Statement by an IMF Mission to Paraguay

Press Release No. 11/419
November 16, 2011

An International Monetary Fund (IMF) mission visited Paraguay during November 9–15, 2011 for discussions with government officials and the private sector, as part of the IMF’s regular consultations with its member countries. At the end of the visit, mission chief Lisandro Ábrego issued the following statement today in Asunción:

“In recent years, Paraguay has strengthened its institutional framework and implemented generally prudent fiscal and monetary policies. These policies have led to positive growth and employment outcomes and helped reduce inflation. Going forward, it is important to keep improving policy formulation and implementation, and strengthening Paraguay’s institutions, as once this hard-won policy credibility is lost, it is not easily recovered.

“While growth has normalized after a sharp rebound in 2010, negative shocks have had an impact this year. After expanding by 15 percent in 2010, growth slowed to 4.5 percent in the first half of the year, reflecting mainly the return of agricultural growth to more normal levels, cement shortfalls, and problems with accessing key beef export markets. In the same vein, inflation also started to slow down, in line with less expansionary monetary conditions, and assisted by lower commodity prices and the appreciation of the guaraní. Staff now expects the economy to grow by 4.5 percent in 2011 and by a similar rate in 2012. Regarding prices, we now expect inflation to end 2011 at 5.5 percent, and rise to slightly above 6 percent by end-2012 as a strong fiscal stimulus takes effect and temporary factors that helped reduce inflation this year are reversed.

“Ongoing developments in fiscal policy are of particular concern. Efforts to expand revenues needed to address important deficiencies in infrastructure and social services have stalled. At the same time, plans to place the increase in Itaipú revenues in a special fund are being rejected in congress. Instead, an initiative to sharply increase public sector wages in 2012 (by more than 2 percentage points of Gross Domestic Product ) could be approved. This would give rise to a significant fiscal impulse next year and would also crowd out critical public sector investment. The mission is also concerned about proposals to essentially eliminate the government's room for maneuver in the formulation of the Financing Plan. In 2011, the Ministry of Finance did an important effort to achieve a less expansionary fiscal policy and continue strengthening the public finances, and the central government is expected to record a small surplus. For 2012, however, the mission projects a significant deterioration in the public finances, with an important deficit (the first deficit since 2003) and a fiscal expansion of more than 2 percent of GDP. The mission considers that the fiscal policy stance should be neutral in 2012 to help contain inflation, which affects disproportionately more the poorest segments of the population, and improve the external sector accounts. 

“The Central Bank of Paraguay (BCP) has responded appropriately to contain the surge in inflation. Since the turn in the cycle, reserve requirements have been increased and the policy rate has been raised by 800 basis points as of August—turning it positive in real terms. This has helped reduce domestic demand growth and inflationary pressures. However, the recent softening in inflation owes also to a significant degree to exogenous temporary factors (e.g., lower meat prices) and other factors that are in the process of being reversed (appreciation of the guaraní). Meanwhile, the growth of credit (particularly in dollars) and domestic demand remains high, although it has been moderating. With fiscal policy set to provide a strong positive impulse in 2012, and in the context of the current uncertain global environment, it would be appropriate to set monetary policy in a “wait and see” mode, as it would allow for clearer signals on the future direction of inflation to emerge.

“The authorities should move quickly to fill existing vacancies on the BCP Board of Directors and recapitalize the central bank. With the two open positions and the term of one current director expiring in April 2012, core operations of the central bank may soon be compromised. The recapitalization of the central bank is also a key ingredient to further enhance its independence and ability to implement monetary policy effectively. Both measures are critical to facilitate the central bank’s move to an inflation targeting regime.  

“Overall, the banking system continues to remain sound and profitable. We welcome the authorities strengthening of financial system buffers, including through higher loan provisions and higher capital requirements. There is, however, scope to continue strengthening the financial sector, including through measures targeting currency mismatches by unhedged borrowers and the high growth of consumer credit. In the cooperative sector, the mission also welcomes progress regarding plans for strengthening regulation and supervision, the creation of a financial safety net for the sector, and the development of risk based indicators. Swift implementation of these initiatives will benefit the sector and reinforce the strength of the overall financial system.

“Finally, the IMF mission would like to thank the authorities and private sector representatives of Paraguay for a very open and stimulating dialogue and for their cooperation and warm hospitality.”



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