Raising growth on a sustainable basis and addressing widespread poverty are the main challenges for Paraguay. The macroeconomic program for 2007 aims at raising growth and reducing inflation. IMF staff recommends that the next Article IV Consultation continues within the 24-month cycle, and supports completion of the second and third Stand-by Arrangement (SBA) reviews. After the 2002 financial crisis, growth has rebounded to almost twice its long-term average, per capita income surged to its highest level in 8 years, and extreme poverty has been reduced by almost one third.
The Executive Board of the International Monetary Fund (IMF) completed on June 29, 2007, the second and third reviews of Paraguay’s economic performance under a 27-month Stand- By Arrangement in the amount equivalent to SDR 65 million (about US$98.4 million). This will make SDR 43 million (about US$65 million) available to Paraguay immediately. However, the Paraguayan authorities intend to continue treating the arrangement as precautionary. The arrangement was approved May 31, 2006 (see Press Release No. 06/117).
The main objectives of the program are to raise growth on a sustainable basis and to address widespread poverty. The program is centered around five reform areas: strengthening macroeconomic management, reinforcing fiscal institutions, tackling financial weaknesses, developing a pro-growth policy agenda, and designing an effective poverty reduction policy.
The Executive Board also concluded the Article IV Consultation with Paraguay.
Following the Board discussion on the second and third reviews, Takatoshi Kato, Deputy Managing Director and Acting Chair, said:
“Paraguay’s economic performance over the past four years has been commendably strong, reversing decades of declining living standards. Since 2003, growth has rebounded to almost twice its long-term average, and extreme poverty has been reduced by almost one-third. The consolidated public debt-to-GDP ratio has been reduced by one half, inflation has been contained, the guaraní has strengthened significantly, and international reserves have reached a historical peak. This progress is the result in large part of the government’s determined efforts to establish fiscal and monetary discipline and entrench structural reforms.
“Performance under the Fund-supported program has been good. In particular, fiscal discipline was maintained despite rising expenditure pressures toward the end of 2006. Following supply shocks during the fourth quarter of 2006, inflation increased significantly, but there has been a substantial reduction in inflation since the beginning of this year. The outlook for economic activity in 2007 remains robust, with real GDP growth projected at 4-5 percent. However, there have been some delays in implementing financial sector reforms. In their medium-term strategy, the authorities are committed to entrenching macroeconomic stability, intensifying reforms to establish the conditions for sustained growth, and addressing remaining vulnerabilities in the financial sector. The authorities’ policies will be aimed at creating an enabling environment for private sector-led growth and achieving a meaningful reduction in poverty.
“Going forward, there is a need for the authorities to implement without delay their new plan to strengthen the financial system. The current high profits and declining level of nonperforming loans in the financial system suggest that now would be a good opportunity for the authorities to improve the financial sector’s regulatory and supervisory frameworks and the central bank’s financial position.
“The Fund, through policy advice and technical assistance, will continue supporting the authorities in their efforts to address these challenges,” Mr. Kato said.