Report No. 10639 LIR Uruguay Macroeconomic Assessment April 1993 Country Operations Department IV Latin America and the Caribbean Region FOR OFFICIAL USE ONLY --4 . .... Documnt of the World Bank 'This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Period Average) 1991 US$1 = N$2,018.8 June 1992 US$1 = N$3,005.6 GLOSSARY AFE - Government Railway Company ANP - Government Port System ANTEL - Government Telecommunications Company ANCAP - Government Petroleum, Alcohol and Cement Company BHU - Government Mor:gage Bank BROU - Bank of the Republic of Uruguay CIF - Cost, Insurance and Freight DDSR - Debt and Debt Service Reduction Support Loan GDP - Gross Domestic Product IMESI - Sales Tax Rate IRIC - Tax Rates on Business Income IRP - Tax Rates on Personal Income LIBOR - London Interbank Offered Rate LRM - Monetary Regulation Bills MERCOSUR - Common Market of the South (Argentina, Brazil, Paraguay, Uruguay) OSE - Government Water Company PLUNA - Government Airline Company SDR - Special Drawing Right UTE - Government Power Company VAT - Value-Added Tax FOR OFFICIAL USE ONLY 0UNTRY DATA - URUGUAY AREA POKAATIoN 3.1 Density rotal: 177.41 sq.km Rate of Growth: 0.5X Pnpulat ion characteristlis PEALTH ... .. ......... ...................... ... ... ... Crude Birth Rate (per thsand) 17.4 Populatlon per Physicfan 365 Crude Death Rate (per thousard) 9.9 Population per hospital bed 238 nfant MortaLity (per thousand) 23.8 DISTRI18TIN OF LAND O0DERSHIP X of farms below 5 ha.: 8.356 (1980) ACCESS TO PIPED WATER ACESSS TO ELECTRICITY ...................... ............................. X of population - urban 95.0 X of Population 87.0 rural 65.0 NUTRI T ION EDUCATION .......... ....... .... Adult literacy rate X 96.0 Calorie Intake as X of req irgients 98.0 Primery school enrolmrent 94.0 Per capita protein intake (gm/day) 79.1 GNP PER CAPITA IN 1991 2860 USS WIOSS DCESTIC PRCDUCT IN 1990 ANNUAL RATE OF GRTH (K, contant 1983 prIces) ........... ...................... ........ ............ ............................................... SNPesos X 1985-90 1990 ........ ........ ....... . ... .-.... ....... GDP at Market Prices 9624 100.0 3.5 0.9 Gross Da,estic Investment 1133 11.8 2.0 -2., Gross National Savings 1507 15.7 5.6 15.1 Gross Dorestlc Savings 1875 19.5 7.7 5.8 Exports of Goods & NFS 2610 27.1 5.4 6.5 lwports of Goods & NFS 1868 19.4 :.6 4.5 UPUT, LABDR AND PROUCTIVITY 1990 GOVERNAENT FINANCE Central Govenment ........................ ......................... .................. ......................... ........................... Value Added Labor Force (1988) (S/Btn.) X of GDP sP SOS X Ths X 1989 1989 19t4-89 ... ...... ........ ......... ........... ----- ...... ...... ....... Agriculture 1046.3 10.9 .. .. Current Revemues 753.6 15.9 16.1 inrdAtry 3314.2 34.4 .. .. Current Expenditures 806.6 17.0 17.1 Services 5263.2 54.7 .. .. Current Surptus -53.0 -1.1 -0.9 Total 9623.7 100.0 1754 100.0 Capital Expenditures 110.7 2.3 1.9 MONEY, CREDIT ard Prices 1985 1986 1987 1988 1989 1990 MERCOANDISE EXPORTS (AVERA8ES) ... ....... ........ . ..... .. ... ... .. ... . --.... .... .... .... ...........................- (Banking System) (mlllitn( of SNpesos outstading period) 1985-90 X Money ard Oussi Money 259.8 478.1 702.4 1369.8 2782.3 6013.5 ....... .... Bank Credit to Ptlbtic Sector 114.8 163.7 207.4 450.9 829.2 1606.8 WOOL 249 16.6 Bank Credit to Priv. Sector 264.6 416.5 615.6 1128.2 1904.5 3527.8 BEEF 202 13.5 Other Finarcial nst. 63.3 96.9 173.1 194.5 356 811.5 FISN 74 5.0 HIDES 115 7.7 BALANCE OF PAYMENTS 1980 1985 1987 1988 1989 1990 MANUFACTURES 426 28.4 ................... .... .... .... .... .-.. .... OTHER 435 29.0 Exports of Goods, NFS 1526 1253 1547 1763 1995 2120 TOTAL 1503 100.0 Imports of Goods, NFS 2144 1033 1405 1444 1501 1582 Resource Balance -618 220 142 319 494 538 EXTERNAL DEST, DECEr8ER 31, 1990 USS mtn. Net Factor Irmcoe -100 -351 -322 -331 -349 -322 .......................-......... ........ (interest payments) 169 366 358 354 337 379 PPG 3044 Net Trarsfers 2 .. .. .. 8 8 Non-Guaranteed 110 Current Account Batance -716 -131 -166 -12 153 224 Total Outstarding and Disbursed 3154 166 12 -153 -224 Direct Foreign Investment 289 .8 55 45 1 3 DEBT SERVICE RATIO FOR 1990 X Official Grant Aid 0 0 0 0 0 0 ---.------.-.---.---.--- Net MLT Borrowing 226 27 238 -30 83 -18 PPG 29.8 Disbjrsemwt 356 220 391 283 295 455 Non-Qaranteed 3.5 Anertization 130 193 153 313 212 473 Total Outstmding ard Disbursed 33.4 Other MLT (net) -112 40 -163 7 -37 25 Other Capital (net) 334 -134 231 251 -43 -268 IERD LENDING, (Dec. 31, 1990) USS min. Errors and Oumnssfios 90 261 -117 -257 -62 115 --.---.-.---.-------.--.-.---.- Change in Net Reserves -118 -66 -78 -4 -95 -81 Debt Outstardlng ane 3ishbrsed 359 DOJ, InciLding LndisbJrsed 724 EXCKANGE RATE(avg) 1980 1985 1987 1988 1989 1990 ........ ........... ..... .... . . .... . .... . . ... .. ... ....... .. ...... Official X-Rate (LCUs/USS) 9 101 2Z7 359 606 1171 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. URUGUAY: MACROECONOMIC ASSESSMENT Table of Contents Page No. EXECUTVE SUMMARY ................. i-ix INTRODUCTION .............. 1 I. SHORT-TERM MACROECONOMIC MANAGEMENT ISSUES .............. 3 A. The Lacalle Government's Policy Initiatives. 3 B. Recent Inflation and the Economy's Sensitivity to Inflationary Shocks. 8 C. The 1990-91 External SI-ck: The External Accounts and the Exchange Rate .16 D. Limits to the Effectiveness of Short-Term Macroeconomic Policy .26 II. FOLICIES FOR STRUCTURAL REFORM ........... ............ . 29 A. The Need for Structural Reform ............................ 29 B. Trade Liberalizaiion and Integration .......................... 31 C. Financial Sector Reform ................................. 32 D. Privatization ......................................... 39 E. External-Debt Reduction ................................. 41 F. Public Administration Reform .............................. 41 C. The Social Security Problem ............................... 44 H. Taxation . .......................................... 46 III. MACROECONOMIC PROSPECTSFOR THE MEDIUM TERM ............. 47 A. Tnvestment, Saving and Real GDP Growth, 1970-91 ................ 47 B. Constraints on Ecoaomic Growth in the 1990s .................... 54 ANNEX 1: SOURCES OF IMPROVEMENT IN THE PUBLIC SECTOR ACCOUNTS, 1989-91 ........................ 61 ANNEX 2: URUGUAY'S INFLATIONARY EXPERIENCE ............................................... 70 ANNEX 3: A FIXED EXCHANGE RATE REGIME .7................................................... 2 ANNEX 4: BACKWARD- AND FORWARD-LOOKING WAGE INDEXATION .................................. 75 ANNEX 5: URUGUAY'S MORTGAGE BANK (BHU) .................................... .... 78 STATISTICAL APPENDIX The repon was wdren by Paid Beckerman (lA4C0), based on missions to Untguay between August 27 and September 3J 1991 and updated by James Hanson (L44DR). Mission members Included Messrs. Carlos Rotdguez (consultant), Marcelo Selowsky (LCVP) and James Hanson (LJ4DR). Jaime Vazquez-Caro contdfbhted to the discussion of taxadon poUcy. Maria Cdssdna Ahnero.Sfochf and Miguel Mercado-Diaz provided research assistance. Messrs. James Hanson (LA 4DR). Henman Mssenbaun (L44CO) and Juan Gfral-Bosca (consultant) provided valuabk commntu. el ERUGUAY: MACROECOAOMIC ASSESSMENT EXECUTIVE SUMMARIY I. BACKGROUND i. Uruguay's macroeconomic performance has improved in most respects si.ace 1990. Real GDP growth was 1.9 percent in 1991 and is likely to be above 3.5 percent in 1992. These growth rates compare favorably with rates under 1 percent in 1989 and 1990. With population growth of about 0.5 percent, per capita GDP has increased, compared with virtual stagnation in 1989 and 1990. ii. Balance of payments performance was strong in 1991. The current account was in surplus for the third year running, although the surplus did decline somewhat compared to 1990. Tourism inflows were particularly strong in 1991. Merchandise exports declined somewhat, largely because of lower prices for key commodity exports, while imports increased, largely in the categories of intermediate and capital goods. Strong short-term capital inflows were the main factor in maintaining international reserve levels adequate--even though Uruguay largely self-financed its Brady debt-reduction transaction in February 1991. iii. The Government has managed an impressive improvement in the fiscal accounts, bringing the overall public-sector deficit from 7.4 percent in 1989 to virtual equilibrium in the first part of 1992. The authorities accomplished this mainly through vigorous tax measures but also by limiting public-sector wage adjustments and capital formation expenditures. Lower international and domestic interest rates and the "Brady" deal also helped to reduce public debt service. Because the fiscal improvement resulted from a combination of (i) lower external and domestic interest rates that may prove transitory and (ii) short-term tax measures, the fiscal improvement is somewhat precarious. In 1990 and again in 1991 the authorities proved themselves willing to raise tax rates rapidly to head off fiscal deterioration. However, further increases are likely to encounter strong political opposition and, in any case, probably would not be desirable from the standpoint of economic efficiency and international competitiveness. iv. The Government also has carried out some significant structural reforms. The "Brady" deal, transacted in February 1991, reduced the external debt burden substantially, and so qualifies as a structural reform. The Government has reduced tariffs and other external trade restrictions. The authorities have tightened their regulatory and policy control over the monetary and financial system and have taken various steps to make public financial institutions more efficient. The legislature has approved a law authorizing privatization of certain state assets and activities, and the Government will use this to reduce inefficient public production activities. v. Despite near fiscal balance, consumer prices rose about 80 percent over 1991. This inflation represents an improvement compared to the 1990 rate of nearly 130 percent, but is still excessive. The high inflation seems - ii - paradoxical in view of the fiscal improvement. A combination of two circumstances appears to explain the high inflation. First, Uruguay's lengthy inflation experiAnce has induced economic behavior patterns--including diminished money demand, extensive dollarizstion, and pervasive "indexation" practices--that magnify and maintain the efftcts of any inflationary shock. Second, in this context, a strong balance of payments constituted an external shock over 1990 and 1991. This shock, derived in large measure from the real effective appreciation of Argentina's currency and the financial inflows resulting from falling i.aternational interest rates, offset the stabilizing effects of tightened demand management over 1990 and 1991. The interaction of this external shock with a low level of monetization and robust indexation mechanisms largely explains why inflation has persisted at so high a rate. vi. Uruguay's circumstances limit the effectiveness of short-term macroeconomic policy: recurrent, day-to-day or month-to-month management of the exchange rate, monetary instruments, and discretionary fiscal policy (including public-sector wage and public-enterprise pricing policies)--for managing inflationary pressure. Relevant circumstances include: (i) the economy's small size (implying the kind of policy ineffectiveness described by the monetary approach to the balance of payments); (ii) inflation-induced behavior patterns; (iii) still-large public-sector external debt; and (iv) the continuing perception of the country as "risky". In addition, the Administration has only a minority in Parliament. The macroeconomy (and the public accounts) remain especially vulnerable to external developments. While the authorities have now brought the fiscal accounts into "balance", this achievement appears precarious, as noted above. In this sense the fiscal accounts cannot be considered firmly "under control". vii. Within these constraints, short-term policy management has, on the whole, been handled skillfully. In particular, the authorities raised taxes as necessary to maintain the fiscal balance. Monetary policy has been maintained reasonably tight, partly through a solid financial-reform process. Exchange-rate policy has been to allow some real appreciation and greater play for market forces (by widening the band around the central tendency) but to "lean into the wind" of the pressures arising from short-term capital inflows and the disturbances in the markets for goods and services arising in neighboring countries. On the whole, this has been managed skillfully. Of course some observers have argued for greater exchange rate flexibility, which would have meant reduced inflation and produced even greater real appreciation, while producers of tradeables have complained about the loss of competitiveness from the real appreciation that actually has occurred. viii. Public sector wage policy has been somewhat more questionable. The Government has maintained the practice of adjusting public-sector wages every four months. During 1990, inflation overtook real public-sector wages, and they were just over 9 percent lower on average than in 1989. In 1991, wage adjustments tended to follow the sawtooth pattern characteristic of the four-month adjustment cycle. Over the year, average real public sector wages remained at about the lower level reached in 1990. If wages had been adjusted according to anticipated inflation this would have reduced inflationary - iii - into 'ion to withdraw from wage-setting in the private sector, but in March 1992 announced a wage guideline for private contracts. ix. Public sector prices havc been used as a revenue generating mec.)anism. Although allowed to deteriorate somewhat in relative terms, they remain among the highest in the hemisphere, hurting Uruguay's competitiveness. The authorities began in late 1991 to make more frequent and differentiated concentrated adjustments in public sector prices; previously they tended to adjust public sector prices according to cost increases in the enterprises, which tended to maintain the public-service prices at higher-than international levels. x. The broad recommendation that follows is to continue and intensify the current short-term policy stance, to ensure that the Government does not contribute to inflationary presiure. At the same time, it must be recognized that short-term policy has only a narrow range of maneuver and is unlikely to reduce definitively inflation and macroeconomic instability. For example, precisely because wage policy is, in fact, a recurrent issue, prassure to set wages at a level to restore purchasing power lost to inflation over the preceding four months is persistent. The authorities would be well-advised to maintain the approach of setting wages based on their inflation targets. This would contribute to a tighter fiscal stance and reduced inflationary pressure. However, unless inflation is at sume point less than these targets, which probably requires additional, structural action, then real public sector wages will decline, reigniting political pressures for higher wages and leading to an exodus of the best civil servants. Public enterprise prices are another area with some limited room in which to maneuver. The authorities should monitor public enterprise costs carefully, and resist the tendency to use public service prices as a tax handle. However, if the deficit widens and inflationary pressure picks up, then it may be necessary to resort to a real increase in public sector prices. Monetary policy cannot be tightened without running the risk of increasing the interest rates paid by the public sector or attracting destabilizing external financial inflows, Tax increases have tended to be improvised, with a view to ease of collectibility rather than economic rationality, and in any case may be reaching limits imposed by competitiveness as well as politics. xi. Exchange rate policy must maintain a difficult balance between preserving international competitiveness and counteracting inflationary pressure. Fixing the exchange rate has been suggested as one approach to reducing inflation, but it has some costs. By fixing the rate, the authorities would give up an instrument--the exchange rate--that can be used to compensate for excessive domestic costs and "ratifying" inflation. From a long-term standpoint, this might reduce indexation problems and could increase Uruguay's status as a financial plaza. The difficulty is first that fixing the exchange rate probably would require a more definitive control of the public sector accounts than actually has been achieved, since it implies that the authorities could not issue money and would have to borrow in order to cover any deficit. Fixing the rate also might increase capital inflows and real appreciation initially, correspondingly decreasing the pressure for - iv - public sector accounts than actually has been achieved, since it implies that the authorities could not issue money and would have to borrow in order to cover any deficit. Fixing the rate also might increase capital inflows and real appreciation initially, correspondingly decreasing the pressure for adjustment but increasing the potential capital outflow and real fluctuations in the future. Another probLem woul.d be the choice of an initial rate, particularly if the Government chose to present the new exchange rate regime to Parliament. Third, and perhaps more important, given the large size arid erratic economic policies of its neighbors, there may be some risk in giving up a policy instrument that may serve as a safety valve. The force of this argument is reduced by the XIready high degree of informal dollarization in the financial sector (over 80 percent of deposits are in dollars) but it continues to have *levance for goods and labor markets, where prices usually are fixed in local currency. xii. Since the effectiveness of and room for maneuver in short-term policy is limited, structural reforms offer the best hope of permanently relieving inflationary pressure and ensuring international competitiveness. These reforms would have longer-term, persistent consequences and, in principle, could be carried out fairly rapidly. xiii. The authorities already have either carried out or secured legislative authorization for reforms in areas such as trade liberalization and integration, the monetary-financial sphere and privatization of state enterprise activities. The Government could deepen and widen the present reform efforts in these areas. xiv. The authorities already have liberalized the trade regime significantly. They have gradually liberalized the tariff schedule from 40- 35-30-20-10 to 24-17-12, and then 20-15-10-6 as of January 1, 1993. In addition, Uruguay gradually has been cutting its tariffs vis-&-vis its MERCOSUR partners, Argentina, Brazil, and Paraguay. The present authorities also have chipped away at Uruguay's "reference-price" system, a long-standing import barrier. Finally, the Government ended trade regulations requiring compensatory exports and minimum domestic content in automobile assembly. These trade liberalizing measures should be intensified, including switching from reference prices to a more transparent, less protectionist approach to anti-dumping policy. xv. The Government is carrying out a gradual but ambitious reform of its monetary and financial system, with the support of the World Bank's Second Structural Adjustment Loan and an IDB Financial Sector Adjustment Loan. The Central Bank is asserting its authority to supervise and regulate the Bank of the Republic of Uruguay (BROU) and the Mortgage Bank (BHU). The Government is fostering a Financial Intermediation Law to spell out the Central Bank's powers and responsibilities and to ensure that the financial system is adequately supervised and capitalized. Over the past year the authorities have made several important reforms in reserve management and other aspects of monetary policy. Reserve requirements have been imposed on the BROU in conformity with those applied to other commercial banks. The BROU is to set v - practices and interest-rate reductions originally intended to relieve mortgage loan payments. The authorities would do well to downsize the BHU, thereby permitting private financial markets to take on some of the housing finance activity now e.fectively monopolized by the BHU. xvi. The present Government privatized one of the three insolvent banks taken over by the state in the mid-1980s. Of the remaining two, one--Banco Caja Obrera--has been recapitalized, and appears ready for sale. The other-- Banco Pan de Azucar--needs recapitalization and internal restructuring. xvii. The authorities plan to sell a minority stake in the sta+- telephone company (ANTEL) to allcw private power generation to be .L.. to the national grid, to privatize the national airline, and to permit private contractors to handle some port services. xviii. The aspect of the economic structure the Government has not thus far adequately addressed is the size and inefficiency of "general government", particularly the public administration and social security system. The social security imbalance, financed out of general revenues, is Uruguay's most urgent macroeconomic problem. The Government presented a social security reform proposal to the legislature, but it was defeated in May 1992; a new, less ambitious reform proposal is being developed. The proposed reform would have reduced contribution evasion and limited pensions--areas in which significant improvement is needed. Even more desirable would be a deeper reform that forces the public sector to pay the full cost of its retirees (the private- sector systems are roughly in equilibrium), a burden of thei public sector that largely goes unrecognized. The ultimate goal would be a privatized Chilean- style system of individual capitalized accounts. xix. Uruguay bears the burden of its public sector in such forms as high taxes, high interest rates, the inflation tax, and the "pass-through" of these costs to final output prices; ultimately this resulted in lower savings accumulation, reduced capital formation, and diminished productive efficiency and international competitiveness. The authorities would be well-advised to develop a program to downsize and focus the structure of public administration, not only to relieve the precariousness of the public finances, but to make the state less burdensome and more effective. Such a reform would also enable the authorities to develop a broad tax reform, both to reduce the tax burden and to make tax incidence more equitable and more efficient. xx. Uruguay's economic performance over the past three decades has fallen short of its potential, in large measure because saving flows and capital formation have been inadequate. GDP grew somewhat faster than trend in the late 1970s and invested a larger proportion of GDP, largely because of a strorg foreign saving inflow. Unfortunately, this was associated with heavy external-debt accumulation rather than equity investments. As a result, in the mid-1980s Uruguay underwent a wrenching recession as foreign saving inflows turned into dissaving outflows and Uruguay nad to service its interest obligations. Although domestic savings, and in particular private savings, - Vi- slowly increased over the latter part of the 1980i, gross fixed investment remained low. xxi. A "macroeconomic consistency" analysis based on World Bank. projections for international prices and interest rates ouggests that Uruguay could grow at a modest 2 percent per annum without encountering balance-of- payments constraints, and with some reduction in domestic debt and with no deterioration in per capita private consumption. The current-account deficit is expected to be below 1 percent of GDP through 1998, ana thes external debt- GDP ratio should decline. Even with an "adverse shock", i.e., with international oil prices and interest rates higher than the base-line projection, Urtaguay can still avoid balance-of-payments constraints, although the current account deficit would be somewhat larger and international reserves somewhat lower in terms of months of imports of goods and non-factor services. II. SUMMARY OF RECOMMENDATIONS xxii. The broad recommendation regarding short-term. macroeconomic Policy is that although prudent fiscal, monetary, exchange rate, wage rate, and public sector pricing policies are essential, they cannot be expected, by themselves, to reduce inflat;.on to tolerable levels in the near future, without a significant real decline in the Uruguay economy. Structural measureg are essential to reduce inflation and increase growth. xxiii. Prudent macroeconomic policies entail, first of all, that fiscal policy should at least maintain the overall public sector accounts in balance, and, if possible, achieve a surplus. This would reduce the inflationary pressure from this source. Achieving a surplus also would be desirable to retire part of the outstanding public debt stock, both external and domestic. The debt still is large relative to GDP and therefore remains a potential destabilizing influence. Because the overall deficit is subject to variability from a number of sources, most notably volatile external and domestic interest rates, the authorities must remain prepared to use short- term "tax handles" to maintain their control over the public deficit--even though it is clear that such tax handlee are damaging to competitiveness and efficiency. However, over the long run, it would be desirable to reduce reliance on these tax handles. xxiv. Monetary Policv must remai-n relatively restrictive, but not so restrictive as to generate excessive .:iflows of external financial resources. The basic targets for the next 12 months are set by the IMF stand-by. However, if reserve inflows begin to substantially exceed IMF targets, then interest rates should be allowed to decline and intervention in the exchange rate reduced, which would tend to appreciate the rate. Attempts to sterilize reserve inflows are likely to encourage further inflows and would increase the Central Bank's quasi-fiscal deficit. Hence, the Central Bank should use great care in issuing debt that would add to this deficit, as it compromises the future independence of monetary policy and the ability to reduce inflation. - Vdi - xxv. Tho authorities have little choice but to manaqe the exchance rate generally As they hav& in the past, leaning against ths wind somewhat" and so permitting some inflationary pressure, but maintaining reasornable conditions of competitiveness. Fixing the exchange rate would reduce the inflation rate, but carries with it large ricks, including the loss of the exchange rate as a policy instrument to absorb external shocks for Uruguay's larger neighbors and to restore international competitiveness, at least transitorily, should domestic costs rise excessively in dollar terms. It also would run the risk of encouraging additional capital inflows that might later reverse themselves, thereby adding to the economy's real instability. There is also the non- trivial issue of fixing the initial exchange rate. xxvi. In oublic-sector waae adiustmentr a forward-looking approach to wage adjustment would be less inflationary than a backward-lookinr ore. The authorities would be advised to resist the temptation to intervene in private sector wage determination. xxvii. Similarly, the authorities would be well-advised to take a forward-looking approach in setting vublic-service Dricee, and make every effort to control public enterprise costs. However, it may prove necessary to use public sector prices as a tax handle co close the fiscal gap. xxviii. The foregoing recommendations reflect the view that short-term policy ib unlikely to succeed in permanently stabilizing the macroeconomy by itself. The reality is that monetary, exchange-rate, taxation, and wage- adjustment policies are limited because of: (i) the economy's narrow monetary and financial base relative to the shocks to which it remains exposed; and (il) the robust inflation-feedback mechanisms in place, as well as by the Administration's lack of a parliamentary majority. These factors imply that economic agents will remain uncertain about the future course and consequences of short-term policy. Even if the authorities succeed in consistently holding the line on short-term policy every time, questions always will arise about the next occasion. Accordingly, the authorities' best hope for lasting stabilization is to continue prudent short-term policy but concentrate their efforts on deepening their structural reforms. The recommendations that follow deal more specifically with different aspects of structural reform policy. xxix. The authorities are strongly advised to maintain the pace of the present trade liberalization program. In particular, the redu(tions in tariff levels are essential to help set the appropriate price and cost pressures on domestic enterprise to control c>sts and to rostructure their enterprises for a more open economy. The autho.ities are strongly advised to phase out the reference-price system for tariffs as rapidly as possible, and to replace it, if deemed desirable, with a genuine anti-dumping regime. xxx. The authorities have carried out profound financial-sector reforms, encompassing mechanisms of monetary control, bank supervision, the "administered banks", the Central Bank, the Bank of the Republic, and the Mortgage Bank, under the Wor..d Bank's Structural Adjustment Loans and the - viii - ID3'e Financial Sector Adjustment Lran. The Government is committed to maintaining and deepening these reforms. As it does so, it would be well- advised to develop further reforms to encourage the private sector's participation in commercial banking and housing finance. The administered barks should be reprivatized as rapidly as possible, to increase the competition in domestic banking services. In raforming the LROU and the BHU, the authorities should be concerned not only with strengthening their finances, but with ensuring that they do not discourage private banks from carrying on profitable credit and housing finance activities. Restrictions on commercial bank activities in these areas--such as the BHU monopoly on issue of housing bonds--need to be identified and removed. In general, recent legislation requiring banks to refinance certain old agricultural credit tends to discourage private bank lending, particularly to agriculture. The Government must identify and, to the extent possibl-, relieve such "legal" disincentives to private bank lending. Tax and reg_latory frameworks need to be evaluated in terms of their impact on the country's role, as a financial center. xxxi. The authorities must carefully implement the nrivatization program authorized by recent legislation for the telephone company, the airline, electricity generation services, and port services to ensure that they yield the rnaximum benefit in reduced cost. The cost reduction must ultimately be passed along to users of these services. Uruguay has maintained zilatively strong public enterprise finances, but hLa done so to a large degree through' relatively high prices that cover relatively high costs. Cost control is essential to permit lower public service prices, and stronger international competitiveness. Success in implementing the present privatization program, supported by the World Bank's Public Enterprise Reform Loan, should enable the Government to extend public enterprise reform to the state combustibles monopoly and to other enterprises. xxxii. The authorities need to develop a significant public administration reform orocram. It is essential that the Government lead Uruguay generally to decide zlearly what functions the Government should carry on, and then move to restructure the public administration to carry on these activities as efficiently as possible. Until it does so, the authorities could develop interim programs to improve public sector efficiency. These could include a carefully targeted early retirement program, a deeper deregulation and debureaucratization effort, improvements in budget monitoring, and more rational use of non-personal public sector resources (including office space and real estate). The authorities should consider using funds available under the World Bank's Second Structural Adjustment Loan to deepen public administration reform efforts. xxxiii. Social security reform is a high (arguably the highest) priority area for structural reform. The Government would be well-advised to return to the legislature to seek approval of something close to the social-security reform legislation rejected in May 1992. It is particularly important to reduce contribution evasion and encourage later retirement. A deeper reform - ix - on the lines of the Ch.lean model, to permit private firms to provide social security benefits, would be desirable ultimately. xxxiv. The authorities have continued to strengthen tax administration, and it is rezommended that they continue this effort. Over the coming months, the authorities will have little choice but to remain prepared to apply the "tax handles" they have applied to control the budget deficit. But, with a v4.ew to the longer-term development of the economy, the Government would be well-advised to develop a thorough-going tax reform. The objectives would be, first, to adjust the tax structure to yield the revenue flow appropriate for the revamped public administration (para. 29), and, second, to ensure that the tax system is optimal from the point of view of resource allocation. URUGUAY: MACROECONOMIC ASSESSMENT INTRODUCTION 1. This assessment is organized in three parts. Part I covers the principal short-term macroeconomic issues. Section A briefly reviews the principal policy activities since 1990, including fiscal policy, the "Brady" deal, trade liberalization, and monetary and financial reform. Sections B and C turn to the question of why inflation has persisted despite the fiscal improvement. Section B argues that Uruguay's lengthy inflation experience has induced economic behavior patterns--including diminished money demand, extensive dollarization, and "indexation" practices--that magnify and maintain the effects of any inflationary shock. Section C argues that an external shock--deriving in part from current Argentine economic policy--has offset the stabilizing effects of tightened demand management over 1990 and 1991. 