Citing external risks and weaker domestic spending, the International Monetary Fund (IMF) recently lowered its projections for Uruguay’s economic growth.
The IMF revised its forecast for the country’s GDP growth this year from 2.5 percent to only 1.6 percent. The projected growth for next year was also cut from the initial 2.2 percent to 1.4 percent.
“During 2015, economic activity in Uruguay has markedly slowed, triggered by a regional downturn. Growth is projected to decelerate to 1.6 percent in 2015 due to a cooling off in domestic spending from recent highs and weak external conditions,” the IMF said.
The economic risks are mostly attributed to external factors in Uruguay’s immediate area such as Brazil and Argentina’s “worse than expected” slumping economy. Falling prices of raw materials and increased volatility of the global oil market will also negatively affect import costs.
The slowdown is also caused by weaker domestic purchasing power and a high inflation rate, which stands way past the central bank’s three to seven percent target range. According to IMF data, inflation in July increased by more than nine percent year-on-year.
The IMF highlighted that curbing inflation is still a “key policy priority,” calling for a more productive disinflation strategy. The organization warned that with the high inflation level, a relatively small exchange rate shock can trigger a rise that may propel inflation rate to double digits.
“A more effective and comprehensive disinflation strategy is needed to put inflation on a downward path. Tight monetary policy has helped contain inflationary pressures in recent years. The fiscal tightening that commenced in 2015 will complement this effort,” the IMF said.
The Central Bank’s “extensive intervention” contained the depreciation of the peso which has declined by almost 20 percent. This puts the gross international reserves to only $2.5 billion in June. But although the central bank’s gross reserves are still enough to cushion severe external shocks, the IMF still discourage too much involvement of the central bank in the exchange market.
“Interventions in the exchange market should be used sparingly to avoid disorderly market conditions. Continued interventions would not be warranted if external depreciation pressures continued. Prolonged interventions could erode the country’s buffers prematurely, with substantial financial risks still ahead.”