Journal Issue


International Monetary Fund
Published Date:
August 2008
  • ShareShare
Show Summary Details

I. Background

1. Accomplishments. Over the last five years real GDP rose by about 25 percent (more than in the previous 12 years), thanks to the pursuit of sound macroeconomic policies and a favorable external environment. Public finances remained in surplus throughout the period; consolidated public debt as a percent of GDP was reduced by more than half to less than 30 percent; the financial system strengthened considerably and no longer poses systemic risks; core inflation was reduced by about three–quarters to less than 5 percent (although it has risen in 2008 mainly due to supply shocks); international reserves more than tripled, to about US$3 ¼ billion; following a downside overshooting, the guaraní strengthened against major currencies (in line with fundamentals); per capita income more than doubled to over US$2,500; and the poverty rate was reduced by ¼ to about 35 percent (Box 1).

A. Developments

2. Output. Real GDP growth in 2007 is estimated at 6¾ percent, driven by a major expansion of the agriculture sector (almost 25 percent). Non–agricultural GDP increased 3 ½ percent, reflecting a good performance of the service sector, offset in part by the lack of dynamism of the secondary sector, and the temporary contraction of the livestock sector. The unemployment rate fell to about 5 ½ percent in 2007, the lowest of the past decade, although underemployment remains high at over 25 percent. Real GDP is expected to grow by at least 5 percent in 2008, owing to a continued vigorous expansion of agriculture.

Paraguay: Real GDP

3. Inflation. Core inflation has risen since mid–2007, reaching 13 percent (y–o–y) in June 2008 (about ½ point lower than headline inflation).1 About 2/3 of core inflation is due to food price shocks, either worldwide (cereals and milk) or country–specific (beef), as well as higher fuel prices. Non–tradable prices accelerated to 9 percent (y–o–y) in June 2008, indicating the emergence of spillover effects from supply shocks and expected wage pressures to the rest of the economy.

Paraguay: Inflationary Pressures

4. Budget. Despite considerable expenditure pressures in the run–up to the April 2008 general elections, fiscal policy remained under control and continued to be adequately countercyclical.2 Tax collections, particularly VAT and import duties, have been buoyant, increasing by over 20 percent through April. At the same time, expenditures were kept in line with the Finance Ministry’s financial plan. As a result, the overall fiscal surplus through May 2008 was significantly larger than expected, and reached nearly 1½ percent of GDP.

Paraguay: Real Fiscal Aggregates

5. Monetary stance. In response to inflationary pressures, the authorities resumed the tightening stance initiated in the second half of 2007, raising interest rates on sterilization bills (LRM) by 150 basis points in March 2008 (the 182–day LRM rate is about 7 percent).3 Notwithstanding these efforts, real interest rates have become negative over the last several months. Strong foreign exchange inflows have led to a sharp increase in international reserves, to about US$3 ½ billon by end–June 2008. Despite large placements of LRM to contain the resulting monetary expansion, currency in circulation increased by over 35 percent (y–o–y) in June 2008. In an effort to control liquidity, reserve requirements were raised from 15 to 17 percent in June 2008.

Paraguay: Monetary Indicators

Paraguay: Financial Indicators

6. Financial system. The banking system remains sound and has not been affected by the global financial turmoil. The average capital adequacy ratio exceeds the 10 percent regulatory minimum. Credit growth of over 70 percent (y–o–y) in May 2008 remains a concern but it has not affected the quality of the portfolio thus far. Nonperforming loans continue to decline (reaching about 1 percent on average) and remain adequately provisioned. Liquidity risks are low, with LRMs representing about 95 percent of banks’ investment portfolio, and funding from parent banks and banks abroad accounting for less than 2 percent of liabilities in May 2008.

Figure 1.Paraguay: Real Sector Developments

Contrary to the regional pattern, growth accelerated strongly in 2007, supported mainly by a record agricultural production. The increase of core inflation since mid–2007 reflects mostly food supply shocks, something also experienced by other countries in the region.

Source: Paraguayan Authorities and Fund staff estimates.

Figure 2.Paraguay: Fiscal Developments

Significant progress has been made in reducing fiscal imbalances in line with general regional trends, although Paraguay has performed better than its MERCOSUR partners. The challenge is to preserve fiscal sustainability and create the fiscal space to meet essential social and infrastructure spending needs.

Source: Paraguayan Authorities and Fund staff estimates.

Box 1.Paraguay: Assessment of Performance under the SBA

Overview. Performance under the current SBA (2006–08) has been strong. Virtually all the macroeconomic objectives were met, and most structural reforms under the program have been achieved, although there were some delays, especially in the financial sector. The program was based on a strong macroeconomic framework supported by four pillars of structural reforms in the following areas: (i) public sector; (ii) financial sector; (iii) enhancing growth; and (iv) reducing poverty.1 The main macroeconomic objectives were to lay the foundation for a gradual but sustainable increase of economic growth to 4–5 percent, lower inflation to industrial country levels, reduce public debt levels to about 30 percent of GDP, and build an adequate external reserve cover. With the exception of the inflation objective, the macroeconomic targets were exceeded, some by large margins.

Key Macroeconomic Targets under the SBA
Real GDP growth (%)
Inflation (y-o-y, %)2.5-7.512.
Overall fiscal balance (% of GDP)
Public debt (% of GDP)1/33.727.731.722.430.517.1
Reserves (NIR) (mn of US$)2/204063375932700

Non financial public sector (excluding central bank).


Public sector reforms. Achievements under the program have been commendable, especially in the revenue mobilization area. Significant improvements were achieved in modernizing the tax and customs administrations, especially regarding new information systems and collection through banks. With the implementation of a commitment control system and development of capital sector investment system, budgetary deficiencies have been reduced. Nonetheless, there has been little progress in reducing budget rigidities given the continued congressional approval of unfunded expenditures. Furthermore, a comprehensive pension reform, including through the consolidation of various pension funds, is needed.

Financial sector reforms. There have been major improvements in the health and the regulatory framework of the financial sector, although reform implementation was uneven and there were delays. The most notable achievement has been the significant improvement of BNF, from an essentially insolvent institution to one with a capital adequacy ratio of over 20 percent, as well as reducing the NPL rate from about 40 at end–2005 to about 8 percent at end–2007. At the same time, prudential regulations have been enhanced, including through the adoption of a modified Resolution 8/03 (to be implemented from October 2008). Although the process has been delayed and protracted, the authorities are now implementing measures to enhance BCP’s financial position.

Pro–growth agenda. While considerable progress has been achieved in improving the business climate, a lasting improvement of SOE performance has proven elusive. Performance under results–oriented contracts has been uneven, with three of the five SOEs not meeting their key targets. Nonetheless, more transparency on SOE performance has been brought to bear with the publication of their quarterly performance reports ( The investment climate has been improved particularly with regard to the facilitation of opening new firms, and the creation of a business development gateway by the government and the private sector (

Social safety net. The creation of a social safety net to protect the most vulnerable has been a key success under the program. The program set out to create a conditional cash transfer (CCT) program (Tekoporã) for poor families (see Box 3).

1 The program builds on achievements of a previous SBA (2003–05) including: (i) significant fiscal consolidation facilitated by a fiscal adjustment law and a customs code; (ii) a revamp of the banking resolution framework; (iii) a reform of the public pension system to reduce deficits; and (v) the introduction of a second–tier banking law.

7. External sector. The external position strengthened further in the first half of 2008, mostly due to high exports earnings associated with high international food prices, in particular of soybeans (the main crop). Faced with large inflows, the authorities intervened and purchased a considerable amount of foreign exchange in the first half of 2008, surpassing the international reserve target for end–December 2008 by about US$600 million, while the guaraní was allowed to appreciate by almost 20 percent against the U.S. dollar in the same period (Box 2).

