have diverted savings to finance current expend-itures instead of investment. 13. Total revenues of the lUruguayan Government (Ordinary Budget and Exchange Differential Account combined) amounted to Ps. 519 million, a sum which is more than 20% of national income. Ordinary revenues have been buoyant, increasing 33% in 1954 and 5% in 1955, while expenditures of the Ordinary Budget were held almost at the same level in 1955 as in 1954. As a result, the deficit of the Ordinary Budget (net of debt amortization) was much less in 1955 than in 1954. On the other hand, net receipts of the Exchange Differential Fund kthe peso profits of the multiple exchange rate system) increased only slightly in 1954 and fell in 1955, while fiscal ex- peniditures from this Exchanige Fund increased, with resulting fiscal defi- cits of Ps. 72 million in 1955. This represents 14h of total fiscal expendi- tures, compared with fiscal deficits in 1951 of 7% of total expenditures (Budget and Exchange Fund combined). 14. Thae Finance ';Vinistry must make good any losses incurred by the government-owned railroads and ports, as well as the Highway Fund and Govern- ment Old Age Pensions Fund. These "tlateral accounts" are customarily in deficit, Ps. 22 million in total in 1953, Ps. 4 million in 1954, and on preliminary reports Ps. 25 million in 1955. 'laking these into account, total deficits were ?s. 42 million in 1954 and Ps. 97 million in 1955, net of amortization of debt. 15. In the short term, these deficits have been financed by increases of floating debt, which is intended to be refinanced with the proceeds of the domestic sale of long-term government bonds. During the six years, 1950 through 1955, total fiscal and lateral account deficits aggregated Ps. 373 million, while bonds issued to consolidate deficits, net of amortization on outstanding issues, totaled Ps. 134 million. Net issues of treasury bills increased Ps. h8 million, while net recourse to the banking system increased Ps. 70 million, leaving Ps. 121 million residual floating debt which is reportedly in the form of unpaid accounts owed principally to Government agencies. - 5- D. Domestic Government Bonds 16. Uruguay enjoys a domestic market for bonds; mortgage bonds are bought principally by the public, while Government bonds are absor'bed mainly by Government agencies, in particular the official pension funds. Over the past six years, 1950-1955, net purchase of Government bonds averaged almost Ps. 70 million annually, although there are marked fluctuations from year to year. 17. In "normal" Uriguayan practice, proceeds of government bond sales are used to provide capital for official entities (ports, railways, power and telephones, oil refining, etc.) and to finance public works. Original expenditures on pablic works are not borne by the ordinary budget, which meets only the service charges on outstanding bonds. In 1952, 1953, and particularly in 1954, sizeable issues of government bonds were, however, also made to consolidate fiscal deficits. Since the budget carries no caoi- tal expenditures, this represents a channelling of savings of the public to finance government current expenditures. 18. Total requirements for bond finance have exceeded the "market" absorp- tion capacity. At the end of 1955, Ps. 420 million of government bonds were authorized but not issued, compared with Ps. 82 million at the end of 1950. At the same time, the average price of government bonds fell from 91 in 1950 to 80 in 1956. Early in 1956 a further issue of Ps. 250 million was author- ized for the consolidation of the fiscal deficits of 1953 and 1954, raising the total bonds authorized but not issued to Ps. 639 million at the end of iipril 1956, compared witil Ps. 1,136 million outstanding at that time. 19. Since the capacity of the "market" to absorb government bonds is limited, the result has been that funds available for public works have been small. Over the 6-year period, 1950-1955, gross issues of Ps. 162 million were made for the capital of public entities, net issues of Ps. 134 million for consolidation of deficits, and gross issues of Ps. 53 million for public worlks. This last figure may be compared with total fiscal expenditures (on current account, net of debt amortization) of Ps. 2,320 million. III. THE GENERAL OUTLOOK 20. The foregoing section describes serious external and internal financial difficulties, which are the