Why is Uruguay Expensive? High Costs Surprise Both Locally and Internationally

Expensive cost of living in uruguay

With a population of 3.4 million, Uruguay boasts the highest cost of living in Latin America, according to the global statistics platform Statista.

María Chaquiriand, a Uruguayan who has lived in Europe for 28 years, is always shocked by the high prices whenever she visits her family in Uruguay.

“The prices of shampoo, deodorant, toothpaste, as well as fruit, pasta, and coffee at the supermarket clearly show the difference,” Chaquiriand tells AFP from Valencia, Spain.

This 48-year-old industrial building maintenance manager also finds transportation, medications, bazaar items, and construction materials costly in Uruguay.

According to Numbeo, a collaborative database with worldwide pricing data, Uruguay is the most expensive country in South America and ranks 37th among 146 economies globally, surpassing Japan (47) and Spain (54).

In Uruguay’s capital, home to half of the country’s population, bread costs three times more than in Asunción, a dozen eggs more than double than in Tokyo, and a cappuccino 66% more than in Madrid.

22% VAT
Economists point to structural reasons.

“Uruguay has a Value Added Tax (VAT) of 22%, one of the highest in the world. Without favorable trade agreements, it faces tariffs of 25% to 35%. Adding a consular fee of 5%, imported products can have a tax burden of 50%,” Alfonso Capurro of CPA Ferrere consulting tells AFP.

There are additional levies on fuel and vehicles.

Uruguay has the most expensive gasoline in the Americas and among the priciest globally, at 76.5 pesos per liter (about $2), according to Global Petrol Prices.

Numbeo places Uruguay fifth among nearly a hundred countries for the cost of a new Volkswagen Golf 1.4.

“Half the price of a car is taxes,” summarizes Javier de Haedo, director of the Economic Situation Observatory at the Catholic University of Uruguay.

Fuel prices are also influenced by distribution and marketing costs, he adds in a discussion with AFP.

“Happy Problem”
In addition to tax pressures, Uruguay features cross-subsidies, such as the 10% retention on diesel prices to fund public transport, notes Capurro.

Regulations, protections, and registration mechanisms effectively act as barriers to importing fruits and vegetables and reduce competition in the personal hygiene and cleaning product markets.

Moreover, Uruguay is transitioning to an upper-middle-income country, thus the average wage is high, and services, which have a large wage component, become more expensive, explains Capurro.

“We are more expensive, obviously, although that’s actually a ‘happy problem’ because we want to be rich, not poor,” he clarifies.

Uruguay has a Gross National Income (GNI) per capita of $18,000, the highest in Latin America, according to the latest World Bank ranking.

The current national minimum wage is about $580. In Paraguay, the country with the lowest cost of living in South America according to Numbeo, it is $370.

“This country is so expensive!” exclaims José Luis Díaz, a 54-year-old hair salon worker in Montevideo. “Wages increase, but the basic basket increases much more. The money is not enough to live here.”

His strategy to make ends meet? “I watch my electric consumption, don’t eat out much, and look for deals,” he tells AFP.

Exchange Rate Lag
Uruguay is also costly due to macroeconomic factors.

“In this 2020-2023 cycle, very good export prices combined with significant foreign direct investment, which generated a large dollar flow that ended up strengthening the peso,” points out Capurro.

The fight against inflation, a priority for the center-right government of Luis Lacalle Pou who took office in 2020, also contributed to the appreciation of the Uruguayan currency.

To curb consumption, the Central Bank raised its monetary policy rate. Although inflation in March moderated to 3.8% over 12 months, its lowest level since August 2005, the benchmark interest rate remains high, at 8.50%.

“The price of the dollar in nominal terms dropped 3% in the last fiscal year and has accumulated a 15% decrease over the past three years,” the Cuesta Duarte Institute, which advises unions, recently stated.

The currency misalignment makes Uruguay less competitive compared to its trading partners, leading to complaints from rural producers, industrialists, and the tourism sector.

“Based on an index of 100 for the average of the 21st century, we are now at 28% exchange rate lag compared to countries outside the region,” warns De Haedo.

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