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Text File | 1994-05-02 | 14KB | 286 lines

<text> <title> Uruguay: Economic Policy </title> <article> <hdr> Economic Policy and Trade Practices: Uruguay </hdr> <body> 1. General Policy Framework Uruguay has a small, relatively open economy. The historical basis of the economy has been agriculture, particularly livestock production. Agriculture remains important both directly (wool and rice) and indirectly for inputs for other sectors (textiles, leather and meat). Industry is now the largest sector and has diversified beyond agroindustry into chemicals and consumer goods for local consumption. Services have assumed greater importance recently, particularly tourism and financial services which benefit from Uruguay's open financial system. The Government has been relatively sucessful in reducing its fiscal deficit from 6.1 percent in 1989 to under two percent in 1990 and 1991. Principal sources of the deficit are losses by the Central Bank on non-performing loans purchased from private banks, foreign debt payments and transfers to the social security system. Inflation peaked at 129 percent in 1990, and is expected to fall to 90 percent in 1991. Seeking to reverse a long-term economic deterioration and prepare itself for the formation of the Southern Common Market (MERCOSUR) being formed by Brazil, Argentina, Uruguay and Paraguay, the Government has started to implement a program of economic reform. Major elements of this program are partial privatization of state enterprises, financial sector reform and reform of the costly social security system. Uruguay is the beneficiary of large inflows of capital, principally from neighboring Brazil and Argentina. The Government has been able to finance a substantial portion of its deficit through the issuance of dollar-denominated treasury bills. 2. Exchange Rate Policies The Uruguayan Government is committed to a floating exchange rate, but has intervened extensively in the market by buying dollars and selling pesos in an attempt to maintain some degree of competitiveness for its exports. However, in 1991, devaluation has lagged well behind inflation, making dollars cheaper and improving the prospects for U.S. exports. Uruguay has no foreign exchange controls. The peso is freely convertible into dollars for any transaction. 3. Structural Policies Price controls are limited to a small set of products and services for public consumption such as bread, milk, passenger transportation, utilities and fuels. The Government relies heavily on consumption taxes (value-added and excise) and taxes on foreign trade (export taxes and tariffs) for its general revenues. A substantial social security tax, sometimes equal to 50 percent of the base wage rate, is assessed on workers and employers. The top tariff rate was lowered from 40 percent to 30 percent in September 1991. This should have a positive effect on U.S. exports. Imported fertilizers are charged a 12 percent value-added tax which is not charged on locally-produced fertilizers. 4. Debt Management Policies Uruguay is a heavily-indebted middle-income country with a strong commitment to servicing its debt obligations. As of March 1991, its total external debt was $7.149 billion. Of this amount, approximately one billion dollars was owed by the public sector to foreign commercial bank creditors. Of the remainder, $2.365 billion are foreign currency deposits of non-residents (mostly Argentines). Dollar-denominated Uruguayan Government bills and bonds make up $1.359 billion, $910 million is owed to international financial institutions, and the balance of $942 million is mostly commercial credits. Total debt service in 1990 was $784 million, equivalent to 46.3 percent of total merchandise exports; 33 percent of combined merchandise and service exports and 9.5 percent of GDP. Uruguay has always sought cooperative solutions to its debt problems, and has never defaulted, preferring instead to reach agreement with its creditors. The Government and its commercial bank creditors signed a Brady Plan debt reduction agreement in January 1991 which resulted in a $634 million dollar buyback of commercial bank debt. A stand-by agreement negotiated with the International Monetary Fund in 1990 was suspended because Uruguay failed to meet its IMF targets. 5. Significant Barriers to U.S. Imports Certain imports require special licenses or customs documents. Among them are drugs, certain medical equipment and chemicals, firearms, radioactive materials, fertilizers, vegetable materials, frozen embryos, livestock, bull semen, anabolics, sugar, seeds, hormones, meat and vehicles. To protect Uruguay's important livestock industry, imports of bull semen and embryos also face certain numerical limitations and must comply with animal health requirements, a process which can take years. In the case of automobiles, the enforcement of local content requirements makes the final price of an imported vehicle very high. Bureaucratic delays also add to the cost of imports, although importers report that a "debureaucratization" commission has improved matters. The Uruguayan Government maintains a legal monopoly in most aspects of the insurance industry, but few significant restrictions exist in other services. U.S. banks continue to be very active in off-shore banking. There are no significant restrictions on professional services such as law, medicine or accounting. Similarly, travel and ticketing services are unrestricted. A new civil aviation agreement has provided equal treatment for foreign carriers. There have been significant limitations on foreign equity participation in certain sectors of the economy. Investment in areas regarded as strategic require Government authorization. These include electricity, hydrocarbons, banking and finance, railroads, strategic minerals, telecommunications, and the press. Uruguay has long owned and operated state monopolies in petroleum, rail freight, telephone service, and port administration. It has extensive holdings in other key areas, including fishing, free zones and air transport. However, under legislation passed in September 1991, private investment will be allowed in telecommunications, rail services, air transport and eletricity. Other pending legislation will allow privatization of port operations and possibly insurance. Government procurement practices are well-defined, transparent and closely followed. Tenders are generally open to all bidders, foreign or domestic. A Government decree, however, establishes that in conditions of equal quality or adequacy to the function, domestic products will have preference over foreign ones. Among foreign bidders, preference will be given to those who offer to purchase Uruguayan products. The Government favors local bidders even if their price is up to 15 percent higher. This will be reduced to 10 percent in 1992. Following a recent reduction in the top rate, Uruguay's tariff structure now varies between 0 and 30 percent. The only exemptions to tariff regulations, in the context of antidumping legislation, are reference prices and minimum export prices, fixed in relation to international levels and in line with commitments assumed under GATT. These are applied to neutralize unfair trade practices which threaten to damage national production activity or delay the development of such activities. They are primarily directed at Argentina and Brazil. 6. Export Subsidies Policies The Government has provided a 12 percent subsidy to wool fabric and apparel using funds from a tax on greasy and washed wool exports. This subsidy will be reduced progressively to six percent by July, 1992. Uruguay is a signatory of the GATT Subsidies Code. 7. Protection of U.S. Intellectual Property The Government of Uruguay recognizes intellectual property rights in a number of