Front Matter

Front Matter

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    Western Hemisphere Department

    ©2009 International Monetary Fund

    Cataloging-in-Publication Data

    Paraguay : addressing the stagnation and instability trap / edited by Alejandro Santos -- Washington, DC : International Monetary Fund, 2009.

    • p. ; cm.

    Includes bibliographical references.

    ISBN 978-1-58906-852-0

    1. Paraguay – Economic conditions – 1954- . 2. Financial crises – Paraguay. 3. Finance – Paraguay. 4. Banks and banking – Paraguay. 5. Monetary policy – Paraguay. 6. Fiscal policy – Paraguay. 7. Inflation (Finance) – Paraguay. 8. Economic development – Paraguay. I. Santos, Alejandro. II. International Monetary Fund. Western Hemisphere Dept.

    HC222.P37 2009

    Disclaimer: This publication should not be reported as representing the views or policies of the International Monetary Fund. The views expressed in this work are those of the authors and do not necessarily represent those of the IMF, its Executive Board, or its management.

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    The Paraguayan economy has come a long way from a period of stagnation coupled with frequent and debilitating financial crises in the 1990s and early 2000s. Faced with these problems, the authorities decided to act decisively after the regional crisis of 2002 and embarked on a successful stabilization program in 2003 until 2005. Once stabilization was achieved, they went on to address the problems of low growth and institutional obstacles under a new program during 2006—08. The results were impressive: growth has been the best in a generation, and fiscal and external imbalances have been substantially reduced.

    In all these efforts, the authorities displayed a vision and level of ownership that is quite commendable. I am pleased that the International Monetary Fund (IMF) assisted the authorities in designing their programs and in providing the needed analysis and expertise, drawing on international experience and best practices. In this process, there was an intense level of collaboration between the authorities, the IMF, and other international financial institutions, such as the Inter-American Development Bank and the World Bank, that warrants recognition. The success of these collaborative efforts and experiences entailed in achieving good economic results is a worthy example for Paraguay’s neighbors in Latin America and for countries in other parts of the world.

    This book encapsulates the analytical work and discussions that underpinned the policies and reforms that Paraguay has been undertaking. It provides an excellent overview of the analytical insights and policy challenges to have in mind in order for the authorities to avoid pitfalls and climb over ridges on the path to sustained growth with stability. It covers a wide range of themes, including improving macroeconomic assessments and policy implementation, eliminating turbulence and deepening financial reforms, and, most important of all, enhancing growth performance and reducing poverty.

    Although the global economy has weakened dramatically and Paraguay’s near-term outlook has dimmed over the past year, we are confident that the authorities will rise to the occasion once more and safeguard their hard-won gains. I am convinced that the lessons learned and the safety margins built over the past five years will provide a solid foundation on which to build the path to long-term sustained growth that will be needed to decisively combat poverty. It is my sincere hope that this book will provide policymakers, academics, opinion makers, as well as the general public, a stepping-stone from which to continue substantive policy deliberations and debate on key economic challenges of the day. It also usefully fills the information gap of worthy economic volumes on Paraguay, of which there are but a few.

    Dominique Strauss-Kahn

    Managing Director

    International Monetary Fund


    It is with great pleasure that we welcome the publication of this book, which could not come at a more opportune moment, as the whole world is grappling with the worst economic crisis since the Great Depression. Like most countries in the world, Paraguay has been hard-hit by the crisis and is now putting into place a coherent and comprehensive anti-crisis plan. The book supports prominently the formulation and execution of the government’s anti-crisis plan for three reasons. First, it provides much-needed sound and deep analysis of the inner workings, key strengths, and weaknesses of the Paraguayan economy. Second, it clearly shows how much Paraguay has strengthened its economic base and considerably reduced vulnerabilities over the past few years; this affords us sizable room to adopt appropriate policies to combat the crisis without jeopardizing economic stability. Finally, the book is an excellent source of information and analysis on a wide range of important economic issues of the day.

