I. Recent Developments

1. The economy continues to enjoy strong and broadbased growth, with significant upside risks to the program’s growth projection for 2008. Recently released quarterly GDP data indicate that the economy grew at an annual rate of 7 ½ percent in the first quarter of 2008. In contrast with the concentrated growth pattern of 2007, the economic expansion in early 2008 was broad–based with agricultural production in the double–digit growth rates, livestock and industry recovering from last year’s weak performance, while the service sector continuing to be supportive. The completion of infrastructure projects has also contributed to a high growth of the construction sector.

Paraguay: Real GDP Growth

(Year on Year, Percent)

Sources: BCP and Fund staff estimates.

Paraguay: Real GDP Growth

(Year on Year, Percent)

		2007		2008
			Act	Prog.
			Q1	Year
Real GDP		6.8	7.6	5.0
	Agriculture	24.1	13.6	8.0
	Livestock	−4.7	10.1	3.5
	Industry	1.0	7.4	3.2
	Services	5.5	4.7	4.7

Sources: BCP and Fund staff estimates.

View Table

Paraguay: Real GDP Growth

(Year on Year, Percent)

		2007		2008
			Act	Prog.
			Q1	Year
Real GDP		6.8	7.6	5.0
	Agriculture	24.1	13.6	8.0
	Livestock	−4.7	10.1	3.5
	Industry	1.0	7.4	3.2
	Services	5.5	4.7	4.7

Sources: BCP and Fund staff estimates.

2. Fiscal policy reinforced its counter–cyclical stance. The fiscal position further strengthened during the second quarter of 2008. Despite the sharp appreciation of the guaraní, which reduced customs revenues and royalties (in local currency terms), overall revenue performance was very strong, with a growth of about 20 percent (yoy). At the same time, expenditures were well–contained, growing by 15 percent. As a result, the overall surplus increased further, to about 2 ¼ percent of GDP in the first half of 2008.

3. Monetary expansion has slowed modestly. Since switching open market operations procedures from fixing LRM rates to conducting weekly auctions of LRMs in mid–June 2008, the Central Bank has continued to mop up liquidity to reduce the growth of monetary aggregates. The annual growth of currency in circulation has declined moderately to 33 percent in late–July 2008, after having peaked at almost 40 percent at end–May 2008. This positive development is also partly due to the 2 percentage point increase in reserves requirements in mid–June 2008.

II. Performance Criteria and Structural Benchmarks

4. All performance criteria for end–June 2008 were met, most with large margins.Table 1 (attached) includes all the quantitative performance criteria.

5. The benchmarks expected to be completed before the end of the arrangement were implemented. As noted in the staff report, the authorities were expected to meet four out of the five benchmarks due for this review (a fifth benchmark, related to the state–owned enterprises was only partly met). Two of the five measures had already been completed by the time the report was published (conditional cash transfers and consolidation of Treasury accounts) and the remaining two benchmarks have now been implemented:

Paraguay: Targets for Sixth SBA Review

^1/Central administration.

Sources: Paraguayan authorities and Fund staff.

Paraguay: Targets for Sixth SBA Review

		Prog.	Actual
(In percent of GDP)
Fiscal Targets
	Fiscal balance1/	0.3	2.2	√
	Wage bill1/	3.6	3.5	√
	Consolidated balance	0.4	3.3	√
		(In percent of currency)
Monetary Targets
	Net international reserves	49.0	165.3	√
	Net domestic assets	−28.9	−129.1	√

^1/Central administration.

Sources: Paraguayan authorities and Fund staff.

View Table

Paraguay: Targets for Sixth SBA Review

		Prog.	Actual
(In percent of GDP)
Fiscal Targets
	Fiscal balance1/	0.3	2.2	√
	Wage bill1/	3.6	3.5	√
	Consolidated balance	0.4	3.3	√
		(In percent of currency)
Monetary Targets
	Net international reserves	49.0	165.3	√
	Net domestic assets	−28.9	−129.1	√

^1/Central administration.

Sources: Paraguayan authorities and Fund staff.

• Central Bank’s balance sheet. As part of the strategy to strengthen the financial position of the Central Bank (BCP), the authorities sent today to the attorney general the disputed claims between the BCP and the Ministry of Finance.

• Payment system. A revamped legal and regulatory framework for the payment system has been prepared and a draft payment system law has been approved by the Economic Cabinet.

Paraguay: Structural Benchmarks for Sixth SBA Review

Sources: Paraguayan authorities.

Paraguay: Structural Benchmarks for Sixth SBA Review

Measure		Due Date		Status
1.	Economic Cabinet approval of the draft payments system law	Sep 2007		Done. Economic Cabinet approved the draft law in late-July 2008.
2.	Increase coverage of the conditional cash transfer program to 19,000 families	May 2008		Done. There were 19,500 families covered by end-May 2008.
3.	Sign result-oriented management contracts for 2008 with SOE and design business plans	May 2008		Partly done. Contracts not signed, but some business plans completed.
4.	Send to Attorney General for his review and clearance the claims in dispute between BCP and MinFin	May 2008		Done. Claims sent to Attorney General in late-July 2008.
5.	Consolidate all Treasury accounts not established by law into one account	Jun 2008		Done. Account consolidation took place in early-July 2008.

