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Press Release No. 03/218
December 15, 2003
International Monetary Fund
700 19th Street, NW
Washington, D.C. 20431 USA

IMF Approves 15-Month US$73 Million Stand-By Arrangement for Paraguay

The Executive Board of the International Monetary Fund (IMF) today approved a 15-month SDR 50 million (about US$73 million) Stand-By Arrangement for Paraguay to support the country's economic program. The approval opens the way for the immediate release of SDR 30 million (about US$44 million). The authorities have indicated their intention to treat the arrangement as precautionary.

Following the Executive Board discussion, Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman, said:

"Paraguay has launched an ambitious reform program to stabilize the economy and begin a process of structural reform to raise growth, reduce poverty, and improve governance. The government has actively sought broad consensus from political parties and civil society for the key elements of its reform program, and this participatory approach should enhance prospects for successful program implementation.

"The stabilization effort is anchored on an ambitious fiscal agenda. The authorities are committed to eliminating the fiscal deficit in 2004, undertaking lasting reform of the institutions of the public sector, restructuring and reducing debt, and clearing all payment arrears.

"Strengthening revenues is a critical component of the program, and will be achieved through increasing key excise tax rates, broadening the base of the value-added tax and the income tax, implementing a new vehicles tax, and strengthening tax and customs administration.

"Efforts at fiscal consolidation will include spending austerity, redirecting spending to the social sectors and public investment, reforming the public employees' pension plan, and containing the losses of public enterprises through efficiency enhancement and adequate pricing policy for fuel and utilities. Expenditure management will benefit from the implementation of the recently approved Public Procurement Law, and the undertaking of external audits of public institutions.

"To ensure successful medium-term fiscal consolidation, the authorities intend to continue working on normalizing relations with external and domestic creditors, and to prepare reforms of the civil service, the social security system, and public enterprises.

"Paraguay's monetary policy will be geared to controlling inflation and allowing a freely floating exchange rate. The central bank will undertake institutional reforms to improve its ability to conduct an independent monetary policy. The authorities will also take important steps to improve the financial system. These measures include restructuring the public banks, strengthening the bank resolution framework, strengthening regulation and supervision of financial entities, including cooperatives, and requiring independent credit ratings of banks.

"With resolute implementation of the policies contemplated in the program and sustained efforts to improve transparency and governance, Paraguay should move into a period of greater economic stability and more robust growth. This, in turn, will contribute to reducing poverty and providing resources to address the country's social challenges," Mr. Sugisaki stated.




ANNEX

Recent economic developments

In 2002 Paraguay's economy fell into its worst recession in decades as a result of the regional crisis, a poor harvest, and lack of political consensus to implement the necessary reforms. Real GDP fell by nearly 2½ percent, inflation accelerated from 8½ percent to 14½ percent, and the guaraní lost 34 percent of its value in relation to the U.S. dollar. Fiscal problems led to the accumulation of large payment arrears, including to some multilateral institutions, and default on some domestic bonds. Open unemployment rose from 7.6 percent in 2000 to 10.8 percent in 2002.

The economic situation has improved in 2003. A good harvest, the improved regional situation, and first steps towards the implementation of the new authorities' program have combined with a more stable domestic political environment to produce a projected increase of around 2 percent in real GDP for the year. Annual inflation was below 10 percent in October, down from the peak of 21 percent reached in April. However, significant economic imbalances remain. In particular, large financing gaps in the public sector and a recovering banking system leave the economy vulnerable to shocks.

Program summary

Paraguay's economic program, which is supported by the Stand-By Arrangement, seeks to create conditions for sustained economic growth and poverty reduction, and to address long-standing governance problems by improving the efficiency and transparency of government operations. The program aims to stabilize the fiscal situation and to initiate structural reforms in the public sector and the banking system. Growth is projected to rise to around 2½ percent in 2004 and climb to around 3½ percent in the medium term. Underlying inflation should fall from 9 percent in 2003 to 6½ percent in 2004. The current account would remain broadly in surplus.

The fiscal policy package prepared by the new government is intended to close the fiscal financing gap, pay off arrears, and place the public debt on a more sustainable path. Fiscal adjustment measures already implemented will produce an improvement of at least 1½ percent of GDP on an annual basis, and measures to be implemented during the program period would yield an additional 2-2½ percent of GDP annually. The adjustment would bring the overall balance into slight surplus and initiate a decline in the debt/GDP ratio toward around 30 percent of GDP by the end of the decade, while accommodating increased capital spending and social investment. On the revenue side, the government's strategy is to raise revenues while minimizing increases in tax rates.

For 2004 the authorities are committed to a monetary policy geared toward controlling inflation while maintaining exchange rate flexibility. The program establishes targets on net domestic assets designed to bring the growth in the money supply down to a rate more consistent with single-digit inflation in the medium term, while allowing for a recovery in private lending. Paraguay's central bank will also work to develop the necessary technical and statistical capabilities to move eventually to an inflation targeting regime.

