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Paraguay

Author(s):
International Monetary Fund
Published Date:
June 2008
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Executive Summary

Performance and Developments

  • The program is broadly on track. All quantitative performance criteria and structural benchmarks for end-June 2007 were observed. The benchmarks included: (i) a plan to increase significantly the compliance with Basel regulations; (ii) a business plan for the National Development Bank (BNF); and (iii) a strategy to strengthen the financial position of the Central Bank. Significant progress continues to be made in the macro and structural areas toward observing conditionality for end-September 2007.
  • Macroeconomic conditions are generally good. The economy grew 4¼ percent in 2006 and is expected to grow at least 5 percent in 2007, well above the historical average of around 2 percent. After a rebound to 12½ percent at end-2006 caused mainly by temporary factors, headline inflation fell to 10½ percent in August 2007, while core inflation fell to 5 percent, consistent with the program target. The overall fiscal balance was close to zero in 2006, and shifted to a surplus of about 1¾ percent of GDP in the first half of 2007. International reserves reached another record high at end-August 2007, at almost US$2¼ billion, while the guaraní remained strong.

Discussions and Appraisal

  • The authorities reiterated their intention to maintain prudent macroeconomic policies. Despite expenditure pressures, the newly appointed Minister of Finance, Mr. Barreto, reaffirmed the government’s commitment to the program and to adhere to the financial plan of the fiscal budget. Staff expressed concerns about the rapid growth of monetary aggregates and its potential impact on inflation while acknowledging the evidence of stronger domestic money demand. In response to preliminary indications of an uptick in inflation in August 2007 (mostly due to a food supply shock), the authorities raised interest rates on monetary control instruments (LRMs) by 50 basis points in late August 2007.
  • The authorities submitted to Congress a tight budget for 2008. The staff supported the maintenance of a zero balance position in 2008. The authorities pointed to strong expenditures pressures, especially as the general election (scheduled for April 2008) approaches, but stressed their commitment to the program objective of fiscal balance.
  • Momentum was regained in the implementation of the structural reform agenda. After an impasse in late 2006 and early 2007, the authorities have begun to implement again structural reforms despite a difficult political environment.
  • Staff supports completion of the review. In view of Paraguay’s strong performance and commitment to the program, the staff supports completion of the fourth SBA review.

I. Developments and Performance

1. Performance under the program has been good. All quantitative targets for end-June 2007 have been met with substantial margins. The public finances remain under control with tax revenues improving while expenditures have been contained. Domestic credit and international reserve targets have also been observed, although currency has been growing faster than programmed. The continued favorable external environment has further strengthened the balance of payments. Progress continues to be made toward the implementation of the structural reform agenda, and all benchmarks for end-June 2007 were observed. The staff will update the Board on performance for end-September 2007 ahead of the Board meeting, but all indications are that the performance criteria and most structural benchmarks for end-September 2007 would be observed.

Paraguay: Performance for June 2007
Prog.Actual
(In percent of GDP)
Fiscal Targets
Fiscal balance 1/0.31.8
Wage bill 1/3.63.5
Consolidated balance0.43.1
(In percent of currency)
Monetary Targets
Net international reserves29.868.1
Net domestic assets-39.5-72.7
Sources: Paraguayan authorities and Fund staff.

Central administration.

Sources: Paraguayan authorities and Fund staff.

Central administration.

2. The economy is expanding at one of the highest rates in recent history. Real GDP growth could exceed 5 percent in 2007, supported mainly by a strong agricultural recovery. This would be the highest rate of economic expansion since 1995.

  • Agriculture. After three years of drought, agriculture recovered and could grow 15 percent in 2007, reflecting the strong performance of soybeans, the main export crop.
  • Livestock. Following a strong expansion over the past three years, livestock production is likely to moderate in 2007.
  • Industry. Manufacturing growth is expected to remain low, at around 2 percent in 2007.
  • Services. With the boom in cellular phone services coming to an end, growth in the service sector is likely to slow to 3½ percent in 2007.

Paraguay: Sources of Growth

3. After seven months of deflation, monthly inflation rose to 3½ percent in August 2007. The bulk of this rise is explained by movements in food prices due to supply disruptions associated with a harsh winter that the authorities expect to be partly reversed in the following months. Despite this jump in inflation, the 12-month rate of non-food inflation was only 2 percent and non-tradeable goods inflation was 3⅓ percent in August 2007.

Figure 1.Paraguay:Real Sector Developments

Sources: Paraguayan authorities and Fund staff estimates.

Figure 2.Paraguay: Fiscal Developments

Sources: Paraguayan Authorities and Fund staff estimates.

  • Core inflation fell from 7 percent at end-2006 to 5 percent at end-August 2007 (in line with the target for 2007) owing to the appreciation of the guaraní, and the decline of oil prices during the first half of 2007.
  • Headline inflation declined from 12½ percent at end-2006 to 10½ percent in August 2007, as fruits and vegetables prices remained highly volatile, falling rapidly in the first seven months of the year and then jumping almost 20 percent in August alone.

Paraguay: Sources of Inflation

4. Public finances have strengthened further. Estimates through end-June 2007 show a central government surplus of about 1¾ percent of GDP (or about 1½ percent of GDP higher than programmed). The consolidated public sector also recorded a surplus significantly higher than programmed.

  • Revenues have remained buoyant. The good performance has been sustained by both tax and nontax revenues. Tax collections increased by almost 9 percent through June 2007, driven by the income and value-added taxes, reflecting the expanding economy and the effect of tax reforms put in place over the past few years. Nontax revenues also remained strong, boosted by increased royalties from the bi-national entities (particularly Yacyretá)1
  • Expenditures have been well-contained. In fact, most spending categories registered negative growth rates through June 2007, while wages and salaries were limited to program levels. The significant under-execution of the capital budget is mainly a result of a backlog in approval of work orders resulting from changes at the Ministry of Public Works, which the authorities intend to reverse in the second half of the year.

Paraguay: Fiscal Performance

5. Following a significant reduction in interest rates earlier in the year to contain large foreign exchange inflows, the Central Bank switched to a tightening stance. Considering that the foreign exchange inflows were attracted by high interest rates, the Central Bank lowered the rates on the 3-month monetary control instruments (LRM) from 11 percent to around 4 percent in March 2007. However, LRM rates were adjusted upward to 4½ percent in August 2007 in response to the inflation uptick.

  • International reserves. Facing the prospect of a strong appreciation of the guaraní, the Central Bank intervened heavily in the foreign exchange market in the first quarter of 2007. The NIR floor for end-June 2007 was surpassed by some US$250 million (over 10 percent of the stock of reserves). Foreign exchange inflows have moderated significantly, and Central Bank intervention has virtually stopped since April 2007.
  • Domestic credit. The Central Bank (BCP) modified the auction system for LRMs, whose supply had been constrained by the BCP, and had increasingly fallen behind demand. With a new interest rate term structure, set at lower levels, the Central Bank has placed large amounts of LRMs, well beyond program projections. In addition, the steeper yield curve, shifted LRM demand to longer maturities; the average LRM maturity increased from about 2½ months (end-April 2007) to over 4 months (end-August 2007). Fiscal over-performance and the associated increase in public deposits at the BCP helped observe the NDA ceiling for end-June 2007.
  • Currency issue. The large increases in NIR could not be fully offset by the sterilization efforts, and domestic currency growth accelerated to over 25 percent by end-June 2007 (against a program projection of less than 20 percent). The lower core inflation and the reduced level of dollarization (see below) indicate that the acceleration in currency growth is partly due to a higher-than-programmed domestic money demand.

Paraguay: Monetary Performance

(In percent of currency cumulative annual flows)

Figure 3.Paraguay: Monetary Developments

Sources: Paraguayan Authorities and Fund staff estimate

Figure 4.Paraguay: Financial System Development

Sources: Paraguayan Authorities and Fund staff estimates.

6. The banking system has continued expanding its operations and improving its financial soundness. The relatively good conditions have been mostly the result of a strengthening of the economy.

  • Balance sheet. On the asset side, banks remain liquid with LRMs and deposits abroad representing almost 30 percent of bank’s assets while credit to the private sector grew by about 10 percent in June 2007. On the liability side, there has been a shift in the currency composition of deposits, and foreign currency deposits fell from over 50 percent of the total in June 2006 to about 45 percent in June 2007. On the capital side, banks remain well-capitalized with capital adequacy ratios at over 20 percent (well above the regulatory minimum of 10 percent).
  • Income position. Banks remain profitable. Lending operations continue to perform well, with non-performing loans declining to 3 percent in June 2007. Consequently, return on equity increased to over 35 percent in June 2007

Paraguay: Financial System, 2001-2007

1/ As of May 2007

7. The external position continues to be strong. The benign environment persisted in the first half of 2007.

  • Current account. Higher export growth (due to high commodity prices and bumper crops) and a slowdown in import growth (partly due to lower oil prices in the first half of the year), contributed to a narrowing of the current account deficit, projected at ¼ percent of GDP for 2007 (down from 2 percent in 2006).
  • Capital account. Higher foreign direct investment (FDI) offset by a slowdown in other private inflows, has reduced the external capital account surplus to a projected 2¾ percent of GDP for 2007 (down from 6¼ percent in 2006).

Paraguay: Sources of Foreign Exchange

8. The electoral process intensifies. The April 2008 general elections are expected to be very competitive. The ruling Colorado Party (PC) will hold primary elections for its presidential candidate in December 2007. An opposition front, which includes several political parties and civil society organizations, has gathered around a Catholic bishop who resigned from priesthood in late 2006 (Mr. Lugo).2 The Liberal party (PLRA)—the traditional second political force—supports the candidacy of Mr. Lugo. The leader of a smaller party (UNACE), Mr. Oviedo, was released from prison in early September and announced his intention to run for President.3

Figure 5.Paraguay: Balance of Payments Developments

Sources: Paraguayan Authorities and Fund staff estimates.

9. Social tensions continue. Public sector employees of several ministries (including the Ministry of Finance and the influential teachers’ union) went on intermittent strikes in June and July, requesting significant salary increases. The tightening of trade controls at the border town Ciudad del Este sparked some social unrest in the south eastern part of the country. In addition, the Supreme Court’s overruling of land expropriations in the north eastern part of the country has also created social pressures.

II. Outlook and Risks

10. Favorable economic outlook. The outlook continues to be positive for the remainder of 2007. The recent tightening of credit conditions in segments of mature financial markets abroad has not had an impact on Paraguay. Projections for growth in the region, particularly Brazil, remain strong, and there are upside risks that Paraguay would exceed the growth rate of 5 percent projected for 2007. The current mix of macroeconomic policies combined with favorable external conditions and the appreciation of the guaraní, have facilitated strong program performance and a decline in core inflation over the past months. However, monetary policy may need to be tightened, as the positive effects of the recent currency appreciation and the strengthening of domestic money demand will taper off.

