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Paraguay: Fifth Review Under the Stand-By Arrangement and Request for Waiver of Performance Criteria

Author(s):
International Monetary Fund
Published Date:
February 2006
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I. Recent Developments and Performance under the program1

1. Against the background of a less favorable macroeconomic environment, the program remains broadly on track. All quantitative performance criteria (PCs) for end-March 2005 were observed. There is no final data yet to assess end-June 2005 quantitative performance criteria, but the authorities and the staff expect that all PCs have been observed. However, there have been delays in implementing some aspects of the structural reform agenda. Two structural performance criteria for this review were not observed (external audits of four public entities and congressional approval of general banking legislation), for which the authorities are requesting waivers.

Paraguay: Performance Under the Program:(In trillions of guaranies, unless indicated)
end-March 2005
Main TargetsProgActual
Fiscal Targets
Fiscal balance 1/0.110.26
Wage bill 1/0.750.74
Consolidated fiscal balance 2/0.170.36
Monetary Targets
Net international reserves 3/1.101.19
Net domestic assets-4.49-5.25
Sources: Paraguayan authorities and Fund staff.

Central administration.

Nonfinancial public sector and Central Bank.

In billions of U.S. dollars.

Sources: Paraguayan authorities and Fund staff.

Central administration.

Nonfinancial public sector and Central Bank.

In billions of U.S. dollars.

Paraguay: Agricultural Output

Paraguay: Inflation

2. Following significant economic achievements in 2004, macroeconomic conditions became more problematic in the first half of 2005.

  • Exogenous factors reduced growth. A drought and lower commodity prices have affected key agricultural products (soy, cotton, and cassava), prompting the authorities to reduce their projection for this year’s real GDP growth from 3¼ to 3 percent despite a strong recovery in manufacturing production. 2

  • Inflationary pressures emerged. Price pressures re-appeared in the first half of the year, following a 20 percent increase in fuel prices, and a 10 percent increase in the minimum wage in April 2005. The 12-month inflation rate climbed to 7¼ percent in May 2005 but fell to about 6 percent in June. An additional 10 percent fuel price adjustment took place in July 2005. The authorities believe that inflationary pressures are due in large part to higher prices of Brazilian goods following a sharp strengthening of the real against the U.S. dollar and higher international fuel prices (Box 1).3

  • Tax collections growth moderated. After growing by more than 33 percent in 2004, tax receipts increased by only 10 percent in the period January–June 2005, but in line with program projections.

  • The guaraní weakened, fueling inflationary pressures. Sizable Central Bank intervention in the foreign exchange market led to a depreciation of the guaraní by almost 5 percent against the U.S. dollar and over 35 percent with respect to the Brazilian real in the twelve months to June 2005. Most of the depreciation took place in the second half of that period.

Paraguay: Tax Collection

Paraguay: Exchange Rate Developments

3. Progress in implementing the structural reform agenda continues to be slower than planned. Recent delays are due mostly to congressional changes in the sequencing of the legislative agenda. 4

  • The end-April 2005 structural performance criterion on the accounting audit of four public entities has not been met. The external audits for ANNP (ports authority), DINAC (aviation authority), INC (cement), and PETROPAR (oil distribution) were delayed following a challenge from the General Comptroller Office to the legality of conducting and paying for external audits. 5 However, the legal issue has been resolved, audit companies selected, and the audits are now underway in three of the four cases. 6 A waiver is being requested for the nonobservance of this performance criterion.

  • The end-April 2005 structural benchmark on the plan for the comprehensive civil service reform has been finalized recently. The action plan approved by the cabinet in July aims at creating the conditions for rationalizing the civil service. Among other measures, the plan envisages: (i) the classification of positions and grades and the definition of positions and their occupational requirements in the ministries; (ii) the design of a merit-based remuneration system and of a program for voluntary retirement and labor mobility; (iii) the implementation of a system for job selection, training, and promotions; and (iv) the strengthening of the information system by digitalizing civil servants’ personnel files.

  • The end-May 2005 structural benchmark on the approval of the second-tier public banking law was observed with a delay in July. The bill was submitted to Congress in late 2004; it was approved by the Senate in early-March 2005 and then approved by the lower house in May 2005. The bill was sent back to the senate for ratification after some modifications and was finally approved by the lower house in July in a form consistent with the program.

  • The end-June 2005 structural performance criterion on the congressional approval of the Comprehensive Banking Law was not observed. The law was submitted to Congress (ahead of schedule) in December 2004. However, Congress has not yet taken up the legislation, because it focused on the first-tier public banking legislation as a priority. A waiver is being requested and a new structural benchmark introduced for mid-September 2005, regarding the authorities’ strategy and timetable for addressing the key objectives of the legislation (i.e., strengthening the banking system).

  • The end-July 2005 structural performance criteria on the submission of the first-tier public banking law to Congress was observed ahead of schedule. The bill was approved by the Senate and is now in the lower house. 7 The bill creates a new consolidated first-tier public bank (BNFD) to which all performing assets and most liabilities are transferred, and closes the old first-tier banks (including BNF). It also provides for the establishment of a trust fund, the transfer of nonperforming loans to that trust fund, and the recapitalization of the new bank. The Senate introduced modifications to the bill, including higher capital requirements, modified loan refinancing rules, and the possibility of BNFD providing guarantees. While the higher capital provisions will strengthen the law, the modified refinancing rules, and extension of BNFD guarantees are problematic. The staff has expressed its concern on these problematic features and the need to rapidly approve the law to allow for an effective restructuring of BNF. The authorities agree and President Duarte-Frutos has personally urged the lower house to reject the problematic modifications introduced by the Senate.

Paraguay: Structural Conditionality for the Fifth SBA Review
MeasureConditionality (Date)Status
1.Independent audit for ANNP,PCIn progress
DINAC, INC, PETROPAR(Apr 2005)
2.Finalize plan for comprehensiveBenchmarkDone
civil service reform(Apr 2005)(Jul 2005)
3.Approval of public bankingBenchmarkDone
law (2nd-tier)(May 2005)(Jul 2005)
4.Approval of comprehensivePCLaw submitted
banking law(Jun 2005)in Dec 2004
5.Submission of public bankingPCDone
law (1st-tier)(Jul 2005)(Mar 2005)
Sources: Paraguayan authorities and Fund staff estimates.
Sources: Paraguayan authorities and Fund staff estimates.

4. Following a relatively calm social situation in the first half of 2005, tensions intensified lately. The authorities addressed some of the concerns of the rural poor by buying land and distributing it among rural workers in the first half of the year. However, there have been several demonstrations against the fuel price adjustments of July 2005.

II. Policy and Program Discussions8

5. Discussions focused on the policies needed to ensure that the macroeconomic program remains on track and to overcome delays in structural reform. The mission noted the increasing fiscal pressures under difficult conditions and stressed the importance of continuing to monitor tax collections. The authorities were confident that the weaknesses in tax collections were temporary and that the fiscal objectives of the program could be achieved despite the less favorable environment. The mission expressed concern about the emerging inflationary pressures. The authorities noted that these pressures originated to a large extent externally. The mission pointed to the large scale interventions in the foreign exchange market that the authorities had undertaken to prevent an appreciation of the guaraní against the U.S. dollar and which had led to significant depreciation against regional currencies earlier this year. 9 In this context, the mission recommended raising interest rates and allowing the exchange rate to move more flexibly in response to market pressures, which would help insulate the country from inflationary pressures coming from abroad. The mission also stressed the importance of continuing the momentum on structural reform. The authorities agreed with the mission’s assessment, noting that the recent delays in the implementation of the structural agenda were mostly due to factors beyond their control, and did not signal any lack of commitment to the reform agenda.

A. Fiscal Policy

6. The fiscal program remains broadly appropriate—given the macroeconomic situation and the financing available—and policy is on track. Budget control has worked well under difficult conditions, suggesting that the financial plan will continue to be useful for the remainder of the year, and that the broad revenue and expenditure targets under the program will be achieved. Part of the fiscal overperformance through March 2005 was due to compression of public investment. The mission stressed the need to contain current spending and to allow public invertment to increase.

7. Strengthened expenditure control mechanisms have effectively contained spending pressures. The authorities have been able to impose fiscal discipline during the first half of the year despite the expansionary 2005 budget approved by Congress. Budgetary control instruments discussed during the fourth review, namely the application of a strict financial plan to guide fiscal policy for 2005 and the operation of the investment coordination unit (UCIP) to prioritize public capital expenditure, have worked appropriately and have facilitated achieving the program objectives for March 2005. However, risks remain and the staff recommended that the authorities resist expenditure pressures and be prepared to take additional measures if necessary to ensure the fiscal objectives.

Paraguay: Public Finances:(In percent of GDP)
200320042005
ActualProg. 1/Proj.
Revenues16.618.918.319.6
Expenditures17.017.318.819.9
Current13.813.313.714.6
Non-interest12.412.112.413.2
Interest1.41.21.31.4
Capital3.24.05.15.3
Statistical Discrepancy0.10.4----
Overall Balance-0.32.0-0.5-0.2
Memorandum item:
Primary Savings4.26.85.96.0
Primary Balance1.02.80.71.0
Real GDP growth (%)3.84.03.23.0
Sources: Paraguayan authorities and Fund staff estimates.

see www.imf.org.

Sources: Paraguayan authorities and Fund staff estimates.

see www.imf.org.

8. While the fiscal target for the rest of the public sector was also observed with a large margin, PETROPAR continues to have financial difficulties. The strong overperformance in the overall public sector deficit in the first quarter was due to a higher than projected surplus in the public enterprises. However, this surplus masks financing problems at the petroleum company (PETROPAR), which continued accumulating arrears to suppliers in the first half of 2005. 10 In an effort to tackle these problems, the authorities have adjusted domestic diesel prices four times during 2005 by 29 percent. The authorities believe that these price adjustments would suffice to cover the cost of importing diesel over the medium term but are willing to take additional action if international oil prices continue rising. To address PETROPAR’s financial problems in a more permanent manner, the authorities have adopted a twofold approach:

  • A hydrocarbons law was submitted to Congress in May 2005. This law will establish a new regulatory framework for the fuel sector and will liberalize domestic diesel prices, eliminating any implicit subsidy by PETROPAR. 11

  • Congress approved a framework oil agreement with Venezuela in June 2005. This agreement will allow PETROPAR to improve gradually the maturity profile of its debt and to eliminate arrears, with favorable longer-term financing terms for the purchase of fuels. 12

9. The authorities are taking steps to address the financial problems of the pension fund for bank employees. This pension fund is on the brink of insolvency, although the authorities do not expect this to affect this year’s budget outcome. So far, the fund has been able to pay pensions by liquidating assets, and it appears that funds could last for the rest of the year. Meanwhile, the government has prepared a draft law to liquidate the fund, transfer employees to the private and public pension funds (depending on whether the employees work at a private or public bank), while at the same time reducing benefits and increasing contributions. 13

B. Monetary Policy

10. The authorities acknowledged that policy action was needed to counter resurgent inflationary pressures. While they considered part of these pressures as exogenous and temporary (i.e., oil shock and imported inflation), they intended to send a strong policy signal to anchor inflationary expectations and lock in the stability gains achieved during 2004. In this regard, the authorities have taken measures to tighten policies, in particular by increasing interest rates on Central Bank securities (LRM) by 100 basis points. The mission stressed the need to conduct exchange rate policy more flexibly to reduce the impact of imported inflation. The authorities reaffirmed their commitment to the program’s inflation objective of 6 percent plus/minus 2 percentage points for 2005, but noted that the end-year outcome was now more likely to fall within the upper rather than the lower range of the target.

