Paraguay’s economy recently experienced particularly large output swings. Economic policies will play a critical role in raising investment by making sure that macroeconomic stability is maintained. The spillovers from the agricultural sector to the rest of the economy are limited. The high level of bank excess reserves in Paraguay reflects a mixture of precautionary and involuntary factors. Large bank excess reserves weaken the monetary transmission channel, and cause inefficiency costs. Bank reforms should be undertaken to preserve financial and macroeconomic stability.
International Monetary Fund. Western Hemisphere Dept.
This paper focuses on the reform options for Paraguay’s fiscal responsibilities law as well as credit growth and banking system vulnerabilities. During the first year of Paraguay’s fiscal responsibility law, implementation has proven challenging, and a debate has emerged over whether its current design is excessively rigid. There are also important reputational costs to amending the framework. Paraguay has experienced rapid credit growth over the past decade. Reflecting these considerations, this chapter analyzes banks’ health and potential risks in Paraguay. Paraguay’s credit markets, as well as the rest of its financial system, are dominated by commercial banks.