He Central Bank of Uruguay (BCU) in coordination with the private sector, are analyzing – after having implemented the debate in December of last year – the possibility of using Indexed Units (IU) as the exchange rate for the property purchase, a measure that would get one step closer to the objective of the de-dollarization of the economy.
The bank created a commission to deal with this specific issue, together with the private sector, for the use of UI, which would reflect inflation and move away from the use of the dollar in the Uruguayan economy. In this sense, the BCU proposed a marketing campaign with the aim of establishing the UI as a unit of change.
“You tell people the price of a property in UI and they say: ‘how much is it in dollars?’ The UI is not installed, is not cultured,” said the president of the Association of Private Construction Promoters, Hannibal Duran, to Telemundo. “In Chili there is the Unidad de Fomento, which is the UI here, but it was imposed 30 years ago,” he exemplified.
IMF pressure
In its 2023 annual assessment report, the International Monetary Fund (IMF) highlighted the need to de-dollarize the economy to avoid the financial risks that this entails, since Uruguay has one of the highest levels of dollarization and the ratio of foreign currency deposits to total deposits among the economies of the Western Hemisphere.
In this sense, the international organization points out that around 75% of total deposits in the banking system are in dollars, and predominantly in the hands of Uruguayan households —which account for 72% of these deposits in the private sector, with companies accounting for the remaining 28%. Besides, the price dollarization prevails in the economy, and the housing market and durable goods are mainly quoted in the US currency, reflecting the high degree of dollarization adopted in contexts of high inflation and large devaluations, but maintained in a stable manner for structural reasons.
The problem, according to the IMF, is that extended dollarization generates risks to financial stabilityespecially due to the high levels of dollar-denominated public debt —despite the fact that this is a point that the government is working to resolve, based on a debt management strategy in pesos—: thus, 50% of the central government’s debt is denominated in foreign currency, as are more of 75% of corporate debt.
The BCU admits slowness in the process
At the beginning of this month, the president of the BCU, Diego Labat, admitted that the de-dollarization process in Uruguay has gone “slower” than expected. He maintained that, in any case, “many steps have been taken” despite the fact that “the international context has not helped the times coincide“. Regarding this, the hierarch highlighted the conversations that the BCU had with national industry players on the subject, and the improvements in the tax regulations that have been proposed.
The president of the BCU hopes that, after these “small steps”, already “the times are coming to put our foot on the accelerator” in this matter, since “the dollarization of the economy is a restriction for the transmission of monetary policy in Uruguay” and “adds a bunch of irregularities in the economy“.
Source: Ambito