Paraguay: Monetary Program:(In percent of currency the previous period)
200320042005
ActualProg. 1/Proj.
Currency29.912.713.210.0
Net international reserves126.452.613.213.1
Net domestic assets-96.5-39.80.0-3.1
Credit to public sector (net)-20.21.84.2-2.3
Credit to banks (net)-73.6-46.0-14.8-12.5
Free reserves-19.2-21.36.86.0
BCP bills (LRM)-17.9-25.8-13.1-14.8
Other bank credit-36.51.1-8.5-3.7
Other items net-2.74.310.611.8
Memorandum item:
Base money growth (%)57.717.69.44.9
Money supply growth (%)35.824.712.011.0
Sources: Paraguayan authorities and Fund staff estimates.

Implicit flows from the stock for 2004 in extended SBA program (see www.imf.org) and actuals for 2003.

Sources: Paraguayan authorities and Fund staff estimates.

Implicit flows from the stock for 2004 in extended SBA program (see www.imf.org) and actuals for 2003.

Paraguay: Central Bank Operations
MFD Technical Assistance

Recommendations 1/
Status
Monetary Policy
1. Formalize with a Board directive the frequency, attendance, and matters to be treated of CEOMA meetings. Implement a procedure for the recording and internal drafting of the minutes of the meetings.A. Done. BCP Board resolution No. 9 (Aug. 23, 2004) and Board resolution No. 12 (Oct. 28, 2004). In addition, internal minutes of CEOMA meetings are being prepared.
2. Construct a standard set of figures and tables, focusing on monetary, price, exchange rate, and external developments.B. Done. A standard set of tables, including recommendations and conclusions by the Economic Research Department, is now used for CEOMA discussions. A monthly written brief is being developed.
Monetary Operations
3. Issue shorter-term instruments (including one month).C. Done. The BCP introduced new LRMs at a maturity of 7 and 14 days, which are offered on a daily basis, and shortened the average maturity of its LRMs.
4. Concentrate the auctions of longer-term instruments and allow their rates to become market-determined.D. In progress. The BCP envisages this measure once excess liquidity in the banking system has been largely absorbed.
5. Revise RIR rulesE. Done. BCP Board resolution (April 21, 2005). The class of LRMs accepted as collateral has been widened, access for short-term RIR has been made automatic, and the discount on the collateral value has been reduced from 15 to 5 percent.
Sources: Paraguayan authorities and Fund staff.

As scheduled for the first semester of 2005.

Sources: Paraguayan authorities and Fund staff.

As scheduled for the first semester of 2005.

11. The authorities made good progress in implementing the recommendations made in the recent MFD Technical Assistance report. All measures envisaged for the first half of 2005, were either implemented or are in the process of being implemented. In particular, procedures and analysis for open market operations were strengthened, the maturity of monetary policy instruments (LRM) was shortened; and rules related to the collateralization of monetary policy instruments were modified.

C. External Issues

12. A more adverse external and domestic environment is likely to lead to a weaker external position for the rest of 2005. Exports are now expected to fall by almost 5 percent in 2005 due to: (i) stricter customs controls in importing countries in the region; (ii) lower duty-free import limits in Brazil for border trade; (iii) lower export prices (soy prices fell by almost one-third in the year to May 2005); and (iv) lower export volumes due to the drought. 14 The current account is expected to deteriorate by almost 2 percent of GDP in 2005 with respect to the previous year (and 1 percent with respect to program projections for 2005). However, the capital account is projected to strengthen considerably in response to expected interest rate hikes, allowing the reserves target to be met.

Paraguay: Balance of Payments:(In percent of GDP)
200320042005
ActualProg. 1/Proj.
Current Account2.20.4-0.4-1.4
Exports39.140.037.637.4
Imports-44.1-46.1-43.7-44.9
Other7.26.55.86.1
Capital Account1.63.20.92.4
Public sector (net)1.70.20.40.5
Private sector (net) 2/-0.13.00.41.9
Overall Balance3.83.60.51.0
Overall Financing-3.8-3.6-0.5-1.0
Net international reserves-5.4-2.7-0.5-0.7
Exceptional financing1.6-0.90.0-0.3
Sources: Paraguayan authorities and Fund staff estimates.

Extended SBA program (see www.imf.org).

Includes errors and omissions.

Sources: Paraguayan authorities and Fund staff estimates.

Extended SBA program (see www.imf.org).

Includes errors and omissions.

13. While efforts continue to be made to normalize relations with creditors, PETROPAR accumulated arrears. Rising diesel prices in the regional and international markets resulted in a further build-up of PETROPAR arrears to suppliers of about US$30 million as of end-June 2005. However, the expected improvement in PETROPAR’s finances will lead to a clearing of existing arrears. The authorities are also engaged in negotiations to normalize relations with all external creditors, including to resolve disputed debts. 15

D. Structural Issues

14. The authorities reiterated their commitment to structural reform notwithstanding recent delays. While the authorities submitted to Congress several bills broadly when expected, Congress gave more emphasis to the two public banking laws and less to the comprehensive banking law. As a result, the first-tier public banking law (which was expected to be approved by Congress after September 2005) was approved by the Senate in May 2005, whereas the comprehensive banking law (which was expected to be approved by Congress in June 2005) was not approved.

Paraguay: Structural Conditionality for the Sixth SBA Review
MeasureConditionalityStatus
(Date)
1. Plans for private capitalBenchmarkIn progress
participation ESSAP,(Aug 2005)
COPACO, PETROPAR
2. Plan to strengthen bankingBenchmarkIn progress
system taking into account(Sep 2005)
FSAP recommendations
Sources: Paraguayan authorities and Fund staff estimates.
Sources: Paraguayan authorities and Fund staff estimates.
  • Public banking reform. The Second-Tier Public Banking law was approved by Congress in July. The First-Tier Public Banking Law was approved by the Senate (ahead of schedule) and is now being considered by the lower house. Congress decided to treat both public banking laws at about the same time, which had not been anticipated under the program.

  • Banking system strengthening. Given the delays in approving the comprehensive banking law, the new economic team intends to develop, by mid-September 2005, an action plan—drawing on the FSAP’s mission recommendations—to achieve the original program objective of strengthening the banking system and any other important concern that may emerge from the FSAP. This will be a structural benchmark.

  • State-owned enterprise reform. The authorities are designing a plan for private capital participation in ESSAP, COPACO, and PETROPAR, involving outsourcing of the management of these companies to professionals in the private sector under a performance contract. Findings from the forthcoming comprehensive audit of the companies’ performance will also be incorporated into the plan.

  • Debt restructuring issues. As of end-June 2005, about 96 percent of the debt eligible for the bond exchange was exchanged. The authorities have made progress in identifying the holders of non-participating debt. More than one third of the untendered debt (about 1½ percent of the eligible debt) is with public entities and is expected to be tendered shortly. The authorities hope to conclude the exchange in the coming months.

E. Program Issues

15. Waivers. The authorities are requesting waivers for: (i) the non-observance of the end-April 2005 structural performance criterion on the conduct of independent accounting audits for ANNP, DINAC, INC and PETROPAR; three of them are underway and expected to be concluded in the next few months; (ii) the nonobservance of the end-June 2005 structural performance criterion on the approval of comprehensive banking legislation; the authorities remain committed to the objectives of this reform and propose the inclusion of a new structural benchmark (see below); and (iii) the applicability of end-June 2005 quantitative performance criteria as necessary information is not yet available (this is needed because the end-June 2005 quantitative PCs become binding). The staff supports these waiver requests given the temporary nature of the deviations and the corrective actions taken.

16. New Benchmark. The authorities propose to introduce a new structural benchmark for mid-September 2005 (to be assessed at the time of the next review) on the development of a plan of action to meet the original program objective of strengthening the banking system, taking into account the recommendations of the FSAP as appropriate. 16

17. Conditionality. The attached letter of intent restates the authorities’ commitment to the program and targets, and lays out the additional commitments to bring the program on track in the structural area. There are no prior actions requested to complete this review.

III. Medium-Term Scenario and Risks

18. There is no material change to the medium-term scenario, or to the risks to the program. Continued macroeconomic stability and further structural reforms are necessary to secure sustained increases in per-capita income and reduce poverty. Under the baseline scenario, prudent macroeconomic policies and vigorous implementation of structural reforms result in 4 percent annual growth. In this scenario, continued fiscal consolidation would reduce the debt-to-GDP ratio to about 30 percent by 2010. The capacity to repay the Fund remains strong even in the event Fund resources are used. Risks to the program continue to include implementation risks that could threaten continued macro stability; external risks, including worsening terms of trade; and political risks. 17

IV. Staff Appraisal

19. Performance under the Fund-supported program continues to be broadly satisfactory, although the structural agenda has not advanced as rapidly as planned. All quantitative performance criteria for end-March 2005 were met and the expectation is that those for end-June 2005 were also observed. While the structural agenda has been subject to changes, often driven by Congress, the authorities have been relatively successful in moving the reform agenda forward in a difficult political environment.

20. However, the macroeconomic environment has become less favorable, and policies need strengthening to ensure the program objectives are achieved. External and domestic conditions have worsened somewhat since the last review. The international oil price and the regional diesel price have increased, key export prices continue to decline (especially soybeans), and regional inflation is up. At the same time, a drought—with a more severe impact than originally anticipated—reduced key crops and a source of foreign exchange. In this context, the staff welcomes the authorities’ commitment to strengthen policies.

21. Fiscal policy has been successfully implemented under difficult conditions although risks remain, especially if the economy weakens further. The staff commends the authorities for the conduct of fiscal policy during the first half of 2005. If economic conditions worsened, it would be imperative to continue to adhere to the financial plan used to conduct fiscal policy against the background of a congressionally approved budget with higher expenditure.

