Paraguay: Request for Stand-By Arrangement—Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Paraguay

The authorities’ program for 2003–05, supported by the previous Stand-By Arrangement (SBA), successfully stabilized the economy despite difficult conditions. A new economic program for 2006–08 is needed to consolidate macroeconomic stability, address remaining vulnerabilities, and create the conditions for higher growth. In the context of a benign environment, inflation fell significantly to 2¾ percent in 2004—the lowest inflation rate since the early 1970s. The return of capital flight in 2004 satisfied increases in the demand for money and generated a rapid growth of monetary aggregates.


The authorities’ program for 2003–05, supported by the previous Stand-By Arrangement (SBA), successfully stabilized the economy despite difficult conditions. A new economic program for 2006–08 is needed to consolidate macroeconomic stability, address remaining vulnerabilities, and create the conditions for higher growth. In the context of a benign environment, inflation fell significantly to 2¾ percent in 2004—the lowest inflation rate since the early 1970s. The return of capital flight in 2004 satisfied increases in the demand for money and generated a rapid growth of monetary aggregates.

I. Introduction

1. The authorities’ program for 2003–05, supported by the previous SBA, successfully stabilized the economy despite difficult conditions. The economy was facing difficult problems at the end of 2003 (when the previous SBA began). Contagion from the regional crisis exposed serious economic vulnerabilities—including large fiscal imbalances, inadequate banking supervision, and chronic low growth. The situation improved considerably following the adoption of a strong program, which encompassed a tightening of macroeconomic policies and an ambitious structural reform agenda. A full-fledged crisis was averted as fiscal consolidation was rapidly adopted, confidence was restored, the financial system recovered, arrears were cleared, economic growth resumed and inflation was contained.

2. A new economic program for 2006–08 is needed to consolidate macroeconomic stability, address remaining vulnerabilities, and create the conditions for higher growth. While the gains attained under the previous SBA were considerable, additional institutional strengthening is needed to sustain macroeconomic achievements, mitigate existing vulnerabilities, and reinvigorate growth. Improvements in the fiscal accounts hinge on a surge in tax collections that must be institutionalized to be sustainable. Further strengthening of monetary policy is needed to help bring inflation down. Additional structural reforms seek to improve productivity, reduce poverty and eliminate impediments to growth.

3. In support of these efforts, the authorities are requesting a 27–month SBA. The authorities’ medium-term objective is to lay the foundations for a gradual but sustainable increase in economic growth to 4–5 percent a year, lower inflation to industrialized country levels, and reduce poverty significantly. The proposed access under the arrangement is SDR 65 million (29 percent of quota on an annual basis). The authorities intend to treat the arrangement as precautionary.

II. Performance under the 2003-05 Program and Recent Developments

A. Macroeconomic Performance

4. Some of the best macroeconomic results in a decade were achieved under the previous program. However, conditions deteriorated in late 2005 and early 2006 and policies were strengthened accordingly.

  • Economic activity. During 2004, the economy grew 4 percent—the highest rate since the mid-1990s—driven by livestock, telecommunications and commerce. In 2005, a series of supply shocks (including a drought and higher oil prices) reduced growth to 3 percent. Livestock, forestry and construction sectors drove such growth.1 There are reports of a continued drought in early 2006, which could jeopardize the authorities’ growth objectives.

  • Inflation. In the context of a benign environment, inflation fell significantly to 2¾ percent in 2004—the lowest inflation rate since the early 1970s. However, considerable pressures emerged since then. A number of exogenous shocks were accommodated and inflation increased to 10 percent in 2005 (outside the 4–8 percent objective range). The Central Bank estimates that about half of the 2005 inflation was due to the oil shock and imported inflation coming from the strengthening of the Brazilian real. The staff estimates that delays in addressing emerging pressures and monetary expansion explain the persistence of high inflation in early 2006, which reached 4½ percent in the first four months of 2006 (and raised the 12month rate to 10½ percent). While the Central Bank estimates that about half of the inflation in the first quarter of 2006 is due to temporary increases in fruits and vegetables, likely to be reversed in the coming months, it acted with determination, raising it short-term interest rates on “letras de regulación monetaria” (LRM) by a total of 375 basis points (to 10½ percent) in February and April 2006.

  • Monetary developments. The return of capital flight in 2004 satisfied increases in the demand for money and generated a rapid growth of monetary aggregates. However, monetary imbalances emerged in 2005 as capital inflows continued and the demand for money stabilized. Currency issue growth accelerated to 17½ percent in 2005 due to a rapid accumulation of net international reserves (NIR). Significant sterilization efforts and an increase in the Central Bank’s short-term interest rates on LRM’s by 425 basis points (to 6¾ percent), were insufficient to offset the large purchases of foreign exchange in the first half of 2005.

  • Fiscal performance. Fiscal consolidation efforts were successful under the program and the Treasury recorded a surplus in 2004 for the first time in a decade. The Treasury reported another surplus of over ½ percent of GDP for 2005 against a program objective of a deficit of the same magnitude. The better-than-programmed performance is due to strong tax collections (despite lower rates for the profit tax), low investment project implementation and across-the-board expenditure cuts made in the last quarter of 2005 to help address inflationary concerns. There are early indications of a further strengthening in tax collections in the first quarter of 2006. Congress approved—for the third consecutive year—a large and underfinanced budget for 2006, which the authorities aim to re-align with the objective of achieving an overall balance of zero.

  • External sector. A benign external environment in 2004 deteriorated in 2005 and the current account balance turned from a small surplus in 2004 to a deficit of 2½ percent of GDP in 2005, mostly reflecting a rapid growth in oil imports.2 Exports grew at a slower rate, with several traditional export items affected by the drought and lower commodity prices (i.e., soybeans, vegetable oil, and cotton) and non-traditional exports growing at a faster pace (i.e., meat). Notwithstanding the deterioration in the current account balance and negative external financing of the public sector, a surge in private capital inflows (including an almost doubling of FDI) resulted in a balance of payments surplus and a record high level of international reserves in 2005 (US$1.3 billion). Following large foreign exchange purchases in the first half of 2005, the Central Bank introduced a policy of limited foreign exchange intervention in mid-2005.

Paraguay: Recent Developments

Annual Growth (in percent) 1/

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Source: Paraguayan authorities.

With respect to same period of previous year, unless otherwise specified.

Data for 2005 based on IMAE estimates.

12-month growth rate e.o.p. (G/US$ for exchange rate).

Data through April.

Registered trade.

