Paraguay and the IMF
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The Executive Board of the International Monetary Fund (IMF) completed the fourth review under an SDR 50 million (about US$ 75.6 million) Stand-By Arrangement for Paraguay, originally approved on December 15, 2003 for 15 months (see Press Release No. 03/218), and extended through September 30, 2005 on December 20, 2004 (see Press Release No. 04/271).
In completing the review, the Executive Board also granted waivers for the nonobservance of one quantitative performance criterion and one continuous performance criterion. The completion of this review makes a further amount equivalent to SDR 3 million (about US$4.5 million) immediately available to Paraguay. However, Paraguay has not made any drawings under the arrangement so far, and the authorities have indicated that they will continue to treat it as precautionary.
The Executive Board has also determined that, on the basis of the corrective measures already undertaken, no further remedial action is required with respect to Paraguay's delayed report on arrears and its obligation to provide information under Article VIII, Section 5 of the Fund's Articles of Agreement.
Following the Executive Board's discussion of Paraguay's economic performance, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, said:
"Paraguay's overall performance under the program continues to be strong. Prudent macroeconomic policies have been maintained and structural reform has been reinvigorated after the extension of the Stand-By Arrangement.
"Paraguay's macroeconomic situation has been better than envisaged under the program. Real GDP growth accelerated to almost 3 percent in 2004 despite a drought, the highest growth rate in a decade, while inflation fell below 3 percent, the lowest inflation rate in three decades. The overall fiscal position of the central government has been brought back into surplus, confidence in the banking system has returned, and the foreign exchange market has broadly stabilized. However, unemployment and poverty levels remain high, underscoring the importance of pressing ahead with the reform agenda.
"The main challenges for 2005 will be to maintain fiscal discipline and move forward the structural reform agenda. On fiscal policy, it will be key that the authorities implement the budget in line with the program, notwithstanding the higher spending implicit in the congressionally approved budget, while using higher projected revenues for a significant increase in capital expenditure in needed infrastructure.
"The fiscal outlook has improved, partly reflecting the congressional passage of the fiscal adjustment law (FAL). At the core of these efforts are the significant improvements in tax administration in the internal revenue service and customs. These gains should be consolidated through institutional strengthening.
"Monetary policy has succeeded in containing inflation while allowing for rapid reserve accumulation. However, further strengthening is required to consolidate inflation performance. The authorities' decision to start implementing the recommendations of the IMF's Monetary and Financial Systems Department is welcome. However, further reforms at the Central Bank will be necessary to strengthen monetary management and build on the success of 2004.
"The structural reform agenda remains ambitious but feasible. Performance has improved after some delays at the end of 2004. The authorities remain committed to the reform agenda and considerable progress has been made in the first quarter of 2005. A particularly important step has been the approval of the second-tier public banking law by the Senate. Looking ahead, the authorities would need to reinforce their commitment to reform by further advancing with the difficult task of restructuring the National Development Bank (BNF). It will also be important to strengthen governance and the climate for private investment to allow the economy to reach its full growth potential.
"With respect to Paraguay's obligation to provide information under Article VIII, Section 5 of the Fund's Articles of Agreement in connection with the delayed reports on arrears, Directors determined that, on the basis of the corrective measures already undertaken, no further remedial action is required," Mr. Kato said.
IMF EXTERNAL RELATIONS DEPARTMENT