11. Increasing risks. At the international level, there is a risk that a global slowdown associated with the credit tightening could spill over to emerging economies and to Paraguay’s neighbors, which could affect Paraguayan exports. In addition, there is a risk that spending pressures would increase in the run-up to the April 2008 congressional and presidential elections, as Congress has the power to approve non-programmed supplementary budgets.

III. Policy Issues4

A. Overview

12. Policy discussions focused on the adequacy of targets and prospects to achieve program objectives for the rest of the year. The authorities reiterated their commitment to the program, and Finance Minister Barreto stressed his intention to maintain fiscal discipline. The authorities acknowledged that the underlying macroeconomic situation was better than anticipated in the first half of 2007 but noted that implementation of the program in the remainder of the year would be more challenging given the increasingly complex political situation. Nevertheless, the authorities stressed that every effort will be made to adhere to the program targets. The mission also discussed progress in implementing the structural reform agenda.

B. Policy Framework

13. Improving macroeconomic conditions required minor adjustments to the macroeconomic framework. Given the strength of the economy in the first half of 2007, the authorities raised their projections for economic growth to 5 percent for 2007; the staff agreed and noted the possibility of some upside risk. Achievement of the core inflation objective of 5 percent (+/- 2 ½ percent) for 2007 remains feasible despite the uptick in inflation in August. For 2008, real GDP growth could moderate to 4 percent, as private investment may decelerate due to political uncertainties, while the core inflation objective of 3 percent for 2008 remains optimistic but feasible.

Paraguay: Macroeconomic Framework
Prog.Proj.Proj
200620072008
(Annual percent change)
Real GDP4.34.05.04.0
Inflation (e.o.p.)12.52½-7½5.03.0
(In percent of GDP)
External current account-2.0-1.3-0.2-0.3
Overall fiscal balance0.10.00.00.0
Consolidated public debt34.632.832.329.5
Sources: Paraguayan authorities; and staff estimates
Sources: Paraguayan authorities; and staff estimates

C. Fiscal Policy

14. The fiscal outlook for 2007 is good, although under increasing stress. While the outcome for the first half of 2007 relied in part on expenditure compression, outlays are likely to rise during the second half of the year. In fact, Congress approved a 20 percent salary increase for teachers in late September 2007 which will put pressure on the end-December 2007 target on the wage bill. Congress is also considering additional requests for supplementary budgets that, if fully implemented, would compromise the fiscal objective for 2007 unless offset by expenditure cuts elsewhere. The authorities are determined to resist these pressures and to meet the program targets.

15. The authorities submitted to Congress a budget for 2008 that maintains fiscal discipline. The 2008 budget submitted has a deficit of about ½ percent of GDP, but implementation on the basis of historical rates of execution suggests that the fiscal position in 2008 will be in balance. The budget includes a 10 percent salary increase (0.1 percent of GDP) to about 30,000 civil servants, whose salaries have remained frozen over the past few years. The budget also includes—for the first time—an outline of a multi-year fiscal framework which anchors the concept of fiscal balance over the medium-term. In the past, Congress has loosened the proposed fiscal stance and the authorities resorted to a financial plan to ensure fiscal discipline, and a similar approach may be needed in 2008.

Paraguay: Fiscal Program 1/(In percent of GDP)
Prog.Proj.BudgetProj.
200620072008
Total Revenues18.918.218.719.919.0
o/w Tax12.412.112.412.112.4
Total Expenditures18.318.118.720.619.0
o/w Wages7.67.77.98.18.0
o/w Capital4.34.44.55.64.6
Discrepancy-0.4--------
Overall Balance0.10.00.0-0.60.0
Sources: Paraguayan authorities; and staff estimates.

Central Government.

Sources: Paraguayan authorities; and staff estimates.

Central Government.

16. The rest of the public sector has been performing very well, although PETROPAR’s strong financial position has recently been affected by higher international oil prices. The prospects for achieving the target of an overall balanced budget for the consolidated public sector for 2007 are good. However, there are still uncertainties as some of the public entities—such as local governments and public enterprises—are not under direct control of the central government. While diesel subsidies have been eliminated, PETROPAR has started facing financial pressures as international oil prices have risen recently, thereby endangering the authorities’ original intention of clearing PETROPAR’s arrears with suppliers by end-September 2007.5 The mission urged the authorities to maintain their flexible pricing policy in order to enhance PETROPAR’s financial position, thus avoiding generalized subsidies. The authorities maintained that given that PETROPAR generated significant profits during the first half of 2007, they were confident that reaching a public sector balanced position for the year as a whole was feasible.

D. Monetary Policy

17. Monetary policies for the remainder of 2007 will be tightened gradually. The authorities are considering ways to strengthen policies to anchor expectations and prevent a revival of inflationary pressures in the more complicated economic environment of the second half of 2007.

  • Curbing money supply. The authorities are considering raising gradually the policy rates for short-term LRMs, which would tighten monetary conditions to bring the actual rate of expansion of monetary aggregates to more sustainable rates.
  • Validating a stronger money demand. The recent decline in dollarization provides evidence of a strengthening of real domestic money demand beyond program expectations. There was agreement that this increase in demand for guaraní-denominated assets would warrant a somewhat higher growth rate of monetary aggregates than allowed under the program. Accordingly, the currency growth estimate for end-2007 (consistent with the inflation objective under the program) was raised cautiously from 12 percent to 15 percent. This was accommodated by revising upward the projection for net international reserves while preserving the same level of domestic credit.
Paraguay: Monetary Program 1/(In percent of currency the previous period)
Prog.Proj.Proj.
200620072008
Currency Issue15.312.015.07.1
Net international reserves87.132.935.97.1
Net domestic assets-71.8-20.9-20.90.0
Credit to public sector-13.5-2.7-5.10.2
Credit to banks-27.4-33.4-20.0-1.6
Other items-30.915.24.21.4
Sources: Paraguayan authorities; and Fund staff estimates.

Central Bank Accounts.

Sources: Paraguayan authorities; and Fund staff estimates.

Central Bank Accounts.

18. The mission had preliminary discussions on monetary policies for 2008. There was a common understanding that, for the time being, projections for 2008 remain broadly appropriate. Inflation continues to be targeted at 3 percent. Assuming that the recent shift in money demand is satisfied, currency growth will fall to about 7 percent by end-2008. The mission will discuss the various aspects of the monetary program for 2008 during the next review.

E. External Sector Policy and Issues

19. There is increasing evidence about the strengthening of the balance of payments. The current account deficit is expected to narrow from 2 percent in 2006 to ¼ percent of GDP in 2007 in line with a projected improvement in the trade balance. Exports are expected to remain strong in the second half of the year, supported by continued soy and cereal exports and high commodity prices. The slowdown in the growth rate of imports observed in the first half of 2007 is expected to be sustained after the record growth in 2006. The current account deficit is being more than financed by private capital flows, mainly foreign direct investment related to increasing the capacity of the Yacyeretá hydropower plant and loans to the private sector reflecting high profitability in agricultural exports.

20. In light of the strengthened external position, the appreciation of the guaraní may continue. There was agreement that resisting potential market pressures towards an appreciation of the currency could bear significant risks to the inflation outlook. The authorities noted that, following a short period of intervention in March-April, they have not intervened significantly in the foreign exchange market in the last few months. As the external position strengthened further, the guaraní appreciated by about 3 percent with respect to the U.S. dollar in September.

Paraguay: Balance of Payments(In percent of GDP)
Prog.Proj.Proj.
200620072008
Current Account-2.0-1.3-0.2-0.3
o/w Exports50.152.355.554.0
o/w Imports-59.7-60.9-63.0-61.4
Capital Account6.31.42.80.8
Public sector (net) 1/-0.20.40.00.2
Private sector (net) 2/6.50.92.80.5
Overall Balance4.20.02.60.5
Sources: Paraguayan authorities; and Fund staff estimates.

General government only.

Includes errors and omissions

Sources: Paraguayan authorities; and Fund staff estimates.

General government only.

Includes errors and omissions

Efforts continue to resolve issues related to disputed claims. At end-June 2007, disputed claims amounted to about US$270 million or about 2½ percent of GDP. Following the submission of claims at the World Bank Settlement Body (ICSID) by the French import verification company (BIVAC) in April 2007, the authorities are assessing the claims of all import verification companies (BIVAC and SGS), and submitted a proposal to resolve the disputed claim to Belgium’s Ex-Herstal. They are waiting for a response. In addition, they continue studying solutions to address a Swiss court ruling against Paraguay on a US$185 million claim in favor of several European and American banks.

F. Structural Policies

21. The authorities have complied with the structural conditionality for end-June 2007. Staff discussed the detail of all the plans involved in observing the three structural benchmarks:

  • Prudential regulations. The benchmark entailed the design of a plan to achieve at least 80 percent of the Basel Core Principles of banking supervision over the medium term. The authorities presented a timely plan, recognizing that about 40 percent of the principles can only be adopted through legal modifications. The mission urged the authorities to identify additional measures that do not require changes in legislation (Box 1).
  • National Development Bank (BNF). The benchmark required the development of a medium-term business strategy to refocus the bank’s operations, improve its management and reduce its operating costs. The authorities submitted a timely plan, defining the future role of the bank and providing adequate projected cash flows.
  • Central Bank (BCP). The benchmark involved the preparation of a strategy to strengthen the financial position of the Central Bank, addressing the negative income position of the bank. After visits to Brazil and Chile to review their experiences in this area, the authorities submitted a plan that takes into account legal considerations and requires an extensive reconciliation of accounts between the Ministry of Finance and the BCP. The reconciliation would be certified by the Attorney General. As the reconciliation will take some time to complete, the authorities have decided that the government will transfer to the BCP 0.2 percent of GDP a year. In the staff’s view, the government should try to finalize the reconciliation process as quickly as possible, and the government should increase its annual transfer to BCP to 0.4 percent of GDP to ensure that the Central Bank losses are fully covered. The authorities expect to finalize the reconciliation of undisputed claims (i.e., those claims that are recorded in the Central Bank’s balance sheet and the Ministry of Finance debt reporting system) by end-2007. The authorities argued that it was not possible to be more generous with these transfers due to budgetary constraints (Box 2).
Paraguay: Structural Conditionality for end-June 2007
MeasureConditionalityStatus
1.Design plan to increase compliance with Basel PrinciplesBenchmarkDone. Authorities presented a plan to meet 80% of principles.
2.Develop plan for BNF to improve financial position and managementBenchmarkDone. Authorities presented a medium-term business plan.
3.Design strategy to strengthen financial position of BCPBenchmarkDone. Authorities presented a plan with transfers to BCP.
Sources: Paraguayan authorities.
Sources: Paraguayan authorities.