22. Monetary policy needs to be used more flexibly to minimize the impact of external shocks and to contain inflation. While an important part of the recent uptick in inflation reflects higher oil prices, adjustments in administered domestic prices, and imported inflation, a more flexible use of exchange rate and interest rate policies could have reduced the impact of these shocks. In this regard, the staff welcomes the recent increases in the interest rates for monetary policy instruments (LRM), and the authorities’ intention to tighten monetary policy further if inflationary pressures persist. In this context, the staff welcomes the Central Bank decision to allow the guaraní to move in response to market pressures which have led to an appreciation of the currency against the U.S. dollar in recent weeks, partially following movement in other regional currencies. The staff also welcomes the authorities’ implementation of the MFD short-term recommendations to improve monetary operations, but notes that additional reforms will be necessary to strengthen further the monetary framework and monetary policy management.

23. With the external current account expected to deteriorate this year, tighter monetary policy will be needed to safeguard international reserves. The weaker-than-expected crops as well as lower export prices will push up the external current account deficit by some 1 percent of GDP from the program projection. In the absence of measures, there will be pressures on the exchange rate and/or the international reserves. It will be important to move interest rates to foster capital inflows and compensate for the shortfalls in the current account.

24. The staff urged the authorities to implement corrective measures on the structural front. The audits of the four public entities need to be finalized and their results used to improve the functioning of public institutions. The authorities are advised to expedite the logistical procedures associated with the bidding for the audit of INC. The staff also stressed the importance of completing in a timely manner the plan for the comprehensive banking reform given the legislative delays in this area (a structural benchmark of the next review). The staff encouraged the authorities to continue supporting in Congress outstanding public banking legislation.

25. The change in the macroeconomic environment in 2005 highlights the economy’s vulnerabilities and the importance of a timely policy response. While the deterioration in growth and inflation in 2005 partly reflects exogenous factors, it highlights the importance of adjusting macro policy to mitigate the impact of shocks (e.g., on inflation), as well as the need to deepen the structural reform agenda to reduce vulnerabilities and strengthen institutions. In this regard, the staff notes the continued practice of building consensus in Paraguay in favor of the authorities’ reform program. This is particularly relevant given the political and social uncertainties, and the lack of a majority in Congress.

26. The staff supports completion of the fifth review under the SBA as well as the waiver requests. In light of the authorities’ strong commitment to the program, generally good performance, and commitment to additional measures to bring structural reform on track, the staff supports: (i) the completion of the fifth SBA review; (ii) the waiver request on the observance of the end-April 2005 performance criterion on the audits of ANNP, DINAC, INC and PETROPAR; (iii) the waiver request on the observance of the end-June 2005 performance criterion on the approval of the general banking legislation; and (iv) the waiver of the applicability of the end-June 2005 quantitative performance criteria.

Box 1.Paraguay: Inflationary Pressures

Following a sharp disinflation throughout 2004, upward pressures on the CPI reemerged in early 2005. End-year inflation came down to 2.8 percent in 2004, but during December the CPI jumped by 1½ percent. Price pressures subsided somewhat in January and February 2005, but regained strength in March–May 2005, following adjustments in fuel prices and public transport tariffs in April 2005. On an annualized basis, the increases of the CPI between November 2004 and May 2005 would correspond to an inflation rate of 14½ percent.

The recent uptick of inflation exhibits a strongly correlated pattern with the guaraní’s weakening against the Brazilian real. This depreciation of the guaraní against the real was reinforced by the real’s appreciation vis-à-vis the U.S. dollar.1 In contrast, currency growth has been lower than inflationary developments, displaying a decreasing trend and falling below the program’s medium-term target rate of 10 percent, indicating a weaker-than-expected money demand.

Paraguay: Reemergence of Inflationary Pressures

Supply factors—especially prices of goods traded with Brazil and oil prices—appear to be the predominant source of the inflationary pressures. To determine these sources, BCP staff cdecomposed the consumer basket in categories related to trade with Brazil, oil-sensitive goods, and aggregate domestic demand. This exercise implied that more than 60 percent of the price increases during the six months preceding May 2005 were attributable to external factors. Excluding these external causes, the contribution of domestic factors to the annualized November–May inflation rate would amount to 5½ percent, still within the range of the program’s inflation objective of 6 percent in 2005.

Paraguay: Decomposition of Inflationary Pressures

To combat inflationary pressures and prevent the resurgence of inflationary expectations, the BCP decided to embark on a course of monetary tightening. In mid-May 2005, the BCP’s Executive Committee for Monetary Operations (CEOMA) increased two of its key interest rates for Central Bank securities (LRM) by 100 basis points. The BCP also stop intervention in the foreign currency market, allowing for a modest strengthening of the guaraní with respect to the U.S. dollar and the Brazilian real.

Paraguay: Inflationary Pressures:(Annualized rate, Nov 04 -May 05)
Contributing factorsIncidence
Annualized inflation14.5
Oil shock3.5
Imported inflation5.6
Aggregate demand5.4
Source: Central Bank of Paraguay
Source: Central Bank of Paraguay
1 Since May 2004, Brazil’s real appreciated over 20 percent against the U.S. dollar. Moreover, a long-term econometric estimate by staff identified a statistically significant pass-through from the Brazilian CPI, to the Paraguayan CPI.
Table 1.Paraguay: Quantitative Performance Criteria
SBAExtension
200320042005
end-Dec.end-Mar.end-Aug.end-Dec.end-Mar.Target
Adj. TargetActualAdj. TargetActual Adj.TargetActualAdj. TargetActualAdj. TargetActualJun. 30
Fiscal targets
1. Overall balance of the central administration (floor, in billions of guaranies) 1/2/-125-10024052343098255792105261111
2. Wage bill of the central administration (ceiling, in billions of guaranies)2/2,7502,7246506681,7911,8123,0102,9847547441,525
3. Overall balance of the public sector (floor, in billions of guaranies) 1/2/-321332506785001,529130999174357310
Monetary targets
4. Net international reserves (floor, in millions of U.S. dollars) 3/8129837731,0161,0571,1411,0591,1681,1001,1891,180
5. Net domestic assets (ceiling, in billions of guaranies) 3/-2,852-3,969-2,839-4,264-4,444-5,231-3,958-4,848-4,488-5,247-5,197
Public debt and arrears targets
6. Contracting or guaranteeing of nonconcessional external debt by the NFPS (ceiling, in millions of US$) 2/5005002000200020020200
7. External payments arrears of NFPS (ceiling, in millions of US$) 4/10291757553016
8. Of which: bilateral arrears 4/514338120000
9. Central government floating debt (ceiling, in billions of guaranies) 4/2/360400350228297235320134
Continuous PCs
10. Contracted or guaranteed short-term external debt by the NFPS00000000000
11. Non-accumulation of external debt arrears 5/0B0B0B0B000

As specified in the TMU (see www.imf.org), for 2005 this target will be adjusted upward by 30 percent in case of over performance in tax revenues.

Cumulative flows from the beginning of the corresponding calendar year.

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

These performance criteria will not apply in 2005.

B = breached.

As specified in the TMU (see www.imf.org), for 2005 this target will be adjusted upward by 30 percent in case of over performance in tax revenues.

Cumulative flows from the beginning of the corresponding calendar year.

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

These performance criteria will not apply in 2005.

B = breached.

Table 2.Paraguay: Structural Conditionality Under the Program
MeasureConditionality 1/TimingStatus and Comments
Public Sector Reform
A. Independent audits for ANNP, DINAC, INC, PETROPARPCApril 30, 2005Waiver requested. Audits already began for most entities.
B. Finalize plan for comprehensive civil service reformSBApril 30, 2005Done. Plan approved by Cabinet On July 22.
C. Plan for private capital participation ESSAP, COPACO, PETROPARSBAugust 31, 2005In progress.
Financial Sector Reform
D. Introduce prudential regulations to cooperativesSBMarch 31, 2005Done. Introduced in late December 2004.
E. Approval of public banking law (second tier)SBMay 31, 2005Done. Approved by Congress on July 21.
F. Approval of new comprehensive banking legislationPCJune 30, 2005Waiver requested. Law submitted to Congress in December 2004.
G. Submission of public banking law (first tier) and adopt commission’s recommendationsPCJuly 30, 2005Done. Law submitted to Congress in in February 2005, and approved by the Senate in May 2005.
Sources: Paraguayan authorities; and Fund staff estimates.

SB = structural benchmarks; PC = performance criteria

Sources: Paraguayan authorities; and Fund staff estimates.

SB = structural benchmarks; PC = performance criteria

Table 3.Paraguay: Selected Economic and Social Indicators
I. Social and Demographic Indicators
Area (thousand sq. km)407Income distribution
By highest 20 percent of households61 percent
PopulationBy lowest 20 percent of households2 percent
Total (in millions-2004)5.7
Rate of increase (percent a year)1.9Health
Density (per sq. km.)14.1Physicians per 1, 000 people1.1
Unemployment10.9Hospital beds per 1,000 people1.3
Access to a water source79 percent
Population characteristicsAccess to a sanitation facility95 percent
Life expectancy at birth (years)70.6
Crude birth rate (per thousand)29.7Education (in percent)
Crude death rate (per thousand)5.0Male literacy rate94 percent
Infant mortality (per thousand live births)26.0Female literacy rate92 percent
Primary school enrollment92 percent
Secondary school enrollment47 percent
II. Economic Indicators, 2002-2005
Actual2005
200220032004Prog.Rev. Proj.
(Annual percent change; unless otherwise specified)
National accounts and prices 1/
GDP at current prices10.024.211.67.56.7
GDP at constant prices0.03.84.03.23.0
Per capita GDP (U.S. dollars, thousands)0.91.01.21.21.2
GDP deflator10.019.67.34.23.6
Consumer prices (end-of-period)14.69.32.86.06.0
Real effective exchange rate 2/
Average (depreciation -)-1.2-6.65.3
End-of-period (depreciation -)-2.69.5-7.5
(In millions of U.S. dollars)
External sector
Exports, f.o.b. (percentage change)-1.617.124.53.0-4.1
Imports, c.i.f. (percentage change)-14.614.727.26.20.0
Net oil exports and imports243331410510510
Current account9412227-27-97
(in percent of GDP)1.82.20.4-0.4-1.4
Capital account642229066163
Overall balance-832112453966
Terms of trade (percentage change)7.57.31.8-5.4-8.8
(In percent of GDP)
Savings-investment balance
Gross domestic investment18.721.020.621.321.5
Private sector12.215.915.814.114.8
Public sector6.45.04.87.26.7
Gross national savings20.523.121.021.020.1
Private sector17.818.613.713.913.0
Public sector2.74.57.37.07.1
Public sector
Central government primary balance-1.91.02.80.71.1
Central government overall balance-2.5-0.32.0-0.5-0.2
Consolidated public sector primary balance 3/-1.42.53.61.42.0
Consolidated public sector overall balance 3/-3.4-0.12.50.00.4
Public sector debt (end-of-year)54.551.741.439.441.3
External47.246.537.436.037.7
Domestic7.35.24.03.43.6
(Annual percent change)
Money and credit
Monetary base-1.057.717.68.25.6
M2-2.224.924.210.79.9
M5 3/-18.517.711.58.36.2
Credit to the private sector 4/-21.0-18.614.010.210.1
Velocity of M28.29.07.97.87.3
Memorandum items:
International reserves (in millions of U.S. dollars)6419831,1681,2201,220
(In months of imports)2.73.33.74.03.7
GDP (in billions of guaranies)29,10536,14040,33344,51643,039
Population (millions)5.55.65.75.85.9
Sources: Paraguayan authorities; and Fund staff estimates.