subject of lively and well-informed debate in Uruguay. In considering the general outlook, it is important to realize that these difficulties have in the main been generated by domestic rather than external forces. Export prices in 1954 were 3% higher than in 1953. Although they fell 10 in 1955, lower prices do not by themselves explain the 26% drop of exchange earnings, the greater part of which resulted from lower export volumes, particularly of wool and meat. 21. The essence of the present situation is that Uruguayan money in- comes have been rising without a corresponding increase of productivity and output. This in turn is due to a slow but steady wage-cost inflation (rather - 6 - than a credit inflation) which has reached the point where at "traditional" exchange rates Uruguayan rural and urban industries are becoming noncompeti- tive. At the same time, there is eerious danger of open credit inflation so long as the Government continues to -run sizeable fiscal deficits. 22. In face of this situation, the Government is granting "bonus" exchange ratues to individual exports to encourage their movement, and is seeking both to increase government fiscal revenues and to promote the ab- sorption of government bonds. Traditionally, devaluation of the external value of the currency is a response when the domestic cost-income stracture is higher than external cost levels. The granting of special "bonus" exchange rates for esports (-with corr-esponding shift of some imports to higner rates) is, of course. a form of "'creeping" devaluation. But neither creeping nor outright devaluation by itself is a cure. with or w-ithout devaluation, it is also necessary to identify and eliminate the sources of domestic inflation. In fact, creeping devaluation, by introducing new uncertainties regarding the domestic equivalents of external prices for exports, discourages produc- tion, and frequently induces shifts fromil output of products the country is well suited to produce (and which are therefore relatively low-cost) to items in which the country enjoys less advantage--and are thus higher-cost and therefore regarded as entit'ed to "bonus" exchange rates. 23. The new (August 1956) exchange rate structure reinforces rather than eliminates this feature on the export side, where at present there are thirteen rates ranging fro,n 1.77 to 4.0 pesos per dollar (assuming a free commercial rate of 4.o). The new system will, however, increase the domes- tic price of non-basic imports, and thereby relieve some of the pressure of irmport demand previously restrained by quantitative licensing. If the free commercial rate is allowed to move in response to market forces, it would move roughly in step with domestic inflation and thus reduce part oL the balance of payments consequences of inflation. 24. This is a valuable feature, because it is difficult to see ilow, in the social and political environment of Uruguay, it will be possible quickly to check wage-cost inflation and fiscal deficits. Uruguay, like New Zealand, has inany of the features of a social welfare free enterprise economy and, like New Zealand and 'inland, is finding it diffi- cult to maintain incentives to personal sacrifice anci effort. A central problem is the fixation of wages. With strong trade unions and semi- autonomous vage boards for individual industries, there is constant pres- sure to raise money wages without much reference to increase of productivity. Sooner or later the consequences show up clearly in colntries which, like Uruguay, New Zealand and the United Kingdom, are highly dependent on inter- national trade. 25. The long-ran remedy is of course the increase of worker Droductiv- ity to support higher real wage earnings. This goal at present confronts several cbstacles in Urugaay. One is an exchange rate system which increas- ingly hampers the traditional export industries and which, by confronting producers with new uncertainties regarding future rates as between possible products, discourages longer-range private planning and investment. - 7 - 26. Another obstacle is the persistence of sizeable fiscal deficits which, under bruguayan financial practices, mop up private savings which would otherwise be available for public and private inve-tment. Government revenues are already hiigh in relation to national income, and it is by no means cerain that they could be increased greatly in real terms without further corroding private incentives to produce. Expenditures from revenue are overwhelmingly transfer and consumption expenditures. Their reduction would require elimination of deficits in important government entities (basically, a problem of rates charged for public services) and restraint of gro-wth, if not actual reduction, of the cost of supporting a large civil service. 