Sixth and Final Review Under the Stand-By Arrangement: Staff Report; Staff Statement; Press Release on the Executive Board Discussion; and Statement by the Executive Director for Paraguay

This paper discusses key findings of the Sixth and Final Review Under the Stand-By Arrangement for Paraguay. The program remains broadly on track. All performance criteria for end-March 2008 were met, and those for end-June 2008 are expected to have been observed. With one exception, all structural benchmarks for 2008 are expected to be implemented, albeit with delays. The economy grew 6¾ percent in 2007 and is expected to continue expanding at least 5 percent in 2008 driven by strong agricultural exports.


This paper discusses key findings of the Sixth and Final Review Under the Stand-By Arrangement for Paraguay. The program remains broadly on track. All performance criteria for end-March 2008 were met, and those for end-June 2008 are expected to have been observed. With one exception, all structural benchmarks for 2008 are expected to be implemented, albeit with delays. The economy grew 6¾ percent in 2007 and is expected to continue expanding at least 5 percent in 2008 driven by strong agricultural exports.

I. Background

1. Accomplishments. Over the last five years real GDP rose by about 25 percent (more than in the previous 12 years), thanks to the pursuit of sound macroeconomic policies and a favorable external environment. Public finances remained in surplus throughout the period; consolidated public debt as a percent of GDP was reduced by more than half to less than 30 percent; the financial system strengthened considerably and no longer poses systemic risks; core inflation was reduced by about three–quarters to less than 5 percent (although it has risen in 2008 mainly due to supply shocks); international reserves more than tripled, to about US$3 ¼ billion; following a downside overshooting, the guaraní strengthened against major currencies (in line with fundamentals); per capita income more than doubled to over US$2,500; and the poverty rate was reduced by ¼ to about 35 percent (Box 1).

A. Developments

2. Output. Real GDP growth in 2007 is estimated at 6¾ percent, driven by a major expansion of the agriculture sector (almost 25 percent). Non–agricultural GDP increased 3 ½ percent, reflecting a good performance of the service sector, offset in part by the lack of dynamism of the secondary sector, and the temporary contraction of the livestock sector. The unemployment rate fell to about 5 ½ percent in 2007, the lowest of the past decade, although underemployment remains high at over 25 percent. Real GDP is expected to grow by at least 5 percent in 2008, owing to a continued vigorous expansion of agriculture.


Paraguay: Real GDP

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001

3. Inflation. Core inflation has risen since mid–2007, reaching 13 percent (y–o–y) in June 2008 (about ½ point lower than headline inflation).1 About 2/3 of core inflation is due to food price shocks, either worldwide (cereals and milk) or country–specific (beef), as well as higher fuel prices. Non–tradable prices accelerated to 9 percent (y–o–y) in June 2008, indicating the emergence of spillover effects from supply shocks and expected wage pressures to the rest of the economy.


Paraguay: Inflationary Pressures

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001

4. Budget. Despite considerable expenditure pressures in the run–up to the April 2008 general elections, fiscal policy remained under control and continued to be adequately countercyclical.2 Tax collections, particularly VAT and import duties, have been buoyant, increasing by over 20 percent through April. At the same time, expenditures were kept in line with the Finance Ministry’s financial plan. As a result, the overall fiscal surplus through May 2008 was significantly larger than expected, and reached nearly 1½ percent of GDP.


Paraguay: Real Fiscal Aggregates

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001

5. Monetary stance. In response to inflationary pressures, the authorities resumed the tightening stance initiated in the second half of 2007, raising interest rates on sterilization bills (LRM) by 150 basis points in March 2008 (the 182–day LRM rate is about 7 percent).3 Notwithstanding these efforts, real interest rates have become negative over the last several months. Strong foreign exchange inflows have led to a sharp increase in international reserves, to about US$3 ½ billon by end–June 2008. Despite large placements of LRM to contain the resulting monetary expansion, currency in circulation increased by over 35 percent (y–o–y) in June 2008. In an effort to control liquidity, reserve requirements were raised from 15 to 17 percent in June 2008.


