IMF Executive Board Concludes 2009 Article IV Consultation with Paraguay

Public Information Notice (PIN) No. 09/64
May 20, 2009

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

On May 1, 2009 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Paraguay.1


The Paraguayan economy performed very well over the past five years, with real GDP growth averaging about 5 percent a year—the best in a generation. The fiscal position strengthened considerably, thereby reducing public debt sharply to relatively low levels. The economy grew by nearly 6 percent in 2008, but growth decelerated in the last quarter of the year. Paraguay’s macroeconomic outlook has been negatively affected by the deterioration in the global environment. The agricultural sector has suffered from the decline in commodity prices, aggravated by the effects of a drought. Economic growth in 2009 is expected to decelerate to about ½ percent. In part reflecting the weakening global environment, inflation in Paraguay is now on a firmly downward trend, and is projected at 5½ percent by end-2009, well within the Central Bank’s target range. The budget recorded a sizeable surplus of 2½ percent of GDP in 2009, mainly on account of good revenue performance and low capital expenditure execution. However, tax revenue performance during the first quarter of 2009 has been lackluster, in part due to weak imports. The external current account deficit is expected to moderate to 1 percent of GDP, largely as a result of significantly lower imports, notwithstanding a decline in exports.

The government has reacted to the adverse economic conditions by adopting an Economic Recovery plan. This plan, which encompasses policies to address both immediate challenges and medium-term structural weaknesses, includes: (i) a fiscal stimulus of about 3 percentage points of GDP in 2009; (ii) steps to provide liquidity to the banking system to enhance lending; (iii) securing additional external financing from multilaterals (including contingent credit lines); and (iv) addressing key medium-term structural issues, including with respect to public financial management and financial sector reform.

The government’s fiscal stimulus focuses on public investment in infrastructure and social programs, including targeted conditional cash transfers. Its full implementation would be consistent with an overall deficit of ¾-1 percent of GDP in 2009, expected to be financed by disbursements from multilaterals and bilateral donors. Key to the success of the recovery program will be its effective and timely implementation, while transparent monitoring should help ensure that resources are spent efficiently.

Executive Board Assessment

While Paraguay has been affected by the global economic crisis, as other countries in the region, Executive Directors observed that the country faces the global downturn from a position of relative strength. The commendably prudent macroeconomic policies pursued in recent years have helped build significant buffers to address external shocks. Against the backdrop of a significant deterioration of the short-term outlook, Directors supported the authorities’ economic priorities to consolidate macroeconomic stability, implement critical structural reforms, especially in the financial sector, and strengthen social conditions, with an emphasis on poverty reduction.

Directors concurred that the recent fiscal surpluses and decline in the public debt burden provide the government with a margin to conduct well-targeted counter-cyclical policies. They welcomed the authorities’ economic recovery plan aimed at weathering the current crisis, and advised that the fiscal stimulus be focused on public investment and targeted social programs to reduce poverty. Directors underscored the need to improve public financial management and inter-ministerial coordination to ensure the plan’s timely and effective implementation. Given the revenue shortfalls so far this year, Directors encouraged further improvements in tax and customs administrations, and recommended that the authorities refrain from granting tax concessions.

Executive Directors supported the current accommodative monetary policy, given the slowdown of the economy and the downward trend of inflation. Nonetheless, they recommended close monitoring of developments to enable the authorities to respond promptly to signs of inflationary or balance of payments pressures. They encouraged the authorities to press ahead with their efforts to strengthen the central bank’s balance sheet to improve the effectiveness of monetary policy. Directors agreed that the flexible exchange rate regime continues to serve Paraguay well by acting as a shock absorber in the face of commodity price fluctuations and strong regional linkages. They noted the staff’s assessment that the exchange rate is broadly in line with fundamentals.

