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Paraguay: Staff Report for the 2017 Article IV Consultation

Author(s):
International Monetary Fund. Western Hemisphere Dept.
Published Date:
July 2017
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Paraguay: An Expansion Above Par

1. Paraguay is facing a less supportive external environment, yet in recent years its performance stands out by regional comparison. Regional growth challenges beyond the near term arise from persistently lower export commodity prices and structural problems in Latin America. Despite these headwinds, Paraguay has managed to improve its relative growth performance over the past several years. Improvements in the macroeconomic framework and policies, favorable supply shocks in agriculture and electricity, a younger population fueling competitive labor costs, and public sector efforts to close infrastructure gaps have offset adverse regional developments and lower commodity export prices.

Latin America: Real GDP Growth

(In percent, 10-year moving average)

Source: IMF World Economic Outlook.

Note: Latin America average is for ARG, BOL. BRA, CHL, COL, CSI, DOM, ECU, SLV, GTM, HND, MEX, NIC, PAN, PRY, PER, URY and VEN.

A. Recent Developments

2. Growth has surpassed expectations so far this year and the expansion has broadened to more sectors. The economy gained momentum towards the end of 2016 and continued expanding significantly by 6½ percent (y/y) during the first quarter of 2017. In contrast to last year, there are signs that the expansion is becoming more broad based across the economy.

  • On the supply side: Robust growth reflects booming construction, favorable trade activity at border towns with Brazil and Argentina, a rebound in the maquila industry and a particularly good soy harvest, which benefitted from record yields and favorable weather conditions.

  • On the demand side: Private investment and consumption have strengthened, alongside public sector investment. Investment related to construction and agriculture has been mainly financed from sources other than bank credit, including foreign funds (e.g., FDI) and firms’ cash positions. Private consumption has benefitted from the increase in minimum wages in late 2016, and growth in labor intensive sectors, such as services and maquila.

Contributions to Real GDP Growth

(in percent)

Sources: BCP and Fund staff calculations.

Monthly Activity Indicator

(Percent change 3mma, S.A., unless otherwise indicated)

Sources: BCP and Fund staff estimates.

3. Inflation remains below target though underlying inflationary pressures are rising. Headline CPI inflation has been low and some disinflation prompted the Central Bank of Paraguay (BCP) to cut rates twice in mid-2016. In February, the BCP reduced its inflation target by 50 basis points to 4±2 percent, citing lower and less volatile inflation, convergence towards regional norms, and reduced exchange rate pass-through. Market expectations quickly adjusted to the new target and headline inflation edged down in June from 3.4 to 2.9 percent. However, core inflation has been steadily rising since the beginning of the year to 5.3 percent, reflecting wage hikes and firmer domestic demand.1

Inflation

(In percent, y/y)

Sources: BCP and Fund staff calculations.

Food and Services Inflation

(In percent, y/y)

Source: Central Bank of Paraguay.

4. Fiscal policy has been characterized by restraint in current expenditures and a shift towards capital spending. The deficit outturn of 1.4 percent of GDP last year complied with the Fiscal Responsibility Law (FRL), implying a policy tightening.2 The authorities offset weakening revenues and higher investment with current expenditure cuts, especially compensation. This compositional shift towards capital spending is being maintained so far this year. Data up to May 2017 show that the public sector wage bill continues to fall as a share of GDP.

Factors Affecting 2016 Deficit

(Percent of GDP)

Sources: Ministry of Finance and Fund staff calculations.

5. Bank lending activity has been stagnant. After rapid credit growth over 2004–15, bank credit has decelerated sharply in the wake of lower commodity prices and cautious lending by banks. Bank FX credit has decreased since last year given weak credit demand, including as investment plans in agriculture were scaled down given lower profitability. Guaraní credit growth has slowed, as consumption credit has also been weak. In terms of credit supply, higher NPLs—broader measures of distressed loans point to a deterioration of banks’ loan portfolio since mid-2016—and higher provisioning has caused banks to be cautious in extending new credit. Nevertheless, credit institutions’ sentiment—a leading indicator—recently turned positive. Outside of commercial banks, there are signs that credit from unregulated non-traditional lenders is growing, but this remains a small fraction of credit.

Contributions to Bank Private Credit Growth

(In percent, year/year)

Sources: Central Bank of Paraguay and Fund staff calculations.

Lenders’ Sentiment and Credit Growth

(Balance of opinion, percent; Private credit growth, percent y/y)

Sources: BCP and Fund staff calculations.

B. External Balance

6. Trade and current accounts are in surplus. Favorable supply shocks, including record electricity production, improved terms-of-trade, and export volumes boosted the trade balance, driving the 2016 current account to a 1.7 percent of GDP surplus. May data point to continued strong exports’ dynamics in the near term, reflecting soy exports from a bumper crop, robust reexports as border-town trade and activity in the maquila industry rebounded with positive economic activity in Brazil and Argentina. With stronger domestic demand, imports also grew vigorously in January-May for both consumption and capital goods following a sharp contraction in capital goods imports last year as agricultural firms curbed investment plans.

7. Reserves have reached high levels and the guaraní has appreciated slightly. The external position strengthened and is now assessed to be stronger than those implied by fundamentals and desirable policies. Reserves have accumulated further to reach 26 percent of GDP—above standard benchmarks (e.g., 190 percent of the ARA metric). At the same time, the BCP frequently announced sales of dollar receipts from electricity exports of the binationals, but did not execute them according to plan, choosing to accumulate reserves instead. 3 The guaraní has changed little since the start of the year, with the REER appreciating only 1.7 percent through June. Staff assesses that the REER is somewhat undervalued, even after adjusting for windfall electricity exports (see chart).4

External Balance Assessment – 2016
EBA- Current accountEBA – REER
Norm 1/Balance 1/GapREER 2/REER 2/
EBA-lite (CA no adjustment) 3/−2.51.74.2−13.7−2.0
EBA-lite (CA adjustment) 3/−2.50.53.0−9.8

Percent of GDP

In percent. + indicates overvaluation with respect to implied benchmark.

Adjusted for the temporary (one-off) high electricity exports and receipts

Percent of GDP

In percent. + indicates overvaluation with respect to implied benchmark.

Adjusted for the temporary (one-off) high electricity exports and receipts

Electricity export

(in GWh)

Sources: Central Bank of Paraguay

Exchange Rates

(percent change, year/year)

Sources: BCP; International Financial Statistics; Haver Analytics; and IMF calculations.

Authorities’ Views

8. The authorities viewed the real exchange rate as being broadly aligned with fundamentals. The BCP did not feel it was appropriate to sell FX reserves as announced to avoid large swings in the exchange rate, given weaker than expected trading volumes in foreign exchange markets (i.e., for U.S. dollars). They contended that the BCP’s behavior on dollar sales was related to the needs of ensuring smooth functioning in markets, where there already appeared to be an over-supply of dollars and the potential for excessive exchange rate volatility. Going forward, the authorities did not see a need for further accumulation of reserves, which had also contributed to excess liquidity conditions.

C. Outlook and Risks

9. Staff’s baseline envisages growth above potential. The outlook is for 4.2 percent growth in 2017, reflecting a more moderate pace of activity in the second half of the year.5 This scenario reflects unwinding positive supply shocks and broadening expansion across sectors:

  • Near-term: Investment will likely be a strong driver of growth partly reflecting major infrastructure projects. Consumption growth should strengthen further with higher minimum wages (which were raised again in July 2017) and employment gains. Exports are expected to perform strongly, relative to last year, despite some slowdown of trade with Brazil in the second half of the year. With stronger demand, the current account surplus is expected to narrow this year to 1.2 percent of GDP. Electricity-price hikes, services inflation and lower deflation in volatile components should raise year-end inflation to around 4 percent (y/y). On macroeconomic policies, the authorities’ announced commitment to the FRL’s ceiling implies a neutral fiscal stance in 2017. With the policy rate below neutral levels, interbank rates below the policy rate and a somewhat undervalued exchange rate, financial conditions have remained supportive. However, the policy rate is expected to gradually rise towards the end of the year with credit showing signs of a mild recovery.

  • Medium-term: Real GDP growth is expected to remain near potential of just below 4 percent-driven by favorable demographics, moderate investment, and productivity growth in line with past performance. With fiscal expenditures growing in line with GDP, overall budget deficits are envisaged to change little. Medium-term current account surpluses are projected to narrow towards balance as exports grow in line with partner demand and commodity prices stabilize. Credit is expected to recover alongside a gradual increase in FDI, as the country’s institutions are strengthened. Inflation will remain consistent with the target, given well-anchored expectations.

10. Risks to the outlook are to the downside (RAM). Heightened political uncertainty in Brazil and the not-yet-firm recovery prospects for Argentina are the main downside risks. A faster-than-expected Fed normalization could strengthen the U.S. dollar or tighten financial conditions (including for sovereign bonds). Additionally, global spillovers to Brazil could have second-round implications for Paraguay. Weaker-than-expected commodity prices could also dampen growth. Domestic nonfinancial risks are climate-related shocks potentially affecting agriculture, construction and livestock sectors. The financial system can be vulnerable to a larger-than-expected retrenchment of credit if bank liquidations of foreclosed properties trigger an adverse feedback loop involving lower land prices and weaker collateral values.

Authorities’ Views

11. The authorities’ broadly shared staff’s views on the outlook and risks. They also saw the economy accelerating in 2017, with strong investment-led growth. On the supply side, agriculture and construction were expected to lead growth this year but the role of manufacturing and services was also highlighted. From their perspective, a continuation of favorable financial conditions given still-weak credit growth will be key to support growth and to offset external risks. Political uncertainty in Brazil was viewed as the main risk to the near-term outlook, although mostly to border-town trade, especially if further currency depreciation ensued in Brazil.

D. Macro-Financial Linkages

12. The impact of risks could be amplified through macro-financial linkages. The key channels relate to a bank-based financial system that is highly dollarized and exposed to a volatile agriculture sector:

  • Exchange rate: A sharp dollar appreciation could impact bank and borrowers’ balance sheets and reduce profits. In turn, this could curtail investment plans in key sectors and dampen growth. However, major FX borrowers appear naturally hedged, containing risks of currency mismatches.6 Bank’s assets and liabilities are also broadly balanced and static simulations suggest they could withstand moderate guaraní depreciations. However, larger shocks (e.g., depreciations exceeding 30 percent) could noticeably reduce capital buffers and, in turn, constrain lending capacity if some banks have to take measures to raise capital, in the absence of higher capital requirements on dollar denominated loans.

  • Agriculture: Rising bank holdings of repossessed collateral—including land—will likely be sold in the next 1–2 years.7 Staff expects limited impact on land prices. However, in a deeper downturn scenario, another adverse price or weather-related shock to agriculture could cause further defaults and collateral liquidations, that could result in an adverse feedback loop between land values, bank losses, borrower creditworthiness, credit supply, and investment. Given the importance of credit to finance agricultural investment, GDP growth would be adversely affected as part of the feedback effects. A tail risk scenario would involve a combination of large, negative agricultural and exchange rate shocks hitting in unison.

Credit and Agricultural Capital Imports

Source: Staff estimates.

Capital/Asset Ratios Under Various Scenarios

(Number of banks with equity/asset ratio in bin; data as of May 2017)

Sources: BCP and Fund staff calculations.

Banks’ Holdings of Assets to Be Liquidated

(Percent of total assets, net of provisions)

Sources: BCP and Fund staff calculations.

Authorities’ Views

13. The authorities did not see significant stability risks originating from the financial sector. Banks are well capitalized and had taken prudent measures last year, retrenching from some segments, such as agriculture, that had experienced strong growth during the commodity boom. High credit dollarization is closely related to business operations in key sectors mainly taking place in dollars and therefore did not signal significant risk of currency mismatches. The authorities also noted that NPLs remain low despite lower commodity prices for agriculture and that bank provisioning has been adequate. In addition, the very low exposure of banks to the construction sector is a mitigating factor for financial stability risks.

Macroeconomic Policies

14. The current policy mix has been broadly appropriate. A relatively neutral fiscal stance for this year is warranted given the cyclical position of the economy (Figure 2). Staff supports the authorities’ commitment to achieve a 1½ percent of GDP deficit, as stipulated by the FRL, as well as maintaining the compositional shift toward capital expenditures, given the country’s large infrastructure gap and the potential benefits of high-quality public investment for medium-term growth.8 At 5.5 percent, staff estimates that the central bank’s policy rate is somewhat below the neutral rate, estimated at about 6 percent (nominal). Monetary policy accommodation supported the economic recovery towards the end of last year given sluggish domestic demand, including fiscal tightening, and weak credit growth.