Revised GDP growth rates and GDP ratios reflects the use of a new national account data recently published by the authorities. However, program GDP ratios were not revised.

INS calculations of real effective exchange rates.

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

Foreign currency items are valued at a constant exchange rate.

Sources: Paraguayan authorities; and Fund staff estimates.

Revised GDP growth rates and GDP ratios reflects the use of a new national account data recently published by the authorities. However, program GDP ratios were not revised.

INS calculations of real effective exchange rates.

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

Foreign currency items are valued at a constant exchange rate.

Table 4.Paraguay: Operations of the Consolidated Public Sector 1/
2005
Jan.-Mar.Jan.-JuneJan.-Dec.
200220032004Prog.Est.Prog. Rev. Proj.Prog. Rev.Proj.
(In billion of guaraníes)
Revenue6,1607,4508,9522,1412,2824,4944,7539,6659,858
Tax revenue2,9273,6764,9361,1751,1112,4522,5885,0985,490
Nontax revenue and grants3,1173,6174,0039521,1672,0122,1574,5054,354
Capital revenue116157141543076215
Current expenditure5,7636,2476,8021,6651,6043,4913,5347,5327,729
Wages and salaries3,0953,2903,6349019131,8191,8643,9574,022
Goods and services572634751153106360368816868
Interest payments603728677136167325365660714
Transfers1,4551,5441,6994384139139061,9522,022
Other3951403757331146103
Capital expenditure and net lending1,8751,8191,9565911751,3139313,2172,893
Public enterprises’ operating surplus4588015832894796207131,063921
Statistical discrepancy 2/35-2072320-6250-61801
Overall balance-986-211,010174357310383-21157
Financing98617-1,010-174-357-310-38321-157
External financing net19459-42-28-788317293299
Domestic financing net-157-24-182-147-358-393-398-273-454
Of which: quasifiscal deficit financing394390182622212691260226
Net change in arrears1,124-417-7870800-20-2
(In percent of GDP)
Revenue21.220.622.1219.221.320.222.121.722.9
Tax revenue10.110.212.210.610.511.012.011.512.8
Nontax revenue and grants10.710.09.98.510.89.010.010.110.1
Capital revenue0.40.40.00.10.00.10.00.10.0
Current expenditure19.817.316.915.014.915.716.416.918.0
Wages and salaries10.69.19.08.18.58.28.78.99.3
Goods and services2.01.81.91.41.01.61.71.82.0
Interest payments2.12.01.71.21.51.51.71.51.7
Transfers5.04.34.23.93.84.14.24.44.7
Other0.10.10.10.30.00.30.10.30.2
Capital expenditure and net lending6.45.04.85.31.75.94.37.26.7
Public enterprises’ operating surplus1.62.21.42.64.32.83.32.42.1
Statistical discrepancy 2/0.1-0.60.60.0-5.70.0-2.90.00.0
Overall balance-3.4-0.12.51.63.31.41.80.00.4
Financing3.40.0-2.5-1.6-3.3-1.4-1.80.0-0.4
External financing net0.11.3-0.1-0.2-0.70.40.10.70.7
Domestic financing net-0.5-1.2-2.0-1.3-3.3-1.8-1.8-0.6-1.1
Of which: quasifiscal deficit financing1.41.10.50.60.30.60.40.60.5
Net change in arrears3.9-1.2-2.00.00.70.00.00.00.0
Memorandum item:
Primary balance-1.42.53.62.810.52.96.31.42.0
Sources: Ministry of Finance and Fund staff estimates.

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

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

Sources: Ministry of Finance and Fund staff estimates.

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

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

Table 5.Paraguay: Central Government Operations
2005
SBAJan.-MarJan.-JuneJan.-Dec.
200220032004Prog.ActualProg. Rev.Proj.Prog. Rev.Proj.
(In billion of guaraníes)
Total revenues5,0486,0017,6371,7611,9053,7334,0238,1378,430
Tax revenues2,9233,6764,9291,1741,1242,4492,5845,0935,482
Nontax revenues 1/2,1182,3182,6965857781,2801,4343,0352,942
Capital revenues7712234496
Current expenditures:4,7664,9815,3631,3181,3142,7952,8766,0896,263
Wages and salaries2,5822,7242,9847547441,5251,5243,3283,291
Goods and services3734084478370218252526595
Interest payments456489483113133280301561596
Transfers1,3261,3341,4313613647597921,6471,765
Other292618731372616
Capital expenditures and net lending1,2811,1651,6253381748277062,2872,271
Statistical discrepancy 2/271291430-1560-15600
Overall balance-728-116792105261111284-240-104
Financing728116-792-105-261-111-285240104
External debt (increase +)11859010310-394010301238
Disbursements7381,1567631641304084331,1421,178
Amortizations619566660154169368423841940
Domestic bonds (increase +)-26-58-78-167-1-167-125-167-131
Net credit from the banking system-27-308-12452-21916-168105-1
Other663-108-6930-20-20-2
(In percent of GDP)
Total revenues17.316.618.915.817.716.818.718.319.6
Tax revenues:10.010.212.210.510.411.012.011.412.7
Nontax revenues 1/7.36.46.75.37.25.76.76.86.8
Capital revenues0.00.00.00.00.00.00.00.00.0
Current expenditures16.413.813.311.812.212.613.413.714.6
Wages and salaries8.97.57.46.86.96.97.17.57.6
Goods and services1.31.11.10.70.71.01.21.21.4
Interest payments1.61.41.21.01.21.31.41.31.4
Transfers4.63.73.53.23.43.43.73.74.1
Other0.10.10.00.10.00.10.00.10.0
Capital expenditures and net lending4.43.24.03.01.63.73.35.15.3
Statistical discrepancy 2/0.90.10.40.0-1.50.0-0.70.00.0
Overall balance-2.5-0.32.00.92.40.51.3-0.5-0.2
Financing2.50.3-2.0-0.9-2.4-0.5-1.30.50.2
External debt (increase +)0.41.60.30.1-0.40.20.00.70.6
Disbursements2.53.21.91.51.21.82.02.62.7
Amortizations2.11.61.61.41.61.72.01.92.2
Domestic bonds (increase +)-0.1-0.2-0.2-1.50.0-0.7-0.6-0.4-0.3
Net credit from the banking system-0.1-0.9-0.30.5-2.00.1-0.80.20.0
Other2.3-0.3-1.70.00.00.00.00.00.0
Memorandum Item:
Primary balance-1.91.02.82.05.11.83.40.71.1
Balance of the Caja Fiscal 3/-2.1-1.6-1.2-1.5-1.1-1.5-1.4-1.5-1.6
Sources: Ministry of Finance; and Fund staff estimates.

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

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

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

Sources: Ministry of Finance; and Fund staff estimates.

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

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

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

Table 6.Paraguay: Public Sector Arrears 1/(In millions of U.S. dollars)
December 2003December 2004
TargetActualTargetActualMarch 2005
Total public sector arrears162157513729
(In percent of GDP)2.82.70.70.50.4
Central government10512351210
Domestic596651210
(In billions of guaranies)(360)(400)(320)(134)0
External4658000
Of which: multilateral00000
Rest of public sector573401629
Domestic00000
External573401629
Of which: PETROPAR arrears to foreign supplier442201629
ESSAP arrears94000
Sources: Ministry of Finance; and Fund staff estimates.

Stock at end of period, Adjusted for program definitions. The program considers as arrears: (i) all payments past due over 30 days; (ii) nondisputed arrears; (iii) domestic arrears which exclude “normal” floating debt (equal to G250 billion, or US$40 million).

Sources: Ministry of Finance; and Fund staff estimates.

Stock at end of period, Adjusted for program definitions. The program considers as arrears: (i) all payments past due over 30 days; (ii) nondisputed arrears; (iii) domestic arrears which exclude “normal” floating debt (equal to G250 billion, or US$40 million).

