Press Release No. 14/572

Press Release: Statement at the End of an IMF Mission to Paraguay

December 12, 2014

A staff team from the International Monetary Fund (IMF), led by Mr. Andre Meier, visited Asunción during December 1-12 to hold discussions for the 2014 Article IV consultation. The team met with Central Bank of Paraguay (BCP) President Carlos Fernández, Minister of Finance Germán Rojas, Minister of Labor, Employment, and Social Security Guillermo Sosa, Minister of Public Works and Communications Ramón Jiménez, and other senior officials, as well as representatives from Congress, the private sector, think tanks, and the donor community. At the conclusion of the visit, Mr. Meier issued the following statement:

“Paraguay remains one of the most dynamic economies in Latin America, with growth projected around 4 percent both this year and next. Public debt is moderate, international reserves are ample, and inflation is expected to stay in line with the target. Notwithstanding these sound macroeconomic fundamentals, the outlook is subject to risks from lower agricultural commodity prices, economic weakness among trading partners, and weather-related shocks. In addition, Paraguay faces important structural challenges, including large infrastructure gaps, poor educational outcomes, and low public sector efficiency.

“The authorities have started to tackle key structural challenges. Tax collection has improved significantly; preparations are underway to launch several large infrastructure projects; and the recently adopted ‘freedom-of-information’ law will foster government transparency. These efforts deserve full support and should be taken further to achieve lasting improvements in public services, institutional quality, and the rule of law. Such improvements, in turn, are critical to attract investment, boost productivity, and underpin medium-term growth and poverty reduction.

“To consolidate macroeconomic stability, Paraguay has adopted new policy frameworks in recent years, notably an inflation targeting regime and the Fiscal Responsibility Law (FRL). These frameworks provide appropriate anchors for policy. It is thus unfortunate that the 2015 budget approved by the legislature envisages spending and a deficit above the limits mandated by the FRL, while perpetuating a pattern of unrealistically high revenue projections. Significant restraint in the execution of the budget will be required to limit the deficit to 1.5 percent of GDP and build the credibility of the FRL, as intended by the government.

“More broadly, the planned expansion of public investment needs to be integrated into a prudent fiscal plan. To accommodate higher capital spending, it will be important to extend the fight against tax evasion, including in the customs administration, and ensure tight control over current spending. Civil service reform would assist this effort, by rationalizing public employment and raising efficiency. Over time, it may well become necessary to mobilize additional revenue, including by raising the tax contribution of the primary sector. A prudent medium-term plan will also leave some buffer relative to the FRL deficit ceiling so that fiscal policy does not need to be tightened during downturns.

“Private sector participation in infrastructure investment is welcome but must be managed carefully to contain risks to the public finances. Particular caution is warranted with respect to deferred financing schemes that could create future government liabilities without the scrutiny of the regular budget process.

“Fiscal risks could also arise from the missing oversight of Paraguay’s pension funds and their significant actuarial imbalances. It is encouraging that the authorities plan to address these risks promptly, starting with the planned creation of the relevant superintendency.

“Turning to monetary policy, the current level of interest rates is consistent with keeping inflation on target. To strengthen the transmission of monetary policy, it will be instrumental to further reduce excess overnight liquidity and develop a more active money market, while encouraging gradual de-dollarization. In addition, we welcome the central bank’s intention to make its sales of government foreign-currency receipts more predictable, distinguishing them clearly from occasional discretionary intervention within the flexible exchange rate regime.

“Credit growth has slowed from the peaks of recent years but remains strong, amid signs of rising indebtedness in the consumer segment. To contain the resulting risks, lenders should be required to observe prudent limits on households’ debt servicing capacity. Other areas for stepped-up oversight include foreign-currency lending to borrowers that are not well hedged against exchange rate risk; and the proper recognition of credit risk in renewed, refinanced, and restructured loans.

“In this context, the proposed revision of the central bank and banking laws is essential to put risk-based regulation and supervision on a robust legal basis. A related priority is to strengthen the governance and resources of the cooperatives regulator, along with the creation of a system-wide creditor database.

“We are grateful to all our counterparts for their kind hospitality and the open and fruitful dialogue.”