NEW CHARTER FOR CENTRAL BANK RAISES QUESTIONS

UNCLAS MONTEVIDEO 000608

SENSITIVE BUT UNCLASSIFFIED
SIPDIS

E.O. 12958: N/A
TAGS: ECON EFIN PGOV UY
SUBJECT: NEW CHARTER FOR CENTRAL BANK RAISES QUESTIONS


1. (SBU) SUMMARY: Parliament approved a new Central Bank charter on
October 22 that expands the number of Board members, spins off the
Superintendency of Saving Protection into an independent entity and
consolidates the remaining superintendencies. The new charter falls
short of giving more independence to the Bank, an aim of the bill as
it was originally drafted. With amendments added by Parliament, the
Central Bank must coordinate its inflation and exchange rate targets
with the Ministry of Economy and, where agreement is not reached,
the Ministry's position prevails. Another GOU goal to de-link the
Board's appointment cycle from the electoral cycle was excluded and
the charter gives increased importance to growth and employment
targets; the original bill prioritized price stability. END
SUMMARY.

2. (U) Parliament approved the new Central Bank charter on October
22; it was originally submitted in February 2006. The new charter
expands the number of Board members from three to five, spins off
the Superintendency of Saving Protection from the Bank to create an
independent entity, and consolidates all remaining superintendencies
(financial institutions, pension funds, capital markets and
insurance) into a single unit. The new superintendency will also
oversee the Financial Information Unit that guards against money
laundering/terrorism financing issues.

3. (SBU) The GOU's original bill aimed to increase the Bank's
independence from the Executive Branch as recommended by the IMF,
but was watered-down in Parliament. Under the new charter, the
President will continue to appoint Board members and they will all
continue to serve for the same term. The new charter also creates a
macroeconomic coordination committee in which three representatives
from the Ministry of Finance and three from the Central Bank will
set the Bank's price stability and exchange rate targets, as well as
coordinate information on the Bank's scope of work and economic
policy in general. In case of a tie, the Ministry's position will
prevail.

4. (U) In addition to the GOU's goal to make inflation control a
principal objective of the Bank, the new charter gives high priority
to growth and employment objectives. In a newspaper interview,
opposition National Party Senator Sergio Abreu indicated a group
within the Frente Amplio conditioned its vote for the bill on the
inclusion of growth and employment targets as equal to the goal of
price stability.

5. (SBU) COMMENT: The Central Bank traditionally consults closely
with the Ministry of Economy. While the current Minister of Economy
is likely to continue to promote prudent Central Bank monetary
policies, even in the face of election year pressures, that may not
be the case in the future and the implementation of the charter
bears close watching.
BAXTER