According to the 2001 Report on the Observance of Standards and Codes on Fiscal Transparency for Uruguay, at the time of the assessment, progress had been made in improving the transparency of fiscal policy setting and budget management. However, in a number of important respects, the full requirements of the Code of Good Practices on Fiscal Transparency were not met. In February 2004, Uruguay subscribed to the International Monetary Fund's (IMF) Special Data Dissemination Standard. Further, as part of the structural performance criteria for the IMF's economic program for the stand-by agreement, the government submitted to congress a five-year spending plan on August 31, 2005, complemented with revenue projections and deficit targets consistent with the program's fiscal targets. In 2005, the government has established a committee to steer reform of the budget process. The committee is preparing a comprehensive reform plan, including the preparation of a draft organic budget law to unify the framework regulating the formulation, coverage, classification, execution, control, and transparency of the budget process.

General Overview

In 2003, Uruguay went through the steepest economic and financial crisis in recent history, which developed mostly from external factors. Devaluation in Brazil in 1999 made Uruguayan goods less competitive and an outbreak of foot and mouth disease in 2001 curtailed beef exports to North America. Starting in late 2001, an economic crisis in Argentina undermined Uruguay's economy, with exports to Argentina and tourist revenues falling dramatically. In mid-2002 Argentine withdrawals from Uruguayan banks started a bank run that was overcome only by massive borrowing from international financial institutions. This, in turn, led to serious debt sustainability problems. A successful debt swap helped restore confidence and significantly reduced country risk. Uruguay's economy resumed growth in 2003, with a 2.5% rise in GDP. GDP grew about 12% in 2004 and 5.0%-6.0% growth is expected for 2005. (U.S. Dos 2006)

According to the 2001 Report on the Observance of Standards and Codes on Fiscal Transparency for Uruguay, at the time of the assessment, progress has been made in improving the transparency of fiscal policy setting and budget management. The quality of fiscal data and public procurement procedures have substantially improved, performance of the operational units of the public sector is more closely monitored, and administrative regulations governing competition in the private sector are being revised. However, in a number of important respects, the full requirements of the Code of Good Practices on Fiscal Transparency are not yet met. Some of these requirements could be relatively easily achieved by making information available internally more accessible to the public. However, some of the more fundamental improvements in fiscal transparency will require detailed study and will take some time to implement in full. (IMF 2001)

According to the Supplementary Memorandum of Economic and Financial Policies to the 2006 Letter of Intent to the IMF, the government has established a committee to steer reform of the budget process. The committee is preparing a comprehensive reform plan, including the preparation of a draft organic budget law to unify the framework regulating the formulation, coverage, classification, execution, control, and transparency of the budget process. (IMF 2006a. p.44)

Furthermore, the government is about to submit to congress a comprehensive tax reform (with a slight delay with respect to the end-February performance criterion). While the government is now envisaging congressional approval by October, instead of June, it will work in parallel to advance the preparation of implementing regulations and procedures to ensure that the reform becomes effective in January 2007. The draft bill is broadly in line with the proposal presented to the public last year, which aims at improving the system's equity and efficiency, including by: (1) introducing a personal income tax; (2) revamping the corporate income tax; (3) lowering VAT rates and broadening its base; (4) eliminating sectoral exemptions and unifying rates for employers' social security contributions; and (5) streamlining the number of taxes. The proposal is designed to be at least revenue neutral, and envisages now a more gradual VAT rate reduction so as to safeguard the fiscal targets. (IMF 2006a, p. 44)

As part of the structural performance criteria for the IMF's economic program for the stand-by agreement, the government submitted to congress a five-year spending plan on August 31, 2005, complemented with revenue projections and deficit targets consistent with the program's fiscal targets. On February 29, 2006, it completed a five-year spending plan, complemented with revenue projections and deficit targets consistent with the program's fiscal targets. (IMF 2006b, p. 25)