2. Section D then argues that Uruguay's economic circumstances limit the effectiveness of short-term macroeconomic policy--defined as recurrent, day-to-day or month-to-month management of the exchange rate, monetary instruments, and discretionary fiscal policy (including public-sector wage policy)--for managing inflationary pressure. Relevant circumstances include: (i) the economy's small size (implying the kinds of policy ineffectiveness described by the monetary approach to the balance of payments); (ii) inflation-induced behavior patterns; (iii) heavy public-sector external debt; and (iv) the continuing perception that the country remains "risky". In particular, the macroeconomy (and the public accounts) remain vulnerable to external developments. While the authorities have now brought the fiscal accounts into "balance", this achievement remains--and is perceived to remain--precarious. In this sense the fiscal accounts are not firmly "under control". 3. The broad recommendation that follows is that, while the authorities must maintain a prudent short-term policy stance, they cannot expect vigorous short-term policies to resolve macroeconomic instability indefinitely. Even apart from the unemployment and the political opposition they would generate, strong short-term measures are likely to have side effects that would either blunt their anti-inflationary effectiveness or entail a high cost in productive competitiveness. The Government should therefore concentrate its efforts on making structural changes in the economy that will both reduce the underlying inflation and increase the economy's growth. These measures will require a major political effort on the part of the Government, as they entail losses to some well entrenched interests and some risk, to which the Uruguayan polity has displayed considerable aversion. 4. Part II considers longer-term structural issues. Since the effectiveness of short-term policy is limited, Section A argues that longer- term structural reforms offer the best hope for permanently relieving inflationary pressure. (The reforms in question are not "longer-term", in the sense that they take a long time to carry out, but rather that their consequences are lasting. Some of the structural reforms recommended could, in principle, be carried out from one day to the next.) 5. The authorities have either carried out or secured legislative authorization for important structural reforms, particularly in such areas as trade liberalization and integration (Section B), the monetary-financial sphere (Section C), and privatization (Section D). The Government should deepen and widen the present reform efforts in these areas (and assuredly would if political constraints permitted). Most of its efforts in these areas have been well-focused. The main aspect of the economic structure the Government has not adequately addressed is the size and inefficiency of "general government", particularly the public administration (Section E) and the social security system (Section F). Uruguay has an overdimensioned public sector for which it pays in the form of high taxes, the inflation tax, high public service prices, high interest rates and the "pass-through" of these costs to final output prices: ultimately, it also pays in the form of lower savings accumulation, reduced capital formation, and diminished productive efficiency and international competitiveness. If the Government implemented a program to reduce and focus the public sector, not only would it relieve the precariousness of the public finances, it would place itself in a position to develop a broad tax reform (Section G), both to reduce the tax burden and to make tax incidence more equitable and more efficient. 6. Part III briefly reviews Uruguay's longer-term economic performance. Section III. A. reviews GDP growth, gross fixed investment, and savings performance over the past three decades. Section B briefly discusses a "macroeconomic consistency" analysis to show that Uruguay can be expected to achieve reasonable real GDP growth over the coming decade without encountering serious balance-of-payments constraints, with some reduction in domestic debt, and with no deterioration in per capita private consumption. I . SHORT-TERM MACROECONOMIC MANAGEMENT ISSUES A. The Lacalle Government's Policy Initiatives 7. The Lacalle Government's short-term maczoeconomic policy initiatives thus far have encompassed: (i) fiscal tightening, mainly higher taxes, and a general containment of public-sector wage levels; and (ii) an IMF stand-by program in December 1990. In terms of structural reforms the Government has carried out: (i) a "Brady" debt reduction deal (transacted in February 1991), which reduced the fiscal deficit and stabilized interest payments; (ii) trade liberalization; and (iii) extensive monetary and financial reforms; it also successfully persuaded the legislature to authorize a measure of privatization. The Government developed a social security reform proposal, but the legislature rejected it in May 1992. 8. Fiscal Tiahtening. When it took office in March 1990, the Lacalle Administrati.on inherited a swelling public sector deficit. The overall deficit (comprising the central administration, social security system, public enterprises, Central Bank, and losses of insolvent commercial banks that had been placed under public management in the mid-1980s) had widened to 7.4 percent of GDP in 1989 from 4.5 percent in 1988. This was partly the consequence of drought conditions that reduced tax and public enterprise revenues, as well as election-year constraints on fiscal policy. Moreover, a November 1989 plebiscite approved a constitutional change requiring that social-security benefits be adjusted for inflation at the same pace as public sector wages. This added about 1-2 percent of GDP to prospective social security deficits. 9. The new economic team regarded the deficit as an emergency, and acted accordingly. The March 1990 "Fiscal Adjustment Law" raised the basic value-added tax (VAT) rate (applicable to about 87 percent of the tax base) from 21 to 22 percent, beginning April 1990, for a period of 12 months. The Government specifically linked this increase to the need to provide financing for the social security inflation adjustment mandated by the November 1989 plebiscite. The same law also temporarily raised the tax rates on business income (IRIC) and on personal remuneration (IRP) from 30 to 40 percent. Toward the end of 1990, the authorities announced that the IRP surtax would be extended past the scheduled termination date, and would decline gradually to 30 percent over a schedule extending into 1992. The VAT increase has been extended several times, and remains in force. 10. On the expenditure side, the Government allowed inflation to erode the real public sector wage bill over the balance of 1990. The data confirm an unmistakable drop during 1990 in real public sector wage levels (see Figure 1 and Statistical Appendix Table 9G). The Government also instituted a voluntary retirement program, under which any public employee could leave his or her position with 12 months, salary as severance pay. An estimated 20,000 workers out of about 268,000 took advantage of the offer. During 1991 their severance pay increased the wage bill, but the benefits of the program are now being felt during 1992. Figure 1 URUGUAY: REAL WAGES IN THE PUBLIC AND PRIVATE SECTORS Dec 1984 = 100 150- 1240 L---- .-.---- -. ' ------------ ---- - --- . 110t2-- ............. 10 0.-. . . .......... - - .-.--------------I..-L 100 -.-.- ...--.-.-.-.----------------.----------. .-...--.... Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 Source: Central Bank of Uruguay -5- 11. Toward the end of 1991, however, notwithstanding the continued fiscal stringency, the Government feared its fiscal performance could deteriorate during 1992 if it left its policy stance unaltered and if it maintained its program of phasing out temporary tax increases. Over 1991 each public sector wage increase tended to produce higher real-wage values in the months immediately following adjustment, although inflation subsequently produced sharp declines (so that the real-wage level for the year remained about the same as its 1990 average). Accordingly, at the end of December 1991, the Government announced a set of detailed decrees to solidify tax revenues. The measures included elimination of virtually all tax exemptions for industrial investment, an increase in the assets tax, and modification of the way in which the income tax was calculated for industry and commerce. The authorities also announced a policy of reducing central government and public enterprises' current expenditures in 1992 by 10 percent in real terms. To improve the social security system's finances, the employers' contribution was increased from 4 to 5 percent. 12. The overall public sector deficit improved from 7.4 percent of GDP in 1989 to 3.6 percent in 1990 and then to 1.1 percent in 1991. Annex 1 describes the sources of improvement in the public accounts in greater detail. The bulk of the improvement--about 4.8 percentage points of GDP--came through higher government revenue. General government non-interest expenditure remained virtually unchanged at about 26 percent of GDP. Public enterprise performance improved by about one percentage point of GDP. The remainder of the improvement came through lower domestic and external interest charges, which reduced the deficits of both the non-financial and financial public sectors: non-financial public sector interest charges fell from 3 percent of GDP in 1989 and 1990 to 2.3 percent of GDP in 1991; the Central Bank's external interest bill fell from 2.6 percent of GDP in 1989 to 2.4 percent in 1990 and 1.6 percent of GDP in 1991. The Central Bank's interest expenditure on Monetary Regulation Bills fell from 1.4 percent of GDP in 1990 to 0.5 percent in 1991. The financial public sector accounts improved by about 1.3 percentage points of GDP between 1990 and 1991. 13. IMF Stand-By ProrTram. In December 1990, the IMF Board approved a 15 month IMF stand-by program, with SDR 94.8 million programmed over six quarterly tranches. The program had eight performance targets: ceilings on (i) the combined public sector deficit; (ii) the non-financial public sector deficit; and (iii) the Central Bank's net domestic assets; and (iv) on the increase in the foreign-currency deposits of the larne publicly-owned commercial bank, the Bank of the Republic (BROU); (v) minimum increase in Central Bank net international reserves; and ceilings on increases in public and publicly-guaranteed external debt with maturities of (vi) up to 12 years; (vii) less than 5 five years; and (viii) less than one year. The program was premised on maintenance of fiscal improvement, allowing for slight deterioration owing to lower taxes on public enterprise revenues and increased transfers to the social security system, as required by the November 1989 plebiscite. Some balance-of-payments deterioration was anticipated for 1991, mainly because of weaker foreign demand and lower prices for key export products. Two key aspects of the program were, first, that the fiscal tightening, monetary stringency, and reduced external demand would permit the authorities to hold inflation w'thin 30 percent over 1991; and, second, that -6- public-cector wages would henceforth be set on "forward-" rather than "backward-looking" indexation formulas. That is, rather than set public-sector wages so as to compensate for purchasing power lost over the preceding four-month cycle, the Government's Letter of Intent promised to set them according to the declining inflation anticipated over the coming four-month cycle. (The wage-indexation issue is discussed in Section B below.) 14. Uruguay sought the IMF program largely because commercial bank creditors insisted on it for debt reduction. In addition to the financing to be provided by IMF set-asides, the program also would provide a basis for participation by the World Bank, the IDB, and the commercial banks. The initial SDR 9 million tranche was drawn immediately following Board approval. During 1991, Uruguay missed some of the performance targets, and the IMF allowed no further drawings because it could not reach agreement with the authorities on measures to reduce the inflation rate. 15. Toward the end of 1991, the IMF and the Government agreed to negotiate a new stand-by program. The new program was developed and negotiated during the first four months of 1992, and was approved by the IMF Board on July 1. Its key programming assumption is an inflation rate of 50 percent over 1992, which implies some decrease from the price increase that occurred January through June (28.3 percent). The essential performance targets are an overall public sector deficit (including the Mortgage Bank deficit) of 1.2 percent of GDP, with international reserves assumed to increase by US$150 million over the year. 16. External Debt Reduction. Toward the end of 1990, Uruguay negoti- ated a Brady Plan debt reduction deal with its commercial bank creditors, and the transaction was executed on February 19, 1991. The deal covered US$1.61 billion in debt outstanding at the end of 1990. Each commercial bank selected one of three options: (i) US$628 million was retired by Uruguay at 56 cents per dollar, i.e., for US$352 million; (ii) US$535 million was con- verted into long-term par bonds yielding fixed annual interest of 6.75 percent, which would henceforth be excluded from any "new-money" basis; and (iii) the remaining US$447 million remained as contracted, and would form the basis for whatever new money in any future concerted financing deals. The debt repurchase price was just above the 50-52 cents prevailing in the second- ary market for Uruguayan debt. The par bond has a 30 year term, with a single amortization to be made at the end of the term. The bond amortization was collateralized with US Treasury zero-coupon bonds purchased by Uruguay's Cen- tral Bank for US$57 million. The interest payments were partially collateralized on a rolling 18-month basis, with bonds or cash pledges; the initial collateral purchase cost the Central Bank US$53 million. The bond also promised supplementary semiannual payments beginr4ng in 1996 if a terms-of-trade index (based on the export prices of rive, wool, and beef and the import price of petroleum) exceeded its June 1988-June 1990 value by 10 percent. Banks selecting the third option provided 20 percent of the total value (US$89 million) in new money with the conversion transaction. 17. The Central Bank spent a total of US$462 million in liquid reserves--US$352 million for the debt repurchase, US$57 million for the - 7 - principal collateral, and US$53 million for the interest collateral. In addition to the new money of US$89 million, Uruguay expected further financing of about US$34 million in set-asides from the IMF stand-by negotiated in December 1990, a World Bank DDSR loan of US$65 million, and approximately US$37.5 million from the IDB as a set-aside under a financial-sector adjustment loan. The total financing of US$224 million was therefore less than half the total amount Uruguay spent in liquid reserves on the transac- tion. Moreover, since Uruguay could not agree with the IMF on reprogramming of its stand-by program after the initial December 1990 drawing, it received no set-asides under this program. The July 1992 stand-by agreement with the IMF included no set-asides. The World Bank DDSR loan was disbursed after the July 1992 drawing under the stand-by, however. 18. Trade Liberalization. The Lacalle Government has undertaken substantial further trade liberalization. It inherited a tariff schedule with rates of 40, 35, 30, 20, and 10 percent, with the lower rates generally applicable to intermediate and capital goods and the higher rates generally applicable to final products, so that the schedule provided considerable effective protection. In April 1990, the Government changed the rate structure to 40, 35, 25, and 15 percent, with the 15 percent rate applying to the bulk of intermediate goods, the largest import item. In addition, the Government temporarily liberalized capital goods imports, exempting them from all tariffs through December 1991 for industrial equipment and through June 1992 for agricultural equipment. At the same time the Government announced a further reduction of rates to 30, 20 and 10 percent for Septem- ber 1991. The Government kept to these scheduled changes, despite political pressure to maintain the 15 percent rate for purposes of tax income and to prolong protection to affected industries. The Government continued its tariff reduction by introducing a tariff schedule of 24, 17, and 12 percent on April 1, 1992, and a further reduction to 20, 15, 10 and 6 percent on January 1, 1993. 19. The Government also has chipped away at Uruguay's principal non-tariff barrier, the list of "reference prices" and minimum import prices on which tariff rates are applied. When a good subject to a reference price is imported, the tariff is computed on the basis of the reference price; when a good subject to a minimum import price is imported, not only is its tariff computed on the basis of the price, but the importer must also pay the difference between the minimum import price and the good's CIF price. Reference and minimum prices are set by the Ministry of Economy and Finance at six-month intervals on the advice of commissions. The Government characterizes the system as an anti-dumping device directed mainly at Brazil: Uruguayan producers claim that Brazil's subsidies and its parallel exchange-rate system facilitate what amount to dumping practices. Brazil's parallel exchange rate system and surrender requirements may encourage Brazilian exporters to under-invoice, but the Uruguayan authorities say specifically that the reference-price system is not intended to address this problem. Nevertheless, the reference prices incorporate some protection. During 1991 the Government substantially liberalized the system: between harch and September 1991, of 221 reference prices, it reduced 93 and eliminated 44; of 55 minimum import prices, it reduced 12, eliminated 6, and converted 8 to reference prices. -8- 20. Comparisons of Uruguay's reference prices with price quotes for corresponding products available in New York (made in October and November 1991) are mixed, with price quotes both above and below the Uruguayan levels. Problems of product definition made it difficult to obtain quotes for certain sectors and impossible in others, notably textiles. With the special exceLion of raw sugar, reference prices for merchandise sold in commodity markets appeared to be below the prevailing market price. Chemical prices presented a mixed picture. Certain reference prices for paper products were well above the price quotes. Most reference prices for steel and pipe products were below the price quotes, with the exception of seamlesG pipes for condensers, boilers, and heat exchangers. 21. The authorities have also reduced tariffs and exceptions for MERCOSUR trade, as required by the treaty signed in Asuncion in March 1991, to create a common market among Argentina, Brazil, Paraguay, and Uruguay. Uruguay had reduced its tariffs vie jA-vis its MERCOSUR partners by 10 percentage points with the signing of the treaty. On January 1, 1992, it lowered them another 10 percent. It is scheduled to lower them by 20 percentage points at the end of 1992, 1993, and 1994, and then remove them entirely by the end of 1995. 22. The Government announced that during 1992 it would end the distorting trade regime applying to Uruguay's automobile assembly industry, which comprises 11 foreign-owned plants producing only about 12,000 vehicles a year. Interim regulations took effect beginning January 1, 1992. Before that date, automobile imports had been subject to "compensatory exports" of 70 percent of the CIF value imported; the minimum percentage of domestic manufacture that had to be exported was 50 porcent; and the minimum domestic content in assembled automobiles was 25 percent. The compensatory-exports requirement wras reduced to 42 percent, the percentage of domestic manufacture that must be exported has been reduced to 25 percent, and the domestic-content requirement has been reduced to 17.5 percent. After July 1, 1992, compensa- tory-export and domestic-content requirements were eliminated, yet vehicle imports are still not entirely free. B. Recent Inflation and the Economy's Sensitivity to Inflationary Shocks 23. Recent Inflationary ExDerience. Although Uruguay has not experienced hyperinflationary episodes as severe as its neighbors, it has nevertheless had monthly inflation rates on the order of 3-6 percent for the past two decades. Annex 2 provides a background discussion of Uruguay's inflationary experience up to 1990. Over 1990 consumer prices rose approxi- mately 130 percent, compared with just under 90 percent over 1989. Inflation peaked at 15.6 percent in September 1990, when the world oil price surge associated with the Gulf crisis combined with a round of wage and public-ser- vice price increases. Over the following seven months inflation declined, apparently in response to the Lacalle Government's fiscal tightening. From January through April 1991 inflation ran at an annualized 77 percent rate, compared with 150 percent from September through December 1990, despite a January public-sector wage increase of about 22 percent. In May 1991, how- ever, consumer prices surged 8.7 percent after that month's public sector wage -9- adjustment and sharp increases in public service prices. Inflation eased in June and July to 4.3 and 4.4 percent, but then took ¬her turn for the worse in August, reaching 6.3 percent on account of inflation-triggered private sector wage increases, increases in public transport fares, and seasonal food price rises. Following the 20-percent public-sector wage increases early in September, concumer prices rose 6.5 percent in that month, then 3.7, 4.7, and 3.1 percent in the last three months of the year. For 1991 ar a whole the price level rose by just over 80 percent. For the first six months of 1992, consumer p.!Lces have risen at monthly rates of 5.2, 2.4, 6.5, 4.1, 4.6, and 2.6 percent, for an accumulated total of 28.3 percent. 24. The coexistence of fiscal balance and 80-percent inflation seems paradoxical. The sensitivity of the economy to inflationary shocks is part of the reason why inflation persists despite substantial fiscal adjustment. Uruguay's lengthy inflation experience has induced economic behavior patterns that have tended to make the economy more sensitive to inflatiornary shocks. Inflation-induced behavior patterns, including diminished money demand, dollarization, the various kinds of behavior loosely described as "indexation" (including wage indexation, public sector price adjustment, and the crawling- peg exchange rate), taken together imply that any inflationary shock is likely to have larger, longer-lasting inflationary consequences. An additional reason inflationary pressure is sometimes "bottled up" in Uruguay is that import barriers have prevented ir.flation from being vented externally. The other part of the reason is the recent inflationary shocks themselves, which were mainly external; these are discussed below. 25. Diminished Demand for Peso Assets. As in other high-inflation economies, Uruguay's willingness to hold its own currency has diminished steadily. In 1985, total peso liquid-denominated instruments (liquidity) averaged 18.9 percent of GDP, M2 averaged 17.1 percent, and Ml 8 percent of GDP. In 1990 total Deso liquid instruments averaged 12.6 percent of GDP; M2 averaged 11.2 percent, and Ml 4.5 percent of GDP. (See Table 1 and Figure 2.) Diminished money demand implies that any given increase in 2eso creation increases that stock proportionally more, and therefore has a larger inflationary effect--or, more precisely, a Larger depreciating effect on the peso. A million pesos of money creation--whether it results from financing the public sector, commercial banks, or from foreign-exchange purchases--is a proportionally larger increase in the money stock if the original money stock is 10 million pesos rather than a 100 million oesos. 26. Informal Dollarization. The decline in peso money demand has been accompanied by a steady increase in domastic dollar-denominated liquid instruments: dollar liquidity rose as a percentage of GDP from 75.1 percent to 83.8 percent in 1990. Unlike peso instruments, virtually all of which may reasonably be assumed to be held by Uruguayan residents, a large--but unfortunately unknown--proportion of the dollar-denominated instruments is held by foreigners, notably Argentines, who routinely maintain deposits in Uruguayan banks. Nevertheless, it is clear that Uruguayan residents have come increasingly to hold dollars and dollar-denominated instruments, and to use these in transactions. TABLE 1: URUGUAY: FINANCIAL AGGREGATES (PERCENT OF GDP) Monetary Narrow Broad Peso Total base aggregate aggregate liquidity liquidity (MO) (Ml) (M2) 1985 8.0 5.9 17.1 18.9 75.0 1986 7.7 6.1 16.8 18.9 76.3 1987 7.3 5.4 14.2 16.4 69.8 1988 8.2 5.3 14.2 16.0 77.4 A 1989 7.2 4.9 13.1 14.7 88.2 1990 4.5 4.6 11.1 12.5 95.7 1991 4.1 4.7 \1 11.3 \1 12.0 \1 NA Data source: Central Bank of Uruguay. Note: \1 preliminaryr, based on data until Nov. 91 - 11 - Figure 2a URUGUAY: CURRENCY COMPOSITION (OF LIQUIDITY STOCKS) US$ Billion 8.0 - .. _.....-... 2.0 0.0 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 IONabonal Currency MfForeignF Currency 1 ' Source: Central Bank of Uruguay Figure 2b URUGUAY: MONEY SUPPLY (M2) US$ Billion 1.2 0.6 0.2 0.0 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 I-M1 -MM Source: Central Bank of Uruguay - 12 - 27. Because dollars have become a circulating-transaction medium, increases in the circulating dollar stock have inflationary consequences. That is, dollars need not be converted into pesos to generate inflationary pressure. Indeed, over 1990 and 1991, the annual inflation rate measured in dollars at the market exchange rate was 15-18 percent. This is an indicator of the extent of the external shock, discussed below; it is about the same rate as Argen:ina since March 1991. 28. Part of the reason demand for Pesos rc4lains low is that expecta- tions and uncertainty of future Peso inflation rates continue to be influenced by the view 'hat the fiscal achievement is precarious--that the fiscal ac- counts could deteriorate sharply and rapidly and produce additional infla- tionary pressure. This view in turn continues to diminish the willingness of economic agents to hold pesos and so expose themselves to the inflation tax on Pesos. Consistently strong fiscal performance would be necessary to reconstitute confidence and increase demand for pesos. 29. Never-heless, the processes of diminishing money demand and informal dollarization are probably irreversible. Once Uruguayan residents learned to use dollars and dollar-denominated instruments, and once commercial banks and other financial institutions met the demand for dollar deposits, the cost to each individual of using dollars diminished sharply. Since the availability of dollars and overseas dollar holdings has increased over the 1980s, the economy has developed a "base" for a dollarized economy. Even if the ceso inflation rate fell to and remained at international levels, Uruguayan residents would have little incentive to substantially increase their peso holdings. While the authorities would do well to remove unnecessary disincentives to holding Pesos instead of dollars (such as differential bank-reserve ratins favoring dollars), policies to promote the Reso would probably be futile. In particular, forcing higher interest rates on Peso deposits to increase their attractiveness only would add unnecessarily to public or private interest costs. 30. The opposite approach is sometimes offered as an option for Uruguay: accepting dollarization by a rapid move to a fixed exchange rate, either in the "weak" version now in effect in Argentina--a fixed exchange rate with the monetary base fully backed by foreign exchange; or in the "strong" version as in Panama--free circulation of the dollar with (virtually) no local currency. Either way, a lower inflation rate would result (particularly if it were accompanied by legal deindexation). The real exchange rate would tend to appreciate from the initial level, reducing competitiveness, particularly if trade liberalization and domestic deregulation did not accompany the switch in the exchange rate regime. From a longer run standpoint, one obvious cost would be the loss of exchange-rate adjustment as a corrective policy instrument; in the absence of wage flexibility and full labor mobility, exchange-rate adjustment may ease the need for wrenching cost adjustments and the possible resulting recession. In particular, the present flexible exchange rate policy has provided a useful safety valve to deal with the large shocks arising from monetary a.nd exchange rate experiments in the neighboring countries. The force of these arguments is reduced somewhat by the already high degree of informal dollarization in the financial sector (over 80 percent of deposits are in dollars), but they remain relevant for goods and labor - 13 - markets, where prices usually are fixed in local currency. Fixing the exchange rate also entails some transitional problems relating to: (i) the amount of additional fiscal effort that would be needed to peg to the dollar and definitively abandon use of the exchange rate instrument; and (ii) the rate at which to convert existing contracts. In particular, the issue of the nonversion rate could create some transition problems if the switch in exchange rate regime were debated for some time in Parliament. Annex 3 discusses a fixed exchange rate regime in more detail. 31. Public Sector Wage Indexation. Uruguay has no formal, automatic wage indexation mechanism for public sector wages. The only rule regarding wage adjustment is that it must occur at least three times a year: in January, May, and September. Although not mandated by any explicit statute, after the restoration of constitutional government in 1985 this rule has evidently become an essential element of the political consensus. There is no rule about the size of the adjustment, however: in principle, the authorities can set it as high or as low as they wish. Public-sector wage adjustments ;,re the most politically sensitive and closely watched aspects of economic policy, however. They directly affect not only the public sector wage bill, but also social security benefits, since a constitutional amendment approved in a November 1989 plebiscite requires that they be adjusted at rates not less than public sector wages. Since higher public sector wages imply a higher public deficit and higher aggregate demand, larger public sector wage increases assuredly imply higher inflationary pressure. The wage-adjustment announcement itself influences private sector inflationary expectations, hence private wage adjustments and price determination. Accordingly, any measure that served to reduce nominal wage adjustments should relieve inflationary pressure. 32. The authorities changed their description of the public sector wage policy several t'mes over the course of 1991, as they sought formulas consistent with both stabiliz&.2'on and political acceptability. As Figure 1 indicates, the adjustments tended to restore real wages in January, May, and September to the real level prevailing four months earlier, leaving inflation to reduce the real wage over the following three months. The average month-by-month public sector real wage level for 1991 as a whole was almost precisely the same as for 1990--which was 9.3 percent lower than it had been in 1989. The time profile was different from the declining pattern of 1990, however. The mid-1990 inflation rate was permitted to erode the real wage level, and this produced the step down in the real wage rate in that year. During 1991 the pattern was more in keeping with the "sawtooth" pattern characteristic of Uruguay's four-mosch wage-determination cycle, although at a lower level than in the years preceding 1990. 33. The public sactor wage adjustment system is often described as "backward-looking indexation" based on the argument that, in practice, the increases have tended to compensate for inflation accumulated over the four months from the previous wage adjustment. Since a change from "backward- looking" to "forward-looking" indexation would help reduce inflation-feedback pressure, the authorities would be well-advised to make this change. (The definitions of backward- and forward-loo'.ing indexation are in some ways quite subtle. This issue is discussed more fully in Annex 4.) However, it should - 14 - be understood that, unless the Government sometimes reduces inflation by more than the target, then real public sector wages will fall, and political pressures to raise the already low level of public sector wages will resurface. 34. Private Sector Waae Adiustment. The .resent Government reluctantly pai icipated in private sector wage-determination beginning in mid-1990. It had indicated initially that, as a matter of policy, it would not, but it became clear that in its absence private sector wage negotiations would work from high inflation forecasts, and management and labor both requested that the Government serve in an umpiring role. Many of the contracts negotiated included "trigger clauses", which were activated by the high inflation tha developed thereafter, particularly in the third quarter of 1991. It continv i be the Government's policy to withdraw from private-sector wa( -determination. During 1992, however, it has already been drawn in: in March 1992 the authorities indicated a 35 percent wage increase guideline for year-long contracts. 35. Public Sector Price Adiustment. Public sector service price adjustment has been a dilemma of a kind familiar in many inflationary economies. Higher adjustments tend to increase cost pressure in enterprises that directly or indirectly use such services as electricity, transport fuel, telecommunications, and so on. Lower adjustments reduce public enterprise profitability and increase the overall public sector deficit, particularly if public enterprise wages have been adjusted upward. Uruguay has mainly followed the first strategy, using high public sector prices, by international standarde, to achieve surpluses in the public enterprises, albeit with low investment. Although there was no rule to this effect, public-service price adjustments thus have tended to reflect recent price increases, and so amounted to another aspect of "backward-looking indAxation". 36. Going beyond this general observation, the data suggest that adjustment of public-enterprise prices has reflected a complex mixture of imperatives. For example, real telephone rates have declined since mid-1985: they had been increased in part to help finance the ambitious investment pro- gram of the national telephone company (ANTEL). Real electricity rates, both for households and for business, have declined sharply from the levels prevailing during 1989, when the (previous) Government had raised them to ration power use, which was in short supply on account of drought conditions. The present authorities increased the prices of petroleum derivatives toward the end of 1990 in response to the sudden tightening of oil supplies as a result of the Persian Gulf crisis, but then allowed inflation to reduce the real price somewhat. 