Uruguay - Economic memorandum

Economic Memorandum on Uruguay PUB-I 336 Latin America and the Caribbean Regional Office December 1977 A World Bank Publication   ECONOMIC MEMORANDUM ON URUGUAY This report is based on the findings of an economic mission to Uruguay during June 1976, composed of Messrs. Alfredo Gutierrez (mission chief), Peter Griffith (fiscal economist, IMF), R. Vaughan Sear (power consultant), Jose Sidaoui (research assistant), Albert Stocker (young professional), Manuel Trucco (external debt analyst), and Lee Ward (fiscal consultant, OAS). The World Bank Washington, D.C., U.S.A.  Copyright C 1977 The International Bank for ReconstrucLict) and Development / The World Bank 1818 H Street, N.W. Washington, D.C. 20433, U,S.A, ISBN 0-916058-10-7  PREFACE World Bank country economic studies such as this "Economic Memorandum on Uruguay" are prepared primarily for the Bank's own use. Their purpose is to provide the information and analysis the Bank needs for planning its own lending operations and for its discussions on economic development policies with the officials of the country concerned. Circulation of these reports is normally restricted to the "official community" -- governments which are members of the Bank and international organizations concerned with development problems. 'In cases where the issues studied have attracted considerable general interest, where we believe the Bank's report could contribute sub- stantially to knowledge and understanding of the problems involved and where the authorities of the country concerned agree to removal of the normal "official use only" restriction on distribution, it seems desirable to make these reports available to a wider audience. This is such a case. The reader is advised, however, that this is a working document rather than a study pre- pared and edited with a view to broader distribution. This country economic memorandum was originally prepared in the last half of 1976 and distributed in December of that year. Since that time there have been additional developments in the evolution of the economy which are worthwhile highlighting. The economic performance during the first half of 1977 indicates that the momentum achieved in 1976 on the external sector and on the fiscal front continued unabated. The strong growth of nontraditional exports more than offset the stagnant levels of beef and wool exports and, coupled with moderate import growth, resulted in a positive trade balance of US$26 million in the first half of the year. Large capital inflows continued to be attracted by favorable interest rates and contributed significantly to a gain of US$89 milion in net foreign exchange reserves. In addition, the Central Government fiscal position showed a small overall surplus as the authorities maintained restraint on current expenditures and the new tax measures introduced in 1975-76 yielded increased revenue. Tax collection rose by 20% in real terms over its level in the first half of 1976, suggesting that the overall deficit for the year may be reduced to 1.5% of GDP (compared with 2.5% of GDP in 1976). These achievements have exceeded the projections incorporated in the report. Inflationary pressures have reappeared, however, as the cost of living increase for the first half of the year amounted to 29% compared with a figure of 10% during the same period in 1976. This setback has been due to a combination of short-term events and a more fundamental structural character- istic. Part of the upsurge in the price level is explained by higher food prices as supplies were adversely affected by bad weather. Demand pressures were intensified by relatively large nominal wage adjustments in the second half of 1976. Given the existing level of protection and the decision not to rely on emergency imports to alleviate these temporatry scarcities, the rate of price increases intensified. Moreover, the considerable gain of foreign exchange reserves contributed to a higher-than-expected expansion of the money supply, thereby sustaining inflationary pressures. Although the authorities are already implementing measures aimed at more restrictive monetary manage- ment, the broader issue of reducing the level of protection to enhance the efficiency of the productive sectors still requires resolution.  