Press Release No. 07/231

Press Release: IMF Executive Board Completes Fourth Review Under Paraguay's Stand-By Arrangement

October 15, 2007

The Executive Board of the International Monetary Fund (IMF) today completed the fourth review of Paraguay's economic performance under a 27-month Stand-By Arrangement originally approved in the amount equivalent to SDR 65 million (about US$101 million).

In completing the review, the Executive Board also approved the country's request for a reduction and rephasing of access under the Stand-By Arrangement. In light of Paraguay's stronger than expected external position, the overall size of the Arrangement will be reduced—at the authorities' request—from SDR 65 million to SDR 30 million (about US$46.6 million). This will make SDR 26 million (about US$40.4 million) available to Paraguay immediately. However, the Paraguayan authorities intend to continue treating the arrangement as precautionary. The Stand-By Arrangement was approved May 31, 2006 (see Press Release No. 06/117).

Following the Board discussion on the fourth review, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chair, said:

"Paraguay's economic performance, supported by a Stand-By Arrangement with the Fund, continues to be strong. Macroeconomic policy implementation has been solid and, despite difficulties in implementing some aspects of the authorities' policy agenda, structural reforms have deepened in many areas. Paraguay has made significant progress towards entrenching macroeconomic stability and thereby setting the basis for accelerated sustainable growth and poverty reduction.

"Fiscal performance remains strong and the outlook for public finances is good, despite a difficult policy environment. A larger than anticipated fiscal surplus for the first eight months of 2007 has created margins for the expenditure pressures that may intensify during the remainder of the year. With economic growth more robust than originally projected, the strong fiscal position is appropriately counter-cyclical. In line with the encouraging fiscal discipline reflected in the 2008 budget submitted to congress, prudent fiscal policies during the rest of 2007 and 2008 will be key to sustaining macroeconomic stability and meeting Paraguay's fiscal objectives.

"Paraguay's monetary policy, which aims to strike a balance between containing currency growth in the face of large foreign-exchange inflows and satisfying an increase in real domestic money demand, will need to avoid the development of a monetary overhang and consequent inflationary pressures. In this regard, the recent switch to a more active stance in the wake of international and regional price pressures is welcome.

"Progress on financial sector reforms is encouraging. The preparation of a business plan for the National Development Bank, a plan for enhancing Paraguay's coverage of Basle Core Principles for Banking Supervision, and a strategy to strengthen the financial position of the Central Bank are commendable. Looking forward, the further implementation of structural reforms will include a bill to Congress that will reflect the legal and budgetary implications of the strategy for strengthening the financial position of the Central Bank, and of completing work on the draft payments system law.

"The authorities are encouraged to continue defending the hard-won macroeconomic stability through appropriate fiscal and monetary policies. Maintaining and, where possible, accelerating the pace of structural reforms will contribute importantly to sustaining economic growth and poverty reduction," Mr. Kato said.