IMF Completes First Review and
Approves New Increase on Uruguay Stand-By

The International Monetary Fund (IMF) today completed the first review, and approved a further augmentation in an amount equivalent to SDR 376 million (about US$494 million) on its current Stand-By credit to Uruguay. The IMF Executive Board also approved the rephasing of amounts previously committed to Uruguay to allow an immediate drawing of up to the equivalent of SDR 603 million (about US$793 million).

The original 24-month Stand-By Credit of SDR 594.1 million (about US$781 million) was approved by the Executive Board on March 25, 2002 (see Press Release No. 2/14) and augmented by SDR 1.16 billion (about US$1.5 billion) to SDR 1.75 billion (about US$2.3 billion) on June 25, 2002 (see News Brief No. 02/54). The new total IMF commitment with Uruguay under the Stand-By amounts to SDR 2.13 billion (about US$2.8 billion).

In commenting on the Executive Board decision, Eduardo Aninat, Deputy Managing Director and Acting Chairman, stated:

"The Executive Board welcomed the Uruguayan authorities' decisive response to the continued deposit outflows and the resulting liquidity problems of the domestic banking system. The Fund's augmented assistance, together with the assistance from other IFIs, will provide critical support to the authorities' strong resolve to restore confidence, ensure debt sustainability, and lay the foundation for a resumption of growth and employment. The measures to close four insolvent private banks and rephase dollar-time deposits at the public banks, together with increased and accelerated financial assistance from IFIs, mean that the financing of the program fully backs all dollar deposits left unrestricted in those banks, while minimizing disruption to the payment system and economic dislocation. Meanwhile, all remaining private banks have reiterated their willingness and ability to meet deposit withdrawals from their own resources.

"Depositors' immediate response when banks reopened this week has been encouraging with only moderate further outflows, but firm implementation of the new banking sector strategy will be crucial to future success.

"Ensuring medium-term debt sustainability remains a key objective of the program. In the short term, continued expenditure restraint will be an important goal, while protecting and targeting social expenditures. The submission of a medium-term tax reform proposal to congress has been brought forward to this October, and its early implementation will be key to improving the medium-term fiscal outlook. This issue will be one of the high priorities in our continuing dialogue with the Uruguayan authorities.

"Following the float of the peso in June, the authorities remain committed to exchange rate flexibility so as to be able to respond to external shocks. Tight control of the peso monetary base will remain the cornerstone for monetary stability, as the authorities continue to develop new monetary instruments to reinforce that policy.

"Significant challenges continue to lie ahead for the authorities, to restore financial stability, regain access to markets, and to return to economic growth. This ambitious program provides the authorities with the opportunity to achieve these objectives, but its full implementation, including sustained structural reform to reinvigorate the economy through privatization and deregulation, will be key in the months ahead and over the medium term.

"The Executive Board commended the Uruguayan authorities for their decisive policy action, their commitment to maintaining a framework that will foster private sector activity, and their continued close cooperation with the Fund," Mr. Aninat said.