Paraguay: Foreign Exchange Market

8. Political situation. After 61 years in power, the Colorado Party lost the presidential elections in April 2008.4 The newly–elected President Fernando Lugo, a former bishop, will assume office on August 15, 2008. The transition to the new government has been smooth, although Congress will be fragmented. Governance in such an environment could prove difficult, and the new government will have to reach political consensus with opposition parties to pursue its legislative agenda. President Lugo has already designated Mr. Dionisio Borda as Minister of Finance, sending a clear signal to the private sector that his government will be committed to macroeconomic stability.5

Paraguay: Results of Presidential Elections

Figure 3.Paraguay: Monetary Developments

In response to large foreign exchange inflows, the central bank has increased foreign exchange purchases and let the exchange rate appreciate. Partial sterilization has led to high growth of monetary aggregates, contributing to inflationary pressures.

Source: Paraguayan Authorities and Fund staff estimates.

Figure 4.Paraguay: Financial System Developments

While financial markets are the least developed in the region, they continued expanding and strengthening as macroeconomic conditions continued to improve.

Source: Paraguayan Authorities and Fund staff estimates.

9. Social conditions. Despite high economic growth and advances in employment, the social situation has deteriorated due to continued and sustained increases in food prices, particularly for the urban poor. There are increasing difficulties in the eastern provinces, where the use of land in highly–mechanized soybean production has fueled conflict with poor small–scale farmers and landless peasants. The new government is expected to implement social emergency measures, but their fiscal impact is as yet unknown.

B. Performance

10. Quantitative. Performance under the program has generally been strong. All quantitative performance criteria through end–March 2008 have been observed, most with large margins. All end–June 2008 performance criteria are expected to have been met too (Table 1).6

Table 1.Paraguay: Quantitative Performance Criteria
Fiscal targets
1. Overall balance of the central administration (floor, in billions of guaranies)1/1841,054✓3301,162✓0546✓95802✓213
2. Wage bill of the central administration (ceiling, in billions of guaranies)1/2,0551,940✓3,0862,949✓4,4434,360✓1,1951,170✓2,429
3. Overall balance of the public sector (floor, in billions of guaranies)1/2021,675✓4592,033✓0930✓1721,292✓253
Monetary targets
4. Net international reserves (floor, in millions of U.S. dollars)2/1,9002,153✓1,9152,182✓1,9202,462✓2,4122,638✓2,462
5. Net domestic assets (ceiling, in billions of guaranies)2/−6,645−7,762✓−6,700−7,756✓−6,016−8,229✓−8,436−9,285✓−8,692
Public debt and arrears targets
6. Contracting or guaranteeing of nonconcessional external debt by the NFPS (ceiling, in millions of US$)1/5000✓50010✓500254✓50070✓500
Continuous PCs
7. Contracted or guaranteed short-term external debt by the NFPS00✓00✓00✓00✓0
8. Non-accumulation of external debt arrears00✓00✓00✓00✓0

Cumulative flows from the beginning of the calendar year.

Stocks. NIR is adjusted upward (downward) for any increase (decrease) in reserve requirement for foreign currency deposits (above pre–specified amounts) and upward by the amount of any program disbursements. Similarly, the NDA target will be adjusted downward (upward) following the adjustment in the NIR.

Sources: Paraguayan authorities; and Fund staff estimates.
Paraguay: Performance for March 2008
(In percent of GDP)
Fiscal Targets
Fiscal balance1/0.11.2✓
Wage bill1/1.81.7✓
Consolidated balance0.32.1✓
(In percent of currency)
Monetary Targets
Net international reserves83.4120.4✓
Net domestic assets−59.2−86.4✓

Central administration.

Sources: Paraguayan authorities and Fund staff.

11. Structural. Progress continued to be made in implementing structural reforms, but there have been delays in implementing the structural agenda. However, most structural benchmarks (SB) for 2008 are expected to be implemented before the end of the arrangement (Table 2).7

Table 2.Paraguay: Structural Conditionality Under the Program
Public Sector Reform
A. Design of an action plan to develop an effectiveSBend-Jun 2006
commitment control system for the public sector
and rationalize the Treasury account system
B. Preparation of a tax codePCend-Dec 2006
C. Draft implementing regulations for the tax procedures codeSBend-Sep 2007
D. Develop an action plan for a comprehensive pension reformSBend-Sep 2007
E. Design a public sector investment systemSBend-Dec 2007
F. Establish a commitment control systemSBend-Dec 2007Done.
G. Consolidate all Treasury accounts not established by lawSBend-Jun 2008
into a Single Treasury Account
Financial Sector Reform
H. Audited and inspected CAR (fully provisioned) of 5 percentSBend-Sep 2006
for BNF at end-June 2006
I. Design an action plan to strenghthen financial sector reformSBend-Jun 2007
reform and increase compliance with Basel Core Principles
to at least 80 percent (in line with regional best practices)
J. Announce a strategy to strengthen the financialSBend-Jun 2007
position of the Central Bank and a timetable for
its implementation
K. Audited and inspected CAR (fully provisioned) of 10 percentPCend-Mar 2007
for BNF at end-December 2006
L. Develop a medium-term business plan for BNF that includes aSBend-Jun 2007
strategy to reduce costs, increase asset recovery, and
improve credit and risk management
M. Send a bill to Congress that reflects the legal andSBend-Sep 2007
budgetary implications of the agreed plan to strengthen
the financial position of the Central Bank
N. Develop legal and regulatory framework to revamp theSBend-Sep 2007
In progress. Expected to be completed before
payment system and preparing a draft paymentthe end of the arrangement.
system law
O. Development of an effective supervisory and regulatorySBend-Sep 2007
framework for the cooperative sector
P. Reinstate a modified Resolution 8/03 to become effective onSBend-Sep 2007
Partly done. Resolution was approved on time,
January 1, 2008but will become effective after October 1, 2008.
Q. Design a strategy for the development of capital marketsSBend-Dec 2007
R. Implement prudential regulations in line with BCP operationalSBend-Dec 2007
S. Send to Attorney General for his review and clearanceSBend-May 2008
Inprogress. Expected to be completed before
the claims in dispute between BCP and the Min. of Financethe end of the arrangement.
Pro-Growth Reform
T. Design a plan to improve business climateSBend-Sep 2006
U. Implement result-oriented management contract forSBend-Dec 2006
V. Implement the plan to improve the investment climate designedSBend-Sep 2007
in September 2006
W. Observance of targets under the result-oriented managementSBend-Dec 2007
Partly done. Contracts signed but problems with 2
contracts for ANDE, COPACO, ESSAP, INC, and PETROPARof the 5 state-owned enterprises.
X Sign result-oriented management contracts for 2008 withSBend-May 2008
Partly done. Contracts not signed, but some
contracts for ANDE, COPACO, ESSAP, INC, and PETROPARbusiness plans completed.
Social Safety Net
Y. Create a conditional cash transfer mechanism for 7,000SBend-Dec 2006
families living under extreme poverty based on contracts
with beneficiaries
Z. Increase the coverage of the conditional cash transferSBend-Dec 2007
program to 15,000 families and establish mechanisms
for the evaluation of results
AA Increase the coverage of the conditional cash transferSBend-May 2008
program to 19,000 families

SB = structural benchmarks; PC = performance criteria.

Source: Paraguayan authorities.
Paraguay: SBA Performance(May 2006 – Mar 2008)
Number of TargetsPerformance
All Targets676496
Quantitative PCs4242100
Continuous PCs22100
Structural PCs22100
Qualitative SBs21 1/1886

Of which 18 SB fully observed and 3 SB partly observed. There have been delays in implementation, which have led to delays in completing previous reviews. One SB had to be reset and modified into three new benchmarks.

Sources: Paraguayan authorities and Fund staff.PC = Perfromance Criteria; SB = Structural Benchmark.
  • Cash transfer program. This program covered over 19,500 families by end–May, or above the 19,000 families target (SB for end–May 2008).

  • Treasury accounts. In an important move towards reaching a single Treasury account, the authorities consolidated all accounts that are not established by law into one account at the BCP in early–July 2008 (SB for end–June 2008).