B. Structural Reform

5. An ambitious structural reform agenda was adopted under the previous program. Achievements in the structural area included Congressional approval of:

  • The fiscal adjustment law. It introduced the personal income tax, eliminated tax exemptions, simplified the tax system and broadened the tax base.

  • The customs code. It granted operational and financial autonomy to customs and expanded its powers of investigation and enforcement.

  • The banking resolution law. It set up a deposit guarantee fund and provided the Superintendence of banks with increased ability to deal with banks in trouble.

  • The public pension fund law. It introduced a parametric reform of the pay-as-you-go public pension system to reduce significantly its cash deficit. It increased contributions, reduced benefits, and increased years of service.

  • The second-tier public banking law. It created the Financial Development Agency (AFD) to provide long-term financing by making available external funds from international financial institutions and donors to commercial banks.

Other reforms included a census on public servants, a plan to reform the civil service career, introduction of prudential regulations for cooperatives, and audits of public enterprises. However, the general banking law was not approved (nor considered) by Congress and the version of the first-tier public banking law considered by Congress is significantly different from that supported by the government. The government intends to veto this law.

C. Political Situation

6. In an important internal party election, President Duarte-Frutos won the Presidency of the Colorado party. The President obtained an overwhelming majority (63 percent of the votes) in February 2006. In the wake of a controversy as to whether he could legally exercise the presidency of the party while being President of the Republic, Mr. Duarte-Frutos delegated the responsibilities in Mr. José Alberto Alderete, who in turn resigned as Minister of Public Works. Mr. Duarte-Frutos’ victory in the party elections could consolidate his political power, which would help in advancing the economic policies envisaged in the program. However, the immediate reaction to his decision to assume the presidency of the party (for a few hours) has been negative.

III. The 2006–08 Program

7. The long-term vulnerabilities and structural deficiencies identified in the last Article IV Consultation served to frame the new program.

  • Staff Report. The main weaknesses identified in the Country Report No. 05/59 included: (i) political instability that translated into economic policy instability; (ii) governance problems that led to corruption and kept growth low; (iii) a weak financial system beset by a series of crises; (iv) inefficient public enterprises in key sectors that depressed efficiency and economic performance; (v) low and falling productivity which resulted in low growth; (vi) high poverty and unemployment with limited social protection.

  • Selected Issues Paper. This document analyzed similar issues, including corruption and low growth, financial vulnerabilities, fiscal rigidities, and macroeconomic instability. The selected issues papers was published by the Fund under the title: “Paraguay: Corruption, Reform, and the Financial System” (2005).

8. The 2006–08 program has been tailored to address these economic weaknesses. Following the expiration of the previous SBA in November 2005, the staff and the authorities engaged in a close dialogue and designed a policy matrix focused on tackling the key issues identified in the Article IV Consultation. This dialogue recognized five main weaknesses exposed during the 2002 crisis, and led to the five policy pillars under the program. This work benefited from the expert advice of FAD, MFD, the World Bank and the IDB (MEFP ¶10).3

  • Strong macroeconomic program. While macroeconomic management has improved, it needs to be entrenched to avoid previous problems. Over the past decade, weak policy responses have exacerbated the impact of external shocks on output, employment and inflation, and have undermined confidence, leading to a number of financial crises.

  • Public sector reform. This reform is designed to address remaining fiscal vulnerabilities and rigidities, including: (i) tackle deficiencies in budgetary planning and expenditure control; (ii) institutionalize improvements in tax collections; and (iii) reduce rigidities in current expenditures, which causes the authorities to cut capital expenditures as the main tool of fiscal adjustment, and thus undermines the credibility and consistency of the public investment program.

  • Financial sector reform. This is a key reform area, since weaknesses in the banking system and supervision have led to several banking crises over the last decade, and undermined public confidence in the system. Consequently, financial sector assets and liabilities are short-term, constraining financial intermediation and long-term investment (Box 3).

  • Pro-growth agenda. Paraguay has one of the worst long-term growth records in Latin America. Per capita GDP fell by 7 percent in real terms over the last 25 years. Shocks and structural impediments hampered growth and increased unemployment. There is a need to embrace reform in many diverse areas (including the judicial system, agriculture, public enterprises, labor markets, and the investment climate among others) to reinvigorate growth (Box 1).

  • An effective social safety net. This program seeks to alleviate the widespread poverty, and mitigate the social costs of reform. Lack of access to water and sanitary resources characterize the dire living conditions of the poor, particularly in rural areas. About 1/3 of the population lives with less than US$2 a day, and about 1/6 of the population lives under conditions of extreme poverty.


Paraguay: Inflation and Real GDP Growth


Citation: IMF Staff Country Reports 2006, 302; 10.5089/9781451832518.002.A001


Paraguay: Budgets and Outcomes


Citation: IMF Staff Country Reports 2006, 302; 10.5089/9781451832518.002.A001


Paraguay: Deposit to GDP Ratio


Citation: IMF Staff Country Reports 2006, 302; 10.5089/9781451832518.002.A001


Paraguay: Real GDP Per Capita

(1995 - 2005)

Citation: IMF Staff Country Reports 2006, 302; 10.5089/9781451832518.002.A001


Paraguay: Poverty Indicators 2004

Citation: IMF Staff Country Reports 2006, 302; 10.5089/9781451832518.002.A001

9. The technical assistance program has been strengthened and refocused to address reform areas identified in the program. To help address weaknesses in the implementation of a strong economic program, the authorities have requested additional technical assistance from the Fund (on fiscal and financial issues), the World Bank and the Inter-American Development Bank (IDB) (on growth and poverty issues). Efforts have been made to provide technical assistance prior to the adoption of key structural measures (Appendix IV).

Paraguay: Weaknesses, Objectives and Policies Under the Arrangement

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Present at the time of the 2002 crisis.

A. Macroeconomic Program

Macroeconomic Framework

10. The program objective over the medium-term is to lay the foundation to double potential real GDP growth to 4-5 percent, reduce inflation and poverty, while maintaining macroeconomic stability. 4 For 2006, the authorities expect real GDP to grow 3½ percent, (gradually increasing to 4½ percent by 2008), and inflation to fall to 7 percent (gradually declining to the low single digits by 2008).5 While this is an ambitious inflation target, it is feasible if the temporary price increases in fruits and vegetables of the first quarter are reversed in the following months (MEFP ¶11).

Paraguay: Macroeconomic Framework

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Sources: Paraguayan authorities; and Fund staff estimates;

(-) = real depreciation;

Central Government.