27. These are not things which governments anywhere can do easily. Successive Uruguayan administrations have declared their intention of elimi- nating fiscal deficits, but without success so far. A recent attempt by the incumbent Administration to increase revenues by introducing an income tax led to a severe political crisis and at least temporary defeat of the pro- posal. 28. However, important sectors of public opinion are alive both to the basic causes of present economic trends and to their dangerous conse- quences for Uruguay's future output and standard of living. As was the case in Chile, it is only a question of tlrn.e before public opinion hardens suffi- ciently to make decisive remedial action politically possible. In the mean- time, Uruguay's production base is being slowly but progressively impaired through distortion in the use of resources and by reduced investment levels. IV. THE EXPORT ?OSiTIO11 PID PRtOSPECTS 29. Total export values fell 7% in 1954 and 26% in 1955. in these two years, export earnings fell from q270 million to 4l84 million, due principally to decline of volumes exported. A. Pastoral Products 30. Uruguay's principal exports are pastoral products--wool (raw and semi-manufactured in the form of wool tops), meat (frozen and canned), and hides. Cattle and sheep graze on the same pastures, and the proportion between them can be varied within limits. 31. Over the last 30 years, the sheep population has grown relatively to cattle numbers; the sheep-cow ratio, which was 2.7 in 1900 and fell to 1.7 in 1924, rose more or less steadily to 2.9 in 1946 and reached 3.4 in 1954. Miany believe that at this level the country is overstocked with sheep under present pastoral methods. 32. Cattle population has been falling since 1951 and sheep numbers rising. This tendency has been induced partly by relatively more favorable prices for wool than for meat. The wool-meat price ratio induced a big kill of breeding cows in 1950 and 1951 to make room for sheep, impairing the - e - reproduction ability of the cattle population. In 1953, there was an excep- tionally large kill of calves and steers, to take advantage of a sharp in- crease in the price of meat extract, a by-product of canned meat. This eliminated beasts which would have matured into beef in -he following years. Lattle killed fell sharply in 1954, and 155 showed no change. FlJith contin- uous increase of domestic meat consumption (meat has been cheap in Uruguay and the Uroguayan people are among the heaviest meat eaters in the world), 1954 and 1955 production left no export surplus; 1954 exports of -.45 nmillion were largely from stocks, and in 1955 meat exports fell to 47 million. 33. Starting in 1954, the wool-meat domestic price ratio hns moved in favor of meat) ai. d the indications are that sheep numbers are now decreasing, tending to restore a more "nori,als" sheep-cattle ratio. Opinions differ widely regarding the speed with which the cattle population will recover. It is noteworthy that over the past forty years there has been an almost uniform cycle in cattle numbers, seven years from high to low. If this cycle is maintained, cattle population is due to grow. 34. Two factors are, however, operating which may change traditional ideas regarding "optimumr" sheep and cattle populations in Uruguay. The first is the growth of the crop area which, although small in relation to total farm area, is removing from pastoral use land which under present methods is the "best" land for cattle fattening. The second factor is the beginning of change towards improved grass types and pasture management which, howe6er slow and sporadic, may vary the former "optimum"l sheep-cattle ratio. 