Paraguay
Fifth Review Under the Stand-By Arrangement: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Paraguay
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International Monetary Fund
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Publication Date:
23 Jun 2008
eISBN:
9781451832549
Language:
English
Keywords:
ISCR; CR; prudent fiscal policy; surplus; authority; SDR; fiscal policy; fund staff estimate; vulnerability to external shocks
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The rebound in inflation since mid-2007 is mostly owed to a jump in food prices in Paraguay. The price volatility of fruits and vegetables explains the divergence between headline and core inflation indicators observed in 2007. Following a decline that started in 2006, core inflation has risen in the second part of 2007. High export volume growth, coupled with a slowdown in import growth, have led to a turn around in the current account from a small deficit in 2006 to a surplus of about 1 ½ percent of GDP in 2007.

Abstract

The rebound in inflation since mid-2007 is mostly owed to a jump in food prices in Paraguay. The price volatility of fruits and vegetables explains the divergence between headline and core inflation indicators observed in 2007. Following a decline that started in 2006, core inflation has risen in the second part of 2007. High export volume growth, coupled with a slowdown in import growth, have led to a turn around in the current account from a small deficit in 2006 to a surplus of about 1 ½ percent of GDP in 2007.

I. Developments in 2007/08

1. Context. Macroeconomic conditions are the best in many years. The economy has grown almost 25 percent in the last 5 years. This kind of sustained economic expansion has not been observed in Paraguay since the late 1970s (when the Itaipú hydroelectric dam was in the last stages of construction). The financial system is the strongest in recent history. The public finances were in surplus in 2007 for the fourth consecutive year. The consolidated public debt fell below 30 percent of GDP (from 70 percent in 2002). The external position remained strong and international reserves reached record highs.

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Paraguay: Sources of Growth

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

2. Output. Real GDP growth was almost 6½ percent in 2007 (well above the 4 percent program objective), supported by strong exports. On the supply side, agriculture was the most dynamic sector (25 percent growth), reflecting larger cultivated areas, better yields, and a record soybean crop.

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Paraguay: Inflationary Pressures and Shocks

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

3. Inflation. Following a period of falling prices, there was an uptick in inflation in the second half of 2007 reflecting food supply shocks. While headline inflation was contained at 6 percent in 2007 (down from 12½ percent in 2006), core inflation ended up a 7¾ percent in 2007 (slightly over the 7½ percent upper bound of the targeted inflation range).1 Non-food inflation remained subdued at 3½ percent in 2007 (Box 1). However, pressures continued in the first two months of 2008 mostly on account of higher food and energy prices, and headline inflation increased to 10½ percent.

Paraguay: Inflationary Pressures

The rebound in inflation since mid-2007 is mostly due to a jump in food prices. Staff estimates that 70 percent of the increase in the core price level during 2007 is due to higher food prices. While this is a global and a regional phenomenon, its effect is exacerbated because the consumer price index is based on the 1992 household budget survey, which assigns a large share to food items. At almost 40 percent, the weight of food in the CPI basket is the highest in the region, which reflects the relatively lower income of Paraguay, and is amplified by the outdated character of the index. From January 2008, the BCP is using a new CPI index based on the 2005 expenditure survey, where the share of food would be reduced by over 5 percentage points. Staff estimates that if the weight of the 2005 expenditure survey were used to measure inflation, 12-month core and headline inflation would have been about one percentage point lower in December 2007.

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Paraguay: Headline inflation and food contribution in 2007

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

The price volatility of fruits and vegetables explains the divergence between headline and core inflation indicators observed in 2007. The core inflation index excludes fruits and vegetables, which represent only 6¼ percent of the basket for headline inflation, as they are by far the most volatile items. In addition, so called sanitary controls on imports in late 2006 (partly to protect income of domestic producers), contributed to a spike of prices in December 2006. These prices subsequently declined in the first quarter of 2007, before stabilizing. Renewed import restrictions between August and October 2007, compounded by adverse weather and higher exports to Argentina, pushed prices up significantly during this period. The lifting of these restrictions in November led to a sharp drop in these prices.

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Paraguary: Possible Impact of New Weights

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

Following a decline that started in 2006, core inflation rose in the second part of 2007. The decline of core inflation reflected a combination of positive factors, such as the fall in international oil prices in early 2007, the positive impact of appreciation on imported inflation, and the moderation of administrated prices. The increase of agricultural commodity prices since the middle of 2007 has led to higher core food prices, and an increase in core inflation to 7.7 percent year-on-year in December 2007, although non food inflation remains quite low at 3.6 percent.

Paragury: Inflation in Dec. 2007

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Source: Staff estimates.

Standard deviation of monthly growth.

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Paraguay: Taxpayer Base

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

4. Fiscal. The authorities conducted an adequate countercyclical policy by strengthening its fiscal stance in 2007.2 While domestic tax collections remained buoyant (reflecting the strength of the economy and the growing number of registered taxpayers), import duties fell due to the effect of the appreciation of the currency. At the same time, expenditures were well-contained. The Central Administration recorded a surplus of about 1 percent of GDP in 2007, and the consolidated public sector surplus increased to over 1½ percent of GDP in 2007.

5. Monetary. The Central Bank (BCP) tightened its policy stance in the second half of the year to curb inflationary pressures and expectations, as it raised interest rates on BCP bills (LRMs) some 150 basis points on 3 occasions between September and December 2007. Improvements in the external position led to an increase in international reserves by US$¾ billion (more than the entire stock of currency), and an appreciation of the guaraní against the U.S. dollar (10 percent). This posed a significant burden on monetary policy as large placements of LRMs were undertaken to contain the monetary expansion.

uA01fig06

Paraguay: Interest Rate on LRMs

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

6. Financial. Banking system soundness indicators strengthened further in 2007. Banks remained well-capitalized (with capital adequacy ratios of over 15 percent), while non-performing loans continued to decline (to 1¼ percent). Profitability and liquidity ratios also remained strong in 2007 while dollarization declined. Credit to the private sector grew 42 percent, and banks started to offer long-term financing, such as mortgage loans of up to 30 years.

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Paraguay: Financial Soundness

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

7. External. The balance of payments continued strengthening in 2007. High export volume growth, coupled with a slowdown in import growth led to a turn around in the current account from a small deficit in 2006 to a surplus of about 1½ percent of GDP in 2007. The capital account was also in surplus as domestic banks repatriated deposits, and foreign corporations pre-financed crops and increased foreign direct investment. As a result, net international reserves increased significantly.

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Paraguay: Sources of Foreign Exchange

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

8. Politics. General elections are scheduled for April 20, 2008, and a change of administration will take place in mid-August 2008. Opinion polls suggest that the elections will be highly contested. While there are seven registered Presidential candidates, the main ones are: (i) Pedro Fadul (Motherland Party); (ii) former bishop Fernando Lugo (with the support of the Liberal Party); (iii) former Minister of Education Blanca Ovelar (from the governing Colorado Party); and (iv) former army chief Lino Oviedo (Ethical Citizens Party).

Figure 1.
Figure 1.

Paraguay: Real Sector Developments

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

Sources: Paraguayan authorities; and Fund staff estimates.
Figure 2.
Figure 2.

Paraguay: Fiscal Developments

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

Sources: Paraguayan Authorities; and Fund staff estimates.

9. Social. Tensions eased after Congress granted a 20 percent salary increase to teachers following protests in late 2007. While the salary increase was not consistent with the fiscal program, the authorities managed to observe the fiscal targets by phasing in gradually the salary increase. However, the social situation remains precarious for the poor as food prices have increased significantly and the poverty rate remains high (about 35 percent).

II. Performance under the 2007 Program

10. Review. Economic performance under the program continues to be very good. While there were some delays in implementing specific structural measures, the program remains on track and the authorities continue to adhere strictly to the macroeconomic program. All performance criteria (PCs) for end-September and end-December 2007 were observed with wide margins.3

Paraguay: Performance for December 2007

article image
Sources: Paraguayan authorities and Fund staff.

Central administration.

11. Structural reforms in 2007. Most structural benchmarks for end-September and end-December 2007 were fully observed. However, implementation of three benchmarks fell short of expectations.

  • September benchmarks. 4 With two exceptions, benchmarks were fully implemented: (i) a modified Resolutión 8/03 (which strengthens loan classification and provisioning requirements) was approved by the BCP Board and will be implemented after October 2008, as agreed with all parties involved instead of January 2008 as envisaged in the program (it is estimated that the bulk of the banking system already complies de facto with this stricter resolution); and (ii) a draft payment system law is under internal review, and the authorities estimate that it will be approved by the Economic Cabinet by mid-April 2008.

  • December benchmarks.5 They were implemented, with one falling short of expectations. The internal evaluations of the management contracts with the five largest state owned enterprises (SOE) revealed some shortcomings: ANDE and COPACO’s performance was acceptable, PETROPAR’s was uneven, while ESSAP and INC’s was weak (Box 2). The authorities intend to strengthen SOE performance in 2008 through the design of well-articulated business plans in the context of new performance contracts.6

Paraguay: SBA Performance

(May 2006 - Dec 2007)

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Sources: Paraguayan authorities and Fund staff. PC = Perfromance Criteria; SB = Structural Benchmark.

Of which 18 SB fully observed and 3 SB partly observed. There have been delays in implementing some measures, which have led to delays in completing previous reviews. One SB had to be reset and modified into three new benchmarks.