  • Central Bank’s balance sheet. As part of the strategy to strengthen the financial position of the Central Bank (BCP), the authorities are expected to send to the attorney general the disputed claims between the BCP and the MOF (SB for end–May 2008).

  • State–owned enterprises. The benchmark related to the signing of revised resultoriented management contracts and corresponding development of strategic business plans for five large state–owned enterprises (SOE) was only partly met (SB for end–May 2008).8 Contracts signed at end–2006 are still in effect (until August 2008), but new ones were not signed as managers are political appointees and realized they might be removed (see ¶23). While most SOEs prepared timely draft business plans, staff viewed them as generally weak as the objectives were not ambitious and the targets were unclear.

Box 2.Paraguay: Foreign Exchange Inflows

Paraguay has received substantial foreign exchange inflows recently. This is related to a combination of medium–term trends and favorable cyclical factors:

  • Trade Balance. The record agriculture production in 2007 and the price increases of primary products led to a rise in exports of about 25 percent. Although this impact was partly offset by an expansion of imports, the trade balance improved by over 1 percent of GDP. With continued strengthening of commodity prices in early 2008, this strong external position is expected to be sustained.

  • Binational Entities. These inflows—amounting to 5 ¾ percent of GDP in 2007—are twice as large as in 2003. Increased inflows reflect the completion of the Yacyretá dam, the increase of royalties from the Itaipú dam, and the increase of social expenditures by both entities.

  • Capital Inflow. Foreign direct investments have jumped from ½ percent of GDP in 2003–05 to over 1 ½ percent in 2006–07. This reflects in part investment from multinational companies in the soybean and telecommunications sectors.

Paraguay: Sources of Foreign Exchange

Paraguay: Uses of Foreign Exchange

Paraguay: Exchange Rate and Reserves

These foreign exchange inflows have led to upward pressures on the exchange rate. The guaraní has appreciated by about 20 percent with respect to the U.S. dollar between January 2007 and June 2008. In nominal effective terms, the exchange rate has appreciated by about 10 percent over the same period.

The central bank has intervened in the foreign exchange market to smooth temporary or seasonal volatility. The central bank has stepped up interventions to reduce volatility and prevent the disruptive impact of seasonal transactions on the foreign exchange market. As of end–2007, the level of reserve was adequate by standard rules–of–thumb of reserve coverage and represented almost 4 months of imports of goods and services or over 3 ½ times short–term external debt (excluding foreign currency deposits).1

1 The Greenspan–Guidotti rule suggests a reserve coverage of 100 percent of short–term debt. An alternative benchmark, based on the Jeanne–Rancière (2007) model, suggests that, at over 20 percent of GDP, reserves are somewhat higher than the optimal level of 16 percent, determined using parameters tailored with country–specific data.

Figure 5.Paraguay: Balance of Payments Developments

The external position is expected to remain strong in 2008, largely on account of surging soybean prices, and despite a moderat slowdown in regional trade partners.

Sources: Paraguayan Authorities and Fund staff estimates.

Figure 6.Paraguay: Program Performance

The program has remained on track throughout the period. Fiscal discipline has resulted in surpluses of the central and overall public sector. The external position has strenghtened, but its impact on currency has only been partly sterilized.

Sources: Paraguayan Authorities and Fund staff estimates.

II. Outlook

12. Prospects. As a primary commodity exporter, Paraguay should continue to benefit from the strong global increase in commodity prices, while investments realized over the past few years in the livestock and agricultural sectors should sustain the ongoing expansion and increase productivity. By contrast, the appreciation of the guaraní, could penalize nontraditional exports. While the supply shock related to higher international oil prices is a drag on the economy, the medium–term outlook for Paraguay remains positive.

13. Risks. Paraguay continues to be vulnerable to an eventual deceleration of the world economy and setbacks in international prices and demand for the country’s commodity exports. The downside risks for growth in Paraguay are increasing, although not for this year given that the agricultural season has been quite good. If the global financial turbulence spreads, it could contaminate the headquarters of foreign–owned banks in Paraguay, leading to a possible credit crunch. There is also the political risk that the new government might fail to assemble a durable working coalition in Congress, which might undermine the fiscal balance and the structural reform agenda that needs to be implemented to sustain high economic growth.

III. Discussions

14. Focus. Discussions with the current authorities focused on ensuring that the new Government takes over an economy in sound shape in August 2008. The authorities reiterated their commitment to the program, and their intention to go out with the reputation of being good economic managers. Staff stressed the need to continue implementing countercyclical policies by sustaining a tightening stance as the economy was growing above potential while remaining flexible and ready to relax policies if there was a clear indication of a sudden softening in economic activity.

15. Engagement. The incoming authorities expressed their desire to maintain a close dialogue and engagement with the Fund (including through intensified technical assistance). Although they had not taken a formal decision, they seemed unlikely to request a successor Fund arrangement immediately after taking office in August 2008. The incoming authorities also expressed their intention to cement macroeconomic stability and deepen structural reforms over the next several years.

A. Macroeconomic Management

16. Fiscal policy. There was agreement to continue with tight policies as an effort to contain inflationary pressures. In particular, it was agreed to save the over–performance of the first half of the year with the objective of reaching an overall surplus of at least ½ percent of GDP in 2008, compared with the program objective of overall balance. This is expected to be achieved through a combination of good revenue performance and tight expenditure controls established in the Finance Ministry’s financial plan. Staff urged the protection of needed capital expenditures, the execution rate of which has generally been low. However, there is a risk that the new government will be under pressure to rapidly increase social spending, especially in light of increasing food and fuel prices that are hitting the poor. Already, Congress passed a new law that would have increased consumer subsidies for electricity by about ½ percent of GDP (overriding a President veto).9 Staff urged the new economic team to resist pressures to increase expenditures sharply as this would exacerbate inflationary pressures, and in turn undermine the policy of protecting the real incomes of the poor.

Paraguay: Fiscal Program1/(In percent of GDP)
Total Revenues18.318.018.518.4
o/w Tax12.011.711.812.3
Total Expenditures17.917.018.517.9
o/w Wages7.
o/w Capital4.
Overall Balance0.

Central Government.

Sources: Paraguayan authorities; and staff estimates

17. Monetary policy. In view of the inflationary pressures, staff stressed the need to tighten monetary policy further, even if this may lead to some further appreciation of the guaraní. Staff expressed concern about the strong growth of monetary aggregates, the negative real interest rates, and the likely negative impact of high credit growth on credit quality once the current favorable conditions subside. The authorities argued that the high growth of monetary aggregates reflects in part higher money demand due to increased confidence in the economy, and that despite rapid growth, credit to the private sector is only 18 percent of GDP, well below the level prior to the 2002 crisis.10 Nevertheless, the monetary authorities agreed in principle on the need of further tightening, while noting that the LRM rate adjustment in late March 2008 has not had its full effect. They also claimed that any additional tightening may attract capital inflows (especially in a low interest rate environment globally) and would further complicate monetary management.

Paraguay: Monetary Program1/(In percent of currency the previous period)
Currency Issue15.328.311.817.0
Reserves (NIR)87.1114.811.882.6
Credit (NDA)-71.8-86.50.0-65.6
Credit to public sector−13.5−18.3−4.6−5.7
Credit to banks−27.4−58.75.7−31.6
Other items-30.9-9.6-1.2-28.2

Central Bank Accounts.

Sources: Paraguayan authorities; and Fund staff estimates

18. External policy. The favorable balance of payments prospects in 2008 translated into sustained appreciation pressures. The current account surplus is expected to narrow moderately from 2 percent of GDP in 2007 to 1¾ percent in 2008 as exports remain high and imports continue to grow at a steady pace consistent with high economic activity and high oil prices. In response to continued foreign exchange inflows and upward pressure on the guaraní, the authorities and staff agreed on the need to maintain a flexible exchange rate regime and restrict interventions to limit the risks to the inflation outlook and the cost of sterilization. Progress continues toward resolving remaining claims in dispute with foreign creditors/suppliers.11

Paraguay: Balance of Payments(In percent of GDP)
Current Account1.
o/w Exports47.545.753.640.9
o/w Imports−55.0−50.0−58.8−44.3
Capital Account2.84.4-0.22.6
Public sector (net)1/−
Private sector (net)2/3.14.3−0.52.2
Overall Balance4.

