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Uruguay Monetary and Exchange-Rate Policy
The Sanguinetti administration turned to Uruguay's
formerly
strong export sector in devising its strategy for renewed
economic growth. Through a combination of exchange-rate
policy,
liberal credit to exporters, and cultivation of new
markets, the
government hoped to revitalize the traditional export
sector
(primarily beef and wool) and promote the manufacture of
nontraditional exports such as apparel.
The most important policy tool was the exchange rate.
Initially, the government planned to allow the peso to
float
freely, in keeping with its philosophy of minimal market
intervention. In practice, however, the monetary
authorities
carried out a "dirty float," repeatedly entering the
currency
market to lower the exchange rate of the peso. Devaluation
translated into increased competitiveness. For a small
country
like Uruguay, facing given world (United States dollar)
prices
for goods, a devaluation of the peso (more pesos per
dollar)
meant that an exporter would receive more pesos for a
given
quantity of goods. This effectively raised the
profitability of
exports (leaving aside other effects) and encouraged the
growth
of the sector.
Exports and GDP both increased after 1985, partly as a
result
of the more competitive exchange rate. But the policy also
had
inflationary effects that counteracted the government's
restrained fiscal policy. The government's intervention in
the
currency market consisted of buying foreign exchange and
selling
pesos. This raised the supply of pesos and lowered their
price
relative to other currencies (the exchange rate). But the
intervention also increased the foreign-exchange component
of the
money supply, thus fueling inflation. The government
attempted to
compensate for this increase in the monetary base by
decreasing
other components of the money supply, a policy known as
sterilization. However, an increasing share of Uruguayan
bank
deposits were denominated in United States dollars rather
than
pesos. Thus, the efforts to restrict the peso monetary
base had
little effect on the overall money supply, which continued
to
increase. As a result, the government could not fine-tune
its
export-promotion strategy to eliminate inflationary
effects.
Inflation persisted despite the decline of the
public-sector
deficit. In short, the government's notable
accomplishments on
the fiscal side were largely negated on the monetary side.
Data as of December 1990
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