Paraguay: Reforming State Owned Enterprises (SOE)1/

Inefficiencies of the SOE sector constitute an impediment to long-term growth in a country in need of improving its infrastructure. SOEs constitute a large segment of the economy and include several natural monopolies that need to improve their performance to create the basis for sustained growth. An attempt to privatize public enterprises was rejected by Congress in 2004. Since then the authorities have changed the strategy to improve the functioning of the SOE as part of the public sector reform. Against that background, the authorities conducted financial and managerial audits of the main SOEs in 2005 to prepare a strategy to improve their performance. The audits revealed serious operational and financial problems in most SOEs.

Performance Indicator Matrix

(Overall performance is calculated as a balanced measure of actual performance in different areas)

article image

In order to address SOE problems, the government adopted a comprehensive management performance system in 2006. The system, overseen by the High Council for Supervision of State-owned Enterprises, consists of three main steps: (i) establishing objective result-oriented contracts signed by the government and the SOEs, in which a series of quantitative and qualitative performance indicators and respective targets are agreed upon (based on the balanced scorecard methodology); (ii) implementing an automated monitoring system which captures and processes the operational information, and calculates the actual performance against the agreed targets; and (iii) submitting quarterly performance results to the High Council, which analyzes the results, produces a report, and makes recommendations on corrective measures when needed.

The system has proved to be an important tool in raising awareness regarding the sector’s performance, which is uneven across companies, and in better identifying major problematic areas. Overall results for the five monitored companies during the first three quarters of 2007 were volatile and varied between 35 and 80 percent of the agreed targets. The results, which are broken down by business categories (commercial, financial, economic, technical, and services), provide relevant information for decision-making towards institutional strengthening and operational improvement in the most critical areas.

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Paraguay: SOE’s Management Performance percent of overall achievement of agreed target

(average of 1st, 2nd and 3rd quarters - 2007)

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

SOE problems are structural and complex to solve, and demand profound structural adjustments and political will. The overall weak results imply that, in some cases, performance can not be improved without major structural changes such as: competitive conditions; transparent institutional relationship with the government (isolating roles as client, stakeholder, and tax collector); operational and technological upgrade; professional workforce; and technically-led decision-making. Going forward, greater involvement of the World Bank and IDB will be required.

There is a need for further strengthening the monitoring mechanism under a clearer strategic management framework. As part of the contracts, the SOE will develop business plans in 2008 to strengthen their performance. Staff recommended that the performance contracts for 2008 include: (i) systematic publication of results and Council decisions; (ii) design of coherent and realistic targets for the next fiscal years; (iii) adoption of comprehensive strategic plans; (iv) establishment of a proper incentive and sanctioning system; and (v) transparent oversight done by a board of directors.

1/ The sector comprises five main enterprises: ANDE (electricity); COPACO (telecommunications); ESSAP (water and sewerage); INC (cement); and PETROPAR (oil distribution).
Figure 3.
Figure 3.

Paraguay: Monetary Developments

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

Sources: Paraguayan Authorities and Fund staff estimates.
Figure 4.
Figure 4.

Paraguay: Financial System Developments

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

Sources: Paraguayan Authorities and Fund staff estimates.

Paraguay: Structural Benchmarks for 2007

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Sources: Paraguayan authorities.

III. Outlook

12. Perspective. The external environment for Paraguay continues to be good, with favorable terms of trade, strong regional growth, and significant foreign investment. So far, the region around Paraguay has coped well with the effects of the financial turbulence in the U.S., but a more pronounced deceleration of the world economy would hamper economic growth. Staff estimates that a 1 percent fall in external demand would reduce GDP growth by ¾ percent. While the authorities are determined to continue implementing sound policies, they noted that pre-election politics could pose a risk to macroeconomic management and the structural reform agenda.

IV. Policy Discussions and the 2008 Program

13. Focus. The authorities reiterated their commitment to the program, and stressed the need to maintain fiscal discipline in 2008 and pursue the envisaged structural reforms. The authorities underscored significant improvements in macroeconomic conditions in 2007, and emphasized that these improvements were due, in good part, to their solid policies implemented in the context of the Fund-supported program in addition to the favorable external environment. The authorities hope that similar policies would be followed by the new administration after the arrangement expires in August 2008.7

Figure 5.
Figure 5.

Paraguay: Balance of Payments Developments

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

Sources: Paraguayan Authorities; and Fund staff estimates.
Figure 6.
Figure 6.

Paraguay: Program Performance

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

Sources: Paraguayan authorities; and Fund staff estimates.

A. Policy Framework

14. Synopsis. The good macroeconomic conditions are expected to continue in 2008 despite political uncertainties. However, real GDP growth is expected to slow to the 4-5½ percent range after its record-high growth of 2007 as agricultural yields return to more normal levels. Given the recent volatile pattern of inflation, the authorities favored maintaining a core inflation target similar to that of 2007, namely 5 percent within a range of ± 2½ percent. The staff believes that the target is credible. The external current account surplus will decline somewhat in 2008 (¶5).8

Paraguay: Macroeconomic Framework

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Sources: Paraguayan authorities; and staff estimates

B. Fiscal Policy

15. 2008 budget. Discussions centered on policies and measures needed to maintain fiscal discipline during the rest of the program and contingencies in case of a less benign external environment. While the government submitted a draft 2008 budget that aimed at broad fiscal balance (after its implementation), Congress increased budgeted outlays for the central government by 1½ percent of GDP. Wages and salaries of all public servants were raised on average by 18 percent (½ percent of GDP over budget), and other expenditures were increased by 1 percent of GDP. Full implementation of the approved budget would lead to a large deterioration in the fiscal accounts, which would be difficult to finance in a non-inflationary way.

16. Policy response. To maintain fiscal discipline, the authorities have designed a financial plan (for the fifth consecutive year) to conduct an orderly containment of expenditures. While the plan envisages cuts in budgeted capital spending, these outlays would still be significantly higher than in 2007. The plan also includes cuts in current expenditures, mainly goods and services and transfers (about ¾ percent of GDP). Nonetheless, wages and salaries will increase by about ¾ percent of GDP, thereby increasing the already high budget rigidities (¶6). Staff expressed concern at the high salary increases for 2008 and its potential inflationary impact. The authorities acknowledged the problem and argued that it was difficult to contain wages given that Congress had announced and approved the salary increase.9 It was agreed that in the event of a sharp economic downturn, the authorities should use automatic stabilizers on the revenues side and should support private spending by rapidly changing the composition of public expenditures to those items with the highest impact on aggregate demand (like the conditional cash transfer program).

Paraguay: Fiscal Program 1/

(In percent of GDP)

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Sources: Paraguayan authorities; and staff estimates

Central Government.

17. Consolidated public sector. The authorities agreed to maintain the zero balance target for the consolidated public sector in 2008. The mission encouraged them to continue pursuing flexible pricing arrangements for SOEs to enhance performance, transparency and accountability. SOEs are expected to continue generating surpluses in 2008, which would be sufficient to offset the potential losses of the Central Bank and will facilitate achieving the zero fiscal balance target for the consolidated public sector in 2008 (¶8). Regarding PETROPAR, staff welcomed diesel price adjustments of 7½ and 5¾ percent in October 2007 and February 2008 and the reduction in arrears to suppliers, but noted that additional price adjustments will be needed given the large increases in international oil prices.10

C. Monetary Policy

18. Concerns. Discussions focused on the high growth of monetary aggregates, the need to curb inflation and the expectations thereof, the large foreign exchange inflows, and the appropriate sterilization policy. Staff noted with some concern the rapid pace of currency growth and the attendant inflationary pressures. The authorities argued that the high currency growth was due to a strengthening in money demand as evidenced by: (i) the success of the program at reestablishing stability and confidence; (ii) the appreciation of the guaraní; (iii) the high remittances from abroad that disproportionately flow to segments of the population without access to banking services; and (iv) the continued decline in dollarization (from 50 percent of deposits in 2006 to about 45 percent in 2007) and the rising maturities of guaraní deposits. While acknowledging the possibility of a strengthened demand for money, staff noted that an increase money demand of such magnitude was unlikely to be repeated and that a tighter monetary policy was needed to contain pressures and anchor inflationary expectations. The authorities agreed that a recurrence of the large increase in the demand for currency is unlikely and designed a monetary program with a more conservative assessment of money demand.

Paraguay: Monetary Program 1/

(In percent of currency the previous period)

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Sources: Paraguayan authorities; and Fund staff estimates.

Central Bank Accounts.

19. Monetary program. Monetary policy will be geared towards achieving the objective of reducing core inflation to 5 percent in 2008 through a monetary program that is consistent with a growth in currency issue of 12 percent (and an increase in the real demand for money of about 6½ percent, implying a small slowdown in velocity of circulation). The authorities agreed to maintain flat the level of BCP’s net domestic assets for the year as a whole in order to anchor expectations and facilitate the process of reducing inflation. All the sources of monetary creation in 2008 would come from purchases of foreign exchange, with net international reserves rising by US$100 million to over US$2½ billion at end-2008 (¶11). Higher-than-expected increases in the demand for money will be accommodated through further accumulation of international reserves. Use of monetary control instruments (LRMs) will continue to be the main policy instrument. Interest rates on LRMs may need to continue rising in the short run to achieve the inflation objective.

D. External Policy

20. Balance of payments. Discussions on the external environment evolved around the need to lock in the gains made in the balance of payments and the downside risks to the outlook posed by a potential global slowdown. Notwithstanding these risks, the external position is expected to remain strong for 2008. The current account surplus is expected to narrow slightly to 1 percent of GDP in 2008 as exports of agricultural products return to more normal levels and the terms of trade remain favorable.11 The capital account is expected to be driven by foreign direct investment (going mostly to telecommunications and meat processing industries) and some public borrowing, allowing for a modest reserve accumulation.12

Paraguay: Balance of Payments

(In percent of GDP)

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Sources: Paraguayan authorities; and Fund staff estimates.