35. On the whole, the indications are that the ratio between sheep and cattle will return to more "normal" levels and, furthermore, that the repro- ductive ability of the cattle population will improve. Ivkoreover, as improved pasture management spreads, total carrying capacity will increase while at the same time cows couldbepar calves earlier, cattle could be fattened more rapidly, and wool output sheep would increase, all factors which would raise annual output from any given livestock population. Wool 36. Raw wool exports fluctuate much more widely than production; Uruguayan farmers and traders usually accumulate stocks when wool prices are rising, hoping they will rise still further, and are reluctant to sell when prices start falling. The result is that export volumes frequently move inversely to prices, as for example in 1951, 1952 and 1954. During 1955, when wool prices fell 10% from 1954, raw wool exports fell to 62> of their 1953 level (although 1955 unit prices were only 5% lower than in 1953), wkihile wool stocks at the end of 1955 were around 80,000 tons, almost one year's clip. To induce traders to sell, the governument introduced temporary "bonus" export rates, with the bonus falling month by month, with the result that wool exports were resumed. 37. The druguayan wool trade is entirely private, and is well known for the "speculative" outlook of its members. Given this market pyschology, and the frequently reported poor and non-uniform grading of Uruguayan wools, Uruguay is likely to earn less on average for any given type of wool off the sheep's back than Australia, New Zealand or South Africa. 38. In the last six years Uruguay has established a sizeable wool-tops industry, and exports of tops now run around q32 million annually. This industry is unable to compete in export markets without "bonus" exchange rates; in June 1956 exports of manufactured tops received 36% more pesos per dollar than raw wool exnorts. heeat 39. It can be expected that meat. output will slowly increase for the reasons described earlier. It .s more doubtful whether beef can regain a strong export position, even if output increases more than dormestic con- sumption. 40. A11 the major packing piants in Uruguay are old and lack modern equipment, while the export packers very seldom operate near capacity. ihieat processing is therefore expensive, reducing the return to the farmer for any given export price. This means that, for any external }neat-wool price ratio, the domestic returns from cattle are less attractive to the farmer than those from sheep than they are in countries with lower packinghouse costs. More- over, now that British bulk purchasing of beef has terminated. the trade has again become competitive. in terms of quality of processing and of uniform- ity of product, Uruguayan beef is inferior to that of Argentina and there- fore l-kely to be marginal in world trade. With intensification of pasture improvement, bruguay would however be in a good technical position to develop a sizeable fat lamb export industry. B. Crop Agricuilture 41. In the ten years 1945-1955 the cropped area increased by almost 525,000 hectares, or 60%, mainly at the expense of the better pasture lands. In recent years exports originating in this sector have run around 43O niillior L2. The high export earnings of 1950 permitted the import in 1951 and 1952 of much new agricultural machinery, thanks to which Uruguayan crop agri- culture is on the whole well mechanized and efficient, and was able to export at exchange rates around 1.80, i.e. with an exchange "bonus" around 20%O above the basic rate of 1.519 formerly applied to raw wool. lathouah wheat is well mechanized, itsE rapid expansion has been due to relatively high government support prices, and exports have involved the governmrent in peso losses; in 1955 the relation between internal and external prices was such that a notional "wheat exchange rate" would have been 2.79. In December 1955 the government reduced the support price to a level where the "wheat exchange rate" would be 2.64. These figures suggest that Uruguay enjoys little com- parative advantage in wheat. - 10 - C. Future Export Earnings 43. Uruguay's future ability to export will depend mainly on output from the pastoral area. Even if crop agriculture expands, it would be at least partly at the expense of pastoral output unless methods of pasture and livestock management improve. Uruguayts need is still for a transition from extensive to intensive pasture use. This transition is already being pioneered by a few progressive farmers. However, with the present avail- ability of technical know-how and advice, and with present uncertainties regarding the domestic prices of both farm supplies and products which are created by constant changes in the structure of exchange rates, transition will be slow. It could be speeded by execution of the Pasture Improvement Project, which is essentially a dispersed demonstration conducted with ade- quate technical supervision. 