Paraguay: Staff Report for the 2017 Article IV Consultation—Informational Annex
Author: International Monetary Fund. Western Hemisphere Dept.
Publication Date:
24 Jul 2017
eISBN:
9781484312193
Language:
English
Keywords:
ISCR; CR; outturn; central bank; Inter-American Development Bank; Paraguay; producer price index statistics; market expectation; IADB's Board; exchange arrangement; vis-à-vis nonresident; Tax administration core functions; Bank supervision; External sector statistics; liability positions vis-à-vis nonresident
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2017 Article IV Consultation-Press Release and Staff Report

Abstract

2017 Article IV Consultation-Press Release and Staff Report

Fund Relations

(As of May 31, 2017)

Article VIII

Membership Status: Joined: December 28, 1945

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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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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 guaranies 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. 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 2016 Article IV consultation in April 2016.

Technical Assistance 2011–17:

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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 Asuncion.

Relations with the World Bank Under JMAP

Meeting of teams. The IMF and World Bank Paraguay teams met in March 2017 to exchange views on economic developments and the macroeconomic outlook in Paraguay, and discuss ongoing work and work plans for the year ahead. This section summarizes key themes of the discussions.

Sustaining the positive outlook for Paraguay given the challenging regional context will require policies to consolidate macroeconomic stability and address structural barriers to growth. Growth picked-up in 2016 and there are signs of a broadening of the expansion. Nevertheless, important barriers to development persist, including large infrastructure gaps, limited capacity to execute public investment projects, and deep-rooted institutional weaknesses. The challenge ahead is to advance the structural reform agenda in a tense political environment given looming presidential elections in 2018, without jeopardizing the sound macroeconomic position attained over the past decade.

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

  • Fiscal and public financial management framework. The fiscal responsibility law provides a suitable anchor for fiscal sustainability, but there is scope to adopt measures to improve budgetary processes and strengthen legal and institutional aspects of the fiscal framework. Authorities should ensure that any eventual changes to the fiscal framework, such as the adoption of a structural balance rule or the creation of a sovereign wealth fund to save part of the extra revenue from the Itaipu hydroelectric dam, which are expected to materialize after 2023, are implemented in a coherent manner to avoid conflicts among the different fiscal rules.

  • Tax revenue administration. Strengthening tax administration is necessary to mobilize revenues, while enhancing the efficiency and equity of the system. This includes measures to strengthen sanctions against evasion, reducing exemptions and deductions, and exploring the possibilities to broaden the tax base.

  • Financial system. The recently enacted banking law should provide a robust legal basis for risk-based regulation and supervision. There is still is a need to strengthen the prudential oversight of the cooperative sector and foster cooperation among the different regulatory authorities. Development of the domestic bond market is a priority for authorities and the elaboration of a new debt management strategy by the Ministry of Finance with support from the World Bank could be instrumental in helping to achieve that goal.

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

  • Tax revenue administration. The Fund will continue to support the authorities’ efforts to mobilize domestic revenue and increase the efficiency of tax administration through technical assistance (TA).

  • Financial system. The Fund will continue to provide TA on the implementation of risk-based bank supervision and regulation and stands ready to assist in the implementation of the new banking laws. The Fund will also conduct a financial sector stability review to undertake a diagnosis of key issues and challenges in Paraguay’s financial sector.

  • Paraguay job diagnostic. The Bank is expected to continue its comprehensive multi-sector job diagnostic analysis to identify challenges for expanding and improving employment opportunities in Paraguay.

  • Fiscal frameworks. The Bank will continue to provide TA to support the government’s efforts to strengthen institutional capacity, improve governance and transparency for a more efficient management of public resources. In that context, the Bank will undertake a public expenditure review, which is expected to focus particularly on social expenditures in education and health. In addition, the Bank will continue to provide support SOEs and strengthen the PPP institutional framework.

  • Governance and business climate. The Bank will support the authorities’ efforts to boost competitiveness, through the promotion of a better investment and business climate.

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

Meeting of teams. The IMF and IADB Paraguay teams met in March 2017 to exchange views on economic developments in Paraguay, and discuss ongoing work and work plans for the year ahead. The IMF team also met with IADB staff based in Asuncion during the Article IV mission.

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 June 9, 2017, the Bank’s active portfolio in Paraguay included loans for the financing of 30 projects. The lending portfolio amounts to US$1,465 million, of which US$1,010 million are pending disbursement. Disbursements in 2017 are expected to total US$197.3 million. The current portfolio includes lending to support the Government in the following sectors: transportation (52%), water and sanitation (14%), institutional capacity (11%), financial markets (8%) and others (15%). The portfolio additionally includes 5 projects pending legislative ratification, amounting to US$142 million. Additionally, the portfolio comprises 23 loans to the private sector for US$216.7 million, mostly in 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

Loans with sovereign guarantee as of June 9, 2017.