37. Until recently, the authorities maintained the practice of increasing public-enterprise prices every four months, at the same time as wages. As Figure 3 shows, real public secto. prices thus have tended to follow "sawtooth" patterns similar to those of real wages. This practice has undoubtedly contributed to the concentration of inflationary pressure in the months of January, May and September. - * ' r g 8 8 8 8 o " @ ° 8 g8 8 8 8 8 o B 8 8 8 188eS8 "888~~~I !~~~~~~6 K,, £Sgi W0, - 16 - 38. Toward the end of 1991 the Government began experimenting with a different approach to public service pricing. Rather than increasing all prices at once and all together, it plans to move them differentially at more frequent intervals. In this way it hopes to maintain them at levels adequate to maintain a high overall surplus, but to distribute the effects of increases over time so that the overall inflationary impact diminishes. It began apply- ing this policy in September and October 1991, when it announced differenti- ated increases in the prices of petroleum derivatives. 39. The foregoing suggests that if the authorities could move to forward-looking wage adjustment, they might also move to something like forward-looking public-service price adjustment to help diminish inflation. As noted above, this will entail reducing inflation by more than the target fr',mn time to time, otherwise real public sector prices will fall and with them public enterprise surpluses. From a longer run perspective, it would be desirable to monitor and reduce real costs in the public enterprises, passing on the savings to the public and increasing Uruguay's competitiveness. 40. External Aspects of the Uruauayan Economyvs Inflation Sensitivitv. To the extent Uruguay has followed a crawling-peg policy (defined as a devaluation rate equal to the difference between domestic and external inflation), exchange rate management is an additional aspect of the indexation pattern. Since 1983, the Central Bank has managed the exchange rate actively, changing it frequently in response to changing conditions. The present policy may be described as a "managed float around a crawling-peg central tendency". In practice, this means that the monetary authority iitervenes with two somewhat contradictory objectives: (i) to ensure that the exchange rate reflects inflationary tendencies within Uruguay; but (ii) that devaluation does not become a source of inflationary pressure. To the extent the monetary authority works to the first objective, the exchange rate becomes, in effect, index-linked, and tends to work against the second objective. Adoption of a crawling-peg exchange rate was, like backward-looking wage indexation, a development that resulted from inflationary experience. (Recent exchange-rate policy is discussed in the following section.) 41. Import barriers cannot be said to have resulted from inflationary experience, but they have tended to block a vent for inflationary pressure. Following the reforms described above, Uruguay's import barriers now mainly take the form of tariffs and reference prices. In addition, the fact that Uruguay's capital account is relatively open implies that anti-inflationary monetary policy may be offset to the extent higher interest rates attract capital inflows, or to the extent private firms bring in finance from abroad when they find domestic credit too expensive or unavailable. (See the following section for evidence of this sort of phenomenon.) C. The 1990-91 External Shock: The External Accounts and The Exchanae Rate 42. During 1990 and 1991, the inflationary shock that struck this inflation-sensitive economy appears to have been mainly external in origin. After reviewing evidence from the 1991 monetary accounts for this assertion, - 17 - this section discusses the balance of payments oer se, and then the associated exchange-rate and monetary policies. 43. Evidence from the Monetary Data. Preliminary monetary data available for 1991 support the view that the balance of payments has been the preponderant immediate source of monetary expansion. At the end of September 1990, M1 amounted to about US$349 million and M2 to about US$909 million. Over the following twelve months, M1 increased in US dollar terms by US$109 million (31.2 percent) and M2 by US$195 million (21.4 percent). Consumer prices in US dollars rose 14.2 percent over the same period. (These monetary aggregates comprise final peso monetary obligations of the Central Bank, the Bank of the Republic (BROU), and private commercial banks.) 44. The order of magnitude of the monetized net increase in the bank- ing system's net international reserve position between December 1990 and September 1991 was approximately US$656 million. (Over the period September 1990 to September 1991, the measured international reserve holdings of the Central Dank, BROU and private banks rose by US$39.3 million, from US$2.53 billion to US$ 2.93 billion. This understates the monetary impact of the reserve increase, howeper, principally because this increase came in spite of the February 1991 debt-reduction transaction, in which the Central Bank paid out some US$263 million from its net reserve position.) The BROU and private banks received substantial foreign exchange ir'lows: the BROU's in- ternational reserve position rose from US$419 million to US$735 million, while the private banks' reserve position rose fromA US$1 billion to US$1.3 billion. 45. Uruguay's 1991 GDP was on the order of US$9 billion, and so the liquid reserve inflow of US$656 million over the first nine months of the year accordingly amounted to about 9.7 percent of GDP prorated over nine months. The inflationary effect of this inflow, however, was effectively magnified by the relatively small size of Uruguay's money stock. The reserve inflow was between one-fourth and one-third of the broad peso aggregate, which was in turn about 12 percent of GDP. If the broad peso aggregate had been, say, 24 percent of GDP, then the reserve inflow would have amounted to between one- eighth and one-sixth of the broad peso aggregate. Uruguay's persistent inflation over 1991 may therefore be understood as resulting from a combination of: (i) a large external shock; and (ii) economic behavior--in particular, low money demand--that magnified the inflationary effect of the shock. 46. The weight of the international reserve increase in the overall monetary base growth over 1991 can be seen by noting that the Central Bank's net international asset position--net international reserves less long-term debt in foreign currency--rose from US$-867 million to US$-426 million, an increase of US$441 million, compared with a total monetary base of US$410 million at the end of 1990 and US$458 million at the end of 1991. In peso terms, net domestic credit increased from N$2,031 billion in December 1990 to N$2267.438 billion, an increase of only 11.7 percent in nominal terms compared with inflation in excess of 80 percent. - 18 - 47. The real narrow neso money stock declined by 10.8 percent between December 1990 and September 1991, although this probably reflects the seasonally high December money demand: the real narrow peso money stock was 21.3 percent higher than it had been in September 1990. Real M2 holdings were virtually unchanged between December 1990 and September 1991, but real M2 was 12.8 percent higher in September 1991 than in September 1990. In nominal terms, total liquidity in national currency--comprising M2, deposits in the Mortgage Bank (BHU),. and Treasury Bills in national currency--grew 49 percent from December 1990 tnrough September 1991, a rate somewhat below that of M2 and well below the 62 percent inflation rate: in real terms the total stock fell about 3.8 percent. 48. Liquidity in foreign currency--comprising foreign exchange deposits and Treasury Bills and Bonds--increased from US$6.2 billion in December 1990 to US$6.8 billion in September 1991. In all, the composition of Uruguay's liquidity continued its steady shift away from peso-denominated assets into dollar-denominated assets (see Figure 2). Dollar-denominated li- quidity was 84.8 percent of total liquidity in December 1990 and 85.3 percent in June 1991. The "total liquidity" aggrogate is in some ways a misleading indicator of broad liquidity trends, first because a large part of it is held by non-residents, and second because Uruguayan residents customarily hold and use dollar currency and other overseas assets not included in total liquidity. In general, non-residents exert a large amount of aggregate demand on Uruguay; no liquidity aggregate can be presumed to be a good measure of the liquidity relevant to Uruguay. 49. Uruguav's balance of Payments strengthened mainly as a consequence of external developments, not as a consequence of recession or deliberate policy actions. As discussed below, real growth increased to 1.9 percent in 1991. The balance of payments remained strong--the current account remained in surplus despite a deteriorating trade balance, because of lower interest rates and strong tourism receipts; and private capital inflows increased. This strengthening of the balance of payments cannot reasonably be described as resulting from recession. It would be difficult to argue that the monetary authority carried out "leading" devaluation; as discussed below, the exchange rate has tended to appreciate in real effective terms. Tightened monetary policy may have contributed to the capital inflow, although it is not easy to constitute strong evidence on this point. (See also para. 60.) 50. Preliminary balance-of-payments data available for the year 1991 provide only limited indications of the sources of the increase in the banking system's net international reserve position, because the errors-and-omissions account is so large. The current-account surplus is estimated to have been US$45.4 million, compared with US$223.9 million for 1990. The trade surplus fell from US$426 million to US$54.2 million. The capital account deficit (excluding errors and omissions) is estimated to have been US$783.4 million, of which only US$356.5 million corresponded to the February 1991 debt reduction transaction. The banking system's international reserve position increased considerably, however, and this was reflected in the unusually large errors-and-omissions surplus of US$443.4 million, nearly 5 percent of GDP. Some part of these errors and omissions were short-term capital movements, but - 19 - some part were probably "invisible" service transactions (implying some under- reporting of the current-account surplus). 51. Preliminary details of the merchandise-trade accounts are available for the first nine months of 1991. The merchandise trade deficit was US$13 million, compared with a surplus of US$426 million for the year 1990. Merchandise exports were 5 percent lower (US$1,167.6 million compared with US$1,230.4 million), principally because world wool prices were considerably lower and because export sales diminished to the troubled economies of Brazil (US$278 million compared with US$345 million) and the former Soviet Union. Manufacturing and meat exports to Brazil were lower by some US$67 million, although sales of rice and barley remained roughly unchanged from 1990. Exports to the Soviet Union fell in part because wool prices were lower, but also because that nation's payment difficulties forced it to reduce orders. Exports to the recovering Argentine market increased to US$113 million from US$48 million, but this was insufficient to compensate for the losses in other markets. Meat export volumes were 40 percent lower, while lower world prices reduced wool earnings by US$60 million. 52. Merchandise imnorts increased considerably in percentage terms over the first nine months, but from a narrow base. Part oZ the import increase resulted from a temporary elimination of tariff levies on capital imports (which expired in two steps in December 1991 and March 1992). An important source of import growth was undoubtedly the relatively strong real growth rate in 1991. One indicator of the greater attractiveness of imports is that, over the first 10 months of 1991, the index of imported products' final sales prices excluding oil rose 16.5 percentage points less than consumer prices and 22.3 percentage points less than wholesale prices. The index including oil rose 22.3 percentage points less than consumer prices and 10.1 percentage points less than wholesale prices. 53. Short-Term Financial Inflows. As noted, the large size of the errors-and-omissions account in the preliminary balance of payments figures suggests that Uruguay has been receiving substantial private financial inflows. The underlying reasons are related at least partially to develop- ments in Argentina. Real-effective appreciation of the Argentine currency has increased Argentine demand not only for Uruguayan goods and services but also for Uruguayan real estate, particularly in the summer resort areas. Some of the financial capital returned to Argentina in recent months appears to have "spilled over" into Uruguay: many Argentine individuals and firms routinely maintain balances in Uruguayan banks. A further point is that Argentine (and, for that matter, world) interest rates, have been falling, making placements in Uruguay more attractive. 54. Thus, reserve inflows appear mainly to reflect capital inflows and tourist expenditure. The authorities felt compelled to purchase the foreign-exchange inflow to prevent their currency from appreciating significantly and reducing export competitiveness. The authorities also took an explicit decision not to attempt to sterilize the reserve inflows, reason- ing correctly that doing so would force domestic interest rates to rise excessively, hence widen the fiscal and quasi-fiscal deficits, and, per- versely, attract further reserve inflows--potentially drawing ;he system into - 20 - a vicious cycle of the kind that has developed on recent occasions in Argentina and Chile. (Indeed, even the tightness that did occur, and the increased regulation of financial activities may have contributed to the capital inflow--see para. 60.) To insulate itself fully from the external shock, Uruguay would have had to impose strong capital controls, an impossible policy and one that would make no sense for a nation that intends to develop further as a regional international financial market. Alternatively, Uruguay could have floated the exchange rate, but that would have meant an even greater loss of external competitiveness than occurred. 55. Exchange-Rate Policy. As noted above, Uruguay's exchange rate policy may be described as a "managed float around a crawling-peg central tendency". In recent practice, this has meant that, through its intervention, the Central Bank aims for a gradual nominal depr3ciation following Uruguay's inflation differential with the rest of the world, but permits floating within a band on either side of this basic trajectory. At the outset of the Lacalle Government the Central BEnk allowed a flotation band of 1 percentage point on either side of the inflation differential trajectory. Toward the end of 1990 it widened the band to 2 percentage points, and in early December 1991 it widened the band yet again to 4 percentage points, undoubtedly in anticipation of the heavy foreign-exchange inflows likely to ensue from the tourist season. In February 1992, the Central Bank slowed the central-tendency devaluation from 4 to 3 percent per month. In May 1992 it further widened the band to 7 percentage points, i.e., 3.5 percentage points on either side of the basic trajectory. 56. From March through August 1990, the exchange rate depreciated in real-effective terms. Since then, however, market pressure has tended to hold the exchange rate to the appreciated end of the band, and the Central Bank has had to intervene to prevent further real appreciation. From its maximum depreciation in August 1990 the real effective rate (pesos per other curren- cies) appreciated at an average 1 percent monthly rate through December 1991; the December 1991 rate was about 14.9 percent more appreciated than in August 1990 in real terms. 57. This appreciation needs to be considered in perspective, however. On a base of 1988 - 100, the real effective exchange rate over the period De- cember 1982 to December 1991 averaged 96.7, with a standard deviation of 5.9. The average real effective exchange rate over the period April 1985 to Decem- ber 1991 was nearly the same; 97.1, with a standard deviation of 5.9. At 95.3, the December 1991 real effective exchange rate was not far from these averages (See Figure 4a). Given the current-account surplus and the volumi- nous foreign exchange inflow, real-effective appreciation seems the appropriate direction in response to the circumstances; the fact that the exchange market has moved the exchange rate to the appreciated edge of the flotation band supports this view. Real-effective exchange rate appreciation in spite of high domestic inflation is consistent with the view that the source of the inflationary pressure is preponderantly external rather than internal. Finally, it is worth noting that the exchange policy has meant a real depreciation vis-&-vis Argentina, but some appreciation against Brazil (See Figure 4b). This is in line with Uruguay's traditional exchange rate policy of "leaning against the wind" from its neighbors. - 21 - Figure 4a URUGUAY: REAL EFFECTIVE EXCHANGE RATE ("Combined" Wholesale, Consumer Prices) 01988- 100 120 1 10 ---_ .__ _ _ __.-_& ._-.--.-_. _ _- . _ --------- 100 ....... . _..- 0 . _ ....... .......... ......... 70 Dec-72 Dec-74 Dec-76 Dec-78 Dec-80 Dec-82 Dec-84 Dec-86 Dec-88 Dec-90 + = depreciation Figure 4b URUGUAY: REAL EFFECTIVE EXCHANGE RATE VIS-A-VIS OTHER ECONOMIES 1988 = 100 180 - 160- ...... ........ 140 - Arenin 120 - _._ 100 - 60. ---..----~------ -- -*..--- .-|--------\/------Nu% lejzuea pue )ooqjek Sil :eoinoS ! MIsodeoew awi l 8011 W6-Uer 06-uer 69-Uer ss-uer L9-uer 99-uer sp -uer s-uer eg-uer ze-uBr - _ ._.. ... _._. - 9 ~~~~~~~~~~~~ ~~~~~~~~~~~~~~~~~~~~~. -...... ...... . . ........ -81. S1ISOd3Q 3W~I1 cJLVNWIWONJG uviioa NO SILU1vS l81LNI :ArnflDfuf S wJn6!j Figure 6 URUGUAY: INTEREST RATES ON PESO DEPOSITS (LESS THAN ONE YEAR) Per Year (Previous 12 months inflation), per cent 120 . . ... . . ... . . . . 110 - - . . - .- . - . .-.. ... - . . 10 - - .. .. ................. --. ..............- _ so -- .... ,n ..S ......... . .... \. .. 80 --. _-._P W_ #__ __ s o ...... . .. ... .................... . ._ . . ._ .... .. ...... . ..... 60--- [> ._. _ _. 40- . .. . ._ Dec-83 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 ore Depofrugu ate Iationarate Source: Central Bank of Uruguay 25 - Figure 7a URUGUAY: PRIVATE BANKS CREDIT TO THE PRIVATE SECTOR Trillions of December 1991 New Pesos 6- 5 X..........._................ . 3 2 1 0 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec89 Dec-90 Dec-91 U Natonalcurrency UForeigncurrency Source: Central Bank of Uruguay Figure 7b URUGUAY: PRIVATE BANKS CREDIT TO THE PRIVATE SECTOR Trillions of December 1991 New Pesos 4.5 4.0 ...................... . ....... ....... ...... . ... .. - ........ - .. ........ 2.5 2.0 1.5 1.0 0.5 0.0 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 |-Residents E3Non-residents Source: Central Bank of Uruguay - 26 - cash surpluses achieved during the first semester of 1991 to repay debt to the Central Ban>, and this has been a source of monetary contraction. The declining (real) domestic credit availability probably encouraged Uruguayan residents to repatriate overseas financial holdings to some extent, although the relative importance of this domestic shock, compared to the external shock of lower world interest rates, is difficult to define. 61. Summina UD: Sources of Inflationary Pressure. The argument of the two preceding sections has been that Uruguay's current high inflationary pressure is the consequence of a balance-of-paymants shock operating on an economy that is highly sensitive to any inflationary shock, in the sense that any shock produces a large inflationary response, and that the economy's robust inflation-feedback mechanisms, including backward-looking price and cost formation, maintain further inflationary pressure over time. 62. The evidence provided thus far is not inconsistent with a somewhat different order of events in the inflation cycle. The argument thus far has been, in effect, that: (i) an external shock occurred; (ii) it induced money creation; and (iii) that in turn raised the price level. If Uruguayan economic agents form their prices through backward-looking calculations with a view to preserving their real value, however, they might then generate their demand for money on the basis of the price level resulting from their price- formation actions taken together. Through a "monetary-approach" mechanism, the economy might then operate to satisfy this demand for money, and so validate the price level, by increasing the balance-of-payments surplus. Particularly if domestic monetary policy is relatively tight, this mechanism could generate a significant positive balance-of-payments response. It is conceivable, if not likely, that something like this mechanism operates in Uruguay, and forms part of its "inertial" inflation processes. Nevertheless, given the size of the external shocks--in particular, the sharp fall in world interest rates and the strong real appreciation of Argentina's currency--it seems reasonable to suppose that events exogenous to Uruguay played a preponderant role in generating the balance-of-payments inflows since 1990. D. Limits to the Effectiveness of Short-Term Macroeconomic Policy 63. This section reviews short-term policy options and provides recommendations regarding short-term macroeconomic policy. The basic conclusion is that short-term policy must be managed prudently to limit inflationary pressure but that short-term macroeconomic policy action has only limited scope to reduce inflation in the short run--hence the need for more structural measures. The principal spheres of short-term macroeconomic policy action are day-to-day exchange-rate and monetary policies, the (more or less) quadrimestral setting of public sector wages, and fiscal policy. Some of the constraints on these policies are political, but many reflect the deeper economic structure. This section reviews these policies in turn. 64. Exchange-Rate Polic . The authorities are well advised to manage their exchange rate policy more or less as they do now, by means of a managed float in a flexible band around a central tendency that "leans against the wind, from its two large neighbors. This is a compromise stance, between the - 27 - basic "extreme" exchange-rate policy alternatives of: (') allowing the rate to float freely, with the Central Bank making no purchases or sales except those required by its international-payments requirements; and (ii) fixing the exchange rate. Each of these alternatives has costs as well as benefits. 65. In the present circumstances, there are reasonable economic arguments for the managed float. It is unclear how long the external circumstances tending to produce appreciation and inflation will last. If they are transitory, th4 monetary authority would be justified in restraining the appreciation; even if they are more or less permanent, the monetary authority might reasonably lean against the market tendency of the exchange-rate adjustment and slow the real appreciation in order to provide more time for firms to reduce their costs. 66. In the current environment, a freely floating rate would tend to appreciate. This would be anti-inflationary, but would also tend to reduce profit margins for exporting and import-competing activities. Particularly because of the rigid wage-detarmination and employment structure, firms may be unable to reduce their costs rapidly, and some firms' profitability might decline to the point of being unable to meet outstanding commitments. This would likely intensify the political pressure on the authorities to act to bring about depreciation, and also political pressure to reverse the process of import liberalization. From a longer-term standpoint a freely floating rate would place greater risk on trading firms, but reduce the risk burden on the rest of the economy. 67. A fixed exchange rate, or a pre-announced devaluation schedule also would reduce inflationary pressures, particularly if indexation could be abolished. However, a fixed rate or schedule would be vulnerable to speculative attack on a scale which could dwarf the amount of reserves; measures to limit reserve loss without devaluation would inevitably lead to development of a parallel exchange market or require excessive interest rates and domestic contraction. 68. More fundamentally, the fiscal accounts probably are not sufficiently under control for the Government to credibly promise not to use money creation (it is uncertain just how a lack of fiscal resources would be handled in Uruguay under a system that eliminates m-oney creation to finance the government). It also may be undesirable to give up the escape valve that the exchange rate instrument provides when Uruguay's neighbors conduct monetary and exchange rate experiments. Finally, there also is the issue of fixing the initial rate, both for financial assets and liabilities and for labor contracts; a significant adjustment might be required and a recession might even develop, dependinc on the choice of the initial rate. Since neither of the extreme policy alternatives seems advisable, the Central Bank's present middle ground of a managed float is probably the least harmful alternative. It allows the authorities a reasonable degree of flexibility, and it does not bind them to commitments that circumstances may not allow them to honor. 69. Monetary Policy. Options for monetary policy are narrow, az.ong other things, because the economy is so small and because the capital account - 28 - is open. The recommendation for monetary policy is therefore to continue, to the extent possibl , to maintain reasonably tight conditions to guard against inflationary pressure, but not so tight as to encourage excessive financial inflows. The basic targets for this approach have been set by the IMF stand- by. However, if reserve inflows begin to substantially exceed IMF targets, then interest rates should be allowed to decline and intervention in the exchange rate reduced, which would tend to appreciate the rate. Attempts to reduce inflationary pressure by sterilizing financial inflows through sales of public obligations are likely to prove futile, because any incipient increase in interest rates rapidly would attract further financial inflows: the main consequence would be increased public indebtedness and a larger quasi-fiscal deficit that would reduce the Central Bank's future room for maneuverability in setting monetary policy. While the monetary authority is well advised to continue to rationalize credit policy as supported by the World Bank and the IDB, care should be taken that overly contractionary credit policy does not encourage destabilizing financial inflows. From a longer-run standpoint, rationalization of the financial sector should be consistent with the Government's view of Uruguay's role as a financial center. (See Section II.C. for an extended discussion of the recommendations for each of the main institutions.) Finally, the Central Bank also would be well advised to limit issue of its own liabilities for monetary policy in order to limit its quasi- fiscal deficit--if it seeks to undertake open market operations, it would be more desirable to use Treasury paper. 70. Public Sector Wage Policy. For fiscal and cost-control reasons, the authorities are, of course, best advised to hold wage increases to a minimum. In particular, they would be well-advised to change the wage- adjustment system from the present virtual "backward-looking" indexation to "forward-looking" indexation, as described above (and in Annex 4). There would appear to be no economic reason why this ought not to be done. How-.ier, unless inflation proves less than the targets at some points, then already low real public sector wages would decline further and political pressures will develop to restore purchasing power of civil servants. In addition, low public sector wages encourage the best civil servants to leave public service. Hence, compression of real public sector wages is not an optimal strategy for bringing inflation under control definitively. A better approach would be to reduce the wage bill through incentives for selective retirements from Uruguay's large public sector. 71. Under the present adjustment rules, the wage-adjustment issue comes up every four months, and on each occasion engenders political controversy. In each of these cycles, the political system obliges the authorities to tread a narrow path: if they set too high an adjustment, they sustain inflationary pressure; but if they set too low an adjustment, and inflation subsequently turns out relatively high for other reasons, the pressure for a larger adjustment in the .ext cycle becomes more difficult to resist. This would continue to be a recurring risk even if the authorities were able to persuade other political actors to move to forward-looking indexation. Frustrating as this reality is to many observers, uncertainty over the future course of wage policy is a long-standing structural reality that cannot easily be resolved in the short term. - 29 - 72. Fiscal Polic . The authorities are well advised to make every effort to maintain the fiscal balance achieved so painfully over the past two years. Apart from the value of successfully carrying through the IMF program, the principal reason is that the public sector needs to contain any further build-up of its substantial domestic and external indebtedness, which leave it exposed to interest-rate and exchange-rate fluctuations. Here, too, the authorities, short-term instruments are limited, given the public sector's heavy burden of entitlements and contractual commitments. The essential short-term problem is the precariousness of certain public-sector accounts, notably the domestic and external interest bills, which depend on interest rates that depend, in turn, on external conditions entirely beyond the authorities' control. The standing political constraints discussed above imply there is little likelihood that the authorities can achieve deep cuts in the wage bill by cutting real public sector wages. Accordingly, in the event of unfavorable interest-rate fluctuations, the authorities have little choice but to use tax handles in the short-term as the least harmful alternative available for maintaining fiscal equilibrium. The most desirable policy would be structural reductions in the responsibility and size of the public sector, with corresponding reductions in the most inefficient tax handles. 73. Many observers would argue that continuing inflation implies, ipso facto, that the public sector adjustment remains insufficient. Even if the basic source of money creation is the external accounts, some observers argue, the public sector must stand ready to sterilize this money creation, if necessary, by being prepared to cut expenditure or to raise revenue on short notice. Not only is this is a difficult principle to apply in practice in an economy whose public administration and tax collection are less than optimally efficient; it also runs counter to the principle that a government's basic taxes and expenditure patterns ought to be stable and essentially directed to the functional requirements of the Government. As noted earlier, the intensity of Uruguay's inflation is largely the consequence of the behavior patterns induced by the experience of inflation; it is unclear whether much would be gained by establishing variable taxes and expenditures as a function of a volatile balance of payments. II. POLICIES FOR STRUCTURAL REFORM A. The Need for Structural Reform 74. If Uruguayan policymakers rely on recurrent short-term policy instruments to establish their credibility, it is likely to take them a long time--perhaps decades--permanently to stabilize the macroeconomy. The exchange-rate and wage-rate issues are ,e urrent, and will only be permanently settled after many adjustment cycles. The authorities' determination will be tested repeatedly; even if they stand firm on every occasion there will always be another occasion, and uncertainty is likely to persist. In the meantime, developments in external conditions, such as shifts in the terms of trade or changes in world interest-rate levels--may unsettle the unsteady equilibrium of the public finances, requiring the authorities to seek or impose additional taxes. Financial markets are likely to continue to be more troubled by the standing need for austerity than by the Government's most recent achievement. - 30 - Even if the authorities establish a successful track record, oeso monetization is likely to improve slowly at best. External or supply shocks, or even one episode of policy "slippage", can easily undo a good track record. 75. In any case, quite apart from the problem of maintaining what amounts to continuing austerity, the underlying reality is that Uruguay's public sector remains too large, its external trade regime imposes heavy inefficiencies on a small economy, and the financial system remains inefficient. The real reason why stabilization through short-term policy remains continually difficult is that the stagnating economy continuously must bear the cost of these inefficiencies. Since the cost is likely to be paid in the form of diminished saving rather than diminished consumption, the overall investible surplus is likely to remain inadequate. With insufficient capital formation, growth will remain sluggish at best. 76. These considerations suggest that the Government's best hope of achieving sustained stabilization is to go beyond the recurrent struggle over short-term policy, and undertake deeper efforts to achieve genuine structural reform. The current authorities already have carried out important structural reforms in several areas. The Government's program of trade liberalization and integration should serve not only the cause of improved productive efficiency, but also should open an external escape valve that will help limit inflationary pressure. Similarly, the Government's ambitious financial-sector reform efforts will contribute not only to productive efficiency, but should also improve the willingness to hold financial assets (including money), and should relieve troublesome aspects of the public sector deficit. The debt- reduction deal transacted in February 1991 reduces some of the uncertainty associated with external debt. The reduction deal amounted (as explained below) to purchase of "insurance" against high future world interest rates. The orivatization program, for which the Government has recently secured legislative authorization, should enable industry to operate more efficiently. In these areas, the Government has developed and implemented important structural reform initiatives, and while they could be deepened, they are nevertheless well focused. 