General government only.

Includes errors and omissions

21. Exchange rate. Discussions centered on the proper mix between exchange rate flexibility and reserve accumulation. The authorities and staff agreed on the need to maintain a flexible exchange rate regime while accommodating the net international reserve target under the program and smoothing out bulky or seasonal transactions. There was agreement that the strengthened fundamentals have led to upward pressure on the guaraní and that if strong fundamentals prevail, further appreciation of the guaraní would be warranted (¶10). While committed to maintaining the flexible regime, the authorities noted the possible adverse effect of an appreciated currency on competitiveness. In the staffs view, the exchange rate is broadly in line with fundamentals and is not a source of concern as the terms of trade remain favorable, the current account is in surplus, and the tradable sector continues expanding.13

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Paraguay: Real Effective Exchange Rate

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

E. Structural Policies

22. Approach. It was agreed that given the forthcoming electoral phase and the short period remaining under the program, the number of measures under the reform agenda for 2008 should be limited. For that reason, the authorities decided to include only one structural benchmark in each of the structural policy pillars under the program.

23. Public sector reform. The authorities have been addressing weaknesses in budget preparation, cash management, and monitoring systems. Expenditure control mechanisms have been enhanced through the adoption of a control system at the commitment level, and the authorities are progressing toward the implementation of a public investment framework that prioritizes needs and improves the quality of capital expenditure. For 2008, priority will be given to establishing a treasury single account (TSA), through the identification of all existing public accounts and their consolidation into a TSA (¶13). The government will centralize all the accounts that are currently not established by law into the TSA.

24. Financial sector reform. The authorities have made significant progress in many financial sector areas, most notably by moving forward the implementation of prudential regulations; strengthening the National Development Bank (BNF); and improving the financial position of the Central Bank (BCP). For 2008, the authorities will focus on strengthening the balance sheet of the Central Bank. To that end, the authorities will continue implementing the strategy they designed in August 2007, and will seek the review and clearance of the Attorney General on the claims on the public sector that are recorded on the balance sheet of the BCP but not recorded in the debt reporting system of the Ministry of Finance. The authorities will subsequently submit legislation to Congress to transfer tradable bonds to BCP to compensate for these disputed claims (¶15).14

Paraguay: Structural Reforms for 2008

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Sources: Paraguayan authorities.

25. State-owned enterprise reform. In addition to the significant progress made in different areas to foster growth (Box 3), the government intends to enhance the strategic planning and monitoring framework of the five largest SOEs in 2008. The adoption of the performance-based contracts and monitoring was a substantial first step toward enhancing SOE performance. Nevertheless, the government will need to reinforce the current mechanism in light of the weak performance of some SOEs, and to improve the overall results of the SOE. Going forward, the government intends to strengthen accountability and governance of SOEs by developing business plans to address weaknesses identified in 2007, and to establish targets for new result-oriented management contracts (¶17).

Paraguay: Strategy to Improve Investment Climate

Given the relatively poor business environment, the government embarked in 2006 on a strategy to improve the investment climate. In the 2007 World Bank survey on the cost of doing business, Paraguay was ranked 110 out of 175 countries in the world and 20 out of 30 countries in Latin America. Although Paraguay performed relatively better in terms of access to credit, investor protection, and property registration, it was classified near the bottom in terms of ease for starting a business, contract enforcement, and employment flexibility (where it was ranked 169 in the world). As a result of such a business climate, private investment is lower than in other Latin American countries. In addition, the informal sector is estimated to account for about 30 percent of GDP while 40 percent of rural properties are held without the correct supporting legal documents.

uA01fig11

Paraguay: Average Time required for a Business Decision

(Index = 1 for OECD

Citation: IMF Staff Country Reports 2008, 180; 10.5089/9781451832549.002.A001

The authorities’ strategy focused on achievable objectives that could be implemented in the short-term. This was to be done through changes in administrative procedures, improved coordination between existing institutions, and modifications of the legal framework. The authorities also sought to reach a consensus with the private sector for legal and institutional changes related to the investment climate. The strategy rested on five main pillars: (i) facilitate private enterprise creation; (ii) reinforce land property rights; (iii) create a one-stop window for exporters; (iv) reinforce the competitiveness of the export sector; and (v) improve the mechanism for reimbursing VAT.

Paraguay advanced in the 2008 World Bank ranking by 7 positions in the world (2 positions within Latin America). This reflects mostly improvements in the ease of starting a business, from an initial level comparable to Latin American’s average to a much better situation. The implementation is generally on track with the timetable initially set by the government.

Paraguay: Implementation of the Business Climate Strategy

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Doing Business, World Bank, 2006 and 2007 and http://www.doingbusiness.org/

26. Poverty alleviation. While efforts continue to be made in increasing social spending, there are concerns that the poor may not have benefited yet from the higher growth while being hurt by the recent sharp increase of food prices. In this context, a strong social safety net, such as the Tekoporaã program—the conditional cash transfer program implemented by the government—is crucial.15 Tekoporã is part of the broader national strategy for fighting poverty that focuses on social protection and economic inclusion of vulnerable families providing financial and technical support to improve quality and productivity of small farmers and firms. For 2008, the authorities intend to triple the coverage of the Tekoporã program to 50,000 families (with an intermediate target of 19,000 families by end-May) (¶19), while strengthening the monitoring mechanisms to ensure that families use the required health and education services. Staff estimates that about 25 percent of the families living under conditions of extreme poverty would have access to the conditional cash transfer program by end-2008.

V. Staff Appraisal

27. Overall. Macroeconomic outcomes were significantly better than anticipated and program implementation continued to be strong. Paraguay is going through a period of sustained high growth with stability, while strengthening efforts to reduce extreme poverty. All performance criteria and the bulk of the structural measures for end-September and end-December 2007 were fully observed. The authorities should be commended for their accomplishments and the strong performance, and encouraged to continue with a solid implementation of good policies in the last months of the program. Although the structural challenges are many, the authorities have successfully begun the road to reform which the next administration would be well advised to continue.

28. Fiscal policy. The authorities have maintained sound fiscal policies despite trying political circumstances. Fiscal performance in 2007 has been particularly good, and the authorities have appropriately adopted a counter-cyclical stance in view of the strength of the economy. Furthermore, in view of the approved expansionary budget for 2008, staff welcomes the authorities’ decision to implement a financial plan that continues with an appropriate fiscal stance. Regrettably, the increase in salaries included in the budget risks fueling inflation pressures, and will lead to budget rigidities as well as the worsening of the quality and composition of expenditures as the government will be forced to make expenditure cuts in other areas. Going forward, there is a need to implement a properly sequenced civil service reform, adopt guidelines to conduct fiscal policy, and curtail excessive unfunded expenditure mandates by Congress to avoid the use of financial plans as a tool for budgetary control.

29. Monetary policy. While there is evidence of strengthening money demand and financial deepening, the BCP should monitor monetary aggregates closely to prevent a monetary overhang and consequent inflationary pressures. Thus far, the uptick of core inflation appears to be driven mostly by food supply shocks, but that could change, especially once higher private and public wages impinge on aggregate demand. In this context, staff welcomes the preemptive monetary tightening of the second half of 2007, and encourages the authorities to remain vigilant and continue on this path to anchor inflationary expectations.

30. Exchange rate policy. Staff welcomes the continued flexible exchange rate policy followed by the authorities (the guaraní appreciated by 10 percent against the U.S. dollar in 2007). The strengthened external position has led to an accumulation of international reserves that is substantially higher than the target, helping reduce Paraguay’s vulnerability to external shocks. Staff supports the authorities’ commitment to maintaining the flexible exchange rate regime and encourages their continued efforts to increase resilience to external shocks.

31. Structural reform. Significant progress was made in many areas of the reform agenda. After some setbacks in late 2006 and early 2007, financial sector reform gathered momentum and the authorities began to adopt key measures, especially on strengthening the Central Bank’s income position. On SOE reform, the methodology used and the anticipated disclosure of information was a good first step towards improving the efficiency and accountability of the SOE, even if the results of the performance contracts were not satisfactory in all cases. There were delays in some structural areas, particularly on the payment system law. The authorities are encouraged to make up for previous delays.

32. Risks. On the external front, foreign demand for exports may suffer if external demand falls, especially as the tightening of credit conditions in mature economies may adversely affect Paraguay’s main trading partners. On the domestic front, the pre-electoral and political environment may force the adoption of measures contrary to the program. Similarly, the conduct of fiscal policy could be difficult even with the design of a solid financial plan as expenditure pressures may continue.

33. Review. The staff supports completion of the fifth SB A review in light of the good performance and program ownership.

Table 1.

Paraguay: Quantitative Performance Criteria

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Sources: Paraguayan authorities; and Fund staff estimates.

Cumulative flows from the beginning of the calendar year.

For 2007 adjusted downward for any cash transfer or payment of interest costs on securities used to strengthen the financial position of the Central Bank.

Stocks. NIR is adjusted upward (downward) for any increase (decrease) in reserve requirement for foreign currency deposits (above pre-specified amounts) and upward by the amount of any program disbursements. Similarly, the NDA target will be adjusted downward (upward) following the adjustment in the NIR.

Table 2.

Paraguay: Structural Conditionality Under the Program

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Source: Paraguayan authorities.

SB = structural benchmarks; PC = performance criteria.

Table 3.