Directors underscored the need to press ahead with structural reforms, especially in the financial and state-owned enterprise sectors. They welcomed the strengthening of the banking system, while recommending continued vigilance in the face of rapid credit growth. Directors encouraged the authorities to enhance significantly the regulation and supervision of financial cooperatives and retirement plans, given the large amounts of funds intermediated by these sectors. They also saw a need to improve the prudential framework for insurance companies. Directors welcomed the authorities’ commitment to finance fully the Deposit Guarantee Fund. They emphasized the need to address operational and financial weaknesses of state-owned enterprises, which create significant bottlenecks in the productive capacity of the economy.

Paraguay: Selected Economic Indicators, 2004-09

  2004 2005 2006 2007



Annual percent change; unless otherwise specified

National accounts and prices


GDP at current prices

16.4 11.2 13.2 17.7 13.3 7.4

GDP at constant prices

4.1 2.9 4.3 6.8 5.8 0.5

Per capita GDP (U.S. dollars, thousands)

1.2 1.3 1.6 2.0 2.6 2.4

GDP deflator

11.8 8.1 8.5 10.2 7.1 6.8

Consumer prices (end-of-period)

2.8 9.8 12.5 5.9 7.5 5.5

Real effective exchange rate


Average (depreciation -)

3.7 -6.5 13.0 10.8 16.4 ...

End-of-period (depreciation -)

-8.6 4.4 20.1 5.5 9.6 ...
In millions of U.S. dollars

External sector


Exports, f.o.b. (percentage change)

32.0 17.4 31.2 24.4 42.0 -13.3

Imports, c.i.f. (percentage change)

27.0 22.9 33.7 17.6 46.9 -14.9

Current account

143 19 45 82 -227 -153

(In percent of GDP)

2.1 0.3 0.5 0.7 -1.4 -1.0

Capital account

41 397 356 362 399 152

Overall balance

277 147 402 762 321 0

Terms of trade (percentage change)

-1.4 -9.9 -2.3 6.2 -1.1 -5.1
In percent of GDP

Savings-investment balance


Gross domestic investment

19.2 19.8 19.6 18.0 18.3 17.7

Private sector

14.5 14.8 14.7 13.4 13.4 12.8

Public sector

4.7 5.0 4.9 4.6 3.7 4.9

Gross national savings

21.4 20.0 20.1 18.7 16.9 16.7

Private sector

14.9 14.2 14.4 12.6 10.5 12.5

Public sector

6.5 5.8 5.7 6.1 6.4 4.2

Public sector


Central government primary balance

2.7 1.9 1.5 1.8 3.3 0.2

Central government overall balance

2.0 0.6 0.1 0.9 2.6 -0.7

Consolidated public sector primary balance 1/

3.2 2.8 3.7 3.4 3.9 0.3

Consolidated public sector overall balance 1/

1.8 0.9 0.8 1.5 2.7 -0.7

Public sector debt (end-of-year) 2/

45.1 37.7 27.7 21.8 19.3 19.5


40.9 34.3 25.3 19.9 17.5 17.8


4.2 3.4 2.4 1.9 1.8 1.7

Consolidated public sector debt 3/

48.8 42.7 34.1 28.2 23.8 21.7
Annual percent change

Money and credit


Monetary base

17.6 4.3 13.0 35.3 18.1 25.4


24.6 16.1 15.3 38.6 21.3 8.9

M5 3/

12.6 8.4 16.6 8.6 15.3 7.0

Credit to the private sector 4/

15.0 15.1 29.0 46.2 36.5 9.7

Velocity of M2

7.7 7.2 7.0 6.4 5.7 5.3

Memorandum items:


International reserves (in millions of U.S. dollars)

1,168 1,297 1,703 2,462 2,864 2,864

(In months of imports)

3.4 2.8 3.2 3.2 4.3 4.0

GDP (in billions of Guaranies)

41,522 46,169 52,270 61,512 69,708 74,842

Sources: Paraguayan authorities; and IMF staff estimates.
1/ Consolidated public sector, including the quasi-fiscal operations of the BCP.
2/ Nonfinancial Public Sector. Based on end-of-period exchange rate conversion of U.S. dollar-denominated debt.
3/ Includes Central Bank Bills (LRMs).
4/ Foreign currency items are valued at a constant exchange rate.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.


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