Sustained economic growth and stability will continue to depend on the capacity of the Government to implement coherent policy measures aimed at bringing the productive sectors into closer integration with world markets and increased exposure to international competitive forces. Continued efforts should be made to ensure that domestic prices of traditional export products reflect world market conditions. Other medium and longer-term policies for sectors such as livestock, agriculture, and manufacturing also need to be clarified in order to broaden the investment planning horizon of domestic and foreign entrepreneurs. It is hoped that this Bank staff report will contri- bute to a better understanding of these issues both in Uruguay and in other countries facing similar situations, and in this way support the economic development efforts of the countries concerned. Adalbert Krieger Vice President, Latin American and the Caribbean Regional Office  TABLE OF CONTENTS Page No. MAP CURU'ENCY EQUIVALENTS SUMMARY AND CONCLUSIONS ...... ............ i - iv I. RECENT ECONOMIC PERFORMANCE ...................... 1 A. Background ................................... I B. Growth of Income and Output, 1974-76 .... .... 2 C. Money and Credit ............................ 5 D. Public Finances ............................. 7 Central Government ........................ 7 Rest of the Public Sector .... ............. 14 E. Prices and Wages ............................ 15 F. Balance of Payments ......................... 17 Current Account ........................... 17 Capital Account ........................... 20 G. External Debt ............................... 21 II. SECTORAL ISSUES .................................. 23 A. Agriculture ................................. 23 B. Industry .................................... 25 C. Power ....................................... 29 D. Urbanization, Unemployment and Income Distribution ........................ 31 III. GROWTH PROSPECTS ................................. 35 A. Development Strategy ........................ 35 B. Policy Requirements ......................... 37 Trade Policy .............................. 37 Fiscal Policy ............................. 37 Public Sector Management .... .............. 38 C. Growth Prospects, 1976-80 ..... .............. 39 Growth and Investment ..... ................ 39 Fiscal Performance ...... .................. 43 Export Prospects ...... .................... 45 Imports .......... ......................... 46 External Capital Requirements .... ......... 48 ANNEXES 1. An Analysis of Uruguay's Tax System 2. Uruguay's Public Sector Fiscal Performance, 1971-75 STATISTICAL APPENDIX  I  W3 ; je- 54r - URUGUAY A 6---w( / Main Rcads Secondary Roads Railroads / Ma)n Airports ii o+ Secndary Airports 2; 0 X Department Boundanes /" / / Internatiaono Boundairies ~[ *sz -e \ / twr1 ~~~~~R I V R 75 'AI 32- Q-- 1\ jL C E I ARN D U ,< T A C U A D y< ,/ T ,) > W S D ~! WO b E S 0~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~W,dOk04iuTr -4 ~~~~~~~~~~~~~~~~~~~~~~~~~~~34 - I South A ( ' ~~~~~~~~~~~~~-I I ) v. ~~~~~~~~~~~~~~~~AmerICo 'P. ~ l Ooe/. (ub CABO PObONIO L <@ 53' - ~~~~~~~~~~u. 54 52 1~~~~~~~~~~~~~~~~~)U,~~~   CURRENCY EQUIVALENTS Currency Unit: New Uruguayan Peso (NUr$) Exchange Rates Effective September 30, 1976 Commercial Rate Buying US$1.00 - NUr$3.61 Selling US$1.00 - NUr$3.65 Financial Rate Buying US$1.00 - NUr$3.86 Selling US$1.00 - NUr$3.87   SUMMARY AND CONCLUSIONS i. The structural changes in the world economy that began late in 1973 had a major adverse impact on the Uruguayan economy. The threefold increase in the price of imported oil (upon which the country is entirely dependent), sub- stantial increases in other import prices, and the closure of the EEC to meat imports resulted in a terms of trade loss equivalent to 2.1% of GDP and a sharp reversal in the balance of payments. These developments also contributed to a precipitous deterioration of fiscal performance and to an acceleration of domestic inflation. A new economic team was appointed in July 1974 in the midst of the severe economic crisis. The authorities realized that long-term solutions to the country's economic problems went beyond stabilization and required reversal of the inward-looking development strategy which had re- sulted in a thwarting of exports and growth. Since then, the authorities have been carrying out an economic reform program aimed at improving resource allocation and productive efficiency through greater reliance on the price mechanism. ii. The authorities strove to achieve in 1975-76 a sustained growth in the commodity producing sectors of the economy by eliminating various types of controls which distorted resource allocation and by adjusting the exchange rate to more realistic levels in order to promote exports. Quantitative and financial controls of imports of raw materials and capital goods were eliminated; control of prices of various domestic products