Fiscal Policy

11. Fiscal policy aims at reducing the public debt to GDP ratio to 30 percent by the end of the decade, supported by maintaining an overall balance of zero in the public finances. Sustained fiscal reform efforts will be needed to lock in recent improvements in tax policy and strengthen expenditure management. These efforts would ensure that the Treasury would generate an overall balance of zero over the medium term. A realistic price policy for public enterprises, together with efficiency gains, should permit them to generate moderate surpluses. These surpluses would cover expected losses of the Central Bank, yielding a balanced position for the consolidated public sector. This prudent fiscal stance, in concert with faster economic growth, would put the public debt to GDP ratio on a rapidly declining trend.6

Paraguay: Fiscal Program 1/

(In percent of GDP)

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Sources: Paraguayan authorities; and Fund staff estimates;

Central Government.

12. Strict application of a financial plan to keep expenditures below those approved by Congress will be critical to achieve the program’s ambitious zero-deficit target for 2006. In December, Congress approved a budget, which is at odds with the zero-deficit objective of the program. During the budget debate, Congress expanded expenditures above the executive’s budget proposal (of which, about one-half was on wages). To ensure the achievement of the program’s fiscal objective, the authorities are committed to keep tight control on current expenditure, while protecting social spending and supporting capital spending. They plan to cut budget expenditures by about 1¾ percent of GDP through the strict implementation of a financial plan. Expenditure measures include: (i) reducing allowances for senior public servants; (ii) lowering over-time outlays; (iii) eliminating hiring of temporary workers; (iv) freezing positions in the first four months; (v) phasing salary increases during the year; and (vi) restricting the purchase of goods and services. Accordingly, outlays in 2006 would be in line with recent expenditure levels (MEFP ¶12).7

13. Additional revenue measures would be considered if necessary. Over the past two years, tax collections have increased by over 1½ percent of GDP. Additional tax collections gains are expected over the medium-term through the full implementation of the 2004 tax reform (fiscal adjustment law) and sustained strengthening of the tax administration office, which should continue to increase revenue collection from Paraguay’s large informal sector.8 However, the tax revenue GDP ratio is envisaged to fall temporarily in 2006 due a reduction in the advances of the corporate income tax rate from 30 percent to 10 percent, as part of the tax reform. As other elements of the tax reform will become effective in 2007/08, tax revenue ratios are expected to recover to almost 12 percent of GDP by the end of the program. Non-tax revenues will pick up in 2006, as the government will obtain higher royalties from the binational hydroelectric entities.

14. To support the growth objectives of the program, a higher level of public investment is planned. The fiscal program envisages a level of capital expenditure of about 4¼ percent of GDP (mostly to improve basic infrastructure), which is realistic and can be easily financed. The authorities would like to implement a higher level of capital expenditures. The staff agreed with the authorities that fiscal targets could be relaxed in the context of the program reviews, if additional capital spending on high quality projects is identified, provided it is accompanied with adequate financing and does not jeopardize macroeconomic stability. The staff does not expect this additional public investment to exceed ½ percent of GDP in 2006. Staff will assess this spending in close consultation with the World Bank and the IDB. (MEFP ¶13).

15. Multilateral institutions will provide over three-quarters of the gross financing requirements for 2006. The IDB and the World Bank will be providing program financing in 2006 (on top of normal project financing). The World Bank is expected to disburse US$15 million, which is the first operation of the financial sector reform loan and the IDB is expected to disburse US$30 million in budgetary support.9 This additional lending will be sufficient to reduce the net external financing need of the Treasury to almost zero in 2006. To cover scheduled amortizations of domestic bonds for G200 billion (almost ½ percent of GDP), the program allows the Treasury to use its deposits at the Central Bank. Staff encouraged the authorities to reopen the domestic securities market (MEFP ¶15).

16. The surpluses of the rest of the public sector are expected to offset the losses of the Central Bank in 2006. As in 2005, the program will envisage a zero deficit target for the consolidated public sector in 2006. Given Central Bank projected losses of ¾ percent of GDP, it will be important that the rest of the non-financial public sector continue generating surpluses similar to those observed in the past. This will depend crucially on a realistic pricing policy for public enterprises and strict control over their costs (MEFP ¶14).10

Monetary Policy

17. Monetary policy aims at reducing inflation to low single digits over the medium-term. The authorities suggested currency issue as their monetary anchor for 2006, and committed to the continuation of a flexible exchange rate policy, with intervention guided by the NIR target. The staff recommended initiating the preparatory work to introduce inflation targeting (including strengthening the statistical infrastructure as well as developing models to track the transmission mechanism from interest rates to inflation).

18. The monetary program for 2006 envisages a substantial tightening to achieve the program objective of bringing inflation down to 7 percent. To that end, the Central Bank plans a sharp break with the previous accommodative policy of late 2005 and aims at reducing the growth of currency issue from 17½ percent in 2005 to 8½ percent in 2006 (significantly lower than nominal GDP growth). To achieve the inflation objectives, as noted above, the Central Bank increased short-term interest rates by 375 basis points to 10½ percent in two stages, in February and April 2006, and is ready to raise interest rates further if inflationary pressures remain. The staff supports this policy approach (MEFP ¶16).

Paraguay: Monetary Program 1/

(In percent of previous period currency)

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Sources: Paraguayan authorities; and Fund staff estimates;

Central Bank accounts

19. The monetary program limits central bank credit expansion while allowing for some reserve accumulation in 2006. The net domestic assets of the Central Bank (NDA) will expand by

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123 trillion in 2006 (4¼ percent of currency) as the public sector is expected to use its deposits at the Central Bank (about 6½ percent of currency), the Central Bank will generate losses (over 10 percent of currency), and commercial banks are expected to reduce their free reserves (about 3½ percent of currency). In order to curb credit expansion, the Central Bank intends to conduct a large amount of open market operations with banks (about 15½ percent of currency). The net international reserves of the Central Bank (NIR) will be strengthened by US$20 million (4¼ percent of currency) and could lead to some Central Bank intervention in the foreign exchange market (MEFP ¶17).

20. The large Central Bank losses put at risk the effectiveness of monetary policy. Over the last 10 years, a series of financial crises and rescue operations have weakened considerably the balance sheet of the Central Bank. In addition, the large number of non-performing assets (including loans to the government) and the need to place its own debt instruments to conduct open market operations have rendered central bank capital negative. Revenue enhancing and expenditure moderation measures adopted under the new Central Bank management reduced the losses of the Central Bank by 2/3 in 2005. However, increasing sterilization efforts and higher interest rates will cause the losses of the Central Bank to rebound to ¾ of GDP in 2006. The authorities agreed that the weak financial situation of the Central Bank distracts them from focusing on monetary policy issues and warrants a strengthening of its balance sheet. They have committed to design a strategy to strengthen the financial position of the bank by end2006 (a structural benchmark under the program).