    There are undoubtedly many challenges that Paraguay will have to overcome on the path to shared prosperity and economic stability. This book provides very useful guidance that policymakers in Paraguay and in the rest of Latin America would do well to take to heart in addressing similar policy issues. We are particularly pleased that the book showcases the authorities’ homegrown approach, which allowed Paraguay to overcome successfully the economic crisis in the early 2000s. The book is also a testament to the level of collaboration between the authorities, the International Monetary Fund, the Inter-American Development Bank, and the World Bank, all in the interest of the well-being of the Paraguayan people. We would like to congratulate the IMF on its well-timed publication, and we look forward to a version in Spanish so that it can reach a wider audience.

    Dionisio Borda


    Ministry of Finance of Paraguay

    Jorge Raúl Corvalán Mendoza


    Central Bank of Paraguay


    This book is a good example of how collaborative efforts can help produce sound policies. It illustrates how various international financial institutions in concert with the authorities worked together to achieve the common goal of lifting Paraguay out of the trap of economic stagnation coupled with financial instability.

    This publication has an extensive coverage of relevant applied issues for the country—including strengthening general macroeconomic management, increasing long-term growth, deepening financial reforms, and reducing fiscal institutional weaknesses—with intellectual rigor and analytical depth, while taking into account political constraints and institutional restrictions.

    At the same time, this book is evidence of how the Western Hemisphere Department, and the Fund in general, is working in an increasingly collaborative manner to respond to the changing needs of its membership. The book shows how a country can successfully emerge from economic, financial, and fiscal crises by implementing the best feasible policies. While the current global recession poses a major challenge for Paraguay and other Latin American countries, I have no doubt that Paraguay will weather the current storm better because of the buffers it has built over the past five years. The preparation for these challenging occasions is as important as the response to the difficult economic circumstances.

    Nicolás Eyzaguirre

    Director, Western Hemisphere Department

    International Monetary Fund


    The authors would like to acknowledge the valuable comments and suggestions provided on earlier versions of the papers presented in this book to officials and participants at the seminar on Structural Reform at the Central Bank of Paraguay in December 2006 and the seminar on Inflation and Exchange Rates, also at the Central Bank of Paraguay, in June 2008, especially Jorge Corvalán, Dionisio Borda, Germán Rojas, César Barreto, Mónica Pérez dos Santos, Ernst Bergen, Jorge L. von Horoch, Gustavo Cartes, Emilio Ortiz, Manuel Alarcón, Carlino Velázquez, Oscar Perez, and Miguel Mora. The authors are also grateful for comments on previous versions from colleagues at the International Monetary Fund (IMF), particularly Nicolás Eyzaguirre, José Fajgenbaum, Patricia Alonso-Gamo, Carlos Medeiros, Mark Horton, Israel Fainboim, and Patricio Casto. Thanks are due to Lucia Castro Herrera, Gloria E. Bustillo, and María Salome Gutierrez for their outstanding support, and to Eugen Tereanu for excellent research assistance. The authors would like to thank Marina Primorac of the IMF External Relations Department for editing the book for publication and coordinating production.

    The views expressed in this book, as well as any errors or omissions, are the sole responsibility of the authors, and do not necessarily reflect the opinions of the IMF.

    About the Authors

    Bergljot Barkbu, a national of Norway, is an economist in the Emerging Markets Division of the International Monetary Fund’s (IMF’s) Strategy, Policy, and Review Department. Ms. Barkbu studied political science and economics at the University of Oslo, Norway, and at the Institute for International Economics at the University of Kiel, Germany. She holds a Ph.D. in economics from the European University Institute in Florence, Italy. At the IMF, she worked in the African Department before joining the Strategy, Policy, and Review Department to work on debt issues in low-income countries, and later, general emerging market policies as well as country assignments to Paraguay and Hungary.

    Benedikt Braumann, a national of Austria, is macroeconomic consultant for the Swiss Ministry of Economics (SECO). He worked previously at the Swiss Central Bank as director for central banker courses, and as a senior economist at the IMF, where his professional interest in Paraguay began in 1998. Since then, he has been visiting the country regularly in monitoring and negotiation missions for the IMF and to provide advice, technical assistance, and capacity-building seminars. Mr. Braumann holds a Ph.D. from the University of St. Gallen, Switzerland.