was lifted; a policy of mini devaluations was actively pursued; interest rates on deposits and loans were freed; and non- traditional exports were stimulated through a system of rebates. Despite the continuation of generally unfavorable external factors, the economy responded unexpectedly well. The balance-of-payments recovered from a loss of net foreign exchange reserves of US$73 million in 1975 to a sizeable surplus estimated at US$100 million in 1976, as exports of nontraditional products expanded rapidly and private capital inflows increased markedly. Inflation which exceeded 100% in 1975, should not surpass 40% in 1976. Uruguay is likely to achieve a fourth consecutive year of positive GDP growth (3%) in 1976, a significant achievement in view of the persistent inability of the economy to sustain positive growth during most of the last two decades. iii. The Central Government's fiscal performance continued to be a diffi- cult aspect of the authorities' economic program. During the last two years fiscal policy has been oriented toward creating a favorable climate for invest- ment of private capital and increasing the rate of private savings. This policy has been accompanied by a shift in the composition of Government revenues away from taxes on international trade and stamp taxes and toward taxes on consumption like the value added tax. Despite new measures introduced to increase revenue and the considerable restraint exercised on current expend- itures in 1975, the fiscal position of the Central Government continued to be weak as the overall deficit was nearly 28% of total expenditures, or about 4.5% of GDP, the same level as in 1974. The overall fiscal deficit in 1976 is ex- pected to improve to less than 20% of total expenditures, or about 3.4% of GDP. Increased revenues should result from the timely collection of IMPROME (tax on inputed agricultural productivity), a new unified corporate income tax rate  which will be in effect for the first full year, and from higher rates for the value-added tax and selective excise taxes. The policy of expenditure restraint should have salutary effects in the area of subsidies and transfers where the lower level of expenditures achieved in 1975 should be maintained. This is the direct result of Government policies toward the decentralized public sector which have bten geared to achieving more realistic price levels for goods and services produced by state enterprises. iv. The still weak fiscal situation of the Central Government requires the implementation of additional measures to assure that public sector opera- tions do not become a source of inflationary pressures and that public sector investment attains levels appropriate with the country's needs. Over the medium- and longer-term, there are several areas of the Central Government revenue and expenditure system where further action will contribute to a reduction of the overall deficit. The continuation of the Government's policy of increasing the tariffs of the nonfinancial public enterprises to levels which will permit financing of capital expenditures from internal savings should gradually eliminate the need for budgetary transfers to these enter- prises. Continued restraint should be exercised in granting wage and salary adjustments while at the same time gradually reducing the number of public sector employees as new employment opportunities are generated in the private sector. On the revenue side, various measures might be considered such as the continuation of gradual rate reductions in the tax rebate system for nontraditional exports, and a further expansion of the value-added tax base through the elimination of special exemptions and the reduction of the list of goods and services subject to the preferential rate. Restructuring the import tariff system by consolidating the numerous types of import duties prevailing now and introducing a more uniform duty structure should not only increase the efficiency of the commodity producing sectors, but also yield increased revenues by taxing more articles at moderate rates. v. The key to sustained economic growth and stability in Uruguay during the coming five years will lie in the Government's ability to consolidate the gains of the last two years through gradual and consistent policies. The most serious difficulties of the 1974-75 crisis appear to have been largely over- come, but this does not imply that the more ingrained structural weaknesses of the Uruguayan economy have been solved. Fiscal deficits, an overly pro- tected industrial sector, and the consequent unemployment and underemployment will continue to be important