77. The areas in which the Government's reform efforts have fallen short have been public sector administration, social securitv, and taxation. Ideally, the Uruguayan Government--indeed, the Uruguayan society--needs to address the issue of precisely what services and benefits its public sector can reasonably provide (including social security), and then redefine and organize the public sector so that it efficiently delivers these services and transfers. Once it is clear how large the public sector should be, then the tax system needs to be reconstituted to improve efficiency and equity. 78. Public sector services and benefits have a cost, which must be borne either through explicit taxation or inflation. Either way, the cost of the public sector will appear in the productive cost structure. The larger and the more inefficient the public sector, the more poorly Uruguayan goods and services will compete in international markets with goods and services produced by economies with smaller and more efficient public sectors. This consideration is increasingly important in light of today's increasingly competitive world environment and Uruguay's entry into MERCOSUR. - 31 - B. Trade Liberalization and Inteoration 79. As noted earlier, the Lacalle Government has liberalized the tariff structure from 40-35-30-20-10 percent to 24-17-12 (as of April 1, 1992), and 20-15-10-6 percent schedule on January 1, 1993. The authorities have also gradually liberalized the reference-price system, and are due to end automobile restrictions during 1992. The authorities have braved intense domestic opposition to maintain this pace. Although public support for liberalization has broadened as the cost of Uruguay's protectionist stance has become more apparent, the pace of liberalization is in question, particularly since the real effective exchange rate hai been appreciating. Worldwide experience indicates, however, that the authorities are correct to keep to a rapid liberalization schedule, and keep domestic activities under urgent pressure to control their costs. In particular, they would be well advised to phase out the reference price system. If they feel that they would need a modern "anti-dumping" system as a "safeguard", they would be well advised to examine other nations' experiences in this regard. Adoption of a reasonable anti-dumping regime clearly would be preferable to the existing reference-price regime. 80. Uruguay has decided to participate in the MERCOSUR common market, created by the March 1991 Treaty of Asuncion with Argentina, Brazil and Paraguay. A full analysis of MERCOSUR, and Uruguay's relationship with it, are beyond the scope of the present assessment. If the establishment of the common market progresses to fruition, however, Uruguay will find its economic structure under pressure to change, and this may create formidable challenges for economic policy, with implications for macroeconomic management. 81. The Uruguayan authorities intend to integrate ths : economy not merely with their neighbors, but with the rest of the world. This is the clear implication of their unilateral trade liberalization program; moreover, in the negotiations regarding MERCOSUR's common external tariff, Uruguay has advocated a low tariff level. Maintenance of this approach would benefit the country. Trade theory strongly suggests that smaller nations derive the largest benefits from economic integration, particularly when the common external tariff is low enough to reduce trade diversion. Integration also implies that larger markets will open to Uruguayan producers. Producers who use lower-cost foreign inputs, and who can export to larger markets, will ben- efit from economies of scale. Therefore, as the smallest economy in MERCOSUR, Uruguay should benefit considerably. Integration with the outside world im- plies, however, that some parts of the present productive structure will prove uncompetitive. The extent of the benefit thus will depend on the extent of Uruguay's adjustment to take maximum advantage of the markets newly opened to its producers and to phase out inefficient production. 82. Thus, Uruguay's benefits will depend on the exient to which it permits inappropriate activities to disappear and investment to occur in activities with more potential. The need for additional investment has policy implications. In the first place, the price system must remain free so that it sets the signals for the best kinds of investment. Then, the flow of external and domestic saving necessary to finance this investment must be - 32 - encouraged, or at least not impeded. The authorities will have to carry out at least some part of the analysis of the needed policy changes to ensure that all this occurs smoothly. C. Financial Sector Reform 83. The financial sector reform program undertaken with the support of the World Bank's SAL I and SAL II and the more recent IDS adjustment loan covers five aspects of Uruguay's financial system: (i) monetary policy and improvement of the Central Bank; (ii) the Bank of the Republic (BROU); (iii) banking supervision; (iv) the Mortgage Bank (BHU); and (v) reprivatization of the so-called "administered banks", i.e., the failed commercial banks taken under state intervention in the mid-1980s. The broad purposes are to make the financial system more cost-effective, less distorted, more competitive, and safer. The reforms carried out thus far have removed long-standing distortions in bank reserve management; reduced the monopoly and cross-subsidization powers of the BROU, and tightened bank supervision. The authorities have reprivatized one of the three administered banks, and are making progress on the remaining two. A further, desirable aim of the reform program has been to relieve the problems of the BHU and to open housing finance to private activity; however, the authorities have been less than successful thus far. An issue that has been incompletely addressed is to make the regulations on supervision and capital, and on the taxation of financial sector operations (including the level of reserve requirements), consistent with the Government's objectives of developing Uruguay's role as a financial center. 84. Monetary Policy and Imvrovement of the Central Bank. Reforms in the sphere of monetary policy are intended to improve the efficiency of banking operations and to improve the authorities' monetary control. On the whole, these reforms are intended to eliminate arbitrary distinctions, allowing banks to manage their resources more flexibly, and reducing the Central Bank's interest obligations on bank reserves. In the early part of 1991, the authorities acted to close an important loophole that allowed banks to take on liquid liabilities without reserve requirements, by subjecting commercial banks' repurchase operations to reserve requirements equal to those of similar deposits. In addition, the Central Bank moved toward equalizing reserve requirements on peso and dollar deposits: it removed remunerated reserve requirements on Peso time deposits with terms exceeding 180 days, and reduced the requirements on time deposits with terms between 30 and 180 days from 12 to 9 percent; it also moved to equalize remunerated reserve require- ments on Peso and dollar deposits. 85. The authorities also changed the rules regarding compliance with reserve requirements. Since early 1991, banks have been permitted to maintain reserve requirements as averages over each month, rather than as before with reserve deficiencies permitted only on three working days. This effectively reduces the reserve requirement, but--no less important--enables banks to manage their liquidity with far greater flexibility. Finally, the authorities have closed the Central Bank's "overnight" window for excess bank reserves, thus eliminating an unnecessary interest expenditure for the Central Bank and obliging banks to manage their resources more carefully. - 33 - 86. During 1991 the Central Bank also eliminated requirements that banks hold its Monetary Regulation Bills (LRM), replacing these with remunerated reserve requirements. Beginning in June 1990 the LRM have been sold at auction, which introduced considerable variability in their yields and valuation. Although the Central Bank sharply reduced the outstanding LRM stock over 1991, '.t sold LRM in the early part of 1992 to relieve the monetary impact of capital inflows. The Central Bank has maintained its practice of remunerating some bank reserveo in order to prevent spreads between lending and deposit rates from rising excessively. The fundamental problem with this approach, however, is that the Central Bank interest bill is itself an element of the para-fiscal deficit and a source of monetary expansion. 87. Essentially for this reason, the authorities would be well advised gradually to phase out the Central Bank's use of interest-bearing liabilities for policy management. This may require lower bank reserve requirements, so that the phasing out of reserve remuneration produces no significant increases in spreads. In general, the Central Bank would be well advised to determine and move to a reasonably low level of bank reserves, and to avoid using manipulation of bank reserve ratios as a means of controlling liquidity. To the extent to which active monetary policy is desirable, the Central Bank would be advised to move toward a modern system of open-market operations in which it buys and sells Treasury obligations for its own account. 88. With IMF technical support, the authorities developed a Central Bank reform proposal, and submitted it to the legislature in June 1992. The legislation that established the Central Bank in 1967 did not define the institution's functions and powers with sufficient precision. The new legislation would enhance and define the independence of the Central Bank and define its operations more explicitly. It would enhance the Central Bank's supervisory role, particularly with regard to the publicly-owned banks and to non-bank financial intermediaries. 89. In general, the Government would be well advised to enhance the Central Bank's independence through explicit legislation (i) making the President, Vice President and Directors independent but (ii) accountable; (iii) precisely defining operations the Central Bank may carry on; (iv) providing that lending to commercial banks be carried out only for unusual liquidity purposes, and then only through the modality of rediscounting of promissory notes; (v) providing that the Central Bank never lend directly to the public sector, but facilitating purchase and sale of Treasury instruments in secondary markets; and (vi) providing that the Central Bank set bank reserve ratios up to certain maxima. The charter should also provide for regular audits of the Central Bank's accounts. 90. Monetary analysts are placing increasing emphasis on the desirability of an independent central bank. Legal independence from ministerial instruction is not sufficient, however, to make a central bank genuinely effective. A central bank must have a sufficiently strong financial standing and credibility to be able to manage the monetary base. A para- fiscal deficit constitutes financial weakness; this is one important reason why a central bank sho"ld avoid taking on domestic interest-bearing liabilities (and for that matter why a central bank should avoid cubsidies of - 34 - management; this would constitute, in a real sense, the Central Bank's "capitalization". The Central Bank's effectiveness also would be enhanced by improvements in its technical capacities. 91. The Central Bank is now considering internal reorganization to improve the efficiency of its policy formulation and operations. The staff of 700 is larger than the institution requires (public sector employment is discussed below). Operating costs are on the order of 0.2 percent of GDP, and a reduction and rationalization of staff size would help reduce the para- fiscal deficit. A more rational, less compacted pay scale would enable the Central Bank to improve the quality of its staff. 92. The Bank of the Republic of Uruouav IBROU1. The BROU is Uruguay's state-owned commercial bank. The BROU's tradition and present role parallel those of the Banco de la Nacion Argentina and the Banco do Brasil: it provides an extensive range of credit for trade, industry, and agriculture. Public sector entities maintain deposits with the BROU or with the Mortgage Bank (BHU; see below). Like the similar institutions in neighboring economies, the BROU performed central-banking functions until the Central Bank was separated from it. It long retained a privileged role in its relations with the Central Bank, effectively running monetary policies of its own, and operated a wide range of credit programs, many at subsidized interest rates. 93. The authorities have been carrying out an extensive reform of the BROU under an IDB Financial Sector Adjustment Loan. They subjected the BROU to Central Bank control like that of any other commercial bank. Beginning at the start of the year, the BROU was required to implement the same standard accounting system as other commercial banks. In March 1991, a reserve requirement of 100 percent was placed against the deposits of the central administration and social security system at the BROU, and reserve requirements equal to those in effect for private sector deposits were placed against the accounts of municipal governments, state enterprises, and decen- tralized agencies. Constitution of the higher reserve stock implied by these changes has been carried out gradually in four deposits by the BROU to the Central Bank every six months beginning June 30, 1991. 94. The BROU was instructed to carry out a thorough evaluation of its asset portfolio, and to adjust its capitalization accordingly. During 1991 the BROU and the Central Bank's supervision staff began the task. The BROU has issued an adjusted balance sheet for December '.991, and is preparing a loan recovery program concentrated on its 200 largest borrowers. The BROU was also directed to modify its policies regarding lending interest rates. Henceforth, the broad policy principle will be that rate differentials should reflect differential asset risks, not subsidization practices. The BROU is henceforth to work from a "basic" interest rate for both Peso and dollar lending, with variations around this rate subject to "dispersion" limits. No further loans are to be made with linkage to commodity prices, but interest on loans exceeding 180 days is henceforth to be at flot.ing rates. 95. The BROU's capacity to place deposits with the Central Bank at interest--enabling it, in effect, to act on its own authority to carry out monetary policy--has been effectively eliminated through the Central Bank's - 35 - Figure 8a URUGUAY: BANK OF THE REPUBLIC US$ Billion DEPOSIT BASE 2.2 2.0 0.8 0.6 .. .... 0.4 0.2 0.0 Dec-84 Dec485 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 Dec-91 MNatTonalcurrency r=Foreigncurrency Source: Central Bank of Uruguay Figure 8b URUGUAY: BANK OF THE REPUBLIC CREDIT TO THE PRIVATE SECTOR US$ Billion 1.4 - 0.8 0.6 0.4 0.2 0.0 Dec-84 Dec-85 Dec-86 Dec47 Dec-88 Dec-89 Dec-90 Dec-91 rNatione:currency CBForeen currency B Source: Central Bank of Uruguay - 36 - decisions. On the other hand, the BROU will henceforth be permitted to participate in the interbank ("call") market. This would seem to make it more like any other bank, but this change would afford the BROU the capacity to carry out "virtual" monetary policy of a slightly different kind. The BROU's sheer size would enable it, for example, to influence the interbank rate. Furthermore, it could provide resources to specific private banks that would be very much like rediscount credit. 96. Reform of the BROU presents several dilemmas. CiiAe is that the institution has a leadership position in the domestic financial market, and a monopoly position in certain kinds of credit. Its sheer size gives it de facto power to affect, if not determine, domestic interest rate levels. Although some of the reforms proposed--in particular, the narrowing of the asset interest-rate dispersion--are intended to help private bank competition, many of them will tend to strengthen the BROU and make it a more formidable competitor for private banks. At least, however, the BROU and the private banks will henceforth compete more nearly according to the same *-les. 97. Bank Su2ervision. The Central Bank is implementing a tighter approach to bank supervision and regulation. It will introduce tighter controls on bank solvency, adopt new inspection procedures, and take a more serious approach to portfolio classification. Uruguayan banks are to conform to the Basel capitalization standards (indeed, in certain aspects, more than the Basel standards), and will be required, by various means, to ensure that their capitalization is in fact reasonably liquid. 98. Improvement of bank supervision and increases in capital requirements, as well as the taxes and reserve requirements on the financial system, create incentives for banks to carry out operations outside Uruguay. The reality of Uruguay's circumstances is that it attracts foreign resources partly because its banking system is relatively less regulated and less heavily taxed. The banking system, with the exception of the BROU, is foreign owned. Many of the banks operating within Uruguay are owned by large, prestigious foreign banks, which are likely to exercise better prudential control of their subsidiaries than the Uruguayan authorities could, and which could probably be relied on to provide additional capital as necessary. To this extent, day-to-day prudential supervision may not need to be very tight. The authorities should, however, monitor developments in or affecting foreign banks that own domestic banks (for example through exchange of information with supervisory authorities) and also should closely monitor those foreign banks that do not meet the test that they would prefer to straighten out a problem in Uruguay than suffer the loss of international prestige. In any case, the Uruguayan authorities must maintain a sound information base regarding banking activities that take place within their jurisdiction. Recent events clearly show that even presumably large and prestigious banks can fail, or be reluctant to provide additional capital to subsidiaries. It is essential that the authorities ensure: (i) that all banks maintain adequate capitalization and appropriate technical standards; (ii) that loan portfolios are properly classified; and (iii) that banks be assured of having adequate liquidity. At the same time, the Government must consider the impact of such standards on the competitiveness of Uruguay as a financial center, and decide where the balance lies. - 37 - 99. The Mortgage Bank of Uruouay (BHU). The publicly-owned Mortgage Bank has recently taken important steps to shore up its unsteady finances. The institution's standing cash-flow problem has been relieved by adoption of four- or six-monthly (rather than annual) inflation adjustment of monthly mortgage payments and an end to interest-rate concessions provided in the mid- 1980s. Nevertheless, the institution remains fundamentally weak. It must pay high interest rates to retain its deposits, which affects the overall interest rate level. A large part of its portfolio continues at subsidized interest rates, and payment arrears affect on the order of 20 percent of the portfolio. The BHU has recorded profits in recent years, but this has been largely because the Peso value of the "Adjustable Unit" (UR), in which its loans are denominated, has grown more rapidly than the peso value of the US dollar, in which the bulk of its liabilities is denominated, because of the real appreciation of the US dollar. Once the appreciation stops, these accounting profits will disappear. 100. The BHU is a virtual monopoly provider of housing finance in Uruguay. The BHU has some 300,000 mortgage accounts, for a population of just over 3 million. It enjoys a number of legal advantages, notably the monopoly of the right to issue "housing bonds". Even if the legal advantages were removed, however, it is unclear that the private sector would want to develop housing finance business operations as long as the BHU remained a formidable presence. The authorities would therefore be well advised to consider going beyond reforming the institution's finances, as they have done thus far under the IDB Financial Sector Loan. They need to consider mechanisms that would permarently reduce the BHU's presence in the market, and so open the way for private participation. Annex 5 discusses the BHU issue in somewhat greater detail. 101. The Administered Banks. In the mid-1980s the Uruguayan Government assumed control ot several private commercial banks that had become insolvent. The World Bank's second Structural Adjustment Loan (SAL II), which became effective in July 1989, was intended in part to support reprivatization. The Uruguayan authorities agreed to develop action plans for restructuring the banks to make them privatizable. The present Government privatized one of the banks, Banco Comercial, in December 1990. Although the terms of the sale were politically controversial, the new bank appears reinvigorated, and has become a reasonably solid competitor in the banking system. Two banks remain in public hands, Banco Caja Obrera and Banco Pan de Azucar. After recording heavy portfolio losses, the authorities recapitalized Banco Caja Obrera and undertook restructuring and reorganization to make it attractive to potential buyers. The authorities have not yet recapitalized nor restructured Banco Pan de Azucar, although the management is prepared to write off a large proportion of the portfolio. 102. As of December 31, 1991, Banco Caja Obrera had deposits of approximately US$160 million, and Banco Pan de Azucar had total deposits of approximately US$335 million. They have had to pay somewhat higher deposit rates than other banks, partly because chronic illiquidity has left their managements unable to risk heavy withdrawals by reducing rates, and this, along with substantial portfolio writedowns, tends to eat into profits on financial operations in both institutions. Both banks' staff levels remain - 38 - Figure 9a URUGUAY: MORTGAGE BANK US$ Billion 1.2 - O's.8 . ........... ..... .......................... 0 .4 ............. ... ...... ......... Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 wa Private sector credit- Monetary liabilifties i __ Source: Central Bank of Uruguay Figure 9b URUGUAY: MORTGAGE BANK DEPOSITS US$ Billion 0.7 - 0.6- 0.4 ...... 0.3 -, ........... 0.2 0.1 0.0 I I - I Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 SuNaeontlcurrnc Bkoruigncuy Sourm: Central Bank of Uruguay - 39 - large, particularly at the higher managerial levels (at lower levels they may be somewhat understaffed). Banco Caja Obrera's (non-financial) operating costs totalled about US$38 million in 1991, or US$3.2 million par month, roughly 2 percent o} its deposit base. Sanco Pan de Azucar's monthly operating costs are about US$2.6 million, about 0.7 percent of the relatively large deposit base, but still excessive. Banco Pan de Azucar is estimated to require substantial recapitalization. 103. Broadly speaking, the authorities' choices with regard to the two administered banks are narrowly circumscribed. They could liquidate the banks; they could attempt to sell them at a relatively low price; or they could restructure them to reduce their cost structure (and then sell them at a relatively high price). Under the "default" option of maintaining them in the public sector, the Government simply loses about US$4 million a month (on the order of 0.5 percent of GDP), since each of the two banks loses approximately US$2 million a month (not including portfolio losses). The authorities would be well advised to move as rapidly as possible to privatize these institutions, even, if necessary, at relatively low prices. To sell them at a high price, the authorities would still have to undertake costly and difficult restructuring. The "cost-benefit" analysis of feasible reforms would most probably indicate that it would be best to proceed rapidly rather than absorb continuing portfolio losses. In addition, the authorities would do well to make the private domestic banking market as competitive as possible as rapidly as possible. 104. The "leGal environment" for commercial-bank lendina is a particular problem that needs to be addressed more carefully. Many private bankers are troubled by recent legislation that will require them to refinance loans that were refinanced in the wake of the financial crisis of 1982. In addition, uncertainty about whether the courts will sustain collateral forfeiture tends to discourage private lending in the agricultural sector. The authorities would be well advised to identify and correct these problems. D. Privatization 105. Non-financial public enterprises account for about 12 percent of GDP. They employ 42,000 workers (down from 55,000 in 1969). The largest non- financial public enterprises are the petroleum, alcohol, and cement company (ANCAP); the power company (UTE); and the telecommunications company (ANTEL). In 1991 ANCAP's revenues were US$813.2 million, UTE's US$403.6 million, and ANTEL's US$291.2 million, or a total of US$1.5 billion out of total non-financial public enterprise revenues of US$1.7 billion. These three enterprises employed 5,100, 10,600, and 7,600 workers, respectively. Capital expenditure was US$160.5 million for UTE, US$76.9 million for ANTEL, and US$11.5 million for ANCAP, or US$248.9 million out of a total non-financial public enterprise capital expenditure of US$270.6 million. Four smaller enterprises operate in air travel (PLUNA), railways (AFE), the port system (ANP), and water and sewerage (OSE). 106. At present only two of the smaller public enterprises receive government transfers: in 1991 the national airline received US$7.1 million - 40 - and the railways--which terminated their loss-making passenger service in 1988--received US$21.6 million. Two of the larger enterprises were important sources of tax revenue: ANCAP provided US$285.1 mz.llion and ANTEL provided US$33.9 million. Although their deficits have never reached crisis proportions, they have had many of the troubling characteristics of state enterprises elsewhere, including monopoly positions, inadequate capital formation, and inefficient use of labor and other resources. Indeed, part of the reason their borrowing requiremeats have veered out of control is that the authorities have maintained prices at relatively high levels to cover their costs. This has effectively transferred state-enterprise inefficiencies to private productive enterprise. (For example, ANTEL's international calling rates average 50 percent higher than the corresponding rates for calls to Uruguay, a very considerable burden for a small economy whose enterprises inevitably have extensive business linkages abroad.) In addition, present state-enterprise operating practices have imposed cost burdens on private firms. A case in point is the ports: despite the natural advantages of Montevideo's harbor, ship servicing and loading is so inefficient as to amount to a serious barrier to international trade, partly as a consequence of restrictive practices imposed by the stevedores' union. 107. With the ports legislation, the authorities have the opportunity to reduce the cost of port operations significantly. Thoy would be well advised to follow implementation closely, since they have the opportunity to make Uruguayan ports, which have natural advantages, the most cost-efficient in the region. (Argentina, and to a lesser extent Brazil, are engaged in efforts to reduce port costs.) 108. In April 1992, the Government secured two pieces of legislation authorizing it to carry out a measure of privatization. The Public Enterprise Law provided for sale of stock in ANTEL and PLUNA and private participation in the planned power system expansion by UTE. The Port Reform Law provided for private concessions by ANP and deregulation of stevedoring services. The Government planned to apply this legislation so as to secure the maximum poesible efficiency gains. The authorities also planned to develop a strong regulatory function, separated from the management of the enterprises; phase out the existing monopoly practices; and remove obstacles to private participation in these activities. However, a referendum held in December 1992 rejected the proposed public enterprise law that would have resulted in the privatizat.on of ANTEL and with it the Government's hopes to complete the sale of equity participation in ANTEL and PLUNA before the end of 1992. 109. The recent putback to the privatzation process should not nevertheless cloud what are fundamental issue: the three largest state-owned firms have common problems of excessive costs. This must be dealt with within or outside a privatization process. For ali t:hree firms--ANTEL, UTE, and ANCAP--the authorities must closely follow their costs to ensure that they are as low as possible. Wage adjustment policy will play an important role here. Over time, the authorities must make every effort to ensire that, through sound investment, careful management of labor costs, and other means these enterprises reduce their costs and so permit a reduction in their output prices. - 41 - B. External-Debt Reduction 110. The essential justifications for Uruguay's debt reduction deal weres (i) that it would relieve the balance-of-payments constraint on eco- nomic growth over the coming decade; and (ii) that it would relieve the public sector's external interest burden. in addition, successful conclusion of the deal was viewed as a prerequisite to strengthening confidence in Uruguay and facilitating further capital inflows. 111. It is too early to say whether the deal has succeeded in these terms. During 1991 and 1992, like many other Latin American nations, Uruguay has had substantial capital inflows, and, as discussed above, domestic interest-rate levels have declined. These inflows resulted partly from declining world interest rates, which made placements in Latin America ger.erally and Uruguay in particular relatively advantageous. Capital inflows from Argentina may reflect the relatively lower rates now available in that economy, as well as some perception that Argentina presents risks and that some diversification of placements remains prudent. Compared with these in- fluences, it is doubtful at best that the debt-reduction deal has made a significant difference in encouraging capital inflows. 112. If world interest rates remain at the lower level they reached in 1991, the d-bt deal provides little improvement over the alternative of a new multi-year rescheduling. The reason is that, of the US$1.61 billion in commercial bank debt outstanding at the end of 1990, US$535 millic!n was converted in6.o long-term par bonds yielding fixed annual interest of 6.75 percent. Had this debt remained at a floating rate, the interest rate would have fallen much lower in 1991 and in 1992. If world interest rates rise again, of course, the deal will turn out to be beneficial ex post. 113. A more favorable view of the debt deal is that the partial debt repurchase and conversion of more than half of the remaining debt to a fixed interest rate amounts to Uruguay's purchasing "insurance" against very high interest rates. If world interest rater remain around 6 percent or lower over the 1990s, with or without the debt deal, the balance of oayments would not have constituted a constraint to annual real growth rates of 2 to 3 percent. The argument that Uruguay ought to have held out for a better deal is probably unfair, since no better deal appears to have been available, and in any case at the time most analysts projected higher world interest rates than they now would. F. Public Administration Reform 114. As noted above (Part I.A.), the recent fiscal improvement has relied relatively more on tax increases than expenditure reduction. By the measure of general government revenue, the public sector has increased in size relative to GDP. In fairness, this was the consequence of the Government's political constraint: upon taking office it had to find financing for the increase in social security benefits mandated by the November 1989 plebiscite, and its legislative minority has implied that its scope for reducing public sector expenditure programs is limited. The adjustment policies have - 42 - succeeded in obliging the society to pay the cost of its public programs through explicit (as opposed to implicit, inflationary) taxation; but they have not thus far succeeded in reducing the scope of the public sector. 115. Preliminary figures indicate that general government expenditure totalled just under 28 percent in 1991, of which 16.7 percent was central administration expenditure and 11.3 percent was social security expenditure. The social security problem, which is Uruguay's highest priority structural economic problem, is discussed below. Central administration expenditure comprised personnel (6.8 percent of GDP), the social security transfer (3.7 percent), interest (1.8 percent), capital formation (1.8 percent), and other items (4.4 percent). Apart from social security, the principal opportunities for improvement would appear to be personnel expenditure. 116. The public sector labor force is relatively large (see Table 2). In February 1992, total public sector employment was estimated at 258,550, just over 8 percent of the total population. (To some degree this high figure reflects the nation's small size--there are some economies of scale in administration.) Of these, some 168,115 were employed by the central administration, 37,451 by municipalities, 8,031 by the three state-owned financial institutions (the Central Bank, the Bank of the Republic, and the Mortgage Bank), 37,054 by the seven non-financial state enterprises, and 5,409 by the social security system (the so-called Social Security "Bank"). Of central administration employees, four broad categories account for 70 percent of total employment: defense (about 20 percent); the Interior Ministry (including public security services, about 15 percent); health (including public hospitals, about 10 percent); and public education (about 25 percent). 