    Luís Duran-Downing, a national of Nicaragua, pursued his undergraduate degree in political science at the University of Grenoble, France, and his Ph.D. in economics at the University of Chicago. Before joining the IMF in 1979, he worked for the Central Bank of Nicaragua, including as deputy general manager. Mr. Duran-Downing held several positions at the Western Hemisphere (WHD) and Policy Development and Review Departments of the IMF, including those of resident representative in Uruguay; head of division for operations in Bolivia, Chile, and Peru; and WHD assistant director. While on leave from the IMF during 1997—2000, Mr. Duran-Downing assisted the president of Nicaragua in the coordination of economic policies. His last assignment was as resident representative in Paraguay, before his retirement from the IMF at the end of 2007.

    Florencia Frantischek, a national of Chile, is a senior economist in the Southern I Division of the IMF’s Western Hemisphere Department and is currently working as a desk economist for Ecuador. She has worked as desk economist for several countries of the Western Hemisphere Department, including Paraguay. Ms. Frantischek graduated from the University of Chile with a degree in economics, and has a Ph.D. in economics from the University of Boston. Prior to joining the IMF, she worked at the University of Chile.

    José Giancarlo Gasha, a national of Peru, is an economist in the Asia and Western Hemisphere Division of the IMF’s Monetary and Capital Markets Department. Mr. Gasha holds a B.A. in economics from Universidad del Pacífico in Perú, and an M.A. and a Ph.D. in economics from the University of Pennsylvania. Prior to joining the IMF, Mr. Gasha worked for the World Bank, the Financial Corporation for Development (public Tier-II bank), Interbank (private commercial bank), and the Universidad del Pacífico in Peru.

    Montfort Mlachila, a national of Malawi, is a senior economist in the Southern II Division of the IMF’s Western Hemisphere Department. Mr. Mlachila graduated from the University of Grenoble with a B.Sc. in economic and an M.Sc. in econometrics, and from the Graduate School of the University of Auvergne Clermont-Ferrand, France, with a M.Phil in economics. Prior to becoming desk economist for Paraguay, he worked on the Caribbean; before joining the Western Hemisphere Department, he worked in the Policy Development and Review Department. He worked at the Reserve Bank of Malawi before he joined the IMF.

    Pablo Molina, a national of Colombia, is a country economist in the Southern Cone Department of the Inter-American Development Bank (IDB). Mr. Molina, a civil engineer from the Industrial University of Santander in Colombia, has a Ph.D. in economics from the University of Illinois at Urbana-Champaign. Prior to joining the IDB he worked at the Central Bank, the Ministry of Finance, and the Controls Office in Colombia.

    Brieuc Monfort, a national of France, was a desk economist for Paraguay in the IMF’s Western Hemisphere Department while contributing to this book. He is now working in the Euro 1 Division of the European Department as desk economist for France. He studied economics at École Nationale de la Statistique et de l’Administration Économique and Ecole Normale Supérieure in Paris, France, and at Harvard University in the United States. Prior to joining the IMF, he worked for the French Ministry of Finance and at the French Embassy in India.

    Santiago Peña, a national of Paraguay, is an economist in the Resident Representative Office of the IMF in Paraguay. Mr. Peña holds a B.A. in economics from the Catholic University of Asunción and a M.A. in economics from the School of International and Public Affairs at Columbia University in New York City. Prior to joining the Resident Representative Office of the IMF in Paraguay, he worked as an economist in the Economic Research Department of the Central Bank of Paraguay.

    Pedro L. Rodríguez, a national of Colombia, was the World Bank’s country manager for Paraguay stationed in Asunción while contributing to this book. He is now at the Poverty Reduction and Economic Management Network of the World Bank. Mr. Rodríguez holds a B.A. in economics and an M.A. in economic development from the Universidad de los Andes in Colombia and an M.A. in economics from Georgetown University in Washington, D.C. Prior to working on Paraguay, Mr. Rodríguez worked on Eastern European countries and was stationed at the World Bank offices in the Kyrgyz Republic and Kazakhstan. Before joining the World Bank, Mr. Rodríguez worked at the Central Bank of Colombia.