problems which will require the persistent attention of the authorities. The rapid success in lowering inflation and turning around the balance of payments during the last two years attests to the economy's responsiveness to a consistent set of signals from the Govern- ment and from the price mechanism. Uruguay has advantages such as a highly literate labor force, a strategic location between the large markets of Brazil and Argentina, and adequate transport infrastructure, ease of long- distance transport through the port of Montevideo, and a natural resource endowment distinctly suited to export-oriented agricultural production, including not only the traditional livestock industry but also a large untapped potential in crop agriculture, food and fruit processing, and fisheries.  vi. The Uruguayan economy has the capacity to grow at an average annual rate of 4% during the period 1976-80. The Government's ability to implement its programs should be facilitated by the more favorable conditions. expected for the country's main export products. Price projections for Uruguay's exports and imports indicate a notable terms of trade improvement in 1977, which should hold for the remainder of the decade. In addition, sustained growth of manufacturing output and exports should be possible with the further expansion of nontraditional exports such as leather products, woolen textiles, processed foods and fish, and other manufactured goods. The realization of these possibilities rests on the reactivation of investment activity by the private as well as the public sector. The achievement of a 4% GDP growth rate would require gross domestic investment to climb steadily from 11% of GDP in 1976 to nearly 13% in 1981. Although private sector investment should provide the main impulse to growth over the coming years, investment by the public sector will play a key supporting role. Public sector capital expenditures, which are projected to increase to about 5% of GDP by 1981, should be primarily directed at increasing the output of the productive sectors of the economy by channeling increasing resources through financial intermediaries for medium and long-term loans to agriculture and industry. It should be emphasized, however, that the successful implementation of a public investment program during the next five years will require appreciable improvements in the public sector's capacity to identify and prepare projects, and define investment priorities. vii. The maintenance of a higher growth rate in the future through export expansion and diversification will require the rehabilitation and moderniza- tion of the country's capital stock. This implies heavy import requirements for new plant and equipment, rehabilitation of the existing stock, and for related intermediate inputs. This process of recapitalization began in 1975-76 and is expected to continue at least through the next five years. Consequently, a rapid expansion of import volume of about 9% will be necessary to achieve the projected overall growth rate. The higher shares of exports and imports to GDP are consistent with what is observable in countries with a primarily agricultural resource base and an outwardly-oriented growth strategy. More- over, the heavy capital import requirements of the economy will also be reflected in a shift in the import structure with capital goods rising to 14% of imports by 1981 compared to 10% in 1974. viii. Despite the projected rapid growth of imports, it is estimated that the expansion of export volume, together with a decided shift in the terms of trade in favor of Uruguayan exports, could permit Uruguay to enjoy a positive trade balance from 1977 to 1979. The current account balance would, however, remain negative throughout the period primarily as a result of increased pay- ment of interest on existing and new external foreign borrowing. Neverthe- less, the more manageable levels of current account deficits projected should lead to an enhancement of the international financial community's assessment of Uruguay's creditworthiness and permit the authorities to obtain new commit- ments on more favorable terms than during the 1974-75 balance-of-payments crisis. The volume of commitments contracted during 1974-75, together with  - iv - their relatively unfavorable terms, will result in a debt service ratio of about 32% in 1976. The projected expansion of exports during 1976-81, together with reduced annual capital requirements of US$210-220 million (relative to 1974-75) and more favorable terms, would result in a reduction in the debt service ratio to 20% in 1977, and even lower thereafter reaching 14% in 1981. The share of public debt outstanding and disbursed as a proportion of GDP was only 17% in 1975 and should remain at that level during the next five years. Under these circumstances, Uruguay would remain creditworthy for the amounts of external capital required to rehabilitate the country's capital stock and to achieve a sustained rate of economic growth.  