22. The authorities have continued to make progress in observing structural conditionality for end-September 2007. Four out of the seven benchmarks due in September were observed in a timely manner; of the remainder, an additional two could be met shortly thereafter. However, the third will now be effective only in the latter part of 2008.

  • Tax code regulations. The benchmark called for the preparation of the implementing regulations for the draft tax procedures code. The authorities have prepared such regulations, and have presented and explained the framework of the code to the public. The reform has come under attack, with opponents arguing that the reforms would give undue power to tax collectors. The authorities are strengthening their information policy to explain the merits of the code. The staff suggested the formation of a committee with broad private sector representation to build consensus in this area.

Box 1.Paraguay: Enhancing Regulation and Supervision of the Banking System

After several failed attempts, the authorities have refocused and strengthened their efforts to improve prudential regulation and banking supervision. In 2005, efforts to address weaknesses in banking regulation faltered as a draft general banking law ran aground in Congress. Subsequently, the authorities developed an alternative strategy, covering sequentially the areas for reform that had been identified in the 2005 FSAP, including legal amendments to the existing law and an action plan for central bank resolutions. However, this strategy also broke down when an important central bank resolution for loan classification and risk provisioning (Resolution 8/03) could not be implemented at end-2006 due to political resistance. Following the advent of a new administration at the BCP in April 2007, the authorities renewed their initiative to move forward in this important reform area, focusing on convergence toward international standards.

The authorities have designed a strategy to increase compliance with the Basel Core Principles for Effective Banking Supervision (BCPEBS). The strategy seeks to increase compliance with the BCPEBS from about 20 percent currently to at least 80 percent by end-2009, and contemplates the following steps:

  • Banking resolutions. Approve a modified Resolucion 8/03 on credit requirements, loan classification and provisioning requirements by September 2007, with effect in January 2008 (4 percent).
  • Operational plan. Implement those parts of the original 2005 central bank action plan that do not require changes in legislation, including strengthening the coordination between supervisory bodies, strengthening “fit and proper” criteria, and enhancing on-site, offsite, cross-border and consolidated supervision (16 percent).
  • Legal amendments. Amend, by end-2009, the current legislation, in particular the Banking Law and the Central Bank Law, to improve governance rules, enhance the independence and sanctioning capacity of the Superintendency of Banks, further strengthen “fit and proper” criteria, and strengthen capital requirements (40 percent).

Paraguay: Compliance with Basel Core Principles for Effective Banking Supervision (BCPEBS)

Additional efforts are being considered to fully meet Basel criteria. While not part of the strategy, the authorities are studying the possibility of implementing additional regulatory changes by end-2008, including strengthening protection for supervisors, and credit and operational risk management practices aims at increasing further compliance with the BCPEBS.

Box 2.Paraguay: Strengthening the Central Bank’s (BCP) Balance Sheet

To reduce the BCP’s losses and cover its capital shortfall, the authorities have designed a strategy to enhance BCP’s balance sheet. The Paraguayan authorities developed in early August 2007 a strategy to strengthen the financial position of the BCP (end-June 2007 structural benchmark). The strategy will help improve BCP’s ability to conduct monetary policy and to achieve its inflation objectives without concern about the consequences of interest rate movements on its balance sheet. The strategy incorporates several due diligence measures to avoid future legal liabilities to either the Ministry of Finance or the BCP. A key feature of the strategy is to effect a capital injection once a comprehensive reconciliation of government debt to the BCP is completed. The authorities believe that without this reconciliation, it would be legally impossible to justify a capital injection in Congress. The strategy contemplates three stages:

I. Financing Part of BCP Losses

The Treasury will transfer to the BCP up to 0.2 percent of GDP per year to cover the quasi-fiscal deficit, including the cost of monetary policy. This transfer will take place whenever the annual net result of BCP’s operations is negative, and will involve cash and/or marketable short-term securities. The authorities intend to submit to Congress a draft law with the implications of this stage of the strategy by early-October 2007. This stage would address the “flow problem” related to BCP operational losses. The staff recommended a transfer of 0.4 percent of GDP to avoid further deterioration of BCP’s balance sheet, but the authorities did not agree because of budgetary considerations.

II. Determination of the Real Value of BCP’s Balance Sheet

The Treasury and the BCP will reconcile the government obligations on the BCP balance sheet, and will critically assess the value of all BCP assets. The reconciliation of accounts between the Treasury and BCP will determine the value of the required capital injection and will need to be approved by the Attorney General. This stage will include all the necessary due diligence measures to avoid future legal liabilities to any party. In the meantime, BCP will implement the necessary measures to strengthen its management practices, and reduce its operating costs. The authorities intend to finalize the reconciliation of accounts and the assessment of BCP’s assets value by the end of 2007. This stage would assess the “stock problem” on BCP’s balance sheet.

Paraguay: Stylized BCP Balance Sheet for 2006(In percent of GDP)
Assets19.5Liabilities & Capital19.5
International reserves17.3Base money7.4
Other assets2.2Deposits8.4
LRMs6.3
Long term liabilities0.7
Capital-3.4

III. Financial Strengthening of BCP

Securities will be issued to the Central Bank to cover the balance sheet shortfall. After finalizing the reconciliation of accounts and determining the true value of all BCP assets, the authorities will recapitalize the BCP by that amount and preserve the net worth of the Central Bank over time (“optimal” BCP capital). To this end, the authorities will send to Congress a draft law authorizing the issuance of marketable government bonds in favor of BCP, which will: (i) settle definitely the outstanding government debt with the BCP that results from the reconciliation process; and (ii) inject any additional capital necessary to cover the difference between the reconciled amount and the “optimal” BCP capital. All the accounts that could not be reconciled in second stage will be written off the balance sheet of BCP. Preliminary estimates suggest that the required injection could amount to about US$ 600 million (6 percent of GDP). This would address the “stock problem”related to BCP’s balance sheet. At this stage a mechanism will also be established to remunerate properly the Treasury accounts at the Central Bank.

  • Pension reform plan. The benchmark proposed the development of an action plan for a pension reform aimed at consolidating the different funds and ensuring the system’s long-term viability. The authorities have prepared a comprehensive plan for pension reform to improve coverage, financial soundness and regulations in the system. The plan aims at the creation of a unified pension fund and is being strengthened, taking into account advice from international experts. The authorities intend to run different parametric reform scenarios to assess the cost of the reform.
  • Resolution 8/03. The benchmark involved the approval of a modified resolution 8/03 to strengthen bank’s loan classification and provisioning requirements to become effective in January 2008. The resolution was approved by the BCP Board in late-September 2007, but with implementation deferred until the latter part of 2008. The staff will continue working with the authorities to try to advance the effective date of this resolution.
  • Implications of BCP’s financial strengthening. The benchmark entailed submitting to Congress a bill with the legal and budgetary implications of the BCP financial strengthening strategy. A draft bill has been agreed between BCP and the Ministry of Finance and is being reviewed by legal experts at the Ministry of Finance. The bill would authorize a transfer to the BCP of 0.2 percent of GDP a year to cover its losses. The legislation also asks for authorization to issue bonds following the reconciliation exercise and the attorney general’s certification. The bill is expected to be sent to Congress in early-October 2007.
  • Cooperatives regulations. The benchmark involved the development of a supervisory and regulatory framework for financial cooperatives. The authorities have issued a general regulatory framework to which all large cooperatives, representing 80 percent of the cooperative sector, are already subject to. In addition, a system for monitoring financial indicators has been established. INCOOP, the cooperatives’ supervisory body, plans to subject medium-size cooperatives to the general framework by December 2007 and also started working on the design of a credit registry, and the drafting of the regulation for a deposit insurance fund for the sector.
  • Payment system. The benchmark required the preparation of a draft payment system law to revamp the system. The Central Bank has prepared a draft law and has selected a private law firm to assess it. The law firm is expected to issue its opinion shortly and thereafter the bill would be considered by the economic cabinet.
  • Investment climate. The benchmark stipulated the implementation of the authorities’ master plan to improve the investment climate and they have done so. In particular, the plan reduced significantly the number of steps taken to open a business in Paraguay.
Paraguay: Structural Conditionality for end-September 2007
MeasureConditionalityStatus
1.Draft implementing regulations for the tax procedures codeBenchmarkDone. Regulations were prepared
2.Develop an action plan for a comprehensive pension reformBenchmarkDone. Plan was developed
3.Reinstate modified Resolution 8/03 becoming effective on Jan 1, 2008Benchmark×Not observed. Resolution approved, becoming effective after Oct 1, 2008.
4.Send bill with implications of plan to financially strengthen BCPBenchmark
Significant progress. Draft law agreed between BCP and MinFin
5.Develop supervisory and regulatory framework for cooperativesBenchmarkDone. Framework was issued and monitoring system established
6.Develop legal framework to revamp the payment systemBenchmark
Significant progress. Law was drafted and is being reviewed
7.Implement plan to improve the investment climateBenchmarkDone. Plan was implemented
Sources: Paraguayan authorities.
Sources: Paraguayan authorities.

G. Program Issues

23. Access. In the attached letter of intent, the authorities have requested a reduction and re-phasing of access under the SBA in light of the stronger-than-anticipated external position. Based on the current assessment of the potential financing need, staff supports a reduction in access from the current 65 percent of quota to 30 percent, with even phasing (after the first credit tranche).

24. Data availability. By the time this review is expected to be considered by the Board, the end-September 2007 performance criteria would have become effective. While the authorities believe that the performance criteria for end-September would be observed, there is not yet sufficient information to formally assess performance. The staff will update the Board on the status of performance criteria for end-September 2007 for which information is available at the time of the Board meeting. The authorities are requesting a waiver of applicability of the end-September 2007 performance criteria.

IV. StaffAppraisal

25. Overall. Program implementation continues to be good with all performance criteria and benchmarks for end-June 2007 being met and good prospects for observing end-September 2007 targets. Policies in the first half of 2007 consolidated the macroeconomic achievements of previous years, while deepening structural reforms. The authorities are to be commended for a solid performance, and encouraged to continue with the strong program implementation. While there is still much work to do, Paraguay has made significant progress towards entrenching macroeconomic stability and thereby setting the basis for higher sustainable growth and poverty reduction.

