The IMF put the magnifying glass on Uruguay: it questions the efficiency of spending on education and analyzes de-dollarization

Recently the executive board of the International Monetary Fund (FMI) approved the review of the Uruguayan economy by Article IV (corresponds to all member countries of the organization, whether or not they have a credit program with it). With this, a report from the Fund’s technical staff that was in Uruguay between September 14 and 25. There he included annexes on specific aspects and in one of them, he concludes that Uruguay allocates a relatively high amount of resources to health, education and infrastructure, but the return on this spending is uneven.

In the case of education, spending went from 2.7% of the Gross Domestic Product (GDP) in 2005 to 4.8% in 2023, although the results did not accompany this budget effort. The scores of the PISA tests of 2018 and 2022 were not very different from those of 2006, and the completion rate of upper secondary education increased only 6.5 percentage points throughout the period, well below that of its regional peers (Peru, Brazil, Colombia, Mexico). “The data is striking because the number of teachers per student in Uruguay is greater than in those countries,” indicated the IMF.

The IMF mentions Ceibal Plan as an example that targeted interventions can improve human capital, as long as technology is complemented by pedagogical reforms and good resource allocation.

The report prepared by Pierre Guérin y Jean-Jacques Hallaertof the Western Hemisphere Department of the organization, used a stochastic frontier model to measure inefficiencies, which compares the results observed in each country with the maximum that would be achievable given its level of spending.

Uruguay was in line with its regional peers in healthwhere life expectancy equals or exceeds that of much of the region, the density of doctors is high even compared to the average for the region. OECD and infant mortality is lower than in most of the neighbors. In infrastructure it was above the region, with access indicators such as broadband and container traffic in ports that compare well. The widest efficiency gap appears in education.

Faced with this panorama, The IMF proposes institutionalizing the so-called spending reviewssystematic evaluations of current spending that, unlike linear cuts, seek to identify inefficiencies, duplicate or low-impact programs, and redirect resources toward higher-return uses. According to the organization, their effectiveness depends on whether they are integrated into the budget cycle, whether there is central coordination from the Ministry of Economy and Finance with the participation of sectoral ministries, and analytical capacity and quality data.

“The efficiency gap in the education sector suggests that Greater spending alone is not enough to achieve better results. At the same time, budgetary rigidity limits the room to reallocate resources, while discretionary volatility in spending can undermine the effectiveness of public programs. In this context, spending reviews can serve as a mechanism to evaluate the composition and quality of spending, identify low-impact or redundant programs, and redirect resources toward more profitable uses, in a gradual and well-planned manner. Improving spending efficiency will require reforms that take time to materialize and whose implementation is not always politically easy,” the report said.

The report cites the experiences of the Netherlands, which carries out periodic reviews that feed into budget decisions, Denmark, with more limited reviews of specific programs, and Chile, which combines selective reviews with broader evaluations. It states that there is no single model and that the key thing is that the scope is well defined and linked to decision making.

“For Uruguay, Institutionalizing spending reviews would favor a more strategic approach to fiscal policy. By systematically identifying inefficiencies and creating room for resource reallocation, these reviews could help address sectoral performance gaps, while mitigating the adverse effects of volatility in public spending. More broadly, they could reinforce the transition to a performance-oriented medium-term budget framework, contributing to better fiscal outcomes and more effective delivery of public services,” the IMF said.

Another annex to the IMF reports, prepared by Hector Perez-Saizfrom the Department of the Western Hemisphere, suggests that at the end of 2025 the gross international reserves of the Banco Central (BCU) were equivalent to about 22% of GDP and about 83% of its total assets. On the liability side, obligations with the financial system, which include monetary policy instruments and bank deposits in the Central Bank, represented 16% of GDP or 62% of the total, while the monetary base barely reached 5% of GDP, that is, 20% of liabilities. In other central banks in the region, assets and the monetary base weigh more and reserves are usually lower.

The IMF attributes this configuration to the strategy of strengthening public balance sheets that Uruguay followed after the 2002 crisis and to favorable external conditions. The downside was the intensive use of sterilization instruments, the Monetary Regulation Bills (LRM) are estimated at 11.4% of GDP, much more than regional peers.

This structure has consequences on the BCU’s balance sheet. As LRM interest rates typically exceed the yield on reserves, maintaining a large stock of safe but low-return assets financed with interest-paying liabilities in pesos generates recurring operating losses, the Fund indicates.

For the IMF, this cost is the fiscal counterpart of an insurance strategy against external shocks in a highly dollarized economy.

“The current strategy of dedollarization of the BCU seeks to strengthen the role of Uruguayan peso. Its objective is to reinforce the function of the peso as a unit of account, medium of exchange and reserve of value internally, by strengthening confidence in the framework of inflation goals and promoting the development of financial markets in local currency,” the organization said.

The report presents two scenarios of dedollarization. In the first, the proportion of central government debt in pesos increases, which today is around 58%. Banks and AFAPs would reduce their LRM holdings and redirect them towards public securities in pesos; The government would use those resources to buy dollars from the BCU and repurchase debt in foreign currency.

The Central balance would contract on both sides, with fewer reserves and less LRM. The IMF estimates that the risks to financial stability would be limited: banks have central government debt equivalent to 2.4% of GDP, and banks and AFAP together hold LRM for around 7% of GDP.

In the second scenario, credit and deposits in pesos grow compared to those denominated in dollars, driven by greater confidence of households and companies in the inflation targeting regime and by competition from new actors such as fintech. Banks would need more reserve requirements (percentage of deposits that they must immobilize in the Central) in pesos, which they could finance by reducing their LRM, and the lower demand for deposits in dollars would imply fewer reserves in the Central.

Today, credit in pesos represents less than 25% of commercial banking assets. In both cases, the cost of maintaining reserves would decrease and the BCU result would improve, although the IMF asks to closely monitor the expansion of credit in pesos to keep inflation on target.

The organization emphasizes that neither of the two paths is guaranteed. They depend on there being sufficient demand from banks and investors for debt in pesos, on families and companies wanting to borrow in national currency, and on banks having regulatory incentives to lend in pesos. This requires, he concludes, continuing to strengthen the monetary, financial and fiscal frameworks, keeping inflation low and stable and preserving the sustainability of public accounts.