Figure 1.Paraguay—A Broadening Expansion

Sources: Central Bank of Paraguay and Haver Analytics, Inc.

Figure 2.Paraguay—Smooth Sailing Ahead?

Sources: Central Bank of Paraguay; Haver Analytics; and Fund staff estimates and projections.

Fiscal Impulse Measures for Paraguay

Source: Staff estimates based on authorities’ data.

/1 Excluding royalties and grants; in percent of non-agricultural and non-energy GDP.

15. Going forward, monetary accommodation should be gradually removed. Given indications that growth is expanding beyond a handful of sectors and some signs of higher inflationary pressures, staff expects that the authorities will gradually tighten policy with modest hikes in 2017 and 2018—bringing the real policy rate in line with staff and BCP’s estimates of the neutral rate. Against the backdrop of interbank rates persistently at or below the floor of the policy rate corridor, staff noted that broadening economic momentum, resuming bank credit growth, and rising domestic spending would necessitate tightening financial conditions, including raising the interest rate corridor by hiking the policy rate. However, if downside risks to growth materialize, the authorities have policy space to respond.

16. Financial conditions are relaxed and liquidity in the banking system should be reduced. While the banking system has historically kept high liquidity, its recent rise can be partly related to the weak lending activity by banks. Additionally, liquidity has been created by the purchase of dollar receipts from the binationals leading to reserve accumulation that has not been sterilized. Higher issuance of BCP paper (IRMs) has partly countered the effect of reserve accumulation on liquidity. Staff also noted that given ample liquidity conditions, and market interest rates below the policy rate, further issuance of IRMs is needed to tighten financial conditions to achieve the targeted monetary stance. From the asset side, increasing dollar sales (i.e., compensatory operations) would limit reserve accumulation to help reduce the central bank’s balance sheet and absorb market liquidity.

Authorities’ Views

17. The authorities broadly concurred with staff’s assessment of macroeconomic policies. The authorities reiterated their commitment to the FRL and to establishing a track record to build credibility of their fiscal anchor. They also contended that further public sector wage increases programmed for 2017 will only apply to certain categories, hence growth in current primary expenditures will continue to be restrained and the emphasis on capital spending will be maintained. Regarding monetary policy, authorities emphasized that it would be important to consider external risks surrounding political uncertainty in Brazil and remaining weak credit growth when examining possible tightening and its correct timing. They acknowledged the existence of ample liquidity and broadly relaxed financial conditions. On this point, the authorities indicated that selling dollars can be an effective way to mop up liquidity.

Structural Policies

A. Reforms for Sustainable and Inclusive Growth

18. Raising potential growth includes addressing key infrastructure gaps. Deficiencies in transportation and electricity distribution are among the main structural bottlenecks. Existing electricity transmission and distribution systems, for example, are inadequate to meet the growing demand for energy.9 Improved navigability of the Paraguay-Parana rivers, including new port terminals, and investment in key road segments would reduce congestion and facilitate trade. Stronger infrastructure and institutions can also help attract and, importantly, retain additional FDI flows.10

Transportation Infrastructure

(In kilometers of total roads per 1000 workers)

Source: World Development Indicators, 2014.

Infrastructure Agenda
ProjectStageFinancingTimelineEstimate (% of 2016 GDP)
Routes 2 and 7ExecutionPPP30 months1.9
Airport Silvio PettirossiBidding (on hold)PPP24 months0.5
Waterway on Paraguay RiverIncluded in SNIPto be defined48 months0.1
Route 9BiddingPublic30 months1.7
Transportation insfrastructure in Central ChacoBiddingTurn-key24 months1.1
Sanitation projects in key citiesBiddingTurn-key48 months2.0
Urban transportation (Metrobus)ExecutionPublic60 months0.8
Electricity distributionExecutionPublicOngoing13.1
Source: Authorities’ data.
Source: Authorities’ data.

19. Given these challenges, fostering public investment efficiency is key. Authorities have advanced with some parts of their National Development Plan (NDP) for 2014–30. The Sistema Nacional de Inversion Publica (SNIP) has been instrumental in aligning investment priorities with the NDP and the Equipo Nacional de Estrategia País (ENEP, a civil society group) in ensuring continuity of the agenda across different administrations. More recently, efforts have been stepped up on key strategic projects to improve viability and to modernize the electricity transmission and distribution system. Strengthening project selection and management can reap more infrastructure for each dollar spent, given that Paraguay ranks below its peers in investment efficiency. Containing projects’ cost overruns is another key element. The business climate would also benefit from strengthening anti-corruption efforts, including by effectively implementing a robust asset declaration regime.

Public Investment Efficiency

Source: IMF Investment and Capital Stock Dataset.

20. Policies to promote inclusive growth are key in the wake of a commodity bust. Paraguay’s record on reducing poverty and inequality was strong over the past decade, partly reflecting the NDP and other government policies. However, inequality remains high and staff analysis shows that the commodity boom made a significant contribution to reducing poverty and inequality in Latin America, which cannot be counted on going forward (see Annex I). Hence, stronger NDP implementation in priority areas, like infrastructure and education, will be important to help prevent a reversal of past gains. Expanding well-designed conditional cash transfers, such as Tekopora and Tenondera would strengthen a limited social safety net. These successful programs are nonetheless very small, with spending at less than ½ percent of GDP, compared to similar programs elsewhere in the region. A thorough expenditure review to identify spending re-prioritization including for social assistance programs would be helpful.11 Tax reform that preserves low tax rates but limits generous income tax deductions would improve the progressivity of the tax system and, at the same time, provide greater fiscal resources to finance initiatives to promote more inclusive growth. Stepping up efforts to combat high levels of informality would complement efforts to make growth more inclusive.12

Employment in the Informal Economy

(in percent of total non-agricultural employment, latest year available)

Source: Women and Men in the Informal Economy: A Statistical Picture, ILO, 2013.

Authorities’ Views

21. The authorities considered continued progress on structural reforms to be a high priority. They noted that some of the infrastructure projects that had been delayed, will proceed. On income inequality and inclusive growth, they welcomed staff suggestions for tax reform and rebalancing toward income taxes to improve progressivity to the extent that it preserves Paraguay’s low tax regime. However, while limiting very generous deductions on personal income taxes is a straightforward option, it may face high political hurdles. On reducing informality, several new initiatives were mentioned, including creating online resources for registration of small businesses, increasing penalties and initiatives for graduating to the formal sector.

B. Strengthening Fiscal Management

22. There is scope to enhance Paraguay’s fiscal framework—anchored by the FRL. The 2017 budget culminated in an unprecedented presidential veto, highlighting the need to strengthen the budget process (see Annex II). Key issues include the possibility for budgets passed by congress (including amendments requested by the Ministry of Finance) to exceed the 1.5 percent deficit ceiling, given that the FRL and annual budget laws have equal legal standing. Moreover, in terms of budget control, the prevailing budget in 2016 included substantial spending amendments to the approved budget, authorizing a deficit equivalent to 2.8 percent of GDP and requiring budget under execution to respect the deficit ceiling in terms of fiscal outturns. For 2017, the authorities have signaled that they will adhere to the FRL limits on an outturns basis which may again require considerable restraint at the budget execution stage.

Paraguay: Budget Formulation and Control

23. Reforms to the fiscal framework can limit budgetary vulnerabilities (Figure 4). Key priorities include:

  • Budget formulation: To address challenges from the legal constraints discussed above, the authorities should consider options to improve the budget process including a pre-budget strategy hearing to build congressional-executive agreement on key aggregates and procedural rules limiting amendments to the budget.

  • Budget control: While the administration has traditionally offset deficit-expanding revisions to the budget with under-execution, future administrations may not exercise such caution. To strengthen the fiscal anchor, it would be desirable to tighten budget control and modify the assessment of FRL compliance to include the execution stage as well as the budget approval stage.

Figure 3.Paraguay—Policy Levers Set Appropriately

Sources: Central Bank of Paraguay, Haver Analytics, Inc. and Fund staff calculations.

1/ Calculated using Fisher’s equation taking the steady state policy rate from staff’s estimated Taylor rule and the inflation target.

2/ Calculated using the inflation target as an ex-ante inflation expectation.

Figure 4.Paraguay—Strengthening Fiscal Management

Sources: Instituto de Prevision Social; IMF, World Economic Outlook; United Nations Population Division; National Authorities; and Fund staff estimates.

Approved Budget, Adjusted Budget, and Outturns in 2016

(In percent of GDP)

Source: Staff estimates based on authorities’ data.

24. Revenue mobilization is another key area. Paraguayan authorities implemented essential measures to strengthen tax administration and revenue mobilization. Specifically, institutional capacity at the Revenue Authority (SET) has expanded in several dimensions. Nevertheless, staffing and legal constraints—including on enforcement, and penalties—present substantial barriers to further efficiency gains (see Annex III). Staff encouraged the authorities to extend recent improvements at SET by (i) boosting enforcement powers; (ii) addressing HR issues; and (iii) increasing resources. In the customs service (DNA), reforms have been less ambitious. Both DNA and SET could realize synergies from improved cooperation. Outside of tax administration, tax expenditures are estimated at 1.6 percent of GDP, and there is significant scope to broaden the tax base by reducing allowances, exemptions, and tax credits on income taxes.13

25. The authorities have introduced a Fiscal Advisory Council (FC) in late 2016 though its effectiveness remains to be established.14 The council’s mandate encompasses assessing the budget proposed by the executive branch and commenting on the fiscal and macroeconomic implications of amendments proposed by the legislative branch to the draft budget, among other activities. In that context, the FC could potentially play an important role as an impartial arbiter in the budget process. However, there is no explicit mandate for the council to comment on fiscal outturns nor on ex-post adherence to the FRL. Paraguay’s council also does not have an independent dedicated staff to undertake its analysis or secretariat to assist with its agenda. Thus, Fund staff recommended granting human and budgetary resources to support high-quality analysis and build the council’s reputational standing. Furthermore, staff urged council members to devise a communication strategy, which should include the creation of a dedicated website, where reports and other documents would be publicly posted.

26. Tentative plans to introduce a structural balance rule will be left to the next administration given elections in 2018. The government is considering amending the FRL going forward, which they view as restrictive and amplifying expenditure volatility. Changes may include revisiting the deficit ceiling and moving to a structural balance rule. Recent IMF TA15 highlighted that a reform in the direction of a structural balance rule would need to consider carefully issues with estimating structural revenues and select prudent deficit targets, with an explicit debt anchor set at safe levels to ensure sustainability (see Annex V and VI). Any modifications of the FRL in general should be accompanied by concrete measures to strengthen fiscal institutions and the PFM framework.

Authorities’ Views

27. The authorities agreed with the key principles of staff’s recommendations on the fiscal framework. They welcomed staff advice on improving budget processes, as well as strengthening public investment management to raise the quality of spending. They emphasized a new pilot program within the Ministry of Public Works establishing a project execution unit with support from the IDB, which should improve the execution of infrastructure spending. Authorities confirmed that any change to the FRL will be necessarily postponed until the next administration but still felt strongly about the benefits of a structural balance rule. Authorities acknowledged the shortcomings with the current design and resources of the FC but pointed that the introduction of the council was already an important first step to enhance fiscal institutions.

C. Challenges and Possible Reforms of the Pension and Health System

28. Recent developments and demographic trends represent key challenges to Paraguay’s pension and health systems (see Selected Issues paper). Paraguay’s population remains comparatively young, though lower fertility and longer lifespans signal significant demographic change in the future, requiring careful management of the corresponding risks for pension and health programs:

  • Pension funds: Under staff’s long-term (85-year) projections, population aging would eventually cause deficits for most public pension programs. Overall, the pension system is estimated to have an unfunded liability of nearly 200 percent of GDP (in net present value terms). Caja Fiscal has already exhibited deficits. In contrast, the program administered by Paraguay’s social security institution, the Instituto de Previsión Social (IPS), is currently posting operational surpluses. However, a rise in coverage may contribute to deficits after 2045 as new entrants become eligible for pension benefits. Moreover, investments are allocated mainly in the local banking system, while regional comparators have more diversified portfolios.