Paraguay: Selected Economic and Social Indicators

1. Social and Demographic Indicators
Area (thousand sq. km) 406.8 Income distribution (2002)
By highest 20 percent of households (percent) 61
Population (2005) By lowest 20 percent of households (percent) 2
Total (in millions-2004) 5.7
Rate of increase (percent a year) 1.9 Health (2004)
Density (per sq. km.) 14.1 Physicians per 1,000 people 1.1
Unemployment 10.9 Hospital beds per 1,000 people 1.3
Access to a water source (percent) 80
Population characteristics (2004) Access to a sanitation facility (percent) 86
Life expectancy at birth (years) 70.6
Crude birth rate (per thousand) 29.7 Education (2003; in percent)
Crude death rate (per thousand) 5.0 Male literacy rate (percent) 94
Infant mortality (per thousand live births) 21.0 Female literacy rate (percent) 92
Primary school enrollment (percent) 106
Secondary school enrollment (percent) 63
II. Economic Indicators, 2002-2007

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. 2007 data up to Q3.

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

Nonfinancial Public Sector. Based on end-of-period exchange rate conversion of U.S. dollar-denominated debt.

Includes Central Bank Bills (LRMs).

Foreign currency items are valued at a constant exchange rate.

Table 4.

Paraguay: Central Government Operations

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Sources: Ministry of Finance; and Fund staff estimates.

Excludes banks’ holdings of government bonds.

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 5.

Paraguay: Consolidated Public Sector Operations 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.

Table 6.

Paraguay: Summary Accounts of the Central Bank, 2003-08

(In billions of guaranies; end-of-period; valued at constant exchange rate)

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Sources: Central Bank of Paraguay; and Fund staff estimates.

Foreign-currency denominated items valued at 6,280 guaraníes per U.S. dollar. This exchange rate also applies for all dates preceding December 2006.

Foreign-currency denominated items valued at 5,100 guaraníes per U.S. dollar. This exchange rate also applies for all dates following December 2006.

Includes LRM held by the nonbanking sector.

Cumulative since beginning of year. Follows program definition.

Narrow monetary base comprises currency issued plus legal reserve requirement deposits in guaraní held at the BCP.

Table 7.

Paraguay: Summary Accounts of the Banking System, 2003-08

(In billions of guaranies; end-of-period; valued at constant exchange rate)

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Sources: Central Bank of Paraguay; and Fund staff estimates.

Foreign-currency denominated items valued at 6,280 guaraníes per U.S. dollar. This exchange rate also applies for all dates preceding December 2006.

Foreign-currency denominated items valued at 5,100 guaraníes per U.S. dollar. This exchange rate also applies for all dates following December 2006.

Reflects debt write-offs of central bank credit to commercial banks during 1997 and 1998.

Table 8.

Paraguay: Banking System Indicators

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Source: Superintendency of Banks.

Definition of CAR does not fully comply with international standards.

Liquid assets are calculated as the sum of cash, reserves, accounts in banks and lending in interbank market.

Table 9.

Paraguay: Balance of Payments

(In millions of U.S. dollars)

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Sources: Central Bank of Paraguay; and Fund staff estimates.

Includes public enterprises and binationals.

Reflects PETROPAR’s arrears on suppliers credits, which are not considered sovereign arrears (see definition in the TMU).

Based on end-of-period exchange rate conversion of U.S. dollar-denominated debt.

Registered trade.

Table 10.

Paraguay: Indicators of External Vulnerability

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Sources: Central Bank of Paraguay; and Fund staff estimates.

Foreign currency components are valued at the accounting exchange rate of Gs. 6,280 per U.S. dollar.

Based on end-of-period exchange rate conversion of U.S. dollar-denominated debt.

Private and public external debt with a residual maturity of one year or less. Excludes foreign currency deposits in banking system.

Table 11.

Paraguay: Schedule of Reviews and Purchases

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Source: Fund staff estimates.

Since Paraguay’s quota is SDR 99.9 million, the percent of quota is almost equivalent to the amount of the purchase in SDR. For instance, the first credit tranche is 25 percent of quota or about SDR 25 million.

The fifth review has been delayed and it is expected to be completed at end-March, 2008.

The fifth review was originally scheduled to be completed by mid-December 2007, and was controlled by end-September 2007 performance criteria. However, due to delays in completing the fifth review, the end-September 2007 performance criteria are no longer relevant, and the review is controlled by the end-December 2007 performance criteria.

Table 12.

Paraguay: Medium-Term Scenario

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Sources: Ministry of Finance; Central Bank of Paraguay; and Fund staff estimates and projections.

Defined as the nonfinancial public sector and the BCP.

Nonfinancial public sector debt; excludes Central Bank bills.

Based on end-of-period exchange rate conversion of U.S. dollar-denominated debt.

Appendix 1. Letter of Intent

Asunción, Paraguay

March 17, 2008

Mr. Dominique Strauss-Kahn

Managing Director

International Monetary Fund

Washington, D.C. 20431

Dear Mr. Strauss-Kahn:

1. This letter and the attached memorandum of economic and financial policies (MEFP) update and supplement our previous correspondence (of May 8, 2006, September 12, 2006, June 15, 2007, and October 2, 2007), describe performance under the government’s economic program for 2007, and propose our economic program for 2008. The attached MEFP articulates the economic policies that the government intends to pursue during 2008 as well as the key targets and objectives under the program (performance criteria and structural benchmarks are included in Tables 1 and 2 of the MEFP). As the program comes to an end in August 2008, the government’s objectives continue to be the consolidation of the stabilization gains achieved over the past few years while reducing poverty and deepening the structural reform agenda.

Table 1.

Paraguay: Quantitative Program Targets

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Cumulative flows from the beginning of the calendar year.

For 2008 adjusted downward for any cash transfer or payment of interest costs on securities used to strengthen the financial position of the central bank.

NIR stock is adjusted upward (downward) for any increase (decrease) in reserve requirement for foreign currency deposits (above pre-specified amounts) and upward by the amount of any program disbursements. Similarly, the NDA target will be adjusted downward (upward) following the adjustment in the NIR.

Table 2.

Paraguay: Structural Conditionality Under the Program for 2008

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SB = structural benchmarks.

2. The program has been designed for the whole of 2008 to facilitate the task of articulating adequate policies for the new administration that takes over in August 2008. With the presidential elections of April 2008 approaching, the political situation will become more complex and implementation of the program more challenging.

3. The program remains on track. Performance under our economic program for 2007, supported by a 27-month Stand-By Arrangement (SBA), has been very good. All performance criteria through end-September and end-December 2007 have been observed. While most structural benchmarks for end-September and end-December 2007 were fully met, there were delays in a few cases due to logistical problems, which are being addressed.

4. Macroeconomic conditions have improved markedly since the adoption of the program in May 2006. Economic growth accelerated and inflation remained within the target band in 2007 despite some price pressures in the second half of the year due to food supply shocks. The public finances remain on a strong footing anchored by the financial plan, and international reserves are at an all time high.

5. Against this background of good economic performance, the Government of Paraguay hereby requests completing the fifth review under the SBA supported program.

6. The Government of Paraguay will maintain the productive and fruitful dialogue we have had with the Fund in the past. We believe that the policies set forth in the attached MEFP are adequate to reach the program objectives, but we will take additional measures, if necessary, to achieve those objectives. In the spirit of cooperation, we will consult and provide Fund staff with all the relevant information required to complete program reviews and monitor performance.

7. As part of our communication policy, we intend to publish this letter on the websites of the Ministry of Finance and Central Bank to maintain our citizens informed about our policy intentions. We also authorize the Fund to publish this letter and the MEFP.

Sincerely yours,

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Appendix 2. Memorandum of Economic and Financial Policies of the Government of Paraguay (MEFP)

I. Background

1. The economic reforms undertaken by the administration of President Duarte-Frutos are beginning to bear fruit, and have established a strong base for the next government. Following the successful stabilization of the period 2003–05, the government adopted another ambitious economic program for 2006-08 to promote growth and reduce poverty while entrenching macroeconomic stability. Both programs have been supported by precautionary Stand-By Arrangements from the IMF. As a result, growth has rebounded to twice its long-term average, and extreme poverty has been reduced by one-third. Public finances have been put on a solid footing mainly through a tax reform which has improved the tax system and strengthened tax administration, increasing the formalization of the economy; and the public debt level has been put on a firm downward path. The financial system has been considerably strengthened, and confidence in the banking system has increased. The external position has been reinforced significantly, thereby allowing an increase in international reserves to record highs, while maintaining a flexible exchange rate regime.

2. The program remains on track, and considerable progress has been made in all areas of the structural reform agenda. All quantitative performance criteria for end-September and end-December 2007 were met with large margins, and most structural measures were observed.1, 2

3. The economy strengthened further in 2007. Real GDP is expected to have grown by almost 6½ percent (against 4⅓ percent in 2006), driven mainly by buoyant exports, especially for soybeans. Headline inflation fell to 6 percent in 2007 (from 12½ percent in 2006) despite sharp increases in food prices. Public finances recorded another surplus against a program objective of fiscal balance, mainly due to continued solid tax collections and firm expenditure controls. The Central Bank managed to accumulate over US$¾ billion in reserves in 2007, and the guaraní strengthened further against major hard currencies.

4. The program for 2008 envisages leaving a solid economic base on which the next administration can build in order to achieve higher and sustainable growth, and a meaningful reduction in poverty. The structure of the 2008 program will be similar to that of 2007. The program will continue to be based on five policy pillars, a strong macroeconomic program anchored by fours structural reform areas: (i) public sector reform; (ii) financial sector reform; (iii) pro-growth agenda; and (iv) a social safety net to alleviate poverty. Performance criteria and structural benchmarks for 2008 related to these policies are specified in Tables 1 and 2, and further defined in the attached technical memorandum of understanding.