Paraguay: Monetary Indicators

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001


Paraguay: Financial Indicators

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001

6. Financial system. The banking system remains sound and has not been affected by the global financial turmoil. The average capital adequacy ratio exceeds the 10 percent regulatory minimum. Credit growth of over 70 percent (y–o–y) in May 2008 remains a concern but it has not affected the quality of the portfolio thus far. Nonperforming loans continue to decline (reaching about 1 percent on average) and remain adequately provisioned. Liquidity risks are low, with LRMs representing about 95 percent of banks’ investment portfolio, and funding from parent banks and banks abroad accounting for less than 2 percent of liabilities in May 2008.

Figure 1.
Figure 1.

Paraguay: Real Sector Developments

Contrary to the regional pattern, growth accelerated strongly in 2007, supported mainly by a record agricultural production. The increase of core inflation since mid–2007 reflects mostly food supply shocks, something also experienced by other countries in the region.

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001

Source: Paraguayan Authorities and Fund staff estimates.
Figure 2.
Figure 2.

Paraguay: Fiscal Developments

Significant progress has been made in reducing fiscal imbalances in line with general regional trends, although Paraguay has performed better than its MERCOSUR partners. The challenge is to preserve fiscal sustainability and create the fiscal space to meet essential social and infrastructure spending needs.

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001

Source: Paraguayan Authorities and Fund staff estimates.

Paraguay: Assessment of Performance under the SBA

Overview. Performance under the current SBA (2006–08) has been strong. Virtually all the macroeconomic objectives were met, and most structural reforms under the program have been achieved, although there were some delays, especially in the financial sector. The program was based on a strong macroeconomic framework supported by four pillars of structural reforms in the following areas: (i) public sector; (ii) financial sector; (iii) enhancing growth; and (iv) reducing poverty.1 The main macroeconomic objectives were to lay the foundation for a gradual but sustainable increase of economic growth to 4–5 percent, lower inflation to industrial country levels, reduce public debt levels to about 30 percent of GDP, and build an adequate external reserve cover. With the exception of the inflation objective, the macroeconomic targets were exceeded, some by large margins.

Key Macroeconomic Targets under the SBA

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Non financial public sector (excluding central bank).


Public sector reforms. Achievements under the program have been commendable, especially in the revenue mobilization area. Significant improvements were achieved in modernizing the tax and customs administrations, especially regarding new information systems and collection through banks. With the implementation of a commitment control system and development of capital sector investment system, budgetary deficiencies have been reduced. Nonetheless, there has been little progress in reducing budget rigidities given the continued congressional approval of unfunded expenditures. Furthermore, a comprehensive pension reform, including through the consolidation of various pension funds, is needed.

Financial sector reforms. There have been major improvements in the health and the regulatory framework of the financial sector, although reform implementation was uneven and there were delays. The most notable achievement has been the significant improvement of BNF, from an essentially insolvent institution to one with a capital adequacy ratio of over 20 percent, as well as reducing the NPL rate from about 40 at end–2005 to about 8 percent at end–2007. At the same time, prudential regulations have been enhanced, including through the adoption of a modified Resolution 8/03 (to be implemented from October 2008). Although the process has been delayed and protracted, the authorities are now implementing measures to enhance BCP’s financial position.

Pro–growth agenda. While considerable progress has been achieved in improving the business climate, a lasting improvement of SOE performance has proven elusive. Performance under results–oriented contracts has been uneven, with three of the five SOEs not meeting their key targets. Nonetheless, more transparency on SOE performance has been brought to bear with the publication of their quarterly performance reports ( The investment climate has been improved particularly with regard to the facilitation of opening new firms, and the creation of a business development gateway by the government and the private sector (

Social safety net. The creation of a social safety net to protect the most vulnerable has been a key success under the program. The program set out to create a conditional cash transfer (CCT) program (Tekoporã) for poor families (see Box 3).