General government only.

Includes errors and omissions

Sources: Paraguayan authorities; and Fund staff estimates.

B. Institutional Strengthening

19. Tax administration. Staff underscored the need to preserve and enhance the considerable gains in tax and customs administration of recent years, and recommended additional efforts to strengthen the operations of the large taxpayer unit and the use of a riskbased auditing approach. Following recent FAD technical assistance, the tax collection agency (SET) has developed a medium–term strategic management plan. Staff urged the incoming authorities to approve the plan in order to ensure administrative continuity for tax administration. Progress continued on strengthening ex–post audits and the consolidation of the bank collection system. Customs enforcement has also been significantly improved with the purchase of state–of–the art electronic equipment for scanning vehicles and containers to detect contraband and illegal products.

20. Expenditure control. A key structural objective under the program has been the strengthening of the public expenditure control system. So far, the newly implemented expenditure commitment control system is working well, although additional fine–tuning is needed.12 The authorities have consolidated all accounts that are currently not established by law into a Single Treasury Account. The mission also urged the initiation of the process to incorporate the rest of the accounts. Going forward, deeper reforms will be needed in the medium term to address weaknesses in the budgetary process, notably the ability of Congress to completely revise the budget presented by the executive branch.

21. Central Bank. Progress continues to be made toward strengthening the financial position of the BCP.13 Following the authorities’ strategy of August 2007, the Ministry of Finance is in the process of transferring bonds to the Central Bank for the equivalent of ¼ of one percent of GDP to regularize the BCP’s claims that are not in dispute. The authorities sent in May 2008 amendments to a BCP bill in Congress, increasing the ceiling of potential budgetary transfers to the Central Bank to cover its losses from 0.2 to 0.5 percent of GDP annually. The bill has been unanimously approved by the Senate’s Finance Committee, which makes it likely that both houses of Congress will approve the law in the near future. In addition, the Ministry of Finance is in the process of forwarding the list of the BCP’s claims that are still in dispute to the Attorney General for his clearance and approval. To further enhance the BCP’s de facto independence, future draft legislation should aim at revising the appointment procedure of the Central Bank’s governing body.14

22. Prudential regulations. The authorities have shown a strong commitment to implement their strategy (designed in June 2007) to enhance the regulatory and supervisory framework for the financial system in line with Basel I criteria. Banks will start reporting information to the Superintendency of Banks based on a strengthened framework from June 2008 onwards. Regulation on increased protection of supervisors is to take effect from September 2008. The final steps are also being taken to have new standards for financial risks management practices by January 2009.

23. State–owned enterprises. Staff expressed strong concern about the poor management and widely reported deficient provision of services of public enterprises (despite generating overall surpluses as a group), which was the weakest area under the program.15 While welcoming the increased transparency brought about by the publication of quarterly assessments, staff noted that enforcement of recommendations and accountability continued to fall short of expectations. Staff regretted that the benchmark on the signing of new resultoriented contracts (setting revised performance targets), and the corresponding development of strategic business plans for all the SOEs that are being monitored was not fully observed. This was associated with the uncertainties of the political transition period given that the management of most SOEs is not expected to remain in office. Staff urged the incoming authorities to address vigorously short–comings in this area, as they hamper growth potential. Apart from signing new contracts to increase efficiency, measures could include the early establishment of new boards, and increased private sector participation.16

C. Poverty Alleviation

24. Social policy. The mission commended the authorities on the continued successful implementation of the conditional–cash transfer program (Tekoporã) for low–income households (Box 3). The end–May 2008 benchmark was met, and more than 19,500 families received assistance. The mission noted that extreme poverty has risen recently mainly due to high food and fuel inflation, notwithstanding the decline in overall poverty levels, and urged the wider expansion of Tekoporã to urban areas. The authorities concurred that urban poverty is a problem that needs to be addressed, and they are considering increasing the coverage to about 100,000 families in 2008 (doubling the original target). However, rapidly increasing the number is likely to face logistical difficulties, including the development of adequate identification and monitoring infrastructure and human resources, although the financial costs should remain modest (about ⅓ percent of GDP). The new government intends to implement new social measures including land reform.

Paraguay: Tekopora Program

Box 3.Paraguay: The Conditional Cash Transfer Program

The creation of a social safety net was one of the four pillars of the stand–by arrangement. It was realized early on that despite increasing growth, some of the people at the bottom of the social ladder would need assistance in order to progressively escape from the vicious circle of poverty. With the assistance of the IDB, a conditional cash transfer (CCT) program (Tekoporã) was set up in 2005, originally on a pilot basis. CCTs have proven quite effective in reducing extreme poverty in several Latin American countries, including Brazil and Mexico.1

The Tekoporã program is aimed at mitigating adverse social conditions of people living in extreme poverty in Paraguay in order to reduce its inter–generational transmission. The idea is to encourage the formation of human capital in poor households by reducing financial constraints. This is done through financial assistance in exchange for meeting certain conditions by families under the program, including school attendance, vaccination, and basic sanitation. The program covers extremely poor families with children under the age of 15 or with pregnant women in poor, rural provinces (“departamentos”). Selection of families is based on a multi–dimensional quality of life index, drawing on the 2001 Household Survey.

Each family receives a modest amount of financial assistance to cover monthly food and education expenses. The assistance amounts up to Gs. 180,000 (about US$45), with a minimum of Gs. 60,000 (about US$15). The total fiscal cost in 2007 was less than 0.1 percent of GDP. Although the amount of monthly assistance is fairly low, the idea is to set it at a level that reduces work disincentives among adults, and to encourage human capital accumulation among the young, while meeting some basic needs.

The program has been quite successful on several levels.2 Originally set to cover 7,000 families in 2006, the number has increased to over 19,500 by end–May 2008, and there are plans to increase the coverage to 100,000 families (almost half of the people in extreme poverty). The program has had a positive impact on school attendance, especially among groups likely to drop out. More fundamentally, it has had a sizeable impact on consumption and in reducing extreme poverty, even after taking into account the transfers themselves. In other words, beneficiaries have been able to autonomously generate income rather than relying solely on the transfers to exit extreme poverty. The main shortcoming has been failure to increase vaccination rates significantly (despite increased health center attendance), and in its inability to raise male labor supply.

Going forward, the main challenge is to scale up the program to cover a lot more poor people, including in urban areas. A recent survey has shown that while the overall level of poverty fell from 38 ¼ percent in 2005 to 35 ½ percent in 2007, the level of extreme poverty rose during the same period from 15 ½ to 19 ½ percent, in part due to a sharp increase in food and fuel prices. Scaling up the program will require developing adequate infrastructure and human resources for service delivery and effective monitoring. Moreover, the extension of the program to urban areas will involve the development of different identification and monitoring systems. Finally, to enhance monitoring and accountability, it would be important to introduce a debit card for beneficiaries, especially in urban areas, rather than the current cash distribution system.

Paraguay: Evolution of Poverty

1 See, The Economist, “When Bribery Pays”, March 13, 2008.2 For a complete assessment, see, Soares and Britto, 2007, “Confronting Capacity Constraints on Conditional Cash Transfers in Latin America: The Cases of El Salvador and Paraguay”, and Soares et al., 2007, “Los Logros y Carencias de las Transferencias de Efectivo Condicionadas : Evaluación del Impacto del Programa Tekoporã del Paraguay”, UNDP International Poverty Centre, Brasilia, Brazil.