44. Assuming no acceleration of the trend towards improvement of the pastoral economy, it is difficult to see how, assuming wool prices around the 55 cent per Pnund level, Uruguay could count on export earnings much over ?200 million annually on average. This takes into accoumt the inroads that renewed. Argentine competitioii may make into uruguVr's expo. ; of Deef and wheat. A steady trend of increased export earnings could, however, be ex- pected if the transition towards improved pasture and livestock management were to accelerate. A growing and secure volume of beef export would prob- ably also require imsprovemient and re-equipment of the packing houses. D. Fluctuation of Export Earnings 45. Experience after World WVar 'I has demonstrated the wide variability of Uruguay's export earnings, due, as already noted, principally to fluctua- tions of wool exports which in turn depend more on changes of volumes ex- ported than on price changes. Year Exports Period Percent (millions of 4) (years) Change 1946 152.8 1949 191.6 3 / 25% 1950 254.3 1 / 32c 1952 208.8 2 - 18% 1953 269.5 1 ' 3070 1955 183.7 2 - 327` - II - 46. Such wide and rapid flucturatLtns- of export earnings constitute a weakness in bruguay's balance of payiments position, of a type which would be neutralized by large available exchange reserves. Uruguay customarily maintains very large gross gold and exchange holdings (roughly equal to one year's imports), but the greater part of the gold is tied up as legal back- ing for the note issue. In times of difficulty the monetary authorities are forced to rely upon lines of credit overseas. For example, at tne end of 1955 total gold holdings amounted to 42155 million, while free gold amounted only to 4185 million; at the same time, e:change was negative at :Q74.5 million.l/ E. Direction of Trade 47. 3vents have confirmed the forecasts of earlier economic reports. that bruguay's direct dollar earnings would be small. In 1955, her exports to the United States were 9/>O of total exports, and her trade deficit with the united States was 427 million. 48. Uruguay has continued to achieve a limited de facto conivertibility by obliging her importers to work through switch transactions, as described in the last economic report on Uruguay (W.H. 40a, hay 3, 1955, paragraph 47). These practices enable UIruguay to utilize her earnings in various currencies to better advantage, although at the price of a somewhat nigher landed cost of imports. At the same time, however, she is more vulnerable to import difficulties than she would be if there were a wider convertibility of European currencies. V. ChED'ITNURTHIMMSS 49. Uruguay's social and economic heritage is considerable, and good potential for future economic growth exists. This potential will, however, be slow of realization if the initiative and energies of her people are not directed tUowards the expansion of production and income. For the reasons expla-ined earlier in this report, the trend in the past few years has been one of weakening incentives and redaced investment for productive purposes, due in the main to foreign exchange and fiscal situations and policies. 50. This has not passed unnoticed in bruguay, where there is wide- spread debate on the sources and remedies for current difficulties. Uruguay being an active democracy, most facets of the economic problemi reflect strong political overtones, and purely technical solutions are not possible. Until the Uruguayans themselves resolve their differences, and emerge with agree- ment upon sufficiently effective and reasonably stable economic policies intended as remedies rather than short-term expedients, her economic position, and particularly her balance of payments position, will remain difficult, with a deteriorating tendency. 