Paraguay: Staff Report for the 2011 Article IV Consultation—Informational Annex

Paraguay weathered the global economic crisis well, supported by an appropriate policy response. The strong rebound of economic growth has given rise to overheating pressures. Policies need to adjust further to ensure a soft landing of the economy. The banking system remains sound, but there is a need to guard it against emerging risks. The monetary policy framework should be strengthened further to support the move to an inflation-targeting (IT) regime. Higher tax revenues are needed to address important deficiencies in infrastructure and basic social services.

Abstract

Paraguay weathered the global economic crisis well, supported by an appropriate policy response. The strong rebound of economic growth has given rise to overheating pressures. Policies need to adjust further to ensure a soft landing of the economy. The banking system remains sound, but there is a need to guard it against emerging risks. The monetary policy framework should be strengthened further to support the move to an inflation-targeting (IT) regime. Higher tax revenues are needed to address important deficiencies in infrastructure and basic social services.

ANNEX 1. FUND RELATIONS

(As of May 31, 2011)

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. Financial Arrangements

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VI. Projected Obligations to the 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 guarani. The exchange rate regime is classified de facto as other managed arrangement (the de jure regime is classified as floating). 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. The U.S. dollar is the principal intervention currency. On May 31, 2011, the average interbank rate for the U.S. dollar was 4,040 =US$1. Paraguay has accepted the obligations of Article VIII, Sections 2(a), 3 and 4 of the Fund’s Articles of Agreement. Its exchange system is free of restrictions on the making of payments and transfer for current international transactions.

VIII. Article IV Consultation. The Executive Board concluded the 2010 Article IV consultation on June 4, 2010.

IX. Technical Assistance:

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X. Safeguards Assessment: Under the Fund’s safeguards assessment policy, Central Bank of Paraguay (BCP) was subject to a full safeguard assessment in respect to the arrangement approved on May 31, 2006. A safeguards assessment of the BCP was completed in October 2006. The report stated that while the BCP 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 resident representative since December 2007. He is returning to headquarters in mid-July 2011 and is being replaced by Mr. Mr. Kevin Ross, who is also the resident representative for Peru and is based in Lima.

ANNEX 2. WORLD BANK-FUND COLLABORATION

1. Meeting of teams. The Fund and Bank Paraguay teams met on March 23, 2011 to exchange views on economic developments, and discuss ongoing work and work plans for the year ahead. This Annex provides a summary of the discussions.

2. The teams agreed that Paraguay’s main macroeconomic challenge is to reduce overheating pressures. Driven by excess demand pressures and increased commodity prices, inflation has been running at around 10 percent, well above the upper bound of the central bank’s target band (5 percent +/- 2 ½ percent). At the same time, the external current account has weakened substantially, despite very favorable terms of trade. Bank credit growth has remained high at about 40 percent, while the fiscal stance for 2011 is projected to be expansionary.

3. Policies need to be geared toward dealing with risks to macroeconomic and financial stability. These include continuing tightening monetary policy and targeting at least a neutral fiscal stance. Macro-prudential measures would help protect financial sector stability and complement monetary policy efforts to contain high credit growth. In line with the 2010 FSAP recommendations, Paraguay should continue strengthening financial regulation and supervision, including in the cooperative sector, where standards are laxer than those for banks.

4. The following reform areas have been identified as “macrocritical”

  • Tax reform. Tax reforms are needed to increase low revenues. These includes implementing the personal income tax and reforming agribusiness taxation.

  • Fiscal framework. The development of a comprehensive forward-looking framework for public-private partnerships (PPPs) could help increase investment in infrastructure while managing associated fiscal risks. Continued progress on developing a sound medium-term fiscal framework (MTFF) is also important to strengthen fiscal management.

  • Financial system. Reforms to banking legislation are needed to continue bolstering the banking system and strengthening regulation and supervision. There is also a need to strengthen regulation and supervision for cooperatives and establishing a safety net for the sector

  • Monetary framework. To support the move to an inflation targeting regime, the central bank (BCP) would need to continue strengthening its operational framework and improving systemic liquidity management. It would be important to implement the recapitalization of the BCP.