IV. Staff Appraisal

25. Overall. Macroeconomic outcomes have been significantly better than anticipated and policy implementation remained strong throughout the program period. There is a broad consensus that the program was very successful in cementing macroeconomic stability, reinvigorating growth, deepening structural reforms and alleviating poverty. All performance criteria and some structural measures for 2008 are expected to have been fully observed. The authorities are to be commended for their achievements and the strong performance. The incoming administration is encouraged to safeguard the reforms implemented and deepen those that are in train.

26. Fiscal. The consistent maintenance of sound fiscal policies throughout the program despite trying political circumstances is worth noting. In fact, Paraguay has recorded fiscal surpluses since 2004, thereby setting public debt levels on a firmly downward trend. Since 2007 the authorities have appropriately adopted a counter–cyclical stance in view of the strength of the economy. This performance reflects the implementation of financial plans that had to offset the impact of expansionary budgets approved by Congress, including large salary increases. As a result, there has been an increase in budget rigidities, and a weakening of credibility vis–à vis economic agents regarding the government’s fiscal stance. Staff urges the authorities to save revenue overperformance to strengthen its counter–cyclical stance and consider a reform of the public financial management framework that would limit Congress’ ability to completely revise the overall annual budget.

27. Monetary. Staff noted that improved fundamentals, in particular high economic growth and increased confidence in the guaraní, have contributed to increased real money demand and financial deepening. However, the current expansion of monetary aggregates exceeds what would be warranted by fundamentals, and the staff urged the authorities to tighten their policy stance. In addition, the uptick of core inflation has spread beyond the initial supply shocks, and raises the risks of a wage–price spiral. In this context, staff welcomes the monetary tightening of March and June 2008 and encourages the authorities to remain vigilant to prevent a monetary overhang, but notes that the Central Bank’s strong concern for its net income position might have deterred a more determined monetary action, reinforcing the case for a rapid recapitalization of the Central Bank.

28. Exchange rate. The authorities have appropriately maintained a flexible exchange rate policy. As the external position has remained strong, the guaraní has appreciated by about 20 percent in the first half of 2008 and international reserves substantially exceeded program targets, thereby reducing Paraguay’s vulnerability to shocks. The external outlook for 2008 continues to be favorable, and staff welcomes the authorities’ commitment to a policy of limited intervention.

29. Reform. The authorities continued to make progress in all areas of the reform agenda. While the structural agenda had some setbacks in late 2006 and early 2007, the impetus for financial sector reform was regained in the second half of 2007 and the authorities began to adopt key measures, especially on designing a strategy to strengthen the Central Bank’s balance sheet. On SOE reform, the authorities took the first steps towards a more determined restructuring in terms of disclosing information and rising awareness about the operations of these companies. Nonetheless, staff regrets that reforms in this area fell short of expectations, and urges further and deeper reforms to unleash the potential growth of the economy.

30. Vulnerabilities. On the external front, the environment for Paraguay’s export sector may suffer if external demand falls, especially as the tightening of credit conditions in mature economies may adversely affect Paraguay’s main trading partners. On the domestic front, there is a risk of an overheating economy that might stoke further inflationary pressures, exacerbating second–round effects from recent fuel and food price increases. On the political front, there is a risk that the new government might fail to establish a working majority coalition in Congress. This could lead to backtracking from recent reforms and increased spending requests, which would undermine macroeconomic stability.

31. Review. The staff supports completion of the sixth and last SBA review in light of the good performance and program ownership.

Table 3.Paraguay: Selected Economic and Social Indicators

I. Social and Demographic Indicators
Area (thousand sq. km)407Income distribution (2002)
By highest 20 percent of households (percent)61
Population (2005)By lowest 20 percent of households (percent)2
Total (in millions)5.9
Rate of increase (percent a year)1.9Health (2004)
Density (per sq. km.)14.5Physicians per 1,000 people1.1
Unemployment (2007)5.6Hospital beds per 1,000 people1.3
Access to a water source (percent)80
Population characteristics (2004)Access to a sanitation facility (percent)86
Life expectancy at birth (years - 2005)71.4
Crude birth rate (per thousand)29.7Education (2004; in percent)
Crude death rate (per thousand)5.0Male literacy rate (percent)94
Infant mortality (per thousand live births)21.0Female literacy rate (percent)92
Primary school enrollment (net, percent)94
Secondary school enrollment (gross, percent)63

II. Economic Indicators, 2004-2008
Annual percent change; unless otherwise specified
National accounts and prices
GDP at current prices16.411.
GDP at constant prices4.
Per capita GDP (U.S. dollars, thousands)
GDP deflator11.
Consumer prices (end-of-period)2.89.812.56.02.5-7.57.5
Real effective exchange rate1/
Average (depreciation -)3.7−6.513.010.8
End-of-period (depreciation -)−8.54.520.25.6
In millions of U.S. dollars
External sector
Exports, f.o.b. (percentage change)32.017.431.424.011.120.0
Imports, c.i.f. (percentage change)27.022.933.817.111.418.9
Net oil exports and imports−434−507−701−723−740−987
Current account14356139232133277
(in percent of GDP)
Capital account41305260450−33423
Overall balance277147402762100700
Terms of trade (percentage change)−1.3−9.4−
In percent of GDP
Savings-investment balance
Gross domestic investment19.219.819.618.420.218.7
Private sector14.514.814.713.714.713.6
Public sector4.
Gross national savings21.420.521.020.421.220.4
Private sector14.914.715.413.715.814.7
Public sector6.
Public sector
Central government primary balance2.
Central government overall balance2.
Consolidated public sector primary balance2/
Consolidated public sector overall balance2/
Public sector debt (end-of-year)3/45.137.727.722.420.517.1
Consolidated public sector debt4/48.842.734.128.926.225.6
Annual percent change
Money and credit
Monetary base17.64.313.035.310.417.8
Credit to the private sector5/13.914.117.646.312.523.4
Velocity of M27.
Memorandum items:
International reserves (in millions of U.S. dollars)1,1681,2971,7032,4622,5623,162
(In months of imports)
GDP (in billions of guaranies)41,52246,16952,27060,16366,13068,026
Population (millions)

INS calculations of real effective exchange rates.

Consolidated public sector, including the quasi–fiscal operations of the BCP.

Nonfinancial Public Sector. Based on end–of–period exchange rate conversion of U.S. dollar–denominated debt.

Includes Central Bank Bills (LRMs).

Foreign currency items are valued at a constant exchange rate.

Sources: Paraguayan authorities; and Fund staff estimates.
Table 4.Paraguay: Central Government Operations
In billion of guaranies
Total revenues7,6378,4199,58810,8372,6203,0305,5706,06912,24612,539
Tax revenues4,9295,4716,2957,0191,6771,8713,5574,0017,8348,394
Corporate taxes8809671,0091,2292791666226551,2901,400
Value added tax1,9392,3722,7863,3188391,0241,7241,9413,7753,899
Import Duties9048439388532182434404939751,030
Nontax revenues1/2,6962,9463,2623,7949241,1561,9762,0484,3374,070
o/w: Public pension contributions440541560752202214392382795795
Capital revenues122312519237217575
Current expenditures:5,3636,2317,1387,9642,0911,9904,2224,1709,3849,407
Wages and salaries2,9843,3343,8574,3601,1951,1702,4292,3955,3725,372
Goods and services447546674704184105374320827875
Interest payments483560519515159149275260562498
Of which: pensions and benefits9401,1261,2071,2643223146496411,4341,434
Capital expenditures and net lending1,6251,8602,1852,2804342551,1359122,8612,860
o/w: Capital expenditure1,3831,4401,5711,5142771038745632,1792,058
Of which:
Net lending−29−2499132−6−11−12−12−23−23
Capital transfers and other271445515634163162273361706825
Statistical discrepancy2/181−39−2160017069069
Overall balance83028948546958022131,0570341
External debt (increase +)103−295−123−207−136−175−9−115192258
Domestic bonds (increase +)−78−137147186060−220−22
New TB issues00318382143119143119155130
Net credit from the banking system3/−162−44−375−83241−73−204−457−192−249
Net credit from Central Bank−11455−468−83741−29−204−390−192−181
Net credit from commercial banks−48−999340−440−670−67
In percent of GDP
Total revenues18.418.218.318.
Tax revenues:11.911.812.
Corporate taxes2.
Value added tax4.
Import duties2.
Nontax revenues1/
o/w: public pension contributions1.
Capital revenues0.
Current expenditures12.913.513.713.
Wages and salaries7.
Goods and services1.
Interest payments1.
Capital expenditures and net lending3.
Statistical discrepancy2/0.4−0.1−0.4−
Overall balance2.
External debt (increase +)0.2−0.6−0.2−0.3−0.2−0.30.0−
Domestic bonds (increase +)−0.2−
Net credit from the banking system3/−0.4−0.1−0.7−1.40.1−0.1−0.3−0.7−0.3−0.4
Memorandum Item:
Primary balance2.
Balance of the Caja Fiscal4/−1.2−1.3−1.2−0.9−0.2−0.1−0.4−0.4−1.0−0.9

Includes receipts from the binational hydroelectric plants Itaipu and Yacyreta, and grants.

