This 2014 Article IV Consultation highlights that economic activity in Paraguay has slowed from record-high growth in 2013, but remains buoyant. Construction, manufacturing, and services led the expansion in 2014, whereas electricity production declined, and re-exports suffered from weak growth in Brazil. Full-year growth is estimated to have slightly exceeded 4 percent. Real GDP is projected to remain close to 4 percent in 2015. Weak trading partner growth and lower export prices cloud the outlook, and agricultural production is projected to rise only marginally above the high level of 2014.

Abstract

This 2014 Article IV Consultation highlights that economic activity in Paraguay has slowed from record-high growth in 2013, but remains buoyant. Construction, manufacturing, and services led the expansion in 2014, whereas electricity production declined, and re-exports suffered from weak growth in Brazil. Full-year growth is estimated to have slightly exceeded 4 percent. Real GDP is projected to remain close to 4 percent in 2015. Weak trading partner growth and lower export prices cloud the outlook, and agricultural production is projected to rise only marginally above the high level of 2014.

Fund Relations

(As of December 31, 2014)

Membership Status: Joined: December 28, 1945 Article VIII

General Resources Account:

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SDR Department:

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Outstanding Purchases and Loans: None

Latest Financial Arrangements:

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Projected Payments to Fund1/

(SDR Million; based on existing use of resources and present holdings of SDRs):

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When a member has overdue financial obligations outstanding for more than three months, the amount of such arrears will be shown in this section.

Exchange Arrangement: The currency of Paraguay is the Paraguayan guaraní. The exchange arrangement of the guaraní is floating, and the exchange rate is determined by supply and demand. The objective of the Central Bank of Paraguay (BCP) under Article 3 of Organic Law No. 489/95 is to preserve and safeguard the stability of the currency and promote the efficiency and stability of the financial system. Article 50 establishes that foreign currency trading by the BCP aims to smooth seasonal fluctuations in supply and demand and offset erratic capital flows and speculative movements that could disrupt the market or the exchange rate. Article 47 establishes that the exchange rate is determined by market forces. The BCP publishes information on its foreign exchange interventions on its website. The BCP intervenes occasionally in the market to smooth the effects of undue fluctuation. The BCP, as the government’s financial agent, receives U.S. dollars from the government flowing from the royalties and compensation paid by the binational hydroelectric entities and exchanges them for guaranís at the request of the government for the purpose of public expenditures. The BCP implemented, effective July 1, 2013, a program of preannounced sales of the U.S. dollars it purchases from the government. The new program is more transparent, better communicated, and more consistent with an inflation-targeting regime. This program indicates in advance the nature, frequency, and size of the BCP’s foreign exchange transactions to avoid influencing market expectations of the exchange rate. Accordingly, the de facto exchange rate arrangement was reclassified to floating from other managed arrangement, effective July 1, 2013. 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 transfers for current international transactions.

Article IV Consultation: The Executive Board concluded the 2013 Article IV consultation in February 2014.

Technical Assistance 2010–14:

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Safeguards Assessment: Under the Fund’s safeguards assessment policy, the 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.

Resident Representative: Mr. Alejandro Santos has been the regional resident representative since December 2014. He is based in Lima, Peru.

Relations with the World Bank Under JMAP

Meeting of teams. The IMF and World Bank Paraguay teams met in November 2014 to exchange views on economic developments in Paraguay, and discuss ongoing work and work plans for the year ahead. The IMF mission also met with the World Bank’s representative in Asuncion. This section summarizes key themes of the discussions.

The Board of the World Bank discussed the new Country Partnership Strategy (CPS) for Paraguay in December 2014. The CPS covers Fiscal Years 2015–18, is closely aligned with the authorities’ first National Development Plan (NDP, 2014–30) and aims to contribute to the NDP’s overall poverty and equity targets. To this end, the CPS specifies three results areas: (i) strengthening resilience to risks and volatility; (ii) boosting pro-poor delivery of public goods and services; and (iii) fostering market integration. The overall World Bank Group financial support is expected to be in the range of US$900 million to US$1,100 million during the CPS period.

The overriding challenge for Paraguay is to address long-standing structural weaknesses while consolidating sound macroeconomic fundamentals. Paraguay enjoyed strong growth over the period 2003–13 and achieved significant progress in poverty reduction. Nonetheless, income per capita continues to lag well behind regional peers, reflecting persistent developmental obstacles, including limited public sector capacity, poor service delivery, and deep-rooted governance problems. The challenge ahead is to overcome these obstacles and advance the structural transformation of Paraguay’s economy, without jeopardizing the sound macroeconomic position attained over the past decade. In this context, it will also be important to improve the economy’s resilience to risks in order to preserve and build on the gains in poverty reduction and shared prosperity of the last few years.