26. Fiscal policy. Fiscal performance in the first half of 2007 has been strong despite the difficult policy environment. The authorities have been successful in implementing a financial plan that aligns the main objectives of the budget with the available financing and the quantitative targets of the authorities’ program. Anticipating an intensification of expenditure pressures towards the end of the year, the authorities accumulated large margins in the first half of 2007. With stronger real GDP growth than originally projected, this fiscal stance was appropriately counter-cyclical. The authorities should be commended for these efforts, and encouraged to save part of the overperformance to consolidate such a stance and contain demand pressures. While fuel subsidies have been eliminated thanks to a more flexible domestic pricing policy and lower international oil prices in the past, it would be important to continue with the flexible pricing policy to reflect currently higher oil prices. The 2008 budget submitted to Congress appropriately maintains fiscal discipline but the authorities will need to use a financial plan if the approved budget were to compromise macroeconomic stability and the authorities’ fiscal objective.

27. Monetary policy. While the Central Bank policy of reducing interest rates might have been successful in discouraging further foreign exchange inflows in the first half of 2007, it led to a significant expansion of liquidity in the banking system. Part of the additional liquidity satisfied a strengthening in domestic money demand, but care should be exercised to avoid a monetary overhang and the consequent inflationary pressures. The staff welcomes the monetary authorities’ switch to a more active stance, as indications of price pressures emerged in August, and that envisages gradual increases in interest rates if needed to keep inflation in line with the program target.

28. Exchange rate policy. The policy of pursuing large foreign exchange intervention (during March and April 2007) prevented an abrupt appreciation of the guaraní, but it highlighted the significant economic costs associated with it, namely the interest cost of conducting large open market operations to sterilize inflows or else the potential inflation and distortions created by the unsterilized inflows. With evidence that the external position has strengthened further, the staff welcomes the authorities’ commitment to a policy of limited intervention.

29. Structural reform. Progress continued to be made in the financial sector reform in the first half of 2007 with the implementation of three key structural measures related to the business plan of the National Development Bank (BNF), the strategy to strengthen the financial position of the Central Bank (BCP), and the plan to increase the coverage of Basel principles for the banking system. While these actions are encouraging, staff regrets that the authorities were unable to strengthen the strategy to recapitalize the Central Bank’s balance sheet in order to more decisively address the cash-flow problem. The staff also regrets that the modified resolution 8/03 will only enter into effect after October 2008 rather than January 2008 as originally envisaged. Furthermore, staff urges the authorities to quickly implement the outstanding structural measures for end-September 2007. Going forward, the authorities will need to persevere in their efforts to keep the momentum, especially given the difficult political environment.

30. Risks. There are significant risks to the program in the months ahead, with a budget in Congress subject to political pressures and general elections in April 2008. While the tightening of credit conditions in mature markets has not had a discernible impact on Paraguay, the situation could deteriorate if emerging economies begin to suffer from those conditions.

31. Review. The staff supports completion of the fourth SBA review in light of the strong performance and renewed ownership of the program as well as the authorities request for a reduction in access under the SBA to 30 percent of quota. The staff also supports a request for a waiver of applicability of end-September 2007 performance criteria.

Table 1.Paraguay: Quantitative Performance Criteria
20062007
End-SeptemberEnd-DecemberEnd-JuneEnd-SepEnd-Dec
Prog.ActualProg.ActualProg.ActualProg.Prog.
Fiscal targets
1.Overall balance of the central administration (floor, in billions of guaranies) 1/2/3258480481841,0433300
2.Wage bill of the central administration (ceiling, in billions of guaranies) 1/2,6952,6363,8803,8572,0551,9783,0864,443
3.Overall balance of the public sector (floor, in billions of guaranies) 1/4401,23104132021,7564590
Monetary targets
4.Net international reserves (floor, in millions of U.S. dollars) 3/1,3191,5461,3291,7031,9002,1531,9151,920
5.Net domestic assets (ceiling, in billions of guaranies) 3/-5,676-7,059-5,026-5,312-6,645-7,762-6,700-6,016
Public debt and arrears targets
6.Contracting or guaranteeing of nonconcessional external debt by the NFPS (ceiling, in millions of US$) 1/5000500275000500500
Continuous PCs
7.Contracted or guaranteed short-term external debt by the NFPS00000000
8.Non-accumulation of external debt arrears00000000
Sources: Paraguayan authorities; and Fund staff estimates.

Cumulative flows from the beginning of the calendar year.

For 2007 adjusted downward for any cash transfer or payment of interest costs on securities used to strengthen the financial position of the Central Bank.

Stocks. NIR is adjusted upward (downward) for any increase (decrease) in reserve requirement for foreign currency deposits (above pre-specified amounts)

Sources: Paraguayan authorities; and Fund staff estimates.

Cumulative flows from the beginning of the calendar year.

For 2007 adjusted downward for any cash transfer or payment of interest costs on securities used to strengthen the financial position of the Central Bank.

Stocks. NIR is adjusted upward (downward) for any increase (decrease) in reserve requirement for foreign currency deposits (above pre-specified amounts)

Table 2.Paraguay: Structural Conditionality Under the Program
MeasureConditionality1/TimingStatus
Measures due by end-June 2007
Public Sector Reform
A.Design of an action plan to develop an effective commitment control system for the public sector and rationalize the Treasury account systemSBend-Jun 2006Done.
B.Preparation of a tax codePCend-Dec 2006Done.
Financial Sector Reform
C.Audited and inspected CAR (fully provisioned) of 5 percent for BNF at end-June 2006SBend-Sep 2006Done.
DDesign an action plan to strenghthen financial sector reform reform and increase compliance with Basel Core Principles to at least 80 percent (in line with regional best practices)SBend-Jun 2007Done.
E.Announce a strategy to strengthen the financial position of the Central Bank and a timetable for its implementationSBend-Jun 2007Done.
F.Audited and inspected CAR (fully provisioned) of 10 percent for BNF at end-December 2006PCend-Mar 2007Done.
G.Develop a medium-term business plan for BNF that includes a strategy to reduce costs, increase asset recovery, and improve credit and risk managementSBend-Jun 2007Done.
Pro-Growth Reform
H.Design a plan to improve business climateSBend-Sep 2006Done.
I.Implement result-oriented management contract for ANDE, COPACO, ESSAP, INC, and PETROPARSBend-Dec 2006Done.
Social Safety Net
J.Create a conditional cash transfer mechanism for 7,000 families living under extreme poverty based on contracts with beneficiariesSBend-Jun 2006Done.
Measures due by end-September 2007
Public Sector Reform
K.Draft implementing regulations for the tax procedures codeSBend-Sep 2007Done.
L.Develop an action plan for a comprehensive pension reform Financial Sector ReformSBend-Sep 2007Done.
M.Send a bill to Congress that reflects the legal and budgetary implications of the agreed plan to strengthen the financial position of the Central BankSBend-Sep 2007
Significant progress. Draft law agreed between MinFin and BCP
N.Develop legal and regulatory framework to revamp the payment system and preparing a draft payment system lawSBend-Sep 2007
Significant progress. Law drafted by BCP being reviewed by independent law firm
O.Development of an effective supervisory and regulatory framework for the cooperative sectorSBend-Sep 2007Done. General regulatory framework was issued and monitoring system established.
P.Reinstate a modified Resolution 8/03 to become effective on January 1, 2008SBend-Sep 2007×Not observed. Resolution was approved on time, but will become effective after October 1, 2008.
Pro-Growth Reform
Q.Implement the plan to improve the investment climate designed in September 2006SBend-Sep 2007Done.
Measures due by end-December 2007
Public Sector Reform
R.Design a public sector investment systemSBend-Dec 2007
In progress.
S.Establish a commitment control systemSBend-Dec 2007
In progress.
Financial Sector Reform
T.Design a strategy for the development of capital marketsSBend-Dec 2007
In progress.
U.Implement prudential regulations in line with BCP operational planSBend-Dec 2007
In progress.
Pro-Growth Reform
V.Observance of targets under the result-oriented management contracts for ANDE, COPACO, ESSAP, INC, and PETROPARSBend-Dec 2007
In progress.
Social Safety Net
W.Increase the coverage of the conditional cash transfer program to 15,000 families and establish mechanisms for the evaluation of resultsSBend-Dec 2007
Almost done. The authorities expect 25,000 families to be covered by end-2007.
Source: Paraguayan authorities.

SB = structural benchmarks; PC = performance criteria.

Source: Paraguayan authorities.

SB = structural benchmarks; PC = performance criteria.