Paraguay: Central Bank Losses

(In percent of GDP)

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Sources: Paraguayan authorities; and Fund staff estimates.

Mostly interest receipts from international reserves.

External Issues

21. While the balance of payments is expected to continue under control over the medium-term, large external vulnerabilities remain. Following the oil-related deterioration in 2005, the current account is projected to record deficits of about 2 percent of GDP over the next few years. These deficits are expected to be more than covered by private capital inflows (mostly in the form of FDI); the authorities intend to keep net external borrowing to a minimum. Net international reserves are expected to grow to maintain an import coverage of about 3½ months. No financing gaps are envisaged. While there is no imminent balance of payments need (hence the treatment of the arrangement as precautionary), the economy remains vulnerable to large shocks, not least those generated by the much larger neighboring economies, as well as to commodity price shocks and the frequent droughts that impair exports.11

Paraguay: Balance of Payments

(In percent of GDP)

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Sources: Paraguayan authorities; and Fund staff estimates;

Includes errors and omissions

22. The authorities will continue with their efforts to normalize relations with external creditors. The fiscal and external problems of 2002/03 lead to the accumulation of large external arrears. These have been addressed, by and large, in the context of the previous SBA. However, there are some claims, which are either in the process of being normalized or in dispute. During 2006, PETROPAR will clear its suppliers’ credits with maturities of over 90 days. The staff encouraged the authorities to find an early resolution to disputed claims. However, the authorities are not willing to pay or recognize the obligations to a syndicate of banks (for US$85 million or 1¼ percent of GDP), as ruled by the Swiss supreme court in May 2005, because they consider these claims the result of private fraud and not public borrowing. The Executive, Legislative and Judicial powers formally rejected the ruling of the Swiss court (Presidential decree No. 6295 of August 2005). The government is exploring the possibility of elevating the case to the International Court of Justice in The Hague. For the purpose of the program, these obligations are regarded as disputed claims and not arrears.12

B. Public Sector Reform

23. The public sector reform will address institutional weaknesses to improve the composition and efficiency of public expenditure and cement improvements in revenue collections. A primary objective of the reform is to improve expenditure management controls to devote more resources for essential social and investment spending. Furthermore, fiscal adjustment to date has relied heavily on increases in tax collections, which to be sustained require strengthening the legal and institutional framework of the revenue collecting agencies. The broad reform agenda to be implemented during the following three years includes measures to: (i) strengthen the budgetary framework to convert it in an effective financial management tool; (ii) reinforce the tax and customs administrations to consolidate recent revenue collections; (iii) enhance expenditure control mechanisms to prevent excesses and increase efficiency; (iv) rationalize the civil service to improve proficiency; and (v) design a comprehensive reform for public and private pensions and health insurance to secure financial sustainability.

24. For 2006, the authorities will focus on adopting the first steps toward achieving lasting improvements in revenue and expenditure management. There is an immediate need to initiate these reforms to entrench fiscal discipline, and the authorities would like to focus on these areas in the first year of the program. Conditionality on public sector reform for 2007/08 will be articulated at the time of the second review under the arrangement. FAD and LEG are providing technical assistance in these areas.

  • Tax Administration. In view of the importance of securing recent improvements in tax collections for the maintenance of macroeconomic stability, the preparation of a tax procedures code is a structural performance criterion for December 2006. The main purpose of the code will be to provide better legal and regulatory capacity to the revenue collecting agencies to enhance enforcement (MEFP ¶19).

  • Expenditure Control. Given recent problems with the inflated budget approved by Congress, and the importance of having a realistic budget for the conduct of a strong fiscal policy in the future, the design of an action plan to strengthen budget preparation, develop expenditure controls at the commitment level and the streamlining of the treasury account system—with a view for an early adoption—is a structural benchmark for June 2006. The plan is expected to define a broad-based path for public financial management (PFM) reform, including the preparation of a long-term macro-fiscal framework for setting expenditure limits and medium-term fiscal goals; the preparation of a medium-term expenditure framework to guarantee the sustainability of government programs; the preparation of a Treasury law significantly reducing the number of accounts, and regulating treasury operations; the recording of expenditure commitments for all transactions. The plan will build on the work of the recent fiscal ROSC and PFM technical assistance missions (MEFP¶ 20).

Paraguay: Structural Reform Agenda

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Sources: Paraguayan authorities and Fund staff; PC = performance criterion.

C. Financial Sector Reform

25. This reform seeks to reduce financial vulnerabilities, foster financial intermediation, bring the regulatory framework closer to international standards, and bolster monetary policy by improving the operational capacity of the central bank. The financial system has been subject to five financial crises over the last decade. There is a need to reduce its vulnerability and improve its functioning. The reform agenda in this area draws heavily on the diagnosis of the FSAP exercise conducted in 2005. The program will focus on the following areas during the next three years: (i) strengthen the financial position of the central bank to ensure its solvency and integrity; (ii) improve the framework for monetary operations by strengthening lender-of-last resort facilities, enhancing the reserve requirement system, and strengthening the regulatory framework for repurchase agreements; (iii) upgrade banking supervision by granting more autonomy and regulatory powers to the superintendence of banks and improving its human, material and technological resources; (iv) strengthen prudential regulations to enhance governance, sharpen the identification of corporate risk and enhance sanctioning capacities; (v) restructure public banks (especially the National Development Bank, BNF) to eliminate systemic risks; (vi) foster capital markets by developing the legal basis for a securities depositary and revamp electronic systems and procedures; and (vii) improve the payments system by establishing real-time gross settlement and an automatic clearing house.

26. For 2006, the program includes some of the most critical actions recommended by the recent FSAP missions. During the first year of the program, the authorities would like to focus on the strengthening of BNF to prevent a systemic risk; the financial strengthening of the Central Bank to improve its effectiveness; and improving the banking law and regulations to reduce vulnerabilities in the financial system. Conditionality on financial sector reform for 2007/08 will be articulated at the time of the second review under the arrangement. MFD is providing technical assistance in these areas.

