Uruguay experienced a major economic and financial crisis between 1999 and 2002, principally a spillover effect from the economic problems of Argentina. The economy contracted by 11% and unemployment climbed to 21%. Despite the severity of the trade shocks Uruguay's financial indicators remained more stable than those of its neighbours, a reflection of its solid reputation among investors and its investment-grade sovereign bond rating, one of only two in South America.
In 2004, the Batlle government signed a three-year $1.1 billion stand-by arrangement with the International Monetary Fund, committing the country to a substantial primary fiscal surplus, low inflation, considerable reductions in external debt and several structural reforms designed to improve competitiveness and attract foreign investment. Uruguay terminated the agreement in 2006 following the early repayment of its debt, but maintained a number of the policy commitments.
Vázquez, who assumed the government in March 2005,created the "Ministry of Social Development" and sought to reduce the country's poverty rate with a $240 million National Plan to Address the Social Emergency (PANES), that provided a monthly conditional cash transfer of approximately $75 to over 100,000 households in extreme poverty. In exchange, those receiving the benefits were required to participate in community work, ensure that their children attended school daily and had regular health check-ups.
In 2005, Uruguay was the first exporter of software in South America. The Frente Amplio government, while continuing payments on Uruguay's external debt, also undertook an emergency plan to attack the widespread problems of poverty and unemployment. The economy grew at an annual rate of 6.7% during the 2004–2008 period. Uruguay's exports markets have been diversified in order to reduce dependency on Argentina and Brazil. Poverty was reduced from 33% in 2002 to 21.7% in July 2008, while extreme poverty dropped