1 The program builds on achievements of a previous SBA (2003–05) including: (i) significant fiscal consolidation facilitated by a fiscal adjustment law and a customs code; (ii) a revamp of the banking resolution framework; (iii) a reform of the public pension system to reduce deficits; and (v) the introduction of a second–tier banking law.

7. External sector. The external position strengthened further in the first half of 2008, mostly due to high exports earnings associated with high international food prices, in particular of soybeans (the main crop). Faced with large inflows, the authorities intervened and purchased a considerable amount of foreign exchange in the first half of 2008, surpassing the international reserve target for end–December 2008 by about US$600 million, while the guaraní was allowed to appreciate by almost 20 percent against the U.S. dollar in the same period (Box 2).


Paraguay: Foreign Exchange Market

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001

8. Political situation. After 61 years in power, the Colorado Party lost the presidential elections in April 2008.4 The newly–elected President Fernando Lugo, a former bishop, will assume office on August 15, 2008. The transition to the new government has been smooth, although Congress will be fragmented. Governance in such an environment could prove difficult, and the new government will have to reach political consensus with opposition parties to pursue its legislative agenda. President Lugo has already designated Mr. Dionisio Borda as Minister of Finance, sending a clear signal to the private sector that his government will be committed to macroeconomic stability.5


Paraguay: Results of Presidential Elections

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001

Figure 3.
Figure 3.

Paraguay: Monetary Developments

In response to large foreign exchange inflows, the central bank has increased foreign exchange purchases and let the exchange rate appreciate. Partial sterilization has led to high growth of monetary aggregates, contributing to inflationary pressures.

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001

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

Paraguay: Financial System Developments

While financial markets are the least developed in the region, they continued expanding and strengthening as macroeconomic conditions continued to improve.

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001

Source: Paraguayan Authorities and Fund staff estimates.

9. Social conditions. Despite high economic growth and advances in employment, the social situation has deteriorated due to continued and sustained increases in food prices, particularly for the urban poor. There are increasing difficulties in the eastern provinces, where the use of land in highly–mechanized soybean production has fueled conflict with poor small–scale farmers and landless peasants. The new government is expected to implement social emergency measures, but their fiscal impact is as yet unknown.

B. Performance

10. Quantitative. Performance under the program has generally been strong. All quantitative performance criteria through end–March 2008 have been observed, most with large margins. All end–June 2008 performance criteria are expected to have been met too (Table 1).6

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.

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.

Paraguay: Performance for March 2008

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Central administration.

Sources: Paraguayan authorities and Fund staff.

11. Structural. Progress continued to be made in implementing structural reforms, but there have been delays in implementing the structural agenda. However, most structural benchmarks (SB) for 2008 are expected to be implemented before the end of the arrangement (Table 2).7

Table 2.

Paraguay: Structural Conditionality Under the Program

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Source: Paraguayan authorities.

SB = structural benchmarks; PC = performance criteria.

Paraguay: SBA Performance

(May 2006 – Mar 2008)

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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 implementation, which have led to delays in completing previous reviews. One SB had to be reset and modified into three new benchmarks.

  • Cash transfer program. This program covered over 19,500 families by end–May, or above the 19,000 families target (SB for end–May 2008).

  • Treasury accounts. In an important move towards reaching a single Treasury account, the authorities consolidated all accounts that are not established by law into one account at the BCP in early–July 2008 (SB for end–June 2008).

  • Central Bank’s balance sheet. As part of the strategy to strengthen the financial position of the Central Bank (BCP), the authorities are expected to send to the attorney general the disputed claims between the BCP and the MOF (SB for end–May 2008).

