Abstract
This paper assesses Paraguay’s First Review Under the Stand-By Arrangement and Request for Waiver of Nonobservance and Applicability of Performance Criteria. Paraguay has made significant progress in the first months of the program. Economic activity has strengthened, inflation prospects have improved, and renewed confidence in economic policy management has helped boost banking system deposits and central bank reserves. Fiscal performance has been favorable, but continued reforms are needed to keep the program on track. The IMF staff welcomes the authorities’ efforts to address Paraguay’s payments arrears difficulties.
The following information has become available since issuance of the staff report. This information does not alter the thrust of the staff appraisal.
Inflation has continued to fall. Monthly consumer price inflation in March 2004 was 0.5 percent, bringing the 12-month rate to 3 percent (from 5.4 percent in February).
Exports and imports are growing rapidly. Exports in January-February almost doubled relative to the same period of last year, mainly due to high soy prices and strong volume growth of other exports, in particular oils, meats, and cereals. Import growth was broadly based, and the trade deficit was roughly as programmed.
The guaraní remains strong. Relative the U.S. dollar, it has risen by 5.5 percent so far this year. However, in real effective terms it has remained roughly constant over this period.
Preliminary data show that end-March program targets on NIR and NDA were met by large margins. Net international reserves stood at US$1,016 million on March 31 (compared to an adjusted floor of US$786.5 million). Reflecting the central bank’s efforts to sterilize the NIR overperformance, NDA were at G.-4,266 billion on March 31 (compared to an adjusted ceiling of G.–2,924 billion) and currency growth was only slightly above the monetary program.
Preliminary data show that the central government posted an overall surplus of G. 243 billion (2.5 percent of GDP) in the first quarter, in line with the programmed surplus of 2.5 percent of GDP. The overperformance is attributable to strong performance of tax revenues (up 38 percent relative to the first quarter of 2002), while spending was broadly in line with the program. General government outturn and below-the-line data (required to evaluate observance) are not yet available for March.
The authorities have cleared most bilateral arrears, though the settlement of small remaining amounts have been delayed for technical reasons or are still under discussion with creditors. As noted in the staff report, the authorities accelerated the repayment of arrears and committed to clear all bilateral arrears by end-March (ahead of the original program schedule which foresaw gradual repayment during 2004). They have now done so except in the following cases where there are either outstanding disagreements or technical difficulties: (1) interest payments to France ($1.3 million), which are under negotiation; (2) arrears to Belgium ($14.7 million), which are disputed and also under negotiation; (3) arrears to Germany (€2.1 million), the legality of which is under review; and (4) very small amounts due to a South African creditor and USAID. The authorities expect to resolve the remaining outstanding arrears in the near future.
Congressional discussion of the Administrative Reorganization and Fiscal Adjustment Law (a PC for end-May) has been further delayed. The draft law, currently being considered by a committee of the Chamber of Deputies, is scheduled to be discussed by the full Chamber on April 15 (it was originally scheduled to be discussed on March 31). The delay reflects continuing disagreements among political parties and business associations on important elements of the draft law. The authorities still expect to secure congressional approval in accordance with the program timetable.