By Ranja Sengupta
IDEAsSeptember 11, 2002
On August 25, 2002, Uruguay's 177th year of independence, 70,000 people protested on the streets of Montevideo. Protestors raised slogans against unemployment, the continued agricultural recession, financial crisis. Their ultimate protest has been against government policies of blind pursuance of IMF conditions which have resulted in a complete dependence on the IMF and an inability to break away from the stranglehold of the US. Strikes and protest marches, fuelled on by the economic decline and banking difficulties, have become a common sight on the streets of Montevideo.
Following in the footsteps of its Latin neighbours Argentina and Brazil, Uruguay has been having its share of major economic events that reflect the present state of confusion and panic in the economy, if at a smaller scale.
The continuous outflow of foreign reserves in the wake of a peaking demand for dollar had already forced Uruguay to completely float its currency on June 20, thus discontinuing a floating exchange rate within a 12 per cent band system tied to the dollar. The Uruguayan Central Bank announced that, unlike in the past where major interventions kept the inflation rate down, there would be only limited intervention to prop up the currency. This was also aimed to apparently tickle the benevolent side of the IMF as it generally favours floating of currencies, especially in situations of a possible external debt default.
This was followed by the declaration of a four day bank holiday amidst fears of a bank run caused by continuous withdrawals. Further, at the insistence of the IMF and the US treasury, a piece of legislation (the law for the Fund for the stabilization of the banking System (FSBS)) limiting bank withdrawals, was passed by the Uruguayan Congress earlier on August 4th. The legislation introduced a measure preventing depositors at Uruguay's two public banks from getting access to $2.2 billion (which is actually three quarters of total) in long-term dollar deposits until 2005.
These measures seemed to achieve their purpose. The holiday was followed by a reversal of the previous US position that had denied any more loans to Uruguay. The IMF lending of additional 1.16 billion SDR (US$1.5 billion) short term loans (24 month stand by credit) on July 25th was followed up in the first week of August with another SDR 376 million (about US$494 million). The new total IMF commitment with Uruguay under the stand-by terms, amounts to SDR 2.13 billion (about US$2.8 billion) [IMF news brief no. 02/87, August 8, 2002]. The measures undertaken by the Uruguayan authorities, along with the sanction of the loans seemed to stabilise the banking system somewhat and no bank run seemed evident on August 4th when the bank holiday ended.
The banking legislation was less popular with the Inter-Union Workers Plenary - National Workers Convention (PIT-CNT), which held a 14 hour general strike on the 7th. Previous strikes, for example a 24 hour general strike held on June 12th, have also drawn an increasingly larger number of people. The tenor has been similar: a demand for higher employment, higher wages and a reversal of the government's efforts to comply with IMF conditions by attempting a cut of fiscal expenditure in the form of higher taxes and increasing the rates of essential services. The governments' attempt to endear itself to the IMF is obviously proving a bit too hard on the people in the street.
Compliance with IMF directives has not however protected Uruguay's economy much. The country's economic turmoil has been multi faceted and long lasting, though panic has recently been the major cause of its undoing.
Foreign direct investments have not picked up despite concessions and privatisation moves carried on by the Battle government. These include privatisation of the national airline, civil service restructuring, social security reform, the concession of the national gas company, port concessions, road maintenance concessions, and improvements in financial sector regulation with Bank support. But all these combined have not really brought on the economic happiness it was guaranteed to do. They have, of course, opened up the paths for future economic control by big powers like the US. More than 100 U.S.-owned companies operate in Uruguay, and many more market U.S. goods and services.
The recent lower ratings by credit rating agencies have not helped either. It makes it more difficult for the government to sell its bonds to raise resources.
Added to the above, has been the emergence of recent banking difficulties. A bank run fear was caused by the banking collapse in neighbouring Argentina. At the beginning of July 2002 the central bank reserves fell by 5.5% bringing the fall to 55% so far in 2002. Reserves currently amount to $1.39bn and have been hit by a 29% fall in bank deposits in the first five months of 2002. A major share of Uruguay's bank deposits are held by Argentines, whose accounts at home are frozen. So the pressure on capital flights is even stronger as domestic and foreign deposits are being simultaneously withdrawn.
Unlike Brazil, both countries also have their bank deposits in dollar or tied to the dollar. In Uruguay, 85 per cent of its bank deposits are in dollars or indexed to the dollar. So the run on the banks has been fast draining out the country's foreign reserves. Uruguay risks running out of cash to make debt payments. This fear brought on the bank holiday and the freeze on withdrawal of long term deposits. The IMF and the US treasury have, of course, insisted on the latter, which put out of reach the ordinary Uruguayans' access to their own long term deposits for three years. A restructuring plan by the Uruguayan Central Bank also includes liquidation of insolvent private banks like the Banco Montevideo/ Caja Obrera, Banco Comercial and the Banco Credito and the transformation of the mortgage bank (BHU) into a non-bank housing institution.
The banking sector in Uruguay has been long thrown open under directives from the IMF. Though foreign investments in this sector requires government authorisation, the fact that a lot of foreign, mainly US, banks operate in Uruguay shows that this is not very restrictive. Among the private banks operating in Uruguay, most are Uruguayan corporations that are mostly owned by foreign banks, and the rest are branches of foreign banks. Under Uruguayan banking legislation banks organised in Uruguay are considered national banks even if their capital is held by a foreign bank. Foreign banks may set up branches in Uruguay which enjoy the same operating privileges as banks incorporated in Uruguay. Financial houses, the majority of which are owned by foreign banks, may conduct any type of financial operations except those reserved exclusively to banks, such as accepting deposits from Uruguayan residents. In 2000, US direct investment in the banking sector stood at 257 million dollars. This is likely to have been another reason for the IMF's eagerness to help out Uruguay.