Table 7.Paraguay: Summary Accounts of the Central Bank(In billions of guaranies; end-of-period; valued at constant exchange rate)
2005
Mar.Jun.Dec.
200220032004Prog.ActualProg.Rev. Proj.Prog.Rev. Proj.
Currency issue1,6992,2072,4882,4222,2192,2122,1532,8162,736
Growth2.229.912.714.54.91010.010.010.0
Net international reserves4,0276,1757,3357,0367,4667,4097,4097,6607,660
(In millions of U.S. dollars)6419831,1681,2201,1891,1201,1201,2201,220
Net domestic assets-2,329-3,969-4,848-4,614-5,247-5,197-5,256-4,844-4,924
Net nonfinancial public sector1,5071,1631,2041,0049729689801,0581,147
Net credit to the central government1,291952947866756829797919964
Net credit to the rest of NFPS2162171257139217139183139183
Net credit to the banking system-2,111-3,362-4,376-4,389-4,642-4,996-4,715-4,873-4,688
Reserve requirements-1,600-2,219-2,195-2,315-2,184-2,370-2,222-2,413-2,293
Free reserves-217-543-1,012-781-819-802-794-842-864
Monetary control bills (LRM)-298-602-1,171-1,302-1,654-1,833-1,627-1,627-1,539
Other4229149797
Other assets and liabilities (net)-1,724-1,770-1,676-1,228-1,578-1,169-1,521-1,029-1,383
Capital and reserves-2,941-1,463-1,674-1,188-1,646-1,128-1,617-988-1,531
Other assets net1,216-308-2-4068-4196-41148
Memorandum item:
Monetary base growth-1.057.717.68.85.06.70.48.24.9
Sources: Central Bank of Paraguay; and Fund staff estimates.
Sources: Central Bank of Paraguay; and Fund staff estimates.
Table 8.Paraguay: Summary Accounts of the Banking System(End-of-period; valued at constant exchange rate)
2005
Mar.Jun.Dec.
200220032004Prog.ActualProg.Rev. Proj.Prog.Rev. Proj.
(In billions of guaraníes)
I. Central Bank
Net international reserves4,0276,1757,3357,0367,4667,4097,4097,6607,660
(in millions of U.S. dollars)6419831,1681,2201,1891,1201,1201,2201,220
Net domestic assets-2,329-3,969-4,848-4,614-5,247-5,197-5,256-4,924-4,924
Credit to public sector, net1,5071,1631,2041,0049729689801,0581,147
Credit to banking system, net 1/-1,814-2,760-3,205-3,087-2,988-3,163-3,008-3,247-3,149
Central bank securities-677-1,071-1,552-1,302-2,029-1,833-2,101-1,627-1,881
Other-1,345-1,301-1,295-1,228-1,202-1,169-1,127-1,029-1,040
Currency issue1,6992,2072,4882,4222,2192,2122,1532,8162,736
II. Monetary Survey
Net foreign assets5,4978,4059,4789,3409,96599,7149,7229,9659,972
(in millions of U.S. dollars)8751,3381,5091,4871,5571,5471,5481,5871,588
Net domestic assets3,4732,1522,2922,4361,7442,1432,0482,4962,412
Credit to the public sector932699369645-24611-261-177
Credit to the private sector6,2305,0815,7886,1385,8776,1365,8976,4646,453
Other-3,689-3,628-3,866-3,766-4,139-3,748-3,859-3,707-3,863
Broad Liquidity (M4)8,97010,55811,77011,77711,52211,85611,77012,46012,384
Bonds and issued securities135310000000
Other monetary liabilities159125312131223122
Central bank securities with private sector281469381711375825516713441
Broad liquidity (M3)8,53910,04711,26311,06311,02611,02811,82211,74511,822
Foreign currency deposits4,6995,2535,3105,7265,3615,7265,3615,7265,361
Money and quasi-money (M2)3,8394,7945,9535,3365,6645,3025,7716,0186,461
Quasi-money1,1981,2081,4821,2821,4081,3131,4371,3781,496
Money (M1)2,6413,5874,4714,0544,2563,9884,3344,6414,965
(Annual percentage change)
M0 (Currency issued)2.229.912.714.54.91010.010.010.0
Credit to the private sector-20.9-18.413.915.410.518.718.710.211.5
M10.835.824.717.022.915.325.311.011.0
M2-2.224.924.9212.519.412.021.910.78.5
M3-21.017.712.15.34.94.55.45.25.0
Of which: foreign currency deposits-31.811.81.1-0.7-7.0-1.7-7.90.01.0
Memorandum items:
Ratio of foreign currency deposits
to M3 (percent)55.052.347.151.848.651.948.248.845.4
Ratio of foreign currency deposits
to private sector deposits in banks (percent)64.963.557.163.157.362.556.861.455.9
Sources: Central Bank of Paraguay; and Fund staff estimates.

Reflects debt write-offs of central bank credit to commercial banks during 1997 and 1998.

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

Reflects debt write-offs of central bank credit to commercial banks during 1997 and 1998.

Table 9.Paraguay: Banking System Indicators
March
200120012200320042005
I. Total banking system (II+III+IV+V)
Share in assets100.0100.0100.0100.0100.0
Capital adequacy ratio (percent)16.917.920.920.523.0
NPLs/total loans16.519.720.610.810.6
Provisions/NPLs37.046.654.854.653.9
Rate of return on assets (ROA)2.21.00.41.72.3
Rate of return on equity (ROE)21.29.04.518.322.0
Liquid assets/total assets 1/23.025.132.630.830.4
Foreign exchange deposits/total deposits65.368.661.755.053.9
II. Total foreign-owned banks
Share in assets45.148.447.435.833.8
Capital adequacy ratio (percent)16.017.620.426.030.4
NPLs/total loans15.320.120.811.011.0
Provisions/NPLs42.657.564.271.273.3
Rate of return on assets (ROA)3.11.60.11.41.8
Rate of return on equity (ROE)30.415.01.212.013.6
Liquid assets/total assets 1/22.227.129.825.426.7
Foreign exchange deposits/total deposits67.871.165.665.264.3
III. Total majority-owned foreign banks
Share in assets38.333.237.245.246.2
Capital adequacy ratio (percent)16.819.921.017.720.1
NPLs/total loans10.610.412.33.73.8
Provisions/NPLs36.843.852.156.946.4
Rate of return on assets (ROA)1.81.41.32.23.1
Rate of return on equity (ROE)18.313.415.525.832.4
Liquid assets/total assets 1/25.026.235.328.829.7
Foreign exchange deposits/total deposits69.370.762.353.853.4
IV. Total domestic-owned private banks
Share in assets7.410.47.48.29.2
Capital adequacy ratio (percent)14.813.614.113.314.2
NPLs/total loans6.58.82.92.11.9
Provisions/NPLs30.818.746.270.370.0
Rate of return on assets (ROA)1.21.11.62.02.0
Rate of return on equity (ROE)13.814.321.128.125.2
Liquid assets/total assets 1/20.118.338.838.139.3
Foreign exchange deposits/total deposits61.862.660.757.652.4
V. National Development Bank (BNF)
Share in assets9.28.08.010.710.8
Capital adequacy ratio (percent)22.918.830.025.023.5
NPLs/total loans46.556.256.248.948.3
Provisions/NPLs31.739.647.643.144.3
Rate of return on assets (ROA)0.3-4.7-2.80.50.6
Rate of return on equity (ROE)2.0-27.3-18.76.88.0
Liquid assets/total assets 1/20.417.330.752.037.3
Foreign exchange deposits/total deposits27.042.532.723.623.6
Source: Superintendency of Banks.

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

Source: Superintendency of Banks.

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

Table 10.Paraguay: Balance of Payments, 2001-2005(In millions of U.S. dollars)
2005
Est.Jan-MarJan-JunJan-Dec.
2001200220032004Prog. 1/Est.Prog. 1/Rev. Proj.Prog. 1/Rev. Proj.
Current account-2669312227-5083126102-27-97
Trade balance-618-283-279-413-133-8-4-28-460-527
Exports1883185221682,7006745998267242,8202,588
Registered99095112421,6263124134974601,6301,585
Unregistered8939019271,0743631863292641,1901,003
Imports-2500-2134-2447-3,113-808-607-830-752-3,280-3,114
Registered-1989-1510-1865-2,652-585-520-674-634-2,713-2,671
Unregistered-512-624-582-461-223-87-156-118-567-444
Services (net)16521423723555636258214214
Factor income1643-410-26-191520611
Transfers16711616519454485452215205
Capital and financial account1635322290-11-76-66-8366163
General government150-49214-3-3233336
Disbursements14414621313927254040185183
Amortization-102-123-130-133-32-30-40-39-161-156
Other108-2799222299
Private Sector 2/135713076-7-74-67-8633127
Direct investment781230648815158374
Foreign currency deposits-61-15334460-16-8-71-30-101-40
Other-4198-244-480-74-12-715193
Errors and omissions58-229-133127000000
Overall balance-45-83211245-61760193966
Net international reserves (increase -)4583-302-18161-20-609-39-51
Gross reserves4584-301-17960-21-609-40-52
Reserve liabilities0-1-1-1110011
Exceptional financing91-670130-280-15
Arrears deferral (+)/clearance (-)91-670130-280-15
Memorandum items:
Current account in percent of GDP-4.11.82.20.4-2.74.96.75.6-0.4-1.4
Gross reserves (in millions of U.S. dollars)7236419821,1681,1201,1891,1801,1801,2201,220
in months of imports of GNFS3.52.73.44.03.63.93.83.93.94.0
External public debt in percent of GDP35.647.246.537.437.037.034.435.237.437.3
Debt service in percent of exports GNFS10.89.111.67.88.87.97.98.68.59.0
Export volume (percentage change) 3/19.5-7.613.814.0-22.65.67.22.05.72.8
Import volume (percentage change) 3/1.4-21.415.617.14.2-9.44.2-1.33.3-3.0
Terms of trade (percentage change)-0.37.57.31.8-5.4-8.8-5.4-8.8-5.4-8.8
Sources: Central Bank of Paraguay; and Fund staff estimates.

Revised program (see www.imf.org).

Includes public enterprises and binationals.

Registered trade.

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

Revised program (see www.imf.org).

Includes public enterprises and binationals.

Registered trade.

Table 11.Paraguay: Indicators of External Vulnerability
Proj.
2000200120002200320042005
Monetary and financial indicators 1/
Broad money (M3), percentage change 2/-0.50.7-21.017.712.14.9
Credit to the private sector, real (percentage change) 2/-9.0-8.7-31.1-25.510.95.9
Share of nonperforming loans in total loans (percent)16.616.519.720.610.810.6
Average domestic lending rate, real16.022.539.019.317.427.8
Central bank bill yield, real-2.812.812.9-1.21.00.2
Central bank foreign short-term liabilities (millions of US$) 3/0.50.20.50.50.30.3
External indicators
Merchandise exports (percentage change)0.7-18.9-1.617.124.5-4.1
Merchandise imports (percentage change)4.1-12.7-14.614.727.20.0
Merchandise terms of trade (percentage change)-4.0-0.37.57.31.8-8.8
Real effective exchange rate (average; percentage change)-6.4-4.4-1.2-6.65.3
Current account balance (percent of GDP)-2.3-4.11.82.20.4-1.4
Capital and financial account (percent of GDP)2.22.51.04.01.32.4
Net foreign direct investment (percent of GDP)1.41.20.20.50.91.1
Inward portfolio investment (percent of GDP)0.00.00.00.00.00.0
Other net investment (percent of GDP)0.71.10.73.20.21.1
External public debt (percent of GDP)33.335.647.246.537.437.3
Debt service (in percent of exports GNFS)10.410.89.111.67.89.0
Gross reserves (in US$)7727236419821,1681,220
In months of imports of GNFS3.23.52.73.44.04.0
Over short-term external debt 3/1.11.10.91.51.71.7
Over foreign currency deposits in domestic banks0.60.60.71.01.11.0
Over short-term external debt and FX deposits in PRY0.40.40.40.60.70.6
Sources: Central Bank of Paraguay; and Fund staff estimates.

Actual data for March 2005.

Foreign currency components are valued at the accounting exchange rate of Gs. 6,280 per U.S. dollar.

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

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

Actual data for March 2005.

Foreign currency components are valued at the accounting exchange rate of Gs. 6,280 per U.S. dollar.

