Statement at the Conclusion of an IMF Staff Visit to Paraguay

Press Release No. 09/312
September 18, 2009

An International Monetary Fund (IMF) mission visited Asunción during September 9-16 to update the 2009-10 economic outlook. The mission met with officials and private sector representatives to discuss recent economic developments and policies. IMF Mission Chief Patricia Alonso-Gamo issued the following statement today in Asunción on the mission’s findings:

“The global economic crisis and the drought have hit Paraguay hard in 2009, but there are some signs of an incipient recovery that would show up in growth numbers for 2010. While real GDP could contract in 2009 by about 4 percent, it is expected to rebound by at least 3-4 percent in 2010, with even better prospects in the event of a very good agricultural season. Exports and imports have declined sharply in the wake of the crisis, but the external position remains solid, with foreign exchange reserves expected to reach US$3.5 billion. The floating exchange rate continues to serve Paraguay well.

“The authorities have reacted well to the crisis, implementing appropriate anticyclical policies while maintaining macroeconomic stability. A fiscal expansion, in the context of the Economic Recovery Plan, has helped to support domestic demand. The 2009 budget is being implemented more effectively, with the expected fall in customs revenues partly offset by a remarkable tax collection effort, and financing secured by successful domestic debt issues and new resources from international donors and multilateral lenders. Public investment execution has improved markedly, in particular in infrastructure and public works.

“The draft budget for 2010 continues to focus on accelerating public investment projects and sustainable well-targeted social programs to improve health and education and mitigate poverty, while containing rigid current expenditures to the extent possible. The proposed fiscal deficit of 1.5 percent of GDP appears appropriate in light of the continued need to stimulate domestic demand in 2010, but there will be little scope to exceed these bounds, given the large financing needs next year and the importance of remaining on a path of long-term fiscal viability. Maintaining sound public finances is essential for creating a stable macroeconomic environment supportive of increased private investment, growth, and employment, as well as for implementing an ambitious and sustainable social reform agenda, which together can contribute to improve living standards and reduce poverty.

“The Central Bank of Paraguay (BCP) has supported the financial system by lowering interest rates and providing liquidity to the banking system, helping to create a favorable environment for the revival of credit to the private sector in the coming months. Inflation remains low at about 2-3 percent in 2009, and should not exceed 5 percent in 2010. The BCP remains vigilant and stands ready to tighten liquidity in the event inflationary or external pressures were to emerge.

“Paraguay’s financial system seems to be weathering the crisis, but some disparities continue to exist within the system. The banking system remains stable and regulatory standards and supervisory practices are solid. It will be important, however, to improve quickly the supervision of cooperatives both to ensure the access of the Paraguayan people to financial services and to reinforce the protection of their savings. Recent initiatives to improve supervision are a welcome first step, but comprehensive measures should be put in place without delay.

“The government is addressing pending structural problems. Significant progress has been made in budget implementation and tax administration, although there is scope for further improvements, including in customs, while efforts should be made to broaden the tax base once the economic recovery takes hold. The recapitalization of the BCP, which is to be decided shortly, should be implemented promptly and will contribute to increase its effectiveness. Shortcomings in infrastructure constitute a serious obstacle to Paraguay’s development and there is awareness than an ambitious and effective public investment effort is needed. Steps are being taken to improve planning and debt management capacity. In addition, the government has started to strengthen the mechanisms for the oversight of state-owned enterprises and to develop a viable business strategy for each of these enterprises.

“While the effects of the crisis will be felt for some time, the Paraguayan authorities are implementing prudent macroeconomic policies that are helping to mitigate the negative impact of the global recession in the short run. The government is also committed to continue the necessary reforms that would help to place the country in a position to resume sustainable growth as soon as possible, as well as to improve significantly the living conditions of the population.

“Finally, the mission would like to thank the authorities, in particular the Ministry of Finance and the BCP, and the citizens of Paraguay for their cooperation and warm hospitality.”



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