  • Health expenditures: Paraguay’s health expenditures have been on a rising trend, while the IPS health program has been recently showing higher underfunding.16 With Paraguay’s still-young population, the rise in expenditures appears linked to non-demographic factors (excess cost growth). Moreover, going forward, excess cost growth and demographic transition are expected to raise the IPS health program’s deficit further.

Selected Pension & Health Programs’ Unfunded Liabilities1/

(Present discounted value, percent of current GDP)

Sources: Fund staff calculations 1/ Analysis includes public pensions with at least 1,700 contributors and assets of Gs. 500 billion.

29. Staff and the authorities discussed reform options for public pensions and the IPS health program. Staff noted that early progress on reforms will help prevent vulnerabilities and reduce the magnitude and disruptiveness of the measures required:

  • Regulation: The authorities have presented draft legislation to congress to reform regulation of pension programs.17 Staff welcomed greater oversight and noted that reforms could help mobilize national savings more efficiently, if implemented prudently.

  • Parametric pension reforms: Staff presented illustrative scenarios to demonstrate possible savings (Table). In each program, some configuration of reforms eliminated estimated funding gaps. Other reforms options18 would need to be considered in some programs with already high contribution rates.

  • Health: Staff advised prompt action on the IPS health program, beginning with a thorough review to identify pressures. Reforms could include improving cost sharing, such as co-pays and deductibles and improving procurement processes.

Illustrative Scenarios: Unfunded Liability After Parametric Reforms(present discounted value, 2015–65; percent of current GDP; green shading indicates that reform eliminates liability)
(1)(2)(3)(4)
Retirement at age 65Benefit cut of 10 pct.Contribution increase of 10 pct.Combination (1)-(3)
IPS−22.1−3.26.8−37.1
Caja Fiscal3.720.023.0−7.3
Caja Itaipu−0.71.11.9−1.9
Caja ANDE0.00.60.9−0.3
Caja Bancaria 1/−7.9−6.2−5.8−9.5
Source: Fund staff estimates.

Caja Bancaria is not found to have an unfunded liability and would remain in balance even without reforms. It is included in the table for completeness.

Source: Fund staff estimates.

Caja Bancaria is not found to have an unfunded liability and would remain in balance even without reforms. It is included in the table for completeness.

Authorities’ Views

30. The authorities noted that passage of legislation creating the pension regulator was fundamental. Following the law’s approval, a committee could then begin to look at reform options for the pension programs. For the health program, the authorities broadly concurred with staff that a review would be an important element of the process as well as introducing control systems to manage expenditures.

D. Making Monetary Policy More Effective and Predictable

31. The adoption of an inflation targeting framework has served Paraguay well. Inflation levels and volatility have decreased since the inception of the IT regime and the BCP has recently lowered its inflation target. However, there is still scope to strengthen the effectiveness of monetary policy and ensure the primacy of the price stability mandate, including:

  • Aligning interbank rates with the corridor: The BCP has continuously improved monetary policy operations in the repo market, narrowing over time the interest rate corridor around the monetary policy rate. However, interbank repo rates usually fall near or below the floor of the corridor, indicating a gap between policy rates and liquidity conditions, weakening policy transmission to market rates.19 Staff saw a role to more closely align targeted and actual rates by better liquidity management, including through additional issuance of IRMs, while stressing the needs to address the BCP’s financial position.20

  • Making pre-announced FX sales more predictable: Staff advised announcing and committing to feasible schedules for dollar sales to avoid complicating the public’s understanding of the role of the exchange rate in the monetary framework. On discretionary interventions, the BCP should continue to intervene only in episodes of disorderly market conditions.

  • Reducing financial dollarization over time: Given the limitations dollarized assets and liabilities impose on the BCP’s ability to affect market interest rates, staff continued recommending a gradual de-dollarization strategy, including through higher capital requirements on dollar-denominated loans. A market-based approach, including further differentiating reserve requirements by currency and considering other macroprudential policies for credit, has been successfully pursued elsewhere (see Box 1).21

Policy Interest Rate Corridor

(Percent)

Sources: BCP and Fund staff calculations.

32. There is scope to enhance the predictability of monetary policy (Figure 5). Central bank transparency is commendable, including preannounced meetings, press releases, and published minutes. Nevertheless, market expectation measures suggest that the public is routinely surprised by policy rate changes and then adjusts with a lag. Staff saw a role for enhancing the central bank’s communication by providing policy guidance when warranted in public statements to aid the formulation of private expectations. Specific measures could include presenting a policy bias or a more detailed explanation linking the outlook for inflation and inflation risks to policy decisions. Moreover, better public understanding of the BCP’s reaction function should help strengthen linkages between policy and market rates and enhance central bank credibility.

Figure 5.Paraguay—Challenges for Monetary Policy

Sources: Central Bank of Paraguay, Fund staff calculations, Garriga (2016) “Central Bank Independence in the World: A New Data Set”.

1/ Latest observation available.

2/ Average of guaraní Sight, Time, and Certificate of Deposit rates, weighted by their shares in the total.

Actual and Expected Policy Rates

(Contemporaneous months; in percent)

Sources: BCP, Encuesta de Expectativas de Variables Económicas and IMF calculations.

Authorities’ Views

33. The authorities reiterated their commitment to the IT regime. The central bank viewed the presence of high liquidity in the system more as a preference of market participants, which have historically used it as a buffer. High dollarization is also seen as a way for exporters receiving dollar revenues to avoid currency risk. On interventions in currency markets, the monetary authority explained that those are conducted during exceptional situations of excessive market volatility. The authorities were receptive to staff advice to enhance central bank communication with stronger policy signals when warranted to improve monetary policy predictability.

E. Continuing Financial Supervisory and Regulatory Reforms

34. Banks are still adjusting to the end of the credit boom. Slow, ongoing adjustment by banks illustrates the need for improving regulatory and macroprudential policies to manage large swings in the credit cycle and to assure continued stability (Figure 6). Although stagnant credit growth has narrowed staff estimates of the credit gap, important pockets of vulnerability regarding bank balance sheets remain. Broad-based measures of distressed loans remain at elevated levels.22 Banks have responded by increasing provisioning, which reduced still-positive earnings. Regulatory capital ratios have risen over the year, though to some degree this reflects decreased risk appetite.

Figure 6.Paraguay—A Turn in the Credit Cycle

Sources: Central Bank of Paraguay, Haver Analytics, Inc., Fund staff calculations.

1/ Trends estimated using a one-sided HP filter with smoothing parameter of 400,000.

Contributions to Estimated Credit Gaps

(Percent of GDP)

Source: Fund staff estimates.

Note: Trends estimated from 2003 using a one-sided HP filter with smoothing paramter of 400,000. FX credit valued at Jan. 2012 exchange rate.

Credit Quality Indicators

(In percent of total loans)

Source: National Authorities.

*Renewed loans are revolving in nature and do not necessarily signal distress.

Selected Financial Soundness Indicators(in percent)
20152013201420152016
Tier 1 capital/risk weighted assets11.711.311.211.713.4
Total capital/risk weighted assets16.114.715.216.117.9
Return on assets2.52.72.62.52.2
Return on equity27.628.728.027.623.3
Nonperforming loans2.62.12.02.62.9
Risk-weighted/total assets65.770.167.465.760.5
Source: IMF, Financial Soundness Indicators.Note: Data are for banks and financieras.
Source: IMF, Financial Soundness Indicators.Note: Data are for banks and financieras.

35. The authorities continue to make progress on risk-based bank supervision. The government ratified a new banking law in December 2016, while the BCP developed a plan to implement regulations in line with the new law. The authorities indicated that changes in capital regulations (including a surcharge for the systemic banks) were being planned. Moreover, the authorities will begin calculating the Liquidity Coverage Ratio (LCR), although for surveillance purposes. To complement these efforts, staff encouraged advancement of other key reforms on strengthening BCP enforcement powers, creating a Financial Stability Council, and establishing deposit insurance for saving and loan cooperatives (Table). In addition, passing a strong law regulating Sociedades Anonimas and bearer securities in line with international AML/CFT standards should enhance entity transparency and could help safeguard correspondent banking relationships.

Key Reforms in Risk-Based Supervision
AreaMeasureProgress
Central bank enforcement powersBCP organic charter lawIn congress
Financial Stability CouncilDecreeNot public yet
Deposit insurance for cooperativesNew lawDraft to Ministry of Finance in June

36. To help diagnose vulnerabilities, staff recommended improving data collection. A credit registry exists, and staff encouraged stepping up authorities’ plans with integrating financial information between banks and cooperatives through a single credit bureau. Staff also recommended improving the availability of data on non-regulated lenders to enable closer supervisory monitoring, given anecdotal evidence of a recent growth in this segment. Additionally, the lack of available real estate price data is a limitation, especially for agriculture lending as it hinders assessing impacts of soy prices on land values to help monitor credit risks.

37. Further improvements in macroeconomic data compilation and dissemination can enhance transparency. Paraguay recently implemented the enhanced general data dissemination (e-GDDS) system to make essential macroeconomic data available online.23 Remaining steps, including compilation of the template on international reserves and foreign currency liquidity and an advance release calendar covering all data categories, would satisfy achieving the higher special data dissemination standards (SDDS).

Authorities’ Views

38. The authorities attached high importance to financial stability. They indicated that securing passage of a robust Sociedades Anonimas law that adequately addressed issues from bearer securities was a fundamental priority to be settled during the current administration, otherwise correspondent banking relationships for smaller domestic banks would be at risk. While acknowledging that the electoral cycle could delay legislative action on other elements of the reform agenda, they expected to make progress on implementing additional regulations in the context of the new Banking Law to upgrade supervision further.

Staff Appraisal

39. Despite a more challenging external environment, Paraguay has grown faster than others in the region and momentum is broadening. Above-potential growth around 4 percent in 2016 and this year is well above main trading partners in the region and the Latin-American average. Part of this growth is also due to catch-up with levels of income per capita in other emerging markets and owes to a continued improvement in productive capacity, diversification of markets and strengthening of institutions. In addition, more recently, some positive supply shocks, mostly related to climate worked as tailwinds in agriculture and electricity, but signs are that economic momentum is broadening to other sectors as well as domestic demand.

40. The policy mix has been adequate and broadly supportive of activity but monetary accommodation should be gradually removed. Fiscal policy is expected to be neutral this year, maintaining the compositional shift towards capital spending and adhering to the FRL on the basis of budget outturns. Monetary policy has been appropriately accommodative to support the recovery towards the end of last year. However, as underlying inflation pressures rise and bank credit growth resumes, monetary policy accommodation should be gradually removed to maintain low inflation. The external position is now assessed to be stronger than implied by fundamentals and desirable policies. Draining excess liquidity through additional issuance of BCP paper (IRMs) and selling dollar reserves would help better align targeted policy rates with interbank rates.

41. The authorities have strived to comply with the FRL, but there is room for further fiscal reforms. The 2017 budget culminated in an unprecedented presidential veto, highlighting the need to strengthen the budget process and to reform the PFM framework. To enhance the credibility of the fiscal anchor, it would be desirable to modify the assessment of FRL compliance to include the execution stage as well as the budget approval stage. The pension and health system also faces near- and longer-term imbalances and needs to be reformed.

42. Regarding monetary policy, the IT framework is serving Paraguay well but can be further strengthened. In addition to tighter operation of the policy corridor, predictability of foreign exchange operations could also be strengthened, given that dollar sales have not always been implemented as announced. Discretionary interventions in the foreign exchange market should continue to be limited to exceptional circumstances such as disorderly market conditions. In addition, high credit dollarization continues to limit the BCP’s ability to affect market interest rates. Finally, greater use of forward-looking policy guidance in public statements could enhance central bank communications and improve predictability of monetary policy.

43. The financial sector appears sound, though banks need to continue strengthening their balance sheets after a decade of rapid credit growth. The banking system remains profitable and reported capital ratios appear comfortable but the ongoing adjustment in bank balance sheets will take more time to complete. Broad-based measures of loan quality deteriorated over the year and remain at elevated levels. In response, banks have increased provisioning and NPLs remain manageable. There are signs that credit from unregulated non-traditional lenders is growing, but this remains a small fraction of credit.

