The staff paper for the Third Review Under the Stand-By Arrangement on Paraguay focuses on the macroeconomic framework and medium-term scenario, risks, and capacity to repay the IMF. There have been delays in implementing some structural measures, especially related to the approval of banking legislation, owing to a shift in the political environment and congressional delays. Macroeconomic performance has been better than envisaged under the program. The authorities have adopted a new strategy involving a two-stage approach that they believe is politically feasible to achieve but will require more time to implement.
The Executive Board of the International Monetary Fund (IMF) today completed the third review under an SDR 50 million (about US$76.2 million) Stand-By Arrangement for Paraguay, originally approved on December 15, 2003 for 15 months (see Press Release No. 03/218), and granted an extension of the arrangement by six months, through September 30, 2005.
In completing the review, the Executive Board also granted the Paraguay authorities' request for waivers of the nonobservance of two quantitative performance criteria and two structural performance criteria, and the modification of four performance criteria.
The remaining amounts available under the arrangement were also rephased in four equal tranches in an amount equivalent to SDR 3 million each (about US$4.6 million). However, Paraguay has not made any drawings under the arrangement so far, and the authorities have indicated that they continue to treat the arrangement as precautionary.
Following the Executive Board's discussion of Paraguay's economic performance, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:
“Paraguay's macroeconomic performance has improved significantly under the program supported by the Stand-By Arrangement. Economic growth has been sustained in 2004 despite a drought, inflation has declined significantly, international reserves have increased, and the exchange rate has stabilized.
“Overall, Paraguay has performed well under the program. On the structural side, the authorities have approved key pieces of economic legislation over the last 12 months, including the fiscal adjustment law, the customs code, the bank resolution law, and the public pension reform law. The authorities will need to press ahead with the reform agenda in order to reduce unemployment and poverty, which remain stubbornly high.
“Reform of public banks remains a critical component of the program. It is important that this process move forward expeditiously, and that the authorities carefully monitor lending by the public banks in the run-up to their reform in order to prevent the resumption of unsustainable lending practices.
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“Fiscal policy has been placed on a sustainable path and the authoritie' 2005 program is aimed at maintaining this improved performance. The fiscal outlook has improved significantly following the improvements in tax administration and the approval of the fiscal adjustment law. Tax collections have increased while expenditures have been kept in check, although capital outlays remain low. The government has eliminated sizable arrears and taken decisive steps toward normalizing relations with all creditors. The stock of public debt is now on a declining trend. For 2005, the authorities intend to pursue a balanced overall budget, with higher projected revenues allowing for a significant increase in capital expenditure in needed infrastructure. It will be important to have mechanisms in place to limit expenditure to programmed levels, and to ensure that investment spending supports high quality projects.
“Monetary policy has been effective in containing inflation while allowing for rapid reserve accumulation. However, monetary management has been complicated by large capital inflows, which threatened to generate rapid monetary expansion or a sharp appreciation of the currency. In order to minimize these risks, the central bank has pursued an active sterilization policy while accumulating international reserves. In 2005 the authorities intend to use interest rate and exchange rate policies more flexibly in order to stabilize inflation,” Mr. Kato said.