II. Macroeconomic Program for 2008

5. The macroeconomic framework for the 2008 program seeks to buttress growth, while maintaining sound policies. After a record harvest in 2007, economic growth is expected to moderate to the 4-5½ percent range in 2008, as crop yields return to more normal levels. Still, given high and volatile inflation in the recent months, the government believes that it is prudent to maintain a similar target of core inflation in 2008, namely 5 percent within a band of ± 2½ percent. Fiscal and monetary policies will be designed with a view to achieve these growth and inflation objectives for 2008.

A. Fiscal Policy

6. The program continues to aim at preserving fiscal discipline, despite strong expenditure pressures. While the 2008 budget submitted to Congress envisaged a small deficit (which is broadly consistent with fiscal balance once historical levels of expenditure execution are taken into account), Congress approved a 2008 budget with a deficit of 2 percent of GDP. We will be guided by the expenditure priorities included in the budget approved by Congress, but we have introduced a financial plan for 2008 to align expenditure intentions with available financing (as has been the practice over the last few years). In line with the broad mandate from Congress, our policy will be to restrain non-social current spending to accommodate a higher level of social and capital spending to support our poverty alleviation efforts and growth objectives, while preserving fiscal discipline.

7. As in previous years, the program will allow an enhancement of quality investments in the social sectors. In particular, in 2008 the government will aim to achieve higher-than-projected levels of capital and targeted social expenditures provided that macroeconomic conditions are appropriate to absorb these additional expenditures and there are higher-than-expected revenues or else financing on appropriate terms directed to quality projects. This issue will be addressed in the context of program reviews.

8. The 2008 program safeguards the objective of broad fiscal balance. Overall fiscal balance at the consolidated public sector level will continue to be a key objective for 2008. The rest of the public sector is expected to maintain its surplus position by strong revenue performance and restraining of current expenditures. The Central Bank is expected to strengthen its balance sheet position once legislation is approved on the recent initiative to make transfers from the Treasury.

9. Going forward, the government intends to increase capital expenditures in order to address serious weaknesses in economic and social infrastructure. To this end, the government is preparing a long-term plan whose key objectives are to boost growth and achieve well-defined development landmarks in different sectors of the economy, including the millennium development goals. In order to ensure that the plan does not undermine the hard-won macroeconomic stability, the government is designing, in cooperation with the international community, a consistent long-term development program.

B. Monetary Policy

10. Monetary policy will aim at containing core inflation at 5 percent in 2008. While the range for the inflation objective in 2008 is similar to that of 2007 (i.e., 5 percent within a band of ±2½ percent), efforts will be made to bring down core inflation from the upper end of the range. To respond adequately to external shocks and reduce vulnerabilities in the inflation outlook, we will continue to follow a flexible exchange rate regime with intervention limited to the achievement of our international reserve target.

11. To anchor inflationary expectations, the monetary authority will pursue a policy of no expansion in the net domestic assets of the Central Bank for 2008 as a whole. We believe that the inflation objective can be achieved by limiting the growth in currency. We will accommodate the expansion in currency through purchases of foreign exchange, and expect to accumulate at least US$100 million in 2008. There will be occasional fluctuations in the net domestic assets of the Central Bank during periods when the demand for money has a different seasonality than the balance of payments but the Central Bank will pursue a policy of maintaining stable its net domestic assets for the year as a whole to anchor expectations. The main instrument of monetary control will continue to be the “Letras de Regulatión Monetaria” whose rates will be set by the Central Bank to achieve its monetary and inflation objectives. The monetary program will continue to be flexible, accommodating higher-than-programmed increases in money demand by allowing a higher growth in currency, accompanied by a commensurate increase in reserve accumulation.

III. Structural Reforms for 2008

12. The structural reform agenda for 2008 will aim at solidifying the gains of the past years. Given the limited time under the program, the general elections and the difficult political environment, the structural reform agenda needs to be well-focused. There will be one main reform for each of the four structural pillars of the program. Nonetheless, the government will continue to pursue reforms already under way in all areas, with emphasis on legislation that could be adopted by the next Congress.

A. Public Sector Reform

13. Expenditure control mechanisms will be strengthened further. To that end, the management of Treasury accounts will be enhanced. Currently, there is a large number of such accounts, some of which are virtually dormant. In order to improve financial management, expenditure control, and transparency, the government will identify all the Central Government accounts and gradually close them, aiming at centralizing all public resources into a single account at the Central Bank. As an initial milestone toward this objective, it will consolidate all the accounts that are currently not established by law into a Single Treasury Account (structural benchmark for end-June 2008), and also initiate the process to incorporate those accounts that are established by law.

14. The institutional framework of the tax and customs administration will be enhanced. In particular, the government will concentrate efforts on conducting audits to ensure tax liabilities are properly discharged. We will also focus on strengthening the operations of the large taxpayer unit at the tax agency, with a view to improving taxpayer selection, through the use of a risk-based approach, and auditing activities. The government will also work on developing a systematic approach to strategic management and performance monitoring for revenue administration. Customs administration will continue to be strengthened through tighter operational controls, with a view of improving ex-post audits operations, and also the consolidation of the bank collection system.

B. Financial Sector Reform

15. The process of strengthening the financial position of the Central Bank will continue in 2008. This process began with the design of a strategy for this purpose in August 2007 and continued with the submission of legislation to Congress in December 2007 to allow for transfers of 0.2 percent of GDP from the Ministry of Finance to the Central Bank. We have entered a process of reconciliation of claims between the public debt records of the Ministry of Finance and the Central Bank’s balance sheet, and have already resolved those claims that are recognized by both institutions. We will send to the attorney general the remaining claims for his information and ruling (structural benchmark for end-May 2008). Once the attorney general gives a positive ruling, we plan to send to Congress legislation to allow a transfer of public bonds to the Central Bank for those amounts that are recorded on its balance sheet but are not included in the public debt records of the Ministry of Finance, which we expect to take place by mid-2008.

16. We will continue to implement our strategy toward strengthening prudential regulations for the banking system. Following our plan designed in June 2007 to enhance the soundness of the banking system and increase compliance with Basel Core Principles to at least 80 percent, the Central Bank approved a modified resolution to upgrade loan classification and provisioning requirements (a modified version of the former Resolution 8/03) in September 2007 and adopted a set of additional regulations in December 2007 under its operational plan. We will continue our work on strengthening the regulatory and supervisory frameworks but some of the needed changes require amendments to the banking law. We will begin consultations with the financial community and Congress to strengthen ownership in this reform area, and assess the viability of sending appropriate legislation to Congress.

C. Pro-Growth Agenda

17. There is a need to further improve the efficiency of public enterprises to provide better public services and increase productivity. To this end, the government signed result-oriented management contracts with the five largest public enterprises in December 2006. While the performance of ANDE, COPACO has been acceptable, and that of PETROPAR uneven, the government believes that ESSAP and INC will need to improve their managerial, operational and financial performance in order to reach acceptable standards under these contracts. In the case of ESSAP, the main problem is a weak financial position derived from an unclear ownership structure as it was made a corporation in 2002 in an unsuccessful privatization attempt. To address this problem, the government sent legislation to Congress in November 2007 to reduce ESSAP’s debt burden, clarify its ownership structure, and improve its financial accountability and monitoring. We believe that, once approved, this legislation will strengthen significantly the performance of ESSAP. In the case of INC, there are a number of performance problems that we intend to address by strengthening the governance structure. We intend to establish new targets and sign new result-oriented management contracts for these enterprises in 2008 (structural benchmark for end-May 2008). As part of the contracts, these enterprises will develop strategic business plans that will serve to address weaknesses identified in 2007 by the Public Enterprises Council.

18. Sustained improvements in Paraguay’s investment climate are needed in order to promote higher levels of foreign and domestic investment. With the assistance of the World Bank and the IDB, the government designed a master plan to help promote the investment climate in September 2006. The Ministry of Industry is taking the lead in its implementation, and progress so far has been satisfactory. Going forward, the government intends to attain the following key targets under the plan in 2008: (i) completion of the one-stop window for opening a business; and (ii) completion of the plan to improve the competitiveness of the export sector, by improving quality standards and sanitary regulation.

D. Social Safety Net

19. We intend to strengthen the conditional cash transfer program. This program has been very effective in reducing extreme poverty in the country. While its coverage is still limited (8,800 families in 2006 and over 17,000 families in 2007), we would like to continue expanding this program. Against this background, we expect to have 19,000 families covered under this program in the first five months of the year (structural benchmark for end-May 2008). It has been challenging to ensure the proper administration and implementation of the program, but we intend to continue strengthening the monitoring mechanisms and the required provision of health and education services while at the same time making a budgetary effort to increase the coverage of the program to 50,000 families by end-2008.

IV. Other

20. We will continue to seek resolution to the disputed claims, negotiating in good faith. There are a number of existing claims in dispute, which we hope to resolve during the program.

Appendix 3. Paraguay—Technical Memorandum of Understanding

This Technical Memorandum of Understanding (TMU) defines the variables subject to quantitative targets (performance criteria and indicative targets), specified in the Memorandum of Economic and Financial Policies (MEFP). It also describes the methods to be used in assessing the program performance and the information requirements to ensure adequate monitoring of the targets.