Sources: Paraguayan authorities.

View Table

Paraguay: Structural Benchmarks for Sixth SBA Review

Measure		Due Date		Status
1.	Economic Cabinet approval of the draft payments system law	Sep 2007	View Expanded	Done. Economic Cabinet approved the draft law in late-July 2008.
2.	Increase coverage of the conditional cash transfer program to 19,000 families	May 2008	View Expanded	Done. There were 19,500 families covered by end-May 2008.
3.	Sign result-oriented management contracts for 2008 with SOE and design business plans	May 2008	View Expanded	Partly done. Contracts not signed, but some business plans completed.
4.	Send to Attorney General for his review and clearance the claims in dispute between BCP and MinFin	May 2008	View Expanded	Done. Claims sent to Attorney General in late-July 2008.
5.	Consolidate all Treasury accounts not established by law into one account	Jun 2008	View Expanded	Done. Account consolidation took place in early-July 2008.

Sources: Paraguayan authorities.

Table 1.

Paraguay: Quantitative Performance Criteria

Sources: Paraguayan authorities; and Fund staff estimates.

^1/Cumulative flows from the beginning of the calendar year.

^2/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 1.

Paraguay: Quantitative Performance Criteria

	2007						2008
	End-Jun		End-Sep		End-Dec		End-Mar		End-Jun
	Prog.	Actual	Prog.	Actual	Prog.	Actual	Prog.	Actual	Prog.	Actual
Fiscal targets
1. Overall balance of the central administration (floor, in billions of guaranies)1/	184	1,054√	330	1,162√	0	546√	95	802√	213	1,497√
2. Wage bill of the central administration (ceiling, in billions of guaranies)1/	2,055	1,940√	3,086	2,949√	4,443	4,360√	1,195	1,167√	2,429	2,364√
3. Overall balance of the public sector (floor, in billions of guaranies)1/	202	1,669√	459	1,930√	0	930√	172	1,292√	253	2,045√
Monetary targets
4. Net international reserves (floor, in millions of U.S. dollars)2/	1,900	2,153√	1,915	2,182√	1,920	2,462√	2,412	2,638√	2,462	3,197√
5. Net domestic assets (ceiling, in billions of guaranies)2/	−6,645	−7,762√	−6,700	−7,756√	−6,016	−8,229√	−8,436	−9,285√	−8,692 -	11,917√
Public debt and arrears targets
6. Contracting or guaranteeing of nonconcessional external debt by the NFPS (ceiling, in millions of US$)1/	500	0√	500	10√	500	254√	500	70√	500	227√
Continuous PCs
7. Contracted or guaranteed short-term external debt by the NFPS	0	0√	0	0√	0	0√	0	0√	0	0√
8. Non-accumulation of external debt arrears	0	0√	0	0√	0	0√	0	0√	0	0√

Sources: Paraguayan authorities; and Fund staff estimates.

^1/Cumulative flows from the beginning of the calendar year.

^2/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.

View Table

Table 1.

Paraguay: Quantitative Performance Criteria

	2007						2008
	End-Jun		End-Sep		End-Dec		End-Mar		End-Jun
	Prog.	Actual	Prog.	Actual	Prog.	Actual	Prog.	Actual	Prog.	Actual
Fiscal targets
1. Overall balance of the central administration (floor, in billions of guaranies)1/	184	1,054√	330	1,162√	0	546√	95	802√	213	1,497√
2. Wage bill of the central administration (ceiling, in billions of guaranies)1/	2,055	1,940√	3,086	2,949√	4,443	4,360√	1,195	1,167√	2,429	2,364√
3. Overall balance of the public sector (floor, in billions of guaranies)1/	202	1,669√	459	1,930√	0	930√	172	1,292√	253	2,045√
Monetary targets
4. Net international reserves (floor, in millions of U.S. dollars)2/	1,900	2,153√	1,915	2,182√	1,920	2,462√	2,412	2,638√	2,462	3,197√
5. Net domestic assets (ceiling, in billions of guaranies)2/	−6,645	−7,762√	−6,700	−7,756√	−6,016	−8,229√	−8,436	−9,285√	−8,692 -	11,917√
Public debt and arrears targets
6. Contracting or guaranteeing of nonconcessional external debt by the NFPS (ceiling, in millions of US$)1/	500	0√	500	10√	500	254√	500	70√	500	227√
Continuous PCs
7. Contracted or guaranteed short-term external debt by the NFPS	0	0√	0	0√	0	0√	0	0√	0	0√
8. Non-accumulation of external debt arrears	0	0√	0	0√	0	0√	0	0√	0	0√

Sources: Paraguayan authorities; and Fund staff estimates.

^1/Cumulative flows from the beginning of the calendar year.

^2/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.