According to policy discussion which formed part of the Third Review of the Stand-By Agreement of the IMF with Uruguay, revenue administration reforms are progressing well, and the authorities remain confident that their ambitious revenue targets for this year will be met. With administration efforts already yielding significant revenues (the social security agency and the tax directorate exceeded their targets for 2005), the reform plan for the tax directorate progressing well, and the plan to restructure customs expected to be ready around midyear, the authorities expect to achieve their revenue collection targets for 2006. Public enterprises are expected to improve their performance significantly in 2006, following weather-related electricity generation cost overruns and the rapid pace of the international oil price increases in 2005, which temporarily resulted in tariff adjustment lags. Staff encouraged the authorities to devote adequate efforts and resources to ensure the tax reform is effective by 2007, in particular the administration of the new personal income tax. (IMF 2006a. p.7)

The new debt office has begun operations, with key objectives including a reduction in dollar debt and a smoothing of the repayment profile. Officials explained that the unit had started to build a debt database and had been finalizing the financing plan for the government. The office already took the lead in successfully completing the recent issuance of US$500 million on international capital markets. A debt strategy is being prepared with Fund technical assistance, aiming at developing the local capital market, increasing the share of peso and inflation-indexed debt, lengthening maturities, and smoothing the amortization profile. (IMF 2006a. p.8)

Overall, in 2005 the fiscal position remained stable with a consolidated deficit equivalent to 1.1% of GDP in the 12 months to August. In turn, the primary fiscal surplus stood at 3.9% of GDP and was counterbalanced by debt interest payments, which amounted to 5% of GDP. The fiscal situation reflected the increase in collections, a certain stability in central government expenditure and a decline in the profits of public companies, due to the rise in oil prices. Fiscal revenue increased by 1.6% in real terms during that period, while primary expenditure grew by 2.3%. The debt/GDP ratio of the non-financial public sector continued to decrease to stand at 66.8% at the end of 2005. The debt swap operation carried out in 2004 and the subsequent improvement in the sovereign risk facilitated the sale throughout the year of successive 12- and 15-year public debt instruments for close to US$ 1 billion. (ECLAC 2005)

The Principles

Clarity of roles and responsibilities.

II

According to the 2001 Report on the Observance of Standards and Codes on Fiscal Transparency for Uruguay, general government is relatively well distinguished from the rest of the economy, but there are important areas where further clarity would be desirable. For fiscal policy purposes, general government is defined to include the central government, the social security agency, and local governments (intendencias). Legally, however, a mixed group of agencies, "los entes autónomos y servicios descentralizados de la esfera comercial e industrial del estado", are identified as a group under government control in the constitution (Article 221). This group covers both agencies performing mainly commercial activities (public financial institutions and nonfinancial public enterprises) and two agencies that only perform noncommercial activities. (IMF 2001). However, the assessment does not address the country's compliance with this principle.

The constitution and the law establish a clear separation of the fiscal roles of the different branches and levels of government. The executive, legislative, and judicial branches are clearly distinguished in the constitution. There is also a clear constitutional distinction in the distribution of responsibilities between the central government and the local governments regarding public revenues and expenditures. (IMF 2001)

The Central Bank of Uruguay (BCU) is legally an autonomous agency, but it is not independent of the government. Moreover, the BCU undertakes the management and servicing of part of the public debt and is directly responsible for interest payments on debt arising from past financial sector restructuring. As a result, the BCU incurs a quasi-fiscal loss. (IMF 2001)

The legal framework for fiscal management is well established in law and has a traditional financial compliance emphasis. The legal framework establishes basic budgetary principles and a clear allocation of roles and responsibilities in the areas of budget preparation, execution, control, and submission of budgetary accounts. The budgetary process is similar for the central government and the local governments. (IMF 2001)

The legal framework focuses mainly on financial control. Changes have recently been introduced, which emphasize goals and performance indicators for the administrative units of the central government. Central and regional governments can commit expenditure for which there are no appropriations in unforeseen circumstances up to a ceiling of 1 percent of the national or local budget. Any such commitments must be reported to congress or local assembly concerned. (IMF 2001)

