Uruguay: Staff Concluding Statement of the 2025 Article IV Mission

Uruguay: Staff Concluding Statement of the 2025 Article IV Mission

September 19, 2025

Washington, DC: An International Monetary Fund (IMF) mission, led by Mr. Raphael Espinoza, visited Montevideo during September 8-19 for the 2025 Article IV consultation. At the end of the visit, the mission issued the following statement:

Context and Recent Developments

Uruguay's economy remains resilient amidst heighted global uncertainty. Following a severe drought in 2023, agricultural production expanded significantly in 2024, sustaining growth around potential and contributing to narrowing the current account deficit to -1 percent of GDP. Substantial real appreciation of the Argentinian's currency in 2024 also contributed to improving the external position and fueled inbound tourism in early 2025. With the output gap closing, the unemployment rate ticked down, and real wages are growing in line with productivity. The fiscal deficit of the central government including social security (CG-BPS) increased in 2024, to 3.2 percent of GDP, necessitating the activation of the fiscal rule's escape clause. International reserves are ample and reached a level equivalent to 11½ months of imports at end-August 2025.

Inflation has remained within the central bank of Uruguay (BCU) tolerance range for more than two years. The global strengthening of the dollar and uncertainty surrounding the referendum on pension reform contributed to a depreciation of the peso at the end of 2024, which led to an increase in inflation. This motivated the BCU to raise its policy rate three times. In 2025, following the global weakening of the dollar, the appreciation of the peso and a decline in inflation expectations, inflation fell to 4.2 percent in August, below the BCU target, motivating rate cuts in July and August.

Global trade policy uncertainty has had limited direct macroeconomic impact so far. This owes to Uruguay's diversified trade partnerships and strong dependence on commodities, whose prices have broadly held up. Uruguay maintains favorable access to financial markets, supported by investment-grade credit ratings and sovereign spreads that are currently at historic lows and are the lowest in the region.

A new administration took over in March, with an agenda that seeks to balance inclusive growth with macroeconomic stability. The agenda prioritizes sustainable economic growth driven by private investment and improved competitiveness while expanding social protection and committing to fiscal prudence and low inflation. New government guidelines for the regular round of wage negotiations, which has two-year duration were issued in July, aiming to boost the wages of low-income workers while contributing to de-indexation.

Outlook and Risks

Growth is expected to moderate in 2025. Growth is projected at 2.5 percent in 2025 and 2.4 percent in 2026, fueled by the post-pandemic recovery of real wages and reduction in domestic uncertainty. Inflation is projected to consolidate around the target of 4.5 percent, which would allow the BCU to contemplate a gradual easing of monetary policy if the domestic context and inflation expectations allow. The current account deficit is expected to widen slightly to 1.7 percent of GDP in the medium term, in line with fundamentals.

Macroeconomic risks are broadly balanced. Downside risks originate from the international environment, which is subject to trade policy and commodity price shocks, regional uncertainty, and climate shocks. Ample liquidity buffers, long debt maturities, favorable borrowing conditions, and an increasing share of domestic debt issuances limit near-term fiscal risks. Systemic risks remain contained, owing to the low credit-to-GDP ratio, liquid and well-capitalized banks, ample FX reserves and a limited sovereign-banking nexus. Upside risks include strong agricultural harvests, favorable commodity prices, new trade agreements, opportunities to access new markets and attract investments, and stronger-than-expected effects of structural reforms.

Stability and growth policies

Fiscal Policy

The fiscal deficit is expected to increase in 2025 due to fiscal inertia. With policy options constrained by the political transition's calendar and expenditure rigidities, the deficit of the CG-BPS is projected to increase to 4.1 percent of GDP in 2025 (3.7 including cuarentones), 0.9 percentage points above the 2024 deficit. The new administration reported that this increase is mainly due to the postponement of expenditures from 2024, advance tax payments, and new spending committed in recent years. This inertia makes the fiscal stance mildly pro-cyclical in 2025, in the context of a nearly closed output gap.

The proposed five-year budget intends to reduce the deficit and stabilize debt in the medium term, below the new prudential debt anchor. It envisages a permanent rise in social spending and investment, to be financed through a gradual increase in revenues by modernizing and making more efficient tax administration, curbing tax fraud, implementing the global minimum tax, and rationalizing certain taxes. These efforts would contribute to improving the structural primary balance of CG-BPS from -1.5 percent of GDP in 2025 and 2026 to 0.1 percent of GDP in 2029. This would stabilize net debt below the prudential debt anchor at around 63 percent of GDP, up from 58 percent of GDP in 2024. There are risks to this adjustment, stemming from the macroeconomic and international tax environment, implementation delays, and spending pressures down the line. Further efforts are recommended to bring the debt-to-GDP ratio on a steady downward path in the medium term. This would be achieved by raising the CG-BPS primary balance progressively to around ½ percent of GDP by 2029. Options include reducing tax incentives, moderating the wage bill, and improving the efficiency of spending.

The proposed reform of the fiscal framework will help consolidate recent credibility gains and promote fiscal discipline. Enhancements, which are in line with previous IMF recommendations, include binding fiscal rule targets anchored to a prudential net debt/GDP ratio, corrective mechanisms for slippages, and greater autonomy and an expanded mandate for the Fiscal Council. Adequate operationalization of this reform and meeting fiscal rule targets will be important to reap the expected reputational benefits. The ongoing social dialogue on social protection and social security is expected to lead to proposals by April 2026 and it will be important that any reform proposal is consistent with the objective of ensuring the sustainability of social spending.