117. An order-of-magnitude indication of the saving in wage costs that could be obtained through departure of public employees can be seen by noting that, since the central administration payroll ordinarily amounts to about 5.5 percent of GDP, the pay of 30,000 workers amounts to about 1 percent of GDP. (The saving for the public sector as a whole is larger for younger workers than for older workers, of course, since the latter tend to qualify sooner for social security benefits.) 118. Although the number of public employees is large, some skills are in short supply. The public administration has the traditional problems of large bureaucracies: workers are allocated inefficiently among functions; regulation of private activity is excessive; pay levels are low, with conse- quent demoralization problems; and so on. Not only is the bureaucracy costly, but much of its activity is unproductive. The dual customs system is perhaps the best-known example: merchandise imports must pass not only through Customs, but a full customs procedure by the BROU as well. 119. There is little doubt that Uruguay could improve its public sector efficiency, with considerable benefit for the productivity of the economy as a whole, by reorganizing government to carry out fewer functions with a reduced number of better-qualified and better-paid personnel. The present Government has proceeded cautiously along two lines to improve public sector efficiency. First, some 20,000 workers in the central administration, state enterprises, - 43 - TABLE 2: URUGUAY: PUBLIC SECTOR EMPLOYEES (As ofFebrury 1992) Total Detached Detached Total Date of Deignsted from to list other other updatc Services Servicet Senate 366 0 8 358 Jan-92 Chamber of Deputies 372 0 0 372 Jun-87 Adini Comm. on Legsative Powers 520 0 9 S51 Jul-90 Office of the President 524 84 0 608 Nov-91 Office of Planning and Budget 206 22 15 213 Jan-92 Gen. Directorate for Statr & Census 243 4 3 244 Nov-91 National Office for Civil Service 157 37 24 170 Jan-92 Ministry of National Defense MUitary 31602 7 24 31585 Nov-91 Civil Servmnta 2424 0 0 2424 Nov-91 M.inl"aY of the Interior 25695 13 63 25645 Jan-92 Min. of Economics and FInace 772' 8 111 7626 Jan-91 Min. of Foreig Relations 595 61 2 654 Dec-91 Mi. of Livestock Agric. & Fbb. 4073 154 120 4107 ian-92 Mi. of Industry and Energy 580 41 31 590 Dec-91 Ministry of Tourism 225 43 19 249 Jan-92 M.. of Transport & Public Works 6697 57 83 6671 Feb-92 Min. of Education and Culture 7320 549 200 7669 Feb-92 .;inisutyofPublic Health 15956 21 39 15938 Jun-91 iia of Labor & Soc. Security 972 155 60 1067 Jan-92 M.;n of Housing 1il 20 0 131 Nov-91 Judicial Power 3749 64 43 3770 Oct-91 ean. Accountng Office 453 4 27 430 Jan-92 Electoral Court 1195 1 36 1160 Aug-91 Administrative Diaputes Coundl 88 0 1 87 Jan-92 National Adinis. of PubUc Education 42323 0 0 42323 Jul-88 tJniversityofths Republic 11127 0 0 11127 May-91 National Institute for Youth 2357 88 59 2386 Dec-91 Social Security Bank 5563 70 224 5409 Feb-92 CentralBank ofUrugusy 713 4 iS 702 Peb-92 Bankof the Republie 5782 3 28 5757 Jan-92 Mortgage Bank of Uruguay 1554 45 27 1572 Jan-92 State Security Bank 1895 40 23 1912 Jan-92 S. PetroL. Alcohol and Cement Co. (ANCAP) 5114 6 71 5049 Dec-91 State Power Compaay (UTE) 10600 14 62 10552 Sep-91 State Railway Company (AFE) 3788 12 4 3796 Dec-91 State Airline Company (PLUNA) 820 21 6 835 Dec-91 Port Authority 3370 20 68 3322 Feb-92 State Telecommunicabons Comp. (ANTEL) 7572 0 31 7541 Jan-92 State Water and Sewerage Comp. (OSE) 5996 29 66 5959 Jan-92 National Insdtute for Coloniadon 294 20 14 300 Jan-92 IL.P.E. 293 2 17 278 May-91 Department of Artivu 1603 8 53 1558 Feb-92 Department of Canelones 2996 7 97 2906 Nov-91 DepartmentofC Largo 1613 4 6 1611 Sep-90 Department of Colonia 1379 14 22 1371 Jan-92 Department of Durazno 1153 8 59 1102 Jan-92 Department of Flores 493 1 0 494 Jan-92 Department ofFlorida 1218 4 11 1211 Jan-92 Department of Lvalleja 1148 3 18 1133 Dec-91 Departmeat of Maldonado 2562 0 0 2562 Jan-92 Department of Payssndu 1244 9 8 1245 Jan-92 Department of Rio Negro 1043 4 14 1033 Nov-90 Department of Rivera 1269 14 15 1268 Jan-91 Department of Rocha 1322 0 32 1290 Dec-91 Department of Salto 1370 6 6 1370 Jan-92 Department of San Jose 718 4 3 719 Oct-91 Department of Soriano 1529 5 9 1525 Dec-91 Department of Tecurarmbo 1667 10 S0 1597 Jan-92 Department of Treants yTres 958 4 44 918 Nov-91 Municipality of Montevideo 12230 64 122 12192 Jan-92 Council of the DepL of Montevideo 349 5 8 346 Peb-92 General Total 258897 1893 2240 2585so - 44 - and state-owned financial institutions accepted early retirement with 12 months' severance pay under a program instituted in April 1990. About 30 percent of these are still working "under contract" on the Government payroll, however, although now without guaranteed employment security. Second, the Government has established a National Debureaucratization Program and an External Trade and Investment Deregulation Plan staffed by experienced public officials, within the Office of the Presidency. These activities have led to important improvements, but thus far they have fallen short of the thoroughgoing streamlining of procedures that a small nation requires. In particular, the early retirement program had the unfortunate consequence of encouraging more able and more essential civil servants to retire early (ANTEL had to improve its benefit structure to retain vital technical staff). 120. The necessary reform effort must go considerably deeper. The Uruguayan Government--'ndeed, Uruguayan society as a whole--must devise a thoroughgoing public administration reform. A small economy that must ensure its international competitiveness cannot afford a public sector that employs about 8 percent of the population (even after taking due account of the high overhead cost of being a sovereign republic). The Government must lead the nation to a consensus on the limited range of functions its public sector will henceforth carry on. It must then reconceive the administrative structure to carry out these functions efficiently, and finally devise and implement an administrative reform to take the civil service from its present structure to the new structure. Appreciable costs will inevitably be incurred in carrying out a reform of this kind, largely through early retirement payments. In implementing such a reform, it is essential that early retirement not simply be offered generally, since it will tend to be accepted by people who are more, not less, valuable to the civil service. 121. Until such a reform can be carried out, the authorities could develop interim programs to improve public sector efficiency. These could include a better targeted, early retirement program; a deeper deregulation and debureaucratization effort; improvements in budget monitoring; and more rational use of non-human public sector resources (including office space and real estate). Indeed, even before the deeper reform, various aspects of the administrative structure could be made more efficient: there is no need, for example, for both the National Customs Administration and the BROU to carry on customs inspections. G. The Social Security Problem 122. There is broad agreement that social security is Uruguay's core macroeconomic problem. The present system incorporates retirement, survivorship, disability insurance, family assistance and unemployment insurance. These programs are managed by the Banco de Prevision Social (the "BPS", despite its name, is an administrative unit, not a bank). (The military and police maintain separate, publicly managed funds, and bank employees, notaries, and university professors have separate state-regulated pension systems.) The BPS is now financed through payroll taxes and earmarked VAT revenues. For private sector payrolls, 7 percent of gross wages is applied to medical insurance and 29.5 percent to pension insurance - 45 - (13 percentage points of the total are paid by the employee and 16.5 by the employer). Public sector contributions are the same, except that the employer's contribution is only 19.5 percent. In addition, since July 1991 there has been a progressive tax on all remunerations, ranging from 3 percent to 8 percent. Five percentage points of the 22-percent value-added tax are earmarked to the BPS, and in any case the Central Government provides a transfer to cover any operating deficit. Pensions are set on the basis of the average wage earned in the three years preceding retirement and on the number of years worked. The minimum retirement age is 55 years for women and 60 for men. Pensioners sometimes establish the number of years they have worked on the basis of declarations supported by testimony; this system is by all accounts subject to widespread abuse. Evasion of contributions is known to be widespread. 123. In addition, there is a significant problem with the funding of public sector employees pensions. Private sector contributions and payments are in equilibrium, except for pensions of low income retirees that represent about 1/3 of the systems deficit. About 2/3 of the deficit represents underfunding of payments to public employees. Thus much of what is termed a social security deficit really represents a hidden cost of public sector employment. 124. Retirement and old-age benefits had declined in real terms through 1989 because they were not adjusted fully for inflation. A November 1989 referendum changed the constitution to require that pensions be adjusted at the same rate as public sector wages, and benefits are therefore tending to rise: in 1989 the average benefit was 58 percent of contributors' wages, but rose in 1991 to about 78 percent. The social security deficit is estimated to have risen from 2.7 percent of GDP in 1990 to 4.8 percent in 1991, and is likely to rise to about 5.4 percent in 1992. If there are no further changes, the deficit should persist in a range of 5 to 6 percent over the next two decades. Some 586,000 persons received retirement, pension-plan, and old-age benefits in 1990. Total contributors were estimated at about 800,000, out of a total population of 3.1 million and an economically active population of 1.4 million. 125. Demographics actually will be somewhat favorable t- the problem over the next two decades, essentially because the age structure has become so heavily weighted to older people that it will improve modestly: the dependency ratio (defined as men and women over the retirement age divided by the economically active population) is expected to decline gradually from 28.6 to 28 percent by 2010. The evasion rate it now esL .ted at about 24 percent, but the system's demographic and benefit structure is such that even if it fell very sharply, the projected deficit for the year 2025 (and prior years) would improve very little: a reduction in the evasion rate to 17 percent would improve the projected 2025 deficit from 4.8 to 3.8 percent of GDP. To maintain benefits at their current level under _-he existing system, the Government would have to maintain or increase its present high tax burden. 126. The Government proposed a reform and submitted it to the legislature for "urgent" consideration; it was rejected in May 1992, however. The proposed reform would have required the health insurance system to be in - 46 - equilibrium without government assistance. It would then have instituted personal accounts managed by the BPS, which would reduce the evasion problem because each worker would be responsible for his or her account. The pension benefit would be calculated on the basis of the accumulated amount of the account. The proposed legislation would also have made it advantageous for workers to delay their retirement to increase their benefits. Projections by BPS suggest that this reform would have ameliorated, but not entirely have eliminated the BPS deficit over the coming two decades. 127. The authorities are now working on a compromise to replace the failed reform effort. Uruguay would be best advised to develop a more thorough reform, including privatization of the system with individual accounts at specialized financial institutions, and correction of the deficit in the Government accounts. Short of that, the Government would be best advised to salvage as much of its reform proposal as it possibly can. Until these changes occur, the high cost of Uruguay's pensions will be borne by the society in the form of higher taxation or additional borrowing, and this will inevitably continue to compromise the economy's international competitiveness. H. Taxation 128. The rapid increase in tax proceeds over the past year and a half has constituted impressive short-term macroeconomic management, but it raises troubling concerns from the point of view of longer-term economic management. There are at least two interrelated considerations. First, taxation of the private sector may come at the expense of private saving rather than consumption; accordingly, the improvement in public saving could come at the expense of deterioration in private saving. Second, large tax increases are troubling on microeconomic grounds: higher indirect taxes, in particular, increase and distort production costs, making the economy less efficient in- ternationally (even with tax rebates for exports, which can never be more than partial and generate their own administrative problems). In addition, higher taxes and repeated changes in "the rules of the game" inevitably discourage private investment and capital inflows. For the short run, as noted above, the authorities remain best advised to increase taxes as rnecessary to hold the overall deficit under control. For the longer term, however, the authorities would be well advised to examine their revenue structure with a view to reducing it as a proportion of GDP and improving the tax structure on microeconomic considerations. 129. Uruguay's tax burden is relatively high by comparison with other Latin American nations. For eight Latin American economies (Brazil, Chile, Costa Rica, Dominican Republic, Mexico, Panama, Paraguay and Uruguay), tax revenue averaged 17.7 percent of GDP in 1988 (see "Trends in Government Expenditures and Revenues in Latin America, 1975-88"); the corresponding figure for Uruguay was 23.3 percent in that year, and has since then risen to 26.6 percent in 1991. Uruguay's social security tax burden was particularly high, at 7.1 percent of GDP compared with 4.9 percent for the eight-nation average. Taxes on transactions and production (including value-added and excises) totalled about 12 percent of GDP, compared with about 5.4 percent of GDP for the eight-nation average. - 47 - 130. Uruguay continues to have tax compliance problems. The large size of the public sector, the heavy weight of expenditures deriving from past commitments (notably debt service and pensions), and the heavy tax burden have inevitably affected taxpayer morale. Before the tax package at the end of 1991 that sharply curtailed them, extensive tax exemptions also worked against taxpayer morale. Many tax exemptions were provided through specific executive decisions, under legislation that effectively gave the decision power to the executive. Inevitably, the perception persisted that larger firms and politically influential entities were more likely to benefit from such exemptions. In general, taxpayers may perceive themselves as not benefiting from their support to the public sector, to the extent that these payments go to pensioners or debt holders. Emigration, particularly of younger people, and tax avoidance or evasion are indicators that currently active workers resent paying for past consumption of previous generations. 131. Largely for these reasons, tax administration is a long-standing problem. The authorities often have found themselves under pressure to use "tax handles"--taxes chosen more for ease of administration rather than for equity or allocative efficiency. While these raise revenues easily, they often represent a detriment to long run competitiveness, e.g. the tax on bank assets. Also, constant changes in "the rules of the taxation game" inevitably discourage saving and investment. 132. Uruguay's tax administration has gradually become more efficient. During 1991, the tax collection area of the revenue service (the "DGI") decided to broaden from the narrow "large-taxpayers" approach to include more taxpayers in its system. The DGI's audits area has begun more aggressive programs along the lines used in Chile to control evasion of the value-added tax. (In recent years, however, Chile has been deemphasizing its aggressive approach in favor of less disruptive means of securing compliance.) 133. Again, Uruguay requires a high tax level because it has a large public sector, essentially because of its high public employment and social security burdens. A reduction in the scope of the public sector is therefore a prerequisite to developing a plan to reform the tax structure. Once Uruguay can determine the dimensions of government and social security benefits it can reasonably afford for several decades to come, it can then design a tax structure with appropriate characteristics of equity and administrative cost. III. MACROECONOMIC PROSPECTS FOR THE MEDIUM TERM A. Investment, Savino and Real GDP Growth. 1970-91 134. Uruguay's GDP has grown modestly (about 1.5 percent annually based on a logarithmic time trend regression) since the mid-1970s, even taking into account the pronounced recession in the early to mid-1980s (see Figure 10). The low population growth rate (about 0.5 percent a year) implies modest real per-capita growth of about 1 percent per year. This reality differs somewhat from the widespread perception that Uruguay is stagnating. - 48 - 135. Real GDP grew at a brisk 4.3 percent annual average rate between 1974 and 1981, supported by relatively high gross fixed investment financed with foreign saving. Real output then plunged sharply in 1982 and 19&3 and continued to decline in 1984, as a consequence of the generalized financial crisis associated with the external debt crisis and the November 1982 devalua- tion. In 1984, real GDP was nearly 20 percent lower than in 1981. Output began to recover in 1985 and grew sharply in 1986 and 1987, led by the growth surges in Argentina and Brazil following the Austral Plan (June 1985) and the Cruzado Plan (February 1986), respectively. In 1987 real GDP just exceeded 1981 real GDP. Real growth slowed from 1987 through 1990, leaving real GDP only about 2 percent higher in 1990 than in 1981. In 1991, preliminary figures indicate that GDP grew about 1.9 percent; in 1992, growth is expected to exceed 3.5 percent. 136. The high 1976-1981 real growth rates, the 1982-84 depression, and the 1985-87 recovery can be clearly observed in Figure 10, which shows real GDP data from 1955 through 1991. The trend growth rate of 1.4 percent annually in the second half of this period--roughly, from the announcement of the 1974 liberalization reforms--is significantly higher in a statistical sense (although evidently much more variable) than the trend growth rate of 0.6 percent annually in the first half. The relatively more rapid 1977-1981 growth took GDP above the longer-term trend, and the recession of 1982-1984 took GDP below. Measured from the 1984 and 1985 recession trough, growth until 1991 would appear to be strong. Measured from the 1987 recovery point, however, growth would seem to be relatively feeble. The broad interpretation of the history described in Figure 10 is that the economy underwent relative stagnation between 1955 and 1974, partly because its import-substitution process proved so inefficient, and partly because of the lack of dynamism in its traditional agricultural export activities. Liberalization and availability of external financing enabled the economy to speed its growth between 1974 and 1982. Recession accompanied the debt crisis in the early 1980s. The Argentine and Brazilian stabilization efforts in 1985 and 1986, along with declining oil prices, contributed to recovery through recovered capacity utilization. After 1987, growth slowed, partly because of inadequate fixed investment, partly because of the 1989-90 drought. 137. Sectoral figures suggest that tertiary activities are becoming a leading source of growth in Uruguay (see Statistical Appendix, Table 2). Agricultural and fishing output grew at an average annual rate of only 0.8 percent between 1975 and 1990. Manufacturing output grew 0.9 percent per year over the same period, while other output--including services--grew 2.5 percent per year. From the peak year of 1981 to 1990, agricultural output fell 2.2 percent per year, manufacturing fell 0.6 percent per year, ard other activities grew 1.1 percent per year. From the depression trough years of 1984 to 1990, agriculture grew 2.9 percent per year, manufacturing 2.8 percent, and other activities 3.5 percent. Finally, from 1987 agricultural output grew 0.8 percent, manufacturing declined 0.8 percent, and other activities grew 1 percent. 138. Exports of goods and non-factor services grew at an annual average rate of 5.6 percent in real terms throughout the 1970-90 period. Imports Figure 10 URUGUAY: GROSS DOMESTIC PRODUCT GDP 1988= 100 110- 100 90 - _ _ 80 - Trend 1955-73 Avg = .6% irend 1974-91 Avg = 1.38% 70 - _______ 60 - 55 57 59 61 63 65 67 69 71 73 75 77 79 81 83 85 87 89 91 Source: IMF data and Central Bank of Uruguay - so - tended to follow the same pattern as GDP, growing through the late 1970s, then declining through the depression period before recovering toward the end of the decade (see Figure 11). The average annual real growth rate of imports was 1.7 percent for the period. The higher growth of exports closed the trade gap of the 1970s and offset the higher interest payments of the 1980s, reducing Uruguay's current account deficit and external borrowing requirements. 139. Gross fixed investment was low throughout the 1980s, implying that Uruguay may now be at or near full capacity utilization. Uruguay's national accounts indicate that the gross fixed investment rate has gone through three phases over the 1970s and 1980s (see Figure 12). Gross fixed investment averaged 11.8 percent of GDP from 1970 through 1976, 19.5 percent of GDP from 1977 through 1982 (a period when several important hydroelectric projects were completed), and 10.5 percent of GDP from 1983 through 1990. In real terms, if total real gross fixed investment in 1980 (the peak year for real investment) was 100, annual gross fixed investment averaged 45, 84, and 46, respectively, in the three periods. The 1977-82 period was characterized by high current-account deficits and high resource inflows accompanied, if not caused by, an appreciated real-effective exchange rate. This favored investment by providing incentives to imports generally and capital-goods imports in particular. Over the same three periods, imports of goods and non-factor services averaged 23.7, 27.6, and 23.5 percent of GDP respectively. 140. Gross fixed investment on the order of 10 percent of GDP is inadequate. At this rate Uruguay may even be failing to replace depreciating capital. If the capital stock has an average life time of 33% years, so that 3.3 percent depreciates each year, and if the capital-output ratio is between Figure 1 1 URUGUAY: REAL IMPORTS AND EXPORTS GOODS AND NON- FACTOR SERVICES 1983 New Pesos, Billions 80 - 6 0 ....... ......... ..... .. ...... ......... .. ............ ..... ....... .. .. .. .. ... ........... ................... ... ..... .. ....... ..... .. ..... ........... ...................................... 20 ... . .... ... ... ... -20--. .. . ..-.......... -40 .- . .. .... .... -60 - .................................. . . . ............... -80 -t 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 NExports rImports Source: Central Bank of Uruguay 8618eAPesdO joloasoil nd - 0681 89861 O8 98g1 Z961. 0961 OL8M1 9L61 bL6L ZL6L OL6I. 0 .. .. -OL9 .__._._._._._._... _._._._..... ....._._._ ........... ..............._._._ -. O Z 91. ...-.-.-.-... -..."SgHS . ,g 00 L = JUBWUJSsAUI 0861. iUl (0103 S AG) NOIIVWHV&IWVIIdV3 lS :IAfnlnun BMN=, .-~~~~~~~~~~~~~~~~~~~~~~~~~~~~1 le niinouBvm juewdinbe pue lueldg3 uollpnsuco M 066l 9896 986; t 86 Z86 tO 08 6; 8t 916 lVL t,6 ZL6 l OL6 l t1'~~~~~~~~~~~~~~~~~~~~~~~~~1 . .... ................................ ................ .-- -- ...... ..........................................S .......... -Z ' ... ....................................... ........ ............ ..... ... ........ . . ....... .. ....... . ......... . ...... .... .. . ...... . .. . ... .... .. .. .. .. . .. 8 091 001 = Jue U4SSAUI 081L IeWJO (UNII AS) NOliVWUO0S lVldVO IV3 1* :vnonun eel einB!4 _Zs_ - 53 - Figure 12c URUGUAY: REAL CAPITAL FORMATION AND GROSS NATIONAL SAVING 1983 Real GDP = 100 2 4 . . ...... ....................... .... ......................... ..,.. ...... .................... ..... .............. / \ ~~Capita Forrnation 20 20 _ ...........;; ... ............... . .......... ................ 12,.- . - - . ~~z4-. . .. ............GrsNtinaSaig ................. . . 4 - - ..N-.. 4. ..0.. -. .-.. -.-........... , 1, i , 1, i, 1, i, I, i . I . I- 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 Figure 12d URUGUAY: REAL CAPITAL FORMATION AND THE EXTERNAL RESOURCE DEFICIT 1983 Peal GDP = 100 24 - -- . ........................ l r Capital Formation 20 - ................ ..... . .... . ... ....................... 16 - ..... .......... ..............._ ................. 12 - .............. ; .. .......... 8~~~~~~~~~~~~~~~~~~~~~~~~~~~~.... _ .. ....... . .. .. ............>__ 4 _. ............................... ............... ............ ..I-------------- ^ < ....... Imports less Exports _ 0O -4 - - - - ------------- 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 - 54 - three and four, then depreciation would be between 9.9 and 13.2 percent of GDP. Uruguay's capital stock may be somewhat longer-lived on average, but it is probable nonetheless that Uruguay's investment rate since 1983 barely equaled replacement. Moreover, low investment implies that Uruguay's capital stock has been relatively older, and thus its plant and equipment is becoming increasingly obsolescent. 141. Figure 13 illustrates this point dramatically. It shows Uruguay's estimated capital stock as implied by the national accounts figures for GDP and gross fixed investment, under the assumptions that the 1954 capital stock was three times that year's GDP and that the annual depreciation rate has been 3.3 percent since then. On these assumptions, the capital stock would have deteriorated somewhat between 1970 and 1974, then grown rapidly until 1983, and then stagnated at just under three times 1988 GDP. 142. Uruguay's gross national savings aggregate remains too low, but it has improved considerably over the latter half of the 1980s. From 1980 through 1985 it ranged between 9.1 and 10.8 percent of GDP (measured on the basis of GDP at current prices). In 1986, however, the year the economy revived from the recession, it rose to 12.8 percent. Since then it has risen, reaching an estimated 15.7 percent of GDP in 1990. Continuing improvement in public-sector saving should make it possible for gross national saving to remain above 16 percent in coming years. B. Constraints on Economic Growth in the 1990s 145. If Uruguay is indeed approaching capacity limitations, then growth during the 1990s will require a higher investment ratio. The gradual improvement in its national saving ratios suggests that Uruguay is strengthening its ability to finance investment from domestic resources. Availability of domestic finance for investment requires the non-financial public sector to maintain a saving rate on the order of 3.5-5 percent of GDP, so that it can finance investment on this order of magnitude without increasing public-sector debt. If foreign saving (the current-account deficit) remains between -0.8 and 0.8 percent of GDP, as projected in the "macroeconomic consistency" analysis discussed below, gross national saving on the order of 13-15 percent of GDP should then permit private investment of roughly that order of magnitude. 146. At this writing, there are no obvious areas of concern regarding short-term changes in world interest rates, oil prices, or other commodity prices that could have a significant impact on Uruguay. World real interest rates are now at record low levels, and oil prices are relatively low, which favors Uruguay. On the unfavorable side, wool and beef prices, and the important markets of Brazil and Russia, are relatively depressed. Even in these circumstances, however, Uruguay has managed co maintain current account surpluses with real growth. For the near term, barring unforeseen developments in the broader world economy, the direction and magnitude of macroeconomic fluctuations in Argentine and Brazil are the largest sources of uncertainty governing Uruguay's current and short-term capital accounts. Sharp real effective devaluation in Argentina could r3pidly reduce Uruguay's Figure 13 URUGUAY: ESTIMATED REAL CAPITAL STOCK 1970-1991 1988 GDP= 100 350 - 340 - _- 330 -. .. ._......... . 320--.... . . . 310---- _ . . ....._.. 300 - .. . . . .. _. 290 - ..... ._. ... . . _... 280- , - i - i , i, . I . I . I . I § 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 Assumed 1969 K/Y = 4; depreciation = 3.0% per year - 56 - tourism exports, for example, or surging real Argentine interest rates could produce a capital outflow. In either case, the T'ruguayan authorities might use exchange-rate and monetary policy to offset the balance-of-payments developments. 147. On present assumptions regarding likely international economic developments, Uruguay's balance of payments is unlikely to present an obstacle to growth during the 1990s (see text Table 3A). A projection based on the World Bank's PAC assumptions for external prices and interest rates suggests that Uruguay should be able to manage real annual growth of 2 percent and maintain its current account surplus between -0.8 and 0.7 percent of GDP from 1992 through 1998. "Identified" financing sources should be available to cover this: the projection suggests that no "unidentified" financing gap would emerge. On the assumptions of the calculations, medium- and long-term debt should decline from 27.4 percent of GDP in 1991 to 22.7 percent by 1998, through amortization and GDP growth. 148. To illustrate the downside risks, if the World Bank PAC assumptions for the period 1992-98 are changed for each year to have (i) LIBOR one percentage point higher; (ii) export prices of wool, beef, hides, and rice 5 percent lower; and (iii) petroleum import prices 5 percent higher, Uruguay should still be able to manage real annual growth of 2 percent, although with current account deficits ranging between -1.6 and 0.3 percent of GDP (see text Table 3B). Even under this scenario, medium- and long-term debt should still decline from just under 27.4 percent of GDP in 1991 to about 22.7 percent by 1998; the only difference between the scenarios is that in the first foreign exchange reserves would average 8.7 months of gocds and non-factor services, whereas in the second they would average 7.5 months. TABLE 3A.: URUGUAY: MACROECONOMIC CONSISTENCY CHECK, 1991-1998. (USIN1G ThE WORLD BANK 'PAC' ASSUMPTIONS) Estimated 1989-1990; proiceted 1991-1998. 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1992-1998 (Average) Real growth rates- Real GDP 0.5% 0.9% 1.9% 2.0% 2.0% 2.0% 2.0'% 2.0% 2.0% 2.0% 2.0% Per-capita private consumption 0.0% 0.0% -03% 53% 4.1% 2.8% 2.9% 2.8% 2.8% 2.7% 3.4% Gross fixed capital formation: -3.0% 3.8% 428% 2.09% 2.0%o 2.0% 2.0% 2.0% 2.09%o 2.0% 2.0% Private -0.8% .2% 59.2% 2.0% 2.0% 2.-Y 2.0% 2.0% 2.0% 2.0% 2.0% Public -6.7% 6.8% 13.7% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% zporisofgoodsand non-factorservices 9.8% 65% 1.7% 0.3% 0.3% 0.3% 0.4% 04% 05% 05% 0.4% Importsofgoodsandmon-factorservices 0.6% -4.5% 17.8% 3.9% 3.8% 15% 2.0% 1.6% 1.6% 1.6% 2.3% Peccnt of GDP , U' Gross ruxed capital formation: 10.4% 0L.7% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% Privale sector 6.8% 6.8% I1Q7% 10.7%o 10.7% 107% 10.7% 10.7% 107% 10.7% 10.7% Public sector 3.6% 3.9% 4.3% 4.3% 4.3% 43% 4.3% 4.3% 4.3% 43% 4.3% Exports of goods and non-factor services 27.7% 29.2% 29.1% 2&7% 28.2% 27.7% 27.3% 26.9% 26.5% 26.1% 27.3% Imporis of goods and non-factor services -25.4% -24.1% -27.9% -28.4% -28.9% -28.7% -28.7% -28.6% -28.5% -28.4% -28.6% Current-account baman c(surplus) 2.09 2.9% 1.0%o 0.7% _-oV0. 0.0% -Q2% -04% -0.6% -Q8% -0.2% Resource balance (surplus) 6.3% 6.7% 3.0% 2.2% 1.2% 1.1% 0.8% 0.6% 0.4% 0.2% 0.9%o Public-sector extemal interest paynents 35% 3.1% 2.2% 1.8% 1.7% 1s% 1.8% 1.8% 1.7% 1.7% 1.8% Other current account -0.99% -Q7% 02% 0.3% 05% 0.8% 0.8% 0.8% 0.7% 0.7% 0.7% Combined public-sector balance -7.3% -3.3% -0.9% 0.3% 05% 0.7% 0.9% 1.2% 15% 1.7% 1.0% Public-sector domestic debt/GDP (period-av&) 27.2% 26.5% 21.7% 116% 15.8% 13.4% 11.1% 9.0% 7.1% 5.4% 11.5% Cap.-goods impsJgr. fixed investment (percent) 19.2% 20.3% 18.4% 18.4% 18.3% 18.3% 1&2% 18.1% 18.1% 1&0% 1&2% TABLE 3A: URUGUAY: MACROECONOMIC CONSISTENCY CHECK, 1991-1998. (cont'd) (USING TIHE WORLD BANK 'PAC' ASSUMPFIONS) Estimated 1989-1990, projected 1991-1998. 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1992-1998 (Average) Millions of US dollars: Curreat-acountbalance(surplus) 155 236 l00 75 -1 4 -28 -55 -84 -116 -29 Resource balance (surplus) 496 550 293 219 134 122 97 73 48 22 102 Net international reserves: change 122 285 148 425 279 272 14e 92 86 93 200 International-reserve assets: change 19 170 105 496 270 264 A44 76 70 76 199 Net internationalreseres: stock 1154 1191 1327 1752 2031 2303 2452 2544 2631 2724 2348 Foreip-cxchang reserves: stock 501 544 688 1184 1453 1717 1862 1937 2007 2053 1749 (Monthsofgoods-and-non-factor-s nvicesimpwts) 4.0 4.1 4.4 7.2 8.2 9.1 93 9.1 8.9 8.7 8.7 NetextcrnaWbonrowingrequirement -15 -171 -140 296 149 143 92 47 64 98 127 Gross external borrowing requirement 295 182 972 529 384 397 386 378 406 431 416 % ofwbich, unidentiried 0 0 0 0 0 0 0 0 0 0 0 t Debt-service payments (USS million) 647 667 1376 458 469 513 577 623 638 636 559 (Percent ofgoods-and-non-fac.-semv imports) 32.4% 31.3% 63.9% 2&9% 20.7% 21.5% 23.1% 23.8% 232% 22.0°5 22.2% Period-endmed.-and long-termdebt(USSmillion) 3274 3103 2648 2903 3000 3093 3152 3164 3192 3252 3108 (Percent of GDP) 41.9% 37.8% 27.4% 28.7So 27.9% 27.2% 26.2% 24.8% 23.6% 22.7% 25.9% Source: World Bank staff projctions. 1.25E-12 TABLE 3B. URUGUAY: MACROECONOMIC CONSISTENCY CHECK. 1991-1998. (ASSUMING ADVERSE SHOCKS WITH RESPECT TO THE 'PAC' ASSUMPTIONS) Estimated 1989-1990 projected 1991-1998. 