  • Public Banks. An important objective of this reform is to strengthen BNF’s financial position to meet international standards. Over the last two years, the BNF has improved its financial situation markedly. It is expected to continue improving its position by accumulating undistributed profits and engaging in a more aggressive asset recovery policy. Achieving an audited capital adequacy ratio (CAR) of 5 percent for end-June 2006 is a structural benchmark for September 2006. Similarly, an audited CAR of 10 percent for December 2006 is a performance criterion for March 2007. Any shortfall on these CAR targets will be met by the government (MEFP ¶21).13 The authorities have also committed to maintain subsequently the capital of BNF at a level sufficient to meet both the CAR of 10 percent as well as any other prudential requirements of the central bank. Furthermore, they will continue the restructuring of BNF in 200708 aiming at reducing its operating cost, improving its risk management, lending practices and internal controls. BNF will continue to be an anchor to the payment system in the country (given its large network of branches) but will limit the scope of its credit operations. The authorities believe that the bulk of the long-term development financing in the country will be provided by the newly created Financial Development Agency (AFD) (MEFP ¶26).

  • Central Bank. Despite the Central Bank’s determination to implement a tight monetary policy, the growing losses of the Central Bank have the potential of weakening their resolve. Therefore, a strengthening of the Central Bank’s financial position is a priority. Preparation of a joint strategy by the Ministry of Finance and the Central Bank for the financial strengthening of the Central Bank is a structural benchmark for December 2006. Submission of a law to Congress adopting all legal and budgetary elements necessary to implement the strategy is also a structural benchmark for April 2007. The authorities would have preferred to complete both measures at the same time, but the legal framework prevents them from doing so. According to the budgetary law, the government has to submit the draft budget to Congress by end-August 2006 (before the strategy is ready). Furthermore, the earliest date to submit to Congress the budget implications of the strategy is April 2007, which is the first date the government can introduce a supplementary appropriations budget (MEFP ¶23).

  • Commercial Banks. Given the importance of strengthening the banking system and preventing further episodes of financial instability, the implementation of the financial sector action plan to achieve the broad objectives of the general banking bill currently in Congress is a structural benchmark for September 2006.14 The plan envisages actions to strengthen monetary operations, redefining minimum capital requirements, setting out fit and proper tests for issuing banking licenses, sharpening the identification of corporate risk and enhancing sanction capabilities. The Central Bank Board can adopt some of these actions but some others would require amendments to the current banking law. The authorities expect to submit to Congress any legislation needed for this purpose by September 2006 (MEFP¶ 22).

D. Pro-Growth Agenda

27. This reform pillar includes measures aimed at eliminating impediments to growth as well as restructuring and modernizing the economy. This is the most diverse pillar as it includes broad-based reforms in a number of areas. The reform agenda—to be implemented over the next three years—has been discussed with the World Bank and the IDB, and focuses on: (i) restructure public enterprises to increase coverage and efficiency in the provision of their services and raise investment; (ii) improve the investment climate to boost investment and productivity; (iii) reform the hydrocarbon sector to modernize and regulate it for a more efficient and less costly delivery of products; (iv) strengthen performance of the agricultural sector by promoting sustainable productivity among farmer and increase small farmers access to markets; (v) enhance the efficiency of civil court procedures by increasing judicial security and reducing the time it takes to make rulings; and (vi) introduce flexibility in the labor market to reduce the cost of formal employment and avoid firings before certain thresholds trigger significant increases in benefits.

28. For 2006, the authorities will concentrate on steps toward enhancing efficiency in public enterprises and improving the investment climate. The authorities have decided to take these steps in the first year of the program to enhance productivity and resource allocation in the economy, and promote private investment and growth. Conditionality on the pro-growth agenda for 2007/08 will be articulated at the time of the second review under the arrangement. The World Bank and the IDB are assisting the authorities in these efforts.

  • Public Enterprises. Following comprehensive audits of all public enterprises in 2005, the authorities intend to enter into result-oriented management contracts (including targets for specific performance indicators), with ANDE, COPACO, ESSAP, INC and PETROPAR. The objective of these contracts is to improve the managerial and operational efficiency of these companies. Implementation of these contracts is a structural benchmark for December 2006 (MEFP ¶24).

  • Investment Climate. The authorities believe that a process of rapid economic growth will require high levels of private investment. The design of an action plan to improve the investment climate is a structural benchmark for September 2006. The plan is expected to include steps to reduce red tape by simplifying procedures for company registration and licensing regulations, supporting exporter and foreign investors through one-stop shops; improving dispute resolution procedures and enforcement of judicial decisions; and strengthening public institutions certifying product quality (MEFP ¶25).

E. Social Safety Net

29. This reform area reflects the authorities’ commitment to protect the most vulnerable segments of society and to alleviate poverty and inequality. The program will allow for an increase in social spending over the medium term, which will be accommodated by lower expenditure elsewhere to remain within the overall expenditure limits. The main objectives of this pillar during the following three years are: (i) strengthen social assistance programs with a view to reaching some of the Millennium Development Goals ahead of schedule; (ii) reorient and improve efficiency of social expenditure especially to reach the rural poor by focusing on education and health; and (iii) improve income inequality though an explicit transfer system.

30. For 2006, the authorities will focus on certain elements of its subsidy/transfer policies. The program envisages an increase in social spending in 2006. The social safety net is expected to have a direct and positive impact on the most vulnerable groups in society. Additional measures on the social safety net for 2007/08 will be articulated at the time of the second review under the program. The World Bank and the IDB are assisting the authorities in these efforts.

  • Cash Transfers. The authorities will create a centralized system of targeted cash transfers to benefit 7,000 families living in extreme poverty conditioned by contracts with beneficiaries. The authorities believe this is the most direct manner to alleviate poverty. The conditions will include, inter alia, children’s school attendance and visits to health centers. Implementation of this system is a structural benchmark for December 2006. The authorities plan to broaden the coverage of the targeted cash transfer system in 200708 (MEFP ¶27).

  • Public Transportation Subsidies. The authorities would like to improve the efficiency of their fuel subsidy program. To that end, they have sent to Congress legislation to provide limited subsidies to public transportation to protect the users from recent increases in international oil prices and to facilitate a gradual elimination of indiscriminate diesel subsidies.

IV. Program Risks

A. Program Vulnerabilities

31. While significant progress has been made in improving medium-term prospects and promoting economic sustainability, the country remains vulnerable to exogenous shocks and domestic setbacks. These include external shocks and the typical uncertainties of a small open economy with a non-diversified agricultural export base (including weather-related risks).

  • External risks. These shocks could include a sharp and prolonged rise in oil prices, a large drop in external demand and macroeconomic imbalances from the much larger neighboring countries. There are significant regional risks as policies in the bigger neighbors are not coordinated with Paraguay.