Taxes must be established by law. However, the tax laws provide the executive branch with some discretion to adjust certain basic elements of taxes within established limits. The tax law usually sets the maximum tax rate and authorizes the government to determine lesser or differentiated rates. There is no specific code of conduct for tax officials, other than the ethical standards of behavior for civil servants under the legislation governing their conduct. The tax code spells out taxpayer rights vis-'is the tax administration. (IMF 2001)

Open budget processes

II

According to the 2001 Report on the Observance of Standards and Codes on Fiscal Transparency for Uruguay, the constitution establishes that the Central Government Budget Law will be prepared and approved for the five years in which the administration is in office. A statement annexed to the law identifies current expenditure for the first year of the five year plan and annual investment expenditure for all five years. Annual and within-year adjustments may be made to current expenditure for expected inflation. Prior to the start of the second and subsequent budget years (the calendar year), a Budget Reporting Law and a Budget Execution Statement are submitted to congress. (IMF 2001) However, the assessment does not address the country's compliance with this principle.

In view of the accountability arrangements and practices, Country Financial Accountability Assessment (CFAA) conducted by the World Bank, concludes that fiduciary risk in Uruguay (the risk that donor and public funds will be used for unauthorized purposes or that unauthorized uses will go undetected) is low. Public financial management continues to be transparent, but bureaucratic. (WB 2005, p. 39)

It is neither mandatory nor standard practice to include in the budget documentation a statement of fiscal policy objectives and priorities, the macroeconomic forecasts serving as a basis for the budget, or a qualitative assessment of the sustainability of fiscal policy. The only forecast contained in the budget documentation relates to investment. It is also not the practice to prepare medium-term macroeconomic or expenditure frameworks or to report on fiscal risks. (IMF 2001)

However, as part of the structural performance criteria for the IMF's economic program for the stand-by agreement, the government submitted to congress a five-year spending plan on August 31, 2005, complemented with revenue projections and deficit targets consistent with the program's fiscal targets. On February 29, 2006, it completed a five-year spending plan, complemented with revenue projections and deficit targets consistent with the program's fiscal targets. (IMF 2006b, p. 25)

There are no fiscal rules, except for the establishment by law of a limit on the central government's indebtedness in the form of treasury bills or bonds. However, government entities included in the Central Government Budget Law are legally compelled to set annual performance targets. Actual performance is monitored twice a year by the Planning and Budget Office. This information is provided to congress along with the Budget Reporting Law. Local governments follow a similar budget process and report to their local assemblies. (IMF 2001)

Central government budget preparation is a joint responsibility of the Planning and Budget Office and the Ministry of Economy and Finance. The director and staff of the Planning and Budget Office propose basic guidelines, evaluate programs and projects from the efficiency point of view, make performance evaluations of the administrative units included in the budget, and prepare the quinquennial investment program. The Ministry of Economy and Finance, through the General Accounting Office designs the budget preparation process and the current budget. This sharing of responsibilities means that no single office is clearly accountable for the budget, and this makes it difficult to coordinate public investment and current expenditures. (IMF 2001)

Uruguay possesses a complete budget classification system, which identifies expenditure by economic category, by executing agency, and by program. The indicator most used to analyze the fiscal position is the overall balance, although the budget documentation does not show how this indicator is derived from the budget estimates. Modified cash accounting is used, and international accounting standards are followed. However, the ongoing implementation of an Integrated Financial Information System (IFIS) already provides some information on expenditures on an accrual basis. The accounting standards are set out in accounting manuals but are not stated in the budget documentation or final accounts. However, changes in accounting policies, as well as their impact on fiscal aggregates are explained in the Budget Reporting Law and Budget Execution Statement. (IMF 2001)

There has been considerable progress in improving the budget control and execution systems of agencies covered by the central government budget. The introduction of an Integrated Financial Information System (IFIS) means that there are now adequate real time data available on the various stages of the expenditure process. (IMF 2001)

The General Accounting Office prepares monthly budget execution data covering changes in appropriations to the agencies included in the central government budget, commitments, and liabilities. With the same periodicity, the National Treasury produces data on cash revenues and payments, and differences with respect to the programmed figures. This information is not published. The General Accounting Office is also responsible for preparing the annual Budget Execution Statement that has to be tabled in congress six months after the end of the fiscal year. The accounting reports are reconciled with the bank accounts monthly and with the budget appropriations annually. (IMF 2001)

