Uruguay

Letter of Intent and Policy Memorandum, March 12, 1999

The government advocates local determination of labor agreements and today some 90 percent of private sector contracts are agreed through decentralized bargaining. Higher employment with moderate, steady wage policies and reduced public interference in the bargaining process, together with a terms of trade gain, increased average household incomes by 7 percent in 1998.

The government continued to make substantial progress with structural reforms. The reform of the social security system, which began in mid-1996, has proceeded faster than expected. By end-1998 more than 500,000 employees had shifted to the private capitalized pension system (more than half the labor force covered by the national pension administration (BPS)). This rapid shift has produced unexpected costs to the government. At the same time, the growth in new net beneficiaries to the public pay-as-you-go system began to level off by end 1998, suggesting that social security entitlement outlays will soon reach their peak. The first phase of the reform of the state, which was initiated in early 1997, was completed and has resulted in the reduction of 14,000 public sector positions (8 percent of total) and in the number of budgetary units in the central administration. Public enterprises continued to expand their joint ventures with private sector firms in the gasoline, lubricants, and cement sectors, and with the construction of a gas pipeline from Argentina to Uruguay. The electricity market was deregulated in 1998, bringing competition in electricity generation and permitting lower average electricity tariffs in Uruguay.

In the banking sector, the government-owned Bank of the Republic (BROU) will extend its contract with a private consultant to continue reforms and improve its efficiency and profitability. The bank has reduced its staffing by nearly 900 persons since mid-1995 (15 percent of total) and will continue this process in 1999; it is implementing a new centralized computer system which will, when finished, bring all branch offices in the country on line with headquarters in Montevideo; it has closed, or merged into 33 smaller branches (Minibancos), some 105 nonviable offices; and it is in the midst of a large-scale effort to safeguard the bank against the year-2000 computer problem. In 1999, the government intends to conduct an analysis and seek an independent external audit of the BROU, the National Mortgage Bank (BHU), and the National Insurance Bank (BSE) to assess the valuation of their assets and liabilities and improve further their operations and profitability. The Central Bank of Uruguay continues to seek ways to bolster its banking supervision and it is expecting a Fund technical assistance mission in this area to visit Montevideo in May 1999. The government is well aware of the need to finalize resolving the issue of the intervened banks and is expecting to conclude agreements with interested parties in the private sector and the banking labor union to end the intervention in the only remaining intervened bank by mid-1999.

Letter of Intent, June 16, 1999

To deal with these challenges, there is agreement in Uruguay that output costs need to be reduced to bolster competitiveness. In the private sector, several leading companies have initiated the renegotiation of labor contracts. In some sectors, and in cooperation with labor representatives, firms are reducing nominal wages (and helping to limit layoffs). Also, trade delegations are tapping nontraditional or under-explored markets outside the Mercosur to foster trade relations, and several Uruguayan companies are considering bids for cooperation agreements or mergers with foreign companies to improve access to capital, technology, and new markets abroad, and to increase their scale and bolster efficiency.

In the expenditure area, and as described in the program presented to the Fund in March, in February 1999 the government reduced outlays on goods and services and investments by 0.4 percent of GDP for the year. These measures are being implemented on schedule. Since then, further cuts have been decided: the suspension of inflation correction to budgetary spending ceilings through May 1999 has been extended through August 1999, and will likely be extended further through year-end. In addition, with inflation projected to be lower than envisaged in the original program, public sector wage adjustments planned for July 1999, based largely on forward looking six-month inflation, will also be lower than originally programmed. In the social security system, the reform of 1996 is beginning to have an impact on the public pay-as-you-go system as the number of old-age pensioners receiving benefits from the public system has peaked recently, but the savings from this turnaround in volume are still small. At the same time, there are some additional health care costs for those now registered formally in the labor markets, together with an uptick in unemployment insurance costs owing to the cyclical downturn.

As mentioned in our letter of March 12, 1999, the government is concentrating in 1999 on implementing structural reforms that are already underway and intensifying, where possible, efforts to involve private sector initiatives and expertise in areas and activities previously reserved exclusively for the state. The government is intensifying efforts to transfer infrastructure investment projects to the private sector (e.g., building and operating toll roads); new bids have been issued for the privatization of port facilities; public enterprises continue to expand their capacity and improve efficiency, in joint ventures with private sector firms, inter alia, in the gas sector; the market for cement and lubricants; mobile telephony; and electricity generation. To bolster the development of the domestic capital market, draft laws on factoring and discounting are progressing in Congress, as is the overhaul of the bankruptcy legislation. In April 1999, the BCU approved new regulations permitting private pension funds to trade qualified securities in the Montevideo stock exchange. In the banking sector, bids have been received for the privatization of the intervened bank La Caja Obrera and a decision on these bids is expected in June 1999. The Bank of the Republic (BROU) has renewed its contract with a private sector consultant to improve the information system in the bank, and hired specialists from the National University to improve personnel management and manpower training. The BROU and the National Mortgage Bank (BHU) have called for bids from international accounting firms to conduct an independent external audit of the banks beginning in the second half of 1999. Also, the government is finalizing negotiations with the World Bank for financial and technical assistance with reforms in the financial system and to bolster banking supervision.

As mentioned in our letter of March 12, 1999, the government is concentrating in 1999 on implementing structural reforms that are already underway and intensifying, where possible, efforts to involve private sector initiatives and expertise in areas and activities previously reserved exclusively for the state. The government is intensifying efforts to transfer infrastructure investment projects to the private sector (e.g., building and operating toll roads); new bids have been issued for the privatization of port facilities; public enterprises continue to expand their capacity and improve efficiency, in joint ventures with private sector firms, inter alia, in the gas sector; the market for cement and lubricants; mobile telephony; and electricity generation. To bolster the development of the domestic capital market, draft laws on factoring and discounting are progressing in Congress, as is the overhaul of the bankruptcy legislation. In April 1999, the BCU approved new regulations permitting private pension funds to trade qualified securities in the Montevideo stock exchange. In the banking sector, bids have been received for the privatization of the intervened bank La Caja Obrera and a decision on these bids is expected in June 1999. The Bank of the Republic (BROU) has renewed its contract with a private sector consultant to improve the information system in the bank, and hired specialists from the National University to improve personnel management and manpower training. The BROU and the National Mortgage Bank (BHU) have called for bids from international accounting firms to conduct an independent external audit of the banks beginning in the second half of 1999. Also, the government is finalizing negotiations with the World Bank for financial and technical assistance with reforms in the financial system and to bolster banking supervision.

Letter of Intent and Memorandum of Economic Policies, April 14, 2000

Before end-March 2001
8. Submit law to Congress to reform special pension funds (Cajas Especiales) for the banking sector, university professionals, notaries, police, and the military.