  • Domestic risks. Financial dollarization carries liquidity and solvency risks for the banking system. Delays in implementing structural reforms would lead to lower growth, threaten fiscal sustainability and undermine the de-dollarization process, thus increasing the economy’s vulnerability to exogenous shocks. As the municipal elections approach (scheduled for November 2006) and the environment becomes more politicized, an important risk to the program will be the potential political challenges to the macroeconomic policies and the structural reform agenda. Delays in the approval of key legislation by Congress remain a potential risk. An additional risk to the program could be a deterioration of the political and social climate, which may complicate economic management.

B. Medium-Term Scenario

32. While the medium-term outlook has improved significantly, it underscores the importance of cementing stability and deepening structural reform to foster sustained growth and reduce poverty. Prospects depend crucially on continued prudent macroeconomic policies and further structural reforms to bolster medium-term growth. The medium-term economic outlook under a scenario of a lasting commitment to macroeconomic stability and broad-based reforms is quite positive and breaks with the pattern of the past. The scenario assumes the continuation of measures to consolidate macroeconomic stability; lock in improvements in tax collection and administration; mobilize resources to reduce poverty; and improve the environment for private investment. It also assumes favorable external demand conditions, particularly from MERCOSUR partners. Accordingly, real GDP growth is projected to rise to 5 percent by 2010, price and financial stability will be maintained, and the public debt-to-GDP ratio will decline to below 30 percent by the end of the decade.

33. A passive scenario of no reform perpetuates the circle of low growth and high poverty of the last 25 years. While macroeconomic stability could still be achieved in this alternative scenario, the economy will remain highly vulnerable to shocks and will continue in a low growth trap. This scenario assumes prudent macroeconomic policies, but no additional structural reforms. Under this scenario, growth projections would be around 2 percent (similar to the past), inflation would be higher, the external current account would be in surplus as investment would be depressed, and a weaker fiscal policy would drive the debt to GDP ratio to over 30 percent by the end of the decade.

C. Capacity to Repay the Fund

34. Paraguay’s capacity to repay the Fund is quite strong. Even if the proposed access under this precautionary arrangement is fully used, the capacity of Paraguay to repay the Fund remains quite strong. The current Fund credit outstanding is zero and the proposed strong program will continue entrenching debt sustainability. The success of the previous arrangement improved significantly the payment capacity of the country. Therefore, notwithstanding the risks to program implementation identified in the preceding section, the staff believes that the risk of nonpayment to the Fund—in the event a purchase is made—is negligible. This program does not pose serious risks to the Fund.

D. Debt Sustainability Analysis

35. Strong macroeconomic fundamentals anchor the sustainability of public debt. A combination of external shocks and weak policy responses placed Paraguay on an unsustainable debt path until 2002. The public debt to GDP ratio rose from less than 20 percent in 1997 to over 70 percent in 2002. One of the main achievements of the previous SBA was to place the public debt on a sustainable path. At end2005, the debt to GDP ratio fell to below 40 percent. Macroeconomic fundamentals have improved significantly over the last two years. With the prospect of higher growth (4½ percent) and low real interest rates (3 percent), the expected primary surplus (1¾ percent of GDP) would be more than enough to ensure a declining debt to GDP ratio.15 Paraguay’s public debt projections appear sustainable and relatively resilient to temporary negative shocks. The debt sustainability analysis (DSA) shows that less favorable assumptions on the underlying macroeconomic variables, such as interest rates and real GDP growth, would lead to a more moderate declining trend of debt-to-GDP ratios than in the baseline scenario. It also indicates that the economy would be particularly vulnerable to an exchange rate shock.

36. The moderate current account deficits over the medium term ensure external debt sustainability. With a benign external outlook and a relatively comfortable external position, it is not surprising that the external debt situation is manageable. The bulk of the external debt (about 95 percent) is public debt, and the public finances are solvent. Over the medium-term, the private sector will increase its borrowing as the public sector debt declines. The external debt to GDP ratio is expected to decline from about 40 percent in 2005 to below 30 percent by the end of the decade. As with the public debt exercise, the outlook is resilient to less favorable assumptions on the underlying macroeconomic variables. It also indicates that the economy would be vulnerable to a prolonged deterioration of the current account balance.

Paraguay: Sustainable Primary Fiscal Balance 1/

(As a percent of GDP)

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To maintain constant a debt to GDP ratio of 40 percent.

V. Program Modalities

37. Length. The authorities and the staff believe that an arrangement covering the period left in the Presidential term of Mr. Durate-Frutos, which is 27months (May 2006–August 2008), will help insulate Paraguay from the normal pre-electoral expenditure pressures and could increase the chances for reform, growth and poverty alleviation.16

38. Access and Phasing. The staff proposes access of SDR 65 million or 65 percent of quota (29 percent on an annual basis). This compares with an access of 50 percent of quota (40 percent on an annual basis) under the previous arrangement. Since there is no Fund exposure to Paraguay now, the first purchase would be the first credit tranche (i.e., 25 percent of quota). The following five purchases would be for 6 percent of quota until reaching 50 percent of quota (achieved under the previous arrangement) within 15 months from approval, thereby providing a comfortable line of defense against unexpected shocks. Subsequently, the remaining four purchases would be for 2½ percent of quota.

39. Reviews. The authorities requested quarterly reviews in the first year of the program, switching to semi-annual reviews subsequently (while retaining quarterly quantitative performance criteria and quarterly scheduled purchases).

40. Conditionality. The authorities and the staff believe that the structure of quantitative performance criteria under the previous SBA was adequate and an analogous structure is proposed for this arrangement.17 This report includes conditionality mostly for 2006. Conditionality for 2007/08 will be proposed to the Board at the time of the second review under the arrangement (scheduled for December 2006).

41. Monitoring. The Program Monitoring Group was created and successfully used in the previous program. The staff reached understandings with the authorities that a similar group, meeting periodically, will continue to monitor the program.18

42. Safeguards Assessment. Under the Fund’s safeguards policy the Central Bank is subject to a safeguards assessment. An assessment was completed in January 2003 under the previous arrangement. A FIN mission visited Asuncion in March and the ongoing assessment will be finalized before the first review of the program in September 2006.