44. The authorities have made important progress on introducing risk-based bank supervision, ratifying a new banking law in December 2016. However, the law is only part of a broader agenda to strengthen financial sector oversight that needs to advance. Authorities should make additional progress in crucial initiatives including: (i) revisions to the BCP organic charter; (ii) establishment of a financial stability council; (iii) implementation of deposit insurance for savings and loan cooperatives; and (iv) integrating financial information through a single credit bureau. Furthermore, approving legislation regarding the Sociedades Anonimas and bearer securities in line with international standards should enhance entity transparency and could help safeguard correspondent banking relationships.

45. The authorities have advanced their structural reform agenda but further progress is needed. Progress has been achieved in several areas of the NDP with strategic infrastructure projects underway. Transparency and tax administration have been strengthened in several dimensions. However, additional effort should be made in removing institutional barriers in combating tax evasion and stepping up investment in transportation as well as electricity transmission and distribution, given large infrastructure gaps. In addition, to secure gains in terms of reduced inequality in the past decade, stronger implementation of the NDP priorities in education, training and expansion of conditional cash transfers will be needed. A tax reform that rebalances away from indirect taxation and maintains low income tax rates but limits deductions could improve progressivity and help finance these initiatives to promote more inclusive growth.

46. Data for surveillance is being strengthened. Paraguay recently implemented an enhanced general data dissemination (e-GDDS) system to make essential macroeconomic data available. Staff encouraged the authorities to complete the remaining few steps to satisfy the higher special data dissemination or SDDS standards.

47. Staff proposes to hold the next Article IV consultation on the standard 12-month cycle.

Box 1.Risk Assessment Matrix1

Note: Colored boxes on left hand side represent shock likelihood and colored boxes on right hand side represent severity of impact.

Red = High, Yellow = Medium, and Green = Low.

1/ The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

Box 2.Dollarization in Paraguay

Paraguay experienced a gradual decline in dollarization in the early 2000s as macroeconomic stability improved and inflation declined. However, progress on de-dollarization has reversed since the global financial crisis, driven by fluctuations in commodity prices, economic activity and the exchange rate.

Paraguay’s credit dollarization closely follows soybean prices, its major export item, and economic activity. A vector autoregression model (VAR) suggests that Paraguay’s dollarization of bank loans (measured in average 2010 exchange rate) is positively affected by soybean prices, economic activity (as measured by the IMEAP), and inflation; and negatively affected by exchange rate depreciation, and an increase in the marginal rate of the reserve requirement ratio (RRR) on foreign currency deposits. Specifically, staff analysis suggests that the impact of one percentage point (ppt) shock to soybean prices leads to higher economic activity, increasing dollarization by a 3½ ppt, cumulatively after one year. A 1 ppt depreciation of the guarani is associated with a decline in dollarization by 3 ppt. Also, stable and low inflation helps to lower dollarization. Finally, an increase in the marginal RRR on foreign currency deposits effectively lowers credit dollarization. Based on the time series estimates, a historical decomposition simulation shows that soybean prices, fluctuations in economic activity, and the exchange rate have been the most prominent factors explaining the uptick in dollarization in recent years.1

Paraguay: Credit dollarization

(in percent of total credit)

Soy price and credit dollarization

(12-month percent change)

Credit dollarization

(12-month change; percent of total credit)

Reducing dollarization would strengthen the effectiveness of monetary policy, and reduce financial risk. The prominence of the agribusiness industry, which invoices and borrows domestically in dollars, weakens monetary transmission and reduces the BCP’s lender of last resort capacity. The analysis suggests that to reduce dollarization and increase the use of local currency, policies should focus on: (i) continuing to build a track record of performance with the IT regime and preserve overall macroeconomic stability; and (ii) reduce the relative cost of transacting in local currency. Also, closely monitoring financial vulnerabilities including currency mismatches and banks’ net open positions; and strengthening risk-based supervision of banks will be important.

1 A historical decomposition estimates the individual contribution of each structural shock to movements in dollarization over a simple baseline (no shock) scenario.

Figure 7.Paraguay—Priorities for Assuring Sustainable and Inclusive Growth

Source:Sources: IMF, World Economic Outlook; World Economic Forum, Global Competitiveness Report (2015–16); Penn World Tables; Federal Reserve Bank of St. Louis’ FRED database; SEDLAC; and Fund staff calculations.

1/ Latin America & Caribbean WEO group excluding small states and Venezuela.

2/ The scale reflects the percentile distribution across all countries in the respective survey; higher scores reflect higher performance WB: World Bank; WEF: World Economic Forum.

Table 1.Paraguay—Selected Economic and Social Indicators
I. Social and Demographic Indicators
Population 2016 (millions)6.8Gini index (2015)47.1
Unemployment rate (2016)6.0Life expectancy at birth (2015)73.0
Percentage of population below the poverty line (2016)28.9Adult illiteracy rate (2015)4.5
Rank in UNDP development index (2015)110 of 186GDP per capita (US$, 2016)4,003
II. Economic Indicators
Est.Proj.Proj.
20112012201320142015201620172018
(Annual percent change, unless otherwise indicated)
Income and prices
Real GDP4.3−1.214.04.73.04.14.23.9
Nominal GDP10.83.415.010.13.19.68.47.7
Per capita GDP (U.S. dollars, thousands)3.93.84.44.64.04.04.24.4
Consumer prices (end of period)4.94.03.74.23.13.94.14.0
Nominal exchange rate (Guarani per U.S. dollar, eop)4,4404,2894,5244,6265,8075,767
Monetary sector
Currency issue11.617.513.28.92.94.95.65.6
Credit to private sector 1/25.615.819.719.88.71.20.72.3
Liabilities to private sector19.314.020.015.94.03.81.54.6
Monetary policy rate, year-end7.35.56.06.85.85.55.86.0
External sector
Exports (fob, values)20.7−7.816.7−3.7−16.82.45.54.9
Imports (cif, values)22.9−5.97.81.1−14.6−5.16.67.9
Terms of trade14.3−10.211.49.8−4.93.5−4.30.7
Real effective exchange rate 2/11.8−1.65.23.2−1.9−2.1
(In percent of GDP, unless otherwise indicated)
Current account0.4−2.01.7−0.4−1.11.71.20.1
Trade balance3.42.35.73.32.15.04.63.5
Exports50.347.447.042.439.940.740.439.9
Of which: Electricity9.09.17.77.17.57.87.36.9
Imports−46.9−45.1−41.2−39.1−37.8−35.7−35.9−36.4
Of which: Oil imports−6.0−6.7−6.0−5.5−3.3−2.9−3.7−3.6
Capital account and financial account1.93.70.35.2−1.2−0.22.20.2
General government−0.2−0.11.83.21.52.82.50.6
Private sector2.13.9−3.01.0−0.9−0.4−0.3−0.3
Of which: Direct investment2.21.90.21.10.91.01.11.1
Errors and omissions0.8−1.81.6−1.2−0.32.00.00.0
Gross international reserves (in millions of U.S. dollars)4,9844,9945,8716,8916,2007,1438,1288,244
In months of next-year imports of goods and services5.04.65.37.26.87.47.87.6
Ratio to short-term external debt2.71.92.42.92.52.73.13.1
Gross domestic investment17.115.115.416.316.818.020.220.6
Gross national saving17.513.017.115.915.819.721.420.7
Central government revenues18.019.017.117.918.718.318.018.0
Of which: Tax revenues12.612.711.812.712.712.512.612.7
Central government expenditures17.020.618.819.020.519.719.519.6
Of which: Compensation of Employees7.59.49.18.89.38.58.38.3
Of which: Net Acquisition of Non Financial Assets2.32.62.32.42.62.93.03.0
Central government net lending/borrowing1.0−1.7−1.7−1.1−1.8−1.4−1.5−1.5
Central government primary balance1.3−1.4−1.4−0.7−1.1−0.7−0.8−0.7
Public sector debt (excl. central bank bills)13.016.217.019.724.024.625.425.1
Of which: Foreign currency11.010.811.614.018.019.320.820.2
Of which: Domestic currency1.95.35.45.86.05.34.64.9
Memorandum items:
GDP (billions of Guaranies)105,203108,832125,152137,798142,003155,603168,691181,666
GDP (US$ billions)25.124.629.030.927.327.4
Sources: Central Bank of Paraguay; Ministry of Finance; and IMF staff estimates and projections.

Includes local currency credit and foreign currency credit valued at a constant exchange rate.

Average annual change; a positive change indicates an appreciation.

Sources: Central Bank of Paraguay; Ministry of Finance; and IMF staff estimates and projections.

Includes local currency credit and foreign currency credit valued at a constant exchange rate.

Average annual change; a positive change indicates an appreciation.

Table 2.Paraguay—Central Government Operations(In percent of GDP)
Projections
20122013201420152016201720182019202020212022
Revenue19.017.117.918.718.318.018.018.118.118.118.2
Taxes12.711.812.712.712.512.612.712.812.812.913.0
Income taxes2.72.52.72.82.82.82.92.92.93.03.0
Excises2.01.61.81.71.71.71.71.71.61.61.6
Value added tax6.56.36.86.96.76.86.86.86.86.96.9
Import duties1.51.31.31.21.11.11.11.21.21.21.2
Other0.10.10.10.20.20.20.20.20.20.20.2
Social contributions1.61.31.71.41.31.21.21.21.21.21.2
Other revenue4.74.03.64.54.54.14.14.14.14.03.9
Grants1.10.80.80.90.90.70.70.70.80.80.8
Itaipu-Yacyreta hydroelectric plants2.11.91.52.32.01.91.81.71.71.61.6
Other nontax revenue1.41.31.31.41.61.61.61.61.61.61.6
Expenditure20.618.819.020.519.719.519.619.719.619.619.7
Expense18.016.516.617.816.816.516.616.716.816.916.9
Compensation of employees9.49.18.89.38.58.38.38.38.38.28.2
Purchases of goods and services1.61.21.51.61.61.51.51.61.61.61.6
Interest0.20.30.40.60.70.80.91.01.11.11.2
Grants3.53.03.13.12.82.72.72.72.72.72.7
Social benefits2.12.12.12.72.62.72.72.72.72.72.7
Other expense1.10.70.70.50.60.50.50.50.50.50.5
Gross operating balance1.00.71.30.91.51.51.41.31.31.31.3
Net acquisition of nonfinancial assets2.62.32.42.62.93.03.02.92.82.82.8
Net lending/borrowing (overall balance)−1.7−1.7−1.1−1.8−1.4−1.5−1.5−1.6−1.5−1.5−1.5
Net financial transactions1.71.71.11.81.41.51.51.61.51.51.5
Net acquisition of financial assets0.10.31.20.20.70.10.10.00.00.00.0
Financial investments0.00.10.70.50.00.00.00.00.00.00.0
Net lending0.00.10.70.50.00.00.00.00.00.00.0
Net incurrence of liabilities1.82.01.91.92.51.71.71.61.51.51.6
Domestic1.80.3−1.10.9−0.3−0.81.11.10.91.01.1
Debt securities0.70.70.50.1−0.3−0.30.60.60.70.80.9
New issues1.00.90.80.40.30.20.91.01.31.41.7
Amortizations−0.3−0.1−0.3−0.4−0.6−0.5−0.4−0.5−0.5−0.6−0.8
Net credit from the banking system0.9−0.6−1.80.70.4−0.50.60.50.20.20.2
Net credit from the Central bank 1/0.8−0.6−1.80.80.3−0.50.60.50.20.20.2
Net credit from the commercial banks0.10.00.0−0.10.10.00.00.00.00.00.0
Other accounts payable0.20.20.20.1−0.40.00.00.00.00.00.0
External−0.11.73.11.02.82.50.60.50.60.50.5
Disbursements0.82.43.61.63.43.11.11.00.90.91.0
Amortizations−0.9−0.6−0.6−0.5−0.7−0.6−0.6−0.5−0.4−0.4−0.5
Statistical Discrepancy 2/0.00.00.40.0−0.40.00.00.00.00.00.0
Memorandum items:
Primary balance−1.4−1.4−0.7−1.1−0.7−0.8−0.7−0.6−0.4−0.4−0.4
Primary balance excl. royalties and grants−4.7−4.1−3.0−4.3−3.6−3.3−3.1−3.1−2.9−2.8−2.7
Primary balance excl. royalties and grants 3/−6.3−5.8−4.3−6.0−4.9−4.5−4.2−4.1−3.9−3.7−3.6
Output gap for GDP excl. agriculture and energy0.12.84.11.90.20.70.60.50.30.20.2
Structural primary balance excl. royalties and grants 3/−6.3−6.4−5.2−6.4−4.9−4.6−4.3−4.2−3.9−3.7−3.6
Fiscal Impulse3.00.1−1.21.2−1.4−0.3−0.3−0.2−0.3−0.2−0.1
Central government gross debt12.613.616.219.721.021.721.521.421.521.521.6
Nominal GDP (in billions of Guaranies)108,832125,152137,798142,003155,603168,691181,666194,925209,873226,460244,265
Sources: Ministry of Finance; Central Bank of Paraguay; and IMF staff estimates and projections.