  • State–owned enterprises. The benchmark related to the signing of revised resultoriented management contracts and corresponding development of strategic business plans for five large state–owned enterprises (SOE) was only partly met (SB for end–May 2008).8 Contracts signed at end–2006 are still in effect (until August 2008), but new ones were not signed as managers are political appointees and realized they might be removed (see ¶23). While most SOEs prepared timely draft business plans, staff viewed them as generally weak as the objectives were not ambitious and the targets were unclear.

Paraguay: Foreign Exchange Inflows

Paraguay has received substantial foreign exchange inflows recently. This is related to a combination of medium–term trends and favorable cyclical factors:

  • Trade Balance. The record agriculture production in 2007 and the price increases of primary products led to a rise in exports of about 25 percent. Although this impact was partly offset by an expansion of imports, the trade balance improved by over 1 percent of GDP. With continued strengthening of commodity prices in early 2008, this strong external position is expected to be sustained.

  • Binational Entities. These inflows—amounting to 5 ¾ percent of GDP in 2007—are twice as large as in 2003. Increased inflows reflect the completion of the Yacyretá dam, the increase of royalties from the Itaipú dam, and the increase of social expenditures by both entities.

  • Capital Inflow. Foreign direct investments have jumped from ½ percent of GDP in 2003–05 to over 1 ½ percent in 2006–07. This reflects in part investment from multinational companies in the soybean and telecommunications sectors.


Paraguay: Sources of Foreign Exchange

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001


Paraguay: Uses of Foreign Exchange

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001


Paraguay: Exchange Rate and Reserves

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001

These foreign exchange inflows have led to upward pressures on the exchange rate. The guaraní has appreciated by about 20 percent with respect to the U.S. dollar between January 2007 and June 2008. In nominal effective terms, the exchange rate has appreciated by about 10 percent over the same period.

The central bank has intervened in the foreign exchange market to smooth temporary or seasonal volatility. The central bank has stepped up interventions to reduce volatility and prevent the disruptive impact of seasonal transactions on the foreign exchange market. As of end–2007, the level of reserve was adequate by standard rules–of–thumb of reserve coverage and represented almost 4 months of imports of goods and services or over 3 ½ times short–term external debt (excluding foreign currency deposits).1

1 The Greenspan–Guidotti rule suggests a reserve coverage of 100 percent of short–term debt. An alternative benchmark, based on the Jeanne–Rancière (2007) model, suggests that, at over 20 percent of GDP, reserves are somewhat higher than the optimal level of 16 percent, determined using parameters tailored with country–specific data.
Figure 5.
Figure 5.

Paraguay: Balance of Payments Developments

The external position is expected to remain strong in 2008, largely on account of surging soybean prices, and despite a moderat slowdown in regional trade partners.

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001

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

Paraguay: Program Performance

The program has remained on track throughout the period. Fiscal discipline has resulted in surpluses of the central and overall public sector. The external position has strenghtened, but its impact on currency has only been partly sterilized.

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001

Sources: Paraguayan Authorities and Fund staff estimates.

II. Outlook

12. Prospects. As a primary commodity exporter, Paraguay should continue to benefit from the strong global increase in commodity prices, while investments realized over the past few years in the livestock and agricultural sectors should sustain the ongoing expansion and increase productivity. By contrast, the appreciation of the guaraní, could penalize nontraditional exports. While the supply shock related to higher international oil prices is a drag on the economy, the medium–term outlook for Paraguay remains positive.

13. Risks. Paraguay continues to be vulnerable to an eventual deceleration of the world economy and setbacks in international prices and demand for the country’s commodity exports. The downside risks for growth in Paraguay are increasing, although not for this year given that the agricultural season has been quite good. If the global financial turbulence spreads, it could contaminate the headquarters of foreign–owned banks in Paraguay, leading to a possible credit crunch. There is also the political risk that the new government might fail to assemble a durable working coalition in Congress, which might undermine the fiscal balance and the structural reform agenda that needs to be implemented to sustain high economic growth.

