Statement by an IMF Mission to Paraguay

Press Release No. 10/163
April 20, 2010

Mr. Robert Rennhack, chief of an International Monetary Fund mission to Paraguay, issued the following statement today in Asunción:

“The IMF mission that visited Asunción from April 7-20 wishes to thank the authorities for friendly, open and fruitful discussions, and for help in organizing very useful meetings with entrepreneurs, bankers, and donors. In all these, we have confirmed that the economic team has bolstered its credibility significantly by maintaining macroeconomic stability in the face of the challenges of severe drought and the global financial crisis in 2009.

“While real GDP fell by 3.8 percent in 2009, monetary and fiscal policy shifted to a countercyclical stance—aided by the real effective depreciation of the Guaraní—that helped limit the fall in domestic demand. In spite of the policy stimulus, inflation eased to 1.9 percent during the year. At the same time, the government employed a countercyclical spending policy through a substantial increase in public investment (which grew by 67 percent in nominal terms) and in conditional cash transfers, without curtailing other spending categories. In spite of this significant increase of public expenditures, the fiscal balance closed with a surplus of 0.1 percent of GDP, thanks to an increase in tax collection by 6.4 percent as compared to 2008. As a result, public debt remained low at 23 percent of GDP, while the quality of bank supervision strengthened further.

“The external current account deficit declined in 2009, and net capital inflows rose, as residents repatriated funds held abroad—an important signal of confidence. This allowed the central bank to gain about US$ 1 billion in net international reserves, which reached US$3.8 billion (25 percent of GDP) by end-2009. This reserve cushion helps safeguard the country from the effects of external shocks and enhances the credibility of macroeconomic policies.

“The macroeconomic policies and a supportive external environment will help the economy rebound in 2010, with real GDP expected to grow by 6 percent. Favorable weather conditions will help produce a record harvest in soy and other agricultural products, which—together with renewed growth in key trading partners—will produce a healthy recovery in exports and—through the agriculture sector’s links with the rest of the economy—promote a recovery in private investment. With the recovery in domestic demand and higher international commodity prices, inflation is projected to rise to 5 percent in 2010 and to decrease to lower levels in the medium term, while the external current account deficit would rise moderately in relation to GDP. At the same time, with continued net capital inflows, net international reserves could rise to US$4.1 billion. Demand policies will support the economic recovery in 2010. Monetary policy will manage liquidity to keep inflation in line with the central bank’s 5 percent goal.

“For 2010, tax revenues are expected to rise in nominal terms. If the personal income tax is implemented, with a required declaration of assets, this will help improve tax collection, formalize the economy, and strengthen tax administration. The government should, however, maintain fiscal discipline by setting clear spending priorities and by phasing in spending increases during the current and the next budget year in a gradual manner, consistent with the performance of revenues, and to ensure continued fiscal sustainability, which is at the core of macroeconomic equilibrium.

“The mission encouraged the government to press ahead with its agenda of institutional reforms to provide an even firmer anchor for confidence and sustain vigorous economic growth. These reforms would include the development of a medium-term framework for fiscal policy, further efforts to strengthen tax administration and broaden the tax base, a more strategic focus for public enterprise reform, the gradual adoption of inflation targeting by the central bank, and further progress to improve financial supervision. As always the Fund stands ready to provide technical assistance in these areas and wishes the government every success in these endeavors.”



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