1/ The situation improved greatly in the early months of 1956. - 12 - 51. It would therefore not be prudent for Uruguay to add significantly to her present level of debt service until the policies which are hampering productive investment from her own resources, and which are also inducing balance of payments difficulties, are remedied. In point of fact, Uruguay has shown considerable restraint in overseas borrowing; her estimated public external debt was 4130.7 million equivalent at the end of 1947, and 4131.4 mi'lion equivalent in December 19551/ when loans contracted with the inter- national Bank totaled ;P38.5 million. The annual service of long-term debt has remained steady at around 0j9.5 million. The Uruguayan State Railways have, however, w4.5 million outstanding on medium-term credits (6 year original maturities) so that total service 1957-1959 is between $11 million and $10 million annually. 52. Scheduled repayments are estimated to reduce long-term public external debt by 42907 million in the 5.-year period 1956-1960, and there- after run around 4t6 million annually; in addition, 45.0 million of mediLun- term debt is scheduled for repayment by 1961. Total annual service on pres- ent debt would be 39.4 million in 1961 and 49.0 million in 1965, thereafter falling slowly until 1972 (W6.4 million), and then declining relatively sharply. 53. If the only long-term borrowing between now and 1961 were the proposed loan, long-term. external debt would be 4 million less in 1961 than it now is. Service on the proposed loanwould be $i2 million annually; this, added to service on present debt, would mean annual service payments bet'ween 411.4 and $11.0 during the early 1960's. Service of 411.4 million would be around 6% of the probable export level of $200 million. Even assum- ing that improved economic policies, and the transition towards improved pastoral methods, will be slow of realization, this level of service should not strain Uruguayr s paymrent capacity. An accelerated transition towards more intensive pastoral methods, and the adoption of economic policies which removed artificial obstacles to productive effort and investment, would increase Uruguay's ability to undertake and service foreign obligations. As noted in previous economic reports, however, without some approach towards convertibility of currencies, Uruguay would have more difficulty in meeting significantly higher service than the scheduled level on present dollar debt (of somewhat over $6 million annually during the early 1960's) than she would have with equivalent higher service in non-dollar currencies. J/ There may actually have been a decrease during this period, since coverage was improved at the later date. The 4131.4 million reported in December 1955 includes 412.4 million equivalent Dollar and Sterling bonds held internally. Most, if not all, of b4.7 million in dollar- denominated treasury bills are also believed to be held inside Uruguay. - 13 - Table 1 Sulik8IHY OF EXTERLThL PUBLIC DEBT National and Government Guaranteed Debt (thousands US; equivalents) Amount Outstanding Item December 31, 1955 TOTAL EXTERNA.L PUBLIC DEBT 131, 3811/ Disbursed and still outstanding 124,838 U;ndisbursed 6,543 U.S. DOLLAR DEBT 85,257 Publicly-issuad bonds 42,022 Privately-placed 5,004 Disbursed and still outstanding 4,7014 Undisbursed 300 loans held or guaranteed by IBRD 28,635 Disbursed and still outs-tanding 22,746 U ndisbursed 5,889 U.S. Government loans 9,596 Export-Import Bank 8,984 Other 612 STERLING DEBT (Publicly-issued bonds) 38,396 SWISS FRANC DEBT (Loans held by IBPD) 7,242 NETHERLANDS GUILDER DEBT 486 Privately-placed 354 Disbursed and still outstanding - Undisbursed 354 Loan held by IBRD 132 ITALIAN LITHA DEBT (Loan held by I3RD) 2 BELGIAN FRANC DEBT (Loan held by IBRD) 2/ 1/ Exchange rates used: Par values: E 1 = P2.80; f. 1 = 00.26316; Lit 1 - 60.0016; BF 1 - 0.02. Current market rate: Sw-F 1 Q O0.23337 as of Dec. 31, 1955 and ?PO.23340 as of April 30, 1956. 2/ As of Dec. 31, 1955, no disbursements of this currency had been made. NOTE: In addition, the Export-Import Bank had p2.67 million outstanding on loans to private companies without government guarantee. Table 2 -E;XT,ERNAL DEBT SERVICL NTational and Government Guaranteed Debt (thousands US equivalents) Total Debt Service Panments by Currency of Payment Lebt out- Payments during ye-ar standing Amorti- U. S. Plounds Swiss Netherlands Italian Belgian Year January 1 zation Interest Total dollars sterling francs guilders lire francs 1956 131,381 11,861 5,189 17,050 14,009 2,300 586 145 8 2 1957 119,106 6,383 4,737 11,120 8,014 2,300 775 18 11 2 1958 112,281 6,668 4,,442 11,110 7,904, 2,277 811 105 11 2 1959 105,149 6,519 4,145 10, 664 7,537 2,210 792 112 11 1960 98,138 