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1992-1998 (Average) Real growth rates: Real GDP 05% 0.9% 1.9% 2.0% 2.0% 2.0%o 2.0% 2.0% 2.0% 2.0% 2.0% Per-capita privatc consumption 0.0% 0.0%o -0.3% 5.1% 4.1% 2.8% 3.0% 2.8% 2.8% 2.7% 3.3% Gross fiaed capital formation: -3.0%o 3.8% 42.8% 2.0% 2.0o 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Private -0.8% 2.2% 59.2% 2.0% 2.0% 2.0o 2.0% 2.0% 2.0% 2.0% 2.0% Public -6.7% 6.8% 13.7% 2.0% 2.0% 2.096 2.0% 2.0% 2.0% 2.0% 2.0% Exports of goods and non-factor servies 9.8% 65% 1.7% 0.2% 02% 03% 03% 0.4% 0.4% 05% 03% Imports of goods and non-factorservices 0.6% -45% 17.8% 3.5% 3.8% 15% 2.0% 1.6% 1.6% 1.6% 2.2% Percent of GDP. Gross rtxed capital formation: 10.4% 107% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 15.0% 'D Private sector 6.8% 6.8% 10.7% 10.7% 10.7% 107%6 10.7% 107% 10.7% 1Q7% 107% I Publie sector 3.6% 3.9% 43% 4.3% 4.3% 4.3% 43% 43% 43% 43% 43% Exports of goods and non-factor srvices 27.7% 29.2% 29.1% 28.6% 28.1% 27.7% 27.2% 26.8% 26.4% 26.0% 27.2% Imports of soods and inon-factor service6 -25A% -24.1% -27.9% -283% -28.8% -28.6% -28.6% -285% -28A% -283% -285% Currcnt-account balaac (surplus) 2.0% 2.9% 1.0% 03% -05% -0.5% -Q.8% -1.1% -1.3% -1.6% -Q08% Resouee balarp (surplus) 63% 6.7% 3.0% 1.8% 0.8% 0.7% 0.4% 0.1% -Q.l% -0.3% 05% Public-sector external interest payments 3.5% 3.1% 2.2% 1.8% 1.8% 1.9% 1.9% 1.9%o 1.8% 1.7% 1.8% Other current aount -O.9O -0.7% 0.2% 0.4% 05% 0.8% 0.8% 0.7% 0.6% 05% 0.6% Combined public-sectorbalance -73% -33% -0.9% 03% 0.4% 0.6% 0.8% 1.1% 1A4% 1.6% 0.9% Public-sector domestic debtGDP(period-av&) 27.2% 26.5% 21.7% 1&6% 15.8% 13.4% 11.1% 9.090 7.1% 5A% 11.5% Cap.-goods imps./gr. rtzed investment (percent) 19.2% 20.3% 184% 18.4% 18.3%o 183% 1&2% 18.1% 1&1% 18.0% 18.2% TABLE 3D. URUGUAY: MACROECONOMIC CONSISTENCY CHECK, 1991-1998. (cont'd) (ASSUMING ADVERSB SHOCKS WITH RESPECT TO THE 'PAC ASSUMPTIONS) Estimated 1989-1990- projected 1991-1998. 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1992-i998 (Averag) M;iUions of US dolars: Curreat-count talnce(surplus) 155 236 100 33 -53 -56 -97 -135 -176 -222 -101 Resourcebalance(surplus) 496 550 293 177 90 74 46 18 -12 -43 50 Netinternationalreserves:change 122 285 148 378 227 211 80 12 -6 -14 127 International-reseve assets change 19 170 105 449 218 204 75 -S -23 -30 127 Net international reservs stock 1154 1191 1327 1705 1933 2144 2223 2Z36 2229 2216 2098 Foreign-change reserves: stock 501 544 688 1137 1355 1558 1633 1628 1605 1575 1499 (Months of goods-and-non-astor-serics impons) 4.0 4.1 4.4 6.9 7.6 83 8.2 7.7 7.1 6.6 75 Net eternal borrowing requirement -15 -171 -140 291 149 142 92 46 64 98 126 Gross external borrowing requirement 295 182 972 525 384 397 386 378 406 430 415 0' ofwicb, unidenfilied 0 0 0 0 0 0 0 0 0 0 0 0 Debt-servce payrnents (US$ million) 647 667 1376 466 485 529 593 639 654 652 574 (Percent of goods-and-no-fac.-serv. impors) 32.4% 31.3% 63.9% 21.7% 21.8% 22.6% 24.2% 24.9% 24.3% 23.1% 23.2% Period-end med.-and-long-ternt debt (USS million) 3274 3103 2648 2903 3000 3093 3152 3164 3192 3252 3108 (Paeent of GDP) 41.9% 37.8% 27.4% 28.7% 27.9% 272% 262% 24.8% 23.6% 22.7% 25.9% Souwce: World Bank staff practions. 287E-13 - 61 - ANNEX 1: SOURCES OF IMPROVEMENT IN THE PUBLIC SECTOR ACCOUNTS. 1989-91 1. The overall public sector deficit improved from 7.4 percent of GDP in 1989 to 3.6 percent in 1990 and then to 1.1 percent in 1991. Examination of the public sector accounts for 1989, 1990, and 1991 (see Statistical Appendix, Table 5) reveals that the bulk of the improvement came through an increase in government revenue of approximately 4.8 percentage points of GDP. Non-interest expenditure of the general government remained virtually unchanged at about 26 percent of GDP. Public enterprise performance improved by about one percentage point of GDP. Lower domestic and external interest charges reduced the deficits of both the non-financial and financial public sectors, but especially the latter: the financial public sector accounts improved by about 1.3 percentage points of GDP. 2. In the conventions used for macroeconomic programming, Uruguay's "overall" public sector accounts comprise the non-financial and the financial public sectors. The non-financial public sector comprises: (a) general government; and (b) non-financial public enterprises, with "general government" in turn comprising: (i) the central administration; (ii) the social security accounts; and (iii) departmental and municipal governments. The financial public sector comprises: (a) the Central Bank (the "para- fiscal" deficit); (b) the "administered" banks (banks under intervention); and, beginning with the proposed 1991 IMF stand-by program; and (c) the Mortgage Bank. (The overall deficit used for purposes of the World Bank's SAL II included neither the administered banks nor the Mortgage Bank.) Although it is entirely state-owned, the Bank of the Republic's deficit is not included in the conventional deficit aggregates. 3. Uruguay's deficit figures are on a nominal basis--that is, no adjustment is made to account for the effect of domestic inflation on public sector Weso-denominated debt. _pite the high inflation, use of an "operational" deficit, i.e., a deficit adjusted in this sense, would make little difference because Uruguay's public sector debt is overwhelmingly dollar-denominated. 4. The Non-financial Public Sector. The non-financial public sector accounts went from a deficit of 3.6 percent of GDP in 1989 to surpluses of about 0.5 percent in 1990 and about 1.4 percent in 1991. Non-financial public sector saving (i.e., non-financial public-sector current revenue less current expenditure) rose from about zero in 1989 to 4.4 percent in 1990 and to 5.5 percent in 1991. Public sector capital formation rose from 3.6 percent in 1989 to 3.9 percent in 1990, and then to 4.1 percent in 1991. In the same years, central administration capital formation fell from 2.3 percent to 2 and then 1.9 percent, while public enterprise capital formation rose from 1.2 per- cent to 1.9 and 2.3 percent. 5. For the four quadrimesters of 1991, the combined overall public sector deficit (excluding the BU) was 0.2, 1.3, 0.6, and 1.1 percent of GDP, a strong performance compared with 6.9, 2.5, 0.8, and 4.7 percent of GDP for 1990. Current revenue of the central administration and social security - 62 - administration reached 29.4 and 29.7 percent of GDP, respectively, in the first two quadrimesters of 1991 before declining (partly under seasonal pressures) to 27.1 and 25.6 percent in the subsequent two quadrimesters of 1991. The non-financial public sector deficit remained in surplus throughout the four quadrimesters of 1991, although it declined from 3.2 percent of GDP in the first quadrimester to just under 1 percent of GDP over the remaining quadrimesters. The Central Bank's quasi-fiscal operations improved from a deficit of 3 percent of GDP in the first quadrimester to about 2 percent of GDP over the remaining three quadrimesters, largely reflecting declining world and domestic interest rates. Preliminary figures suggest that the tax package introduced at the end of 1991 lifted general government revenues to almost 30 oercent of GDP in the first quadrimester of 1992, and the overall public sector accounts actually went into surplus. 6. General Government. Revenue of the general government rose from 21.8 percent of GOP in 1989 to 25 percent in 1990 and 26.6 percent in 1991. The 1990 and 1991 figures were the highest since (at least) 1976. The 1989 figure was one of the lowest after 1980; only the figure for the (deep recession) year of 1984 was lower. Central administration revenue rose from 15.9 percent of GDP in 1989 to 18.1 percent in 1990 and 19.1 percent in 1991, while social security revenue rose from 5.9 percent of GDP in 1989 to 7 percent in 1990 and 7.6 percent in 1991. This performance reflects the Government's willingness to use tax increases in the struggle to control the deficit. 7. Current expenditure of the general government dipped from 28.2 percent of GDP in 1989 to 27.7 percent in 1990, then rose slightly to 27.9 percent in 1991. Current expenditure of the central administration fell from 17 percent of GDP in 1989 to 16.2 percent in 1990, but then rose slightly to 16.7 percent in 1991. The central administration's personnel expenditures declii:ed from 5.8 percent of GDP in 1989 to 5.4 percent in 1990 and 5.2 percent in 1991, mainly through a substantial reduction in real wages (see Figure 1 in the main text). This was partly offset by severance payments (as discussed below). The lower wage bill was almost entirely offset by an increase in current expenditure on other goods and services from 2.4 percent of GDP in 1989 to 2.9 percent of GDP in 1991. Interest payments of the central administration declined slightly from 2.0 percent of GDP in 1989 to 1.8 percent of GDP in 1991, mainly as a result of lower domestic interest rates (the central administration owes none of the debt affected by the Brady transaction). The central administration's transfer to social security-- including the contributions for its workers--fell from 5.3 percent of GDP in 1989 to 4.6 percent in 1990, but returned again to 5.3 percent in 1991. 8. The effect on the wage bill of lower real wages has been partially offset by the effects of a program instituted in April 1990, which offered 12 months' wages to public sector employees voluntarily electing early retirement. The offer was open through the end of February 1991. About 5 percent of the workers in the Central Government and public enterprises are now estimated to have taken advantage of it. During 1991 the wage bill included some of their severance pay; moreover, many workers who accepted severance packages remained at work under contracts (which can, however, be terminated at any moment). The positive impact of the program will be felt - 63 - beginning mid-1992 because there were delays in implementation of the program: existing statutes require public workers who resign to undergo a lengthy bu- reaucratic process intended to ensure that workers were not resigning under political pressure. The fact that the program was open to all public sector workers had at least one undesirable consequence: relatively younger and relatively skilled workers, who had the best prospects of finding new employment, were naturally the first to take advantage of the offer. Certain public enterprises lost some skilled workers and professionals. The telephone company (ANTEL) had to improve its benefits to retain some essential employees. 9. Public sector wage-determination remained a quandary for the Government through 1991. In March 1991, the Government indicated that it would henceforth try to maintain a constant real wage bill, which real GDP growth would cause to decline gradually over time as a percentage of GDP. In addition, as public sector employment diminished through the early-retirement program the Government had announced about one year earlier, this policy would permit public sector real wages to climb toward the September-December 1989 level. The Government's July 1991 policy memorandum on wages and public enterprise prices indicated that the Government would aim hence.orth to limit all remuneration paid by the Treasury, such that, by the end of each auad- rimester, measured on an accumulated basis from January 1991, total wages and wage taxes paid never exceeded 39 percent of the total revenue collected by the General Tax Directorate. (The percentage for 1990 had been 39 percent.) Under this policy rule, assuming GDP roughly constant, 61 percent of any marginal increase in tax revenues could go to reducing the fiscal deficit. However, if taxes rose with GDP, the wage bill could rise accordingly. Later, the authorities indicated that they would adjust wages in line with the exchange rate, on the assumption that this would help maintain Uruguay's in- ternational competitiveness. However, many observers found it difficult to discern how this policy approach was in fact being implemented. (See Annex 2 below for a further discussion of wage "indexation".) As noted in the main text, the average public sector wage level over 1991 was virtually the same as over 1990, which was 9.3 percent lower than the level over 1989. 10. Social security revenues rose from 5.9 percent of GDP in 1989 to 7.6 percent of GDP in 1991, as a consequence of higher tax rates and improving administration. Social security expenditures rose slightly, from 11.2 to 11.3 percent. Because social security expenditures exceed revenues, and there is some lag in both benefit payments and revenue collection, a lower inflation rate tends to widen the social security system's deficit through the Tanzi effect. The fact that inflation was higher in 1989 than in 1990 but lower in 1991 partially explains why the social security system deficit (before the transfer) improved in 1990 and worsened in 1991. The transfer from the central administration to the social security system was smaller in 1990 than in 1989 in part because inflation was higher during 1990 than during 1989: the fact that social security expenditures exceed revenues implied that inflation caused a larger reduction in the real value of payments than in the real value of revenues. 11. Public enterRrise performance improved considerably between 1989 and 1991. The current operating surplus moved from an overall deficit of - 64 - 0.2 percent in 1989 to a surplus of 3 percent in 1991. The three largest enterprises--the fuel, telephone, and electrical power entities--constitute just below 90 percent of total public enterprise activity. Relatively high pricea in combination with diminishing real wage bills and lower finance charges contributed to this outcome: personnel expenditure fell from 2.1 percent of GDP in 1989 to 1.9 percent in 1991, and interest expenditure fell from 1 percent of GDP to 0.5 percent in 1991. Sharp increases in public service prices--particularly in May 1991--explain the bulk of the improvement, however: the state enterprises recorded a deficit of 1 percent of GDP in the second quedrimester of 1991, but then surpluses of 0.4 and 2 percent of GDP in the third and fourth quadrimesters. (The 1989 performance was influenced by drcught conditions, which caused some limitations in power production.) The May 1991 increases contributed to that month's high inflation rate. 12. The Financial Public Sector. The financial public sector deficit, encompassing the Central Bank and the administered banks, accounted for a large part of the improvement in the overall public sector accounts between 1989 and 1991 (see Statistical Appendix, Table 6). The Central Bank's losses rose slightly from 3.3 percent of GDP to 3.6 percent of GDP in 1990, then fell to 2.3 percent in 1991. The 1-percentage-point-of-GDP improvement in the Central Bank's losses between 1989 and 1991 accounted for a relatively small part of the 6.3-percentage-point improvement in the overall deficit; but the 1.3-percentage-point improvement in the Central Bank's losses between 1990 and 1991 was more than half the 2.5-percentage-point improvement in the overall deficit between 1290 and 1991. 13. Central Bank losses arise mainly from servicing its interest-bearing debt, and the .f rovement in its accounts are largely the consequence of lower interest rates and smaller liability stocks. The Central Bank's foreign-exchange expenditure fell by one percentage point of GDP between 1989 and 1991, while expenditure to service the Central Bank's own "Monetary Regulation Bills" (LRM) fell from 1.1 percent in 1989 (and 1.4 percent in 1990) to 0.9 percent of GDP, partly through lower domestic interest rates, but also because the monetary authority sharply reduced the stock outstanding. The Central Bank services external debt originally contracted by the public and private sectors, which was refinanced under various arrangements during the 1980s. The Central Bank also carries and services some external debt due to bilateral and multilateral entities, and it also carries the debt to the IMF. Remuneration of Central Bank liabilities is in itself a source of money creation, and at least partially offsets the monetary absorption achieved by issuing sterilization instruments such as the LRM. 14. LRM rates have been determined through auction since June 1990. The fact that LRM could be placed at interest rates even lower than the prevailing inflation rate helped the authorities maintain some control over the outstanding LRM stock. Until early 1992 the authorities gradually worked down the outstanding LRM stock, but then expanded it to counteract liquidity growth coming from external sources. Care must be taken with this policy; it not only creates new Central Bank liabilities whose service increases future para-fiscal deficits, but also encourages further financial inflows. - 65 - 15. Inclusion of the profits and losses of the state-owned banks in the overall deficit poses conceptual and measurement problems. The banks' overall losees include non-operating losses (such as asset write-offs) that have no consequence for current borrowing requirements, although they do affect capital and do ultimately affect the banks' capacity to service their debt, i.e., meet withdrawal demands. Other practical measurement problems include consolidation issues: the BROU and BHU earn interest on holdings of Treasury obligations; for example, during consolidation, such interest should disappear. 16. Uruguay's para-fiscal deficit is a serious problem, because in itself it constitutes a source of monetary expansion; moreover, over the longer term it decapitalizes the Central Bank, diminishing the monetary authority's financial capacity to carry on stabilization policy. For various reasons, however, Uruguay's para-fiscal deficit has not been as serious a problem as Argentina's quasi-fiscal deficit in the latter part of the 1980s. First, external debt and foreign exchange deposits, which pay relatively low international interest rates, figure far more prominently in Uruguay's Central Bank debt than they did in Argentina. Second, remuneration of bank reserves and the interest bill on LRM have been far smaller in magnitude than the cor- responding figures were in Argentina in 1988 and 1989. Because interest rates on LRM -^e negative in real terms, it is less likely that these debt stocks would mushroom in the near term. 17. The composition of Uruguay's public deficit figures is affected by the fact that the Central Bank carries a significant amount of debt on its books that should more properly be regarded as Treasury debt. The nonfinancial public sector accounts are in surplus, but it is important to remember that the bulk of the public sector debt to foreign commercial banks is on the Central Bank's books. This is arbitrary; if this debt were on the Treasury's books, the Treasury deficit would be larger and the Central Bank deficit smaller, although the overall deficit would be the same. 18. Public Sector Domestic Indebtedness. At the end of September 1991, total public sector domestic debt stood at US$2.3 billion, of which just under 95 percent was in dollars. (Because the obligations promise to pay dollars, they could be regarded as external debt, and relatively old debt at that. The World Bank's World Debt Tables record only the estimated stock held by nonresidents.) The bulk of this debt was Treasury debt in the form of bonds and bills (see Figure 1). About US$10 million in Mortgage Bank bonds and US$57 million in Central Bank Monetary Regulation Bills (LRM) remained outstanding. The Mortgage Bank has issued no new bonds in recent years; the bonds outstanding are the remnant of older issues. The Central Bank issues are for open market operations, as discussed above. 19. At something on the order of 25 percent of GDP, Uruguay's public sector internal debt is on the same order of magnitude as its external debt. This is a heavy burden, and the authorities have been understandably determined to reduce it. Thus far, they have succeeded in keeping the debt from grow4.ng. At the end of March 1990 Treasury debt totalled US$2.08 billion; at the end of June 1991 it stood very slightly higher, at US$2.18 billion. In contrast, over the two years before March 1990 the Annex 1 Figure URUGUAY: INTERNAL TREASURY DEBT US$ Billion 2.4 2.0.-._--;.r. 1.8- 1.6- 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 Jun-87 Dec-87 Jun-88 Dec-88 Jun-89 Dec-89 Jun-90 Dec-90 Jun-91 Dec-91 Source: Central Bank of Uruguay - 67 - Treasury debt stock had increased at a rate of just under US$300 million a year. During 1991, the cost of servicing and refinancing the debt has been relatively lower, largely because LIBOR has fallen sharply, and also because substantial financial inflows have placed further downward pressure on domestic interest rates. The ratio of dollar debt to peso GDP has also fallen because of the peso's real effective appreciation. The authorities are well aware that these conditions could reverse, and they aim accordingly to reduce the debt stock to the extent possible by running a surplus in the public sector accounts. 20. During 1991 the authorities succeeded in lengthening the average term of the dollar-denominated debt and have placed it at lower rates. In mid-1990 the Treasury placed dollar-denominated bills and bonds at spreads of 1.3-1.5 percentage points above LIBOR. In recent months they have made place- ments at rates below LIBOR. This constitutes further evidence that Uruguay is receiving substantial financial inflows, i.e., liquidity appears to be available in domestic financial markets. In any event, even if these capital inflows reverse somewhat over 1992, it is unlikely that the cost of the debt will increase excessively. 21. In contrast with the "distress" crises that mushrooming public sector internal debt has occasioned in Argentina and Brazil in recent years, Uruguay's internal debt appears not to present immediate "distress potential". Because the bulk of the debt is in dollars, its cost has remained within range of international standards; had the debt been in pesos, real interest rates--and the accumulated debt stock--would probably have been considerably higher. If Uruguay's dollar GDP grows, the ratio of the debt stock to GDP should remain more or less constant even if the Treasury carried out no net amortization. To the extent the Treasury manages a sustained primary surplus and applies the proceeds to amortize its debt, the debt-GDP ratio should tend to decline. This should reduce the pressure on domestic interest rates. 22. The fact that the public sector domestic debt is overwhelmingly dollar-denominated implies that it would make little difference to use an "inflation-adjusted" deficit to monitor public sector performance. Uruguayan policy-makers trying to meet IMF program targets might, it is claimed, systematically avoid issuing lower-cost peso-denominated debt, fearing that high nominal interest rates might worsen the nominal deficit. Peso interest rates are now relatively low, inter alia, because the outstanding stock of peso obligations is small; substantial issues of peso-denominated debt could probably force up peso interest rates very quickly. 23. Where a government has significant outstanding domestic-currency obligations, and where inflation is high and variable, use of a nominal-basis deficit for performance evaluation has at least two practical implications. First, as an example, suppose the inflation rate increased on account of a balance-of-payments surplus, and nominal domestic interest rates rose in response to higher expected inflation while real interest rates diminished in response to improved liquidity conditions. As they refinanced short-term peso-denominated obligations, the authorities would find their nominal interest bill and nominal deficit increasing, even though their real interest bill was diminishing. Second, in circumstances like these, the authorities - 68 - might not know how much adjustment they would have to carry out to meet pro- gram targets until it was too late. For example, suppose the nominal interest rate at which the authorities must refinance outstanding domestic-currency debt rises sharply in the third month of a quarter for which performance targets must be met. There might be no time to reduce other expenditures to offset the higher nominal interest bill. 24. The macroeconomic consistency analysis for the period 1992-98 presented in Part III, Section B, incorporates a forecast of the growth rate of the domestic debt. Under the assumptions of that analysis, the year- average public sector domestic debt stock over each year would decline steadily as a proportion of GDP from 21.6 percent in 1991 to 5.4 percent by 1998. (The projection calls for a combined public sector surplus on the order of 1 percent of GDP, which permits retirement of both domestic and external debt.) 25. Developments in Fiscal Policy at End-1991. In the absence of new measures, programmed tax reductions, including the phasing out of the tempo- rary tax increases enacted in April 1990 and tariff reductions, would probably have produced a deterioration in the fiscal accounts of at least 0.5 percentage points of GDP between 1991 and 1992, and possibly as much as 1.5 percentage points. While the overall 1992 deficit would probably have remained within the SAL II conditionality limits originally set out for 1989 and 1990 (a floor of 2.7 percent of GDP for non-financial public saving and a ceiling of 3.5 percent for the overall deficit), the authorities have been persuaded that a convincing fiscal policy would have to be tighter. Toward the end of 1991, the au3thorities decided to postpone reducing the VAT rate. At the end of December they also announced a package of fiscal decrees. As a result, Government revenue performance improved as economic activity remained robust and domestic and world interest rates remained low. 26. The basic VAT rate was to have declined from 22 to 21 percent in October 1991. The Government decided, however, to maintain the higher rate. The Government estimates that, had it allowed the VAT rate to decline in October, the VAT yield would have been about US$27.5 million less in 1992 (0.3 percent of GDP) than in 1991 with a constant GDP Thus the maintenance of the VAT contributed considerably to the higher revenues of 1992. 27. The most important measure in the year-end package was a decree revoking all previous decrees that provided tax exemptions of any kind. The authorities estimate that this ac. on alone would yield tax revenues on the order of 0.5 percent of GDP in 1992. Further adjustments were made to the regulations regarding the IRIC, the IRP, and the net worth tax, with an estimated positive effect on revenue of about 0.1 percent of GDP. The sales tax (IMESI) rate on certain items, notably tobacco products, was increased for an estimated yield of about 0.1 percent of GDP. In the area of social security, the Government raised the employer contribution for health insurance to the maximum currently allowed, from 4 to 5 percent of each enterprise payroll. This measure was estimated to yield about 0.1 percent of GDP. On the expenditure side, the Government announced changes in the system of con- tracting for public works via leasing arrangements; these changes were estimated to reduce 1992 expenditure by 0.2 percent of GDP. - 69 - 28. The Government has estimated that the reduction in the IRIC tax rate will imply a decline in the 1992 IRIC yield of about US$20 million compared with 1991. Moreover, under the preaent schedule for reducing the IRP rate, part of which has gone into effect during 1991, the Government estimates that the yield during 1991 has already been US$20 million lower than it would have been with no change in the surtax, and that it will be another US$20 million lower in 1992 than in 1991. The total consequence of these changes would be a decline in public sector savings of less than US$40 million, or about 0.5 percentage points of GDP (taking GDP to be US$9.1 billion). In addition, this would be offset to the extent real GDP grows: the Government estimatee that these taxes have short-term elasticities with respect to real GDP of between one and 1.5. If GDP grew in real terms by 2 percent during 1992, the additional tax yield might offset the effect of the lower tax rate by US$20-25 million, or 0.3 percentage points of GDP, leaving a minimal net decline, on the order of 0.1 percentage points of GDP. 29. As noted earlier, the Lacalle Government has reduced tariffs from the 40-35-30-20-10 percent schedule it inherited to a 20-15-16 schedule in January 1993. The Government correctly estimated, however, that higher import flows, together with the reinst,.tement of capital goods tariffs would imply that tariff revenue will decline negligibly, if at all, in 1992. - 70 - ANNEX 2: URUGUAY'S INFLATIONARY EXPERIENCE 1. Unlike some of its neighbors, Uruguay has never experienced hyperinflation, and even double-digit monthly price-level increases have been exceptional. This partly explains why it has never attempted heterodox stabilization, and has never imposeo price freezes. Nevertheless, chronic in- flation has had a corrosive effect on Uruguay's economy. It has weakened the effectiveness of the price system in allocating resources; discouraged capital formation; and forced the political system to concentratG on income distribution to the detriment of growth and development. 2. Annual inflation over the past two decades has run on the order of 60-80 percent (see Figure 1). The external debt crisis of the early 1980s intensified inflationary pressure in Uruguay, as in other Latix. American economies: annual inflation averaged 75 percent after 1982, compared with about 65 percent from 1970 through 1982. overseas bank finance enabled Uruguay to sustain an appreciating real effective exchange rate and (hence) high current-account deficits in 1978-82. The real effective exchange rate (1988 = 100) appreciated from 92.0 in December 1978 to 63.7 in November 1982. The current account deficit, which never exceeded US$200 million in any other year before or sincr, reached US$357.1, US$709.1, US$461.4, and US$234.6 million in 1979, 1980, 1981, and 1982, respectively (1980 GDP was about US$10 billion at the heavily appreciated exchange rate). The external debt rose from US$998 million (US$793 million of which was public) at the end of 1978 to US$1.9 billion (US$1.7 billion of which was public) at the end of 1982. 3. Beginning in 1982, international financial markets cut back their lending at the same time rising world interest rates increased Uruguay's public sector and foreign interest bill. The public sector deficit was too large to finance in the narrow domestic financial market, and monetary financing became the only alternative until fiscal adjustments coula be made. Sharp devaluation became necessary to reverse the current account deficit and to encourege foreign exchange sales to the authorities. A massive devaluation in November 1982 lifted the December 1982 real effective rate 76.1 percent above the November 1982 rate. Money creation and devaluation together generated inflationary pressure. To make matters worse, Uruguay's Central Bank assumed a substantial amount of external debt that devaluation and surging world interest rates left the private sector--and, in particular, the Mortgage Bank--unable to service. Inflation moderated after the traumatic November 1982 devaluation, but persisted over the remainder of the decade ct 60-80 percent a year. Economic actors responded to the likelihood of further inflation and devaluation by developing and refining defense mechanisms. The;se included s' )adily diminishing holdings of Peso-denominated assets to avoid exposure to the inflation tax; increasing use of the dollar as a unit of account and store of value; and, particularly after restoration of a constitutional government in 1985, development of "backward-looking" indexation practices. Annex 2, Figure URUGUAY: MONTHLY CPI PERCENTAGE CHANGE Percent per ,nonth 22 - 20 . . 18 - 16 - . - -- 14 -.. . _ . ... 12 . __ _ . 10---- _ .. ........ ...... ------ -'------'- ------ - ........... ''-''-'''''''-''-'''-''''-''-------''' -2 - Dec-72 Dec-75 Dec-78 Dec-81 Dec-84 Dec-87 Dec-90 1-Percentage change-Moving-average- Source: IMF data. - 72 - ANNEX 3: A FIXED EXCHANGE RATE REGIi11 1. Many observers have suggested that the authorities could cut the Gordian Knot of inflation by fixing the exchange rate. In order to fix the exchange rate credibly after so many years of exchange-rate variability, the authorities probably would have to commit themselves to: (i) stand ready to redeem the existing monetary base for forei2n exchange; and (ii) issue domestic currency exclusively for purchase of foreign exchange. This would mean either adopting a fixed exchange rate with the monetary base fully backed by foreign exchange--as Argentina did under the March 1991 "convertibility law"--or formally dollarizing as in Panama--free circulation of the dollar with (virtually) no local currency. There is also the difficult issue of fixing the initial rate. 2. The December 1991 monetary base was US$458 million (including required reserves on dollar deposits); gross foreign exchange reserves totalled approximately US$500 million. That is, money holdings are so small that the Uruguayan Central Bank iB reasonably close to being abls to meet condition (i) without having to devalue. Formal dollarization would, of course, require actual purchase by the Central Bank of the outstanding monetary base for US dollars, accompan;.ed by the conversion of all peso assets and contracts into US dollars. 3. Condition (ii) would require that any prospective govarnment deficit be small enough to be financed without money issue, since the Central Bank could not issue domestic currency to finance the public sector; and also that the Central Bank would not have to create money to finance commercial banks with liquidity problems. Thus, the public sector would have to be able, credibly, to meet all its outstanding obligations, including external and domestic debt service, social security liabilities, and the wage bill. In addition, the commercial banks would have to be strong enough to not require Central Bank financing over an extended period. 4. Part II of this assessment argues that substantial structural reform still needs to he carried out to relieve the precariousness of the pvolic sector accounts and strengthen the banking system. If Uruguay fixed the exchange rate before consolidating the requisite public sector and financial system reforms, then the Central Bank might find itself under pressure to renege on its commitment to a fixed exchange rate at some point. Or, the public sector would run some risk of having to default on what would be dollar commitments to social security beneficiaries, external and domestic creditors, or public workers. Thus condition II might be hard to satisfy now, given the precarious nature of the present public sector balance. Indeed, the fixing of the exchange rate before these reforms are carried out might encourage capital inflows that would reduce the pressures to carry out the reforms and provoke a real appreciation, with later capital outflows that would be destabilizing. 