Includes mainly use of government deposits at the Central Bank.

Captures the discrepancy between above-the-line calculations and financial accounts.

In percent of potential non-agricultural non-energy GDP.

Sources: Ministry of Finance; Central Bank of Paraguay; and IMF staff estimates and projections.

Includes mainly use of government deposits at the Central Bank.

Captures the discrepancy between above-the-line calculations and financial accounts.

In percent of potential non-agricultural non-energy GDP.

Table 3.Paraguay—Operations of the Consolidated Public Sector 1/(In percent of GDP)
Est.Projections
20122013201420152016201720182019202020212022
Revenue23.622.122.824.023.723.623.723.924.024.024.0
Tax revenue12.812.312.712.812.612.712.812.812.913.013.1
Nontax revenue and grants 2/10.49.19.610.810.610.310.410.610.610.510.4
Public enterprises operating surplus0.50.70.40.40.50.60.50.50.50.50.5
Expenditure25.323.523.525.424.924.925.125.225.125.225.3
Expense21.620.320.521.820.720.620.921.021.121.221.3
Compensation of employees12.011.711.311.710.610.510.510.410.410.410.3
Purchases of goods and services2.72.12.72.62.62.62.62.62.72.72.7
Interest payments0.60.80.81.11.21.41.71.81.92.02.2
Transfers 3/5.25.05.05.85.65.45.45.45.45.45.4
Current transfers4.14.14.24.94.84.64.64.64.64.64.6
Capital transfers1.10.90.80.90.70.80.80.80.80.80.8
Other expense1.10.70.70.70.80.70.70.70.70.70.7
Gross operating balance2.11.82.22.23.02.92.92.92.92.82.7
Net acquisition of nonfinancial assets3.73.23.03.64.14.34.24.14.04.04.1
Net lending/borrowing (overall balance)−1.6−1.4−0.7−1.3−1.1−1.4−1.4−1.3−1.1−1.2−1.3
Net financial transactions1.61.40.71.31.11.41.41.31.11.21.3
Net acquisition of financial assets0.60.90.7−0.20.80.20.20.10.10.10.1
Net incurrence of liabilities2.22.31.41.12.01.61.61.41.31.31.5
External−0.11.73.11.23.52.80.70.60.60.50.5
Disbursements0.82.43.81.84.23.51.31.21.10.91.0
Amortizations−0.9−0.7−0.6−0.6−0.7−0.7−0.6−0.6−0.4−0.5−0.5
Domestic2.10.4−1.9−0.2−1.2−1.20.90.80.60.81.0
Domestic debt0.70.70.50.1−0.3−0.30.60.60.70.80.9
Disbursements1.00.90.80.40.30.20.91.01.31.41.7
Amortizations−0.3−0.1−0.3−0.4−0.6−0.5−0.4−0.5−0.5−0.6−0.8
Deposits1.2−1.2−2.7−0.9−1.4−1.5−0.2−0.2−0.5−0.4−0.4
Change in net deposits com.bks0.4−0.6−1.0−1.7−1.8−1.0−0.7−0.8−0.7−0.6−0.6
Change in net deposits CBP0.8−0.6−1.80.80.3−0.50.60.50.20.20.2
Quasifiscal deficit financing 4/0.20.90.40.70.60.60.60.40.40.50.6
Other accounts payable0.20.20.20.1−0.40.00.00.00.00.00.0
Memorandum items:
Primary balance−1.0−0.70.1−0.30.00.00.30.60.80.80.8
Public sector debt (excl. central bank bills)16.217.019.724.024.625.425.124.824.724.524.4
Domestic public debt5.35.45.86.05.34.64.95.15.55.86.3
Foreign public debt10.811.614.018.019.320.820.219.719.318.718.1
Sources: Ministry of Finance; and IMF staff estimates and projections.

Includes the nonfinancial public sector and the central bank.

Includes social contributions and grants.

Includes social benefits, grants, and capital transfers.

Corresponds to net losses of central bank capital which are not automatically compensated by the government.

Sources: Ministry of Finance; and IMF staff estimates and projections.

Includes the nonfinancial public sector and the central bank.

Includes social contributions and grants.

Includes social benefits, grants, and capital transfers.

Corresponds to net losses of central bank capital which are not automatically compensated by the government.

Table 4.Paraguay—Summary Accounts of the Central Bank(In billions of Guaranies; eop; valued at constant exchange rate)
Projections
20122013201420152016201720182019202020212022
Currency issue8,6069,74410,61510,92011,45712,09512,76913,48114,23215,02515,862
Growth17.513.28.92.94.95.65.65.65.65.65.6
Net international reserves23,06727,12531,93427,52131,78936,35036,88637,73539,89942,36745,741
In millions of U.S. dollars4,9835,8596,8985,9456,8677,8527,9688,1518,6199,1529,881
Net domestic assets−14,461−17,381−21,319−16,601−20,332−24,254−24,117−24,254−25,667−27,342−29,879
Net nonfinancial public sector−1,354−5,837−8,282−6,565−7,127−7,898−6,932−5,964−5,515−5,061−4,612
Net credit to the central government−1,342−5,837−8,282−6,565−7,126−7,897−6,931−5,963−5,514−5,060−4,612
Net credit to the rest of NFPS−12−1−1−1−1−1−1−1−1−1−1
Net credit to the banking system−11,792−14,926−16,961−16,123−20,641−25,765−27,835−30,078−33,471−37,497−43,038
Reserve requirements−6,539−7,605−9,096−9,617−9,558−9,983−10,389−10,771−11,129−11,490−11,863
Free reserves−2,685−1207−2,036−2,292−2,992−2,992−2,992−2,992−2,992−2,992−2,992
Monetary control instruments 1/−3,665−7,473−6,918−5,349−9,321−14,020−15,684−17,545−20,579−24,244−29,412
Other1,0971,3611,0901,1361,2291,2291,2291,2291,2291,2291,229
Other assets and liabilities (net)−1,3153,3823,9246,0877,4369,40810,65011,78813,31815,21517,772
Capital and reserves1,5575,3876,2182,8973,7094,6835,7546,6237,4888,5659,918
Other assets net 2/−2,872−2,005−2,2943,1913,7274,7254,8965,1645,8316,6517,853
Memorandum Items:
Total stock of IRMs outstanding 1/3,6017,6146,8735,3079,24714,02015,68417,54520,57924,24429,412
Monetary base 3/13,59813,18014,61615,01916,05816,92317,79818,67819,58620,53821,539
Monetary base, annual growth17−31137555555
Quasifiscal balance2611,1235429939149741,0708698641,0761,353
In percent of GDP0.20.90.40.70.60.60.60.40.40.50.6
Cost of monetary policy operations4005345925836521,0031,4571,6191,7992,0852,434
In percent of GDP0.40.40.40.40.40.60.80.80.90.91.0
Sources: Central Bank of Paraguay; and IMF staff estimates and projections.

Includes overnight-deposit facility and central bank bills (LRM). A fraction of LRM is held by non-bank institutions.

Includes LRM held by the non-banking sector.

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

Sources: Central Bank of Paraguay; and IMF staff estimates and projections.

Includes overnight-deposit facility and central bank bills (LRM). A fraction of LRM is held by non-bank institutions.

Includes LRM held by the non-banking sector.

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

Table 5.Paraguay—Summary Accounts of the Financial System 1/(In billions of Guaranies; end-of-period; valued at constant exchange rate)
Projections
20122013201420152016201720182019202020212022
I. Central Bank
Net international reserves23,06727,12531,93427,52131,78936,35036,88637,73539,89942,36745,741
In millions of U.S. dollars4,9835,8596,8985,9456,8677,8527,9688,1518,6199,1529,881
Net domestic assets−14,461−17,381−21,319−16,601−20,332−24,254−24,117−24,254−25,667−27,342−29,879
Credit to public sector, net−1,354−5,837−8,282−6,565−7,127−7,898−6,932−5,964−5,515−5,061−4,612
Credit to banking system, net 2/−8,127−7,452−10,042−10,774−11,320−11,745−12,151−12,534−12,892−13,252−13,626
Credit1,0971,3611,0901,1361,2291,2291,2291,2291,2291,2291229
Deposits9,2248,81311,13211,91012,54912,97413,38113,76314,12114,48214,855
Central bank securites3,6017,6146,8735,3079,24714,02015,68417,54520,57924,24429,412
Central bank securites−3,601−7,614−6,873−5,307−9,247−14,020−15,684−17,545−20,579−24,244−29,412
Other−1,3793,5223,8796,0457,3629,40810,65011,78813,31815,21517,772
Currency issue8,6069,74410,61510,92011,45712,09512,76913,48114,23215,02515,862
II. Monetary Survey
Net foreign assets22,53325,14729,51725,62829,84934,43134,97935,83938,01540,49443,879
In millions of U.S. dollars4,8685,4326,3765,5366,4487,4387,5567,7428,2128,7479,479
Net domestic assets31,69539,45944,79551,96250,96350,63854,13357,03758,46159,63960,055
Credit to the public sector−4,856−9,327−12,278−11,205−13,441−14,205−13,233−12,259−11,804−11,344−10,890
Credit to the private sector47,87857,29868,66074,60275,51176,05677,78681,44986,24693,507102,288
Other−11,326−8,512−11,587−11,436−11,107−11,213−10,420−12,153−15,981−22,523−31,343
Broad liquidity (M4)54,22964,60674,31377,59080,81185,06989,11192,87696,475100,133103,934
Bonds and issued securities00000000000
Other monetary liabilities2,7653,7604,8265,5294,9465,1935,4265,6435,8466,0516,263
Central bank securities with private sector0140000000000
Broad liquidity (M3)51,46460,70669,48772,06175,86579,87783,68587,23390,62994,08297,672
Foreign currency deposits16,89320,28625,35826,41626,83327,90629,02330,18431,27032,36533,497
Money and quasi-money (M2)34,57140,42044,12945,64549,03251,97054,66357,05059,35961,71864,175
Quasi-money16,81320,34022,41122,96924,40825,87227,16628,25229,26930,29431354
Money (M1)17,75820,08021,71822,67624,62526,09827,49728,79830,09031,42432,821
(Annual percent change)
M0 (Currency issued)17.513.28.92.94.95.65.65.65.65.65.6
Credit to the private sector15.819.719.88.71.20.72.34.75.98.49.4
M110.013.18.24.48.66.05.44.74.54.44.4
M212.016.99.23.47.46.05.24.44.04.04.0
M313.818.014.53.75.35.34.84.23.93.83.8
Of which: Foreign currency deposits17.820.125.04.21.64.04.04.03.63.53.5
Memorandum items:
Ratio of foreign currency deposits
to M3 (percent)32.833.436.536.735.434.934.734.634.534.434.3
Ratio of foreign currency deposits
to total private sector deposits (percent)35.335.438.238.237.438.338.138.138.138.138.1
Sources: Central Bank of Paraguay; and IMF staff estimates and projections.

Includes banks, finance companies, and the 20 largest cooperatives.

Excludes LRM held by the banking sector.

Sources: Central Bank of Paraguay; and IMF staff estimates and projections.

Includes banks, finance companies, and the 20 largest cooperatives.

Excludes LRM held by the banking sector.