I. RECENT ECONOMIC PERFORMIANCE A. BACKGROUND 1. Uruguay is a small fertile country with a population of less than three million people bordered by the two largest countries in South America: Argentina and Brazil. The country is endowed with a relative abundance of land, well suited to agriculture and grazing, and a pleasant temperate climate. Its population, which is increasing quite slowly, is culturally homogeneous, has attained a high literacy level and resides primarily in urban areas. 2. During the first'half of the twentieth century, the highly pro- sperous and productive agricultural sector was able to provide the base for high income levels and extensive social benefits. In the post-World War II era, however, the country encountered increasing difficulty in maintaining living standards in the face of deteriorating terms of trade and a burdensome and inefficient import substitution industrial structure which was fostered during the world crisis of the 1930s and 1940s. In an attempt to maintain urban incomes, resources were continually drawn from agriculture through fiscal, exchange rate and price pdlicies. Economic policies emphasized in- come distribution, consumption and industrial protection instead of growth, investment, and exports. The result was the gradual stagnation of exports, a decline in per capita incomes, persistent inflation and periodic balance- of-payments crises. 3. The structural changes in the world economy which began in late 1973 had a staggering impact on the Uruguayan economy. The threefold increase in the price of imported oil (upon which the country is entirely dependent), sub- stantial increases in other import prices, and the closure of the EEC to meat imports resulted in a terms-of-trade loss equivalent to 2.1% of GDP and a sharp reversal in the balance of payments from a current account surplus of US$37 million and a net reserve gain of US$90 million in 1973, when beef and wool prices were at historic highs, to a current account deficit of US$133 million and, depite substantial external borrowing, a net reserve loss of US$58 mil- lion in 1974. These developments also contributed to a precipitous deteriora- tion of fiscal performance and to an acceleration of domestic inflation. A large fiscal deficit, equivalent to nearly 30% of expenditures, was brought about as budgetary subsidies for basic imports were increased while import levies were reduced in an effort to sustain real income levels. Wage and price policy which had also been designed to maintain income of producers and consumers in the face of a declining gross domestic income also strongly con- tributed to inflation which exceeded 100%. 4. A new economic team was appointed in July 1974 in the midst of the severe balance-of-payments and fiscal crises. The authorities realized that long-term solutions to the country's economic problems went beyond stabiliza- tion and required reversal of the inward-looking development strategy which  -2- had resulted in a thwarting of exports and growth. Since then, the authorities have been carrying out a program of stabilization and economic reform based on the freeing of domestic prices and the liberalization of the foreign trade and payments systems from the burdensome controls instituted in the past. The basic objectives of the program are the improvement of resource allocation and productive efficiency through greater reliance on the price mechanism, and the promotion and diversification of nontraditional exports, i.e., those other than beef and wool. The encouraging results for 1975 and the generally favor- able outlook for 1976 indicate that this strategy is succeeding more rapidly than expected. Exports of nontraditional goods are booming, the balance of payments is expected to show an overall surplus in 1976, and the inflation rate should not surpass 40% this year despite the elimination of a large number of price controls. The economic prospects for Uruguay today are far better than could have been expected during the difficult days of 1974. The economy has emerged from the depths of the crisis, the private sector is show- ing increased confidence in government economic policies, and the authorities continue to advance in the implementation of programs and to consolidate