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

Table 12.Paraguay: Schedule of Reviews and Purchases
Amount of Purchase
DateMillions of SDRsPercent of QuotaConditions
Purchases available44.044.0
December 15, 200330.030.0Approval of arrangement
March 16, 20044.04.0First review and end-December 2003 performance criteria
July 30, 20044.04.0Second review and end-March 2004 performance criteria
December 20, 20043.03.0Third review and end-August 2004 performance criteria
March 30, 20053.03.0Fourth review and end-December 2004 performance criteria
Purchases to become available6.06.0
August 22, 20053.03.0Fifth review and end-March 2005 performance criteria
September 30, 20053.03.0Sixth review and end-June 2005 performance criteria
Total50.050.0
Source: Fund staff estimates.
Source: Fund staff estimates.
Table 13.Paraguay: Indicators of Capacity to Repay the Fund 1/
Projections
2004200520062007200820092010
Fund repurchases and charges
In millions of SDRs0.01.21.61.619.125.87.5
In millions of U.S. dollars0.01.82.42.429.139.311.4
In percent of exports of goods and NFS0.00.10.10.10.81.10.3
In percent of quota0.01.21.61.619.125.87.5
In percent of gross official reserves0.00.10.20.22.22.90.8
Fund credit outstanding
In millions of SDRs0.050.050.050.032.47.40.0
In millions of U.S. dollars0.076.176.176.149.211.20.0
In percent of exports of goods and NFS0.02.42.32.21.40.30.0
In percent of quota0.050.150.150.132.47.40.0
In percent of gross official reserves0.04.14.03.92.50.50.0
Memorandum items:
Exports of goods and NFS (mlns. of U.S. dollars), baseline3,2863,1633,3263,4403,5633,6843,832
Debt service (millions of U.S. dollars)345317311333350333344
Quota (millions of SDRs)100100100100100100100
Quota (millions of U.S. dollars)148152152152152152152
Gross official reserves (millions of U.S. dollars)1,1681,2201,2461,2771,3071,3471,381
U.S. dollars per SDR (e.o.p.) 2/1.481.521.521.521.521.521.52
Sources: Central Bank of Paraguay; and Fund staff estimates.

Assumes all purchases made as scheduled under current program starting from August 22, 2005, and repurchases made on the obligations schedule.

WEO projections.

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

Assumes all purchases made as scheduled under current program starting from August 22, 2005, and repurchases made on the obligations schedule.

WEO projections.

Table 14.Paraguay: Medium-Term Scenario(In percent of GDP, unless otherwise specified)
Est.Projections
2004200520062007200820092010
I. Program scenario
Real sector
Real GDP growth (annual percentage change)4.03.03.54.04.04.04.0
Consumer prices (annual percentage change)2.86.05.04.03.03.03.0
GDP per capita (US dollars)1,1781,1681,2251,2811,3431,4081,480
Public finances 1/
Revenues22.222.923.32223.223.322.922.9
Current primary expenditures15.216.316.216.216.116.116.1
Interest payments1.71.71.81.71.71.41.4
Capital expenditures4.86.76.76.76.86.86.8
Public enterprise operating surplus1.42.12.11.91.81.71.5
Primary balance3.62.02.42.22.11.71.5
Overall balance2.50.40.60.50.40.30.2
Public sector debt (in millions of U.S. dollars)2,7992,8232,8252,8352,8672,9061,932
(In percent of GDP)41.441.338.836.534.532.730.7
Balance of payments (in millions of U.S. dollars)
Exports2,7002,5882,7372,8462,9653,0803,220
Imports3,1133,1143,2423,3603,5153,6523,826
Current account27-97-59-66-95-106-130
(In percent of GDP)0.4-1.4-0.8-0.8-1.1-1.2-1.4
Capital and financial account901637890123160181
Gross international reserves1,1681,2201,2391,2641,2921,3461,397
(In months of imports)4.04.04.03.93.83.83.8
II. No Reform Scenario
Real sector
Real GDP growth (annual percentage change)4.03.02.02.02.02.02.0
Consumer prices (annual percentage change)2.86.06.05.04.04.04.0
GDP per capita (US dollars)1,1781,1681,2031,2341,2691,3061,347
Public finances 1/
Revenues21.122.923.123.123.122.822.8
Current primary expenditures14.416.316.716.917.217.718.3
Interest payments1.61.71.91.92.12.22.3
Capital expenditures4.56.77.07.07.17.07.0
Public enterprise operating surplus1.42.12.11.91.81.61.4
Primary balance3.62.01.51.00.5-0.4-1.1
Overall balance2.40.4-0.3-0.9-1.5-2.5-3.4
Public sector debt (in millions of U.S. dollars)2,7992,8232,8762,9973,1663,4003,704
(In percent of GDP)41.441.340.139.940.241.142.6
Balance of payments (in millions of U.S. dollars)
Exports2,7002,5882,7132,7972,9143,0283,147
Imports3,1133,1143,2023,2643,3593,4323,535
Current account27-97-39-103095136
(In percent of GDP)0.4-1.4-0.5-0.10.41.11.6
Capital and financial account901637887116149165
Gross international reserves1,1681,2201,2591,3351,4801,7252,026
(In months of imports)4.04.14.14.34.65.26.0
Sources: Ministry of Finance; Central Bank of Paraguay; and Fund staff estimates and projections.

Defined as the nonfinancial public sector and the BCP.

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

Defined as the nonfinancial public sector and the BCP.

Figure 1.Paraguay: Selected Economic Indicators

Source: Central Bank of Paraguay and Ministry of Finance.

Figure 2.Paraguay: Exchange Rate Developments

Source: Central Bank of Paraguay and Fund staff estimates.

Figure 3.Paraguay: Selected Financial Indicators

Source: Central Bank of Paraguay.

Figure 4.Paraguay: Selected Banking Indicators

Source: Central Bank of Paraguay.

APPENDIX I Paraguay—Fund Relations

(As of June 30, 2005)

I. Membership Status: Joined December 28, 1945; Article VIII

II. General Resources Account:

In millionsIn percent
of SDRsof Quota
Quota99.90100.00
Fund holdings of currency78.4378.51
Reserve position in Fund21.4821.50

III. SDR Department:

In millionsPercent of
of SDRsAllocation
Net cumulative allocation13.70100.00
Holdings86.04628.18

IV. Outstanding Purchases and Loans: None

V. Exchange Rate Arrangement: The currency of Paraguay is the Paraguayan guaraní. The exchange rate regime is a managed float. The exchange rate is determined in the interbank foreign exchange market, but the central bank intervenes in the foreign exchange and monetary markets to smooth out exchange rate fluctuations in real effective terms. The U.S. dollar is the principal intervention currency. On May 31, 2005, the average interbank rate for the U.S. dollar was/G6,235 =US$1.

VI. Article IV Consultation: The 2002 Article IV consultation was concluded by the Executive Board on March 10, 2003; the documents are IMF Country Reports No. 03/94 and 03/95. The 2004 Article IV consultation was concluded by the Executive Board on July 30, 2004; the document is Country Report No. 05/59.

VII. Technical Assistance:

DepartmentPurposeDate of Delivery
MAEPolicy Advisory to the Central BankMarch 1994–Present
FADTax PolicyFebruary 1999
FADTax AdministrationMarch 1999
STAMonetary StatisticsFebruary 2000
STABalance of Payments StatisticsJune 2000
STAMultisector, GDDS accessionFebruary 2001
MAECurrency OperationsMarch through September 2002
FADCustoms AdministrationMay 2002
MAEFinancial Sector SurveillanceJuly 2002
FADROSCAugust 2002
STAMultisector, follow-upSeptember 2002
MAEBanking SupervisionSeptember through November 2002
MAECentral Bank OperationsNovember 2002
TRESafeguards AssessmentJanuary 2003
MFDBanking SupervisionJanuary 2003 through April 2004
MFDCurrency Handling and ReformFebruary 2002 through April 2004
MFDPayment SystemJuly 2003
FADCustoms and Tax AdministrationDecember 2003
MFDReorganization of the Central Bank and Monetary OperationsJanuary 2004
FADCustoms Administration AdvisorJuly 2004 to May 2005
MFDMonetary Operations and Monetary Policy FormulationOctober 2004
MFDPublic Banking RestructuringFebruary 2005
FADCustoms and Tax AdministrationFebruary 2005
MFD and WBFSAP MissionApril 2005 and July 2005

VIII. Safeguards Assessment: Under the Fund’s safeguards assessment policy, Central Bank of Paraguay (CBP) is subject to a full safeguard assessment. A safeguards assessment of the CBP was completed on January 31, 2003. The assessment concluded that substantial risks might exist in legal structure and independence of the Central Bank, and in its control environment. Staff findings, proposed recommendations under program conditionality, and other recommendations are reported in IMF Country Report No. 03/94. The CBP has implemented all significant recommendations made in the report. Staff will continue to monitor the implementation of the remaining recommendations.

X. Resident Representative: Mr. Luis H. Duran-Downing has been appointed as Representative since February 2004.

APPENDIX II Paraguay—World Bank Relations1

(As of June 30, 2005)

A new Paraguay Country Assistance Strategy (CAS) was approved on December 16, 2003, covering the period from mid-FY04 to FY07. The Bank’s strategy as outlined in the new CAS aims at restoring confidence in the economy and lays the basis for sustainable growth and poverty reduction. To this end, the CAS supports (i) the fiscal and financial reforms the Administration has to send to congress; (ii) improved governance and transparency in public administration; (iii) sustained growth, particularly in the rural areas where poverty is concentrated and deepest; and (iv) social inclusion, to improve the coverage and efficiency of basic social services to help Paraguay meet the millennium development goals. The proposed base case-lending program for the CAS periods is for US$325 million, of which US$80 million, or about 25 percent, are envisaged for adjustment operations. One of them, the Economic Recovery Loan for US$30 million was approved on December 16, 2003 together with the CAS, and has been fully disbursed.

A comprehensive Policy Notes document was completed in May 2003 and discussed with the new Administration in June 2003. In FY04, the Bank also prepared a Social Protection Study and a Country Financial Accountability Assessment (CFAA). In FY05, the Bank has completed an Institutional and Governance Review. In addition, sector work on a Health Strategy and a Public Expenditure Review (PER) is underway and will be delivered in FY05.

Four World Bank-financed projects are presently under implementation, for a total value of US$123 million in commitments, of which US$55.6 million are undisbursed as of April 13, 2005. These projects include Fourth Rural Water Supply, Natural Resource Management, Pilot Community Development, and the Secondary Education Reform. There is also an active program of grants currently being implemented.

A first Programmatic Financial Sector Adjustment Loan and Technical Assistance Loan were approved on April 5, 2005. A technical assistance loan for the Modernization of the Ministry of Finance was also approved on April 5, 2005. A Maternal Health II project is under preparation for early FY06 delivery. A Social Security Reform Technical Assistance Loan, a Sustainable Rural Investment Project, which will be a follow-up to the ongoing Natural Resource Management Project, and a Road Maintenance Project are also being prepared for delivery in FY06. The FY06 program further includes a second Programmatic Financial Sector Adjustment Loan.