Table 3.Paraguay: Selected Economic and Social IndicatorsSorry—the quality of the source document is insufficient to render this image into text.
Table 4.Paraguay: Central Government Operations
200320042005200620072008
Jan-JunJan-DecJan-Dec
Prog.ActualProg.Proj.Proj.Prop. Budg.
In billion of guaranies
Total revenues6,0017,6378,4199,5884,8095,19310,45010,57011,55412,150
Tax revenues3,6764,9295,4716,2953,2083,3886,9547,0037,5417,396
Income taxes6248809671,0094796981,1471,3311,4151,252
Excises7041,0001,0071,0495786391,1651,1781,2761,363
Value added tax1,5701,9392,3722,7861,4601,5113,1303,1533,3863,462
Import Duties6659048439384133819107348081,144
Other113205282513278158603607656175
Nontax revenues 1/2,3182,6962,9463,2621,6001,8043,4933,5674,0124,740
o/w: Public pension contributions364440541560317324646646696702
Itaipu-Yacyreta1,4561,6401,6511,8838111,0461,7551,8302,0541,583
Capital revenues7122312131113
Current expenditures:4,9815,3636,2317,1383,6363,4677,9058,0058,7519,142
Wages and salaries2,7242,9843,3343,8572,0551,9784,4434,4434,8824,951
Goods and services408447546674326233784784843973
Interest payments489483560519266244518487594587
Transfers1,3341,4311,7712,0679781,0042,1412,2762,4182,597
Of which: pensions and benefits9439401,1261,2076275951,3201,3361,5031,508
Other2618192210719141535
Capital expenditures and net lending1,1651,6251,8602,1859906692,5442,5552,8023,390
Statistical discrepancy 2/35181–39–2160–150–1500
Overall balance–110830289481841,043000–383
Financing110–830–288–48–184–1,043000383
External debt (increase +)588103–295–122–59–223898512118
Disbursements1,1517636588324162321,0401,0291,1511,030
Amortizations5636609549544754559509451,0291,012
Domestic bonds (increase +)–58–78–137147–80–43242–121378
Net credit from the banking system 1/–308–162–44–373–45–620–91–126–1210
Net credit from Central Bank–343–11455–466–45–558–91–175–1210
Net credit from commercial banks35–48–99930–6205000
Other–111–6931883000–157000–14
In percent of GDP
Total revenues16.818.418.218.98.49.218.218.719.019.9
Tax revenues:10.311.911.812.45.66.012.112.412.412.1
Income taxes1.72.12.12.00.81.22.02.42.32.1
Excises2.02.42.22.11.01.12.02.12.12.2
Value added tax4.44.75.15.52.52.75.45.65.65.7
Import duties1.92.21.81.80.70.71.61.31.31.9
Other0.30.50.61.00.50.31.01.11.10.3
Nontax revenues 2/6.56.56.46.42.83.26.16.36.67.8
o/w: public pension contributions1.01.11.21.10.60.61.11.11.11.2
Itaipu-Yacyreta4.13.93.63.71.41.83.13.23.42.6
Capital revenues0.00.00.00.10.00.00.00.00.00.0
Current expenditures14.012.913.514.06.36.113.714.114.415.0
Wages and salaries7.67.27.27.63.63.57.77.98.08.1
Goods and services1.11.11.21.30.60.41.41.41.41.6
Interest payments1.41.21.21.00.50.40.90.91.01.0
Transfers3.73.43.84.11.71.83.74.04.04.3
Capital expenditures and net lending3.33.94.04.31.71.24.44.54.65.6
Statistical discrepancy 3/0.10.4–0.1–0.40.00.00.00.00.00.0
Overall balance–0.32.00.60.10.31.80.00.00.0–0.6
Financing0.3–2.0–0.6–0.1–0.3–1.80.00.00.00.6
External debt (increase +)1.60.2–0.6–0.2–0.1–0.40.20.10.20.0
Disbursements3.21.81.41.60.70.41.81.82.01.7
Amortizations1.61.62.11.90.80.81.71.71.71.7
Domestic bonds (increase +)–0.2–0.2–0.30.3–0.1–0.10.00.10.00.6
Net credit from the banking system–0.9–0.4–0.1–0.7–0.1–1.1–0.2–0.20.00.0
Other–0.3–1.70.40.60.0–0.30.00.00.00.0
Memorandum Item:
Primary balance1.02.71.91.50.82.30.90.91.00.3
Balance of the Caja Fiscal 4/–1.6–1.2–1.3–1.3–0.5–0.5–1.2–1.2–1.30.0
Sources: Ministry of Finance; and Fund staff estimates.

Excludes banks’ holdings of government bonds.

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.

Excludes banks’ holdings of government bonds.

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 5.Paraguay: Consolidated Public Sector Operations 1/
200320042005200620072008
Jan-JunJan-DecJan-Dec
Prog.ActualProg.Proj.Proj.
In billion of guaranies
Revenue7,4508,95910,11411,8215,8586,38112,70213,12914,202
Tax revenue3,6764,9365,4836,3203,2153,3986,9757,0327,571
Nontax revenue and grants3,6174,0104,5965,4692,6322,9825,7146,0966,629
Capital revenue1571435321111311
Current expenditure6,2476,9597,9089,1774,5194,38710,15710,27811,125
Wages and salaries3,2903,6344,0874,7112,4272,4055,2715,3915,904
Goods and services6347559941,2004893901,2351,3761,477
Interest payments7286787518584804461,103856924
Transfers1,5441,6992,0482,3731,0971,1342,4702,5802,772
Other5119327352512777548
Capital expenditure and net lending1,8191,9562,3062,5801,3987603,2473,3883,792
Of which: capital expenditure1,8502,1892,5502,8441,4688453,4683,6924,119
Primary balance9091,3151,2981,9606822,2021,103856924
Public enterprises’ operating surplus7965936461,039260522702537716
Statistical discrepancy 2/–198119–132–68900000
Overall balance–177564144132021,756000
Financing17–756–415–413–202–1,756000
External financing net459–42–445–257–170–331–134–13691
Disbursements1,2738087719394162311,0401,0281,361
Amortizations8148501,2161,1965865621,1741,1651,271
Domestic financing net–2472–201–476–32–1,268134136–91
Bond financing–58–78–137147–80–43242–110
Net credit from the banking system–356–183–176–728–59–1,257–296–90–185
Quasifiscal deficit financing39033311210510732429185204
Other–417–7862323200–157000
In percent of GDP
Revenue20.921.621.923.310.211.322.123.223.3
Tax revenue10.311.911.912.45.66.012.112.412.4
Nontax revenue and grants10.19.710.010.84.65.39.910.810.9
Capital revenue0.40.00.10.10.00.00.00.00.0
Current expenditure17.516.817.118.17.97.817.718.218.3
Wages and salaries9.28.88.99.34.24.29.29.59.7
Goods and services1.81.82.22.40.90.72.12.42.4
Interest payments2.01.61.61.70.80.81.91.51.5
Transfers4.34.14.44.71.92.04.34.64.5
Other0.10.50.10.10.00.00.10.10.1
Capital expenditure and net lending5.14.75.05.12.41.35.66.06.2
Of which: capital expenditure5.14.95.05.12.41.35.66.06.2
Public enterprises’ operating surplus2.21.41.42.00.50.91.20.91.2
Statistical discrepancy 2/–0.60.3–0.3–1.40.00.00.00.00.0
Overall balance0.01.80.90.80.43.10.00.00.0
Financing0.0–1.8–0.9–0.8–0.4–3.10.00.00.0
External financing net1.3–0.1–1.0–0.5–0.3–0.6–0.2–0.20.1
Disbursements3.61.91.71.80.70.41.81.82.2
Amortizations2.32.02.62.40.00.02.02.12.1
Domestic financing net–0.10.2–0.4–0.9–0.1–2.20.20.2–0.1
Of which: quasifiscal deficit financing1.10.80.20.20.20.10.70.30.3
Other–1.2–1.90.50.60.0–0.30.00.00.0
Memorandum item:
Primary balance2.53.22.83.91.23.91.91.51.5
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 6.Paraguay: Summary Accounts of the Central Bank(In billions of guaranies; end-of-period; valued at constant exchange rate)
2003 1/2004 1/2005 1/20062007 2/2008 2/
DecJunDecDec
Actual 1/Actual 2/ProgramActualProgramProj.Proj.
Currency issue2,2072,4882,9253,3713,3713,0453,2193,7763,8774,153
Growth29.912.717.615.315.319.326.212.015.07.1
Net international reserves6,1757,3358,14610,6938,6849,69010,9819,7929,89310,169
(In millions of U.S. dollars)9831,1681,2971,7031,7031,9002,1531,9201,9401,994
Net domestic assets–3,969–4,848–5,221–7,322–5,312–6,645–7,762–6,016–6,016–6,016
Net nonfinancial public sector1,1631,3661,4101,015728375220638557566
Net credit to the central government9529671,06370342547–121334249233
Net credit to the rest of NFPS211398347311303328341304308333
Net credit to the banking system–3,362–4,376–5,026–5,828–5,484–6,558–7,477–6,611–6,158–6,222
Reserve requirements–2,219–2,195–2,331–2,535–2,209–2,457–2,653–2,531–2,527–2,650
Free reserves–543–1,012–683–651–633–1,174–986–521–567–517
Monetary control bills (LRM)–602–1,171–2,014–2,644–2,644–2,942–3,847–3,573–3,076–3,067
Other22222159151212
Other assets and liabilities (net)–1,770–1,838–1,605–2,508–556–462–504–43–415–360
Capital and reserves–1,463–1,722–1,368–141–116–94–192228–69134
Other assets net 3/–308–116–237–2,367–440–368–312–271–346–494
Memorandum items:
Total stock of LRMs outstanding1,0711,5522,2933,2243,2243,5454,3544,3053,8453,566
Quasifiscal balance 4/–390–333–112–105–105–107–32–429–185–204
in percent of GDP–1.1–0.8–0.2–0.2–0.2–0.2–0.1–0.7–0.3–0.3
Costs of monetary policy operations 4/219181179331331213199583366328
in percent of GDP0.60.40.40.60.70.40.41.00.60.5
Monetary base3,4064,0064,1804,7244,7245,1525,1545,2485,2935,568
annual growth (in percent)57.717.64.313.013.036.336.411.112.05.2
Narrow monetary base 5/2,9543,1223,6674,1694,1694,0144,2564,7624,8075,133
annual growth (in percent)44.35.717.513.713.721.328.614.215.36.8
Sources: Central Bank of Paraguay; and Fund staff estimates.

Foreign-currency denominated items valued at 6,280 guaranies per U.S. dollar.

Foreign-currency denominated items valued at 5,100 guaranies per U.S. dollar.

Includes LRM held by the nonbanking sector.

Cumulative since beginning of year. Follows program definition.

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

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

Foreign-currency denominated items valued at 6,280 guaranies per U.S. dollar.

Foreign-currency denominated items valued at 5,100 guaranies per U.S. dollar.

Includes LRM held by the nonbanking sector.

Cumulative since beginning of year. Follows program definition.

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

Table 7.Paraguay: Summary Accounts of the Banking System(In billions of guaranies; end-of-period; valued at constant exchange rate)
2003 1/2004 1/2005 1/20062007 2/2008 2/
DecJunDecDec
Actual 1/Actual 2/Prog.ActualProg.Proj.Proj.
I. Central Bank
Net international reserves6,1757,3358,14610,6938,6849,69010,9819,7929,89310,169
(in millions of U.S. dollars)9831,1681,2971,7031,7031,9002,1531,9201,9401,994
Net domestic assets–3,969–4,848–5,221–7,322–5,312–6,645–7,762–6,016–6,016–6,016
Credit to public sector, net1,1631,3661,4101,015728375220638557566
Credit to banking system, net–2,760–3,205–3,012–3,185–2,840–3,616–3,630–3,038–3,082–3,155
Central bank securites–1,071–1,552–2,293–3,224–3,224–3,545–4,354–4,305–3,845–3,566
Other–1,301–1,457–1,326–1,928241413689354139
Currency issue2,2072,4882,9253,3713,3713,0453,2193,7763,8774,153
II. Monetary Survey
Net foreign assets8,4059,47810,02812,49110,14011,25912,69511,46911,65512,260
(in millions of U.S. dollars)1,3381,5091,5971,9891,9882,2082,4892,2492,2852,404
Net domestic assets2,1522,3132,6712,3983,5642,9082,4673,8594,0534,242
Credit to the public sector699531237–188–411–1,165–1,647–700–270–497
Credit to the private sector5,0815,7886,6017,7607,0517,1557,8577,4968,0238,680
Other–3,628–4,006–4,167–5,174–3,077–3,082–3,743–2,937–3,700–3,941
Broad Liquidity (M4)10,55811,79112,69914,89013,70414,16615,16215,32815,70816,502
Bonds and issued securities31000000000
Other monetary liabilities91258532265513282931
Central bank securities with private sector469381280580580603507732769499
Broad liquidity (M3)10,04711,28512,33414,27813,09813,50914,64214,56814,91015,971
Foreign currency deposits5,2535,3105,3966,2805,1005,4975,7395,6105,7126,119
Money and quasi-money (M2)4,7945,9746,9387,9987,9988,0128,9048,9589,1989,853
Quasi-money1,2081,4821,4721,6681,6681,8402,0061,8691,9192,055
Money (M1)3,5874,4925,4666,3306,3306,1726,8987,0897,2797,797
Annual percentage change
M0 (Currency issued)29.912.717.615.315.319.326.212.015.07.1
Credit to the private sector–18.413.914.117.66.85.927.96.313.88.2
M135.825.221.715.815.822.937.312.015.07.1
M224.924.616.115.315.323.236.912.015.07.1
M317.712.39.315.815.75.826.311.213.87.1
Of which: foreign currency deposits11.81.11.616.416.4–12.212.910.012.07.1
Memorandum items:
Ratio of foreign currency deposits
to M3 (percent)52.347.143.744.038.940.739.238.538.338.3
Ratio of foreign currency deposits
to private sector deposits in banks (percent)63.557.154.655.450.350.648.349.849.649.6
Sources: Central Bank of Paraguay; and Fund staff estimates.