Statistical Issues

(As of July 2017)

Assessment of Data Adequacy for Surveillance

In 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. The country has recently implemented the IMF’s enhanced General Data Dissemination System (e-GDDS) after being a GDDS participant since September 2001. Authorities are currently disseminating 14 of the 15 e-GDDS data categories through the recently developed National Summary Data Page (NSDP). In order to graduate to Special Data Dissemination Standard (SDDS), the authorities will need to compile the template on international reserves and foreign currency liquidity, will need to improve the labor market data category, so that quarterly data has national coverage, and will need to have an advance release calendar covering all the data categories.

National accounts. National accounts estimates, broadly consistent with the guidelines of the 1993 SNA, were released in 2005. Authorities are well advanced in implementing an update of the base year of the national accounts from 1994 to 2014. The release of the new series is expected by the end of 2017. A series of annual supply and use tables is being compiled for the years 2008–2014 from which reconciled estimates of GDP based on the production, expenditure and income approaches are being derived. A recent TA mission reviewed the source data and methods for the compilation of the tables. The main methodological recommendations of the mission include revisions on imports, distribution margins, household final consumption, and gross fixed capital formation. Progress has been slow in the implementation of the 2008 SNA, particularly the compilation of institutional sector accounts due to source data constraints.

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 first quarter of 2017.

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 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.

Government finance statistics. The government finance statistics (GFS) used for internal purposes and for reporting to WHD are broadly consistent with the recommendations of the Government Finance Statistics Manual 2001 (GFSM 2001). In early 2015, the Ministry of Finance introduced GFSM 2001 classifications and presentation for monthly budgetary central government statistics, which are published regularly on the Ministry’s website. The asset position of the social security system is available on a daily basis. 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. Deficiencies remain in recording short- term supplier and commercial credit of the public sector. The latest available data for general government and its subsectors in the 2016 GFS Yearbook are for 2015. 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.

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. 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.

External sector statistics. Quarterly balance of payments and international investment position (IIP) data, which follow the recommendations of the fifth edition of the Balance of Payments Manual (BPM5), are available from 2000 onwards, and are reported to STA for publication in the IFS. The BCP has been working on improving the quality of the external sector statistics, but some deficiencies remain. For example, estimates of different current account components such as reexports of goods, freight services, and travel services, rely on outdated assumptions. Similarly, the BCP needs to update the compilation methods of some financial account components such as transactions related to intercompany lending within direct investment in the reporting economy, external deposits of the non-financial private sector, and external debt liabilities of banks. A recent technical assistance mission proposed changes to compilation methods of key balance of payments and IIP components and assisted in the preparation of preliminary updated data for some components. The BCP plans to incorporate the data updates together with the data release on a BPM6 basis. The Data Template on International Reserves and Foreign Currency Liquidity (RDT) is the only Special Data Dissemination Standard (SDDS) prescribed category for external sector data that is pending.

Data Standards and Quality

Paraguay became a participant in the Fund’s General Data Dissemination System (now e-GDDS) in September 25, 2001 and its metadata are up to date. Paraguay disseminates 14 of the 15 data categories required in the Table of Common Indicators Required for Surveillance, which puts the country in threshold 1 of the e-GDDS monitoring framework. Paraguay is encouraged to advance through the e-GDDS thresholds by publishing stock market data (if available) and improving the coverage for central and general government operations, the central bank and depository corporations surveys, and external debt. Paraguay data ROSC was published on August 18, 2014.

Paraguay: Table of Common Indicators Required for Surveillance

(As of June 28, 2017)

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Any reserve assets that are pledged or 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 discount rates, money market rates, rates on treasury bills, notes and bonds.

Central government (CG) revenue, expenditure, balance, and composition of financing data are available monthly.

The general government consists of the central government, social security funds, and state and local governments.

Guaranteed non-financial public sector debt. Including currency and maturity composition.

Includes external gross financial asset and liability positions vis-à-vis nonresidents.

Monthly frequencies for goods only.

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

Reflects the assessment provided in the data ROSC published in August 2014 and based on the findings of the mission that took place during February 12–26, 2014 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), not observed (NO), or not available (NA).

Same as footnote 9, 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.

1

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

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Cover IMF Staff Country Reports
Paraguay: 2017 Article IV Consultation-Press Release and Staff Report
Author: International Monetary Fund. Western Hemisphere Dept.
Volume/Issue:
Volume 2017: Issue 233
Publisher:
International Monetary Fund
ISBN:
9781484312193
ISSN:
1934-7685
Pages:
66
DOI:
https://doi.org/10.5089/9781484312193.002