Financial sector reforms are intended to make the system more resilient and efficient. The authorities have already taken measures to enhance bank supervision and resolution capabilities, as well as pass legislation to introduce a deposit insurance system. Under the program they plan to reform the public banks and modernize regulatory requirements for all financial institutions.

The structural reform agenda is focused on strengthening public sector efficiency and governance. Initiation of public sector reform (in particular the public enterprises, the central bank, and the social security institute) and a public banking law, among other measures, will provide an improved institutional environment for sustained economic stability and growth.

Paraguay joined the IMF on December 28, 1945; its quota is SDR 99.9 million (about US$146 million), and it has no outstanding use of IMF credits. Paraguay last had an IMF program in 1960.

Table 1. Paraguay: Selected Economic Indicators, 1999-2004

 

 

 

                 Est.             Proj.

 

1999

2000

2001

2002

2003

2004

 

             
          (Annual percent change) 
 

National accounts and prices

             

GDP at current prices

3.0

11.5

4.4

13.7

16.7

9.3

 

GDP at constant prices

0.5

-0.4

2.7

-2.3

2.0

2.4

 

Consumption

-3.6

0.8

6.2

-5.1

2.8

2.4

 

Investment

-3.8

-0.7

-17.5

-11.0

-4.6

7.6

 

Net exports (contribution to growth)

4.8

-0.9

0.4

4.4

0.0

-0.8

 

Exports

-27.0

-15.1

-0.4

14.3

2.3

0.2

 

Imports

-27.1

-6.7

-1.6

-6.3

1.5

3.0

 

GDP deflator

2.5

11.9

1.7

16.4

14.3

6.7

 
               

Consumer prices (average)

6.8

9.0

7.3

10.5

14.1

7.5

 

Consumer prices (end-of-period)

5.4

8.6

8.4

14.6

8.8

8.0

 

Real effective exchange rate

             

Average (depreciation -)

6.4

-3.1

-1.5

-3.9

...

...

 

End-of-period (depreciation -)

2.4

4.3

-12.5

-6.6

...

...

 
               
 

(In millions of U.S. dollars)

   

External sector

             

Exports, f.o.b.

2,307

2,322

1,876

1,878

2,102

2,111

 

Imports, c.i.f.

2,750

2,864

2,495

2,159

2,339

2,398

 

Current account

-165

-163

-278

92

83

26

 

(in percent of GDP)

-2.1

-2.1

-4.0

1.7

1.4

0.4

 

Capital account

509

157

152

5

-308

116

 

Overall balance

87

-254

-50

-123

75

141

 

Terms of trade (deterioration -)

2.3

-4.6

-0.1

7.4

5.9

-4.8

 
               

(In percent of GDP)

   
   

Public sector

             

Central government primary balance

-2.8

-3.1

0.2

-1.7

1.0

1.5

 

Central government overall balance

-3.6

-4.3

-1.1

-3.1

-0.3

0.2

 

Consolidated public sector primary balance 1/

-1.8

-2.6

1.0

-1.3

1.2

2.2

 

Consolidated public sector overall balance 1/

-3.1

-4.0

-0.7

-3.2

-0.6

0.3

 
               

Public sector external debt (end-of-year)

28.9

30.6

33.5

42.9

44.3

40.5

 

Domestic public sector debt 3/

3.1

3.4

4.9

6.8

4.8

5.3

 
               

(Annual percent change)

     
   

Money and credit

             

Monetary base

9.5

-1.3

5.8

-1.0

49.9

3.2

 

M2

10.7

2.2

4.9

-2.2

19.0

17.0

 

M5 3/

6.4

-0.1

1.5

-18.5

18.4

14.4

 

Net foreign assets 4/

13.1

-5.4

-5.5

-12.8

25.2

4.8

 

Net domestic assets 4/

-6.7

5.3

7.0

-5.6

-6.8

9.6

 

Credit to the public sector 4/

-9.0

2.3

3.5

5.2

2.5

0.7

 

Credit to the private sector 4/

1.3

-0.8

-0.7

-14.9

-10.7

6.3

 

Velocity of M2

6.6

7.2

7.2

8.3

8.2

7.6

 
               

Memorandum items:

             

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

988

772

723

641

818

855

 

(in months of imports)

3.6

3.2

3.5

2.8

3.7

3.5

 

GDP (in billions of guaranies)

24,144

26,921

28,119

31,977

37,302

40,779

 

Sources: Paraguayan authorities; and IMF staff estimates.

   

1/ Consolidated public sector, including the quasi-fiscal operations of the BCP.

   

2/ Includes use of deposits.

 

3/ Foreign currency items are valued at a constant exchange rate.

 

4/ Contribution to M5 growth.

       




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