Uruguay: 2014 Article IV Consultation-Staff Report; and Press Release

Elections: The candidate of the ruling coalition Frente Amplio, former president Tabaré Vazquez, won the presidency and will take office in March 2015. With Frente Amplio retaining majority in both houses of Parliament, broad continuity in macroeconomic policy making is expected. Focus: Amid moderating but still solid growth, the 2014 consultation focused on four broad themes: confronting inflation, reinforcing fiscal sustainability, safeguarding financial stability, and bolstering strong and inclusive growth for the medium run. Main Policy Advice: ? A comprehensive disinflation strategy is needed to bring inflation to the mid-point of the target range. This would include maintaining a tight monetary policy stance, moving towards tighter fiscal policy, reducing the extent of backward-looking indexation of wages, wellcrafted central bank communication on the direction of monetary policy, and enhanced central bank autonomy. The present conjuncture provides an unusually good opportunity to achieve a paradigm shift in expectations. ? Fiscal sustainability would be reinforced by raising the primary balance by 2 percent of GDP over the medium term to ensure a downward trend in net public debt. ? Banks' exposures to exchange rate depreciation risks bear continued close monitoring. It would be useful to strengthen risk weights for foreign currency loans to unhedged borrowers and incorporate greater exchange rate stress into the supervisory stress tests. ? Uruguay's medium-term growth would benefit additionally from heightened efforts to boost infrastructure, strengthen education outcomes, and foster an innovation-friendly business environment. Past advice: In recent Article IV consultations, there has been broad agreement between the authorities and Fund staff on the macroeconomic policy objectives. Views have differed on the appropriate stance of fiscal policy, with staff favoring a tighter stance. The tightening in the monetary policy stance since mid-2013 has been in line with staff advice. The authorities have taken several steps to reduce the fiscal risks stemming from the impact of recurrent droughts on the balances of the state-owned electricity company, including by boosting investment in wind power, creating an energy stabilization fund, and purchasing weather related insurance. The authorities continue to make steady progress in implementing the 2012 FSAP recommendations to further strengthen financial regulation and supervision, and improve access to finance.