Measurement error to reconcile above–the–line estimate with measure of the fiscal balance from the financing side.

Excludes banks’ holdings of government bonds.

Includes pension payments to central government employees and Chaco War veterans.

Sources: Ministry of Finance; and Fund staff estimates.
Table 5.Paraguay: Consolidated Public Sector Operations1/
Jan-MarJan-JunJan Dec
In billion of guaranies
Tax revenue4,9365,4836,3207,0441,6821,8793,5684,0137,8688,422
Nontax revenue and grants4,0104,5965,4696,4311,6051,8163,3603,3727,2616,778
Capital revenue14353232201348388080
Current expenditure6,9597,9089,17710,1902,5712,5345,2605,29211,84112,013
Wages and salaries3,6344,0874,7115,3571,4411,4462,9102,9236,4346,515
Goods and services7559941,2001,1942581735845231,3761,420
Interest payments678751858910260240479460971941
Capital expenditure and net lending1,9562,3062,5802,8325802741,4421,0523,6303,485
Of which: capital expenditure2,1892,5502,8443,0856193461,5361,1823,9213,771
Primary balance1,3151,2981,9602,1064311,5327291,9719711,442
Public enterprises’ operating surplus5936461,03971218392-20432262956
Statistical discrepancy2/119−132−6890000000
Overall balance7564144131,1961721,2922531,5110850
External financing net−42−445−258−384−134−195−40−171157121
Domestic financing net72−201−476−812−39−537−1,193−877−157−643
Bond financing−78−13714718606−44−220−22
Net credit from the banking system−183−176−728−1,042−63−560−1,182−923−333−945
Net credit from commercial banks−257−146−250−210−273−531−624−533−142−764
Net credit from Central Bank74−30−478−832211−29−558−390−192−181
Quasifiscal deficit financing3331121054424174967176323
In percent of GDP
Tax revenue11.911.912.
Nontax revenue and grants9.710.010.510.
Capital revenue0.
Current expenditure16.817.117.616.
Wages and salaries8.
Goods and services1.
Interest payments1.
Capital expenditure and net lending4.
Of which: capital expenditure4.
Public enterprises’ operating surplus1.
Statistical discrepancy2/0.3−0.3−
Overall balance1.
External financing net−0.1−1.0−0.5−0.6−0.2−0.3−0.1−
Domestic financing net0.2−0.4−0.9−1.4−0.1−0.9−0.4−1.5−0.2−1.1
Of which: quasifiscal deficit financing0.
Memorandum item:
Primary balance3.

Public sector comprises only the nonfinancial public sector and the Central Bank.

Measurement error to reconcile above the line estimate with estimates of the fiscal balance from the financing side.s

Sources: Ministry of Finance and Fund staff estimates.
Table 6.Paraguay: Summary Accounts of the Central Bank, 2004–08(In billions of guaranies; end–of–period; valued at constant exchange rate)
Currency issue2,4882,9253,3713,3714,3263,8664,1683,8654,3124,8365,063
Net international reserves7,3358,14610,6938,68412,55512,30213,45312,55715,61913,06716,129
(In millions of U.S. dollars)1,1681,2971,7031,7032,4622,4122,6382,4623,0632,5623,162
Net domestic assets-4,848-5,221-7,322-5,312-8,229-8,436-9,285-8,692-11,307-8,231-11,065
Net nonfinancial public sector1,3661,4101,015728111130153−94−208−86−137
Net credit to the central government9671,063703425−241−200−244−446−582−433−422
Net credit to the rest of NFPS398347311303352330396352373347285
Net credit to the banking system−4,376−5,026−5,828−5,484−7,461−7,362−8,226−7,450−9,413−7,216−8,829
Reserve requirements−2,195−2,331−2,535−2,209−3,089−2,764−3,287−3,024−3,577−3,239−3,424
Free reserves−1,012−683−651−633−1,022−1,007−1,148−992−1,092−962−1,092
Monetary control bills (LRM)3/−1,171−2,014−2,644−2,644−3,352−3,592−3,824−3,436−4,747−3,017−4,316
Other assets and liabilities (net)−1,838−1,605−2,508−556−879−1,204−1,211−1,148−1,685−929−2,099
Capital and reserves−1,722−1,368−141−1161611851,0702081,8333342,087
Other assets net4/−116−237−2,367−440−1,040−1,389−2,282−1,357−3,518−1,263−4,186
Memorandum items:
Total stock of LRMs outstanding3/1,5522,2933,2243,2243,9074,4904,4914,2955,6403,7715,754
Quasifiscal balance5/−333−112−105−105−44−24−17−49−67−174−322
in percent of GDP−0.8−0.2−0.2−0.2−−0.1−0.1−0.3−0.5
Costs of monetary policy operations4/1811793313313869990201198399434
in percent of GDP0.
Monetary base4,0064,1804,7244,7246,3905,9186,5106,0456,7707,0527,528
annual growth (in percent)17.64.313.013.035.315.
Narrow monetary base6/3,1223,6674,1694,1695,5075,0505,5175,1925,7866,2296,545
annual growth (in percent)5.717.513.713.732.127.437.522.

Foreign–currency denominated items valued at 6,280 guaraníes per U.S. dollar. This exchange rate also applies for all dates preceding December 2006.

Foreign–currency denominated items valued at 5,100 guaraníes per U.S. dollar. This exchange rate also applies for all dates following December 2006.

A fraction of LRM, about 15 percent at end–2007, is held by non–bank institutions.

Includes LRM held by the nonbanking sector.

Cumulative since beginning of year. Follows program definition.

Narrow monetary base comprises currency issued plus legal reserve requirement deposits in guaraní held at the BCP.