5,667 3,871 9,538 6,366 2,210 771 178 11 2 1961 91,951 5,785 3,626 9,411 6,832 2,210 340 2 23 t4 l9o2 85,617 5,925 3,375 9,300 6,262 2,210 796 5 23 4 1963 79,112 6,085 3,111 9,196 6,179 2,210 776 4 23 4 1964 72,416 6f,249 2,841 9,090 6,094 2,210 755 4 23 4 1965 65,521 6,416 2,571 8,987 6,009 2,210 737 4 23 4 1966 58,424 5,260 2,295 7,555 5,072 1,735 717 4 23 4 19o7 52,648 5,358 2,061 7, 419 5,021 1,670 697 IJ 23 4 1 9t8 46,773 5,528 1)822 7,350 4,971 1,670 678 4 23 4 1969 40)698 5,704 1,576 7,280 4,921 1,670 658 4 23 4 1970 34,415 5,888 1,322 7,210 4,871 1,670 638 4 23 4 1971 27,914 5,824 1,057 6,881 4,562 1,670 619 3 23 l4 1972 21,441 5,667 800 6,467 4,197 1,640 600 3 23 4 1973 15,087 3,968 547 4,515 2,355 1,551 579 3 23 4 1974 10,392 3,300 363 3,663 1,604 1,1470 56o 2 23 4 1975 6,323 1,451 218 1,669 177 1,436 43 11 2 1976 4,057 1,294 142 1,436 1,436 1977 1,901 1,141 67 1,208 1,208 - 15 - Table 3 I;XTERNATL TRADE hNf FOREIGN EXCi-ANGE (millions of 'US dollars equivalent) Net Gold Change and in Exports Imports :3alance Exchange-/ Net Exchangeb/ 1945 122.0 93.7 /28.3 252 / 24 1946 152.8 147.4 / 5.4 297 /145 1947 162.5 215.3 -52.8 255 - 42 19)8 178.2 199.7 -21.5 2)41 - 14 1949 191.6 181.2 /10.4 216 - 25 1950 254.3 200.8 /53.5 312 / 96 19¸1 236.3 309.4 -73.1 199 -113 1952 208.8 236.6 -*27.6 216 / 17 1953 269).5 193.4 /76.1 23 / 18 1954 248.9 273.1 -24.2 1(8 - 56 1955 183.7 225.0 -41.3 1)412/ 37 19¸6 (Illarch) 172 a/ At end of year. b/ During year. CJt November 1955, W1.27. - 16 X Table 4 7MAIN EXPORTS (Values in US,4) millions) Product 1950 1951 1952 1953 1954 1955 Wool (raw) 153 97 68 127 93 74 Wool tops 7 21 22 37 32 31 Neat and meat products 43 45 41 44 45 7 Hides, skins and bristles 29 26 23 24 l 1.5 Flour -- 5 18 8 79 12 Linseed and linseed oil 8 10 12 13 8 5 Grains (excl. linseed) - 4 9 -- 11 26 Other 13 28 16 17 23 14 Total 254 235 209 270 249 184 ,lable 5 DESTINATION OF PASTOP0, EXPORTS (USO millions) Country of Raw Wool Meats, Hides and Skins Destination i951 1952 1953 195 l95 3 1951 1952 1953 1954 1955 United Statesl, 75.1 24.0 33.4 21.3 12.4 8.9 8.9 9.0 8.9 1.0 Great BrAtain-1 0.7 21.7 55.3 27.5 13.6 23.8 8.8 24.1 11.4 5.1 Europe / 18.7 20.0 35.9 37.9 41.6 32.3 34.2 27.5 32.5 11.6 Other 2.0 2.6 2.7 5.9 6.6 5.3 12.1 7.8 11.3 4*c Total 96.5 68.3 127.3 92.6 74.2 70.3 64.1 68.4 64.0 22., % lotal Export Values 41.0 33.0 47.2 37.2 40.4 30.0 31.0 25.0 25.7 12.1 Volume (thou- sand tons) 33.6 45.7 79.5 53.6 49.4 128.6 124.7 118.9 114.6 40.3 Unit Value (195o 100) 171.0 89.0 95.0 102.0 89.0 133.0 122.0 137.0 132.0 27.0 1/ Including Dominions and possessions. 2/ Including overseas possessions. - 17 - Table 6 R.A- ,W1OOL EXPORTS (thousands of bales, averaging 480 kilos each) Annual Averagesl/ Total To U.S. Percent to U.S. 1918/19 - 1919/20 J.16.9 52.0 44.5 1920/21 - 1924/25 101.7 29.2 28.8 1925/26 - 1929/30 130.8 19.1 14.6 1930/31 - 1934/35 113.6 41.1 3.6 1935/36 - 1939/40 111.0 20.8 18.7 1940/41- 1944/45 122.7 105.6 86.1 1945/46- 1949/50 144.o 85.7 59.5 1950/51 154.0 1 8.5 77.0 1951/52 103.0 59.8 58.1 1952/53 260.2 68.5 26.3 1953/54 156.9 25.9 16.5 1954/55 128.9 18.3 14.2 1/ Crop years, October 1 to September 30. Table 7 TRADE BALANCES BY AREA (192 m1940 illiion pesos 1946-1954 :p million) Trade Balance Period Total Western Hemisphere 1 (annual averages) Lxports U.S.A. Other Total Europe1/ Total-/ 1926-1930 97 -16 - 1 -17 /26 /11 1936-1940 100 f 6 -10 - 4 r26 /27 1946-1948 165 -18 -49 -67 /46 -23 1949 192 /10 -19 - 9 /10 ,/lo 1950 254 f89 -33 /56 - 3 /54 1951 236 / 7 -50 -43 -31 -73 1952 209 -15 -27 -42 /17 -28 1953 270 /14 -38 -24 /95,E /76 19544, 249 -13 -34 -47 /192' -24 1955-N 184 - 27 -20 -47 /10 -42 1/ Including United Kingdom. 2/ Including other countries. 3/ Including Soviet area (Soviet area /21; Europe excluding Soviet -2). / Preliminary. Table 8 WOOL PRODUCTION, PPICES AN-D EXPORTS Production-/ Exports Unit Value Export Greasy of ExDorts Values / & Washed Tops (greasy & washed) ( -- thousand tons -- ) (US/kilo) (@ millions) 1949 65.3 48.4 0.6 1 .34 68.3 1950 74.1 90.0 2.4 1.65 159.9 1951 84.1 33.6 4.2 2.62 117.5 1952 85.4 45.7 8.5 1.45 90.3 1953 91.0 79.5 13.2 1.55 164.7 1954 91.9 53.6 11.3 i.64 124.5 1955 87.2 49.4 12.7 1.48 105.6 / Crop year ending September 30 of year shown. 