Financial Relations With the World Bank(In millions of U.S. dollars)
I. IBRD/IDA Operations
Committed
(Net of Cancellations)DisbursedUndisbursed
Active loans
Natural Resource Management50.041.48.6
Fourth Rural Water Supply40.023.316.7
Community development9.01.77.3
Education Reform24.01.023.0
Total active loans123.067.455.6
Total inactive loans728.8728.80.0
Total IBRD/IDA851.8796.255.6
Repaid (incl. Repay to 3rd parties)548.6
Total outstanding261.3
O/w IBRD239.4
O/w IDA21.9
II. IFC Operations
LoansEquityTotal
Commitments0.00.00.0
Repayments and cancellations0.00.00.0
Now held by IFC0.00.00.0
Undisbursed0.00.00.0
III. IBRD/IDA Loan Transactions (calendar year)
199719981999200020012002200320042005
Disbursements41.237.742.146.626.813.542.316.21.9
Repayments27.524.624.620.215.316.821.034.84.1
Net lending13.813.117.526.411.5-3.321.3-18.6-2.2
APPENDIX III Paraguay—Relations with the IDB 1

(As of June 30, 2005)

Portfolio

1. As of May 31, 2005, the active loan portfolio amounts to US$592.5 million, with an undisbursed balance of US$315.1 million. In addition, there are 47 active Technical Cooperation operations for US$20.5 million, of which US$10.4 million are undisbursed.

New Strategy

2. In July, 2004 the IDB approved its new strategy for 2004–2008 with Paraguay, which calls for the Bank’s work to be concentrated in the following areas:

  • Strengthening governance by restoring the credibility of State institutions. The aim of this component will be to enable the State to coordinate the economic development process by heightening the efficiency and transparency of public administration, promoting greater citizen participation, and consolidating democratic institutions;

  • Laying the foundations for sustainable growth through the consolidation of the market economy and greater regional and global integration by creating conditions conducive to increased private-sector participation, greater competitiveness, and deeper integration; and

  • Reducing poverty and improving the quality of life of low-income sectors of the population through the development of human capital and the provision of greater access to quality basic services.

Pipeline

3. Given the large active portfolio and the fiscal constraints there were no new loans approved to Paraguay in 2004. IDB concentrated its actions in 2004 mostly in grants for institutional strengthening (13 operations for US$2.5 million) and in aligning the existing operations to the priorities of the Paraguayan government. Particular mention should be made to a pioneer operation in IDB that promotes civil society participation in programs for combating trafficking of human beings.

4. The lending program for 2005 includes the following operations:

  • Strengthening of the Judiciary System II, for US$10.8 million

  • Depositary, Compensation and Liquidation System, for US$2.0 million

  • Professionalism of the Civil Service, for US$5.0 million

  • Asunción Coastal Development Program, for US$64.0 million

  • Science and Technology Program, for US$6.5 million

APPENDIX IV Paraguay: Statistical Issues

(As of July 8, 2005)

Paraguay began participation in the General Data Dissemination System in September 2001; metadata was also published on the Fund’s Dissemination Standards Bulletin Board at that time.

A. Real Sector Statistics

New national accounts estimates, prepared with the assistance of an IADB-financed expert and following the methodological and conceptual framework of the System of National Accounts 1993 (1993 SNA), have recently been released. The new estimates feature more compete industrial coverage, an input-output matrix, and expanded source data for the compilation of the new benchmark and base year (1994). Quarterly national accounts estimates for 1997–2001 also became available recently.

Both the consumer (CPI) and producer price indices (PPI) are reported on a regular and timely basis. The CPI has a base period of 1992, and the PPI of December 1995. Changes in the base period and basket of the CPI are scheduled to take place after the results of a household income and expenditure survey covering the period 2001–02 become available.

The coverage and quality of employment and unemployment statistics have improved significantly since a regular household survey was introduced in 1998; frequency, however, remains annual and the publication lag is close to one year. Wage indices are updated twice a year.

B. Government Finances Statistics

Reliable monthly data are available on a timely basis for the central government, where considerable improvements have been made over the past years. The asset position of the social security system is available on a daily basis. However, some shortcomings in classification and recording remain and Paraguayan government finance statistics are not considered fully consistent with the methodology of the IMF Government Finance Statistics Manual 1986 (GFSM 1986). For example, nontax revenues include social security contributions and public enterprises and the social security system utilize somewhat different classifications schemes for revenues and expenditures than the central government. A law (Ley 1535) that was passed in 2000 should allow closer integration, as it sets uniform standards and creates a database for the entire public sector. Data on medium- and long-term public external debt are reliable and available on a monthly basis. Domestic public debt data are available on request, but should be integrated with the external public debt database. Deficiencies remain in the measurement of short-term supplier and commercial credit to the public sector. Moreover, there are discrepancies between the financing data reported by the monetary and fiscal authorities. On November 2003, the Ministry of Finance (MOF) issued a decree requiring all decentralized entities and public enterprises to provide updated monthly financial and balance sheet data to the MOF. Other measures are being taken to make reporting more transparent. Under the SBA, all public enterprises and the IPS are required to undergo a complete financial audit by an internationally recognized auditor.

Annual data covering only budgetary central government (central administration) through 2003 have been reported for publication in the 2004 GFS Yearbook. However, since 1994 no outstanding debt data and no breakdowns for expenditure by function data have been provided for publication in the GFS Yearbook. Monthly and quarterly data are not reported for publication in IFS. Data on local governments and public enterprises are deficient and not reported regularly. There are no current plans to migrate to the GFSM 2001.

C. Monetary Statistics

Monetary statistics are considered broadly reliable. Following the work on methodologies initiated in the 2000 STA missions, Paraguay completed the establishment of a unified compilation and reporting system for the complete range of monetary data. This system harmonizes monetary data for use of the Central Bank of Paraguay (CBP), for reporting to STA for dissemination in the IFS, and for Fund surveillance and program monitoring purposes. A revision of the classification criteria has led also to a marked reduction in the discrepancies of interbank positions. A recent STA money and banking statistics mission recommended that (i) institutional coverage of the depository corporations survey be expanded to include financial investment funds and financial cooperatives; (ii) the compilation unit be given on-line access to the database maintained by the superintendency of banks; and (iii) methodological notes be disseminated, including an explanation of improvements and reasons for breaks in the series.

The superintendency of banks publishes a detailed and informative report on the soundness of the financial system.

D. External Sector Statistics

Quarterly and annual balance of payments (BOP) and the international investment position (IIP) statistics are available from 2001 onwards on the CBP website, and are reported to STA on a regular and timely basis. Annual IIP data have been compiled and disseminated for the period 1995–2003. The classification of the BOP and of the IIP follows the recommendations of the Balance of Payments Manual 5th edition (BPM5). BOP technical assistance by STA has led to improvements in the quality of the data on capital flows, especially in the coverage on foreign direct investment, and in the recording of external debt transactions in the BOP and in the IIP. The CBP now produces a highly informative bulletin on BOP statistics. Special studies by the central bank have improved the estimation methods for remittances of Paraguayans abroad and informal trade transactions, but deficiencies remain in the area of private capital outflows that contribute to the sizable negative errors and omissions in the BOP statistics over the past few years.

Key STA recommendations in the area of BOP statistics include the need to: (i) introduce quarterly surveys for recording services, transfers, and financial transactions of the nonfinancial private sector; (ii) apply quality control procedures for surveys; (iii) revise and improve the statistical techniques to take into account unrecorded merchandise trade and smuggling; (iv) improve the compilation procedures of services and financial transactions; and (v) institute a system of coordination with other official agencies, and within the CBP, to promote intersectoral data consistency.

Paraguay—Table of Common Indicators Required for Surveillance(As of July 8, 2005)
Date of latest observationDate receivedFrequency of Data1Frequency of Reporting1Frequency of publication1
Exchange Rates6/30/057/7/05DDD
International Reserve Assets and Reserve Liabilities of the Monetary Authorities25/30/055/31/05DDD
Reserve/Base Money6/30/057/7/05DDD
Broad Money5/31/057/7/05MMM
Central Bank Balance Sheet6/30/057/7/05DDD
Consolidated Balance Sheet of the Banking System5/31/057/7/05MMM
Interest Rates35/31/057/7/05MMM
Consumer Price IndexApr. 20055/02/05MMM
Revenue, Expenditure, Balance and Composition of Financing4–General Government5Apr. 200505/18/05MMM
Revenue, Expenditure, Balance and Composition of Financing4–Central Government5Apr. 200505/24/05MMM
Stocks of Central Government and Central Government-Guaranteed Debt6Dec. 20042/01/05QQQ
External Current Account BalanceMar 20055/01/05QQQ
Exports and Imports of Goods and ServicesMar 20055/01/05MMM
GDP/GNP20042/01/05AAA
Gross External DebtDec. 200405/02/05QQQ

Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA).

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discounts rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA).

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discounts rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition.

APPENDIX V Paraguay—Work Program
MissionDates
Fifth SBA Review
Board MeetingAugust 22, 2005
FSAP
First MissionApril 19–29, 2005
Second MissionJuly 5–15, 2005
Board MeetingMid-October, 2005
Sixth SBA Review and
Negotiations on a Successor Arrangement
MissionSeptember 6–13, 2005
Board MeetingSeptember 30, 2005
2006 Article IV Consultation
MissionFebruary 6–17, 2006
Board MeetingMarch 31, 2006
Memorandum items:
Approval of SBADecember 15, 2003
First SBA ReviewApril 12, 2004
Second SBA ReviewJuly 30, 2004
Third SBA Review (and SBA Extension)December 20, 2004
Fourth SBA ReviewMarch 28, 2005
ATTACHMENT I

Asunción, Paraguay

August 8, 2005

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. de Rato:

1. The Fund-supported program, in place since December 2003, has been remarkably successful in stabilizing the economy and the financial system, and making important inroads towards adopting an ambitious structural reform agenda that will lead to an increase in the potential growth of the economy and a reduction in poverty.

2. Significant accomplishments were achieved in 2004 assisted by a positive external environment. The economy recovered and reached one of the highest growth rates of recent history; inflation was reduced to one of the lowest in decades; the budgetary situation was turned around and the Treasury registered a surplus, the first in a decade; the guaraní was stabilized; the situation in the financial system was normalized following the serious crisis of 2002; and important structural reforms were adopted, including the approval of the fiscal adjustment law, the public pension system reform, the new customs code and the second-tier public banking law.