Sources: Central Bank of Paraguay; and Fund staff estimates.
Table 7.Paraguay: Summary Accounts of the Banking System(In billions of guaranies; end–of–period; valued at constant exchange rate)
I. Central Bank
Net international reserves7,3358,14610,6938,68412,55512,30213,45312,55715,61913,06716,129
(in millions of U.S. dollars)1,1681,2971,7031,7032,4622,4122,6382,4623,0632,5623,162
Net domestic assets-4,848-5,221-7,322-5,312-8,229-8,436-9,285-8,692-11,307-8,231-11,065
Credit to public sector, net1,3661,4101,01572811198153−219−20888−137
Credit to banking system, net3/−3,205−3,012−3,185−2,840−4,109−3,868−4,402−4,061−4,667−3,886−4,513
Central bank securites−1,552−2,293−3,224−3,224−3,907−4,370−4,491−4,138−5,640−4,276−5,754
Currency issue2,4882,9253,3713,3714,3263,8664,1683,8654,3124,8365,063
II. Monetary Survey
Net foreign assets9,47810,02812,49110,14013,50513,84015,46514,19317,46414,78917,088
(in millions of U.S. dollars)1,5091,5971,9891,9882,6482,7143,0322,7833,4242,9003,351
Net domestic assets2,3132,6712,3983,5644,3413,3474,8663,7264,0694,0805,082
Credit to the public sector531237−188−411−1,665−1,550−1,861−2,170−2,445−1,313−2,762
Credit to the private sector5,7886,6017,7607,05110,3169,50211,99010,60412,2599,75112,746
Broad Liquidity (M4)11,79112,69914,89013,70417,84617,18720,33117,91921,53318,86922,170
Bonds and issued securities00000026026026
Other monetary liabilities12585322683215514182999
Central bank securities with private sector3812805805805556296675958946151,439
Broad liquidity (M3)11,28512,33414,27813,09817,20816,53819,58317,30920,59518,22520,606
Foreign currency deposits5,3105,3966,2805,1006,1205,6327,7686,1057,9615,7657,286
Money and quasi-money (M2)5,9746,9387,9987,99811,08810,90611,81511,20512,63412,46013,321
(Annual percentage change)
M0 (Currency issued)12.717.615.315.328.324.233.920.133.911.817.0
Credit to the private sector13.914.117.617.646.330.264.335.056.017.623.6
Of which: foreign currency deposits1.11.616.416.420.04.744.46.438.79.819.0
Memorandum items:
Ratio of foreign currency deposits
to M3 (percent)47.143.744.038.935.634.139.735.338.731.635.4
Ratio of foreign currency deposits
to private sector deposits in banks (percent)57.154.655.450.345.342.848.243.747.341.644.8

Foreign–currency denominated items valued at 6,280 guaraníes per U.S. dollar. This exchange rate also applies for all dates preceding December 2006.

Foreign–currency denominated items valued at 5,100 guaraníes per U.S. dollar. This exchange rate also applies for all dates following December 2006.

Exclude LRM held by the banking sector.

Sources: Central Bank of Paraguay; and Fund staff estimates.
Table 8.Paraguay: Banking System Indicators
I. Total banking system (II+III+IV+V)
Share in assets100.0100.0100.0100.0100.0
Capital adequacy ratio (percent)1/20.920.520.420.116.8
NPLs/total loans20.610.
Rate of return on assets (ROA)
Rate of return on equity (ROE)4.518.322.631.734.7
Liquid assets/total assets2/32.630.826.623.324.3
Foreign exchange deposits/total deposits61.755.052.749.144.3
II. Total foreign-owned banks
Share in assets47.435.831.329.128.4
Capital adequacy ratio (percent)1/20.426.027.225.520.6
NPLs/total loans20.811.
Rate of return on assets (ROA)
Rate of return on equity (ROE)
Liquid assets/total assets2/29.825.429.024.525.5
Foreign exchange deposits/total deposits65.665.
III. Total majority-owned foreign banks
Share in assets37.
Capital adequacy ratio (percent)1/21.017.717.817.415.1
NPLs/total loans12.
Rate of return on assets (ROA)
Rate of return on equity (ROE)15.525.835.345.853.5
Liquid assets/total assets2/35.328.822.618.521.1
Foreign exchange deposits/total deposits62.353.851.748.842.8
IV. Total domestic-owned private banks
Share in assets7.
Capital adequacy ratio (percent)1/14.113.313.415.612.2
NPLs/total loans2.
Rate of return on assets (ROA)
Rate of return on equity (ROE)
Liquid assets/total assets2/38.838.134.034.628.2
Foreign exchange deposits/total deposits60.757.654.751.551.6
V. National Development Bank (BNF)
Share in assets8.010.711.39.58.5
Capital adequacy ratio (percent)1/
NPLs/total loans56.248.940.319.47.8
Rate of return on assets (ROA)−
Rate of return on equity (ROE)−
Liquid assets/total assets2/30.752.031.233.834.5
Foreign exchange deposits/total deposits32.723.620.613.18.8

Definition of CAR does not fully comply with international standards.

Liquid assets are calculated as the sum of cash, reserves, accounts in banks and lending in interbank market.

Source: Superintendency of Banks.
Table 9.Paraguay: Balance of Payments(In millions of U.S. dollars)
Current account14356139232-518440273133277
Trade balance−248−459−693−508−254−93−338−100−702−541
o/w fuel products−434−507−701−723−175−239−368−504−740−987
Services (net)3273494253919799183188413423
Factor income−134−58−19−25−17−7−32−13−61−28
Capital and financial account41305260450191-40328-33423
General government−26−107−2112−28−38−2−233868
Private Sector1/41228243829129−38350−71355
Direct investment3247166182454089141179211
Foreign currency deposits30423165143000000
Errors and Omissions93−214380000000
Overall Balance277147402762-501760600100700
Net International Reserves (increase -)−186−129−405−75950−1760−600−100−700
Gross Reserves−185−130−405−75950−1760−600−100−700
Reserve Liabilities−1100000000
Exceptional Financing−92−193−2000000
Arrears deferral (+)/clearance (-)−92−193−2000000
Memorandum items:
Current account in percent of GDP2.−
Gross reserves (in millions of U.S. dollars)1,1681,2981,7032,4622,4122,6382,4623,0632,5623,162
in months of imports of GNFS3.
External public debt in percent of GDP3/41.334.625.420.418.815.219.015.319.315.9
Debt service in percent of exports GNFS7.
Export Volume (percentage change)4/17.711.18.917.
Import Volume (percentage change)4/17.113.432.614.
Terms of trade (percentage change)−1.3−9.4−

Includes public enterprises and binationals.

Excludes disputed claims (Office Nacional du Ducroire, PDI, $8 million, BIVAC and SGS, $77 million, Swiss bank syndicate, $85million) and unidentified creditors (D.B. Pty, $0.03 million)

Based on average exchange rate valuation of GDP.

Registered trade.

Sources: Central Bank of Paraguay; and Fund staff estimates.
Table 10.Paraguay: Indicators of External Vulnerability
Monetary and financial indicators
Broad money (M3), percentage change1/17.712.
Credit to the private sector, real (percentage change)1/−25.510.93.9−4.938.3
Share of nonperforming loans in total loans (percent)2/20.610.
Average domestic lending rate, real19.317.418.515.419.2
Central Bank bill yield, real−1.21.0−
International reserves (millions of US$)9831,1681,2971,7032,462
Central bank foreign short-term liabilities (millions of US$)
External indicators
Merchandise exports (percentage change)16.832.017.431.424.0
Merchandise imports (percentage change)14.427.022.933.817.1
Merchandise terms of trade (percentage change)0.1−1.3−9.4−2.25.8
Real effective exchange rate (percentage change)−6.63.7−6.513.010.8
Current account balance (percent of GDP)
Capital and financial account (percent of GDP)
Net foreign direct investment (percent of GDP)
Inward portfolio investment (percent of GDP)
Other net investment (percent of GDP)2.6−
External public debt (percent of GDP)2/48.141.334.625.420.4
Debt service (in percent of exports GNFS)
Gross reserves (in US$ million)9841,1681,2981,7032,462
In months of imports of GNFS3.
Over short-term external debt3/
Over foreign currency deposits in domestic banks1.

Foreign currency components are valued at the accounting exchange rate.

Based on end–of–period exchange rate conversion of U.S. dollar–denominated debt.

Private and public external debt with a residual maturity of one year or less. Excludes foreign currency deposits in banking system.

Sources: Central Bank of Paraguay; and Fund staff estimates.
Table 11.Paraguay: Schedule of Reviews and Purchases
June 2007 PhasingNew Access and Phasing
Amount of Purchase
DatePercent of Quota1/Conditions
May 31, 200625.025Approval of arrangement
September 29, 20066.0First review and end-June 2006 performance criteria
June 29, 200712.0Second and third reviews and end-September and end-December 2006 performance criteria
October 15, 20076.01.0Fourth review and end-June 2007 and end-September 2007 performance criteria 2/
March 28, 20086.01.0Fifth review and end-December 2007 performance criteria 3/
March 28, 20085.01.0End-December 2007 performance criteria 3/
July 30, 20082.51.0Sixth review and end-March 2008 performance criteria 4/
July 30, 20082.51.0End-June 2008 performance criteria

Since Paraguay’s quota is SDR 99.9 million, the percent of quota is almost equivalent to the amount of the purchase in SDR. For instance, the first credit tranche is 25 percent of quota or about SDR 25 million.

