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.
The Executive Board of the International Monetary Fund (IMF) today completed the fifth review of Paraguay’s economic performance under a 27-month Stand-By Arrangement for an amount equivalent to SDR 30 million (about US$49 million). Completion of the review will make up to SDR 28 million (about US$46 million) available to Paraguay immediately. However, the Paraguayan authorities intend to continue treating the arrangement as precautionary.
The original amount of the arrangement of SDR 65 million (about US$107 million) was reduced—at the authorities’ request—to SDR 30 million (about US$49 million) by the time of the fourth review (see Press Release No. 07/231). The Stand-By Arrangement was approved May 31, 2006 (see Press Release No. 06/117).
Following the Board discussion on the fourth review, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, said:
“Paraguay is enjoying the best macroeconomic conditions in many years, supported by a Stand-By Arrangement from the Fund. The economy is estimated to have grown robustly in 2007, and the public finances were in surplus for the fourth consecutive year, leading to a substantial fall in the consolidated public debt. At the same time, the health of the financial system has improved, the external position remains strong, and international reserves have reached new record highs.
“The authorities appropriately adopted a countercyclical fiscal stance during 2007, recording a budget surplus for the central government. Following the approval by Congress of an expansionary budget for 2008, the authorities have adopted a financial plan aimed at maintaining fiscal discipline. Looking ahead, there is a need to reform the budgetary process to prevent the financial plan from becoming a tool for budgetary control in place of the budget that is adopted by Congress.
“Given the inflationary pressures that emerged during the second half of 2007, the tightening of monetary policy was appropriate. To contain core inflation to 5 percent (within a band of ± 2½ percent) for 2008, monetary policy will need to remain tight. A flexible exchange rate policy should be maintained, with exchange market intervention aimed only at achieving the international reserve target.
“Structural reforms have intensified. Considerable progress was made in strengthening the central bank balance sheet, reinforcing prudential regulations, and developing an expenditure commitment control system. For 2008, reforms rightly focus on consolidating the Treasury accounts, continuing the process of strengthening the Central Bank’s income position, signing new results-oriented management contracts with the five largest state-owned enterprises, and extending the coverage of the conditional cash transfer program.
“The Fund encourages the authorities to continue pursuing prudent fiscal and monetary policies to consolidate macroeconomic stability and to further deepen structural reforms. The aim should be to leave the incoming administration a solid economic foundation on which it will be able to build sustainable long-term growth and meaningful poverty reduction,” Mr. Kato said.