Monetary Policy

The appointment of the first BCU president without political affiliation marks a step forward in central bank de facto independence. Key to the disinflation strategy has been the commitment to bring inflation to the target of 4.5 percent, which is underpinned by contractionary monetary policy, enhanced central bank communication and supported by the budget and the government's guidelines for collective bargaining.

The monetary policy stance has been appropriately contractionary. With lower inflation expectations, the real interest rate is above the real neutral rate. This, together with the peso appreciation, has contributed to lower inflation. Recent declines in the policy rate are justified by declining inflation and inflation expectations. Further emphasizing in public communications that the inflation target is 4.5 percent with a tolerance range should continue to help anchor expectations.

The BCU has significantly improved its monetary policy framework and communication, but additional steps could further strengthen its credibility. The exchange rate should continue being a shock absorber, with foreign exchange interventions only used to respond to disorderly market conditions. To improve monetary policy transmission and strengthen the financial sector, the BCU started to revamp its de-dollarization strategy. A first legislative proposal focuses on increasing competition in the deposit market in local currency. To align de jure BCU independence with that of other central banks in the region and further strengthen credibility, the appointment of Board members should follow best international practices, including appointments for fixed terms not overlapping with the electoral cycle.

Financial Sector

The banking system is well capitalized, highly liquid and profitable. Uruguayan banks maintain capital ratios that are almost twice the minimum regulatory requirement, with strong profitability and low non-performing loans supported by adequate loan loss provisions. While dollarization heightens FX credit and liquidity risks, these are mitigated by low household indebtedness, moderate and mostly hedged corporate debt, and ample FX reserves. Financial intermediation remains low with private credit at 31 percent of GDP, although it has increased by 10 percent of GDP since 2010. Housing-related financial stability risks are low due to a relatively small residential housing market and stable prices.

The authorities remain committed to strengthening the regulatory and supervisory framework. The regulation of digital asset services providers has improved and the regulatory perimeter has been expanded. The Superintendency of Financial Services (SSF) should continue implementing its roadmap to strengthen the risk-based supervisory framework. Planned initiatives aim at improving data management and reporting within the financial supervision system. The recently established Macroprudential Policy Committee should be leveraged to strengthen the macroprudential framework. The new National Strategy for Combating Money Laundering and other ongoing regulatory efforts will enhance the effectiveness of the Uruguay's AML/CFT framework and improve its alignment with FATF standards.

Greater access to credit and de-dollarization would support growth and contribute to macroeconomic stability. Limited access to credit in local currency and modestly developed capital markets hinder the financial sector's contribution to growth and limit the effectiveness of monetary policy. Improving creditworthy firms' access to credit-particularly for underserved segments like SMEs-while maintaining prudent lending standards, combined with regulatory reforms to facilitate a level playing field could contribute to financial development.

Structural Policies

After a period of slow growth, structural reforms are key to boost Uruguay's economic potential. Ambitious reforms could pay off as Uruguay has gaps compared with advanced economies in terms of infrastructure, trade facilitation, entry barriers and regulatory bottlenecks, market concentration, human capital, and access to credit. The new authorities have already announced measures to cut red tape, open new export markets, and modernize institutions and fiscal incentives for investment, export promotion, and innovation. They are also allocating more resources to increase human capital, to attract foreign talent, and to tackle insecurity. For the coming years, intensifying the reform agenda is recommended, for instance by simplifying further the processes for business creation, licensing and taxation, enhancing competition policy, and improving education quality and reducing school dropouts. The administration is reforming incentive frameworks in SOEs to better align wages with productivity. In addition, to make the most out of SOEs potential, efficient allocation of resources and cost-reflective pricing are important. The administration has developed a new agenda to develop financial mechanisms for better adaptation to climate change, a long-standing topic for the country.

Uruguay is gaining regional recognition in innovation and Artificial Intelligence (AI). To maximize the potential gains from AI, it would be recommended to close digital gaps, and to promote an equitable and ethical integration of AI-driven innovation into education and industry. In addition, leveraging the recent successes in technology adoption, support programs could be designed for workers at risk from disruption from AI.

Uruguay's labor market faces substantial challenges, including limited flexibility, high youth unemployment, and an aging population. Labor market institutions have contributed to stability and relatively low inequality and have allowed coordinated mechanisms to navigate crises. However, firms perceive hiring and wage-setting practices as restrictive. Introducing measures that help account for firm heterogeneity in these practices would strengthen competitiveness, contribute to a more efficient labor allocation and potentially dynamize employment opportunities. The recent guidelines for wage negotiation proposed by the government are aligned with inflation objectives and contribute to de-indexation, while supporting low-income wages. Given high rates of unemployment for vulnerable populations, it is recommended to monitor potential employment effects of the new round of agreements for the young and low-skilled. Population aging poses risks to growth and sustainability, highlighting the value of policies that encourage labor force participation and facilitate the integration of migrants.

The team would like to thank the Uruguayan authorities for their hospitality, constructive dialogue, and collaboration during the Article IV mission to Montevideo between September 8-19, 2025.