5. In mov'ng to a fixed exchange rate regime, the initial peg would be very important. If the initial exchange rate were relatively low--i.e., - 73 - Annex 3, Figure URUGUAY: "INFLATION TAX" PAID ON M2 US$ Million 800- 200 100 0 Dec-84 Dec-85 Dec-86 Dec-87 Dec-8B Dec-89 Dec-90 IOIfaion ta Source: Staff estimates. Annex 3, Figure URUGUAY: "INFLATION TAX' RECEIVED ON THE MONETARY BASE US$ Million 45-W 400- 350- 300 250 4 200 - - 150 100 0 Dec-84 Dec-85 Dec-86 Dec-87 Dec-88 Dec-89 Dec-90 I inflation Tax Source: Staff Estimates - 74 - with the ceso relatively strong--exporter.' and import-competitive industries' costs would be relatively high in dollars, and they might find it difficult to become competitive. On the other hand, if the exchange rate were relatively high--with the reso relatively weak--the balance of payments would be strong, and the consequence could be a foreign exchange inflow and continuance of inflation. Indexation might or might not cease with dollarization; if it did not, wage costs would rise with the (dollar) price level. If the switch to a new regime were taken to Parliament, then debate over the appropriate rate could be lengthy and add to the uncertainty of the transition, but if it were not taken to Parliament, then the legislators might well say they were not appropriately consulted. 6. From a longer run standpoint, fixing the exzhange rate means the authorities reduce their reliance on exchange rate adjustment as a policy tool. The Bretton Woods approach, means the exchange rate instrument is given up "until further notice"; the Panama approach probably means that the exchange rate instrument is given up permanently. Policymakers are likely to hesitate before giving up this policy instrument permanently, particularly in light of the links between Uruguay and its large neighbors, which historically have engaged in various monetary and exchany' rate experimenta. However, the Bretton Woods approach is less credible, preci ely because the authorities retain the option to return to the prior exchanX, rate regime. 7. It is tempting to think that fixing the exchange rate would be helpful even now, particularly since Uruguayan wealth-holders are tending to dollarize informally. The peso is tending to disappear as a store of value, and serves a diminishing range of unit-of-account and transaction functions--principally, wage and tax payments. As its base diminishes, the inflation tax ought to be diminishing, implying that in moving to dollarization, Uruguay would be making a slight change. In fact, as the Figure in this Annex shows, the peso inflation tax effectively paid on the monetary base or on M2 has remained relatively high in recent years. If dollarization proceeds on its present course it is likely the peso base will diminish further, and this will increase the economy's inflationary bias. But the present argument remains: assuming the authorities do not wish to run the risk of taking on dollar obligations they might not be able to meet, then fixing the exchange rate is a secondary, potentially distracting issue. What matters for fundamental, sustainable improvements in inflation and growth are the structural reforms discussed in Part II. - 75 - ANNEX 4 s BACI RW- AND FORWARD-L^OOKING WAGE INDEXATON 1. "Backward-looking" indexation can be defined as percentage wage adjustments roughly equal to the percentage increases in consumer prices over the preceding four months. Not all the 20 wage adjustments carried out between May 1985 (the first adjustment carried out after restoration of constitutional government) and September 1991 met this criterion (see the Table of this Annex). The average increase in public sector wages was 23 percent while the average increase in consumer prices over the preceding four months was 21.9 percent; the average of the increases in public sector wages deflated by the increases in consumer prices over the preceding four months was 0.3 percent. This could have occurred under almost any wage adjustment method, however. Backward-looking indexation would have implied that the standard deviation of the increases in public sector wages deflated by the increases in consumer prices over the preceding four months (i.e., the standard deviation of the percentage real wage increases) would be (close to) zero. In fact, this standard deviation was 8.8 percentage points, with the figures ranging between negative 14.3 percent (May 1990) and positive 28 percent (September 1985). The figures were negative for 10 of the adjustments and positive for the other 10. 2. Backward-looking indexation using this definition would not have implied that average real wages for each four-month period would remain constant; that would depend on the magnitude and pattern of the inflation over the subsequent four - snths. The data show considerable variabilitys average real public sector .ges remained fairly stable from the second quadrimester of 1985 through the first quadrimester of 1989 (on an index of 1984=100, ranging from a low of 108.2 in the second quadrimester of 1985 to a high of 113.4 in the first quadrimester of 1988). From the first quadrimester of 1988, however, real public sector wages declined, reaching 93.0 in the second quadrimester of 1990. They rose from there to 98.7 in the third quadrimester of 1991. Backward-looking indexation using this definition would imply that monthly real wages will follow a "sawtooth" pa,;tern, with the real wage highest at the beginning of each quadrimester and lowest at the end. This pattern is quite pronounced for Uruguay, as may be observed in Figure 1 of the main text. 3. Consistent with the view that higher public sector wage adjustments generate higher inflationary pressure, the series of percentage wage adjustments at the start of each quadrimester from the second quadrimester of 1985 to the first quadrimester of 1991 and the series of consumer price increases ov.r the quadrimester have a correlation coefficient of 0.634, which is statistically significant at the 0.5 percent level. It is unclear, of course, whether the second of the two series is caused by the first or whether the two series are caused by other factors. The thiird quadrimester of 1990, when a combination of events in Argentina and the Persian Gulf crisis induced heavy anticipated inflationary pressure, is proDably an "outlying" data point; however, if it is excluded, the correlation coefficient falls to 0.309 and is statistically significant only at the 10 percent level. ANNEX 4, TABLE: URUGUAY: REAL WAGES, MAY 1985 - SEPTEMBER 1991. Quadrimester Inflation rates Public sector wages: Private sector wages: beginning. over quadrimester: Growth rate over Real wage Real wage Growth rate over Real wage Real wage Wholesale Consumer preceding four months: at start over preceding four mos.* at start over prices prices of quad- quadri- of quad- quadri- Nominal Real rimester* mester Nominal Real rimester mester May-85 12.6% 18.9% 32.8% 3.1% 1053 108.2 28.7% 5.9% 108.2 110.2 Sep-85 19.8% 21.4% 29A% 28.0% 114.6 111.8 28.8% 19.1% 1172 115.0 Jan-86 16.0% 21.0% 20.0% -4.6% 113.3 109.5 23.3% 1.1% 119.1 1185 May-86 20.7% 19.0% 21.7% 3.6% 113.9 110.8 20.0% 4.2% 118.0 1165 Sep-86 19.2% 185% 16.9% -4.7% 111.9 109.8 21A% -0.3% 120.4 119A Jan-87 14.8% 17.9% 21.1% 5.2% 114.3 111.0 21.6% 8.2% 123.6 125.0 May-87 20.5% 173% 16.7% -0.6% 113.2 109.9 19.2% 4.4% 125.0 126.9 Sep-87 13.7% 13.8% 14.1% -5.5% 110.2 110.9 203% 3.5% 1282 130.6 - Jan-88 13.2% 183% 22.1% 12.7% 1182 113.4 19.4% 10.1% 134.6 133.2 May-88 21.0% 20.5% 15.7% -3.8% 115.7 111.5 14.2% -4.9% 129.9 127.1 Sep-88 17.2% 18.6% 16.5% -6.4% 111.9 108.6 17.8% -8.5% 127.0 130.6 Jan-89 20.0% 24.7% 23A% 5.9% 116A 109.4 23.6% 11.2% 132.4 130.8 May-89 25.3% 22.4% 15.7% -10.5% 108.1 106.1 19.2% -73% 126.6 131.9 Sep-89 20.3% 23.9% 23.9% 0.6% 109.4 106.2 27.4% 5.4% 131.7 1353 Jan-90 29.7% 30.9% 24.8% 0.5% 1102 1025 26.2% 4.2% 134.1 132.1 May-90 28.6% 29.1% 21.2% -143% 102.0 96.5 22.7% -13.2% 125.8 120.6 Sep-90 323% 35.5% 45.5% -4.4% 115.0 93.0 392% -7.3% 135.7 1213 Jan-91 17.7% 21.0% 27.7% -4.9% 108A 96.5 422% 26.2% 142.4 130.1 May-91 23.7% 25.8% 24A% 5.8% llA 96.9 19.9% -6.2% 141.1 131.0 Sep-91 15.8% 193% 25.5% OA% 111.2 98.7 26.9% 9.5% 142.4 137A Observations: 20 20 20 20 20 20 20 20 20 20 Average: 20.1% 21.9% 23.0% 03% 111.7 106.1 24.1% 3.3% 128.2 126.2 Standard deviation: 5A% 5.1% 7.1% 8.8% 3.8 6.1 6.7% 9.4% 8.8 73 - 77 - 4. Having said this much, however, it remains broadly fair to say that, in determining each public sector wage adjustment, the authorities have taken the previous four months' inflation heavily into account. The correlation coefficient of the 20 wage adjustments with the preceding 4 months' inflation rates is 0.397 (statistically significant at the 5 percent level). It is not unreasonable to describe this as similar to "backward- looking" indexation in its effect. Accordingly, under the present system, the higher the inflation rate over any fouL-month period, the h3gher the subsequent wage adjustment, and hence the higher the subsequent inflationary pressure will tend to be. 5. A policy move to a forward-looking approach to public sector wage adjustment would therefore be advisable. The meaning of "forward-looking indexation" is not generally agreed. The following definition might, however, be recommended: the authorities would first program the growth rate of the average real wage for the coming four months over the previous four months; given their programming assumption for the inflation rates in each of the four months, they could then compute the corresponding nominal wage increase. (Described this way, the approach is s=mewhat circular, since the nominal wage increase that would set the intended average real wage would affect the public deficit, and consequently both the forecast money supply and inflation rate; this might be inconsistent with the programmed inflation rate. In fact, the authorities would have to use a macroeconomic model iteratively to determine the programmed nominal wage increase consistent with a given programmed inflation rate and the programmed real wage increase.) 6. One advantage of this wage adjustment approach over backward- looking adjustment is that it would focus explicitly on (the increase in) the average real wage to apply over the coming four months. Backward-looking indexation could produce any real wage outcome over the period during which the adjusted wage applies. The forward-looking approach would require the authorities to deal explicitly with the intended real wage. They could even discuss the intended real wage openly. Forward-looking wage indexation as defined here would offer no guarantee that the real wage would turn out as calculated, of course, since the inflation rate could be different from the programming assumption. Employees and their labor unions may prefer to take their chances with the backward-looking approach rather than with this one. The average real wage over the coming period could be used as an explicit understanding between the authorities and public sector employees; however, it would be easy to verify ex Post whether the real wage had fallen short or exceeded the target. This c: 'uJd then be taken into account in the subsequent adjustment. - 78 - ANNEX 5: URUGUAY'S MORTGAGE BANK IBHU) 1. The publicly-owned Mortgage Bank (BHU) poses an intricate policy problem. The institution's basic problem is the inherent difficulty of long-term financial operations in an environment of chronic inflation, aggravated by its public status. To understand the BHU's problem, it helps first to review the dilemmas that longer-term financial operations face in general in an inflationary environment. 2. First, suppose the institation used only conventional R20o- denominated lending and deposit instruments. In a high-inflation context, long-term depositors would Peek compensation not only for the inflation they expected, but also for at least part of whatever additional inflation they feared. To cover this higher cost, the institution would have to collect a higher interest rate on its loans. The required interest rate could be so high as to create serious cash-flow and profitability problems for would-be borrowers, reducing their willingness to borrow and reducing lenders' willingness to lend to them. This is why high inflation tends to destroy longer-term financial markets. Alternatively, the financial institution could operate with shorter-term deposits, and engage in term transformation. Shorter-term deposits are subject to lower inflation risk. In this case, however, the institution itself could face serious inflation risk: if inflation rates rose, its nominal deposit rates could rise with deposit renewals, and if its loan rates remained fixed, this could make the institution unprofitable. If the institution failed to pay higher deposit rates, it would lose deposits, and this could induce a cash-flow problem. The institution might make new loans at higher interest rates, but it would take time to renew the portfolio: the institution could sell its mortgages, but would take a loss in doing so. 3. To cope with these problems, many financial institu$itons in high inflation economies have "inflation-proofed" their loans and deposots through such devices as dollar-denomination, "adjustable units" and other forms of "indexation". An institution offering inflation-proof deposits should experience far less withdrawal pressure when inflation rates rise, since the indexation would compensate for whatever inflation occurred. The difficulty is that, to ensure solvency, the institution must then have similarly inflation-proofed assets, i.e., index-linked loans. Unfortunately, index- linked loans pass the inflation risk along to borrowers: their incomes may fail to keep pace with inflation, and their ability to meet their payment obligations may deteriorate accordingly. 4. One way that financial institutions using indexation have attempted to deal with this problem is to promise holders of inflation-proof mortgages that, to the extent their incomes failed to keep pace with the inflation rate, they could borrow to maintain their mortgage payments. Unfortunately, this also tends to be problematic: a borrower who requires credit to meet an interest payment is, iiso facto, a risky borrower. Moreover, a financial institution that must provide credit to a borrower in order to meet its own interest bill is, -iso facto, failing to receive a cash inflow. Depositore are likely to perceive this as a cash Aow problem, and to - 79 - regard it as an increased risk that must be compensated by higher interest rates. The institution's managers may, therefore, find themselves in the trap of having to raise interest rates to prevent withdrawals and so to maintain a sound cash flow--or, compensating depositors at interest rates that borrowers ultimately cannot cover. 5. These are the "stylized" circumstances the BHU faces in its basic operations. The BHU has generally paid whatever interest rates it had to in order to attract and hold funds. BHU's deposits are mostly in dollars, so the BHU has an additional dimension of structural risk: the dollar can vary against the UR (i.e., by appreciating or depreciating in real terms). To relieve the burden on its borrowers, it has denominated its loans in "readjustable units" (URs), which are linked roughly to the inflation rate. Although borrowers' loan accounts are denominated in URs, their monthly interest and amortization payments ari linked to their wages, which are adjusted about every four mont..s. If monthly payments fail to cover the in- terest due, the difference is capitalized into the loan balance. 6. The inherent difficulty of carrying on term lending in a high- inflation context would either dissuade private financial institutions from carrying on longer-term activities or else propel them into illiquidity or insolvency. Public sector institutions like BHU, on the other hand, are likely to remain afloat through subsidies of one kind or another. Moreover, political exigencies are likely to make matters worse for a public sector institution: even if required by market conditions to pay high interest rates, it is likely also to be directed either to reduce its receipts of interest and amortization, or else to capitalize a larger proportion of them. For example, in 1985, when the economy was in deep recession, the authorities directed the BHU to relieve mortgage payments in several ways. It reduced the annual in- terest rates on loans in good standing by as much as 3 percentage points. 't also permitted borrowers to capitalize part of the large increase in monthly payments that took place that year in special accounts (known as "suspensions", or "coloamentos"), on which no interest was to be paid and no amortization until the maturity date of the loan. (The "colaamentos" were denominated in URs, however, and so continued to be adjusted for inflation. The loss of interest income was highly damt.aging for BHU's finances.) 7. The BHU's situation is further complicated by the fact that Uruguayan real estate developers have persuaded the BHU to finance development of new projects, particularly urban apartment complexes. The BHU makes an investment for its own account when it contracts with aevelopers and construction firms; the BHU then owns the property until apartments can be sold. This ties down BHU's financial resources and exposes BHU to all the risks of the property market. 8. In June 1991, the BHU's deposits totalled approximately US$600 million, of which some US$350 million were in foreign currency; and private loans of about US$l billion (eee Figure 9 of the main text). The de- posit rates were generally higher than those offered at other banks: the BHU has a pipeline of loan commitments, and to fund these it must attLact net additional deposits. The loans were mostly denominated in "Readjustable Units", units of account linked every month to wages. There are some 300,000 - 80 - mortgage accounts, a large number for a nation of 3.1 million, and an obvious explanation of the political importance of the institution and its activities. Roughly 40 percent of the loan portfolio is at subsidized interest rates, as low as 1 or 2 percent per year (in URs). The contracted interest rate for the remainder is on the order of 7 percitnt per Readjustable Unit. 9. Over the period 1985-90, BHU reported a profit, but this was mainly the consequence of the tact that the UR rose faster than the exchange rate, so that the loan portfolio tended to grow faster than BHU's largely dollar-linked liability stock. The BHU remains exposed to adverse longer-term movements in the wage-dollar relationship. The loan portfolio now provides a monthly cash yield of about US$8 million, on the order of 0.8 percent. On top of this, the Treasury provides the BHU with a monthly cash subsidy of about US$1 million. (The Treasury also services BHU's external debt, but that does not figure into the institution's cash flow.) Net new deposits run at about US$4 million a month. Against these cash inflows, the BHU has tended to pay out about US$4 million in withdrawals of interest and principal (BHU's deposit interest rate is set so as roughly to equilibrate withdrawals and new deposits). With monthly operating costs totalling about US$2 million, the BHU has about US$7 million a month with which to provide new loans and fulfill outstanding commitments. 10. BHU staff believe they need between US$12 and US$14 million to keep their commitments backlog from rising. That is, they would need to generate a monthly cash inflow of about US$18 to US$20 million, rather than the US$13 million they have now from the portfolio yield, the Treasury subsidy and new deposits. If the Treasury subsidy and new deposits remain at US$l and US$4 million, respectively, then the portfolio yield would have to increase from US$8 million to US$13-15 million to meet these needs. 11. The authorities took some steps during 1991 to improve BHU's cash inflow. Between February and August 1991 they allowed mortgage-holders to pay down their "coloamento" accounts at 30 centavos per peso. This program reduced the total amount of "coloamentos" outstanding by about 15 percent. The BHU raised all monthly payments to their originally contracted amounts, and raised all interest rates to their origirally contracted amounts. This action increased the monthly yield of the loan portfolio from about US$7 million to about US$8 million. Later in the year, the authorities obtained legislative authorization for a far more important change, to permi* increases in the monthly payments once every four months rather than once a year. The BHU estimates that this change could yield an increase exceeding US$l million in the monthly return on the loan portfolio, depending on the inflation rate (the higher the inflation rate, the larger the improvement resulting from more frequent adjustment). Since Uruguay is now accustomed to wage adjustments every four months, this change would seem reasonable enough; nevertheless, opposition legislators opposed it. In the end, however, a compromise was reached under which some loan p&yments will be adjusted .emi-annually and some every four months. 12. The Government intends gradually to remove all subsidized housing programs from the BHU and place them under a new ministry dealing with housing, urbanization, and environmental issues ("VOTMA"). Meanwhile, under - 81 - the IDB's financial-sector adjustment loan, the Uruguayan authorities have begun to develop a structural reform program for BHU. Measures supported by the IDB loan include: (i) improved loan recovery; (ii) measures to rationalize interest rates and otherwise improve the portfolio yield; (iii) limitations on new lending operations, particularly on operations involving construction at BHU's risk; and (iv) an effort to control the build-up of deposit liabilities. These changes are the minimum necessary to keep BHU functioning without slipping into a cash-flow squeeze. Nevertheless, BHU is still on a cash flow tightrope: it must maintain high interest rates to equilibrate new deposits and withdrawals; it must maintain a reasonable flow of new credit operations to hold depositors who hope to qualify for loans; and it must do everything possible to improve and maiatain the cash flow from its portfolio, short of significantly increasing the institution's payment arrears. 13. Deeper reforms are ultimately necessary to place provision of housing and mortgage finance on a more sound basis. It is not sufficient simply to tighten BHU's finances; indeed, strengthening BHU's finances will make it a more formidable monopolist. At present, private banks carry on virtually no housing finance activity. The circumstances described above partially explain this. The looming presence of BHU in the housing market, with its standing capacity to subsidize, probably also explains the prilate sector's reluctance to undertake housing finance activity. The authorities would be well advised to take the necessary steps to permit significant private sector activity in the area of housing finance. The authorities could begin by removing whatever statutes establish monopolies or special privileges for BHU. In particular, existing law provides for a BHU monopoly on housing bond issues. It would also be desirable to develop legislation to facilitate securitization of mortgages, since commercial banks would remain disinclined to provide mortgage credit if they had no option to sell such credit in secondary markets. Even with the appropriate legal framework in place, however, the large size of BHU would remain a deterrent to housing finance activity by private commercial banks. 14. Ultimately, it would be desirable to phase out BHU's role as a retailer, and have commercial banks take up mortgage financing, perhaps with a second-tier institution raising financing through bond sales. BHU could ultimately become this institution. A first step toward this might be to gradually limit the kinds of retail operation BHU could carry out. The authorities could direct BHU, for example, to steadily retire from its more "upscale" real-estate financing. This process could be hastened by having BHU sell its portfolio to interested private banks. Borrowers could be encouraged to pay off the full value of their outstanding loans to BHU at a discount; presumably most would do so by taking out new mortgages from private commercial banks. The World Bank has considered the possibility of financing rehabilitation activities in the central zone of Montevideo, using private banks as retail providers of credit; at present, BHU does not provide credit for rehabilitation. This could serve as a means of gradual entry by private commercial banks into real estate activity. - 82 - STA TISTICAL APPENDIX STATISTICAL APPENDIX. TABLE 1A. URUGUAY: NATIONAL ACCOUNTS SUMMARY AT CURRENT PRICES (Percent of GDP) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1 Imports of GNFS 20.1 22.6 21.2 21.2 21.1 19.0 17.3 23.6 21.4 21.1 20.3 19.2 19.2 19.2 19.3 19.8 Exports of GNFS 19.6 19.9 18.8 16.8 15.6 15.2 14.3 25.7 26.6 26.8 26.2 21.6 23.8 25.4 26.8 23.5 Resource balance -0.5 -2.8 -2.3 -4.3 -5.5 -3.8 -3.0 2.1 5.2 5.6 5.9 2.4 4.7 6.3 7.5 3.8 Total Expenditures 100.5 102.8 102.3 104.3 105.5 103.8 103.0 97.9 94.8 94.4 94.1 97.6 95.3 93.7 92.5 96.2 Total consumption, etc 79.6 81.3 79.6 80.3 81.3 82.4 83.2 83.6 82.7 83.0 82.7 83.3 82.1 82.4 81.1 83.3 General govemment 14.4 12.8 12.8 12.0 12.7 14.4 15.7 14.5 13.6 14.4 14.3 13.2 13.2 13.4 13.3 13.3 Private, etc 65.2 68.5 66.8 68.3 68.6 68.0 67.5 69.1 69.1 68.5 68.3 70.1 69.0 69.1 67.8 70.0 Statistical discrepancy 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Gross domestic investment 21.0 21.5 22.7 24.0 24.2 21.4 19.8 14.3 12.1 11.4 11.4 14.3 13.2 11.3 11.5 13.0 1 GDFI 21.6 21.5 22.7 22.9 23.6 21.7 20.4 13.7 10.9 9.6 10.1 11.4 11.9 11.6 11.2 11.9 w Nonfnancial Pub. Sector 6.8 7.3 8.3 6.6 5.5 5.2 7.3 4.3 4.4 3.3 3.6 3.5 4.0 4.4 4.0 0.0 I Private Sector 14.9 14.2 14.4 16.2 18.1 16.6 13.2 9.4 6.5 6.4 6.5 7.9 7.9 7.2 7.3 0.0 Changes in Stocks -0.7 0.0 0.0 1.2 0.6 -0.3 -0.6 0.5 1.2 1.7 1.3 2.9 1.3 -0.3 0.2 1.0 Gross domestic saving 20.4 18.7 20.4 19.7 18.7 17.6 16.8 16.4 17.3 17.0 17.3 16.7 17.9 17.6 18.9 16.7 Net factor income -2.0 -1.7 -1.6 -0.8 - 1.0 -0.7 -2.0 -5.6 -0.7 -7.4 -4.8 -4.1 -4.1 -4.4 -3.9 -2.5 Net current transfers 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.3 0.1 0.1 0.4 Gross national saving 18.4 17.1 18.9 18.9 17.7 16.9 0.0 0.0 0.0 0.0 0.0 0.0 14.0 13.3 1S.1 14.7 Net Indirect Taxes 14.5 14.5 15.7 14.0 14.1 13.9 132 13.0 14.1 14.7 16.6 16.3 0.0 0.0 0.0 0.0 Gross national product 98.0 98.3 98.4 99 2 99.0 99.3 98.0 94.4 99.3 59.6 95.2 95.9 95.9 95.6 96.1 97.5 Source: Central Bank /1 Preliminary. Note: Net Factor Income and Transfers in USS were taken from BOP and transformed into current NU$ using the average exchange rate calculated by the CB. STATISTICAL APPENDIX TABLE IB: URUGUAY: NATIONAL ACCOUNTS SUMMARY AT CONSTANT 1983 PRICES (Percent of GDP) 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991/1 Imports of GNFS 22.0 23.5 23.9 27.4 27.8 :".7 26.5 23.6 20.4 19.8 23.7 25.4 25.4 25.4 24.5 28.1 Exports of ONPS 18.7 19.8 19.6 i3.7 19.3 20.1 20.0 25.7 25.5 26.6 27.3 23.2 25.3 27.6 30.2 29.3 Resource balance -3.3 -3.7 -4.3 -7.7 -8.6 -7.5 -6.5 2.1 5.1 6.7 3.7 -2.2 -0.1 2.1 5.7 12 Total Expenditures 103.3 103.7 104.3 107.7 108.6 107.5 106.5 97.9 94.9 93.3 96.3 102.2 100.1 97.9 94.3 98.8 Total consumption, etc 86.2 84.0 82.9 82.8 83.8 85.3 86.4 83.6 82.9 82.7 84.9 89.7 88.5 87.4 83A 86.2 General govemment 11.9 11.3 11.9 12.o 11.7 12.-i 13.4 14.5 14.7 14.6 14.7 14.4 14.0 14.1 14.5 14.9 Private, etc 74.3 72.7 71.1 70.2 72.0 72.9 72.9 69.1 68.2 68.1 70.2 75.3 74.4 73.4 68.9 71.3 Statistical discrepancy 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Gross domestic inv'es:nent 17.1 19.7 21.4 24.9 24.8 22.3 20.2 14.3 12.0 10.5 11.4 12.5 11.6 10.4 10.9 12.7 co GDFI 17.7 19.7 21.3 23.7 24.2 22.6 20.8 13.7 10.7 8.4 8.7 10.3 10.8 10.6 9.9 11.1 General Government 0.0 0.0 0.0 0.0 5.5 5.2 7.3 4.3 4.4 3.3 3.6 3.5 3.5 3.9 0.0 0.0 Private Sector 0.0 0.0 0.0 0.0 18.7 17.4 13.5 9.4 6.2 5.1 5.2 6.8 7.2 6.9 0.0 0.0 Changes in Stocks -0.7 -0.0 0.0 1.2 0.6 -0.3 -0.6 0.5 1.3 2.2 2.7 2.2 0.9 -0.1 1.0 1.6 Gross domestic saving 2 16.5 16.8 18.8 19.3 17.5 16.7 15.6 16.4 17.0 15.8 18.3 15.7 17.8 18.8 20.4 18.0 Net factor income -2.1 -1.7 -1.6 -0.8 -1.0 -0.7 -2.1 -5.6 -0.7 -7.0 -5.8 -6.1 -6.3 -6.6 -5.8 -2.5 Net current transfers -0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.4 Grossnationalsaving12 14.4 15.2 17.2 18.5 16.5 16.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 12.3 14.7 1S.9 Net Indirect Taxes 14.6 14.5 15.7 14.0 14.1 13.9 13.2 13.0 14.1 14.7 16.6 16.3 16.6 15.8 0.0 104.2 Gross national product /2 97.9 98.3 98.4 99.2 99.0 99.3 97.9 94.4 99.3 93.0 94.2 93.9 93.7 93.4 94.2 97.5 Capacity to import 21.5 20.6 21.3 21.8 20.5 22.1 21.9 25.7 25.4 25.1 30.6 28.6 31.6 33.8 34.0 33.5 Terms of trade adjustment 2.7 0.8 1.7 2.1 1.3 2.0 2.0 0.0 -0.1 -1.4 3.3 5.4 6.3 6.2 3.8 4.2 Gross domestic income 102.7 100.8 101.7 102.1 101.3 102.0 102.0 100.0 99.9 98.6 103.3 105.4 106.3 106.2 103.8 104.2 Gross national income 100.6 99.2 100.1 101.3 100.2 101.3 99.9 94.4 99.1 91.6 97.5 99.3 100.0 99.6 98.0 101.6 Source: Central Bank. 1V Preliminary. 2/ Adjusted for terms of trade. Note Net Factor Income and Net Transfers in Constant NUS deflated by Imports deflator STATISTICAL APPENDIX TABLE 2: URUGUAY: GROSS DOMESTIC PRODUCT BY SECTOR, 1970-90 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 (as percent growth) GDP at market prices -0.3 -1.6 0.4 2.9 6.1 3.9 1.5 4.9 6.0 6.2 1.7 -9.7 -10.0 -1.5 1.6 8.5 8.0 0.1 1.2 0.8 1.7 NetlndirectTaxes -5.0 35.6 -24.6 -15.3 25.0 13.2 0.9 14.0 -5.3 7.0 -0.2 -14.4 -11.1 7.0 6.5 22.2 5.6 2.2 -3.6 GDP atfactor cost 0.4 -7.3 6.0 5.8 3.7 2.4 1.6 3.4 8.1 6.0 2.0 -8.9 -9.8 -2.7 0.8 6.1 8.5 -0.4 2.1 Agriculture -6.3 -10.5 2.6 3.3 5.6 1.9 3.2 -6.7 -0.4 16.2 5.5 -7.3 0.0 -13.4 12.9 -2.0 4.8 -1.1 3.2 1.6 -0.4 Indust"y -2.0 1.6 -2.0 2.1 9.1 3.8 5.0 8.8 7.6 3.0 -2.8 -13.4 -10.1 1.5 -4.2 10.3 11.3 2.0 -2.4 -1.3 0.3 Services 3.2 -1.0 1.5 3.4 4.1 4.5 -1.6 5.5 6.4 6.2 4.2 -7.5 -12.7 0.3 2.6 10.5 6.6 -1.0 3.2 2.1 3.2 _ STATISnICAL APPENDIX TABIE 3: URUGUAY. BALANCE OF PAYACMEN SUMMARY (In millions of US dollan) 1970 1971 1972 1973 1974 197S 1976 1977 1978 1979 1980l 1981 1982 1983 1984 1985 1986 1987 1988 1I8 1990 1991 Espait of GNFS 290. 2527 350.6 409.7 499.8 551.0 6462 808.5 912.9 11942 1564 1700.7 15373 1411A 1289.4 1252. 1499.6 1547.0 1762.7 1994.9 2119.9 2153.7 Mewhandise(FOB) 224.1 196.8 281.6 327.6 381A4 3849 565.0 611.6 686. 788.1 10583 1229.7 1256.4 1156.4 924.6 853.6 1087.8 1182.3 140435 1599.01692.9 1604.7 Non-faceorseima 65.9 55.9 68.9 2.1 118.5 166. 131.2 197.0 226.8 406.1 4675 47140 280.9 255.0 364.8 3992 411.8 364.7 3582 395.9 4274) 5494) ImporW of GNFS 319.6 312.9 279.6 3663S 592.3 6762 705.2 914.3 9702 1503.5 2143.7 20984) 158.5 1194A 1066.9 1032.8 1179.7 1405.1 1444 1500. 1582. 18794 Mecanmdisc (POD) 203.1 203.0 178. 248.6 433.6 494.0 536.6 6867 709.8 1166.2 16682 1592. 1038A 739.7 7322 675.4 81435 107939 1112.2 11362 12669 1637.0 Non-fawtorucvic. 11635 99.9 100.9 117.9 158.8 182.1 1686 227.6 260.4 337.3 4753S 505.9 547.1 454.7 334.7 357.4 365.2 3252 3323 364.4 3153S 2424) Resomreebelauc -29.6 -50.2 71.0 43.3 -9235 -1252 -9.0 -105.8 -57.3 -309.3 -617.7 -3973 -482 217.0 222 220.0 319.9 141.9 3182 4943 5373 274.7 Not factornmm -24.8 -21.6 -23.6 -254) -42.6 -71.1 -7124 -68.0 -76.8 -54.9 -100.1 -73.8 -196.8 -287.8 -361.6 -35D.9 -300.6 -307.8 -330.6 -34.9.1 -321.7 -232.8 Fackor receipts 13 0.8 1.4 5.7 4.7 3.8 6.8 11.6 18.4 542 67.7 145.8 147.2 623 87.2 77.4 92.7 102.9 114.7 203.0 257.9 2343 Fs"to pqmmea 26.3 22.4 25.0 30.8 473 74.9 792 7935 952 109.1 167.8 219.6 34440 35)3 448.8 428.3 3933 410.7 4453 552.1 579.6 467.1 ThtaintezcstDUB 17.6 17.6 21.0 23.9 373 57.4 69.6 72.0 73.7 80.9 169.3 195.6 2215 273.9 350.6 355.8 346.6 357.9 353.8 3373 378. 228.0 OthcrFaetorPayxnet&&dic 8.9 4.8 4.0 6.9 10.0 1735 9.6 73 213 282 -13 24.0 1223 76.4 982 6235 46.7 52.8 91.5 214.8 201.1 239.1 ~ N(rummntmnsfcrs -0.9 -0.6 -02 -0.1 -12 -135 -1.0 2.1 I 1.6 1 2.0 2.9 . . - - - - - . CumTnt Reiepts 035 03 0.4 03 02 06 12 235 16 1.8 25 33 .5. - . Othera,r. traenf 03 0 0.4 O 03 0.2 0.6 12 235 16 1.8 235 3.5 - - . - . - CuhrenPayments IA4 1.1 0.7 0.6 1.4 2.1 2.2 0.4 02 03 035 OA ~ - .. - - . - . CwrrAX dlbefor OfL~Orant -553 -72.4 472 18.1 -136.3 -197.8 -82.4 -171.6 -13P.7 -36V.7 -715.8 -4682 -245.0 -70.8 -139.1 -130.9 19.3 -16539 -12.4 1452 215.8 41.9 OfL CapitaIGrnts I/ 102 8.9 113 19.1 18.6 83 8. 4.6 5.7 5.6 6.7 6.8 10.4 11.0 10.0 10.8 253 8.0 213 8.0 8.1 40.1 CwirAKDICB after Off.Gmntc -45.1 -633S 58.7 372 -117.6 -189.5 -73.8 -167.1 -127.0 -357.1 -709.1 -461.4 -234.6 -59.8 -129.1 -120.1 44.6 -15i7.9 8.9 1532 223.9 82. LTCapitaI Inalo -435 52.76 18357 -32. 63.0 150.6 79.08 1012 1522 358.8 4043 345.6 515.1 6263 35.1 593 1743 1202 22.1 18. -286. 126 Dinoc iwvestment .. .. . .. .. .. 66.0 128.8 21S53 289.5 48.6 -13.7 -5.6 -3.4 -7.9 3235 452 4435 1.0 3.0 0.0 Net LT Bonwing -1.1 31.9 28. 6.4 251.9 364) 81A4 66.1 34.6 2532 2263 3533 241.7 3813 3935 27.0 102.3 23735 -29.7 833 -182 21.0 ditbummients 50.3 79.3 12535 86. 38335 284. 240.4 264.8 4172 32135 3562 456.0 5332 552. 189.4 220.0 2Y739 390.6 282.8 2953 454.8 - repayments DUB SlA 47A6 96. 79.7 131.6 248.6 1594) 198. 382.6 68.3 129.9 152.7 2913 120.7 14939 193.0 105.6 153.1 312.5 212.0 473.0 - OtherLTJnfIow(nct) -3.4 20.9 -10.1 -393 -188.9 114.7 -23 -3D.8 -112 -109.9 -11135 -563 287.1 250.6 -14 I 4 CA 393 -16235 73 -65.6 -2714) 105.0 lbtalOthcitems(Net) 21.1 -1.1 -50.9 22.7 26.4 -52.1 88.9 233.0 113.1 72.1 4234) 149.7 -696.5 -6323 96 1274) 68.6 1153 -27.1 -763 1434) -3984) Netsbort-termcapital 446 503 132 5235 1084) -13.7 101.9 1914) --47.7 M29 333.5 3112 568.0 -376.9 130.8 -133.8 -155.7 2094) 204.4 -183 194) -23.0 Errnandoausioma -2335 -51A6 -64.1 -29.8 -81.6 -38.4 -134) 424) 160.8 -10. 8935 -1613 -1264 -255A6 -1212 260.8 2243 -93.1 -23135 -584) 124AA 04) STATISTICALAl!PENDIX TABLE 3: URUGUAY: BALANCE OF PAYMENTS SUMMARY (coned) (In millions of US dollars) 1970 1971 1972 1973 1974 1975 1976 1977 1978 :979 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 i990 1991 Changes in ntdrseses 28.5 11.9 -26.3 -27.0 282 90.9 -942 -1672 -1383 -73.8 -1182 -33.9 416.0 65.7 84.4 -66.4 -287.5 -782 -3.9 -95D -80.5 190.0 NetoceditfomlMF 8.8 02 21A -09 392 38.6 283 -25.8 -1193 - _ _ 95.8 141.7 -15.1 127.6 453 -2.8 -83.3 -98.0 -111.5 -43.0 Reserve angesa.c.l 19.8 11.6 -47J -26.1 -11 23 -122.6 -141A -19.0 -73.8 -1182 -33.9 3202 -760 99.5 -194.0 -332.8 -75.4 79A 3.0 31.0 233D0 Gross Resis (esxcd. Gold) 13.8 20.1 69.0 1OD.6 80.6 585 1762 322.4 352.4 323.1 383.8 430.0 1163 206.9 134A 1742 481.6 530D 532.0 S01A 544.4 346.0 Gmss Resrves (md. Gold) 1862 2D4.6 2985 497.5 740.0 554.9 653.8 9122 1175.1 2017.9 2401.1 17783 1422.1 1199.6 941.6 1030.6 1499.9 1793D0 16023 1547.6 14665 1146D0 Nou. Of. (Ann. avgXd) 03 03 0.5 0.9 12 23 33 4.7 6.1 7.9 9.1 10.8 13.9 34.5 56.1 10.A 152.0 226.7 359A 605.5 1171.1 2018.8 Noa. Off. (nd-of-yearXac) 03 OA 0.7 0.9 1.7 2.7 4.0 5A 7.1 8.5 10.0 11.6 33.8 433 74.3 125D 181.0 281.0 451.0 805.0 1594D) 2489D MUV-Manu.