III. Discussions

14. Focus. Discussions with the current authorities focused on ensuring that the new Government takes over an economy in sound shape in August 2008. The authorities reiterated their commitment to the program, and their intention to go out with the reputation of being good economic managers. Staff stressed the need to continue implementing countercyclical policies by sustaining a tightening stance as the economy was growing above potential while remaining flexible and ready to relax policies if there was a clear indication of a sudden softening in economic activity.

15. Engagement. The incoming authorities expressed their desire to maintain a close dialogue and engagement with the Fund (including through intensified technical assistance). Although they had not taken a formal decision, they seemed unlikely to request a successor Fund arrangement immediately after taking office in August 2008. The incoming authorities also expressed their intention to cement macroeconomic stability and deepen structural reforms over the next several years.

A. Macroeconomic Management

16. Fiscal policy. There was agreement to continue with tight policies as an effort to contain inflationary pressures. In particular, it was agreed to save the over–performance of the first half of the year with the objective of reaching an overall surplus of at least ½ percent of GDP in 2008, compared with the program objective of overall balance. This is expected to be achieved through a combination of good revenue performance and tight expenditure controls established in the Finance Ministry’s financial plan. Staff urged the protection of needed capital expenditures, the execution rate of which has generally been low. However, there is a risk that the new government will be under pressure to rapidly increase social spending, especially in light of increasing food and fuel prices that are hitting the poor. Already, Congress passed a new law that would have increased consumer subsidies for electricity by about ½ percent of GDP (overriding a President veto).9 Staff urged the new economic team to resist pressures to increase expenditures sharply as this would exacerbate inflationary pressures, and in turn undermine the policy of protecting the real incomes of the poor.

Paraguay: Fiscal Program1/

(In percent of GDP)

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Central Government.

Sources: Paraguayan authorities; and staff estimates

17. Monetary policy. In view of the inflationary pressures, staff stressed the need to tighten monetary policy further, even if this may lead to some further appreciation of the guaraní. Staff expressed concern about the strong growth of monetary aggregates, the negative real interest rates, and the likely negative impact of high credit growth on credit quality once the current favorable conditions subside. The authorities argued that the high growth of monetary aggregates reflects in part higher money demand due to increased confidence in the economy, and that despite rapid growth, credit to the private sector is only 18 percent of GDP, well below the level prior to the 2002 crisis.10 Nevertheless, the monetary authorities agreed in principle on the need of further tightening, while noting that the LRM rate adjustment in late March 2008 has not had its full effect. They also claimed that any additional tightening may attract capital inflows (especially in a low interest rate environment globally) and would further complicate monetary management.

Paraguay: Monetary Program1/

(In percent of currency the previous period)

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Central Bank Accounts.

Sources: Paraguayan authorities; and Fund staff estimates

18. External policy. The favorable balance of payments prospects in 2008 translated into sustained appreciation pressures. The current account surplus is expected to narrow moderately from 2 percent of GDP in 2007 to 1¾ percent in 2008 as exports remain high and imports continue to grow at a steady pace consistent with high economic activity and high oil prices. In response to continued foreign exchange inflows and upward pressure on the guaraní, the authorities and staff agreed on the need to maintain a flexible exchange rate regime and restrict interventions to limit the risks to the inflation outlook and the cost of sterilization. Progress continues toward resolving remaining claims in dispute with foreign creditors/suppliers.11

Paraguay: Balance of Payments

(In percent of GDP)

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General government only.

Includes errors and omissions

Sources: Paraguayan authorities; and Fund staff estimates.

B. Institutional Strengthening

19. Tax administration. Staff underscored the need to preserve and enhance the considerable gains in tax and customs administration of recent years, and recommended additional efforts to strengthen the operations of the large taxpayer unit and the use of a riskbased auditing approach. Following recent FAD technical assistance, the tax collection agency (SET) has developed a medium–term strategic management plan. Staff urged the incoming authorities to approve the plan in order to ensure administrative continuity for tax administration. Progress continued on strengthening ex–post audits and the consolidation of the bank collection system. Customs enforcement has also been significantly improved with the purchase of state–of–the art electronic equipment for scanning vehicles and containers to detect contraband and illegal products.