2/ Raw wool and tops. - 19 - Table 9 EXPORT PiRICES 1948 1949 1950 1951 1952 1953 1954 1955 Unit Export Prices (p per kilo) Raw wool 1.134 1.344 1.646 2.617 1.454 1.549 1.645 1.482 Nleat: frozen .355 .316 .308 .1l12 .487 .466 .483 .523 canned .706 .673 .602 .730 .823 .826 .757 .760 Flour .279 .122 .103 .161 .155 .154 .161 Wheat .101 .084 073 .1388 .o648 .0527 Unit Domestic Prices (Pesos per kilo) Wiool 1.816 1.861 2.670 5.146 1.981 2.283 2.206 1.939 Meat: steers .236 .250 .251 .273 .293 .290 .447 .338 cows .196 .188 .181 .206 .225 .226 .272 .282 Wheat nominal .1380 .12454 .1731 .1743 .1737 .1715 .1685 Export Price Indices (1949 f 100) Raw wool 100 122 195 108 115 122 110 Meat: frozen 100 97 130 154 147 153 166 canned 100 90 109 122 123 112 112 Flour 100 85 132 127 126 132 Wheat 100 87 165 77 75 Domestic Price Indices (1949 - 100) Wool 100 144 277 107 123 119 104 Nieat: steers 100 100 109 117 120 179 155 cows 100 96 110 120 120 145 150 Wheat (support price) 100 105 125 126 126 124 122 - 20 - Table 10 COM4POSITION OF V0LIRTS (Excluding gold. USO millions) 1949 19)0 1951 19%5 1953 1954 51955 Fuels 18.9 13.3 29.9 31.3 22.4 37.1 26.5 Foods and Tobacco 30.3 29.9 36.4 29.5 28.5 28.3 30.8 Seeds and Raw liaterials 36,0 Lb3.1 67.5 49.8 51.2 61.6 53.5 (excluding iron and steel) 85K2 86.3 133.8 110.6 102.1 127.0 110.8 Capital Goods Construction Materials 16.5 18.2 27.6 20.9 16.3 28.1 21.1 Agricultural, Industrial and Transport Equipment 42.0 54.9 97.6 67.0 44.7 71.6 54.9 Other Capital Goods 13.1 13.0 16.6 13.6 1565 20.4 16.3 71.6 86.1 141,8 101.7 76.5 120.1 92.3 Ali Other 24.4 2o.4 33.8 24.3 114.8 26.0 22.9 Total Imports 181.2 200.8 309.4 236.6 193.4 273.1 22ˇ..` Percentages: Fuels, foods, tobacco, seeds and raw materials 47 43 43 h7 53 47 49 Capital Goods 40 43 46 43 40 44 41 Other Goods 13 14 11 10 7 9 10 - 21 - Table 11 1iOONEY, CREDIT, AND PRICES 1950 1951 1952 1953 _ 1554 1955 Dec. Dec. Dec. Dec. March Dec. Niarch Dec. Absolute Values in million pesos Isioney Supply Currency 314 323 353 388 364 432 430 452 Deposits 264 2)47 271 304 318 315 332 320 TOTAL 577 571 624 691 683 747 762 773 Other Deposits Time 581 652 687 787 799 866 875 908 Government 63 57 63 88 100 91 96 102 Bank Loans to Government 158 161 163 191 195 240 218 268 to Business 783 1004 1050 1152 1200 1372 1463 1556 Bank's Foreign Assetsi/ 474 302 328 355 340 270 272 21i4 index nu.nbers, Dec. 1949 = 100 Bank's Foreign Assetsi/ 145 92 100 108 104 82 83 65 Bank Loans: to Business 114 146 153 168 175 200 214 227 Time Deposits 113 127 134 153 156 168 170 177 1liONEY SUPPLY 122 121 132 146 144 158 161 163 PRICES (1949 = 100) Cost ofi living 96 109 125 133 141 155 157 171 ivagesJ 107 114 122 139 160 179 j Net, converted at 1.519. 2/ Net, i.e. loans minus government deposits. _/ Private enterprise in Ivlontevideo. - 22 - Table 12 PUBLIC FINANCE (million pesos, rounded) 1950 1951 1952 1953 1954 1955 (pre.im) Receipts: Ordinary budget 279.1 357.5 323.0 341.9 453.7 475.6 Exchange fund 57.1 74.9 54.8 52.8 57X7 39.0 Total 336.2 432iL 377.8 39*.7 511.4 514.6 Expenditures: Ordinary budget 305.7 367.0 355.6 412.8 503,4 513.6 less amortization 16.5 17.4 19.9 21,4 24.0 28.8 net budget expenditures 239.2 349.6 335l.7 .4 479.4 88.8 Exchange fund 58.0 73.5 68.6 57.2 70.2 101.8 Total 347^2 423.1 404.3 448.6 549.6 586.6 Deficits: Ordinary budget-/ 10.1 f7*92 12.7 49-.5 25.7 9.2 Exchange fund (0.9 46.6-/ 13.8 4.4 12.6 62.8 Other: Old age pensions 17.2.- 5.5 1.6 ) Highway fund 4.54/ 3.0 2.9 0.9 0.4 ) Railroads 16.85/ V 65 10.7 13.1 2.4 ) 25.0 Ports 3.0 2 0 7.8 1.1 ) Other minor accounts 8.92/ ) Total deficits./ 48.5 57.0 52.6 75.7 42.2 97.0 Bonds issued to consolidate, deficits, minus all -13.6 -14.6 26.6 34.9 117.1 -16.5 amortization Net issues of Treasury Bills 7.6 1.9 10.0 28.5 6.9 -7.05 1/ Net of long-term debt operations. 2/ Accumulated to Iviarch 1, 1952. Accumulated 1947 through 1950. 4 Accumulated 1945 through 1950. Accumulated 1942 through 1950. Accumulated 1946 through 1952. - 23 - Table 13 NET VISIBLE GOVERNMENT. BORROWING-/ (million pesos, rounded) 1950 1951 1952 1953 1954 1955 Internal bonds Gross issue for Public works 15.3 5.4 14.7 5.3 12.4 Capital of entities 15.3 17.9 8.2 28.0 72.8 20.0 National defense 60.7 3.3 Issue for consolidation of deficits, minus all internal anortization -13.6 -i4.6 26.6 34.9 117.1 -16.5 Net issue, internal bonds 62.4 21.8 4o.3 77.6 195.2 16.o External bonds Net amortization 2.8 2.8 3.2 3.8 3.3 3.6 Net long-term borrowing 59.6 19.0 37.1 73.8 191.9 12.3 Internal bonds: authorized but not issued 81.9 76.2 178.0 178.0 441.6 419.9 I/Nominal values.