VI. Staff Appraisal

43. Performance under the previous program supported by an SBA was broadly satisfactory, although the revival of inflation was disappointing. The authorities’ previous program was designed at a difficult time with the aim of stabilizing the fiscal situation and the banking system and initiating needed structural reforms. On the macroeconomic side, the measures were timely and the results immediate. Fiscal consolidation efforts were successful and the Treasury registered a surplus in 2004 and 2005. The situation in the banking system improved considerably with confidence restored, better profitability and much lower non-performing loan indices. On the structural side, there were some delays (partly due to Congress), but five major pieces of economic legislation were approved (fiscal adjustment law, customs code, banking resolution law, public pension fund law, and second-tier public banking law). These efforts paid off and the economy actually grew more in the years covered by the previous SBA (11½ percent growth in the period 200305) than in the previous ten years (10½ percent growth in the period 19932002).

44. The authorities’ new program is comprehensive and calibrated to the challenges still facing Paraguay. It is based on a continuation of prudent macroeconomic policies that are expected to entrench economic and financial stability, and an ambitious structural reform agenda that should help reverse the vicious cycle of low growth and declining per capita income, which prevailed in Paraguay over the last quarter of a century.

45. The program is ambitious and has more than a reasonable chance of success due to the high degree of ownership and commitment. As the authorities do not have much experience in implementing some of the proposed reforms, technical assistance from the Fund and experts from other international financial institutions will be needed to support these reforms. Despite these constraints, there is a strong ownership and consensus within the whole cabinet of ministers in advancing the reform process. The economic team was successful in committing different ministers to lead specific reforms of the structural agenda. Therefore, the staff reached understanding on the program with broad sectors within the government.

46. The staff welcomes the authorities’ decision to implement a strict financial plan to achieve the program objective of a zero fiscal deficit in 2006. As the approved budget—adjusted for realistic revenues—entails a deficit of almost 2 percent of GDP, against a target of a balanced budget in the program, fiscal developments will need to be closely monitored to contain expenditure pressures or if necessary take immediate corrective actions. An additional complication is that for the first time the financial plan will apply to wage items. The program allows for some flexibility on additional capital expenditure but has no margin for extra current expenditures.

47. The monetary program needs to be implemented carefully to succeed in addressing inflationary pressures. The authorities have adopted a very tight monetary program, with the growth in currency issue expected to decelerate sharply to 8½ percent in 2006, a much lower rate than nominal GDP growth. To achieve this objective, the central bank has raised its short-term interest rates by nearly 400 basis points in recent months. However, further actions may be needed to bring inflation down to the target rate. The authorities are encouraged to implement rapidly their strategy for strengthening the financial position of the Central Bank, as this would enhance the ability of the Central Bank to focus its attention on monetary policy.

48. The structural reform agenda is quite ambitious. In order to safeguard the timely implementation of the structural agenda, efforts were made to rely less than in the past on reforms that require congressional approval (although seeking approval of laws is unavoidable in some areas). As there are many reforms in different areas, the implementation will require a high degree of coordination among their different policy makers involved. Frequent meetings of the program monitoring group will help identify problems at an early stage, design corrective measures and ensure adequate performance.

49. As with the previous program, there are a number of risks. Important vulnerabilities to the program come not only from financial vulnerabilities, but also from political and social uncertainties. Municipal elections are scheduled for November 2006 and pressures to stop reforms and increase expenditures could arise. The staff welcomes the introduction of legislation to establish a subsidy on public transportation to protect vulnerable groups and address social concerns, while facilitating the adoption of a diesel pricing policy that would eliminate indiscriminate subsidies. The success of the program will thus depend not only on the authorities’ determination to strongly implement the reforms contained in the program, but also on their ability to communicate policies appropriately and persuade stake holders about the merits of the policies adopted.

50. The staff supports the authorities request for a new SBA. The staff believes the program is appropriate in addressing Paraguay’s many challenges. The authorities’ program strikes a good balance between emphasis on macroeconomic and structural issues, building on initial efforts to address long-standing problems. Achieving its objectives will require sustained efforts and the full support of the international community. The accomplishments under the previous arrangement and the high level of ownership on the policies augur well for the success of this program.

Paraguay: Why is Growth So Low?

Paraguay’s real per capita income has performed poorly relative to the region over the last quarter of a century. Following a period of rapid economic growth in the 1970s—associated with the construction of the Itaipú and Yacyretá hydroelectric complexes—Paraguay entered a period of relative economic stagnation since the 1980s. Over the last 25 years, real per capita income fell by 8½ percent. During the 1990s, Paraguay displayed the worst performance in the region, with an average real per capita income growth rate of -0.9 percent a year. With population growth projected at about 2 percent a year, it would take five years of economic growth at a consistent rate of 5 percent just to recover the losses in per-capita income since 1981.

A growth accounting exercise suggests that the decline in per capita income was primarily driven by a significant fall in total factor productivity (TFP). A standard Solow-type growth exercise—using production factor shares in income based on the newly released 1994-base national accounts—revealed that while labor and capital had positive and significant contributions to output growth (like in most countries), the TFP (the Solow residual) declined, on average, by 1¼ percent annually during 1980-2004. Efficiency losses in the utilization of factors of production appear to have dragged down real GDP per capita growth substantially.1

Structural reforms are needed to increase growth in per capita income and reverse the trend of declining productivity. The decline in TFP reveals problems of efficiency and productivity rather than scarcity of input factors. The dismal growth experience over the last two decades reflects severe structural deficiencies that have adversely affected the private sector, such as poor regulation, institutional weaknesses, lack of infrastructure, and shortcomings in education and health care. While macroeconomic stability is crucial for anchoring private sector expectations, overcoming structural bottlenecks by means of an ambitious and focused reform agenda are necessary to reverse the trend and shift Paraguay to a higher growth path.

In the medium term, Paraguay’s growth rate could more than double under a decisive and consistent structural reform strategy. A comparison with Chile, Latin America’s best performer in this area, is particularly instructive. Combining Chile’s efficiency gains in TFP with Paraguay’s factor endowment would have yielded a growth rate of nearly 6 percent a year in the past 25 years. This implies that the economy could have more than doubled its current size if proper policies would have been adopted.

Real Per Capita GDP Growth

(Average annual growth rate, in percent)

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Source: IFS

Paraguay: Growth Accounting (1980-2004)

(Average growth rate, in percent)

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Source: IMF staff estimates.

TFP Growth, Real GDP Per Capita and Investment Share in GDP

(1980-2004, ten-year rolling average)

Citation: IMF Staff Country Reports 2006, 302; 10.5089/9781451832518.002.A001


In an extensive cross-country regional analysis, Loayza et al. (2004) show that TFP performance in Paraguay is even worse when adjusting for improvements in human capital. See Loayza, Fajnzylber, Calderón (2004), Economic Growth in Latin America and the Caribbean. Stylized Facts, Explanations, and Forecasts; Central Bank of Chile Working Paper No. 265.

