By Nick Mann | 5 November 2012

Uruguay has shown ‘deft’ debt management in recent years but needs to tighten its controls over government spending to reach its debt reduction targets, according to the International Monetary Fund.

‘Prudent’ macroeconomic policies, important institutional reforms and favourable external factors had contributed to a decade of ‘spectacular’ growth, the IMF said in its annual survey of the South American country.

Uruguay’s economy is expected to grow by 3.5% this year and 4% next year, largely fuelled by buoyant domestic demand resulting from strong growth in real wages.

The IMF also highlighted the effectiveness of the country’s buffers against global economic shocks, such as its small banking system, and said its debt management had ‘reduced debt vulnerabilities significantly’.

As of June 2011, Uruguay’s public debt amounted to 55% of its gross domestic product, and the government plans to reduce this to 44% by 2015.

To achieve this, the government would need to tackle the state-owned electricity company’s (UTE) recurring drought-related deficits, according to IMF division chief Ulric Erickson von Allmen, head of the Uruguay survey. He added: ‘In the meantime, the budget should rely on a greater contribution from the central government and less on public enterprises to achieve the debt target. This objective also calls for a tight grip on government spending.’

The government could also enhance its ‘already-strong’ fiscal framework by creating rolling five-year budgets and including even longer horizons for certain areas of expenditure, such as social spending, the IMF added.

Immediate action should also be taken to reduce Uruguay’s high inflation rate, which has resulted from strong domestic demand and, most recently, a spike in global food prices.

The IMF advocated prudent wage growth and further fiscal restraint to contain upwards pressures on prices. But it was less positive about plans to cut or freeze some consumer prices.

‘The mission is more sceptical about the recent agreement to cut/freeze some consumer prices as it creates distortions without addressing the root causes of inflation,’ Von Allmen said.

It also warned that the widespread use of wage indexation – where wages are linked to increases in the cost of living – could encourage inflation further, in turn reducing the competitiveness of Uruguay’s economy and hurting exports and growth.