Uruguay is still struggling to recover
from the social and economic consequences of the prolonged
recession over 1999-2001, and the 2002 deep crisis.
Indications are... Show More +
that initial measures to combat the crisis
have taken hold. A successful restructuring of public debt
has provided financial relief. The severe poverty impact of
the crisis was cushioned, albeit not averted, by a well
established social safety net. Some of the lost ground has
already been regained, and GDP is expected to grow by about
11 percent in 2004. Unemployment declined from nearly 20
percent in 2002 to 12.5 percent in late 2004. However, much
more needs to be done to consolidate the recovery, and set
the country on a path of sustained growth with equity. The
economic crisis highlighted how vulnerable Uruguay is to
adverse external shocks, and in particular, from its two
largest neighbors. Trade was concentrated heavily with the
MERCOSUR partners of Uruguay; the banking system made wide
use of the dollar for many financial transactions, without
proper regard for exchange rate and country risks; a large
offshore banking industry was vulnerable to capital flight;
90 percent of all bank deposits, including domestic
deposits, were denominated in foreign exchange, making banks
strongly vulnerable to risks; similarly, a high level of
public debt denominated in foreign exchange, exposed the
public finances to unforeseen risks. The Bank's fiscal
analysis shows that social expenditures (which account for
80 percent of all government spending) and the public debt
service will not be fiscally sustainable without reform.
Policy options stipulate restructuring social expenditures
to enhance effectiveness, both for purposes of fiscal
sustainability and greater equity. Economic growth, in turn,
will depend upon increasing investment, and enhancing
competitiveness. This is primarily the role that the private
sector should play, though in developing a favorable
investment climate, the government has an important role to
play too. The incoming administration has an opportunity to
reassess the respective roles of the public and private
sectors in setting Uruguay on a higher growth path. This
will require creating new opportunities, through trade and
infrastructure, as well as a more enabling environment for
private sector development. This is another recurring theme
of these Policy Notes. Show Less -