Table 6.Paraguay—Summary Balance of Payments(In millions of U.S. dollars)
Projections
20122013201420152016201720182019202020212022
Current account−501478−127−2874603594331172157206
Trade balance5721,6631,0265811,3661,3271,0791,1311,3291,3621,392
Exports11,65413,60513,10510,89811,15511,76412,34213,01013,71114,31314,940
Of which: Electricity2,2322,2372,1802,0362,1322,1112,1512,1832,2612,2952,330
Of which: Beef8271,0591,4311,2461,1851,2231,2011,2551,3111,3701,432
Of which: Soy1,6242,7902,4251,7661,9832,2542,3122,3542,4712,5832,699
Imports−11,083−11,942−12,079−10,317−9,789−10,437−11,263−11,879−12,382−12,951−13,548
Of which: Fuel products−1,647−1,735−1,696−906−796−1,069−1,108−1,131−1,169−1,223−1,289
Services (net)−170−219−222−244−220−280−262−249−231−212−192
Transport−296−276−311−341−306−346−348−352−348−344−340
Travel5830333726122230354147
Other68275660595564738291101
Factor income−1,661−1,685−1,537−1,297−1,461−1,490−1,584−1,693−1,789−1,878−1,903
Transfers759720606672776801811842863885908
Capital and financial account922901,616−322−5462672153295375521
Capital transfers5161141154163164175185196208220
Direct investment48072346259274306337381442526631
Portfolio investment5005001,30028050050000000
Of which: government05001,00028050050000000
Other investment−108−543−171−1,015−991−344−439−413−342−358−330
Of which: government−3013−11123277216176177204205206
Errors and omissions−446469−358−82538000000
Overall balance−251,0361,130−691943985116183468532727
Net international reserves (increase -)25−1,036−1,131691−943−985−116−183−468−531−725
Gross reserves25−1,036−1,131691−943−985−116−183−468−532−727
Reserve liabilities00000000012
Exceptional financing00000000000
Arrears deferral (+)/clearance (-)00000000000
Memorandum items:
Current account in percent of GDP−2.01.7−0.4−1.11.71.20.10.10.50.40.5
Gross reserves (in millions of U.S. dollars)4,9945,8716,8916,2007,1438,1288,2448,4278,8959,42710,154
In months of imports of GNFS4.65.37.26.87.47.87.67.47.57.57.5
External public debt in percent of GDP 1/10.811.614.018.019.320.820.219.719.318.718.1
Debt service in percent of exports GNFS11.29.09.711.411.711.411.110.910.410.410.5
Export volume (percent change)−9.923.31.0−3.22.97.93.74.03.93.93.9
Import volume (percent change)−9.59.37.6−0.32.14.83.23.13.13.13.2
Terms of trade (percent change) 2/−10.211.49.8−4.93.5−4.30.7−0.1−0.6−1.0−0.7
Sources: Central Bank of Paraguay; and IMF staff estimates and projections.

Based on average exchange rate valuation of GDP.

Excludes unregistered trade and imports destined for re-export.

Sources: Central Bank of Paraguay; and IMF staff estimates and projections.

Based on average exchange rate valuation of GDP.

Excludes unregistered trade and imports destined for re-export.

Table 7.Paraguay—Indicators of External Vulnerability(In percent of GDP, unless otherwise indicated)
20122013201420152016
Monetary and financial indicators
Broad money (M3), percentage change 1/13.818.014.53.75.3
Credit to the private sector, real (percent change) 1/11.415.415.05.4−2.6
Share of nonperforming loans in total loans (percent)2.12.01.82.52.8
Average domestic bank lending rate, real13.016.215.416.113.4
Central Bank bill yield, real1.83.10.92.92.0
International reserves (millions of U.S. dollars)4,9835,8596,8985,9456,867
Central bank foreign short-term liabilities (millions of U.S. dollars)0.00.00.01.41.2
External indicators
Merchandise exports (percentage change)−7.816.7−3.7−16.82.4
Merchandise imports (percentage change)−5.97.81.1−14.6−5.1
Merchandise terms of trade (percentage change)−10.211.49.8−4.93.5
Real effective exchange rate (percentage change)9.4−3.18.5−8.02.0
Current account balance (percent of GDP)−2.01.7−0.4−1.11.7
Capital and financial account (percent of GDP)3.70.35.2−1.2−0.2
Net foreign direct investment (percent of GDP)1.90.21.10.91.0
Other net investment (percent of GDP)−0.4−1.9−0.6−3.7−3.6
External public debt (percent of GDP) 2/10.811.614.018.019.3
Total external debt (percent of GDP)65.554.553.559.558.7
Excluding debt of binational companies21.318.922.026.127.8
Debt service (in percent of exports GNFS)11.29.09.711.411.7
International reserves (in millions of U.S. dollars)4,9835,8596,8985,9466,868
In months of imports of GNFS4.65.37.26.87.4
Ratio to short-term external debt 3/1.92.42.92.52.7
Ratio to foreign currency deposits in domestic banks1.31.31.34.24.3
Sources: Central Bank of Paraguay; and IMF staff estimates.

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.

Sources: Central Bank of Paraguay; and IMF staff estimates.

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.

Table 8.Paraguay—Medium-Term Framework(In percent of GDP, unless otherwise indicated)
Projections
201420152016201720182019202020212022
National accounts and prices
Real GDP growth (in percent)4.73.04.14.23.93.83.83.83.8
Gross domestic investment16.316.818.020.220.620.720.720.821.0
Gross domestic savings15.915.819.721.420.720.821.221.321.5
Consumer prices (end of period; in percent)4.23.13.94.14.04.04.04.04.0
Public finances
Central government primary balance−0.7−1.1−0.7−0.8−0.7−0.6−0.4−0.4−0.4
Central government net lending/borrowing−1.1−1.8−1.4−1.5−1.5−1.6−1.5−1.5−1.5
Central government debt16.219.721.021.721.521.421.521.521.6
Public sector debt19.724.024.625.425.124.824.724.524.4
External sector
Terms of trade (annual percent change)9.8−4.93.5−4.30.7−0.1−0.6−1.0−0.7
Current account−0.4−1.11.71.20.10.10.50.40.5
Foreign direct investment1.10.91.01.11.11.21.31.41.6
Gross international reserves (in US$ billion)6.96.27.18.18.28.48.99.410.2
Sources: Central Bank of Paraguay; Ministry of Finance; and IMF staff estimates and projections.
Sources: Central Bank of Paraguay; Ministry of Finance; and IMF staff estimates and projections.
Annex I. Commodity Shock and Income Inequality in Paraguay1

Inequality fell significantly in Paraguay in the 2000s, during the commodity boom. Paraguay performed robustly during mid-2000s, above peers in the region, both in terms of output and income per-capita growth. At the same time, measures of poverty and income inequality point to an improvement during the same period, signaling that growth helped with equalizing incomes (despite inequality remaining elevated with a Gini coefficient at 0.50). Falling inequality during the 2000s was a feature of many countries in Latin America. Among them, inequality fell disproportionately more in commodity exporters. Most of them faced a significant change in commodity export prices during the 2000s with prices climbing by 40–50 percent on average. For some commodities, as in the case of Paraguay, agricultural and livestock commodity prices increased by about 70 percent in the period 2006–2013.

Average GDP Growth

(In percent)

Source: Central Bank of Paraguay.

Gini Coefficient

(Population weighted average)

Source: PovcalNet; WDI.

How did the commodity boom cause inequality to fall? We identify three main channels common to most Latin American commodity exporters. The first channel entailed a significant reallocation of resources and income in rural relative to urban areas and to sectors relatively more labor intensive. The second channel favored more low-skilled jobs than high-skilled jobs. And finally, in some countries, higher revenues from royalties related to the commodity sectors were used to support cash transfer programs that allowed for a reduction of poverty.

What do the data tell us? Data for Paraguay show that during the period 2006–2013 employment grew relatively more in rural areas, where the agriculture and livestock sectors are more prominent, and for low skilled workers. Salaries also show that incomes increased relatively more for lower skilled labor. However, during the same period Paraguay experienced other structural changes that could have affected income distribution, including policies. The share of population living in urban areas grew quite significantly by 2 percentage points, as a result of continuous migration trends from rural areas. This might have helped with equalizing incomes between rural and urban centers. In addition, skills among the labor force exogenously increased, supporting a reduction of the skill premium.

Government policies might also have had an impact. In 2004, a VAT reform extended the tax base even to basic goods (though at a lower rate) increasing the revenue from indirect taxes, which surged by 2 percent of GDP. Transfer programs also increased but remained relatively small (below ½ of GDP). The government expanded and hired significantly more workers, whose salaries are generally higher than other sectors, with only some exclusions. Finally, the government stepped up in-kind transfers, such as health care in mid-2000s, which grew by 2 percentage points of GDP in the period 2006–2013.

Employment by Area

(In percent of population age 25–64)

Source: SEDLAC (CEDLAS and the World Bank).

Wages: Primary Versus High-Skilled Sectors

(Ratio primary to high-skilled services, in percent)

Source: SEDLAC (CEDLAS and The World Bank)

We use a model to study all these changes.2 To examine the relative strength of each channel related to the commodity boom and of other exogenous shocks, we exploit a dynamic general equilibrium model with heterogeneous agents and sectors. The model captures both differences in income between rural areas, mostly based on agriculture, and urban areas, where other sectors such as manufacturing and services are more prominent. The different sectors are also employing workers with different skills. For more details on the model see Balakrishnan et al (2017).3 We simulate the increase in agricultural and livestock commodity prices in 2006–2013 and the other exogenous shocks and policies.

What do we find? The impact of the commodity boom accounted for a significant share of the reduction in the Gini coefficient between 2006–2013 (2.5 basis points), both as rural incomes increased as well as low-skilled jobs and incomes. Migration and higher skills in the labor force contributed to a reduction of inequality. The increase of indirect taxes had the potential to increase inequality by a large magnitude (about 3 Gini basis points). However, given that most of the rural informal sector does not pay VAT, this impact is significantly muted. The increase in health care spending had the effect of reducing inequality, although its impact was mitigated by the fact that health care centers are still concentrated in urban areas.4 Combining all the policies, the increase in health care dominates the negative impact of the VAT reform on measures of income inequality and the net impact is a reduction of the Gini by about ¼ of a basis point.

Change in Gini

(In basis points)

Source: IMF staff calculations

Annex II. Budget Processes in Paraguay: A Comparative Perspective1

Tensions between branches of government escalated in the 2017 budget process, culminating in an unprecedented presidential veto. In December 2016, the President vetoed the budget approved by Congress for fiscal year 2017, in light of controversial modifications made by the Senate that included raising public sector salaries (amounting to 0.2 percent of GDP), reducing bond issuances, and imposing a cap on Central Bank instruments used for open-market operations and liquidity management. In the absence of a congressional override of the Presidential veto, the 2016 fiscal year budget law continues to apply in 2017.

Legislative authority over the annual budget approval process appears unconstrained in Paraguay. Under the Constitution, no limits are placed on Congress’ power to revise budgets submitted by the Executive. Consequently, although the FRL and Law of Financial Administration of the State (LFAS) were both passed to constrain the budget envelope, legally, they do not appear to be able to restrict the Congress’ ability to do so. The LFAS contains important restrictions on the budget approval process, while the FRL purports to restrain Congress from modifying budget estimates except in accordance with budgetary principles established in the LFAS. While these provisions serve as useful guidelines, the extent to which they bind Congress is doubtful beyond reputation costs. Essentially, neither the FRL nor the LFAS enjoy a higher legal status constitutionally than the annual budget law.

In contrast, several other jurisdictions constrain legislative powers to modify the budget. For example, Peru’s Constitution prohibits Congress from increasing public expenditure without offsets. Under Spain’s Constitution, every budget revision that involves an increase in expenditures or a decrease in budget revenues, requires approval of the Executive before it is passed. Chile’s Constitution limits Congressional powers to modify budget bills such that they can only accept, reduce or reject the services, employment, emoluments, loans and benefits expenditures proposed by the President. Under the Polish Constitution, the amendments of the Legislative branch to the budget draft may not exceed the deficit level provided by the budget bill presented by the Executive. In the absence of constitutional constraints, legislative measures have been used by some jurisdictions, although their effectiveness is not always assured. In Brazil and Portugal, procedural rules to be followed by Congress in modifying the budget presented by the Executive, are embedded in higher-ranking legislation whose revision requires a super-majority of Congressional votes.

