Uruguay battles inflation as peso soars, putting exports at risk

April 15, 2011 at 5:27 PM
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MONTEVIDEO, Uruguay, April 15 (UPI) -- Uruguay President Jose Mujica renewed vows to fight inflation but reminded Uruguayans the nation faces an uphill fight amid rising prices and risks to exports from a soaring peso against the U.S. dollar.

Officials say Uruguay's galloping inflation is the price the Latin American country must pay for consistently high economic growth over the past few years. Critics blame the government for spending too much due to over-optimism on the strength of that growth.

Mujica said the government had sufficient tools at hand to make sure the country's inflationary spiral did not run out of control. Uruguay has experienced up to 80 percent inflation in the past. This time, officials insist, the inflationary rate is no more than 8 percent and still manageable.

The president urged Uruguayans to lend a helping hand in the fight against inflation but warned not to expect any easy solutions.

Mujica said in a broadcast he was putting the government "on a diet, with a budget where spending matches effectively collected taxes." He said the plan would mean the government could only spend to the extent it collected in revenue. "It is what economists in their fancy jargon call fiscal equilibrium, which means living within your means," Mujica said.

Analysts said the inflation, if not controlled, could put at risk the delicate balance between production costs, wages and the net cost of exports.

Mujica called on Uruguayans to brace themselves for unpleasant experiences as the belt-tightening went into effect. He said inflation was more than "that personal sour feeling when you go shopping and find the price of beef has gone up," MercoPress reported.

Measures aimed at beating inflation would be neither perfect nor neutral and would always leave an impact on someone and be an excuse for protests.

However, he said, the fundamentals of Uruguay's economy were working very well and the situation could still be managed.

"We're not going to look sideways, we are going to address the issue head on, with the best techniques possible, with no appeal to extreme policies from fundamentalist theories," said Mujica.

He pointedly enjoined business to cooperate in the government's fight against price spikes and refrain from speculative trading.

He reminded Uruguayans it took the country nearly three decades -- from 1972 to 1998 -- to bring inflation down from 80 percent to 8 percent. He called those "26 years of enormous sufferings for many people, but we Uruguayans battled and finally won. In consideration and respect for that historic effort, I'm saying inflation will be stopped."

The government already has embarked on ambitious fiscal remedies to stem inflation, including increases in interest rates, delays in price rises for essential consumer items that are still administered by the government, and more imports of fruits and vegetables.

However, rising energy prices in the wake of pro-democracy movements in the Middle East and North Africa are a major worry.

The Uruguayan economy expanded 8.5 percent in 2010, in line with previous increases in economic growth. But government spending led to a steady decline in the fiscal surplus, which dropped from 0.9 percent of GDP in 2008 to a shortfall in 2010, represented by a fiscal deficit of 1.4 percent of GDP.

Inflation in March 2011 reached 8.17 percent. Additional pressures on the economy built up amid a continued overvaluation of the Uruguay peso against the dollar, which risks making the country's exports less competitive.

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