The Uruguayan economy will grow little this year, but a recovery is projected in 2024, with a rate of growth 3% or higher. This projection is based on the recovery of agriculture, after the droughtand a better performance of consumption levels, based on the improvement of the real salary and the employmentwhich is being registered this year.
But there are some yellow lights that condition that positive perspective. The situation of Argentina with much lower relative prices and that diverts consumption towards the neighboring shore, is one of the factors to take into account in this context. Also some macroeconomic challenges specific to the Uruguay.
In addition to its particular circumstances, the Uruguayan economy is also – obviously – subject to the vagaries of the regional and global context. In this sense, the contribution of the International Monetary Fund (IMF) in its latest report on the world economic situation (World Economic Outlook, October 2023) and its focus on the region, because it incorporates a series of aspects that are valid for all economies in the region, including Uruguay.
He IMF highlights the good recovery of regional economies after the pandemic (with the exception of Venezuela and Argentina), especially highlighting the performance of Brazil, better than expected. When evaluating the region’s response to the increase in inflation last year, the organization evaluates the application of contractionary monetary policies to combat it, pointing out that most economies with inflation targeting regimes will meet their goal this year or next.
However the IMF warns about the risks of lower growth due to these contractionary anti-inflationary policies. It suggests that the region has to establish a difficult balance between lowering inflation firmly and avoiding a period of low growth longer than necessary. For this – the report points out – there must be a good evaluation of past experiences, taking into account – in addition – that monetary policy decisions have a certain delay in their effect and that there are cycles in economic activity.
He also warns that the tax policies They must be recomposed to later have a greater capacity to respond to social demands or new challenges. In good romance, this means that you have to reduce the fiscal deficits current. And he points out that the reform agenda must be maintained to boost long-term growth, which remains low in the region. In this sense, he proposes that it is relevant to increase investment, reduce informality and develop more trade.
In his specific mention of Uruguay, he IMF highlights that the inflation has remained in the target range with the help of contractionary monetary policy and currency appreciation. He points out that the central bank has begun to lower the interest rate, but “correctly maintaining a contractionary bias in its monetary policy.” He says fiscal policy has become marginally expansionary in response to the drought, but that the public debt remain stable. “Strong macroeconomic performance has resulted in lower levels of risk country in the region and has allowed Uruguay improve your credit rating from all the main global rating agencies,” concludes the monetary fund in its paragraph on Uruguay.
It is interesting the noticeably positive evaluation that the organization has of the Uruguaybut it is also important to bring the warnings that the IMF does for the region, because many fit the country. On this level the panorama is not so reassuring.
On the one hand, Uruguay also faces the dilemma between combating inflation with a contractionary monetary policy and the risk of having meager growth, with loss of competitiveness and an economy that does not recover strongly enough next year.
In his press conference to present the regional chapter, the Director of the Western Hemisphere Department of the IMFeconomist Rodrigo Valdes (former Minister of Economy of Chile) pointed out that the region remains very dependent on the evolution of commodity prices, which have fallen in the last year. Uruguay is not the exception in this sense: although it reached very interesting levels of competitiveness in several tradable sectors, the aforementioned drop in prices makes cost adjustment essential to maintain the dynamics of competitive sectors. But that seems difficult with the rigidities of the internal market, wage indexation and a monetary policy that leads to the strengthening of the currency. There is a difficult dilemma that will have to be resolved in the best way in the coming months.
The Monetary Fund’s approach about the need for greater trade is correct, although perhaps it should do so with greater vigor if it has true influence over the main economies. The organization points out that there are opportunities to develop intraregional trade, both through agreements and by reducing bureaucratic and logistical barriers.
But at this level, we are rowing against the current: in the current global context there is a stagnation in bilateral or multilateral negotiations for trade agreements, if not a retreat towards the protectionism. A friendlier scenario in this regard would be tremendously advantageous for Uruguay and the government has aspirations for progress, at least modest, within the framework of the president’s next trip. Luis Lacalle Pou to USA and China.
Finally, the document IMF -Valdés also highlighted this at the conference- highlights the relevance of addressing the problems of public insecurity, which have worsened in the region. This also conspires against long-term growth and development. Uruguay is no exception either.
Source: Ambito