The government is improving the system of public procurement to increase accountability while permitting increased flexibility. It is introducing centralized monitoring systems and an information system on government procurement supply and demand. Civil service recruitment has been frozen for the past five years and it is established by law that it will remain so for a further five years, with certain exceptions for such groups as the police, health workers, and highly specialized personnel. There is full legislation on hiring staff and setting pay levels, with considerable discretion in the former and excessive complexity in the latter. (IMF 2001)

The National Internal Audit Office is responsible for the legality and financial conformity of internal audit. Its operational capacity has been reduced in the last few years because of a recruitment freeze. It undertakes selective operational audits, the conclusions of which are published semiannually. However, there are no institutional procedures to ensure that the recommendations from these audits are implemented. The Central Accounting Offices in the ministries and agencies are in charge of ex ante internal control. They have to report on every act that gives rise to a commitment, the recognition of a liability or a payment, and the legality of that act. (IMF 2001)

Significant progress is being made in improving the transparency of fiscal policy setting and budget management. Through the implementation of the Integrated Financial Information System (IFIS), the quality of fiscal data has substantially improved. Other important advances in transparency are the improved public procurement procedures, the revision of the administrative regulations governing competition in the private sector, setting targets for and monitoring performance of the operational units of the public services, and the inclusion of own revenues of public agencies in the budget. (IMF 2001)

Public availability of information.

II

According to the 2001 Report on the Observance of Standards and Codes on Fiscal Transparency for Uruguay, there were delays in providing general government fiscal information. Under the constitution, local governments prepare their own budgets, which are presented for deliberation and approval by the local assemblies. Local governments are not legally obliged to provide financial information to the central government. This results in difficulties and delays in producing general government financial information. (IMF 2001) . However, the assessment does not address the country's compliance with this principle.

In February 2004, Uruguay subscribed to the International Monetary Fund's Special Data Dissemination Standard (SDDS). (IMF SDDS website)

Central government budget documents are not published in their entirety. According to the constitution, the national budget law should be accompanied by annexes covering revenues, current expenditures, investments, public employees' wages, and targets and performance indicators of budgetary programs. This complementary information is only provided to congress, except for the performance information, which is published by the Executive Committee for the Reform of the State and can be found on its website. (IMF 2001)

The constitution provides for comprehensive coverage of the budget, but the coverage of fiscal activity in budget documents is not yet complete. The national government presents the central government budget for deliberation and approval by congress. In practice, the budgets of the EASDECI are not tabled in congress, unless there are discrepancies between the government and the agency. The public social security budget, which represents a large share of public sector expenditure in Uruguay, is not presented to congress. (IMF 2001)

The central government budget contains little information about fiscal aggregates for past fiscal years, it does not include projections, nor estimates of contingent liabilities and quasi-fiscal activities, or information on tax expenditures. Every month, the Central Bank of Uruguay (BCU) publishes information on the level and composition of public debt but not on total financial assets. (IMF 2001)

Independent assurances of integrity.

II

According to the 2001 Report on the Observance of Standards and Codes on Fiscal Transparency for Uruguay, the Tribunal de Cuentas de la República is the supreme audit institution and is independent of the executive branch of government. The president of the Tribunal is appointed by the legislative branch. The Tribunal annually audits the accounts of all public sector agencies for legality and financial conformity. There is no institutional mechanism for enforcing compliance with its findings. (IMF 2001) However, the assessment does not address the country's compliance with this principle.

In February 2004, Uruguay subscribed to the International Monetary Fund's Special Data Dissemination Standard (SDDS). (IMF SDDS website)

Macroeconomic forecasts are debated publicly. However, the assumptions and methods of preparation are not presented in detail. (IMF 2001)

The National Statistics Office has a technical independence in collection and preparation of statistics. Budget execution statistics are prepared by the General Accounting Office and the National Treasury. The Central Bank of Uruguay (BCU) has the responsibility of preparing the national accounts. (IMF 2001)