5. The division of labor between the teams would be along the following lines:

  • Tax reform. The Fund will continue providing technical assistance (TA) to support authorities’ efforts to reform the tax system.

  • Fiscal framework. The Fund has recently provided technical assistance (TA) on the macro-fiscal aspects of PPPs and the development of a MTFF. Depending on the authorities’ TA priorities for this year, it could provide further assistance on establishing a comprehensive PPP framework.

  • Monetary framework. The Fund plans to provide TA on further strengthening monetary operations and transitioning to an inflation targeting regime.

  • Financial system. The Fund will continue providing TA to strengthen bank supervision and regulation. It also plans to provide assistance on improving financial soundness indicators and developing stress testing tools for the cooperative sector.

  • State-owned enterprises. The Bank will continue providing Technical Assistance to the authorities to support the reform of the state oversight and ownership functions of SOEs.

  • Wage bill and human resources of public sector. The Bank will continue providing advisory services to identify opportunities to improve efficiency of the public sector performance.

  • Public financial management and public service delivery. The Bank will continue providing advisory services to the Government to improve internal audit control framework and buget process.

6. Work programs. The table below lists the teams’ work programs for the year ahead.

Work Programs of the World Bank and IMF Teams

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ANNEX 3. STATISTICAL ISSUES

Data provision to the Fund has some shortcomings, but is broadly adequate for surveillance. 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.

A. Real Sector

1. National accounts estimates, broadly consistent with the guidelines of the 1993 SNA, were released in 2005. However, no comprehensive regular program for data collection through economic censuses and surveys exists (an industrial survey was conducted in 2002, and an economic census is currently being undertaken) and source data for nonfinancial services, household consumption, and changes in inventories are insufficient. Major areas of concern include: (i) the 1994 reference year needs to be updated; (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 9 months. Several STA missions on the compilation of quarterly national accounts (QNA) were fielded in August 2007, August 2008, November 2009 and March-April 2011. 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 2011-12. The STA mission of November 2009 assisted the authorities in outlining a work program for updating the national accounts’ base year.

2. Both the consumer (CPI) and producer price indices (PPI) are reported on a regular and timely basis. Since January 2008, the Central Bank of Paraguay (BCP) has been using a new CPI index based on the 2005-06 household budget survey. The geographic coverage of the CPI is limited to Greater Asunción (the capital and metropolitan area) 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, and gas are not covered.

3. Since the introduction of a regular household survey in 1998, the coverage and quality of employment and unemployment statistics have improved significantly. Since 2010, data are released on a quarterly basis. Wage indices are updated twice a year.

4. 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.

B. Fiscal Sector

5. The Government finance statistics (GFS) used for internal purposes and for reporting to WHD is broadly consistent with the recommendations of the Manual on Government Finance Statistics 1986 (GFSM 1986). 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). 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.

6. Annual data covering general government for 2009 have been reported for publication in the 2010 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.

C. Money and banking Sectors

7. 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. Data on credit cooperatives, which account for around ¼ of deposits and loans of the banking sector, are reported to the BCP on a monthly basis since January 2011. The BCP, with assistance from STA, plans to include monthly data of the 20 largest credit cooperatives in the monetary survey during 2011-12. The Superintendency of Banks publishes a detailed and informative report on the soundness of the financial system.

D. External Sector

8. 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 IIP are available from 2001 onwards on the central bank website, and are reported only once a year to STA for publication in the IFS. 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.

9. 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 on Balance of Payments Statistics assisted the BCP in November 2006 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 June 30, 2011)

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

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.

Any reserve assets that are pledged of otherwise encumbered should be specified separately. Also, data should comprise short-term liabilities linked to a foreign currency but settled by other means as well as the notional values of financial derivatives to pay and to receive foreign currency, including those linked to a foreign currency but settled by other means.

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.