Foreign-currency denominated items valued at 6,280 guaranies per U.S. dollar.

Foreign-currency denominated items valued at 5,100 guaranies per U.S. dollar.

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

Foreign-currency denominated items valued at 6,280 guaranies per U.S. dollar.

Foreign-currency denominated items valued at 5,100 guaranies per U.S. dollar.

Table 8.Paraguay: Banking System Indicators
20022003200420052006
I. Total banking system (II+III+IV+V)
Share in assets100.0100.0100.0100.0100.0
Capital adequacy ratio (percent) 1/17.920.920.520.420.1
NPLs/total loans19.720.610.86.63.3
Provisions/NPLs46.654.854.657.759.1
Rate of return on assets (ROA)1.00.41.72.13.0
Rate of return on equity (ROE)9.04.518.322.631.7
Liquid assets/total assets 2/25.132.630.826.623.3
Foreign exchange deposits/total deposits68.661.755.052.749.1
II. Total foreign-owned banks
Share in assets48.447.435.831.329.1
Capital adequacy ratio (percent) 1/17.620.426.027.225.5
NPLs/total loans20.120.811.06.43.6
Provisions/NPLs57.564.271.263.468.6
Rate of return on assets (ROA)1.60.11.41.42.2
Rate of return on equity (ROE)15.01.212.011.318.6
Liquid assets/total assets 2/27.129.825.429.024.5
Foreign exchange deposits/total deposits71.165.665.265.161.2
III. Total majority-owned foreign banks
Share in assets33.237.245.248.051.4
Capital adequacy ratio (percent) 1/19.921.017.717.817.4
NPLs/total loans10.412.33.72.31.8
Provisions/NPLs43.852.156.987.283.0
Rate of return on assets (ROA)1.41.32.23.03.9
Rate of return on equity (ROE)13.415.525.835.345.8
Liquid assets/total assets 2/26.235.328.822.618.5
Foreign exchange deposits/total deposits70.762.353.851.748.8
IV. Total domestic-owned private banks
Share in assets10.47.48.29.49.9
Capital adequacy ratio (percent) 1/13.614.113.313.415.6
NPLs/total loans8.82.92.10.81.4
Provisions/NPLs18.746.270.377.178.6
Rate of return on assets (ROA)1.11.62.02.22.9
Rate of return on equity (ROE)14.321.128.130.835.9
Liquid assets/total assets 2/18.338.838.134.034.6
Foreign exchange deposits/total deposits62.660.757.654.751.5
V. National Development Bank (BNF)
Share in assets8.08.010.711.39.5
Capital adequacy ratio (percent) 1/18.830.025.026.532.2
NPLs/total loans56.256.248.940.319.4
Provisions/NPLs39.647.643.145.131.6
Rate of return on assets (ROA)–4.7–2.80.50.40.5
Rate of return on equity (ROE)–27.3–18.76.85.35.7
Liquid assets/total assets 2/17.330.752.031.233.8
Foreign exchange deposits/total deposits42.532.723.620.613.1
Source: Superintendency of Banks.

Definition of CAR does not fully comply with international standards.

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

Source: Superintendency of Banks.

Definition of CAR does not fully comply with international standards.

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

Table 9.Paraguay: Balance of Payments(In millions of U.S. dollars)
200320042005200620072008
Jan-JunJan-DecJan-Dec.
Prog.ActualProg.Proj.Proj.
Current account12513911–194–1924–146–24–29
Trade balance–280–248–484–911–319–253–886–744–754
Exports2,1632,8543,3164,7742,8332,9805,4145,8696,155
Registered1,2421,6271,6591,8501,3221,4752,5132,6452,803
Unregistered9221,2281,6572,9241,5111,5052,9013,2253,351
Imports–2,443–3,102–3,800–5,685–3,152–3,233–6,300–6,613–6,909
Registered–1,865–2,658–3,240–5,231–2,930–3,009–5,779–6,114–6,389
Unregistered–577–444–560–455–223–224–521–500–519
Services (net)245327349383136136336366342
Factor income–8–138–78–5242–4779–49–36
Transfers165194224386122188325403419
Capital and financial account178383124528321425729183
General government77–26–107–21–11–5318423
Disbursements2131391071848249202198218
Amortization–130–133–175–169–92–89–185–181–195
Other–6–32–39–360–130–130
Private Sector 1/101644184739426724028660
Direct investment223268185113125236236246
Foreign currency deposits33530441178012001200
Other–2563–90110–19224–70–186
Errors and Omissions–9293–19314413316213300
Overall Balance21127013040219740124426654
Net International Reserves (increase -)–343–186–128–406–197–450–217–237–54
Gross Reserves–342–185–129–406–197–450–217–237–54
Reserve Liabilities–1–11000000
Exceptional Financing132–84–13050–27–290
Arrears deferral (+)/clearance (-) 2/91–84–13050–27–290
Reschedulings000000000
Memorandum items:
Current account in percent of GDP2.32.00.1–2.0–0.60.8–1.3–0.2–0.3
Gross reserves (millions of U.S. dollars)9831,1681,2971,7031,9002,1531,9201,9401,994
in months of imports of GNFS3.53.42.52.93.23.53.23.13.0
External public debt in percent of GDP 3/48.141.334.626.122.322.723.223.922.3
Debt service in percent of exports GNFS11.67.58.86.05.55.15.85.25.3
Export Volume (percentage change) 4/13.616.911.18.835.842.323.724.56.5
Import Volume (percentage change) 4/8.617.112.553.321.220.28.211.82.8
Terms of trade (percentage change)1.0–1.1–11.2–3.4n.a.2.44.87.6–2.1
Sources: Central Bank of Paraguay; and Fund staff estimates.

Includes public enterprises and binationals.

Reflects PETROPAR’s arrears on suppliers credits, which are not considered sovereign arrears (see definition in the TMU).

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

Registered trade.

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

Includes public enterprises and binationals.

Reflects PETROPAR’s arrears on suppliers credits, which are not considered sovereign arrears (see definition in the TMU).

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

Registered trade.

Table 10.Paraguay: Indicators of External Vulnerability
20022003200420052006
Monetary and financial indicators
Broad money (M3), percentage change 1/–21.017.712.39.315.7
Credit to the private sector, real (percentage change) 1/–31.1–25.510.93.9–4.9
Share of nonperforming loans in total loans (percent) 2/19.720.610.86.63.3
Average domestic lending rate, real 2/39.019.317.418.615.4
Central Bank bill yield, real 2/12.9–1.21.0–0.10.8
International reserves (millions of US$)6419831,1681,2971,703
Central bank foreign short-term liabilities (millions of US$)0.50.50.30.70.0
External indicators
Merchandise exports (percentage change)–1.616.832.016.244.0
Merchandise imports (percentage change)–14.614.427.022.549.6
Merchandise terms of trade (percentage change)2.11.0–1.1–11.2–3.4
Real effective exchange rate (percentage change)11.1–6.63.7–6.513.0
Current account balance (percent of GDP)1.82.32.00.1–2.0
Capital and financial account (percent of GDP)1.03.20.54.24.7
Net foreign direct investment (percent of GDP)0.20.40.50.91.9
Inward portfolio investment (percent of GDP)0.00.00.00.00.0
Other net investment (percent of GDP)0.72.6–0.13.02.5
External public debt (percent of GDP) 3/63.648.141.334.626.1
Debt service (in percent of exports GNFS)9.111.67.58.86.0
Gross reserves (in US$)6419831,1681,2971,703
In months of imports of GNFS2.83.53.42.52.9
Over short-term external debt 4/1.01.61.71.9...
Over foreign currency deposits in domestic banks0.71.01.11.1...
Sources: Central Bank of Paraguay; and Fund staff estimates.

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

Latest available data, September 2005.

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

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

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

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

Latest available data, September 2005.

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

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

Table 11.Paraguay: Schedule of Reviews and Purchases
June 2007 PhasingNew Access and Phasing
Amount of Purchase
DatePercent of Quota 1/Conditions
May 31, 200625.0Approval of arrangement
September 29, 20066.0First review and end-June 2006 performance criteria
June 29, 200712.0Second and third reviews and end-September and end-December 2006 performance criteria
October 15, 20076.026.0Fourth review and end-September 2007 performance criteria
December 15, 20076.01.0Fifth review and end-September 2007 performance criteria
March 15, 20085.01.0End-December 2007 performance criteria
June 15, 20082.51.0Sixth review and end-March 2008 performance criteria
August 28, 20082.51.0End-June 2008 performance criteria
Total65.030.0
Source: Fund staff estimates.

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

Source: Fund staff estimates.

