Statement by the IMF Staff Representative

The Paraguayan authorities have prepared an economic program to stabilize their macroeconomic situation and begin a process of structural reform. Fiscal adjustment and structural reforms should pave the way for more rapid growth over the medium term. Despite these expected improvements in economic policies and performance, Paraguay remains vulnerable to external shocks. The fiscal situation has deteriorated sharply in recent years. Severe financing constraints have produced sizable public sector payments arrears. On the revenue side, the government's fiscal strategy is to raise revenues while minimizing increases in tax rates.

Abstract

The Paraguayan authorities have prepared an economic program to stabilize their macroeconomic situation and begin a process of structural reform. Fiscal adjustment and structural reforms should pave the way for more rapid growth over the medium term. Despite these expected improvements in economic policies and performance, Paraguay remains vulnerable to external shocks. The fiscal situation has deteriorated sharply in recent years. Severe financing constraints have produced sizable public sector payments arrears. On the revenue side, the government's fiscal strategy is to raise revenues while minimizing increases in tax rates.

December 15, 2003

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 edged higher. Monthly consumer price inflation in November 2003 was 1.3 percent, bringing the 12-month rate to 9.9 percent. In October, producer prices rose by 2.5 percent, causing the 12-month rate to reach 16.9 percent.

  • The guaraní has continued to appreciate against the dollar, closing at 6,050 per dollar on December 9 (up 16 percent for the year).

  • Net international reserves were US$884 million on December 9. Although some decline may be expected in the second half of December due to government debt service payments, reserves are likely to remain well above the program target for end-December. These additional reserves will provide an important cushion against any adverse shocks during the program.

  • Tax revenues increased by 39 percent in November, continuing the sharply higher trend since August. Revenues in the first 10 days of December continued at roughly the same pace.

  • Asset quality of the banking system has begun to improve. The average nonperforming loan ratio declined from 23.2 percent in September to 22.7 percent in October 2003.

  • The 2004 budget will be approved in the coming days. A final vote in the Chamber of Deputies was taken on December 9, and the final Senate vote is expected soon. Early pressures in Congress to sharply increase spending have been defeated, and congressional leaders have assured the staff that the final version will be fully consistent with program targets.

  • The Senate and Chamber of Deputies have both passed the Public Pension Reform Law. Slight differences in the version approved mean the law returns to the Senate for reconciliation. Passage of the law is a condition for the first review under the program.

  • Paris Club creditors have indicated their willingness to consider granting forbearance to permit the clearance of arrears to its members in line with the program.

Paraguay: Request for a Stand-By Arrangement
Author: International Monetary Fund