the gains of the last two years. The present economic strategy has not been modified by the new political leadership which emerged in June 1976. B. GROWTH OF INCOME AND OUTPUT, 1974-76 5. Goverment economic policy in 1975 was aimed at attaining a sustained growth in the commodity-producing sectors of the economy by eliminating various types of controls which distorted resource allocation and by achieving a more realistic exchange rate in order to promote exports. Quantitative and finan- cial controls of imports of raw materials and capital goods were eliminated; control of prices of various domestic products was lifted; the policy of mini- devaluations was continued; and nontraditional exports were also stimulated through a system of rebates. Despite the continuation of generally unfavor- able external factors, the economy responded to these measures by attaining a growth rate of 3.5%--the highest during the last five years and the third consecutive year of positive economic growth (see Table 1). This achievement is significant in view of the persistent inability of the Uruguayan economy to sustain positive growth rates during most of the last two decades.  - 3 - Table 1: SECTORAL GROWTH OF GDP, 1971-76 /1 (Percentages) Estimated 1971 1972 1973 1974 1975 1976 Agriculture /2 -1.1 -9.8 3.9 -0.6 1.4 2.0 Manufacturing /3 -1.8 -0.4 -0.2 3.7 6.7 7.0 Construction 6.0 1.4 -19.1 6.4 22.4 9.0 Commerce -4.4 -5.5 0.9 2.9 4.4 1.0 Services /4 0.1 -2.2 2.7 0.4 0.6 0.6 Total -1.0 -3.3 0.9 1.6 3.6 3.0 /1 At factor cost in 1961 constant prices. /2 Including livestock and fishery. /3 Includes mining and quarrying. /4 Includes transport, electricity, banks, ownership of dwellings and government. Source: Central Bank and mission estimates. 6. As in the previous year, the impetus for growth in 1975 was provided mainly by the manufacturing and construction sectors which achieved their high- est growth rates in recent years--7% and 22% respectively. Manufacturing growth was led by the expansion of output of leather and textile manufactures for export. This was stimulated by a devaluation of 65% as compared to 1974 1/ and the system of export rebates which averaged 20% of f.o.b. value. The positive effect of the above policies was also seen in an improved investment climate, as evidenced by an upsurge of plans for investment in expansion and modernization of plant capacity (indicated by an Office of Planning and Budget- ing survey). The rapid expansion of construction activity in 1975 reflects the accelerattion of construction of the Salto Grande hydroelectric project being built jointly with Argentina, and the completion of two bridges crossing the Uruguay River at Fray Bentos and Paysandu. On the other hand, residential construction did not grow significantly as increased activity in the area of Punta del Este stimulated by Argentine capital was largely counterbalanced by a slowdown in public housing programs. 1/ This was about equal to the increase in domestic prices thus giving exporters the full benefit of world price increases.  -4- 7. The output expansion experienced in 1975 was accompanied by a notable deterioration in the country's terms of trade which amounted to 1.7% of GDP (see Table 2). Import prices registered only a small increase over 1974 levels and the major portion of the terms of trade loss was attributable to the sharp fall in prices for beef and wool, the country's principal export products. Thus, despite a jump of nearly 21% in export volume, led by wool and nontraditional products, the resource gap increased from 2.8% of GDP in 1974 to 3.4% in 1975. Table 2: SOURCES AND USES OF RESOURCES, 1971-751' % of GDP Growth (%) 1971 1972 1973 1974' 1975 1973-74 1974-75 GDP 100.0 100.0 100.0 100.0 100.0 1.6 3.6 Terms of Trade -1.4 1.3 4.2 0.5 -1.7 Imports 14.4 13.4 13.9 14.6 14.9 7.0 5.7 Exports (Import Capacity) 12.0 14.9 15.5 11.8 11.5 -22.5 1.0 Resource Gap 2.4 -1.5 -1.6 2.8 3.4 Available Resources 101.0 99.8 102.6 103.2 101.6 2.2 2.0 Consumption 87.2 88.0 91.3 92.6 91.4 3.0 2.3 Gross Investment . 13.8 11.8 11.3 10.7 10.3 -4.2 0.0 Domestic 'Savings_! 11.4 13.3 12.9. 7.9 6.9 -38.1 -9.0 Source: Central Bank 1/ Derived from data in US$ at average 1967-69 prices and exchange rates. 2/ Includes,terms of trade adjustment. 