(%change) - 0. - . . -. . . .O --15 -2.3 -2.1 0.8 19.9 9.8 73 -0.7 5.7 5.7 IndczRc'iEff(1M) I_ . . 0 113.0 117.9 72.9 71.0 68.6 67.4 683 643 672 60.7 69. Source: IMPandWoddBaknDatdabseI V/ ldioateabae as All Oft 'Tneror Capital Grants only. STAT[STICAL APPENDIX TABLE 4: URUGUAY: INTERNATIONAL RESERVES, AND EXTERNAL DEBT (USS Million) Gross intL reserves (yr.-end): External debt (year-end) Total Total (gold at world Foreign Gold Public, Non-guar- IMF Short- price) exchange (Mn. Troy guaran- anteed term (US$mn.) ozs.) teed 1970 1865 13.8 172.7 NA 268.9 28.9 18.3 NA 1971 204.0 20.1 183.9 NA 292.9 40.3 185 NA 1972 295.0 69.0 226.0 NA 326.9 35.1 39.8 NA 1973 477.9 100.6 377A NA 3465 30.6 38.9 NA 1974 730.4 80.6 649.8 NA 518.6 118.6 78.1 NA 1975 551.5 585 493.0 NA 6183 52.2 116.8 NA 1976 650.9 176.2 474.6 NA 693.8 57.3 144.9 NA co 1977 896.1 322A 573.8 1104.8 736A 83.1 119.3 166.0 X 1978 1109.0 352A 756.6 9983 793.8 675 0.0 137.0 1979 1829A 323.1 1506.3 1323.0 932.4 184.6 0.0 206.0 1980 2225.7 383.8 1841.9 1659.8 1126.9 210.9 0.0 322.0 1981 1821.0 430.0 1391.0 2174A 1348.2 326.2 0.0 500.0 1982 1386.7 116.3 1270A 2646.8 1700.2 205.8 95.8 645.0 1983 1217.4 206.9 10105 3292.0 2510.3 158.3 237A 386.0 1984 972.6 '34.4 8382 3271.3 2527.8 129.2 2223 392.0 1985 1016.8 174.2 842.6 3919.4 2695.1 60A 349.9 814.0 1986 1499.' 481.6 10183 3906.1 2895.3 42.6 3952 573.0 1987 1798.6 530.0 1268.6 4270.8 3098A 144.0 392A 636.0 1988 1626.3 532.0 1094.3 3822.7 29505 86.2 309.0 477.0 1989 15703 501.3 1069.0 3761A 2978.0 104.9 2015 477.0 1990 1446.6 544A 902.1 3706.7 3044.0 110.0 100.7 452.0 1991 1163.9 345.8 818.1 3589.9 3011A 69.0 57.5 452.0 Source: Intemational Monetary Fund, World Bank. STATISTICAL APPENDIX TABLE SA: URUGUAY: PUBLIC-SECTOR ACCOUNTS. Consoli- dated Non-financial public-sector. non-finan- Surplus cial, Current Person- _ Interest capital financial saving General General nel Central Social Public Central Public forma- public- govt Central Social govL Cental Social anmin. security enterpr. admnin. enterpr. tion sector revenue adnin secmity exped. admi.L secuiity surplus (Percent of GDP) 1975 NA NA NA NA 12.1 NA NA -14.7 NA NA -7.9 NA -2.9 -1.0 -0.9 -aI NA 1976 NA NA 0.5 22.3 13.6 8.7 -22.8 -14.3 -8.5 NA -9.0 NA -2.0 -12 -1.1 -O., NA O 1977 NA NA 1.7 23.3 14.8 8.5 -228 -14.0 -8.8 NA -8.2 NA -1.8 -1.0 -1.0 -0.0 NA 1978 NA NA 1.9 21.0 i4.1 7.0 -20.2 -13.1 -7.1 -100 -7. -0.3 -1.8 -0.9 -0.9 -0.0 NA 1979 NA 1.0 3.1 20.4 14.6 5.7 -1&6 -126 -6.0 -8.7 -6.8 -0.2 -1.6 -0.7 -0.6 -0.1 -2.1 1980 NA 1.7 3.9 21.5 16.2 5.2 -21.4 -14.2 -7.2 -9.6 -7.7 -0.2 -1.7 -0.5 -0.4 -0.1 -2.2 1981 NA -0.4 2.5 24.5 17.4 7.1 -26.2 -15.4 -10.8 -1Q2 -8.0 -0.4 -1.9 -0.5 -0.3 -0.2 -2.9 1982 NA -8.0 -4.9 22.6 15.2 7.4 -34.5 -214 -13.2 -127 -10.2 -0.4 -2.2 -0.7 -0.6 -0.1 -3.9 1983 NA -4.1 -0.4 24.1 16.8 7.3 -30.8 -1&9 -11.9 -11.3 -9.1 -0.3 -1.8 --2.5 -13 -1.2 -3.6 1984 -8.3 -4.2 -1.1 20.4 14.7 5.7 -29.0 -1&7 -1Q4 -9.0 -6.7 -0.5 -1.8 -3.9 -2.0 -1.9 -3.1 1985 -4.0 -0.7 2.0 22.4 16.0 6.3 -27.5 -17.5 -10.0 -9.7 -7.0 -0.3 -2.4 -3.1 -2.2 -0.9 -2.7 1986 -4.8 -0.9 3.0 24.0 16.8 7.2 -26.8 -165 -10.3 -9.8 -7.1 -0.4 -2.3 -3.3 -1.9 -1.4 -3.9 1987 -4.0 -1.3 2.0 23.3 16.3 7.0 -26.3 -15.8 -105 -9.2 -6.5 -0.4 -2.3 -2.5 -1.5 -1.0 -3.3 1988 -4.5 -1.6 2.2 23.8 16.8 7.1 -27.5 -16.7 -10.9 -9.3 -6.8 -0.3 -2.1 -2.6 -1.6 -0.9 -3.8 1989 -7.4 -3.6 -0.0 21.8 15.9 5.9 -2&2 -17.0 -11.2 -8.1 -5.8 -0.3 -2.1 -3.0 -2Z0 -1.0 -3.6 1990 -3.6 0.5 4.4 25.0 18.1 7.0 -27.7 -16.2 -11.5 -7.5 -5.4 -0.3 -1.9 -3.0 -1.9 -!.1 -3.9 1991 -1.3 1.1 5.2 26.5 18.9 7.6 -2&0 -16.8 -11.3 NA -6.8 NA -1.9 -2.3 -1.8 -0.5 -4.0 Source: Central Bank of Unrguay. STATISTICAL APPENDDX TABLE SB: URUGUAY: PUBLIC-SECTOR ACCOUNTS: CENTRALADMNISlRATION, PUBLICENTERPRISE& Non-financial public-sector: Central administration: Pub1c nepntse Surplus Surplus Current Capital Crret Net Capital saving Current Current forma- operat- Operat- Cuent transfersfor'ia- revenue expendi- Pes- Soc. sec Interest Other tion mg ing ezpendi-frson- Inputs nerest and tion ture: ne bander suplus: income ture: nel a (Pecent of GDP) 1975 -4.4 -2.7 12.1 -14.7 -7.9 -2.8 -0.9 -32 -1. NA NA 14.2 NA -2.9 -73 -0.1 NA NA 1976 -2.6 -0.7 13.6 -14.3 -9.0 -1.0 -1.1 -3.1 -1.9 NA 0.0 12.8 -127 -2.0 -8.0 -0.0 -2.6 NA 1977 -1.2 0.7 14.8 -14.0 -8.2 -1.0 -1.0 -3.9 -1.9 NA 0.3 12.1 -11.8 -1.8 -8.0 -0.0 -2.0 NA 1978 -1.3 1.0 14.1 -13.1 -7.8 -0.6 -0.9 -3.8 -2.3 NA 0.4 11.2 -18 -1.8 -7.5 -0.0 -1.4 NA 1979 0.2 2.0 14.6 -12.6 -6.8 -0.8 -0.6 -4.3 -1.8 0.2 0.5 10.6 -IQ1 -1.6 -7.1 -0.1 -14 -0.3 1980 0.1 2.0 16.2 -14.2 -7.7 -2.6 -0.4 -3.6 -20 1.0 1.3 13.1 -IL8 -1.7 -73 -0.1 -2.7 -03 1981 -0.1 2.0 17.4 -15.4 -8.0 -3.2 -0.3 -3.9 -2.1 0.2 1.0 12.9 -11.8 -1.9 -6.8 -0.2 -3.0 -0.8 1982 -8.7 -6.2 15.2 -21.4 -IQ2 -6.6 -0.6 -4.0 -25 -0.1 0.4 13.3 -12.9 -2.2 -7.9 -0.1 -2.8 -0.5 1983 -4.2 -21 16.8 -1&9 -9.1 -4.9 -1.3 -3.6 -2.1 -0.0 1.4 15.1 -13.7 -1.8 -85 -1.2 -22 -15 1984 -5.8 -4.0 14.7 -18.7 -6.7 -4.9 -2.0 -5.1 -1.8 1.3 2.6 18.9 -16.2 -1.8 -9.5 -1.9 -3.0 -13 1985 -3.1 -1A 16.0 -175 -7.0 -4.3 -2.2 -4.0 -1.6 1.7 2.8 16.9 -141 -Z.4 -7.1 -0.9 -3.7 -1.1 1986 -13 0.3 16.8 -16.5 -7.1 -3.3 -1.9 -4.1 -1.6 0.2 2.4 14.3 -11.9 -2.3 -4.7 -tIA -35 -2.2 1987 -1.3 0.5 16.3 -15.8 -6.5 -3.5 -1.5 -4.2 -1.9 0.1 1.5 125 -11.0 -2.3 -4.7 -1.0 -3.0 -14 1988 -2.0 0.1 16.8 -16.7 -6.8 -4.0 -1.6 -4.2 -2.1 0.1 1.9 13.1 -112 -2.1 -4.9 -0.9 -33 -1.7 1989 -3.5 -1.1 15.9 -17.0 -5.8 -53 -2.0 -4.0 -2.3 -0.2 1.1 12.9 -11.8 -2.1 -5.7 -1.0 -3.1 -1.2 1990 -.1 1.9 18.1 -16.2 -5.4 -4.6 -1.9 -4.3 -2.0 0.6 24 14.8 -12.3 -1.9 -5.7 -1.1 -3.6 -19 1991 0.4 2.1 18.9 -16.8 -6.8 -3.7 -1.8 -4.5 -1.7 0.8 3.0 14.2 -ILI -1.9 -4.7 -0.5 -4.0 -2.3 Source: Central Bank of Unrupay. STATISCAL APPENDIX TABLE 5C URUGUAY: PUBUIC-SECIrOR ACODUNTS: SOCIAL SECURITY, FINANCIAL ENTITIES, MONIEVIDEO Munici- Central pality Social secwity Bank Central Admin- of Smuplus admin- Badn isteaed Monte- Revenue Transfer Expeadi- istered (par- banks video from ture: Benefits Person- banks fisuall central ne suMplus admin. 1975 NA NA 2.8 NA NA NA NA NA 0.0 NA 1976 1.2 8.7 1.0 -&5 NA NA NA NA 0.0 NA 1977 0.7 85 1.0 -8.8 NA NA NA NA 0.0 NA 1978 05 7.0 0.6 -7.1 -6.8 -0.3 NA NA 0.0 NA 1979 0.6 5.7 0.8 -6.0 -5.8 -0.2 NA NA 0.0 NA 1980 06 5.2 2.6 -7.2 -6.9 -0.2 NA NA 0.0 NA 1981 -0.5 7.1 3.2 -108 -1I05 -0.4 NA NA 0.0 NA 1982 0.8 7.4 6.6 -13.2 -12.8 -0.4 NA NA 0.0 NA 1983 0.2 73 4.9 -IL9 -11.6 -0.3 NA NA 0.0 NA 1984 0.2 5.7 4.9 -10.4 -9.9 -0.5 -4.0 -4.0 0.0 NA 1985 0.6 63 43 -I1O -9.7 -0.3 -32 -3.2 0.0 NA 1986 0.2 7.2 3.3 -10.3 -9.9 -0.4 -3.9 -3.9 0.0 NA 1987 -0.0 7.0 3.5 -10.5 -101 -0.4 -2.7 -2.7 0.0 NA 1988 0.2 7.1 4.0 -1Q.9 -10.5 -0.3 -2.8 -2.8 0.0 NA 1989 0.0 5.9 5.3 -11.2 -l109 -0.3 -3£ -3.3 -05 -0.0 1990 0.0 7.0 4.6 -11.5 -113 -0.3 -4.1 -3.6 -0.5 -0.1 1991 0.0 7.6 3.7 -11.3 NA NA -2.5 -2.3 -0.2 0.1 STATISTICAL APPENDIX TABLE 5D: URUGUAY: FINANCING OF THE CENTRAL ADMINISTRATION DEFICIT. Combined deficit Central Fnancing: of the adfinis- central tration Net Net Net Net Other adnminis- deficit: credit BC _J BROU place- place- eCAl (net) tration, from the Account- Revalu- ment of meat of loans Central BCJ, ing flows ation bonds bEis Bank BROU (Peinent of GDP) 1975 NA 4.4 1.0 1.2 1.3 -0.1 -0.1 3.4 0.1 0.0 -Q0 1976 NA 2.1 1.4 1.7 1.7 0.0 -0.3 1.0 0.3 0.0 -0.1 1977 NA 03 1.6 1.8 1.7 0.2 -0.2 0.6 -0.2 -0.2 -0.6 1978 NA 0.2 0.6 0.6 0.5 0.1 -0.0 -0.2 0.7 -0.1 0.3 1979 NA -1.1 0.4 0.3 0.3 0.0 0.0 -0.1 -0.4 -0.i -0.0 1980 NA -0.9 -0.2 -0.1 -0.1 0.0 -0.1 -0.1 -0.2 -0.1 0.4 1981 NA -0.8 0.3 0.4 0.4 0.0 -0.1 0.0 0.0 -0.1 -02 1982 NA 7.4 7.0 6.3 '6.2 0.1 0.7 0.1 1.2 0.2 0.2 1983 NA 3.0 3.3 3.2 3.2 -0.0 0.0 -0.4 13 03 -02 1984 85 4.9 2.7 2.8 2.9 -0.0 -0.1 0.4 3.1 0.3 -OS 1985 4.6 2.5 02 0.8 1.0 -0.1 -0.7 1.9 15 0.4 -0.9 1986 5.0 0.9 -0.8 -0.5 -1.0 0.4 -03 1.3 1.1 0.2 -04 1987 4.0 1.1 -0.8 1.1 03 0.8 -1.9 0. 1.7 0.1 0.1 1988 4.7 1.7 -1.5 -0.4 -1A 1.0 -1.1 1.0 2.3 0.1 0.1 1989 7.4 3.2 1.4 1.7 -0.4 2.1 -0.2 0.1 1.8 0.1 -0.0 1990 3.6 -01 -1.4 0.3 -1.7 2.0 -1.7 -0.0 1.5 -0.0 -0.0 1991 1.3 -0.6 -13 -1.0 -2.4 1.3 -0.2 1.5 -0.5 -0.1 -01 Soir: Cental Ban of Uuguay. STArIST1CALAPPENDIX TABLE G: URUGUAY: PAA-PISCAL SURPLUS OP111E CERAL BANK. Central B"ak Foreig- orein- Domestic Domestic- srplu ezcbp Refi- IMP o*m to POPIDE- Pot- Plmarcia Othr e pchae Cora- Bill Other currencq Operat- Monetary Oteer aqre Plae- Loa Other cpn- Bsaned purchase l0RD fofo system ieome podent and expend- lag Reula- income meats in recousy kut eteu ' det mt Purchase foreig- deposits beands itre coss don fomds. debt refi- bods echngp Biab com_s- ticed depostb s 5m (Perosatof GDP) 1982 -0.8 -0.7 0.4 0.4 0.0 0.0 -0.6 -O.S 0.0 -0.1 0.0 t983 -3.5 -1.9 0.3 03 0.0 O -1.9 -0s. 0.0 -1.4 0.0 1984 -4. -4.7 -1.2 -Os -1.3 -0.2 -0.8 -0.3 -0.4 0.7 0.4 0.1 02 -0.8 -0.1 -02 -0.4 o.A 0.6 02 0.0 m5 -32 -3A -1.0 -0.5 -0.9 -0.1 -0.5 -0.1 -0.3 05 0.3 0.1 O1 -0.7 -02 -04 -0.1 C.: .3 0.0 D00 198I -3.9 -3.7 -1.3 -0.5 *--.6 -02 -0.5 -02 -0.3 0.6 OA 0.0 0.1 -1.1 -0.2 -0.9 -0.0 .4 02 0.1 0.0 1987 -2.7 -2.4 -0.8 -OA -0.3 -0.1 -0.3 -0.2 -0.3 o.S 0.5 O 0.1 -1.0 -0.2 -0.8 -O 0.2 0.1 0.1 0.0 1988 -28 -2.3 -0.8 -0.3 -O. -0.2 -0.4 -0.2 -0.3 o.s 0.5 O 0.0 -i.2 -0.2 -1.0 -0.1 0.2 02 0.0 0.0 1989 -3.3 -2.6 -1.0 -0.3 -0.0 -02 -Q4 -0.3 -Q4 0.6 0.6 0.0 O -1.5 -0.2 -1.1 -0.1 0.2 02 0.0 0.0 199 -3. -2.4 -0.8 -0.2 -0. -0.3 -0.3 -0.4 -0.4 0.4 0.4 0.0 0.0 -1.8 -0.2 -1.4 -O.1 0.1 0.1 0.0 o o 1991 -2.3 -1.6 -0.3 -0.1 0.0 -0.2 -0.2 -0.3 -0.5 0.3 0.3 O 0.0 -1.0 -0.2 -0.5 -0.4 0.1 0.1 0.0 0.0 (US$ milon) 1990t 1 -67.5 -45S.8 -20. -86 -0.0 -1.6 0.0 -8.3 -6.6 11.2 11.0 0.0 0.1 -34.3 -2.8 -28.9 -2.6 IA OD 0.0 0.0 1992 -81.4 -53.8 -16.4 -3.4 O -6.7 -11.7 -7.1 -8.6 9.0 9.0 0.0 0.0 -38.5 -4. -32.3 -2.2 1.9 1.9 0.0 0.0 19903 -72.1 -41.8 -16.1 -2.6 O -3.4 0.8 -7.3 -11.2 to2 9.4 O 0.8 -42.4 -3.9 -34.6 -4.0 2.0 1.9 O.C 0.0 19904 -18.3 -S72 -16.5 -2.8 0.0 -9.7 -11.5 -9.7 -7.1 6.7 6.2 0.0 o.s -30.3 -5.3 -22.3 -2.8 2.5 2.5 0.0 0.0 1991.1 -67.3 -53.9 -30.1 -6.3 0.0 -1.8 O -6.7 -9.0 12.1 10.6 O 1.S -26.9 -3.0 -21.2 -2.7 I.4 1.4 0.0 O 1991.2 -46.5 -35.0 2.8 -1.9 0.0 -5.9 -10.1 -10.0 -9.9 1. 9.6 0.0 0.3 -23.1 -5.4 -11.3 -6.4 1.6 .6 0.0 0. 1991.3 -43.3 -27.1 -0.4 -3.6 00 -6.1 0.0 -6A -10.6 8 7.6 0.0 G4 -25.7 -5.5 -7.9 -12.3 1.5 IS 0.0 .O 199L -64.3 -46. -55 -1.8 0.0 -6.6 -7.7 -7.4 -17.1 2.7 24 0.0 0.4 -25A -5.5 -62 -13.6 43 4.3 0.0 0.0 Da sowuce:Cenval Bak of Uruguay. STATISTICAL APPENDIX TABLE 6: URUOUAY: PARA-PISCAL SURPLUS OP THE CENTRAL BANI. (coot'd) Ctotrel Bank Foreip- Foreip- Domestie Domestic- wplus exchape Reri- IMP Loa sto POFDE- Port- Fancial Other exchbae Cors- Bils Olber currency Opernt- Moety Ote cuancy Plae- Loan Other expen- _anced purcbhe 1tRD foio qyem income pcndel and' expea- Ing Regaa- twmc meuts in reovery humt externl debstnos purchase foreign- deposius bonds iure cost tion funds. debt tei- bonds excwhoge Bms commis- anced deposits oans (USS million) Ja-90 -42.6 -36.7 -22.3 -4.8 -0.0 -16 0.0 -2.2 -5.7 7.2 7.2 0.0 0.0 -13.6 -0.7 -11.6 -13 OA 0.4 0. 0.0 Feb-90 -11.7 -6.1 0.8 -3.8 -0.0 0.0 0.0 -2.2 -0.9 2.2 2.2 0.0 0.0 -S.3 -0.8 -6.9 -.6 05 0.5 0.0 0.0 Mar-90 -13.2 -3. 0.9 O O O 0.0 -3.9 -0.0 1.7 1.6 0.0 O.i -12.4 -1.3 -10.4 -0.7 0.5 0 O0 0.0 Ape-90 -41A -31.3 -11! OA 0. -6.1 0.0 -2.2 -4.6 1.4 1.4 0.0 0.0 -i2.9 -1.2 -11.1 -0.6 IA IA 0.0 O. May-90 -19.3 -11.1 1.0 -3.4 0.0 -3.2 0.0 -2.2 -3.3 6.2 6.2 0.0 0.0 -14.2 -1.2 -12.1 -0.9 -0.2 -0.2 0.0 0.0 Jun-90 -20.7 -11 I. OA 0.0 2.6 -11. -2.7 -0.6 1.4 1.4 0.0 0.0 -11.4 -1.6 -9.1 -0.7 0.: 0.7 0.0 0.0 Jul-90 -38S -25.3 -20.1 0.4 0.0 -1.4 0.7 -2.1 -2.9 22 1.6 0.0 0.6 -16.1 -1.3 -14.0 -0.8 0.8 0.8 0.0 0.0 Aug-90 -16.8 -75 1.1 -3.1 0.0 0.0 0.1 -2.9 -2.7 1.7 1.6 0.0 0.1 -11.6 -0.9 -9.7 -1.1 0.6 0.6 0.0 0.0 Sep-90 -16.5 -8.9 0.9 0.0 0.0 -1.9 0.0 -2.3 -5.6 6.3 6.2 O 0.1 -14.8 -1.7 -10.9 -2.1 0.5 05 O O Oct-90 -39.3 -31.9 -19A 0.0 0.0 -4.0 0.0 -4.3 -4. 2.5 2.3 00 0.1 -10.4 -1.4 -8.0 -1. 0.7 0.7 O O Nov-90 -19.2 -8.6 0.9 -2.8 0.0 -35 0.0 -2.3 -0.9 2.0 1.9 0.0 0.1 -13.2 -IA -10.7 -1.0 0.7 6J. 0.0 0.0 Dec-90 -19.8 -16A 2.2 0.0 0.0 -2.1 -11.5 -3.1 -2.2 2.3 2.0 0. 0.2 -6.7 -2.3 -3.5 -0.8 1.2 1.2 0.0 O0 Jan-91 -39.3 -32.3 -21.6 -3.9 0.0 -1.8 0.0 -2.2 -2.8 7.1 7.1 0.0 0.0 -14.4 -0.7 -12.8 -0.9 0.3 0.3 O 0.0 Feb-91 -21.9 -20.2 -9.4 -2A 0.0 0.0 0.0 -2.8 -5.5 2.5 22 0.0 0.3 -4.9 -J.9 -2.9 -1.1 0.6 0.6 0.0 0.0 Mar-91 -6.1 -1.5 1.0 0.0 0.0 0.0 0.0 -1.7 -0.7 25 1.3 0.0 1.1 -7.6 -1A -5.5 -0.7 0.4 0.4 O 0.0 Apr-91 -21.2 -17.2 1.0 0.0 0.0 -34 0.0 -4.8 -10.0 2.8 2.7 O 0.1 -7.4 -2.2 -3.S -1A 0.5 05 0.0 0.0 May-91 -3.0 -4.8 0.9 -1.9 0.0 -2. 0.0 -2.6 1.4 6.0 5.9 0.0 0.1 -4.8 -1.8 -15 -15 0.5 0 0.0 0.0 Jun-91 -22.3 -13.1 0.9 0.0 0.0 0.0 -10.1 -2.7 -1.2 1.2 1.1 0.0 0.1 -105 -.4 -6.0 -33 05 05 . 0.0 Jul-91 -22A -15A -25 -1.8 O -2.6 O -2.3 -6.6 I. 1.3 0.0 0.1 -8.6 -1.7 -2.6 -4.3 O 0.4 0.0 0.0 Aug-91 -12A -7.8 1.2 -1.8 O -3.2 O -2. -2.0 1.6 1.3 O. 0.2 -6.7 -1.7 -2.4 -2.6 0.6 0.6 0.0 0.0 Sep-91 -8.3 -3A 0.9 0.0 0.0 -0.2 0.0 -2.1 -2.0 5.0 4.9 0.0 0.1 -10.4 -2.1 -2.9 -S.3 0.5 05 0.0 0.0 Oct-91 -18.4 -12.1 0.8 O 0.0 -3.3 0.0 -3.2 -63 1.3 1.2 0.0 0.1 -8.1 -1.7 -2.0 -4.3 0.4 0.4 0.0 0.0 Nov-91 -13.2 -6.5 -0.2 -1.7 0.0 -2.9 0.0 -13. -0.3 0.7 0.6 0.0 0.1 -8.5 -1.5 -2.6 -4.4 1.1 1.1 0.0 0.0 Dcc-91 -32.7 -27A -6.2 -0.1 0.0 -0.4 -7.7 -2.7 -10.2 0.7 03 0.0 0.2 -8.8 -2.3 .7 -4.8 2.8 2.8 0.0 O0 Jan-92 -11.4 -9.2 -43 -0.1 0.0 -1.3 0.0 -1.3 -2.0 S.1 5.1 O 0.0 -7.8 -1.1 . -0.6 0.5 0.5 0.0 0.0 Feb-92 -tS.l -3.3 0. -15 0.0 O 00 -1.3 -1.3 0.4 0.4 0.0 0.1 -13.5 -l.8 -S.4 0.5 0.5 0.0 0.0 Dat souee: Central Bank of Uruguay. STATISTICAL APPENDIX TABLE 7: URUGUAY: PRINCIPAL TAXES. Totab Pticipsl Domestic ___ ta On pgo- __ t lame On a" Other Tax Interas- rewuue dican Value- IMESI: Other lndusby IMAGRO Otber worth te credits iond Import Cus- 'Subtrac- items ad added Fuel Tobwaco Eletui- Automo- Specific (incL and IMEB trade charg. ton tios. muse- products cal bies consump- reign- commerce IRA consular tariffs export Wasu caerg) lion e teesan items sae) (Percent oi GDP) 1975 11.5 10.3 9.5 3.9 S.1 1.6 1.1 0.1 0.1 0.0 2.0 1.2 0.7 0.3 0.2 03 03 -1.0 12 0.6 0.5 0.1 1976 12.5 10.6 9.8 4.8 4.9 2.0 1.1 0.1 0.1 0.4 1.2 1.6 0.9 0.5 0.2 0.7 0.5 -2. 1.9 1A 0.5 0.1 us 1977 13.4 11.3 10.3 5. 5.2 2.2 1.0 0.2 0.1 0.5 1.3 1.8 1.0 0.6 0.2 0.9 0.3 -1.9 2.1 1.5 0.5 0.1 1 1978 12.7 10.9 9.9 4.9 5. 1.9 1.0 0.2 0.0 0.5 1.4 1.8 1.3 0.4 0.2 0.7 0.2 -1.7 1.8 1.2 0.5 0.0 1979 13.b 10.2 9.1 4.8 4.3 1.7 0.8 0.1 0.0 0.5 IA 1.8 1.3 0.3 O 0.5 0.1 -1.2 2.8 2.1 0.7 0.0 1980 14.9 11.9 10.1 6.h 3.9 1.8 1.0 0.1 0.2 0.6 0.2 2.6 1.9 0.5 0.1 0.8 0.1 -1.6 3.0 2.4 0.6 0.0 1981 14.8 12.2 11D 7.0 4.1 1.7 t0 0.2 0.3 0.7 0.1 2.0 1.9 0.1 0.0 0.9 0.1 -1.8 2.6 2.1 OS 0.0 19S2 12.8 10.7 9.9 6.2 3.7 1.6 t.2 0.0 0.2 0.7 0.1 1.6 1.5 0.0 0.0 1.0 0.1 -1.9 2.1 1.8 0.3 0.0 1983 13.5 10.9 9.6 5.5 4.0 2.1 1.2 0.1 O 0.6 0.1 1.8 1.7 0.0 0.1 1.2 0.1 -1.7 2.6 1.3 0.2 1.1 1984 t2.6 10.4 10.1 5.9 4.2 2.2 1.0 0.0 0.0 05 0.4 1.1 1.0 0.0 O 0.7 0.1 - 1.5 2.2 1.6 0.2 0.4 1985 14.4 12.2 11.1 6.3 4.8 2.5 1.0 0.0 0.J 05 0.7 1.3 0.8 0.4 O. 0.9 0.1 -1.2 2.2 1.8 02 0.2 1986 15.0 12.3 11.0 6.3 4.7 2.2 0.9 0.2 0.0 0.6 0.8 1.3 0.8 0.4 0.0 1.1 0.1 -1.2 2.7 2.3 02 02 1987 ISA 12.6 II 6.4 4.6 2. 0.7 0.3 0.2 0.6 0.7 15 0.9 05 0.0 1.2 0.1 -1.2 2.4 2 0.3 0.1 1988 15.3 13.0 11.5 7.3 4.2 2.0 0.7 0.3 0.2 0.6 0.5 1.7 1.1 0.5 O. 1.1 0.1 -1.4 2.3 1.9 0.3 0.1 1989 14.7 12.6 11.3 7.1 4.2 2.0 0.8 0.3 0.2 0.6 0.4 1.2 0.9 02 00 1.2 0.1 -12 2.1 1.7 0.3 0.1 1990 16.5 14.0 122 7.6 4.6 2.1 0.8 0.3 0.2 0.6 0.6 1.2 1.0 0.2 00 1.3 0.1 -0.8 2.5 2. 0.3 0.1 1991 16.7 14.5 12.8 8.0 4.8 1.9 0.9 0.3 0.3 0.7 0.7 1.1 1.0 0.1 0.0 1.1 0.1 -0.7 2.2 1.8 03 0.1 Soure: Central Bank of Uruguay. STATISTICAL APPENDIX TABLE 8: URUGUAY: PUBLIC-SECTOR DOMESTIC DEBT OUITSANDING (USS BILLION). Total Peso-de- Dollar- Treasuty: BHU Central nominated denominated Bank US$ Bonds US$ Bills Peso Bills Dec-89 2.146 0284 1.862 1.986 0.843 1.018 0.124 0.036 0.124 Jan-90 2.197 0323 1.873 2.017 0.869 1.005 0.143 0.037 0.143 Feb-90 2.227 0327 1.900 2.045 0868 1.031 0.145 Q.036 0.145 Mar-90 2.274 0355 1.919 2.078 0.880 1.039 0.159 0.036 0.159 Apr-90 2.278 0366 1.912 2.078 0.878 1.034 0.166 0.034 0.166 May-90 2.292 0377 1.915 2.086 0.871 1.044 0.171 0.035 0.171 Jun-90 2.293 0378 1.915 2.087 0.863 1.052 0.172 0.03S 0.172 Jul-90 2? 0357 1.943 2.103 0.862 1.081 0.160 0.037 0.160 Aug-90 23: 0382 1.973 2.146 0.885 1.087 0.174 0.034 0.174 Sep-90 2387 0.407 1.980 2.168 0.880 1.100 0.188 0.033 0.186 Oct-90 2.399 0.417 1.982 2.173 0.895 1.087 0.192 0.034 0.19i Nov-90 2396 0359 2.036 2.199 0.892 1.145 0. 0.035 0.162 Dec-90 2.309 0.273 2.036 2.155 0.898 1.137 0.119 0.035 0.119 Jan-91 2.315 0.275 2.040 2.173 0.889 1.151 0.133 0.009 0.133 Feb-91 2.343 0.268 2.076 2.205 0.913 1.163 0.129 0.009 0.129 Mar-91 2.349 0.268 2.081 2.210 0.934 1.146 0.129 0.010 0129 Apr-91 2.395 0.251 2.144 2.265 0.983 1.161 0.121 0.010 0.121 May-91 2.278 0.126 2.152 2.210 0.979 1.173 0.058 0.010 0.058 Jun-91 2.244 0.124 2.120 2.177 0.951 1.169 0.057 0.010 0.057 Jul-91 2.254 0.123 2.131 2.187 0.951 1.180 0.056 0.011 0.056 Aug-91 2.253 0.130 2.124 2.184 0.943 1.181 0.060 0.010 0.060 Sep-91 2.257 0.125 2.132 2.189 0.934 1.198 0.057 0.010 0.057 Oct-91 2.249 0.120 2.129 2.184 0.950 1.179 0.055 0.010 0.055 Nov-91 2302 0.121 2.181 2.236 1.018 1.163 3.055 0.010 0.055 Dec-91 2.234 0.113 2.121 2.173 0.988 1.134 0.051 0.010 0.051 Data source: Cental Bank of Uruguay. STATISTICAL APPENDIX TABLE 9A: IJRUGUAY: CONSOLIDATED BANKING SYSTEM: ASSETS AND CAPITAL (Billions of US. dollars) Net Net Monetary Tatl. Domes- Net Net Net Other Liabil- Re- tic Creditto Central Other Credit to Credit to National Foreign Capital Other ities serves Credi1 the Public Govt. Operations Other Public Banks the Currency Currency Sector and Inv. Sector (BHU) Private Fund Sector Dec-89 1.906 2.663 0.960 0273 -0273 0.546 t0.687 0.422 2.735 0.664 2.071 -1A54 0.033 -1.487 4.569 Jan-90 1.935 2.724 1.010 0.291 -0.273 0565 0.719 0.426 2.706 0.656 2.049 -1.417 -0.028 -1.390 4.659 Feb-90 2.035 2.714 1.016 0297 -0283 0580 0.719 0.424 2.723 0.643 2.081 -1.450 -0.054 -1396 4.749 Mar-90 2.073 2.670 1.046 0333 -0268 0.607 0.708 0.425 2.705 0.621 2.084 -1.507 -0.103 -1.404 4.742 Apr-90 2.014 2.702 1.045 0335 -0.269 0.604 0.709 0.439 2.672 0.598 2.074 -1.453 -0.144 -1309 4.717 May-90 2.057 2.671 1.063 0340 -0267 0.607 0.723 0.445 2.628 0.574 2.054 -1.465 -0.181 -1284 4.728 Jun-90 2.092 2.718 1.038 0316 -0294 0.610 0.722 0.459 2.616 0.560 2.056 -1395 -0.132 -1.263 4.809 Jul-90 2.133 2.706 1.026 0.294 -0311 0.605 0.732 0.473 2.5% 0.541 2.055 -1388 -0.191 -1.197 4839 Aug-90 2.285 2.613 0.996 0.294 -0342 0.636 0.702 0.477 2.526 0537 1.989 -1386 -0.233 -1.152 4.898 Sep-90 2391 2.540 1.003 0321 -0384 0.705 0.682 0.477 2.431 0.544 1888 -1372 -0.290 -1.082 4.930 Oct-90 2.419 2564 0.993 0.306 -0369 0.675 0.687 0.480 2.477 0.551 1.926 -1.,85 -0.285 -1.100 4.983 Nov-90 2A37 2.580 0.922 0.262 -0.404 0.666 0.660 0.472 2370 0.561 1.809 -1.184 -0315 -0.869 51017 Dec-90 2.537 2.674 0.905 0201 -0.460 0.661 0.704 0.489 2.614 0.579 2.035 -1334 0.142 -1.476 5211 Jan-91 2.807 2.525 0.867 0.165 -0.462 0.627 0.702 0.486 2.540 0514 2.026 -1369 0.170 -1539 5332 Feb-91 2.611 2.888 0.874 0.166 -0.477 0.643 0.709 0.477 2548 0.508 2.040 -1.010 -0.043 -0-9f8 5.499 Mar-91 2599 2.926 0.836 0.143 -0.475 0.619 0.692 0.458 2538 0.491 2.046 -0.905 -0.105 -0800 5525 Apr-91 2.812 2.779 0807 0.125 -0543 0.667 0.683 0.472 2531 0.485 2.046 -1.032 -0.152 -0.879 5590 May-91 2.829 2.800 0.811 0.127 -0580 0.707 0.684 0.471 2539 0.480 2.059 -1.022 -0.175 -0.847 5.629 Jun-91 2.871 2.840 0.795 0.107 -0.607 0.714 0.688 0.479 2540 0.482 2.058 -0.974 -0.191 -0.784 5.711 Jul-91 2.877 2.843 0.817 0.131 -0561 0.692 0.636 0.499 2587 0.474 2.113 -1.060 -0.196 -0.864 5.721 Aug-91 2.899 2.895 0.890 0.193 -0.536 :0.729 0.698 0.489 2573 0.480 2.093 -1.057 -0.227 -0.830 5.794 Sep-91 2.930 2.902 0.837 0.139 -0586 0.726 0.698 0.496 2573 0.486 2.087 -1.005 -0.257 -0.748 5.831 Oct-91 2.910 2.897 0.842 0.156 -0547 0.703 0.686 0.486 2.602 0505 2.097 -1.033 -0248 -0.784 5.807 Nov-91 2.867 2.935 0.811 0.121 -0591 0.712 0.691 0.488 2.648 0.532 2.115 -1.)12 -0.263 -0.750 5.801 Dec-91 2.693 3.246 0.678 -0.005 -0.647 0.642 0.683 0509 2.758 0563 2.196 -0.699 -0.024 -0.676 5.939 Source of basic data: Central Bank of Uruguay. STATISTICAL APPENDIX TABLE 9B: CONSOLIDATED BANKNG SYSTEM: MONETARY LIABILITIES. (Billions of US. dollrs) National Currency Currency Deposits Other Deposits Private Other in in Private in Sector Deposits Circua- National Sector Demand Savings Time Foreign Deposits tion Currency Deposits Deposits Deposits Currency Dec-89 0.866 0.261 0.606 0.545 0.135 0.072 0339 0.060 3.703 3.621 0.081 Jan-90 0.814 0.217 0.597 0540 0.134 0.071 0.335 0.057 3.845 3.766 0.078 Feb-90 0.814 0.224 0.590 0.526 0.135 0.064 0.327 0.063 3.935 3.864 0.071 Mar-90 0.758 0211 0.548 0.497 0.115 0.063 0.318 0.051 3.984 3.911 0.074 Apr-90 0.740 0.198 0542 0502 0.132 0.061 0.309 0.041 3976 3.909 0.067 1 May-90 0.736 0.194 0543 0.484 0.122 0.058 0.305 0.058 3.992 3.905 0.086 co Jun-90 0.768 0.218 0.550 0.490 0.121 0.064 0.304 0.060 4.041 3.972 0.069 Jul-90 0.782 0.206 0576 0512 0.140 0.062 0.310 0.064 4.057 3985 0.071 Aug-90 0.745 0.206 0.539 0.478 0.116 0.059 0.303 0.061 4.153 4.051 0.102 Sep-90 0.739 0.206 0532 0.482 0.115 0.063 0.303 0.050 4.192 4.090 0.101 Oct-90 0.728 0.209 0519 0.474 0.116 0.058 0300 0.045 4.255 4.158 0.097 Nov-90 0.747 0.225 0521 0.472 0.120 0.055 0.297 0.049 4.270 4.181 0.089 Dec-90 0.828 0.264 0563 0519 0.165 0.064 0.291 0.044 4.383 4.265 0.118 Jan-91 0.835 0.250 0585 0.540 0.186 0.061 0.293 0.046 4.497 4.406 0.091 Feb-91 0.830 0.256 0575 0502 0.140 0.060 0302 0.073 4.668 4554 0.114 Mar-91 0.873 0.287 0586 0509 3.130 0.064 0.315 0.077 4.652 4554 0.097 Apr-91 0.806 0.239 0568 0522 0.133 0.062 0.327 0.046 4.784 4.664 0.120 May-91 0.829 0.253 0576 0.523 0.131 0.063 0329 0.053 4.800 4.675 0.125 Jun-91 0.866 0.280 0586 0530 0.137 0.067 0326 0.057 4.845 4.737 0.108 Jul-91 0.837 0.254 0583 0530 0.140 0.065 0326 0.052 4.884 4.784 0.100 Aug-91 0.841 0.254 0587 0520 0.132 0.062 0.326 0.067 4.953 4.850 0.102 Sep-91 0.862 0.245 0.617 0540 0.157 0.068 0.316 0.076 4.969 4.851 0.118 Oct-91 0.851 0.264 0587 0519 0.138 0.065 0.316 0.068 4.956 4.856 0.100 Nov-91 0.868 0.285 0582 0521 0.145 0.065 0.311 0.061 4.934 4.826 0.108 Dec-91 0.981 0.341 0.641 0571 0.193 0.071 0.307 0.070 4.957 4.852 0.105 sTrATiCAL AWNMt TANS 9C: URUGUAY: CENTRAL SAM (BWU): ASS3M (Mflmc of US.ddlaw) Nel Not lId. D1ea- Net Net Net odt _ceit Re- die Ctetito CaiaI Otber Ce.t to BROU BEiU EtIate tothe Natlaii FPVWi id va~ CleaQit thoe Pulab Go. Opaticau OUter PubUe Bob BDab Ranve OtherBUa it. Curaiq O 0renq Mai9y setort and kw. Socd AornI 1m Net naI SedGr lkti- Ftmd Per, Octi. on Ev.ti Banks Dec-9 0.990 -569 0.737 o09 -0.2 0322 0.644 -also -0397 .4A22 -0524 -0.2U 0040 o0m01 Wn 0.027 -LlU Jan-90 0963 -55s 0.7d5 0.18 -0204 0322 0467 -027 -0.410 O.25 -02M2 -Qm 0.41 0013 0m 0.012 -1.138 Feb-90 0.96 -0561 03758 o97 -.222 031S 0.661 -a209 -0396 0.423 -235 -0.277 o042 o0.13 00 0.012 -1.122 Mar-9D 0.961 -0Q84 .770 0.106 -0215 0321 0664 -0219 -OA4l 0.425 -023 -0s75 O002 o0m18 o.o 0.017 -1.13 Apr-90 0.905 -0.544 0.8O0 0128 -am93 0321 0.672 -217 -44I 0439 -0.214 -02s ODO 0.018 0D1 om7 -1.145 May-90 0.99 -o56 0.823 039 -0184 0324 O084 -.236 -0.442 O44 -Q238 -278 0A40 o05 091 0.014 -.138 Jun-90 0.917 -0.564 0.763 0.077 -_246 0323 0d6 -0206 -0A435 0.4 -0.228 -0265 0037 o.015 0m 0m4 -1.136 Ju1-90 0.903 -.534 0.785 0.091 -0232 0323 0695 -0207 -0.43 0.473 -0247 -0.279 0032 0.014 Om0 0013 -1596 Aug-90 0.950 -0-567 0.726 O.s -a.2m7 0.326 0.678 -.197 -4568 0478 -0217 -055 0038 o017 OD0 om6 -1I.IS Sep-90 0.9S7 -0627 0.693 0597 -024 0321 o0s.5 -024 -06456 0.475 -O253 -0.292 058 0.017 091 0.06 -1.103 Od-90 0.976 -0.613 0.730 0.858 -0253 0312 0.671 -287 -490 0a478 -0.27s -Q287 0012 0.018 o0 om7 -174 No-90 0.987 -0.619 0.641 -0.001 -0325 0324 O042 -0.319 -0.494 0.471 -Q296 -0259 -.s Om 008 0.83 -1.033 Dec-90 I.0l1 -0.691 O041 -cm0 -0353 0325 0.670 -a0037 -0541 A085 0.025 -Q26 0.311 O86 O0.7 079 -13M8 Jan-91 1.094 -0.691 0675 -0O.4 -0a26 03n 0.679 -0.47 -0.8 OAs5 -0378 -0.3s -a078 O5 O0.7 O.78 -0.975 Feb-91 0.783 -as70 0.64 -0.016 -338 0321 0681 -0519 -0612 a473 -0.380 -036 -0.474 085 Oa07 0.7 - M-91 O.08 -0.39 0613 -0A49 -as65 0316 0.62 -0445 -0.551 OA54 -0388 -4.15 -a73 O05 om7 om8 -0a602 Apri-91 0854 -0.473 0564 -0102 -A420 0318 0566 -0525 -QY6 OA49 -a4D59 -082 -0.77 o086 O.W7 o009 -37 May-91 Oi26 -0.449 055 -0.108 -0426 0318 0666 -0548 -0.55 0.469 -461 -a377 -054 085 o.0D6 0079 -0545 Ju-91 OAS -0.411 0545 -130 -A.447 0318 0.674 -0529 -0550 a476 -.4s4 -0356 -OA9 OS5 006 009 -12 Jul-91 0.88O -0L447 056 -0ls -0422 0.310 078 -0.97 -0. 0495 -0519 -OA49 -0.Oi O85 a006 O.79 -0.3l Aug-91 0.47 -0.481 O55 -0.118 -Q428 0309 066 -.606 -0.53 OA85 -0.512 -40S -0104 0084 O055 O79 - 6 Sep-91 0.51 -.493 0.7 -0173 -0.482 0so9 O.80 -530 -31 0.494 -A443 -357 -0.06 OC55 O.O3 0052 -525 OCd-91 056 -a?47 0.52 -046 -0.453 0307 0.74 -0.51 -05 OA3 -O4zi -43 -0a079 0072 05 0.067 -07 NOW-9H 016 -0439 0A84 -0.200 -.494 0.295 04 -0466 -379 OAS5 -0372 -0289 -0 a072 0.005 0.0a7 -.529 Dac-91 5O22 -0352 OAB2 -Q256 -0.541 02S5 o04 -0.431 -0M7 OQ6 -0AiO -0.314 -0os6 O027 O.0 om6 -037s Sawco ofasic dat r Cher Bak ofUrupa. STATISTICAL APPENDIX TABLE 9D: URUGUAY: CENTRAL BANK (BCU): CAPITAL AND MONETARY LIABILITIES. (Billions of US. dollars) Monetary Base Currency Deposits Capital Long-term Monetary Other (MO) in in BROU BHO Private Public Other Debt in Regulation Circula- National Banks Enter- Foreign Bills tion Currency prises Currency (LRM) Dec-89 1.137 -2.010 -0.121 -0.1': 0.421 0.335 0.086 0.060 0.000 0.014 0.011 0.000 Jan-90 1.115 -2.006 -0.139 -0.108 0.407 0300 0.107 0.083 0.000 0.013 0.011 0.000 Feb-90 1.070 -1.991 -0.141 -0.061 0.408 0.313 0.095 0.074 0.000 0.011 0.010 0.000 Mar-90 1.024 -1.999 -0.153 -0.025 0.377 0.278 0.099 0.085 0.000 0.013 0.000 0.000 Apr-90 0.984 -2.002 -0.160 0.034 0.361 om 0.088 0.077 0.000 0.010 0.001 0.000 May-90 0.945 -2.013 -0.166 0.096 0.373 0.266 0.107 0.093 0.000 0.010 0.004 0.000 Jun-90 0.951 -2.010 -0.168 0.090 0.353 0284 0.069 0.056 0.000 0.009 0.003 0.000 Jul-90 0.929 -2.007 -0.157 0.138 0.399 0284 0.115 0.104 0.000 0.011 0.000 0.000 Aug-90 0.902 -2.016 -0.170 0.172 0384 0.273 0.111 0.101 0.000 0.010 0.000 0.000 Sep-90 0.848 -1.993 -0.182 0.224 0360 0.267 0.094 0.082 0.000 O.11 0.001 0.000 Oct-90 0.851 -1.998 -0.185 0.258 0.362 0.281 0.081 0.067 0.000 0.013 0.001 0.000 Nov-90 0.818 -1.994 -0.158 0.301 0368 0.288 0.079 0.063 0.000 0.015 0.001 0.000 Dec-90 1264 -1.968 -0.116 -0.561 0.410 0355 0.055 0.036 0.000 0.017 0.001 0.000 Jan-91 1252 -1.956 -0.130 -0.141 0.403 0.334 0.070 0.045 0.000 0.023 0.000 0.000 Feb-91 1.066 - 1.416 -0.127 -0.124 0.412 0.342 0.070 0.057 0.000 0.008 0.005 0.000 Mar-91 0.953 -1392 -0.126 -0.037 OA18 0.362 0.056 0.042 0.000 0.012 0.001 0.000 Apr-91 0.936 -1.406 -0.119 -0.009 0381 0.318 0.063 0.054 0.000 0.007 0.002 0.000 May-91 0.909 -1.401 -0.057 0.005 0.377 0.318 0.059 0.047 0.000 0.009 0.002 0.000 Jun-91 0.899 -1367 -0.056 0.012 0.397 0348 0.049 0.038 0.000 0.009 0.002 0.000 Jul-91 0.897 -1369 -0.055 0.027 0.391 0.330 0.061 0.050 0.000 O009 0.001 0.001 Aug-91 0.874 -1371 -0.059 0.039 0.366 0.324 0.041 0.032 0.000 0.007 0.002 0.000 Sep-91 0.862 -1375 -0.056 0.045 0358 0324 0.034 0.024 0.000 0.007 0.002 0.001 Oct-91 0.881 -1372 -0.054 0.008 0.379 0340 0.039 0.029 0.0no 0.008 0.001 0.000 Nov-91 0.861 -1350 -0.054 0.014 0378 0358 O.20 0.010 0.000 0.008 0.001 0.001 Dec-91 1.088 -1.303 -0.050 -0.110 0.470 0.445 0.026 0.024 0.000 0.002 0.000 0.000 STATISTICAL APPENDIX TABLE 9E: URUGUAY: FINANCIAL ASSETS (Billions of US. dollars) Total Liquidity Liquidity Liquidity in Treasury Deposits in BHU BHU Banking Treasury M2 Foreign Bills National Certifi- Readjust- Accept- Bils Currency in Private Publ;c Currency cates of able Hous- ances in Foreign Sector Enter- Savings ing Bonds National Cufrency prises Deposits (ORH) Currency Dec-89 6.403 5.252 1.292 3.960 3.874 0.086 1.151 0.025 0.008 0.000 0.074 1.044 Jan-90 6.516 5.412 1302 4.111 4.027 0.084 1.103 0.025 0.008 0.000 0.080 0.990 Feb-90 6.599 5.500 1.294 4.206 4.129 0.077 1.099 0.025 0.008 0.000 0.081 0.985 Mar-90 6.606 5.568 1301 4.267 4.187 0.080 1.038 0.025 0.008 0.000 0.087 0.918 Apr-90 6598 5.573 1.310 4.262 4.189 0.074 1.025 0.024 0.007 0.000 0.093 0.902 May-90 6.624 5.603 1.319 4.284 4.191 0.093 1.021 0.025 0.007 0.000 0.096 0.893 Jun-90 6.706 5.650 1313 4.337 4.261 0.077 1.056 0.025 0.007 0.000 0.100 0.924 Jul-90 6.767 5.704 1347 4357 4.277 0.080 1.063 0.027 0.007 0.000 0.093 0.936 Aug-90 6347 5.819 1357 4.462 4352 0.110 1.028 0.024 0.007 0.000 0.076 0.921 Sep-90 6.869 5.846 1.345 4501 4392 0.109 1.024 0.024 0.007 0.000 0.084 0.909 Oct-90 6.937 5.949 1.365 4584 4.476 0.108 0.988 0.024 0.007 0.000 0.055 0.902 Nov-90 6.998 5.974 1.362 4.612 4.512 0.100 1.024 0.025 0.007 0.000 0.060 0.931 Dec-90 7.255 6.153 1.420 4.734 4.603 0.131 1.102 0.026 0.007 0.000 0.059 1.009 Jan-91 7.400 6.274 1.421 4.853 4.750 0.103 1.126 0.000 0.008 0.000 0.074 1.044 Feb-91 7.600 6.466 1.433 5.033 4.906 0.127 1.134 0.000 0.008 0.000 0.071 1.055 Mar-91 7.635 6.458 1.443 5.015 4.906 0.109 1.176 0.000 0.008 0.000 0.060 1.108 Apr-91 7.750 6.639 1.494 5.146 5.016 0.130 1.111 0.000 0.008 0.000 0.061 1.041 May-91 7.774 6.646 1.489 5.157 5.023 0.134 1.128 0.000 0.008 0.000 0.050 1.070 Jun-91 7.841 6.683 1.485 5.198 5.081 0.117 1.158 0.000 0.008 0.0D0 0.049 1.102 Jul-91 7.885 6.746 1.513 5.233 5.124 0.109 1.139 0.000 0.009 0.000 0.048 1.082 Aug-91 7.930 6.780 1.467 5314 5.200 0.113 1.150 0.000 0.009 0.000 0.056 1.086 Sep-91 7.967 6.800 1.463 5337 5209 0.128 1.167 0.000 0.009 0.000 0.054 1.104 Oct-91 7.972 6.812 1.474 5.338 5.229 0.110 1.159 0.000 0.008 0.000 0.052 1.099 Nov-91 8.005 6.818 1.495 5324 5.205 0.118 1.186 0.000 0.009 0.000 0.049 1.128 Dec-91 8.092 684 1.450 5-354 5.238 0.116 1.289 0.000 0.009 0.000 0.039 1.241 Source of basic data: Central Bank of Uruguay. STATSTICAL APPENDIX TABLE 9F: URUGUAY: MONETARY AGGREGATES. (Billions of US. dollars) M2 Private Public Ml Sector Savings Time BHU Enterpr. Currency Private Public Savings, Deposits Deposits Savings Time in Circu- Deposits Enterpr. Tume Deps. Accts. Deposits lation Deposits Dec-89 1.044 0.586 0.072 0338 0.176 0.011 0.448 0.260 0.136 0.052 Jan-90 0.990 0.581 0.071 0335 0.174 0.008 0.402 0.217 0.134 0.051 Feb-90 0.985 0.560 0.064 0.327 0.169 0.009 0.416 0224 0.136 0.057 Mar-90 0.918 0.540 0.063 0318 0.158 0.011 0367 0.210 0.115 0.042 Apr-90 0.902 0.530 0.061 0309 0.160 0.010 0.362 0.197 0.133 0.032 May-90 0.893 0.518 0.058 0.305 0.155 0.010 0365 0.193 0.122 0.050 Jun-90 0.924 0.523 0.064 0304 0.154 0.010 0390 0.217 0.122 0.051 Jul-90 0.936 0.525 0.062 0310 0.153 0.014 0397 0.205 0.141 0.051 Aug-90 0.921 0.537 0.059 0303 0.175 0.017 0367 0.205 0.116 0.046 Sep-90 0.909 0.536 0.063 0303 0.169 0.024 0349 0.205 0.116 0.028 Oct-90 0.902 0 530 0.058 0300 0.172 0.017 0355 0.207 0.117 0.031 Nov-90 0.931 0.515 0.055 0.297 0.183 0.013 0384 0224 0.120 0.039 Dec-90 1.009 0.536 0.064 0.291 0.181 0.009 0.465 0.263 0.165 0.036 Jan-91 1.044 0.562 0.061 0.293 0.209 0.016 0.466 0.248 0.187 0.031 Feb-91 1.055 0.586 0.060 0302 0.224 0.012 0.457 0.255 0.141 0.062 Mar-91 1.108 0.611 0.064 0315 0.232 0.029 0.468 0.286 0.130 0.051 Apr-91 1.041 0.621 0.062 0327 0.232 0.014 0.406 0237 0.134 0.034 May-91 1.070 0.629 0.063 0329 0.237 0.015 0.425 0.252 0.132 0.041 Jun-91 1.102 0.627 0.067 0326 0.234 0.020 0.455 0.279 0.137 0.039 Jul-91 1.082 0.637 0.065 0326 0.247 0.019 0.426 0.250 0.140 0.036 Aug-91 1.086 0.631 0.062 0326 0.243 0.026 0.429 0.253 0.132 0.043 Sep-91 1.104 0.624 0.1068 0316 0.24 0.024 0.457 0.244 0.158 0.055 Oct-91 1.099 0127 0.065 0316 0.246 0.030 0.442 0.263 0.139 0.040 Nov-91 1.128 0.634 0.065 0311 0.257 0.029 0.466 0284 0.145 0.037 Dec-91 1.241 0.633 0.071 0307 0.255 0.024 0.584 0340 0.194 0.051 STATISTICAL APPENDIX TABLE 90: URUOUAY: BASIC MONTHLY PRICE. INTEREST-RATE AND MONETARY DATA. Annualized inflation ntes: Annual interest rtes: Exchange rates: Wages (1984 = 100):Resl public-seivice prices: Monetary aggregates (per cent growth over Whole- Cosum r pries: Asetrates: Libility rates: Offidial Real- Public Private ElectricalEnergy Telephone Regular precedingperiod). sale (NUSIUSS effective ector sector gasoline pric in peso in U.S. Six-month rates: On peso deposits: Dolar pd. avg.; (1988 = Household Industrial- Monetary Narrow Broad dollars Lesstbhn More than time growth 100) commercial base aggregate aggregate pess dollars one yr. one yr. deposits rate) (MO) (MI) (M2) Dec-89 112.9 97.1 11.1 89.4 12.2 94A 94.8 6.6 4.9 96.3 109.5 133.8 115.8 124.3 88.2 85.9 -23.7 28.7 8.4 Jan-90 104.4 81.0 -8.7 104.0 12.0 99.0 97.4 6.4 5.9 105.3 104.9 127.7 120.8 129.6 87.7 81.3 2.2 -6.1 7.7 Feb-90 115.8 121.6 13.2 117.2 12.1 100.0 96.6 6.6 5.8 102.6 98.0 146.1 113.1 121A 82.1 76.2 3.2 9.2 6.9 Mar-90 243.3 180.4 37.7 117.8 12.3 102.6 98.6 6.6 6.1 105.9 105.4 131.2 134A 144.8 94.2 90.1 0.5 -4.6 6.7 Apr-90 49.9 125.6 -16.5 114.2 12.2 113.0 NA 6.5 8.6 108.1 101.8 124.5 127.7 137.7 90.3 85.7 4.6 5.8 6.9 May-90 138.8 92.3 -16.3 124.6 12.2 113.8 NA 6.4 72 111.1 96.6 119.1 118.4 129.2 84.7 80.4 10.7 8.0 6.8 Jun-90 154.8 199.9 550 142.2 11.9 91.4 NA 6.9 5.7 108.8 100.5 126.1 124.5 137.1 89.7 85.3 0.9 11.7 6.7 Jul-90 95.2 93.2 9.1 127.8 12.0 90.6 NA 6.4 4.9 109.5 95.1 121.3 117.8 129.7 84.9 80.7 18.5 5.8 4.2 Aug-90 71.7 91.6 21.4 122.8 12.0 86.6 63.8 6.4 3.9 111.6 93.8 116.1 112.1 123.5 80.8 76.8 1A -4.4 5.7 Sep-90 539.9 416.4 205.3 112.2 11.8 87.0 62.5 6.6 45 104.6 100.3 118.3 118.4 129.8 82.9 94.6 -OA 0.0 5A Oct-90 95.2 112.2 29.8 119.4 11.8 93.3 81.3 6.3 4.2 103.7 94.2 118.3 111.6 122.3 78.1 101.2 7.2 6.8 6.6 Nov-90 61.1 85.5 -19.7 119.8 12A 97.2 83.5 6.4 7.2 106.2 89.5 118.5 106.6 116.9 74.7 96.7 8.5 15.2 7.6 Dec-90 42.3 88.5 -6.9 122.0 12.6 99A 88.0 6.8 6.1 106.8 88.5 130.5 102.3 112.2 71.7 92.8 32.9 29.3 8.5 Jan-91 133.1 131. 29.7 125.4 11.2 96.2 93.3 6A 4.9 101.9 101.1 132.8 108.4 119.2 77.4 96.0 3.4 6.3 7A Feb-91 34.1 51.1 -13.6 121.2 10.7 89.4 81.7 5.6 4.8 104.4 98.3 133.0 105.3 115.8 75.2 93.2 4.9 1.2 5.9 Mar-91 94.7 79.5 24.8 114.4 10.3 81.2 79.3 4.3 3.1 100.7 94.6 129.4 99.9 109.9 71.3 885 4.3 4.8 4.1 Apr-91 16.2 57.3 -10.3 102.0 10.1 74.6 75.0 5.1 4.8 101.1 92.3 125.4 97.4 107.2 69.6 86.3 -22.4 -9.2 4.2 May-91 135.7 172.5 94.4 106.2 10.2 69.8 67.3 5.1 2.9 95.8 102.5 129.8 109.1 120.0 83.0 91.4 11.6 7A 2.9 Jun-91 74.6 65.6 12. 101.4 10.2 70.4 68.0 5.0 3.3 93.8 98.6 132.2 104.3 114.8 79.4 87.5 8.6 IIA 4.5 Jul-91 73.1 66.8 7.0 100.6 10.5 70.0 NA 4.9 3.8 93.9 95.8 128.7 99.8 109.8 76.0 83.7 5.7 -1.6 3.3 Aug-91 80.6 107.8 30.3 100.0 10.0 70A 67.0 4.6 4.0 93.8 90.9 133.2 945 104.0 71.9 79.2 -3.6 3.1 5.7 Sep-91 89.5 112.7 33.9 101.6 9.7 70.4 68.0 4.6 3.9 93.3 104.4 133.7 107.0 117.6 88.1 77.2 3.3 11.3 4.4 Oct-91 48.7 55.1 -3.2 101.6 9.6 70.8 NA 4.8 4.0 92.7 t01.3 134.5 103.4 113.6 85.0 77.5 14.5 0 6 4.6 Nov-91 39.1 73.4 8.3 93.0 9.3 70.0 NA 4.4 4.0 94.0 97.2 139.3 99.7 109.5 82.0 74.7 0.7 7.9 3.9 Dec-91 47.6 44.4 -1.5 91.4 8.9 69.6 NA 4.2 3.2 94.1 9A.8 137A 96.6 106.1 79A 76.0 37.3 32.2 8.9 Source: International Monetary Fund. Central Bank of Uruguay.