Abstract
Paraguay’s Fifth Review Under the Stand-By Arrangement and Request for Waiver of Performance Criteria are discussed. The overall fiscal position remains in surplus, the exchange rate weakened slightly with respect to the U.S. dollar, but considerably with respect to the Brazilian real, and international reserves continue to rise. There have been delays in implementing the structural reform agenda. The authorities need to maintain momentum and deepen the structural agenda to reduce vulnerabilities, strengthen institutions, and lay the basis for growth.
The Executive Board of the International Monetary Fund (IMF) completed the fifth review under an SDR 50 million (about US$73.3 million) Stand-By Arrangement for Paraguay, originally approved on December 15, 2003 for 15 months (see Press Release No. 03/218), and extended through September 30, 2005 on December 20, 2004 (see Press Release No. 04/271).
The completion of this review makes a cumulative amount equivalent to SDR 47 million (about US$68.9 million) immediately available to Paraguay. However, Paraguay has not made any drawings under the arrangement so far, and the authorities have indicated that they will continue to treat it as precautionary.
In completing the review, the Executive Board also granted waivers for the nonobservance of two performance criteria related to the approval of a new comprehensive banking legislation and the audits in public entities.
Following the Executive Board’s discussion of Paraguay’s economic performance, Mr. Rodrigo de Rato, Managing Director and Chair, stated:
“Paraguay’s overall performance under the program continues to be satisfactory despite a challenging political and economic environment. Inflationary pressures resurfaced during the first half of 2005, but monetary tightening and a more flexible exchange rate policy are expected to keep inflation under control. The overall fiscal position has remained in surplus, as a strict financial plan was applied successfully to the execution of the budget. Banking system indicators continue to improve, and dollarization has remained at a lower level than in previous years. However, unemployment and poverty levels remain high, underscoring the importance of pressing ahead with the structural reform agenda.
“The authorities have been successful in maintaining fiscal discipline, notwithstanding the higher spending implicit in the budget approved by Congress, in part through improvements in tax administration and effective expenditure control. Continued fiscal discipline will be needed. To consolidate the gains achieved to date, further institutional strengthening will be needed. In this regard the authorities’ recent measures to reduce, and eventually eliminate, the oil company’s financial difficulties are welcome.
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“Monetary policy has so far contained resurgent inflationary pressures. The authorities should stand ready to tighten monetary policy further should inflationary pressures continue. It is also important to strengthen further the financial system, building on the insights gained by the ongoing technical assistance from the IMF. In this connection, the authorities have made substantial progress in strengthening public banking legislation. The second-tier public banking law was enacted in July 2005. However, the reform of general banking legislation has fallen behind schedule. The authorities remain committed to the objectives of this reform, and are drawing up an action plan to achieve these objectives,” Mr. de Rato said.