20. Expenditure control. A key structural objective under the program has been the strengthening of the public expenditure control system. So far, the newly implemented expenditure commitment control system is working well, although additional fine–tuning is needed.12 The authorities have consolidated all accounts that are currently not established by law into a Single Treasury Account. The mission also urged the initiation of the process to incorporate the rest of the accounts. Going forward, deeper reforms will be needed in the medium term to address weaknesses in the budgetary process, notably the ability of Congress to completely revise the budget presented by the executive branch.

21. Central Bank. Progress continues to be made toward strengthening the financial position of the BCP.13 Following the authorities’ strategy of August 2007, the Ministry of Finance is in the process of transferring bonds to the Central Bank for the equivalent of ¼ of one percent of GDP to regularize the BCP’s claims that are not in dispute. The authorities sent in May 2008 amendments to a BCP bill in Congress, increasing the ceiling of potential budgetary transfers to the Central Bank to cover its losses from 0.2 to 0.5 percent of GDP annually. The bill has been unanimously approved by the Senate’s Finance Committee, which makes it likely that both houses of Congress will approve the law in the near future. In addition, the Ministry of Finance is in the process of forwarding the list of the BCP’s claims that are still in dispute to the Attorney General for his clearance and approval. To further enhance the BCP’s de facto independence, future draft legislation should aim at revising the appointment procedure of the Central Bank’s governing body.14

22. Prudential regulations. The authorities have shown a strong commitment to implement their strategy (designed in June 2007) to enhance the regulatory and supervisory framework for the financial system in line with Basel I criteria. Banks will start reporting information to the Superintendency of Banks based on a strengthened framework from June 2008 onwards. Regulation on increased protection of supervisors is to take effect from September 2008. The final steps are also being taken to have new standards for financial risks management practices by January 2009.

23. State–owned enterprises. Staff expressed strong concern about the poor management and widely reported deficient provision of services of public enterprises (despite generating overall surpluses as a group), which was the weakest area under the program.15 While welcoming the increased transparency brought about by the publication of quarterly assessments, staff noted that enforcement of recommendations and accountability continued to fall short of expectations. Staff regretted that the benchmark on the signing of new resultoriented contracts (setting revised performance targets), and the corresponding development of strategic business plans for all the SOEs that are being monitored was not fully observed. This was associated with the uncertainties of the political transition period given that the management of most SOEs is not expected to remain in office. Staff urged the incoming authorities to address vigorously short–comings in this area, as they hamper growth potential. Apart from signing new contracts to increase efficiency, measures could include the early establishment of new boards, and increased private sector participation.16

C. Poverty Alleviation

24. Social policy. The mission commended the authorities on the continued successful implementation of the conditional–cash transfer program (Tekoporã) for low–income households (Box 3). The end–May 2008 benchmark was met, and more than 19,500 families received assistance. The mission noted that extreme poverty has risen recently mainly due to high food and fuel inflation, notwithstanding the decline in overall poverty levels, and urged the wider expansion of Tekoporã to urban areas. The authorities concurred that urban poverty is a problem that needs to be addressed, and they are considering increasing the coverage to about 100,000 families in 2008 (doubling the original target). However, rapidly increasing the number is likely to face logistical difficulties, including the development of adequate identification and monitoring infrastructure and human resources, although the financial costs should remain modest (about ⅓ percent of GDP). The new government intends to implement new social measures including land reform.