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

Table 12.Paraguay: Medium-Term Scenario
200420052006200720082009201020112012
Projections
Real sector
Real GDP growth (annual percentage change)4.12.94.35.04.04.55.05.05.0
Consumer prices (annual percentage change)2.89.912.55.03.03.03.03.03.0
GDP per capita (US dollars)1,2201,2891,6111,7151,8091,8881,9782,0592,159
(In percent of GDP)
Gross domestic investment20.819.620.121.421.722.322.522.823.1
Private sector16.114.615.115.415.515.515.515.715.6
Public sector4.75.05.16.06.26.86.97.17.4
Gross national savings22.819.718.121.221.422.122.523.223.9
Private sector16.313.912.315.215.215.315.516.116.4
Public sector6.55.85.86.06.26.86.97.17.4
Public finances 1/
Revenues21.621.923.323.223.323.323.223.423.3
Current primary expenditures15.115.516.416.616.716.516.316.316.2
Interest payments1.61.61.71.51.51.51.41.31.2
Capital expenditures4.75.05.16.06.26.86.97.17.4
Public enterprise operating surplus1.41.42.00.91.21.61.41.41.5
Primary balance3.22.83.91.51.51.51.41.31.2
Overall balance1.80.90.80.00.00.00.00.00.0
Public sector debt 2/3/45.137.728.426.624.624.023.422.822.1
Consolidated public sector debt 3/49.243.035.033.530.628.526.424.622.5
(In millions of U.S. dollars)
Public sector debt 2/3,0272,8762,8072,7512,7402,8412,9553,0603,170
Balance of payments
Exports2,8543,3164,7745,8696,1556,6127,1247,6808,260
Imports3,1023,8005,6856,6136,9097,3907,9008,4469,032
Current account13911–194–24–29–32–259116
(In percent of GDP)2.00.1–2.0–0.2–0.3–0.30.00.40.8
Capital and financial account3831245229183947318–32
Gross international reserves1,1681,2971,7031,9401,9942,0562,1282,2052,288
(In months of imports)3.42.52.93.13.02.92.92.92.8
Sources: Ministry of Finance; Central Bank of Paraguay; and Fund staff estimates and projections.

Defined as the nonfinancial public sector and the BCP.

Nonfinancial public sector debt; excludes Central Bank bills.

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

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

Defined as the nonfinancial public sector and the BCP.

Nonfinancial public sector debt; excludes Central Bank bills.

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

APPENDIX I. Paraguay—Letter of Intent

Asunción, Paraguay

October 2, 2007

Mr. Rodrigo de Rato

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. de Rato:

1. This letter updates our previous correspondence (of May 8, 2006, September 12, 2006, and June 15, 2007), describes performance under our economic program, and reiterates our commitment to the program. The program’s objectives remain the same, namely, to entrench stabilization while reducing poverty and increasing the potential growth of the economy by adopting an ambitious reform agenda.

2. The program remains on track. Performance under our economic program, supported by a 27-month Stand-By Arrangement (SBA), has been very good. All quantitative and structural performance criteria as well as all structural benchmarks through end-June 2007 have been observed by now, some by large margins.

3. Macroeconomic conditions have improved markedly since the adoption of the program in May 2006. Economic growth accelerated and inflation fell significantly in the first half of 2007. The public finances remain on a strong footing anchored by the financial plan and international reserves reached another record high in June 2007. While there was an uptick in inflation in August due to supply shocks, we will remain vigilant and will ensure adequate policies to achieve our inflation objective.

4. Contrary to our initial concerns, our external position has strengthened beyond expectations, and external vulnerabilities have reduced significantly. Against this background, and with the aim of strengthening our reform agenda, we believe it is appropriate to request: (i) reducing our access under the SBA—which we intend to continue treating as precautionary—from 65 percent (SDR 65 million) to 30 percent of quota (SDR 30 million); (ii) maintaining the same timing and number of program reviews as specified before; (iii) granting a waiver of applicability on the end-September 2007 performance criteria as the relevant data is not yet available; and (iv) completing the fourth review under the SBA supported program.

5. We will continue the productive dialogue we have maintained with the Fund in the past. The government believes that the policies under the program are adequate to achieve the program objectives, but we will take additional measures, if necessary, to achieve those objectives. We will consult and provide Fund staff with all the relevant information required to complete program reviews and monitor performance.

6. As it is customary now, we intend to publish this letter in the websites of the Ministry of Finance and Central Bank to maintain our citizens informed about our policy intentions. We also authorize the Fund to publish this letter.

Sincerely yours,

______/s/___________/s/_____
Germán Rojas

President

Central Bank of Paraguay
César Barreto

Minister of Finance
APPENDIX 2. Paraguay—Fund Relations

(As of August 31, 2007)

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

II. General Resources Account:

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

III. SDR Department:

In millions of SDRsPercent of Allocation
Net cumulative allocation13.70100.00
Holdings93.41681.94

IV. Outstanding Purchases and Loans: None

V. Latest Financial Arrangements:

ApprovalExpirationAmount ApprovedAmount Drawn
TypeDateDate(SDR Million)(SDR Million)
Stand-ByMay 31, 2006Aug 31, 200865.000.00
Stand-ByDec 15, 2003Nov 30, 200550.000.00

VI. Projected Payments to Fund

(SDR Million; based on existing use of resources and present holdings of SDRs):

Forthcoming
2007200820092010
Principal
Charges/Interest0.000.000.000.00
Total0.000.000.000.00

VII. 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 August 31, 2007, the average interbank rate for the U.S. dollar was G5,090 =US$1. Paraguay has accepted the obligations of Article VIII, Sections 2(a), 3 and 4 of the Fund’s Articles of Agreement. Staff is considering whether the application of the income tax regime and the new Law of Administrative Reorganization and Financial Adequacy (Ley No. 2421/04) may give rise to exchange restrictions subject to Fund jurisdiction.

VIII. Article IV Consultation: The Executive Board concluded the 2007 Article IV consultation on June 29, 2007.

IX. Technical Assistance:

DepartmentpurposeDate of Delivery
MAEPolicy Advisory to the Central BankMarch 1994-2004
FADTax PolicyFebruary 1999
FADTax AdministrationMarch 1999
STAMonetary StatisticsFebruary 2000
STABalance of Payments StatisticsJune 2000
STAMultisector, GDDS accessionFebruary 2001
MAECurrency OperationsMarch-September 2002
FADCustoms AdministrationMay 2002
MAEFinancial Sector SurveillanceJuly 2002
FADROSCAugust 2002
STAMultisector, follow-upSeptember 2002
MAEBanking SupervisionSeptember-November 2002
MAECentral Bank OperationsNovember 2002
TRESafeguards AssessmentJanuary 2003
MFDBanking SupervisionJanuary 2003-April 2004
MFDCurrency Handling and ReformFebruary 2002-April 2004
MFDPayment SystemJuly 2003
FADCustoms and Tax AdministrationDecember 2003
MFDReorganization of the Central Bank and Monetary OperationsJanuary 2004
FADCustoms Administration AdvisorJuly 2004-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
FADUpdate of ROSCSeptember 2005
STAROSCJanuary-February 2006
MFDCentral Bank RecapitalizationMarch 2006
MFDPeripatetic Banking ExpertOctober 2005, February and August 2006.
FADPublic Financial ManagementMarch 2006
FINSafeguards AssessmentMarch 2006
STAConsumer Price IndexApril -May 2006
FAD and LEGTax Procedure CodeMay 2006
LEGMoney LaunderingJuly 2006
STAMonetary and Financial StatisticsAugust-September 2006
MCMPayments SystemOctober 2006
STABalance of PaymentsNovember 2006
FADRevenue AdministrationDecember 2006
FADPeripatetic Customs AdvisorMay 2007
FADTax Code RegulationsJune 2007
MCMDevelopment of Local Capital MarketsJune 2007
MCMBanking Regulation and SupervisionJune 2007
STAQuarterly National AccountsAugust 2007
STAConsumer Price IndexAugust 2007

X. Safeguards Assessment: Under the Fund’s safeguards assessment policy, Central Bank of Paraguay (CBP) is subject to a full safeguard assessment in respect to the arrangement approved on May 31, 2006. A safeguards assessment of the CBP was completed in October 2006. The report states that while the CBP has made some progress in strengthening the safeguards framework since the 2003 safeguards assessment, vulnerabilities remain in certain areas such as financial reporting and program data reporting to the Fund.

XI. Resident Representative: Mr. Luis H. Duran-Downing has been appointed as senior resident representative since May 2005.

APPENDIX 3. Paraguay—World Bank Relations1

(As of September 10, 2007)

The Country Assistance Strategy (CAS) was approved on December 16, 2003, aiming at restoring confidence in the economy and to support reforms in areas, such as the financial sector, rural development, health, and education. At the moment the portfolio of the Bank consist of three operations, of which two are projects under implementation:

  • Pilot Community Development ($9m, approved in FY00); and
  • Secondary Education Reform ($24m, approved in FY02).

And one project awaiting Parliament approval:

  • Road Maintenance Project ($74m, approved on August 24, 2006)

The three World Bank-financed projects presently under implementation or awaiting ratification by parliament have a total value of US$107 million in commitments, of which US$87.6 million remain undisbursed as of September 10, 2007.

In addition to loans, the Bank has mobilized grants for the institutional strengthening of Congress ($0.4m) and the Ministry of Finance ($0.3m); to improve management of indigenous lands ($1.7m); to support social development in two municipalities ($0.9m); to promote development in indigenous communities ($1.6), and to improve biodiversity and forestry ($0.3m from the Institutional Development Fund, and $0.3m and $0.9m from the Global Environment Fund).

On the analytical, in FY07 the Bank has recently completed a Land Tax Study, and is preparing an Integrated Fiduciary Framework (jointly with the Interamerican Development Bank) and Education Attainment Assessment.

Projects under preparation include an additional financing for the Pilot Community Development Project, a Sustainable Rural Investment project, a Modernization of the Water Sector project, a Private Sector Development project, and a Forestry Project.

Financial Relations With The WorldBank

(In millions of U.S. dollars)

I. IBRD/IDA Active Operations (as of September 10, 2007)

Committed (Net of Cancellations)DisbursedUndisbursed
Active loans
Community development9.07.41.6
Education Reform24.012.012.0
Road Maintenance*74.00.074.0
Total active loans107.019.487.6
Total IBRD/IDA11,046.3
Repaid602.0
Total outstanding252.8
O/w IBRD (including exchange rate adjustment)234.3
O/w IDA18.5

II. IFC Operations (as of September, 2007)

LoansEquityTotal
Commitments15.00.015.0
Held by IFC15.00.015.0
Undisbursed0.00.00.0

III. IBRD/IDA Loan Transactions (calendar year)2

199819992000200120022003200420052006
Disbursements37.742.146.626.813.542.316.216.731.9
Repayments24.624.620.215.316.821.034.826.627.5
Net lending13.117.526.411.5–3.321.3–18.6–9.94.4
APPENDIX 4. Paraguay—Inter-American Development Bank Relations1

(As of August 31, 2007)

Portfolio

As of August 31, 2007, the active loan portfolio amounts to US$788.6 million, with an undisbursed balance of US$468.8 million. In addition, there are 65 active Technical Cooperation operations (regular TCs, MIF, and Small Projects) for US$24.1 million, of which US$15.4 million are undisbursed. Loan approvals in 2006 reached a new record level of US$251.4 million.

