Abstract
IMF Country Report No. 22/355
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IMF Country Report No. 22/355
PARAGUAY
REQUEST FOR A TWO-YEAR POLICY COORDINATION INSTRUMENT—PRESS RELEASE; STAFF REPORT; AND STATEMENT BY THE EXECUTIVE DIRECTOR FOR PARAGUAY
December 2022
In the context of the Request for a Two-year Policy Coordination Instrument, the following documents have been released and are included in this package:
A Press Release including a statement by the Chair of the Executive Board.
The Staff Report prepared by a staff team of the IMF for the Executive Board’s consideration on November 21, 2022, following discussions that ended on September 2, 2022, with the officials of Paraguay on economic developments and policies underpinning the IMF arrangement under the PCI. Based on information available at the time of these discussions, the staff report was completed on November 2, 2022.
A Statement by the Executive Director for Paraguay.
The documents listed below have been or will be separately released.
Letter of Intent sent to the IMF by the authorities of Paraguay*
*Also included in Staff Report
The IMF’s transparency policy allows for the deletion of market-sensitive information and premature disclosure of the authorities’ policy intentions in published staff reports and other documents.
Copies of this report are available to the public from
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Press Release
PR22/406
IMF Executive Board Approves Paraguay’s Policy Coordination Instrument
FOR IMMEDIATE RELEASE
Washington, DC – November 22, 2022: On November 21, 2022, The Executive Board of the International Monetary Fund (IMF) approved a two-year Policy Coordination Instrument (PCI) for Paraguay.1
Paraguay continues to recover from the COVID-19 pandemic amidst simultaneous shocks that would lead to flat GDP growth and inflation above the Central Bank’s target range this year. The outlook for a recovery in 2023 is favorable, and the authorities are pursuing policies to follow a stronger, more resilient, and inclusive development path. On the back of very positive experiences with Fund-supported programs, the authorities requested approval of a two-year program supported by the Policy Coordination Instrument (PCI) to underpin the implementation of needed structural reforms.
The PCI aims to address the current challenges and foster policy continuity that would encompass two years, the last year of the current and the first year of the next administration. Program reviews take place on a semi-annual fixed schedule. While the PCI involves no use of IMF resources, successful completion of program reviews would help signal Paraguay’s commitment to continued strong economic policies and structural reforms.
The authorities’ reform efforts will be anchored by three key pillars: (i) ensure macroeconomic stability and resilience by making efforts to rebuild fiscal buffers and ensure fiscal sustainability going forward, while continuing to implement a data-dependent and forward-looking monetary policy; (ii) enhance productivity and foster economic growth by advancing structural reforms to improve the effectiveness of the government, modernize the public sector and improve the business climate, and; (iii) enhance social protection and inclusiveness through augmenting coverage and efficiency of Paraguay’s social assistance programs, and implementing reforms to pull informal workers into the formal economy.
Following the Executive Board’s discussion, Mr. Kenji Okamura, Deputy Managing Director and Acting Chair, issued the following statement:
“The Paraguayan authorities implemented appropriate fiscal, social, and financial support measures to mitigate the negative impact of the pandemic and to sustain recovery in 2020 and 2021. However, this year the economy is facing simultaneous shocks, including a severe drought in late 2021/early 2022 and a spike in global inflation exacerbated by Russia’s war in Ukraine. While the economic outlook remains favorable, several risks arise from global headwinds, more frequent adverse climate shocks, and domestic uncertainties.
“Against this backdrop, the authorities’ economic program under the PCI will be focused on policies to ensure macroeconomic stability, foster economic growth, and enhance social protection. The PCI is underpinned by strong macroeconomic policy plans and will support ongoing initiatives aimed at the implementation of a broad structural reform agenda.
“Rebuilding policy buffers and returning to the fiscal deficit ceiling of 1.5 percent of GDP in 2024 will be critical to ensure macroeconomic stability. Important measures include enhancing domestic revenue mobilization, reforming the public pension fund, and raising the efficiency of the public sector. Monetary policy is aimed at bringing inflation back to the 4 percent target and keeping inflation expectations well-anchored. The authorities are committed to maintaining a strong reserve position and using foreign exchange interventions only to address disorderly market conditions.
“The authorities are focused on fostering the conditions for sustained economic growth, bolstering the efficient use of public resources, and creating more favorable conditions for private investment. Envisaged actions include modernizing public institutions, increasing government effectiveness, strengthening governance and controlling corruption, as well as improving the business climate. Efforts to build resilience to climate change are also needed.