Paraguay: Tekopora Program

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001

Paraguay: The Conditional Cash Transfer Program

The creation of a social safety net was one of the four pillars of the stand–by arrangement. It was realized early on that despite increasing growth, some of the people at the bottom of the social ladder would need assistance in order to progressively escape from the vicious circle of poverty. With the assistance of the IDB, a conditional cash transfer (CCT) program (Tekoporã) was set up in 2005, originally on a pilot basis. CCTs have proven quite effective in reducing extreme poverty in several Latin American countries, including Brazil and Mexico.1

The Tekoporã program is aimed at mitigating adverse social conditions of people living in extreme poverty in Paraguay in order to reduce its inter–generational transmission. The idea is to encourage the formation of human capital in poor households by reducing financial constraints. This is done through financial assistance in exchange for meeting certain conditions by families under the program, including school attendance, vaccination, and basic sanitation. The program covers extremely poor families with children under the age of 15 or with pregnant women in poor, rural provinces (“departamentos”). Selection of families is based on a multi–dimensional quality of life index, drawing on the 2001 Household Survey.

Each family receives a modest amount of financial assistance to cover monthly food and education expenses. The assistance amounts up to Gs. 180,000 (about US$45), with a minimum of Gs. 60,000 (about US$15). The total fiscal cost in 2007 was less than 0.1 percent of GDP. Although the amount of monthly assistance is fairly low, the idea is to set it at a level that reduces work disincentives among adults, and to encourage human capital accumulation among the young, while meeting some basic needs.

The program has been quite successful on several levels.2 Originally set to cover 7,000 families in 2006, the number has increased to over 19,500 by end–May 2008, and there are plans to increase the coverage to 100,000 families (almost half of the people in extreme poverty). The program has had a positive impact on school attendance, especially among groups likely to drop out. More fundamentally, it has had a sizeable impact on consumption and in reducing extreme poverty, even after taking into account the transfers themselves. In other words, beneficiaries have been able to autonomously generate income rather than relying solely on the transfers to exit extreme poverty. The main shortcoming has been failure to increase vaccination rates significantly (despite increased health center attendance), and in its inability to raise male labor supply.

Going forward, the main challenge is to scale up the program to cover a lot more poor people, including in urban areas. A recent survey has shown that while the overall level of poverty fell from 38 ¼ percent in 2005 to 35 ½ percent in 2007, the level of extreme poverty rose during the same period from 15 ½ to 19 ½ percent, in part due to a sharp increase in food and fuel prices. Scaling up the program will require developing adequate infrastructure and human resources for service delivery and effective monitoring. Moreover, the extension of the program to urban areas will involve the development of different identification and monitoring systems. Finally, to enhance monitoring and accountability, it would be important to introduce a debit card for beneficiaries, especially in urban areas, rather than the current cash distribution system.


Paraguay: Evolution of Poverty

Citation: IMF Staff Country Reports 2008, 268; 10.5089/9781451832563.002.A001

1 See, The Economist, “When Bribery Pays”, March 13, 2008.2 For a complete assessment, see, Soares and Britto, 2007, “Confronting Capacity Constraints on Conditional Cash Transfers in Latin America: The Cases of El Salvador and Paraguay”, and Soares et al., 2007, “Los Logros y Carencias de las Transferencias de Efectivo Condicionadas : Evaluación del Impacto del Programa Tekoporã del Paraguay”, UNDP International Poverty Centre, Brasilia, Brazil.

IV. Staff Appraisal

25. Overall. Macroeconomic outcomes have been significantly better than anticipated and policy implementation remained strong throughout the program period. There is a broad consensus that the program was very successful in cementing macroeconomic stability, reinvigorating growth, deepening structural reforms and alleviating poverty. All performance criteria and some structural measures for 2008 are expected to have been fully observed. The authorities are to be commended for their achievements and the strong performance. The incoming administration is encouraged to safeguard the reforms implemented and deepen those that are in train.

