This statement provides additional information on developments since the issuance of the staff report for the fourth review under the Stand-By Arrangement for Paraguay. This information does not materially change the staff appraisal.
I. Recent Developments
Inflationary pressures moderated while food prices continued to rise. Headline inflation fell to 0.9 percent in September 2007 (from 3.4 percent in August), reducing the 12-month rate of inflation to around 10 percent (from 10½ percent). Higher food prices explain the whole inflation rate of September. Core inflation was 5½ percent in September (against a 5 percent target). The 12-month rate of non-food inflation was only 1¾ percent in September 2007.
Monetary policy was tightened further in response to inflationary developments. As a precautionary measure, the Central Bank raised interest rates again in early October 2007; the 3-month rate on central bank liquidity control instruments (LRM) was increased from 4½ percent to 5 percent and the 12-month rate from 7 percent to 8 percent.
The fiscal position remains strong. Preliminary information for August 2007 indicates a strengthening of the fiscal position as central government revenues were higher than programmed while expenditures continued to be contained. Tax collection grew at 11 percent in the 12 months to August, while expenditures grew by 8 percent. As a result, a sizeable overall surplus of 2 percent of GDP was recorded in the first eight months of the year.
II. Performance Criteria
Two performance criteria (PC) for end-September 2007 were observed. Although there is no sufficient information available to assess the remaining end-September 2007 PCs, staff and authorities expect that they have been met (the authorities have requested a waiver of non-applicability).
- International reserves. In the absence of significant intervention in the foreign exchange market, the PC on net international reserves of the Central Bank was met by a margin of US$265 million.
- Domestic credit. With a better functioning LRM market and higher rates in the last few weeks, placements of LRMs have been higher than programmed and the PC on the net domestic assets of the Central Bank was met by a margin of G 1.0 trillion.
III. Structural Benchmarks
As noted in the staff report, the authorities met four out of the seven benchmarks for end-September 2007. The measure related to a fifth benchmark—the approval of a modified resolution 8/03—was implemented but its effectiveness was delayed by several months.
- Resolution 8/03. The authorities approved this resolution at end-September 2007 as envisaged in the program. They stressed that it was difficult to reach consensus with the financial community and the banks’ borrowers, and argued that they preferred to ensure support from all stakeholders by delaying the resolution’s date of effectiveness from January to October 2008 rather than risking another confrontation (as in December 2006 when the resolution had to be postponed). The authorities feel that this delay is necessary to provide financial institutions with the time needed to adjust their accounting systems to the reporting requirements established by the new resolution. Staff sees merit in these arguments, and acknowledge that in reality the broad majority of banks and financial entities already comply with the resolution, but regrets the delay as it gives no legal backing to the Superintendency of Banks to enforce the higher standards during the interim period. The staff will continue working with the authorities to try to advance the schedule for the implementation of prudential regulations.
The situation with the remaining benchmarks is as follows:
- Legislation to partially cover Central Bank losses. There is agreement between the Ministry of Finance and the Central Bank to transfer 0.2 percent of GDP to the Central Bank on an annual basis to cover its losses, but the draft law that contains this element of the authorities’ strategy continues to be subject to internal legal review and has not yet been sent to Congress. It is expected that this legislation will be sent to Congress by end-October 2007.
- Legislation to improve payment system. While the legislation was drafted, it is still being reviewed by a private law firm. It is expected that this draft law will be approved by the economic cabinet by end-November 2007.