Strategy

A review of IDB’s Country Strategy with Paraguay was approved in November, 2006. The main focus of IDB’s actions for 2007-2008 will be the support of economic growth and poverty alleviation.

Pipeline

The lending program for 2007 includes the following operations:

  • Program to Support the Economic Census of Paraguay , US$5.0 million
  • Program to Support Paraguayan Exports - REDIEX, US$10 million
APPENDIX 5. Paraguay—Statistical Issues

While data provision is broadly adequate for program purposes, there is a need to improve the timeliness and accurate reporting of statistics. Paraguay became a GDDS participant in September 2001 with the publication of its metadata on the Fund’s Dissemination Standards Bulletin Board (DSBB). A data ROSC mission visited Paraguay in January-February 2006; the authorities’ response to the report and the mission’s recommendations were published on the Fund’s website on June 30, 2006.

A. Real Sector

A new national accounts series—broadly consistent with the guidelines of the 1993 SNA— was released in 2005. It was prepared with the assistance of an expert financed by the IDB and comprises a more complete coverage of industries, an input-output matrix, and expanded data sources for the compilation of the new base year (1994). However, no comprehensive regular program for data collection of economic censuses and surveys exists (an industrial survey was conducted in 2002) and source data for nonfinancial services, household consumption, and changes in inventories are insufficient. Major areas of concern include: (i) the 1994 reference year is becoming obsolete; (ii) excessive use is made of fixed coefficients for value added and household consumption; (iii) changes in inventories are obtained residually; (iv) informal activities are not monitored; and (v) supply and use tables have been compiled only until 1997. While the periodicity of annual GDP meets GDDS recommendations, timeliness does not because data are disseminated with a lag of 11 months. An exploratory TA mission on the compilation of quarterly national accounts was fielded in August 2007.

Both the consumer (CPI) and producer price indices (PPI) are reported on a regular and timely basis. The geographic coverage of the CPI is limited to Asunción (the capital) and expenditure weights are representative of the consumption patterns of urban households. The CPI has a base weight period of 1992, and the PPI of December 1995. The household budget survey 2005-2006, for which information has already been gathered and analyzed, will be used for updating the CPI basket and weights and for developing the index in accordance with the classification and valuation systems established in the 1993 SNA. The new CPI is scheduled for publication by January 2008. Preparation of the index is receiving technical advice from the IMF Statistics department. The latest IMF price statistics mission was conducted in July-August 2007. The mission concluded that the authorities are largely on target to meet the referred publication schedule. The PPI basket (150 items) is not fully representative of current national output; electricity, water, gas, and services are not covered.

Since the introduction of a regular household survey in 1998, the coverage and quality of employment and unemployment statistics have improved significantly. However, frequencies remain at the annual level, and the publication lag is close to one year. Wage indices are updated twice a year.

The data ROSC mission found that the resources are insufficient for real sector statistics and constrain further development, particularly the full adoption of the 1993 SNA.

B. Fiscal Sector

For surveillance purposes, the government finance statistics (GFS) are broadly consistent with the recommendations of the Manual on Government Finance Statistics 1986 (GFSM 1986). The authorities have not yet prepared a plan to migrate to the Government Finance Statistics Manual 2001 (GFSM 2001). Monthly data are available for the central administration (budgetary central government). Data on the operations of the local governments are not included in the GFS. The asset position of the social security system is available on a daily basis. Statistics on the central administration include data of the Postal Service Directorate (a nonfinancial public corporation) and the statistics of the nonfinancial public sector include data of financial public corporations (four employer social insurance schemes). These social insurance schemes are treated as financial corporations in the monetary and financial accounts. Data on medium- and long-term external debt are reliable and available on a monthly basis. Domestic debt data are available on request, but need to be fully integrated with the external debt database. Deficiencies remain in recording short-term supplier and commercial credit of the public sector. Moreover, there is a discrepancy in the fiscal data reported by the monetary and fiscal authorities. Measures are being taken to make reporting more transparent.

Annual data covering general government for 2005 have been reported for publication in the 2006 edition of the GFS Yearbook. However, since 1994 no outstanding debt data and no breakdowns for expenditure by function have been provided for publication in the GFS Yearbook. Monthly and quarterly data are not reported for publication in IFS.

C. Money and Banking Sectors

Money and banking statistics are broadly reliable because of the adoption of a new accounting plan for commercial banks and finance companies in 1995. Following the work on methodologies initiated by a 2000 STA mission, Paraguay completed the establishment of a unified compilation and reporting system for the whole range of monetary data. This new system intends to harmonize monetary data for use within the Central Bank (CBP), for reporting to STA for publication in IFS, and for operational and monitoring purposes. A revision of the classification criteria has led also to a marked reduction in the discrepancies of interbank positions. However, the lack of coverage of the credit cooperatives remains a matter of concern since they account for around 25 percent of deposits and loans of the banking sector.

The superintendency of banks publishes a detailed and informative report on the soundness of the financial system. The authorities have commenced submission of monetary statistics based on standardized report forms.

D. External Sector

Quarterly and annual data on balance of payments and the international investment position (IIP) are available from 2001 onwards on the central bank website, and are reported to STA. In October 2006, Paraguay became the first non-SDDS participant that reported quarterly external debt data to the World Bank’s Quarterly External Debt Statistics (QEDS) database. The classification of the balance of payments and the IIP follows the recommendations of the Balance of Payments Manual, 5th edition. Improvements have been made in the quality of the data on capital flows, especially in the coverage of foreign direct investment, and in the recording of external debt transactions in the balance of payments and in the IIP. The central bank now produces a highly informative bulletin with balance of payments statistics. Special studies by the central bank have improved the estimation methods for remittances of Paraguayans abroad and unregistered trade transactions, but serious deficiencies remain.

Also, deficiencies remain in the area of private capital outflows, which are difficult to register due to Paraguay’s open capital account. Major recommendations of the 2006 data ROSC mission include the need to: (i) design and conduct sample surveys to capture data for items currently excluded from balance of payments statistics or items not appropriately covered (e.g., some services, direct and portfolio investment abroad, real estate); (ii) review and update the statistical techniques to estimate unrecorded trade; (iii) prepare periodical reports to inform management of the CBP of the quality of survey’s data (response, coverage, response errors); and (iv) initiate a process of quarterly reconciliation of flows and stocks of medium- and long-term external public debt with the MOF.

A follow up technical assistance mission in November 2006 assisted the BCP in implementing recommendations of the ROSC mission. In particular, the follow up mission focused on: (1) assessing the surveys used to capture data on services, direct investment, nonfinancial private sector portfolio investment, and other investment; (2) reviewing and updating the statistical techniques used to calculate unrecorded trade; (3) reassessing the treatment of the binational hydroelectric energy enterprises in the external sector accounts; and (4) reviewing and preparing a preliminary template for reporting data on international reserves and foreign currency liquidity.

Paraguay: Table of Common Indicators Required for Surveillance(As of September 19, 2007)
Memo Items:
Date of latest observationDate receivedFrequency of Data1Frequency of Reporting1Frequency of publicationData Quality Methodological soundness 7/Data Quality Accuracy and reliability 8/
Exchange Rates09/18/0709/19/07DDD
International Reserve Assets and Reserve Liabilities of the Monetary Authorities2Aug. 200709/11/07DMD
Reserve/Base MoneyAug. 200709/11/07DMDO, LNO, LO, OO, O, O, LO, LO
Broad MoneyMay 200706/29/07MMM
Central Bank Balance SheetAug. 200709/11/07DMD
Consolidated Balance Sheet of the Banking SystemJul. 200709/11/07MMM
Interest Rates3Jul. 200709/11/07MMM
Consumer Price IndexAug. 200709/03/07MMMO, LO, O, OO, LO, LNO, O, LO
Revenue, Expenditure, Balance and Composition of Financing4—General Government5Jun. 200608/03/07MMMLO, LO, LO, LOLO, LNO, O, LO, LO
Stocks of Central Government and Central Government-Guaranteed Debt6Q1 200707/19/07QQQ
External Current Account BalanceQ1 200707/19/07QQQO, LO, LO, LOLO, O, LO, LO, LO
Exports and Imports of Goods and ServicesJun. 200608/03/07MMM
GDP/GNP200608/03/07AAAO, LO, LO, LOLO, O, LNO, O, LO

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

Reflects the assessment provided in the data ROSC published on June 30, 2006 and based on the findings of the mission that took place during January 25-February 8, 2006. For the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning (respectively) concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 7, except referring to international standards concerning (respectively) source data, assessment of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.

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

Reflects the assessment provided in the data ROSC published on June 30, 2006 and based on the findings of the mission that took place during January 25-February 8, 2006. For the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning (respectively) concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 7, except referring to international standards concerning (respectively) source data, assessment of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.

APPENDIX 6. Paraguay—Work Program
MissionDates
Fourth SBA Review
MissionJul 25-Aug 8, 2007
Board MeetingOctober 15, 2007
Fifth SBA Review
MissionNov 7-20, 2007
Board MeetingDecember 21, 2007
Memorandum items:
Approval of SBAMay 31, 2006
First SBA ReviewSeptember 29, 2006
Second and Third SBA Reviews and 2007 Article IV ConsultationJune 29, 2007
1

Congress approved a law in July 2007 that delayed, for the second time, the introduction of the personal income tax to 2008. The law was vetoed by President Duarte-Frutos in August 2007, but Congress overrode the Presidential veto.

2

Political observers have noted a potential complication as the Vatican maintains that a serving bishop cannot resign from his position as a member of the clergy and the Paraguayan Constitution establishes that members of the clergy cannot run for the Presidency.

3

Mr. Oviedo was granted conditional release by a military tribunal on the grounds of good conduct. He was serving a 10-year sentence given by a military court in 1997 for an alleged coup attempt. Political observers note that the tribunal did not clarify whether the conditional terms of his release made him eligible to run for President.

4

Former Finance Minister Bergen resigned in late July 2007 (during the mission) and discussions continued with his successor, Minister Barreto. Subsequently, Deputy Finance Minister von Horoch resigned in late September 2007 and was replaced by Mr. Alarcon.

5

The program’s performance criterion on arrears excludes PETROPAR’s overdue payments to suppliers as public enterprises are independent and these amounts do not represent sovereign debt. PETROPAR’s overdue payments to suppliers amounted to about US$25 million at end-June 2007.

1

Prepared by the staff of the World Bank.

1

As of June, 2007

2

As of September 30, 2007.

*

Not yet effective.

1

Prepared by the staff of the IDB.

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