Uruguay: What does the Future Hold?
Even though the IMF loan has come through, it will not solve Uruguay's problems unless investor panic can be controlled. And panic seems to be suspiciously encouraged by apparently loose statements made by people like Paul O'Neill, the US treasury Secretary, after which an IMF loan becomes all the more necessary. The IMF loan will increase indebtedness, has to be paid back soon, and Uruguay will be playing into the hands of the US. Such debts cannot be repaid, nor can it help the economy unless real sector changes are operative. The government would do better to concentrate on developing its sagging agricultural sector, hydro power potential and gas pipelines.
On the other hand, desperate attempts to cut the fiscal deficit, in compliance with IMF conditions, have been made by the present president. This has moved government resources away from key sectors like electricity and water, increased unemployment and has penalised wage earners by levying taxes on them, thus leaving people in greater panic and misery. It is not surprising that they will seek to secure whatever little bank deposits they have. But given the new legislation and the threat of more bank holidays, their access to their own deposits will also be severely limited from now on.
In addition, in an apparently minor but significant event, Uruguay has definitely not been helped by factors like the recently announced increase in agricultural subsidies to farmers in the US by the Bush Administration. In fact, the continuance and increase of agricultural subsidies in countries like the US and the EU run contrary to the agreements of the WTO, and double cross the signatory developing countries. In the words of Benjamin Lessing, with friends like that, who needs enemies? Or, to put a finer point on it, what good is an IMF bailout if your economic future is to sell agricultural products to the United States on ridiculously poor terms of trade? (The Last Domino' by Benjamin Lessing, 'The American Prospect', 9th August, 2002).
Following IMF policies by themselves have proved to be disastrous for many countries, it is more so in an atmosphere of economic domination and collusion within and among the developed blocks like the US, Canada and the EU. The IMF has been brokering individual country deals in Latin America, mainly to prevent a strong coalition within it, and to further strengthen US control over individual markets by ensuring unimpeded access. The proposed Free Trade Area of the Americas (FTAA) that will combine all the American markets, is another such attempt. The idea has been to weaken the Mercosur trading block, previously the third most powerful in the world, which partially integrated markets in Brazil, Argentina, Uruguay and Paraguay. Recent sessions of Mercosur have recognised the need for resisting such moves and forming understandings and support systems within it. Offering individual loans to Brazil and Uruguay is to pre-empt such an attempt. By making these countries indebted and dependent on the US, the latter hopes to break any possible threat to its own interests from the Latin American coalition from inside. It is trying to make allies of some and enemies of others, thus ensuring a conflict of interests among them.
Regional coalitions, based on local interests, that can challenge such domination is the only way Uruguay can hope to maintain its economic freedom and profitability. It should strengthen its ties with Mercosur and other Latin American economies. Such need has been recognised by many of its neighbours, often at a bitter cost, but unfortunately the Uruguayan government still seems far from this realisation. It has been more pro-North than many of its neighbours. President Batlle's administration has shown remarkable activeness in forging both a bilateral trade agreement and a Four-plus-One free trade agreement between Mercosur and the U.S. He has also gone ahead and severed diplomatic ties with Cuba, much to the chagrin of many Uruguayans. His aim is obviously to secure his own future and that of the economy, which he hopes to do by securing loans. And the US has tried to perpetuate and cash in on that. But as is evident from the effects of the IMF-policies, higher inflation and lower wages to name only a few, Battle's well being is not synonymous with that of the people on the streets.
Opening up and privatisation may be the operative word in the Washington-consensus era, but indiscriminate and complete opening up or privatisation is not a must for Uruguay. Uruguay is in fact, the fourth-most free economy in Latin America, as adjudged by the 2002 version of Index of Economic Freedom by the Heritage Foundation. But that has not helped it much. Cautious and wiser policies must be explored for the very few areas that are not yet open, for example, transmission and distribution rights in energy and oil imports. Uruguay would do well to learn from Argentina, which immediately precedes Uruguay in the 'Index of Economic Freedom' list.
The fact that opening up is not the only necessary option in today's world is highlighted by the recent attempts to sell-off energy utilities by private multinationals in Brazil, delay of privatisation of two oil companies in India, and the consideration of re-nationalisation of private sector units in England. As highlighted in Brazil, private sector interests, especially foreign, in continuing investments in a country will be determined by the state of that economy and its own state of affairs elsewhere. This makes them very prone to sell offs at any given point of time. Given the fact that Uruguay at the moment cannot offer the first, and many multinationals (led by Enron) are facing trouble at home, the government may do well to start looking inwards rather than outwards, especially where essential sectors are concerned.
Similarly, keeping the US happy may bring in the loans now but will take away the economic autonomy that Uruguay will need sooner or later. The Uruguayan economy has been traditionally strong. Its advantage in livestock production had ensured substantial export revenue earlier. It is relatively free from corruption, has a strong social security base. It needs to develop its own industry, agriculture and its energy sector. There is no reason why it cannot leap back and stand on its own legs. It can also become a strong ally of its neighbours, rather than that of the US.
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