In this context, the following reform areas have been identified as critical:

• Fiscal framework. The FRL provides a suitable anchor for fiscal sustainability. Improvements in the budget process are critical to underpin the new fiscal framework provided by the FRL. Potential fiscal risks, including from the public pension fund system and from private sector participation in infrastructure investment, need to be addressed proactively.

• Tax policy and revenue administration. Continued improvement in tax enforcement is necessary to increase low revenues while enhancing the progressivity of the tax system. This includes further improving tax and customs administration, reducing exemptions, and exploring the possibility of raising the tax contribution of the primary sector.

• Public services. Improvements in public infrastructure (including transport, electricity, and water and sanitation) are crucial to support economic development and improve livelihoods. Boosting the pro-poor delivery of public goods and services, including in education and health, will contribute to poverty reduction and shared prosperity. Advances in these areas will need to be underpinned by improved government efficiency.

• Financial system. The proposed reform of the banking and central bank laws is needed to provide a robust legal basis for risk-based regulation and supervision. There is also a need to significantly strengthen the prudential oversight of the cooperative sector and, on that basis, establish a safety net for the sector.

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

• Tax policy and revenue administration. The Fund will continue providing technical assistance (TA) to support the authorities’ efforts to improve the tax system and increase revenue collection. The Bank will continue to provide TA to support the authorities’ efforts to strengthen the tax administration (core business areas including the legal function) by modernizing the tax administration and increasing its effectiveness. In addition, the Bank will continue to analyze the distributional impacts of fiscal policies to support the authorities’ efforts to improve the progressivity of the tax and transfer system.

• Financial system. The Fund will continue to provide TA on the implementation of risk-based bank supervision and stands ready to support the authorities’ efforts to develop further their stress-testing toolkit.

• Money laundering. The Fund will continue to provide TA on the calibration of a risk assessment tool for banks and other financial institutions to prevent money laundering and terrorism financing (ML/TF).

• Medium-term debt management. The Bank, with the Fund’s support, will continue providing technical assistance to develop a medium-term debt strategy so as to reduce domestic debt servicing costs and promote the development of a domestic government debt market.

• State-owned enterprises. The Bank will continue providing TA to support the government’s efforts to improve corporate governance, eliminate payment arrears, and strengthen technical oversight of SOEs.

• Poverty. The Bank will provide TA on improving the measurement of poverty and income inequality, with emphasis on understanding why Paraguay’s inequality is so high. Gender issues will also be considered. It will also provide TA on improving the monitoring and evaluation system of the National Development Plan and on the targeting of social programs, as well as study the impacts of food price fluctuations on poverty and potential policies to manage negative effects.

• Education and social programs. The Bank will provide technical assistance on education programs, social assistance, and rural and agricultural development.

• Pensions. The Bank will continue providing advisory services to improve the pension system, including with best practices.

Public expenditure and revenues. The Bank will continue to provide TA on public expenditure and budget processes, including fiscal rules, fiscal policy in volatile environments, efficiency of public expenditure, tax revenues, fiscal policy and equity, and commodity prices and fiscal policy.

• The Bank and IFC will also jointly provide advice to the government on two potential areas for PPPs.

Mitigation of agricultural volatility. The Bank will provide advisory services to manage risks stemming from volatility at the macroeconomic, sector, and microeconomic levels.

Paraguay Job Diagnostic: The Bank will undertake a comprehensive multi-sector job diagnostic analysis to identify challenges for expanding job opportunities in Paraguay.

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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Relations with the Inter-American Development Bank

The IMF and IADB Paraguay teams met in November 2014 to exchange views on economic developments in Paraguay, and discuss ongoing work and work plans for the year ahead. The IMF mission also met with IADB staff based in Asuncion.

The IADB’s Board of Executive Directors approved in 2014 the Country Strategy with Paraguay (2014–2018). Sovereign-guaranteed lending under the program is expected to reach approximately US$1 billion.

Under the Strategy, the national authorities and the Bank identified the following priority sectors in which the IDB Group would focus both its financial and non-financial products and services: (i) transportation and connectivity; (ii) water and sanitation; (iii) energy; (iv) productive development; (v) financial sector; and (vi) public management. Furthermore, the Bank will support the social sector through two channels: (i) with specific interventions in each of the priority sectors, in support of the objective of reducing extreme poverty; and (ii) through a crosscutting element in the form of interventions to support the investment of FONACIDE resources, primarily targeting education and health.