The fourth review was originally scheduled to be completed by mid–September 2007, based on end–June 2007 performance criteria. The review was completed with a delay on October 15, 2007, and was controlled by end–September 2007 performance criteria.

The fifth review was originally scheduled to be completed by mid–December 2007 based on end–September 2007 performance criteria. The review was subsequently completerd with a delay on March 28, 2008, and was controlled by end–December 2007 performance criteria.

The sixth review was originally scheduled to be completed by mid–June 2008, based on March 2008 performance criteria. The review was subsequently completerd with a delay on July 30, 2008, and was controlled by end–June 2008 performance criteria.

Source: Fund staff estimates.
Table 12.Paraguay: Medium–Term Scenario
Real sector
Real GDP growth (annual percentage change)
Consumer prices (annual percentage change)2.89.812.
GDP per capita (US dollars)1,2161,2921,5681,9822,6022,8092,9473,0993,259
(In percent of GDP)
Gross domestic investment19.219.819.618.418.719.619.920.320.5
Private sector14.514.814.713.713.613.713.914.014.2
Public sector4.
Gross national savings21.420.521.020.420.420.620.720.920.9
Private sector14.914.715.413.714.714.814.814.714.6
Public sector6.
Public finances1/
Current primary expenditures15.115.515.915.416.215.915.615.515.4
Interest payments1.
Capital expenditures4.
Public enterprise operating surplus1.
Primary balance3.
Overall balance1.
Public sector debt2/3/45.137.727.722.417.116.315.715.214.7
Consolidated public sector debt3/
(In millionsof U.S. dollars)
Public sector debt2/3,0272,8762,8072,7732,8152,8772,9693,0713,187
Balance of payments
Current account1435613923227717815011979
(In percent of GDP)
Capital and financial account41305260450423185213245285
Gross international reserves1,1681,2981,7032,4623,1623,5263,8904,2544,618
(In months of imports)

Defined as the nonfinancial public sector and the BCP.

Nonfinancial public sector debt; excludes Central Bank bills.

Based on end–of–period exchange rate conversion of U.S. dollar–denominated debt.

Sources: Ministry of Finance; Central Bank of Paraguay; and Fund staff estimates and projections.
APPENDIX I. Paraguay—Letter of Intent

Asunción, Paraguay

July 14, 2008

Mr. Dominique Strauss–Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. Strauss–Kahn:

1. Achievements. Macroeconomic conditions have improved markedly since the adoption of the Stand–By Arrangement (SBA) in May 2006. Macroeconomic performance has exceeded most of the objectives under the SBA; economic growth reached an estimated 6 ¾ percent in 2007, public debt levels have been reduced to around 20 percent of GDP, and international reserves have reached record levels. However, while core inflation was reduced to 6 percent at end–2007, it reached a cumulative 4 percent over the first five months of 2008, mostly driven by international supply shocks on food and fuel items. A key challenge for the new administration that takes over on August 15 will be to consolidate these gains.

2. Program implementation. Performance under our economic program for 2008, supported by the SBA, has been quite strong.

  • Quantitative performance criteria. All performance criteria through end–March 2008 have been observed with large margins. In particular, international reserves have surpassed US$3 billion and the public finances have recorded a surplus of about 1 ½ percent of GDP, both substantially above program objectives. We also believe that the end–June 2008 performance criteria have been met.

  • Structural benchmarks. All structural benchmarks through end–June 2008 have been met, except for the benchmark on the signing of revised result–oriented management contracts and development of business plans for five large state–owned enterprises, which was only party satisfied due to time constraints and the imminent change of the government and the management of these companies.

3. Sixth program review. Against this background of good economic performance, the Government of Paraguay hereby requests the completion of the sixth and last review under the SBA–supported program.

4. Expiration of the program. We remain committed to the broad macroeconomic and reform agenda set out in previous Letters of Intent as the program comes to an end in August 2008. We encourage the new administration to maintain the productive and fruitful dialogue we have had with the Fund.

5. Publication. As part of our communication policy, we intend to publish this Letter in the websites of the Ministry of Finance and Central Bank to maintain our citizens informed about our policy intentions. We also authorize the Fund to publish this Letter.

Sincerely yours,
Germán RojasMiguel Gómez
PresidentMinister of Finance
Central Bank of Paraguay

Core inflation in Paraguay excludes fruits and vegetables but includes other food items as well as fuels (which have also been subject to supply shocks). In the absence of the food and fuels shocks, staff estimates that inflation would be 7 ½ percent, or at the top of the authorities’ inflation range of 2 ½ to 7 ½ percent for 2008.

Staff estimates that the Central Administration’s primary surplus for 2008 would be about 1 percent of GDP higher than the structural primary surplus.

To improve liquidity management, the Central Bank switched open market operations procedures from fixing LRM rates to conducting weekly auctions of LRMs in June 2008.

International observers characterized the elections as free, fair and highly participatory; the results were not disputed. Mr. Fernando Lugo gained 41 percent of the votes (with a coalition that included the Liberal Party, PLRA), against 31 percent by former Education Minister Ms. Blanca Ovelar’s (from the Colorado Party, ANR). Former general Mr. Lino Oviedo (from the Ethic Citizens Party, UNACE) came in third with 22 percent of the votes.

Mr. Borda already served as Finance Minister from 2003–05 under President Duarte Frutos. He negotiated the first SBA in 2003 and initiated a round of important structural reforms.

All performance criteria have been observed since the approval of the SBA in May 2006.

The economic cabinet is expected to approve a draft payment system law shortly (originally a benchmark for September 2007).

However, the authorities published in May 2008 (for the first time) the quarterly assessments of all SOE from 2007 through the first quarter of 2008.

The fiscal impact for 2008 is likely to be minimal as the law will only become effective later in the year once the implementing decree has been put in place. Two other laws (also originating within Congress) are under consideration with potentially large fiscal impacts: (i) introduce an old–age pension for people without coverage; and (ii) create a pension fund for housewives.

Part of credit expansion appears to be temporary as the continued appreciation of the guaraní has created incentives among primary exporters to hedge foreign exchange risk by borrowing short–term in foreign currency to insure themselves against foreign exchange losses ahead of the repatriation of export proceeds.

Claims in dispute amount to about 1 percent of GDP, and include (i) Belgium’s Ex–Herstal (US$7 million);(ii) import verification companies (US$75 million); and (iii) a Swiss court ruling in favor of several European and American banks (US$85 million).

This could include the adoption of a more adequate definition of the commitment and accrued stages of the budget execution process. In particular, there is a need for differentiated definitions according to the economic category of expenditure. The authorities should also establish the moment for recording the commitment and accrued stage for each type of expenditure.

For a description of the authorities’ strategy to strengthen the financial position of the Central Bank see Box 2 of the Staff Report for the Fourth SBA Review (Country Report No. 07/54).

Under Paraguayan law, both the BCP governor and the four members of the Board of Directors are proposed by the President and approved by the Senate. But whereas directors are appointed for a five year term (one appointment every year), the governor’s term ends automatically with the term of the President. The mission emphasized the merits of decoupling the term of the BCP governor from the political cycle.

The rapid increase in international oil prices recently has put an extra strain on PETROPAR’s finances given their policy of quarterly diesel price adjustments to prevent subsidies. The next price adjustment is expected for August 2008.

The new authorities are unlikely to include outright privatization in their reform program. Two attempts to introduce legislation on the subject have been rejected by Congress in the past (2002 and 2006).

Other Resources Citing This Publication