Uruguay: Staying the Course in a Volatile Region

After a decade of high and inclusive growth, Uruguay’s economy is slowing

Solid liquidity buffers and deficit reduction plans help support the economy’s resilience

Reducing inflation remains a key policy priority

“At this time of heightened regional uncertainty, we recommend enhancing the credibility of the medium-term objectives for fiscal and monetary policies, which would complement Uruguay’s buffers for weathering economic and financial shocks,” said Jan Kees Martijn, the IMF’s mission chief for Uruguay.

Having achieved more than a decade of high and inclusive growth since its financial crisis in 2002, Uruguay’s per capita income is among the highest in Latin America, while its level of inequality is among the lowest. The country also regained investment grade status in 2012, with further upgrades since then.

In their annual report, IMF economists recognized the economic and social achievements of the past decade but also the risks and challenges facing the country, calling for measures to strengthen Uruguay’s resilience to shocks.

“In the near term—until fiscal consolidation has been fully entrenched, and inflation is comfortably within its target range—there is only limited room for countercyclical policies to counter adverse external shocks to growth,” noted the IMF staff report.

Challenging times

Uruguay’s economy slowed markedly in 2015—growing by only 1.5 percent from 3.5 percent in 2014. Despite the progress made toward greater economic diversification and reducing regional linkages, the economy is still hindered by slowing activity across Latin America, anemic growth in other export markets, and declining prices of its main commodity exports (such as soy, meat, and paper pulp). For 2016, the report expects the Uruguayan economy to remain tepid at 1.4 percent.

Like most currencies in the region, the Uruguayan peso has depreciated significantly against the U.S. dollar over the past year. Extensive central bank intervention in the foreign exchange market after July helped curb the pace of depreciation but the flip side of this has been a notable reduction in international reserves. The depreciation of the peso has fed into domestic prices. In spite of the slowdown in activity, inflation has exceeded 9 percent since July 2015, well above the central bank’s target.

Cushioning the impact

As external risks mount, Uruguay’s flexible exchange rate can help cushion the impact of external shocks. Indeed, the recent depreciation has...