Going forward, Paraguayan authorities should consider options to strengthen their budget process and improve coordination between branches of government. One option is to require agreement between the Executive and Congress on the fiscal aggregates that will shape the budget in the context of a pre-budget strategy hearing. Another approach involves a sequester-type mechanism that would discourage Congress from breaching the overall budget envelope during the budget approval process. Starting from the 1990s, the U.S. has introduced legislation including the 2010 Statutory Pay-As-You Go Act and the 2011 Budget Control Act, requiring across-the-board automatic spending cuts if discretionary spending approved by Congress increased the federal deficit beyond a specified limit. More generally, procedural rules could be introduced requiring offsetting revenue or expenditure measures when budget amendments are proposed. The authorities could consider anchoring such an approach in appropriate legal provisions.

Annex III. Mobilizing Tax Revenues in Paraguay1

Paraguay’s tax system is characterized by relatively low rates and heavy reliance on indirect taxes (Figure 1). The Value-added tax (VAT), personal (PIT) and corporate (CIT) income tax rates were set at a rate of 10 percent across the board, after the implementation of the 2004 tax reform (which took place over several years). These statutory rates are low when compared to other countries in the region. As of 2016, almost ¾ of revenues were accounted for by VAT and excise taxes. Nevertheless, the share of income taxes on total tax revenue has increased over the past decade, in part as a result of reforms, such as the introduction of the PIT in 2012 and the establishment of a revamped tax on agricultural incomes in 2014.

Figure 1.Paraguay’s Tax System and Structure from a Comparative Perspective

Source: Authorities’ data and FAD Tax rate database. The PIT and CIT rates depicted are the statutory top rates. The VAT rate is the national statutory standard.

The tax pressure has increased, partly as a result of improvements in tax administration. The total tax revenue to trend GDP ratio increased by close to 3 percentage points of GDP over the last decade. Notably, this increase in revenues was driven by VAT and income tax collections.

Tax Revenue

(In percent of trend GDP)

Source: IMF staff estimates based on Authorities’ data.

Institutional capacity at the Revenue Authority (SET) has been strengthened in a number of dimensions. The SET has achieved significant progress in planning capacity; in monitoring processes; and in implementing electronic services (such as registering taxpayers through the internet, electronic notification, and electronic data capture). Furthermore, the SET has also strengthened compliance and enforcement processes through the creation of a strategy to control medium-sized taxpayers; by implementing biometric data capture; and by improving administrative arrears collections.

These efforts have translated in improvements in several indicators. The Taxpayer registry increased from 581,639 in 2013 to 684,048 in 2015. The number of tax audits increased by 66 percent and the number of tax adjustments increased by 224 percent over the same period. The internet filing rate increased from close to 48 percent in 2013 to over 92 percent in 2015. According to authorities’ estimates, the VAT gap (i.e. the difference between potential and actual VAT revenue collections) fell from close to 55 percent in 2005 to less than 31 percent in 2014. Moreover, a simple measure of the efficiency of VAT collections based on national accounts data (C-efficiency) also points to significant enhancements since 2003.

C-efficiency in Paraguay

Source: IMF staff estimates based on Authorities’ data.

Progress in modernizing customs administration has been more uneven. The National Customs Administration (DNA) still lacks a clear and effective organizational structure and a modern accountability framework. Furthermore, it could benefit from moving to a risk management approach that would include preventive measures and post clearance audit as part of a comprehensive strategy. The share of physical inspections remains high and these are often discretionary. Finally, the DNA could also better exploit the data generated by its current systems for risk analysis.

A number of institutional and legal constraints impose barriers to further efficiency gains. The SET is understaffed; the economically active population-to-staff ratio is 40 percent higher in Paraguay compared to countries in the region. In addition, the current mechanisms to deal with corrupt and underperforming staff are ineffective. Moreover, the enforcement of arrears collection is not part of the SET’s attributions. Legal issues also pose obstacles to stronger compliance and enforcement. Procedures for imposing sanctions on tax evasion are weak by international standards. Furthermore, there is also scope to improve interagency coordination between the SET and the DNA to exchange information; to address undervaluation of goods; and to tackle the non-payment of excise taxes.

Going forward, the implementation of a comprehensive Plan to Fight Tax Evasion (PFTE) combined with measures to broaden the tax base could contribute to increase revenue mobilization. The PFTE would entail a substantial increase in SET’s staffing and technological resources. Another pillar would consist of designing a results-based incentive system for SET’s staff. The third pillar would involve the enactment of laws to strengthen SET’s enforcement powers (audit, arrears, fines, etc.). This would entail some modifications in current legislation. Authorities could also consider other actions to broaden the taxpayer base. Reducing the high levels of PIT allowances and VAT exemptions and phasing-out of the VAT credit against the PIT are concrete examples of actions that could be undertaken.

Annex IV. Implementation of Past Fund Policy Advice

The authorities have taken on board many of the policy recommendations from the 2016 Article IV consultation.

  • Directors emphasized the need for continued efforts to mobilize revenue and contain current expenditure while making space for capital spending, especially on infrastructure. Directors also suggested that authorities should continue to build a track record in implementing the current FRL before undertaking changes to the fiscal framework. In 2016, fiscal outturns fully adhered to the FRL ceilings and were marked by a compositional shift towards capital spending. Current primary expenditure, especially compensation of employees, contracted in real terms. Proposals to change the FRL are still tentative and are expected to be implemented by the next administration.

  • On monetary and exchange rate policy, directors argued that limiting discretionary foreign exchange market interventions to exceptional circumstances of disorderly market conditions, would reinforce the inflation targeting regime. Directors also recommended reforms to enhance liquidity management. The BCP continues to limit discretionary interventions to exceptional circumstances. In addition, the central bank increased issuance of monetary regulation instruments (IRMs) to mitigate excess liquidity in the interbank market.

  • On financial sector policy, directors welcomed progress towards introducing risk-based supervision and encouraged the authorities to continue upgrading monitoring and analytical capacity and strengthen institutional arrangements to carry out these functions. Authorities ratified a new banking law in December 2016. The law grants additional powers to the BCP and facilitates the revised regulatory framework. As the law is implemented, the central bank should also receive enhanced powers to implement macroprudential measures to better manage future credit cycles. The BCP continues to receive technical assistance from the IMF to implement risk-based supervision.

  • Directors commended the authorities for progress on implementing their structural reform agenda covered in the National Development Plan and stressed that infrastructure remains a key priority, especially improving electricity distribution and transportation. In addition to accelerating the execution of public investment in transportation and electricity distribution, authorities have also made important progress in public investment management. The national public investment system (SNIP) has been instrumental in aligning investment priorities with the national development plan. Authorities implemented a “map of investments” to strengthen the monitoring of projects by public servants, but also by civil society.

The authorities have also maintained their commitment to transparency in the discussions with staff, by consenting to the publication of the mission’s concluding statement.

Annex V. External Stability Assessment
ParaguayOverall Assessment
Foreign asset and liability positionBackground. Paraguay’s net international investment position (NIIP) has hovered 40 percent of GDP over the last 5 years. The negative FDI position reflects large inflows of capital in the agricultural sector and in businesses related to the maquila. More recently the construction sector was another repository of FDI. Paraguay also has a negative net asset position related to loans mostly due to large projects financed by multinationals and more recently to bond issuance by the government on international markets.

Assessment. Gross external debt has remained quite stable in the last two years around 59 percent of GDP, as a result of two offsetting forces: the debt of the binational hydroelectric company (ITAIPU) decreasing and multilateral loans and bonds increasing the liabilities. Going forward debt is expected to decrease as the binational portion continues to fall and the position remains sustainable under a range of adverse shocks (Figure AII.1 and Table AII.1).
The external position strengthened to levels that appear stronger than those implied by fundamentals. The exchange rate is assessed as mildly undervalued. The external debt position does not raise sustainability concerns.
Current accountBackground. Paraguay’s current account has been in surplus over the last 20 years averaging 0.7 percent of GDP. In the past couple of years, the average balance has turned to negative, mainly as a result of low agriculture commodity prices. The current account is projected to return to positive balance over the medium term, as commodity (especially soy) prices rebound in 2017 and fuel import prices increase only mildly. While national savings have remained relatively stable as a share of GDP, investment has decreased in the last 2 years, as a result of low prospects in the commodity production sectors.

Assessment. The current account is estimated to have reached 1.7 percent of GDP in 2016, as agricultural exports were boosted by positive shocks to crops and fuel prices remained low. Electricity exports were also exceptionally high, due to temporary record generation. Excluding those sales, the current account would be just above ½ percent of GDP. The country has gone through a significant adjustment in 2015, in line with worsening external fundamentals. The current account surplus is projected to narrow this year to 1.2 percent of GDP as a strong pick up in agricultural investment and imports related to the construction sector partly offset very strong growth in exports and re-exports. Towards the medium term, the current account balance is expected to move close to 1 percent of GDP, in line with the historical average.
Real exchange rate and competitivenessBackground. Paraguay’s real effective exchange rate (REER) is highly correlated with commodity prices. Amidst lower commodity export prices and a consequent negative terms-of-trade shock, the REER has depreciated 2 percent in 2015 and 1 percent in 2016, primarily reflecting nominal depreciation. Inflation has remained tame, as import prices remained low and domestically activity cooled down.

Assessment. The EBA results suggest a mild undervaluation of the REER, also in line with an accumulation of reserves. In general, staff sees the rate moving in line with fundamentals, although probably the adjustment to permanently lower commodity prices has not been completed yet.
Capital and financial accountsBackground. The CA deficit is financed by FDI and external loans, with a multilateral institution playing an important role (IADB loan of USD 200 million in December 2016). Lately, the government has more frequently tapped the international markets with a placement of bonds in 2016 and this year for USD 500 million each year.

Assessment. Paraguay has a fully open capital and financial account but financial markets are not deep or developed, yet. Despite adverse conditions in the region, Paraguay has enjoyed a stable flow of FDI. 2016 also saw remittances growing very rapidly by about 20 percent, the largest increase in the last 5 years. Vulnerabilities arising from linkages with international financial markets in the region are very limited, with foreign asset holding below 1 percent of total financial system assets.
FX intervention and reserves levelBackground. The exceptional dollar sales of the binationals last year were one of the main cause of reserve accumulation at the BCP. The pre-announced sale of part of these reserves did not proceed as announced and as a result the BCP accumulated reserves for more than USD 900 million.

Assessment. Reserves remain ample (at 7 months of imports) and above the Fund metrics for a small open economy. A flexible exchange rate is the first line of defense against external shocks. Staff has recommended to continue with a rules-based approach for the regular dollar sales and to limit discretionary interventions to exceptional situations of disorderly market conditions.
Table 1.Paraguay: External Debt Sustainability Framework, 2012–2022(In percent of GDP, unless otherwise indicated)
ActualProjections
20122013201420152016201720182019202020212022Debt-stabilizing non-interest current account 6/
Baseline: External debt65.554.553.559.558.858.656.654.152.050.348.8−0.9
Change in external debt1.9−10.9−1.06.0−0.8−0.1−2.1−2.5−2.1−1.6−1.5
Identified external debt-creating flows (4+8+9)1.4−11.8−4.17.2−1.9−1.5−2.6−2.9−3.0−3.0−3.2
Current account deficit, excluding interest payments−0.5−3.6−1.5−1.2−3.0−1.0−2.0−2.6−2.8−2.9−3.3
Deficit in balance of goods and services−1.6−5.0−2.6−1.2−4.0−2.0−2.7−3.2−3.4−3.5−3.8
Exports50.549.945.343.143.743.844.344.043.442.942.4
Imports48.844.942.741.939.741.841.640.940.039.338.7
Net non-debt creating capital inflows (negative)−1.9−0.2−1.1−0.9−1.0−1.0−1.0−1.0−1.0−1.0−1.0
Automatic debt dynamics 1/3.9−7.9−1.59.32.00.50.40.70.80.91.0
Contribution from nominal interest rate2.61.91.92.32.42.42.52.62.72.82.8
Contribution from real GDP growth0.8−7.8−2.4−1.8−2.4−1.9−2.1−2.0−1.9−1.9−1.8
Contribution from price and exchange rate changes 2/0.5−2.1−1.08.92.1
Residual, incl. change in gross foreign assets (2–3) 3/0.60.93.1−1.21.11.30.50.50.91.41.7
External debt-to-exports ratio (in percent)129.7109.3118.1138.1134.5133.9127.8123.0119.8117.4115.0
Gross external financing need (in billions of US dollars) 4/1.30.30.91.00.61.20.90.70.70.70.6
in percent of GDP5.10.92.93.72.210-Year10-Year4.03.02.32.01.81.5
Scenario with key variables at their historical averages 5/58.650.743.837.732.227.1−2.8
Key Macroeconomic Assumptions Underlying BaselineHistorical AverageStandard Deviation
Real GDP growth (in percent)−1.214.04.73.04.15.05.53.33.73.73.73.83.8
GDP deflator in US dollars (change in percent)−0.83.31.8−14.2−3.45.713.91.40.71.92.22.01.9
Nominal external interest rate (in percent)4.03.53.73.74.04.20.54.24.54.95.35.65.9
Growth of exports (US dollar terms, in percent)−7.116.5−3.2−16.01.98.119.05.05.65.04.64.74.6
Growth of imports (US dollar terms, in percent)−5.38.31.4−13.4−4.69.723.010.33.83.83.84.23.9
Current account balance, excluding interest payments0.53.61.51.23.04.03.31.02.02.62.82.93.3
Net non-debt creating capital inflows1.90.21.10.91.01.20.61.01.01.01.01.01.0

Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Derived as [r – g – r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt.