    Tobias Roy, a national of Germany, is a senior economist at the IMF’s Western Hemisphere Department and currently the IMF’s resident representative in Paraguay. Mr. Roy holds a doctorate in economics from the Free University of Berlin, where he worked as a teaching and research assistant before serving as professor at the University of Applied Sciences in Berlin. Prior to his assignment with Paraguay, he worked as IMF economist in Cape Verde, Suriname, and Belize.

    Alejandro Santos, a national of Mexico, is division chief in the Latin Caribbean Division of the IMF’s Western Hemisphere Department. Mr. Santos holds a B.A. in economics from Universidad Autónoma de Nuevo León in Mexico, and an M.A., M.Phil., and Ph.D. in economics from Yale University in the United States. He was the IMF mission chief for Paraguay during the two Stand-By Arrangements and has been IMF resident representative in Bolivia and Russia. Prior to joining the Western Hemisphere Department, he worked in the Policy Development and Review Department, where he was assigned to many emerging market crises, including those in Argentina, Korea, Indonesia, and Russia.



    Financial Agency for Development (Agencia Financiera de Desarrollo)


    National Electricity Company (Administración Nacional de Electricidad)


    Central Bank of Paraguay (Banco Central de Paraguay)


    National Development Bank (Banco Nacional de Fomento)


    Stock Exchange (Bolsa de Valores y Productos de Asunción)


    Capital Adequacy Ratio


    National Securities Commission (Comisión Nacional de Valores)


    State Telephone Company (Compañía Paraguaya de Comunicaciones)


    Consumer Price Index


    Dynamic Ordinary Least Squares


    Error-Correction Model


    Emerging Markets Bond Index


    State Water Supply Company (Empresa de Servicios Sanitarios de Paraguay)


    Food and Agriculture Organization


    Liquidity Window for IRM (Facilidad de Liquidez de Corto Plazo con Reporto de IRM)


    Inter-American Development Bank


    Agricultural Income Tax (Impuesto a la Renta de la Actividad Agropecuaria)


    International Monetary Fund


    National Cement Company (Indústria Nacional de Cemento)


    National Cooperatives Institute (Instituto Nacional de Cooperativismo)


    Institute of Rural Development (Instituto Nacional de Desarrollo Rural y de la Tierra)


    Information Notice System


    Social Security Institute (Instituto de Previsión Social)


    Monetary Control Instruments (same as LRM) (Instrumentos de Regulación Monetaria)


    Gross Domestic Product


    Generalized Method of Moments


    Monetary Control Bills (same as IRM) (Letras de Regulación Monetaria)


    Ministry of Agriculture and Livestock (Ministerio de Agricultura y Ganadería)


    Ministry of Education and Culture (Ministerio de Educación y Cultura)


    Ministry of Finance

    MPFy BS

    Ministry of Public Health and Welfare (Ministerio de Salud Publica y Bienestar Social)


    Nominal Effective Exchange Rate


    Net Foreign Assets


    Non-financial Public Sector


    Net International Reserves


    Nonperforming Loans


    Organization for Economic Cooperation and Development


    State Oil Company (Petróleos Paraguayos)


    Public Financial Management


    Purchasing Power Parity


    Export and Investment Network (Red de Inversiones y Exportaciones)


    Real Effective Exchange Rate


    Root Mean Square Error


    Real-Time Gross Settlement


    Secretariat for Social Action (Secretaria de Acción Social)


    Under Secretary Of Taxes (Subsecretaria de Estado de Tributación)


    Superintendence of Banks (Superintendencia de Bancos)


    State-Owned Enterprise


    Technical Secretariat of Planning (Secretaría Técnica de Planificación)


    Total Factor Productivity


    Unit Labor Cost


    United Nations Educational, Scientific and Cultural Organization


    United States Agency for International Development


    Vector Auto Regression


    Value Added Tax


    Vector Error Correction Model


    World Bank


    World Economic Outlook


    Western Hemisphere Department

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