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Getting Beyond Public Debt and Banking System Fragilities, Uruguay's Critical Issues

IMF chief economists forecast 4.3 percent global growth for 2005 and 2006

Posted: September 22, 2005

Washington -- The International Monetary Fund (IMF) projects “robust” global growth for 2005 and 2006 but warns that high and volatile oil prices continue to pose a significant risk to the world economy.

With stronger global manufacturing and trade, moderate inflation levels and benign financial market conditions, the expansion “remains broadly on track,” said the IMF in its semi-annual World Economic Outlook issued September 21. Accordingly, it revised its April growth forecast only slightly, reducing the previous 2006 figure by 0.1 percent.

Raghuram Rajan, the IMF chief economist, briefed reporters on the report the same day and said that the world economy has proved “tremendously resilient” in the last few years.

"Disease, natural disasters and soaring oil prices have only caused minor blips in an overall picture of healthy growth," he said.

On a specific question about Uruguay, Rajan and Timothy Callen, Chief, World Economic Studies Division Research Department, stated:

QUESTION: I would like to elicit a comment of what you say about Uruguay and after the strong recovery of last year with strong growth, more than 12 percent, and what are the more important challenges going more than you say about the debt and the sustainability of the debt and the dollarization of the economy. The government of Uruguay now is projecting 5.5 percent growth this year, but you are still keeping 6 percent as the projection for this year.

MR. RAJAN: I will leave the specific question on Uruguay for a second. The main concern that emerging markets have, I think, is to, in a sense, to restore the flow of capital and their ability to use capital properly without experiencing the fear of crisis. In a sense, this implies reducing the risk associated with external capital flows. Being able to reduce, for example, the extent of dollarization, reducing the extent to which this necessarily comes through banking systems but also help allow these countries to borrow through markets, domestic markets rather than necessarily international markets. So there are a whole variety of reforms which need to take place and I think those reforms will help--and this goes back to the broader point I was trying to make earlier--will help capital flow again the natural way, from rich countries to emerging markets and to poor countries, such that investment can be made in the poorer countries and emerging markets, which will help in turn the rich countries as the aging populations age to, in a sense, secure the returns for their retirement.

On the specific question?

MR. CALLEN: You said getting beyond the public debt and banking system fragilities, but we certainly see those as being the two critical issues for Uruguay. If you look at public debt, it is even this year projected to be well in excess of 70 percent of GDP. A lot of it is foreign currency denominated. As you say, the banking system is still highly dollarized. These are very important vulnerabilities that the government needs to continue to address.

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