The contribution from price and exchange rate changes is defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator).

For projection, line includes the impact of price and exchange rate changes.

Defined as current account deficit, plus amortization on medium- and long-term debt, plus short-term debt at end of previous period.

The key variables include real GDP growth; nominal interest rate; dollar deflator growth; and both non-interest current account and non-debt inflows in percent of GDP.

Long-run, constant balance that stabilizes the debt ratio assuming that key variables (real GDP growth, nominal interest rate, dollar deflator growth, and non-debt inflows in percent of GDP) remain at their levels of the last projection year.

Figure 1.Paraguay: External Debt Sustainability: Bound Tests 1/2/

(External debt in percent of GDP)

Sources: International Monetary Fund, Country desk data, and staff estimates.

1/ Shaded areas represent actual data. Individual shocks are permanent one-half standard deviation shocks. Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown.

2/ For historical scenarios, the historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead.

3/ Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance.

4/ One-time real depreciation of 30 percent occurs in 2010.

Annex VI. Public Debt Sustainability Analysis
Table 1.Paraguay: Public Sector DSA – Baseline Scenario(in percent of GDP unless otherwise indicated)
Debt, Economic and Market Indicators1/
ActualProjectionsAs of June 15, 2017
2006–201420152016201720182019202020212022Sovereign Spreads
Nominal gross public debt17.524.024.625.425.124.824.724.524.4EMBIG (bp)218
Public gross financing needs0.92.32.51.91.41.10.91.01.25Y CDS (bp)
Real GDP growth (in percent)5.33.04.14.23.93.83.83.83.8RatingsForeignLocal
Inflation (GDP deflator, in percent)5.60.15.34.03.63.43.84.03.9Moody’sBa1Ba1
Nominal GDP growth (in percent)11.23.19.68.47.77.37.77.97.9S&PsBBBB
Effective interest rate (in percent)2/5.45.65.33.33.33.53.84.24.5FitchBBBB
Contribution to Changes in Public Debt
ActualProjections
2006–201420152016201720182019202020212022cumulativedebt-stabilizing primary balance 8/
Change in gross public sector debt−0.94.20.60.8−0.3−0.3−0.1−0.2−0.2−0.3
Identified debt-creating flows−1.67.40.50.6−0.6−0.5−0.4−0.6−0.5−2.0
Primary deficit−1.50.30.00.0−0.3−0.6−0.8−0.8−0.8−3.3−0.8
Primary (noninterest) revenue and grants21.724.023.723.623.723.924.024.024.0143.2
Primary (noninterest) expenditure20.224.323.723.623.423.323.223.223.2139.9
Automatic debt dynamics 3/−1.64.2−1.1−1.2−1.0−0.9−0.9−0.9−0.8−5.6
Interest rate/growth differential 4/−0.90.5−0.9−1.2−1.0−0.9−0.9−0.9−0.8−5.6
Of which: real interest rate−0.11.10.0−0.2−0.10.00.00.00.1−0.2
Of which: real GDP growth−0.8−0.6−0.9−1.0−0.9−0.9−0.9−0.9−0.9−5.4
Exchange rate depreciation 5/−0.63.7−0.1
Other identified debt-creating flows1.43.01.51.80.70.91.31.11.16.9
NFPS asset accumulation 6/1.43.01.51.80.70.91.31.11.16.9
Residual 7/0.7−3.20.20.20.30.30.30.30.31.7
Source: Fund staff estimates and projections.

Public sector is defined as consolidated public sector. It includes the non-financial public sector and the central bank. The stock of public debt excludes central bank bills.

Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

Derived as [(r − π(1+g) − g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the numerator in footnote 3 as r − π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 3 as ae(1+r).

Includes social security surplus, accumulation of deposits from the sovereign bond issuance in 2014, and financing of the national development bank.

Includes asset changes and interest revenues (if any). For projections, it includes the impacts of exchange rate changes.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Source: Fund staff estimates and projections.

Public sector is defined as consolidated public sector. It includes the non-financial public sector and the central bank. The stock of public debt excludes central bank bills.

Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.

Derived as [(r − π(1+g) − g + ae(1+r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).

The real interest rate contribution is derived from the numerator in footnote 3 as r − π (1+g) and the real growth contribution as -g.

The exchange rate contribution is derived from the numerator in footnote 3 as ae(1+r).

Includes social security surplus, accumulation of deposits from the sovereign bond issuance in 2014, and financing of the national development bank.

Includes asset changes and interest revenues (if any). For projections, it includes the impacts of exchange rate changes.

Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

Table 2.Paraguay: Public DSA – Composition of Public Debt and Alternative Scenarios
Underlying Assumptions
(in percent)
Baseline Scenario201720182019202020212022Historical Scenario201720182019202020212022
Real GDP growth4.23.93.83.83.83.8Real GDP growth4.25.05.05.05.05.0
Inflation4.03.63.43.84.03.9Inflation4.03.63.43.84.03.9
Primary Balance0.00.30.60.80.80.8Primary Balance0.01.01.01.01.01.0
Effective interest rate3.33.33.53.84.24.5Effective interest rate3.33.33.43.74.14.3
Constant Primary Balance Scenario
Real GDP growth4.23.93.83.83.83.8
Inflation4.03.63.43.84.03.9
Primary Balance0.00.00.00.00.00.0
Effective interest rate3.33.33.53.94.44.7
Source: Fund staff estimates and projections.
Source: Fund staff estimates and projections.

Staff analysis, based on Granger-causality tests, suggests that core inflation leads headline inflation.

The estimated structural balance (excluding royalties and grants) points to a negative fiscal impulse of about 1.4 percent of potential non-agriculture non-energy GDP. A more conventional measure of the cyclically-adjusted primary balance suggests a negative fiscal impulse of 0.8 percent of potential GDP in 2016.

The BCP is required to purchase U.S. dollar the government receives from its binational hydropower plants. To sterilize these purchases, the BCP generally sells these dollars in “compensatory operations” on a preannounced schedule. However, it may suspend sales at any point and sometimes alternatively issues central bank paper. These FX transactions differ from “complementary operations” which are undertaken to address disorderly market conditions.

As shown in one of the charts, electricity production edged above historical averages in 2016 at record production of 48 million GWh. In the adjusted balance, we strip off the temporary share of these export values.

The monthly activity indicator (IMAEP) shows already signs of deceleration, with a cumulative growth for Jan–April of 4.8 percent compared with 7 percent in Q1.

Major sectors that borrow extensively in foreign currencies largely involve agriculture and livestock firms. Staff analysis finds that higher soy prices tend to raise credit dollarization (Box 1). Soy price changes also affect credit dollarization in other sectors albeit to a less degree, including wholesale and services, where hedging against currency risk may be less complete.

Regulations require that banks sell repossessed collateral within 2 years of seizing it, or make a provision of the full amount of the assessed value of the property. These costs suggest that they will sell these properties.

David, A. C. (2017) “Fiscal Policy Effectiveness in a Small Open Economy: Estimates of Tax and Spending Multipliers in Paraguay” IMF Working Paper 17/63, March.

Losses in transmission and distribution are in the order of 31 percent, well above the average for Latin America (about 14 percent), while peak demand is growing at a sustained pace of 8 percent per year.

Paraguay attracts significant foreign capital, with gross inflows of about 7 percent of GDP on average. However, only a small share remains reinvested in the country. Consequently, net FDI inflows are much lower at around 1½ of GDP, on average.

Authorities have planned for a public expenditure review focusing on health and education to take place in 2018 jointly with the World Bank.

See IMF country report 15/38. Key recommendations include phasing out burdensome regulations (including certain licensing and registration requirements), continue to strengthen the penalty structure for non-compliance, and positive incentives for formalization.

Currently, the income tax rate is 10 percent but revenue collected through income taxes stands at below 3 percent of GDP.

The FC was established by Presidential Decree No. 6498/2016 of December 19, 2016 and consists of three non-remunerated fiscal experts.

The TA mission recommended that a medium-term debt anchor should be publicly announced and the deficit threshold for the structural balance rule (SBR) should be linked to this debt objective. Simulations in the report suggest that a “safe” level for the debt anchor in Paraguay could lie in the range of 30 to 45 percent of GDP. Linked to the debt anchor, a structural deficit of the central government should not exceed 2 percent of trend GDP per year. For more details see IMF Country Report 17/67.

For accounting purposes, IPS’s finances consolidate pension, health, and administrative program operations. However, operationally, the surplus in the pension component may not be used to finance the health component.

The law aims to create a separate Superintendence of Pensions, develop an oversight council, broaden permissible investment instruments, and establish an advisory committee empowered to dictate portfolio allocation limits.

For example, raising the number of years’ wages in the benefits calculation, as recently proposed by the IPS.

In this case, actual monetary conditions are looser than announced monetary conditions.

The large negative equity position of the BCP stood at 2.8 percent of GDP in 2016 and remains a vulnerability that authorities acknowledge should be addressed. Any cost associated with greater IRM issuances should be incorporated in estimates of recapitalization needs.

The differential between reserve requirements for FX and Guarani deposits stands at 7 percentage points, relatively modest compared to peers in the region who also faced high credit dollarization.

A broader measure of distressed loan includes nonperforming loans as well as refinanced and restructured loans, where borrowers have been past due 60 days or more. Refinanced loans involve changing the terms while restructured loans can entail more comprehensive financial relief. Occasionally, the central bank can approve temporary measures on how modified loans are classified for agriculture and livestock to help grant relief to borrowers in the wake of adverse external shocks.

The National Summary Data Page (NSDP) can be accessed here: http://cbparaguay.knoema.com/vmutwx/national-summary-data-page-nsdp?lang=en.

Prepared by Marika Santoro (WHD) from joint analytical work with Sandra Lizarazo, Angelica Martinez Leyva and Marina Mendes Tavares (all SPR).

This model was recently developed by IMF staff to analyze the macroeconomic and distributional impact of commodity price booms and busts, and economic policy changes in commodity exporter countries, and has previously been used in the Article IV consultations of Bolivia 2016 and Republic of Congo 2016. Some of its results have also been showcased in the recent SDN “Macro-Structural Policies and Income Inequality in Low-Income Developing Countries” (January 2017).

Ravi Balakrishnan, Sandra Valentina Lizarazo, Adrian Peralta-Alva, Marina Mendes Tavares, 2017, Commodity Boom and Bust and Income Inequality, IMF Working Paper, forthcoming.

As a caveat, we do not dispose of data on the distribution of the health care as in-kind transfers by income percentiles so we make some assumptions. We assume that the increase in health care spending provided by the central government (Ministry of Health) (most of the increase, 1.7 percent of GDP) would benefit disproportionally low income categories while the increase observed at the Instituto de Prevision Social (0.3 percent of GDP) benefitted the relatively better-off. The geographical distribution of health care centers also affected the distribution of the transfer between urban and rural populations, with two thirds of the centers located in urban cities.

Prepared by Elsie Addo Awadzi (LEG), Antonio David (WHD), Ana Obiang (LEG), and Karla Vasquez Suarez (LEG).

Prepared by Antonio David (WHD), Azael Perez (FAD), and Enrique Rojas (FAD).

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