“The emphasis of the authorities’ reform agenda on enhancing social protection and reducing poverty and inequality is welcome. Further measures will be needed to improve the impact of social assistance programs, increase their coverage among the vulnerable population, promote the formalization of the economy, and strengthen financial inclusion.”
Title page
PARAGUAY
REQUEST FOR A TWO-YEAR POLICY COORDINATION INSTRUMENT
November 2, 2022
KEY ISSUES
Context: Paraguay continues to recover from the COVID-19 pandemic amidst simultaneous shocks that would lead to flat GDP growth and inflation above the IT range this year. Those conditions are reflected in rising social demands within a politicized environment before the 2023 general elections. The outlook remains favorable, and the authorities are pursuing policies to follow a stronger, more resilient, and inclusive development path. On the back of very positive experiences with Fund-supported programs, the authorities are requesting approval of a two-year program supported by the Policy Coordination Instrument (PCI) to underpin the implementation of needed structural reforms.
Main Policy Commitments
- Ensure Macroeconomic Stability and Resilience. Aligned with their goal to converge to the 1.5 percent of GDP fiscal deficit ceiling by 2024, the authorities have committed to reform the “Caja Fiscal” and the pension system, strengthen the supervision of SOEs, and enhance revenue collection. Also, they are engaged in maintaining a strong reserve position and continue publishing detailed information on its foreign exchange operations.
- Enhance productivity and foster economic growth. The authorities aim to strengthen public procurement, civil service, and the government structure, improve financial supervision, strengthen governance and control corruption, and improve the business climate.
- Enhance social protection and inclusiveness. The authorities have committed to strengthening their social protection and inclusiveness programs while implementing policies to reduce informality.
Risks: Program risks are low considering Paraguay’s positive economic outlook and strong external position. Risks to the outlook are tilted to the downside as recurrent adverse weather conditions, more prolonged than expected inflation pressures, de-anchoring of inflation expectations, and local COVID-19 outbreaks could weigh on higher exchange rate (ER) volatility, tighter monetary policy, and lower growth.
Staff support the authorities’ request for a two-year program under the PCI.
Approved By
P. Alonso-Gamo (WHD) and E. Cerutti (SPR)
Discussions were held in Asunción between August 25 and September 2, 2022 and continued from Washington D.C.. Staff-level agreement was reached on October 13. The staff team comprised Mauricio Villafuerte (head), Tobias Roy, Mauricio Vargas, Yuanchen Yang, Manuk Ghazanchyan (all WHD), and Jehann Jack (SPR). Jesús Sanchez and Nicolás Landeta (WHD) provided research and administrative assistance. Jorge Corvalan (OED) attended the policy meetings. The team met with Central Bank of Paraguay (BCP) President José Cantero, Minister of Finance Óscar Llamosas, other senior officials from the government, and representatives from the donor community.
Contents
CONTEXT
RECENT DEVELOPMENTS
OUTLOOK AND RISKS
POLICY DISCUSSIONS
A. Pillar I. Ensure Macroeconomic Stability and Resilience
B. Pillar II. Enhance Productivity and Foster Economic Growth
C. Pillar III. Enhance Social Protection and Inclusiveness
PROGRAM MODALITIES AND RISKS
STAFF APPRAISAL
FIGURES
1. Recent Developments
2. Fiscal Developments
3. External Sector Developments
4. Monetary Indicators
5. Financial Sector Developments
TABLES
1. Selected Economic Indicators
2a. Operations of the Central Bank Government (In billions of Guranies)
2b. Operations of the Central Bank Government (In Percent of GDP)
3. Balance of Payments
4. Summary of Accounts of the Central Bank
5. Summary of Accounts of the Financial System
6. Gross External Financing Needs and Source 2021-24
7. Financial Soundness Indicators
ANNEXES
I. Risk Assessment Matrix
II. External Sector Assessment
III. External Debt Sustainability Assessment
IV. Summary of Capacity Development Strategy
APPENDIX
I. Program Statement
Attachment I. Technical Memorandum of Understanding
The PCI is available to all IMF members that do not need Fund financial resources at the time of approval. It is designed for countries seeking to demonstrate commitment to a reform agenda or to unlock and coordinate financing from other official creditors or private investors. (see https://www.imf.org/en/About/Factsheets/Sheets/2017/07/25/policy-coordination-instrument)