Paraguay: Inflation Dynamics

After an outstanding inflation performance in 2004, inflationary pressures emerged during 2005. A combination of improved macroeconomic management and a benign external environment led to the lowest inflation rate in Paraguay in over 30 years during 2004. However, this pattern started to revert in late 2004 and through the first half of 2005. Agriculture was hit by a drought, international oil prices continued to rise, and the Brazilian real appreciated considerably against the U.S. dollar (exacerbating the real depreciation of the guaraní).1 The intensification of underlying inflationary pressures was partly masked in the CPI by the erratic behavior of fruits and vegetables prices. Core inflation (which excludes fruits and vegetables) displays a more discernible pattern of continued inflationary pressures during 2005.

However, an analysis of the underlying sources of inflation reveals a significant shift away from external factors toward domestic factors during 2005. To determine these sources, BCP staff decomposed the consumer basket in categories related to trade with Brazil, oil-sensitive goods, and domestic items. During 2004 (phase I), overall inflation was very low (about 2 percent) and primarily driven by oil prices. In the first half of 2005 (phase II), external pressures intensified and brought inflation up to an annualized rate of 14½ percent. However, since the second half of 2005 (phase III), external factors subsided, and inflation appears to be driven increasingly by domestic factors, including non-core inflation. During the first half of 2005, monetary policy was eased as the Central Bank (BCP) was overwhelmed with inflows of foreign exchange, and was unable to fully sterilize the monetary impact of international reserves accumulation. Annual currency growth accelerated to 17½ percent at end-December 2005 while money demand growth began to ease up.

To combat inflationary pressures, the BCP recently intensified its efforts of monetary tightening. During the first four months of 2006, the BCP’s Executive Committee for Monetary Operations (CEOMA) increased its key interest rates for Central Bank securities (LRM) by some 400 basis points to 10½ percent (35 days maturity). This has generated a better control of monetary aggregates and currency growth fell to about 15 percent by end-March 2006. The authorities are committed to tighten further to maintain a firm control on monetary aggregates.


Paraguay: Inflation Measures


Citation: IMF Staff Country Reports 2006, 302; 10.5089/9781451832518.002.A001


Paraguay: Decomposition of Inflationary Pressures

Citation: IMF Staff Country Reports 2006, 302; 10.5089/9781451832518.002.A001


Paraguay: Emergence of Inflationary Pressures

Citation: IMF Staff Country Reports 2006, 302; 10.5089/9781451832518.002.A001


Since May 2004, Brazil’s real appreciated by 30 percent against the U.S. dollar.

Paraguay: Financial Sector Assessment

The financial system in Paraguay is recovering after several years of financial crises that followed a rapid financial liberalization process in the early 1990s. Following a run on deposits and an attack on the currency in 2002/03, macroeconomic policy has succeeded in containing inflation while restoring economic growth, which has prevented further financial instability. However, the slow progress in overcoming weaknesses and vulnerabilities is partly due to the piecemeal character of measures adopted by the government. A more comprehensive effort towards financial reform is needed.

An upgrade of the banking legal framework and prudential regulations would spur oversight. Further initiatives should aim at strengthening governance and risk-oriented supervision; improving supervisory capacities and accountability, including legal protection to central bank (BCP) and superintendency of banks (SB) employees; granting more autonomy and sanctioning/regulatory powers to the SB; and upgrading the resources of the SB. The FSAP also recommends restructuring the National Development Bank (BNF) to minimize fiscal costs, eradicate moral hazard and assure its good future performance.

The framework for the supervision of credit cooperatives needs to be completed and implemented. Credit cooperatives have grown fast and are gaining systemic relevance as they account for 10 percent of total deposits and 16 percent of total credits of the financial system. A framework with new prudential regulations and coordination arrangements with the SB are needed for effective supervision. Improved quality and quantity of information provided by cooperatives should be a priority to ensure the adequate measurement and control of monetary aggregates.

Overall conditions for long-term financial contracts suffer from deficient insolvency procedures and the lack of a prudential framework for pension funds. Strengthening creditor rights and streamlining insolvency procedures are critical steps to promote the supply of credit to the private sector. Allowing a better use of pension funds to finance sound long-term investments requires the designation of an authority in charge of regulation. Moreover, clear risk management guidelines need to be defined for the Instituto de Previsión Social (IPS), the mandatory pension fund, which should be allowed to invest in government securities, and be repaid long overdue government obligations that constrain its capital base.

A debt management strategy consistent with Paraguay’s budget cycle would help gain credibility and reduce implicit and explicit costs of public debt. The lack of a framework conspires against the credibility of government bonds issuances and a gradual lengthening of the maturity of government obligations. In the medium term, the development of a secondary market could act as a catalyst for developing the local capital market and facilitate the use of government securities for monetary operations.

An overhaul of the Paraguayan payments system would help mobilize long-term resources. Main areas of improvement include: (i) settlement finality protection of the system against bankruptcy procedures; (ii) establishing the legal bases for: dematerialization/immobilization of securities, custody and netting arrangements, and electronic documents and signatures; and (iii) the legal definition of repo operations. The approval of a comprehensive payments system law should be considered a priority by the Central Bank.

Table 1.

Paraguay: Selected Economic and Social Indicators

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Sources: Paraguayan authorities; and Fund staff estimates.

Revised GDP growth rates and GDP ratios reflects the use of a new national account data recently published by the authorities. However,

program GDP ratios were not revised.

INS calculations of real effective exchange rates.

Consolidated public sector, including the quasi-fiscal operations of the BCP.

Based on average exchange rate valuation of GDP.

Foreign currency items are valued at a constant exchange rate.

Table 2.

Paraguay: Central Government Operations

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Sources: Ministry of Finance; and Fund staff estimates.

Includes receipts from the binational hydroelectric plants Itaipu and Yacyreta, and grants.

Measurement error to reconcile above-the-line estimate with measure of the fiscal balance from the financing side.

Includes pension payments to central government employees and Chaco War veterans.

Table 3.

Paraguay: Operations of the Consolidated Public Sector 1/

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Sources: Ministry of Finance and Fund staff estimates.

Public sector comprises only the nonfinancial public sector and the Central Bank.

Measurement error to reconcile above the line estimate with estimates of the fiscal balance from the financing side.