8. Economic policies designed to maintain consumption standards and which had the effect of discouraging investment were reversed in 1975. Costly minimum foreign financing requirements for imports and budgetary subsidies for both domestically produced and imported goods were eliminated during the year. This was reflected in a reduced growth of consumption (2.3%) and the mainte- nance of the same real levels of investment as in 1974. These developments contrast with the experience of the previous two years when consumption in- creased at an average annual rate of 3.7% and gross domestic investment  -5- declined at a rate of 4.2%. Gross domestic savings continued to decline in 1974-75, however, although at a significantly reduced pace from the previous year. 9. Preliminary 1976 estimates indicate that GDP growth will probably slacken to 2-3% as the pace of construction of the Salto Grande dam settles to a more moderate level and the commerce and services sectors experience a slower expansion. These sectors were adversely affected by the changes in the exchange rate of the Argentine peso during late 1975 and early 1976, which led a large number of Uruguayans to travel to Argentina for purchases of consumer goods. On the other hand, production of nontraditional exports is continuing to perform well and should be the leading sector. In fact, growth of this sector has exceeded expectations and if it continues unabated GDP growth could exceed 3%. A small improvement in the agriculture sector growth can be expected in 1976 as a result of price adjustments for various crops. The harvest of most crops in the early part of the year indicates a 2% increase. Cattle production should at least be maintained at 1975 levels given the improvement in the beef market and provided the weather continues to be good. In any event, Uruguay is likely to achieve a fourth consecutive year of positive GDP growth in 1976--a performance last achieved in 1963-66. C. MONEY AND CREDIT 10. The monetary and credit system of the Uruguayan economy in recent years has been characterized by negative real interest rates. This situation has contributed to a lack of longer-term financial savings and hence to an extreme shortage of longer-term credit for industry and agriculture. The only sources of long-term credit to the private sector have been the indexed sub- loans under Plan Agropecuario financed with IBRD funds and housing loans from the National Housing Fund. Private sector credit demands have been difficult to contain in the face of negative interest rates. Moreover, interest rates have not served to allocate financial savings to the most productive uses and real investment and growth have suffered as a consequence. The authorities instituted a series of measures in late 1974 to begin redressing the situation in conjunction with the complete liberalization of foreign exchange trans- actions in the financial market. Maximum effective interest rates to borrowers (including commission and taxes) were increased to 78.6% and interest rates payable on deposits were also increased and ranged from 18% to 48% depending on the duration of the deposit. Time and savings deposits increased signifi- cantly during the year in response to the upward adjustment of nominal interest rates. 11. The lower rate of inflation in 1975, combined with higher nominal interest rates, resulted in positive effective lending rates for the first time in about five years and, together with the elimination of sectoral credit allocation guidelines, helped to improve the resource allocation mechanism. In line with the overall economic policy of decontrol of the domestic price  -6- system, the authorities freed all interest rates on deposits and loans in early 1976, although a ceiling interest rate chargeable.on loans was set at 62% payable at maturity. Real interest rates on deposits were also attained during the year as the inflation rate experienced a rapid deceleration and commercial banks adjusted nominal interest rates upwards. Rapid progress has thus been made in permitting interest rates to play their resource allocation role, although the credit structure remains basically short-term. Neverthe- less, the achievement of adjustable interest rates should lead to an expansion of longer-term lending, which together with credit from the medium- and long-term industrial credit lines recently contracted with bilateral and multilateral lenders should alleviate the shortage of credit for investment. Table 3: SUMMARY ACCOUNTS OF THE BANKING.SYSTEM (% GDP) 1971 1972 1973 1974 1975 Net Foreign Assets - 3.9 - 3.1 1.0 - 0.7 - 3.4 Net Domestic Credit 29.1 27.2 19.9 20.7 23.9 Public Sector 7.3 7.8 4.2 4.4 5.2 Private Sector 16.6 20.4 16.5 19.1 19.6 Other. 5.2 - 1.0 - 0.8 - 2.8 - 0.9 SDR Allocation (-) 1.2 1.0 1.0 0.8 0.8 Monetary Liabilities 23.9 23.0 19.9 19.2 19.7 Currency 11.5 9.8 8.0 7.1 5.8 Demand Deposits 4.9 5.5 5.1 5.0 4.3 Time and Foreign Currency Deposits 7.5 7.7 6.8 7.1 9.6 Source: Central Bank, IMF 12. Desp