26. Fiscal. The consistent maintenance of sound fiscal policies throughout the program despite trying political circumstances is worth noting. In fact, Paraguay has recorded fiscal surpluses since 2004, thereby setting public debt levels on a firmly downward trend. Since 2007 the authorities have appropriately adopted a counter–cyclical stance in view of the strength of the economy. This performance reflects the implementation of financial plans that had to offset the impact of expansionary budgets approved by Congress, including large salary increases. As a result, there has been an increase in budget rigidities, and a weakening of credibility vis–à vis economic agents regarding the government’s fiscal stance. Staff urges the authorities to save revenue overperformance to strengthen its counter–cyclical stance and consider a reform of the public financial management framework that would limit Congress’ ability to completely revise the overall annual budget.

27. Monetary. Staff noted that improved fundamentals, in particular high economic growth and increased confidence in the guaraní, have contributed to increased real money demand and financial deepening. However, the current expansion of monetary aggregates exceeds what would be warranted by fundamentals, and the staff urged the authorities to tighten their policy stance. In addition, the uptick of core inflation has spread beyond the initial supply shocks, and raises the risks of a wage–price spiral. In this context, staff welcomes the monetary tightening of March and June 2008 and encourages the authorities to remain vigilant to prevent a monetary overhang, but notes that the Central Bank’s strong concern for its net income position might have deterred a more determined monetary action, reinforcing the case for a rapid recapitalization of the Central Bank.

28. Exchange rate. The authorities have appropriately maintained a flexible exchange rate policy. As the external position has remained strong, the guaraní has appreciated by about 20 percent in the first half of 2008 and international reserves substantially exceeded program targets, thereby reducing Paraguay’s vulnerability to shocks. The external outlook for 2008 continues to be favorable, and staff welcomes the authorities’ commitment to a policy of limited intervention.

29. Reform. The authorities continued to make progress in all areas of the reform agenda. While the structural agenda had some setbacks in late 2006 and early 2007, the impetus for financial sector reform was regained in the second half of 2007 and the authorities began to adopt key measures, especially on designing a strategy to strengthen the Central Bank’s balance sheet. On SOE reform, the authorities took the first steps towards a more determined restructuring in terms of disclosing information and rising awareness about the operations of these companies. Nonetheless, staff regrets that reforms in this area fell short of expectations, and urges further and deeper reforms to unleash the potential growth of the economy.

30. Vulnerabilities. On the external front, the environment for Paraguay’s export sector 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, there is a risk of an overheating economy that might stoke further inflationary pressures, exacerbating second–round effects from recent fuel and food price increases. On the political front, there is a risk that the new government might fail to establish a working majority coalition in Congress. This could lead to backtracking from recent reforms and increased spending requests, which would undermine macroeconomic stability.

31. Review. The staff supports completion of the sixth and last SBA review in light of the good performance and program ownership.

Table 3.

Paraguay: Selected Economic and Social Indicators

I. Social and Demographic Indicators
Area (thousand sq. km)407Income distribution (2002)
By highest 20 percent of households (percent)61
Population (2005)By lowest 20 percent of households (percent)2
Total (in millions)5.9
Rate of increase (percent a year)1.9Health (2004)
Density (per sq. km.)14.5Physicians per 1,000 people1.1
Unemployment (2007)5.6Hospital beds per 1,000 people1.3
Access to a water source (percent)80
Population characteristics (2004)Access to a sanitation facility (percent)86
Life expectancy at birth (years - 2005)71.4
Crude birth rate (per thousand)29.7Education (2004; in percent)
Crude death rate (per thousand)5.0Male literacy rate (percent)94
Infant mortality (per thousand live births)21.0Female literacy rate (percent)92
Primary school enrollment (net, percent)94
Secondary school enrollment (gross, percent)63

INS calculations of real effective exchange rates.

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.

Sources: Paraguayan authorities; and Fund staff estimates.
Table 4.

Paraguay: Central Government Operations

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Sources: Ministry of Finance; and Fund staff estimates.

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

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

Excludes banks’ holdings of government bonds.

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