A. Fiscal Targets

1. Targets on the Overall Balance of the Central Administration
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For the purposes of the program, the central administration (CA) includes the executive, judicial and legislative branches. The overall balance of the CA will be measured and monitored from the financing side, as equal to minus the net financing of the C A. The net financing of the CA is defined as the sum of: (i) net external financing to the central government; (ii) the change in net credit to the central government from the financial system, excluding government bonds; (iii) the net issuance of government bonds; (iv) net financing from all other sources to the government (consisting of any form of financing other than government bonds) including by the private sector; (v) asset sales; (vi) the net change in domestic floating debt (deuda flotante), as defined below; and (vii) the net change in external arrears. Items denominated in foreign currency will be converted into guaraníes at the average exchange rate for each month.

For the purposes of the program, any government bonds issued to (i) capitalize the central bank, (ii) capitalize the Banco Nacional de Fomento (BNF), or (iii) finance the deposit guarantee will not be included in the definition of fiscal deficit.

Net external financing is defined as central government’s foreign borrowing, including bonds issued abroad, less amortization payments (including debt prepayments) of foreign debt. Net credit from the financial system is defined as the change in net credit to government, as reported in the monetary accounts of the BCP, excluding government bonds. Net change in domestic floating debt is defined as the difference between accrued expenditure (gastos obligados) and payments transferred (gastos transferidos). Net change in external arrears is defined as the difference in the stock of arrears to external creditors during a period of reference, as reported by the ministry of finance’s SIGADE system. Data will be provided to the Fund by the ministry of finance with a lag of not more than three weeks past the test date.

The floor on the Cumulative Central Administration Overall Balance for 2008 will be adjusted downward by the full amount of cumulative transfers and/or interest due on any bonds issued during 2008 as part of the program to strengthen the financial position of the Central Bank.

2. Targets on the Central Administration Wage Bill
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The wage bill of the CA is defined as the accrued remuneration to all central administration employees (servicios personates), including overtime and effective social contributions (budget line items 100-199),1 as reported in by the ministry of finance’s monthly Situatión Financiera de la Administratión Central. Data will be provided to the Fund by the ministry of finance with a lag of not more than three weeks past the test date.

3. Targets on the Overall Balance of the Consolidated Public Sector
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For the purposes of the program, the consolidated public sector comprises: (i) the non-financial public sector (NFPS) and (ii) the Central Bank of Paraguay (BCP).

The NFPS includes the CA as defined above, the social security institutes, the provincial governments, autonomous decentralized agencies, and the nonfinancial public enterprises.2

Under the program, the consolidated public sector’s overall balance will be measured and monitored as equal to minus the net financing of the NFPS, plus the operating balance of the BCP. The net financing of the NFPS is defined as the sum of: (i) net external financing; (ii) the change in net domestic credit to public sector from the financial system, excluding government bonds; (iii) the net issuance of government bonds; and (v) other net financing of the nonfinancial public sector by the private sector, including net increase in the stock of domestic floating debt, external arrears, and asset sales. Items denominated in foreign currency will be converted into guaraníes at the average exchange rate for each month.

Net external financing of the NFPS is defined as all external disbursements less amortization paid by the NFPS as defined above. The change in net credit is defined as the net flow of gross domestic credit (excluding treasury bonds) plus use of deposits by the NFPS in the domestic financial system. Domestic floating debt of the NFPS is defined as the difference between accrued expenditure (gastos obligados) and payments transferred (gastos transferidos) vis-à-vis the private sector. It will be measured as the central government floating debt net of debts with the rest of the NFPS as defined herein. External arrears are defined as the sun of (i) any principal and interest accrued by the NFPS and not paid by the due date as reported by the ministry of finance’s SIGADE; (ii) the net change in arrears to foreign suppliers of the NFPS. The operating balance of the BCP is measured as all administrative and financial revenues minus costs (including costs of monetary policy and interest on BCP external debt). Data will be provided to the Fund by the ministry of finance and the central bank with a lag of not more than three weeks past the test date.

B. Monetary Targets
4. Targets on Net International Reserves of the Central Bank of Paraguay (BCP)
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For monitoring purposes, net international reserves (NIR) of the BCP are defined as the U.S. dollar value of gross foreign assets in foreign currencies minus gross liabilities in foreign currencies with original maturity of less than one year. Data will be provided by the BCP to the Fund with a lag of not more than five days past the test date.

Gross foreign assets are defined consistent with the Fund Data Template for International Reserves and Foreign Currency Liquidity, and include all liquid foreign currency-denominated claims of BCP, including monetary gold, holdings of SDRs, the reserve position in the IMF, and foreign currency in the form of cash, deposits abroad, and Paraguay’s net cash balance within the Latin America Trade Clearing System (ALADI). Excluded from gross foreign assets are participations in international financial institutions (including Corporatión Andina de Fomento (CAF), IDB, IBRD, Asociación International de Fomento, and Banco de Desarrollo del Caribe), the holdings of nonconvertible currencies, and holdings of precious metals other than gold. Gross foreign liabilities are all foreign currency denominated BCP liabilities of contracted maturity up to and including one year plus the use of Fund financing. Non-U.S. dollar denominated foreign assets and liabilities will be converted into U.S. dollars at the market exchange rates of the respective currencies as of December 31, 2007.

NIR targets will be adjusted upward (downward) for any increase (decrease) in reserve requirement deposits (encaje) associated with foreign currency deposits in commercial banks, compared to the following levels: March 31, 2008: US$ 271 million; June 30, 2008: US$298 million; September 30, 2008: US$305 million; and December 31, 2008: US$295 million.

NIR targets will also be adjusted upward (downward) by the surplus (shortfall) in program disbursements relative to the baseline projection. Program disbursements are defined as uncommitted external disbursements that are usable for the financing of the overall central government budget.

External Program Disbursements (Baseline Projection)

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5. Targets on Net Domestic Assets

Net domestic assets (NDA) of the BCP are defined as the difference between currency issue (provided by the BCP) and the net international reserves (NIR) of the BCP, both measured based on end-of-period data. Data will be provided to the Fund by the BCP with a lag of not more than five days past the test date.

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For the purpose of NDA calculation, NIR will be converted into guaraníes at an accounting (program) exchange rate of G 5,100/US$. The ceiling on NDA will be adjusted upward (downward) by the equivalent in guaraníes of the downward (upward) adjustments made to the floor on the NIR of the BCP as described above.

NDA targets will also be adjusted downward (upward) by the surplus (shortfall) in program disbursements relative to the baseline projection. Program disbursements are defined as uncommitted external disbursements that are usable for the financing of the overall central government budget.

C. Public Debt and Arrears Targets3

6. Targets on Contracting or Guaranteeing of New Nonconcessional External Debt by the Consolidated Public Sector
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The limit applies to the contracting or guaranteeing by the consolidated public sector within the calendar year of new nonconcessional external debt with an original maturity of more than one year, including commitments contracted or guaranteed.4 For program purposes, a debt is concessional if it includes a grant element of at least 35 percent on the basis of currency- and maturity-specific discount rates based on the commercial interest reference rates (CIRR) published monthly by the OECD.5 Excluded from the limits are credits extended by the IMF and balance of payments support loans extended by multilateral and bilateral creditors. The Ministry of Finance will provide data to the Fund with a lag of not more than 30 days from the test date.

The concessionality of loans in currency baskets will be assessed on the basis of U.S. dollar interest rate tables. For loans with interest rates based on the internal policy of the creditors, the relevant interest rate to define concessionality will be the interest rate for each creditor at the time of the commitment. Loans or portions of loans extended in the context of a debt rescheduling or a debt reduction operation will be excluded from the ceiling.

7. Performance Criterion on Short-Term External Debt of the Nonfinancial Public Sector

As a continuous performance criterion, the NFPS will neither contract nor guarantee any short-term external debt during the program period. Short-term debt is defined as debt with a contractual maturity of one year or less. Excluded are normal import-related credits, forward contracts, swaps, and other futures market contracts. The public enterprises will provide the necessary information to the ministry of finance, which will provide the data to the Fund, with a lag of not more than 30 days from the test date.

8. Performance Criteria on External Payments Arrears of the Consolidated Public Sector

The Consolidated Public Sector, excluding PETROPAR, will accumulate no new external arrears during the program period. The stock of external arrears of the PS will be calculated based on the schedule of external payments obligations reported by SIGADE. Data on external arrears will be reconciled with the relevant creditors, and any necessary adjustments will be incorporated in these targets as they occur. For the purposes of this performance criterion, an arrear will be defined as a payment, which has not been made within 30 days after falling due. In addition, the public enterprises will report to the ministry of finance and the BCP arrears on any external debt that is not recorded under SIGADE. The same 30-day grace period will be applied to all external payments of public enterprises, except where explicit agreements exist with creditors on an extended grace period. The Ministry of Finance will provide the final data on the stock of consolidated public sector external arrears to the Fund, with a lag of not more than 30 days from the test date.

In addition, the government is engaged in good faith efforts to resolve overdue claims in dispute, and will attempt to negotiate and resolve these as soon as possible. Claims by a syndicate of European and American banks against the state of Paraguay resulting from a judgment made by the Swiss Federal Supreme Court on May 31, 2005, will be considered claims in dispute.

D. Reporting

Monitoring the program requires accurate and timely data. All information on performance criteria, indicative targets, and balance of payments support loans will be reported to Fund staff within the timeframes prescribed above. Debt stocks and associated flows broken down by both creditor and debtor types and maturity will be provided on a quarterly basis.