3. In 2005, we are confronting a less favorable external environment with higher oil prices, lower export prices, and upward pressures in global interest rates. In addition, a drought affected several key crops in the first half of the year. As a result, inflationary pressures have emerged and our economic growth objective for 2005 had to be lowered. Notwithstanding these developments, we will continue treating the Stand-By Arrangement (SBA) as precautionary.

4. This letter of intent outlines some additional measures we have adopted recently or intend to adopt in the next few months to confront the new scenario. This letter updates our earlier commitments included in the December 2003 letter with the original request for the Stand-By Arrangement (SBA), the December 2004 letter requesting an extension of the SBA through September 2005 and delineating our economic program for 2005 as well as reaffirming commitments included in the letter of March 2005.

5. Despite adverse external circumstances and difficult domestic conditions, the program remains broadly on track. All quantitative performance criteria for end-March 2005 under the SBA-supported program were observed, assisted by a prudent monetary policy and the application of a strict financial plan to guide fiscal policy.

6. However, there was a delay in conducting the independent audits for ANNP, DINAC, INC and PETROPAR (a structural performance criterion for end-April 2005). The audits for ANNP, DINAC and PETROPAR are already underway. In addition, the contracting process of auditing INC is in its final stages. We request a waiver for this delay, which was due to a legal challenge made by the General Comptroller Office, and the more rigorous procedures followed under the procurement law. In addition, a draft general banking law was submitted to Congress in December 2004 but has not been approved by Congress yet (a structural performance criteria for end-June 2005). We would like to review our strategy on general banking legislation and request a waiver for the non-observance of this target.

7. Progress was made in other aspects of the structural reform agenda: (i) the second-tier public bank law was recently approved by Congress and enacted by the President of the Republic (July 27, 2005); (ii) the plan for the comprehensive civil service reform (a structural benchmark for end-April 2005) has been finalized and a draft law was sent to a commission in the cabinet to study further; (iii) the hydrocarbons law was submitted to Congress in May 2005 with the aim of liberalizing diesel prices; (iv) PETROPAR arrears have been contained; and (v) the inventory of contingent liabilities is underway.

8. Several additional measures are being taken to strengthen our program and ensure that its objectives are achieved.

  • In order to contain emerging inflationary pressures, we have increased further the interest rates on our monetary policy instrument (Letras de Regulación Monetaria, LRM) for maturities lower than 91 days. We will tighten monetary policy further in the short-run if expected inflationary pressure persists (and will increase LRM rates over the medium-term to align them with regional rates). We also introduced additional flexibility in our exchange rate policy to ward off imported inflationary pressures.

  • The Ministry of Finance is strengthening efforts to strictly apply the approved financial plan for 2005, which will facilitate achieving the program objective of containing the budget deficit to ½ percent of GDP.

  • Given the delay in congressional approval of the general banking law (a structural performance criterion for June 2005), we are developing a plan of action, to be completed by mid-September 2005 (structural benchmark), to meet the objectives of strengthening the banking system as outlined in the letter of intent of December 2003, taking into account the recommendations of the FSAP when appropriate.

  • Diesel prices were adjusted four times by an accumulated 29 percent in 2005 to ease the financial burden on PETROPAR, reduce distortions and align prices to those in the region. We expect to liberalize diesel prices once Congress sanctions the hydrocarbons bill. In the event Congress does not approve the bill by mid-September 2005, we will revisit our current diesel pricing policy.

  • We will finalize the implementation of the (short-term) recommendations made by the technical assistance mission from the IMF’s Monetary and Financial Department (MFD) to improve the functioning of monetary operations and the performance of financial and exchange markets. 1

  • The first and second legs of the financial sector assessment program (FSAP), including a comprehensive assessment of our financial sector were successfully conducted in April and July 2005. We look forward to the final results of this exercise. Following the detailed review of the FSAP recommendations by the relevant entities, we intend to implement them and address identified problems.

  • We are working with the IMF Fiscal Affairs Department to update our report on the observance of standards and codes (ROSC) in the fiscal area, to strengthen budgetary procedures. The conclusions of the report will be analyzed and its recommendations adopted when appropriate.

  • Progress continues to be made in other segments of the reform agenda.

9. We reiterate our commitment to the policies described in our letters and memoranda of economic and financial policies of December 2004 and March 2005, and would like to request: (i) a waiver on the nonobservance of the structural performance criterion on the audits of four public entities in April 2005; (ii) a waiver on the nonobservance of the structural performance criterion on the approval of the general banking legislation in June 2005; (iii) a waiver on the applicability of the end-June 2005 quantitative performance criteria because some of the relevant information is not yet available; and (iv) completion of the fifth review under the SBA. The Government will continue the usual close dialogue with the Fund and stands ready to adopt the necessary measures to achieve the objectives of the program.

Sincerely yours,

/s//s/
Monica Perez dos SantosErnst Bergen
PresidentMinister of Finance
Central Bank of Paraguay

The Central Bank of Paraguay changed its methodology for estimating GDP and has released a new series with 1994 as the base year (the previous base year was 1982). This report incorporates the new GDP figures, which are about 5 percent lower than the previous series. Consequently, most variables appear somewhat higher when expressed as a percent of GDP than those reported in previous documents and those under the program (programmed GDP in 2005 is also higher than now projected).

Furthermore, Brazil’s offensive to crack down on contraband in the border with Paraguay temporarily affected legal border trade.

Fuel prices in the regional market increased further following Argentina’s decision to stop exports of diesel in December 2004. Argentina was Paraguay’s main supplier of diesel. The latest deliveries of diesel came from Russia.

One such congressional change in the legislative agenda was the re-introduction of the privatization bill in April 2005 (the bill allows for the privatization of the telecom, water and railroad companies). This legislation was not part of the program. The privatization bill was originally proposed by the executive branch in 2000, but suspended by Congress in 2002 after strong opposition from vested interests and other segments of society. The Senate approved the privatization bill in May 2005 but the lower house rejected it in June 2005 after renewed opposition from the same groups.

A legal interpretation from the Attorney General was necessary to resolve the issue. The General Comptroller Office argued that the only body legally authorized to conduct such audits was their office and that external audits were a misuse of public funds.

The audit for INC have not begun yet. The Inter-American Development Bank is financing the audit and it requires a transparent and more rigorous bidding process. The authorities are confident that INC’s audit will start by end-August 2005.

The program envisaged the creation of a commission to develop a business plan and reorient the operations of the development bank (BNF) in the expectation that there might be delays in congressional consideration of this law. While the commission was created, its role is less important than envisaged, as the draft law incorporated some of the commission’s tasks.

There was a change in the economic team in the middle of the policy dialogue. Discussions began with Finance Minister Borda and Interim Central Bank President Sánchez. However, Mr. Borda resigned in mid-May, and then Minster of Industry Ernst Bergen was appointed as Minister of Finance. Ms. Pérez dos Santos (a former IMF economist) assumed the Presidency of the Central Bank in early-June. Discussions were concluded with the new economic team.

Paraguay follows a managed float exchange rate regime and intervenes to smooth out exchange rate fluctuations. In practice, the Central Bank follows the exchange rate vis-à-vis the U.S. dollar more closely than other regional currencies (given the high degree of dollarization in the financial system). The authorities stopped intervening in the foreign exchange market after mid-May 2005, and the guaraní has strengthened by about 3½ percent against the U.S. dollar since then.

Starting in January 2005, PETROPAR’s arrears are excluded from the arrears performance criterion under the program as defined in the technical memorandum of understanding of December 2004 (see www.imf.org).

Once the hydrocarbon law is approved and price liberalized, the authorities intend to move from ad-valorem fuel taxes toward specific fuel taxes, which will be indexed to inflation to avoid large fluctuations in revenue collections due to sharp movements in oil prices.

The agreement specifies that Venezuela will sell oil products to Paraguay at market prices, but under favorable financing terms. In particular, PETROPAR could purchase a significant amount of oil products and receive long-term financing (up to 15 years) at an interest rate of 2 percent per year.

The authorities believe there are enough assets to finance the deficit until the end of the year. They have received technical support from the World Bank to evaluate alternative options to deal with the financial problems of the pension fund for bank employees.

Exports as a percent of GDP do not change much with respect to program projections because programmed GDP was higher than the revised estimate under the new BCP methodology.

The status of negotiations on arrears is as follows: (i) Germany’s KfW (€ 4 million), a law authorizing payment by ANDE’s was promulgated in April 2005; (ii) Belgium’s Office Nacional du Ducroire (Ex-Herstal) (US$8 million), all debts authorized by Congress were paid in November 2004. For past due interest (PDI), the authorities informed staff that negotiations over size and modalities of payment continue; Paraguay has proposed to pay into a fund to improve the environment; (iii) South African supplier D.B. Pty Limited (US$0.03 million), efforts are being made to locate the supplier; (iv) import inspection firms BIVAC (France) and SGS (Switzerland) (up to US$77 million), an investigation is being conducted on the nonpayment to these companies for services provided between 1996 and 1999; (v) PETROPAR’s suppliers (US$30 million), as explained before, prices were adjusted, a hydrocarbons law was sent to Congress to liberalize diesel prices, and an agreement was reached with Venezuela to finance future diesel imports, improving the cash flow and payment capacity of PETROPAR; and (vi) the authorities have represented to staff that they are disputing commercial bank claims, involving the conduct of a former Paraguayan diplomat, in relation to which Paraguay has been adjudicated liable in Swiss court proceedings (US$85 million), the authorities are considering their options in consultation with their professional advisers, the staff will report on further developments at the time of the next review (these claims were not included in the list of disputed claims originally provided by the authorities at the start of the program).

The objectives of this law in the original SBA (Country Report No. 04/66) included: (i) strengthen the institutional framework for monetary policy management; (ii) upgrade regulatory requirements for risk weighted capital; (iii) bring accounting and prudential standards up to international best practices; (iv) bring regulation and supervision of non-bank deposit-taking institutions up to international best practices; and (v) improve the operational capacity of the Superintendency of Banks.

For the latest debt sustainability analysis, see Country Report No. 05/59. The staff believes that the assessments made then remain valid.

Prepared by the staff of the World Bank.

Prepared by the staff of the IDB.

Most of these recommendations have already been adopted, the list includes: (i) formalize the frequency, attendance, and matters to be treated of Executive Committee for Monetary Operations (CEOMA) meetings; and implement a procedure for the recording and internal drafting of the minutes of the meetings; (ii) construct a standard set of figures and tables, focusing on monetary, price, exchange rate, and external developments; (iii) issue shorter-term instruments (including one month); (iv) start using the one-month rate as the key policy rate; (v) concentrate the auctions of longer-term instruments and allow their rates to become market-determined; and (vi) revise repo (RIR) rules.

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