Abstract
This 2002 Article IV Consultation highlights that Paraguay’s economic performance in recent years has been characterized by slow economic growth and increasing unemployment and poverty rates. This stagnation reflects structural impediments to growth, exacerbated by external and domestic shocks. In 2002, the economy fell into its worst recession in decades, with real GDP down by 2½ percent, according to official estimates, or 4½ percent, according to IMF staff estimates, while inflation accelerated to 14½ percent. The public finances also deteriorated sharply in 2002.
Since issuance of the staff report, the following additional information on recent developments has become available. This information does not alter the thrust of the appraisal.
Inflation has accelerated further. Monthly consumer price inflation in February was 1.8 percent, bringing the 12-month rate to 20.2 percent, hi January, producer prices rose by 14.8 percent, raising the 12-month rate to 56.6 percent.
While gross reserves have remained at around $650 million since end-2002, public sector arrears have risen to an estimated $290 million as of end-February (up from $175 million at end-2002). Nearly US$100 million of total arrears are external. Arrears to the IDB and World Bank were nearly US$20 million, while the bulk of the rest were to bilateral lenders and foreign suppliers.
Banking system deposits have been stable, but credit and asset quality continue to decline. Credit to the private sector fell by 3.2 percent in January (year-on-year), and the average nonperforming-loan ratio rose to 20.6 percent in January, from 19.7 percent in December.
The central bank in late February approved a loan to the government to clear some payments arrears. The loan of $39 million, which is within the statutory limits of government borrowing from the central bank, is to be used to clear arrears with the World Bank and the IDB and to redeem part of overdue government bonds with domestic banks (with the rest to be rescheduled to 2005).
Congress is currently considering a draft law to recapitalize the National Development Bank (BNF) with around US$70 million in government bonds and to require that a more comprehensive public banking reform law be submitted within 180 days. President González Macchi had annoimced last week that a comprehensive public banking reform would not be undertaken until a new government takes office.