The Ministry of Finance will be responsible for gathering data on a monthly basis from all the institutions that comprise the consolidated public sector, including the incorporated enterprises (Sociedades Anónimas) COPACO and ESSAP. It will compile this information according to the standard format of the Ministry of Finance’s monthly financial situation report (Situatión Financiera). The data will be supplied to the Fund and published on the Ministry of Finance’s external website within 30 days of each test date.

Annex 1. Paraguay—Fund Relations

(As of February 29, 2008)

I. Membership Status: Joined December 28, 1945; Article VIII

II. General Resources Account:

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III. SDR Department:

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IV. Outstanding Purchases and Loans: None

V. Latest Financial Arrangements:

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VI. Projected Payments to Fund

(SDR Million; based on existing use of resources and present holdings of SDRs):

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VII. Exchange Rate Arrangement: The currency of Paraguay is the Paraguayan guaraní. The exchange rate regime is a managed float. The exchange rate is determined in the interbank foreign exchange market, but the central bank intervenes in the foreign exchange and monetary markets to smooth out exchange rate fluctuations in real effective terms. The U.S. dollar is the principal intervention currency. On February 29, 2008, the average interbank rate for the U.S. dollar was

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. Paraguay has accepted the obligations of Article VIII, Sections 2(a), 3 and 4 of the Fund’s Articles of Agreement. Staff is considering whether the application of the income tax regime may give rise to exchange restrictions subject to Fund jurisdiction.

VIII. Article IV Consultation: The Executive Board concluded the 2007 Article IV consultation on June 29, 2007.

IX. Technical Assistance:

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X. Safeguards Assessment: Under the Fund’s safeguards assessment policy, Central Bank of Paraguay (CBP) is subject to a full safeguard assessment in respect to the arrangement approved on May 31, 2006. A safeguards assessment of the CBP was completed in October 2006. The report states that while the CBP has made some progress in strengthening the safeguards framework since the 2003 safeguards assessment, vulnerabilities remain in certain areas such as financial reporting and program data reporting to the Fund.

XI. Resident Representative: Mr. Tobias Roy has been appointed as resident representative since December 2007.

Annex 2. Paraguay—World Bank Relations1

(As of February 29, 2008)

The Country Assistance Strategy (CAS) was approved in December 2003. It aimed at restoring confidence in the economy and at supporting reforms in key areas of the economy, such as financial sector, rural development, health, and education. At the moment the Bank’s portfolio consist of four operations, of which three are projects under implementation:

  • Pilot Community Development (US$9 million, approved in FY02)

  • Secondary Education Reform (US$24 million, approved in FY04)

  • Road Maintenance Project (US$74 million, approved in FY07)

One project is awaiting Parliament approval:

  • • Sustainable Agricultural Development (US$37.5 million approved in January 2008)

The four World Bank-financed projects presently under implementation or awaiting ratification by Parliament have a total value of US$144.5 million in commitments, of which US$119.1 million remain undisbursed as of February 4, 2008.

In addition to loans, the Bank has mobilized grants for the institutional strengthening of Congress (US$0.4 million) and the Ministry of Finance (US$0.3 million); for improving the management of indigenous lands (US$1.7 million); to support social development in two municipalities (US$0.9 million); to promote development in indigenous communities (US$1.6 million), and to improve biodiversity and forestry (US$0.3 million from the Institutional Development Fund, and US$0.3 million and US$0.9 million from the Global Environment Fund). Paraguay has also elected to become a governance and anti-corruption (GAC) pilot country, and the Bank is currently discussing with the authorities the best way to support this agenda.

On the analytical front, in FY07 the Bank completed a Land Tax Study and an Integrated Fiduciary Framework (jointly with the Interamerican Development Bank and the European Union). A Secondary Education Attainment Assessment was completed in FY08, and the Policy Notes for the New Administration are currently under preparation and will be presented to the incoming administration late in FY08.

While the CAS has now formally expired, the Bank is proceeding with the preparation of two additional projects already included in this CAS (Additional Financing for the Pilot Community Development Project, and a Water Reform Project). A new CAS will be prepared with the forthcoming administration which would take over in August 2008 and presented to the Board in late FY09.

Financial Relations With The World Bank

(In millions of U.S. dollars)

Annex 3. Paraguay—Inter-American Development Bank Relations2

(As of February 29, 2008)

Portfolio

As of February 29, 2008, the active loan portfolio amounts to US$799.9 million, with an undisbursed balance of US$435.7 million. In addition, there are 71 active Technical Cooperation operations (regular TCs, MIF, and Small Projects) for US$24.6 million, of which US$15.0 million are undisbursed. Loan approvals in 2007 reached US$6.2 million.

Strategy

A review of IDB’s Country Strategy with Paraguay was approved in November, 2006. The main focus of IDB’s actions for 2008 will be the support of economic growth and modernization of the state. During 2008 a new IDB strategy for 2009-2013 will be prepared in accordance with the new government’s priorities. It is expected that the main emphasis will be placed on social programs for poverty alleviation.

Pipeline

The lending program for 2008 includes the following operations:

  • a. Strengthening of the Customs Administration II Phase, US$9.0 million

  • b. Strengthening of the Fiscal Administration II Phase US$5.5 million

  • c. Integrated Municipal Fiscal Management and Development, US$120 million

  • d. Conditional Line of Credit for AFD, US$50 million

  • e. Trade Facilitation Banco Sudameris, US$5 million

  • f. Environmental System Support II Phase, US$7 million

Expected Total 2008: US$196.5 million

Annex 4. Paraguay—Statistical Issues

While data provision is broadly adequate for program purposes, there is a need to improve the timeliness and accurate reporting of statistics. Following a data ROSC mission in January-February 2006, the authorities’ response to the report and the mission’s recommendations were published on the Fund’s website on June 30, 2006. The country is a GDDS participant.

E. Real Sector

National accounts estimates—broadly consistent with the guidelines of the 1993 SNA—were released in 2005. However, no comprehensive regular program for data collection of economic censuses and surveys exists (an industrial survey was conducted in 2002) and source data for nonfinancial services, household consumption, and changes in inventories are insufficient. Major areas of concern include: (i) the 1994 reference year is becoming obsolete; (ii) excessive use is made of fixed coefficients for value added and household consumption; (iii) changes in inventories are obtained residually; (iv) informal activities are not monitored; and (v) supply and use tables have been compiled only until 1997. While the periodicity of annual GDP meets GDDS recommendations, timeliness does not because data are disseminated with a lag of 11 months. An STA mission on the compilation of quarterly national accounts (QNA) was fielded in August 2007. The mission agreed with the authorities on a work plan for the production of provisional QNA series by end-2008. Production of definite QNA series would need to await a revision of the national accounts base year and the compilation of supporting basic data, which are tentatively scheduled for completion by 2009/10.

Both the consumer (CPI) and producer price indices (PPI) are reported on a regular and timely basis. From January 2008, the Central Bank of Paraguay (BCP) is using a new CPI index based on the 2005-06 household budget survey. The geographic coverage of the CPI is limited to Asuncion (the capital) and expenditure weights are representative of the consumption patterns of urban households. The PPI has a base weight period of December 1995 and its basket (150 items) is not fully representative of current national output; electricity, water, gas, and services are not covered.

Since the introduction of a regular household survey in 1998, the coverage and quality of employment and unemployment statistics have improved significantly. However, frequencies remain at the annual level, and the publication lag is close to one year. Wage indices are updated twice a year.

The data ROSC mission found that the resources are insufficient for real sector statistics and constrain further development, particularly the full adoption of the 1993 SNA. The authorities have been trying to address these resource shortcomings in the context of the recent compilation of a new CPI and the production of provisional QNA series.

F. Fiscal Sector

Government finance statistics are broadly consistent with the recommendations of the Manual on Government Finance Statistics 1986 (GFSM1986). The authorities have not yet prepared a plan to migrate to the Government Finance Statistics Manual 2001 (GFSM 2001). Monthly data are available for the central administration (budgetary central government). Data on the operations of the local governments are not included in the GFS. The asset position of the social security system is available on a daily basis. Statistics on the central administration include data of the Postal Service Directorate (a nonfinancial public corporation) and the statistics of the nonfinancial public sector include data of financial public corporations (four employer social insurance schemes). These social insurance schemes are treated as financial corporations in the monetary and financial accounts. Data on medium- and long-term external debt are reliable and available on a monthly basis. Domestic debt data are available on request, but need to be fully integrated with the external debt database. Deficiencies remain in recording short-term supplier and commercial credit of the public sector. Moreover, there is a discrepancy in the fiscal data reported by the monetary and fiscal authorities. Measures are being taken to make reporting more transparent.

Annual data covering general government for 2006 have been reported for publication in the 2007 edition of the GFS Yearbook. However, since 1994 no outstanding debt data and no breakdowns for expenditure by function have been provided for publication in the GFS Yearbook. Monthly and quarterly data are not reported for publication in IFS.

G. Money and Banking Sectors

Paraguay completed the establishment of a unified compilation and reporting system for the whole range of monetary data. This new system intends to harmonize monetary data for use within the BCP, for reporting to STA for publication in IFS, and for operational and monitoring purposes. A revision of the classification criteria has led also to a marked reduction in the discrepancies of interbank positions. However, the lack of coverage of the credit cooperatives remains a matter of concern since they account for around 25 percent of deposits and loans of the banking sector. The BCP, with assistance from STA, plans to begin including monthly data of the 20 largest credit cooperatives in the monetary survey by mid-2008. The superintendency of banks publishes a detailed and informative report on the soundness of the financial system.

