With most of the COVID-related flexibility measures now withdrawn, bank solvency and asset quality have proven to be resilient, with an NPL ratio of 1.8%.

However, in the context of financial constraints, reserve requirements have been halved since 2019, and system-wide liquidity buffers have declined.

As a result, banks' exposure to the Central Government has increased, reaching 11.1% of total bank assets.

The proposed fiscal consolidation and funding plan, along with regulatory reforms that would restore reserve requirements to at least 15% of deposits, would strengthen bank liquidity buffers without undermining private credit.

This should be complemented by the approval of the Financial Stability Bill, efforts to recapitalize the Banco Central de Reserva (BCR), and a review of the legal framework for cooperative banks.

The Banco Central payment infrastructure (Transfer 365) is rapidly improving retail payments and has a high potential for financial inclusion.

The institution also stated that improved terms of trade are expected to help reduce the current account deficit this year, although it will remain high (5.4 percent of GDP), and fiscal policy will be expansionary. In a baseline scenario without market access, an increase in short-term public debt is expected, preventing the reestablishment of adequate reserve buffers.

Translated by: A.M