As of November 30, 2014, the Bank’s portfolio in Paraguay included loans for the financing of 24 projects. The lending portfolio amounts to US$857 million, of which US$477 million are pending disbursement. Disbursements in 2014 are expected to total US$81 million. The current portfolio includes lending to support the Government in the following sectors: transportation (51 percent), energy (14 percent), social sector (11 percent), financial sector (7 percent), and agriculture (5 percent). The portfolio additionally includes 12 loans to the private sector for US$200million mostly in agriculture and the financial sector.

Financial Relations with the Inter-American Development Bank1

(In millions of U.S. dollars)

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Source: Inter-American Development Bank.

Only loans with sovereign guarantee are considered.

Statistical Issues

(As of December 2014)

Assessment of Data Adequacy for Surveillance

General: Data provision to the Fund has some shortcomings, but is broadly adequate for surveillance. Paraguay has made significant improvements in the compilation and dissemination of macroeconomic statistics, but some shortcomings persist. In February 2014, a Data ROSC mission conducted an assessment of data quality based on the new 2012 DQAF for six datasets (national accounts, CPI, PPI, GFS, monetary, and balance of payments and IIP statistics). The mission also assessed Paraguay’s macroeconomic statistics against the GDDS and, at the request of the authorities, against the SDDS; the authorities’ response to the report and the mission’s recommendations were published on the Fund’s website on August 18, 2014. The country is a GDDS participant.

National Accounts. National accounts estimates, broadly consistent with the guidelines of the 1993 SNA, were released in 2005. A program for changing the outdated base year (1994=100) and implementing relevant 2008 SNA recommendations is under development. The production boundary is broadly in line with the 1993 SNA and recently included the two binational hydroelectric enterprises following the 2008 SNA. Nonetheless, there are no independent estimates of the nonobserved economy after 1997, and mineral exploration and own-account production are mostly excluded. Source data for nonfinancial services, household consumption, and changes in inventories are insufficient. Currently, the major deviations from concepts and definitions established in the 1993 SNA involve: investment in in-house development of software; investment in mineral exploration; investment in military expenses in fixed assets; the estimation of output broken down by market, nonmarket, and own final use components; the inclusion of work-in-progress in forestry and livestock production; and the partial inclusion of the nonobserved economy in the national accounts. Annual GDP meets GDDS recommendations, and QNA meets DSSD timeliness requirements (90 days). Several STA missions on the compilation of quarterly national accounts (QNA) were fielded in August 2007, August 2008, November 2009, and March—April 2011. QNA series were published in December 2010. The STA mission of March—April 2011 assisted the authorities in outlining a work program for updating the national accounts’ base year.

Labor market. 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, although the latter covers the Asuncion area only. The last available observation for the quarterly series is the third quarter of 2014, whereas the annual data for 2013 were released in June 2014.

Price statistics. 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 June 2010 and its basket (185 items) is representative of current national output; electricity, water, and gas are not covered.

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 QNA series. A new ROSC mission took place in February 2014.

Government finance statistics. 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). There was a GFS TA mission to the country in July 2014 that assisted the authorities in the process of adopting the GFSM 2014 methodology. 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

The latest available data for general government and its subsectors in the 2013 GFS Yearbook are for 2012. 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.

Balance of payments. The classification of the balance of payments and the international investment position (IIP) follows the recommendations of the fifth edition of the Balance of Payments Manual (BPM5). Quarterly data on balance of payments and the IIP are available from 2001 onwards, and are reported only once a year to STA for publication in the IFS. Improvements have been made in the quality of the external sector statistics, especially in the coverage of foreign direct investment and in the recording of external debt transactions but some deficiencies remain.

An STA mission on External Sector Statistics assisted the BCP in September 2014 in implementing recommendations of the ROSC mission. In particular, the mission focused on: (1) assisting the Central Bank of Paraguay in the migration to the methodology of the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6); (2) reviewing and updating the adjustments in the estimation of data on foreign trade; (3) assisting in improving the coverage of direct investment data; and (4) reviewing and preparing a data template for reporting data on international reserves and foreign currency liquidity.

Monetary and financial statistics. Paraguay reports monetary data for the central bank and other depository corporations (ODCs) using the standardized report forms (SRFs). An integrated monetary database meeting the data needs of the BCP, STA, and WHD is in operation Coverage of the ODC survey is complete, including data on credit cooperatives, which account for around 20 percent of deposits and loans of the system. The Superintendence of Banks reports 11 of the 12 core and 7 of the 13 encouraged financial soundness indicators for deposit takers to STA on a monthly basis.

Paraguay: Staff Report for the 2014 Article IV Consultation
Author: International Monetary Fund. Western Hemisphere Dept.