H. External Sector

The classification of the balance of payments and the international investment position (IIP) follows the recommendations of the Balance of Payments Manual, 5th edition. Quarterly and annual data on balance of payments and the international investment position (IIP) are available from 2001 onwards on the central bank website, and are reported to STA. Improvements have been made in the quality of the data on capital flows, especially in the coverage of foreign direct investment, and in the recording of external debt transactions. Special studies by the central bank have improved the estimation methods for remittances of Paraguayans abroad and unregistered trade transactions, but serious deficiencies remain.

Also, there are deficiencies in the area of private capital outflows, which are difficult to register due to Paraguay’s open capital account. An STA mission in November 2006 assisted the BCP in implementing recommendations of the ROSC mission. In particular, the mission focused on: (1) assessing the surveys used to capture data on services, direct investment, nonfinancial private sector portfolio investment, and other investment; (2) reviewing and updating the statistical techniques used to calculate unrecorded trade; (3) reassessing the treatment of the binational hydroelectric energy enterprises in the external sector accounts; and (4) reviewing and preparing a preliminary template for reporting data on international reserves and foreign currency liquidity.

Paraguay: Table of Common Indicators Required for Surveillance

(As of February 29, 2008)

article image

Daily (D); Weekly (W); Monthly (M); Quarterly (Q); Annually (A); Irregular (I); Not Available (NA).

Includes reserve assets pledged or otherwise encumbered as well as net derivative positions.

Both market-based and officially-determined, including discounts rates, money market rates, rates on treasury bills, notes and bonds.

Foreign, domestic bank, and domestic nonbank financing.

The general government consists of the central government (budgetary funds, extra budgetary funds, and social security funds) and state and local governments.

Including currency and maturity composition

Reflects the assessment provided in the data ROSC published on June 30, 2006 and based on the findings of the mission that took place during January 25-February 8, 2006. For the dataset corresponding to the variable in each row. The assessment indicates whether international standards concerning (respectively) concepts and definitions, scope, classification/sectorization, and basis for recording are fully observed (O), largely observed (LO), largely not observed (LNO), or not observed (NO).

Same as footnote 7, except referring to international standards concerning (respectively) source data, assessment of source data, statistical techniques, assessment and validation of intermediate data and statistical outputs, and revision studies.

Annex 5. Paraguay—Work Program

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1

Core inflation in Paraguay excludes fruits and vegetables prices (which declined in 2007) but includes other food prices (which increased significantly).

2

Staff estimates that the Central Administration’s primary surplus for 2007 was over ½ percent of GDP higher than the structural primary surplus.

3

To this date, all performance criteria (PC) have been observed since the approval of the SBA in May 2006.

4

The authorities submitted draft legislation to Congress to provide annual budgetary support of up to 0.2 percent of GDP to the BCP to cover its losses, and the BCP and the Ministry of Finance reconciled their undisputed claims. To settle these claims, the Ministry of Finance will issue public bonds to the BCP amounting to ¼ percent of GDP.

5

As part of its operational plan, the BCP issued key regulations on opening financial institutions, prepared regulations for credit risk management; and strengthened the superintendency of banks’ risk unit by increasing staff and providing adequate training.

6

The authorities already took corrective measures on ESSAP in December 2007 by submitting to Congress a draft law with a view to restructure its debt, clarify its ownership structure, and strengthen its financial oversight.

7

While discussions covered the whole year, performance criteria and structural benchmarks are proposed for the first half of 2008. The sixth and last review is scheduled for June 2008, but it is likely to be delayed a few weeks given the political calendar. In that event, there would be an opportunity to assess program performance through end-June 2008.

8

The symbol ¶ refers to the paragraph number in the authorities’ MEFP (Appendix 2).

9

While the wage bill in Paraguay is broadly in line with the average of its MERCOSUR trading partners (8 percent of GDP), it is now higher than the average for Latin America (7 percent of GDP)

10

PETROPAR’s policy is to smooth out domestic diesel prices without providing subsidies for the year. For most of the first half of 2007 PETROPAR reported profits from the distribution of diesel, but recent international oil price increases have led to an estimated 5 percent subsidy on the domestic diesel price.

11

Paraguay’s balance of payments remains vulnerable to external price shocks. Staff estimates that a 10 percent deterioration in the terms of trade would lead to a 2½ percent of GDP worsening in the external current account.

12

The authorities continue to be engaged in resolving claims in dispute amounting to 11⅓ percent of GDP at end-December 2007, including (i) Belgium’s Ex-Herstal (US$7 million); (ii) import verification companies (US$75 million); and (iii) a Swiss court ruling in favor of several European and American banks (US$85 million).

13

For an assessment of the exchange rate, see Box 3 in “Paraguay—Staff Report for the 2007 Article IV Consultation and Second and Third Reviews Under the Stand-By Arrangement” (www.imf.org) June 18, 2007.

14

Following transfers of about ¼ percent of GDP on account of the reconciliation of undisputed claims between the Ministry of Finance and the Central Bank, staff estimates that additional transfers of some 5¾ percent of GDP could be needed to settle the disputed claims.

15

The Tepokorã program is based on contracts with families living in extreme poverty (usually with children under 15 years of age or with pregnant woman) to give a monthly cash allowance of about US$35 per month in return for, among others, meeting minimum school attendance and immunization of beneficiaries’ children. The program is expected to cost 0.2 percent of GDP in 2008.

1

The variables subject to quarterly quantitative performance criteria under the program include: (i) overall balance of the Central Administration; (ii) wage bill of the Central Administration; (iii) overall balance of the public sector; (iv) net international reserves of the Central Bank; (v) net domestic assets of the Central Bank; (vi) contracting or guaranteeing of nonconcessional external debt by the nonfinancial public sector; (vii) contracting or guaranteeing of short-term external debt by the nonfinancial public sector (on a continuous basis); and (viii) non-accumulation of external debt arrears (on a continuous basis).

2

The list of structural measures observed through end-December 2007 includes: (i) the establishment of an expenditure commitment control system; (ii) the design of a public sector investment program; (iii) the design of a strategy for the development of capital markets; (iv) the implementation of a number of prudential regulations in line with the BCP’s operational plan to strengthen the regulatory and supervisory framework of the banking system; and (v) the increase in the coverage of the conditional cash transfer program to over 15,000 families. A new payments system legislation was drafted and will be elevated to the Economic Cabinet by mid-April 2008. The benchmark related to the implementation of the result-oriented management contracts for five public enterprises for end-December 2007 was observed, although the results were positive for only three of them (ANDE, COPACO, and PETROPAR). We are taking action in the other two public enterprises (ESSAP and INC) to ensure that theses management contracts are observed in the first half of 2008.

1

It will exclude any Treasury transfers to the Caja Fiscal registered as wages for new employment positions authorized in the budget but not yet appointed.

2

Altogether they include: Pension funds (Instituto de Prevision Social (IPS), Caja Bancaria, Caja Ande, Caja Ferroviaria, Caja de Empleados Municipales), the public universities (UNA, UNE, UNP, UNI), 17 provinces (gobiernos departamentales), 17 autonomous regulatory and development agencies, the public enterprises (PETROPAR, ANDE, ANNP, DINAC, and INC) and incorporated enterprises owned by the state (ESSAP and COPACO).

3

The stock of debt does not include disputed claims to the following parties: Belgium’s Ex-Herstal, a South African supplier; French and Swiss import verification companies; the National Bank of Argentina, and claims by a syndicate of European and American banks against the state of Paraguay resulting from a judgment made by the Swiss Federal Supreme Court on May 31, 2005. Any of these claims that would be considered as debt will be added to the stock figure.

4

The term “debt” has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with respect to Foreign Debt adopted on August 24, 2000 (Board Decision No. 12274-(00/85). In line with Paraguayan law, debt will be deemed contracted only if it has received approval by Congress.

5

The grant element is calculated as the difference between the net present value (NPV) of debt and its nominal value, expressed as a percentage of the nominal value of the debt (i.e., Grant Element = (Nominal Value—NPV)/Nominal Value). The NPV of debt is calculated by discounting the future stream of payments of debt service due on this debt. For debt with a maturity of at least 15 years, the ten-year average CIRR will be used to calculate the NPV of debt. For debt with a maturity of less than 15 years, the six-month average CIRR will be used.

1

Prepared by the staff of the World Bank.

2

Prepared by the staff of the IDB.

Same Series

Other IMF Content

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Cover IMF Staff Country Reports
Paraguay: Fifth Review Under the Stand-By Arrangement: Staff Report; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Paraguay
Author:
International Monetary Fund
Volume/Issue:
Volume 2008: Issue 180
Publisher:
International Monetary Fund
ISBN:
9781451832549
ISSN:
1934-7685
Pages:
76
DOI:
https://doi.org/10.5089/9781451832549.002

Paraguay: Sources of Growth

Paraguay: Inflationary Pressures and Shocks

Paraguay: Headline inflation and food contribution in 2007

Paraguary: Possible Impact of New Weights

Paraguay: Taxpayer Base

Paraguay: Interest Rate on LRMs

Paraguay: Financial Soundness

Paraguay: Sources of Foreign Exchange
Figure 1.

Paraguay: Real Sector Developments
Figure 2.

Paraguay: Fiscal Developments

Paraguay: SOE’s Management Performance percent of overall achievement of agreed target

(average of 1st, 2nd and 3rd quarters - 2007)
Figure 3.

Paraguay: Monetary Developments
Figure 4.

Paraguay: Financial System Developments
Figure 5.

Paraguay: Balance of Payments Developments
Figure 6.

Paraguay: Program Performance

Paraguay: Real Effective Exchange Rate

Paraguay: Average Time required for a Business Decision

(Index = 1 for OECD