## cr17233

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---

### Recent developments
- Growth:
  - Economy expanded by 6½ percent (y/y) during the first quarter of 2017.
  - Expansion broadened across sectors: robust construction, favorable border trade, rebound in the maquila industry, and a particularly good soy harvest.
- Supply and demand drivers:
  - Investment strengthened (private and public); construction and agriculture investment financed largely from non-bank sources including FDI and firms’ cash.
  - Private consumption bolstered by increase in minimum wages in late 2016 and growth in labor-intensive sectors (services and maquila).
- Inflation:
  - BCP reduced its inflation target by 50 basis points to 4±2 percent in February.
  - Headline CPI edged down from 3.4 to 2.9 percent (June).
  - Core CPI inflation has been rising to 5.3 percent.
- Fiscal:
  - 2016 deficit outturn was 1.4 percent of GDP, complying with the Fiscal Responsibility Law (FRL).
  - Authorities offset weakening revenues and higher investment with current expenditure cuts, especially compensation; public sector wage bill continues to fall as a share of GDP (data to May 2017).
  - Staff estimates: estimated structural balance (excluding royalties and grants) points to a negative fiscal impulse of about 1.4 percent of potential non-agriculture non-energy GDP; a cyclically-adjusted primary balance suggests a negative fiscal impulse of 0.8 percent of potential GDP in 2016.
- Credit and banking:
  - Bank lending activity stagnant after rapid credit growth over 2004–15.
  - Bank FX credit decreased since last year; guaraní credit growth slowed; consumption credit weak.
  - Higher NPLs and higher provisioning caused banks to be cautious; lenders’ sentiment recently turned positive.
  - Non-traditional unregulated lenders show signs of growth but remain a small fraction of credit.
- External balance and reserves:
  - 2016 current account was a 1.7 percent of GDP surplus.
  - Reserves reached 26 percent of GDP—above standard benchmarks (e.g., 190 percent of the ARA metric).
  - Guaraní REER appreciated 1.7 percent through June; staff assesses REER somewhat undervalued even after adjusting for windfall electricity exports.
- Electricity:
  - Electricity production reached record production of 48 million GWh (noted as edging above historical averages in 2016).

### Outlook and risks
- Staff baseline projections and near-term drivers:
  - 2017 growth projected at 4.2 percent.
  - Near-term drivers: investment (including major infrastructure projects), consumption (higher minimum wages raised again in July 2017), employment gains, strong exports.
  - 2017 current account surplus expected to narrow to 1.2 percent of GDP.
  - Year-end inflation expected around 4 percent (y/y) due to electricity-price hikes, services inflation, and lower deflation in volatile components.
  - Monetary conditions: policy rate below neutral; interbank rates below policy rate; policy rate expected to gradually rise towards year-end.
  - Medium-term: real GDP growth near potential of just below 4 percent; fiscal expenditures growing in line with GDP implying little change in overall budget deficits; current account projected to narrow toward balance; inflation consistent with target.
  - IMAEP monthly indicator: cumulative growth for Jan–April of 4.8 percent compared with 7 percent in Q1.
- Risks (RAM):
  - Downside external risks: heightened political uncertainty in Brazil, fragile Argentina recovery, faster-than-expected Fed normalization, weaker-than-expected commodity prices.
  - Domestic risks: climate-related shocks to agriculture, construction and livestock; financial risks from a larger-than-expected retrenchment of credit if bank liquidations of foreclosed properties trigger declines in land prices and collateral values.
- Authorities’ view:
  - Authorities broadly shared staff’s views; expected acceleration in 2017 driven by investment-led growth; main near-term risk seen as political uncertainty in Brazil.

### Macro-financial linkages and vulnerabilities
- Key vulnerability:
  - Bank-based financial system that is highly dollarized and exposed to a volatile agriculture sector.
- Exchange rate channel:
  - Sharp dollar appreciation could impact bank and borrowers’ balance sheets and profits, curtail investment, and damp growth.
  - Major FX borrowers appear naturally hedged; bank assets and liabilities broadly balanced; static simulations suggest banks could withstand moderate guaraní depreciations.
  - Larger depreciations (e.g., exceeding 30 percent) could noticeably reduce capital buffers and constrain lending if banks must raise capital and higher capital requirements on dollar-denominated loans are absent.
- Agriculture channel:
  - Rising bank holdings of repossessed collateral (including land) likely to be sold in the next 1–2 years.
  - Staff expects limited impact on land prices in baseline, but a deeper downturn or combined large negative agricultural and exchange rate shocks could cause adverse feedback among land values, bank losses, borrower creditworthiness, credit supply, and investment—reducing GDP growth.
- Regulations and practices:
  - Regulations require banks to sell repossessed collateral within 2 years or provision the full assessed property value.

### Financial sector stability: assessment and policy guidance
- Key facts:
  - Banks are well capitalized and retrenched from some high-growth segments (e.g., agriculture).
  - High credit dollarization is closely related to dollar-denominated business operations and did not signal significant currency mismatch risk, per authorities.
  - NPLs remain low; provisioning adequate; very low exposure to construction is mitigating.
- Staff findings and estimates:
  - Current policy mix broadly appropriate.
  - Relatively neutral fiscal stance warranted given cyclical position.
  - Staff supports authorities’ commitment to achieve a 1½ percent of GDP deficit (FRL) and maintain compositional shift toward capital expenditures.
  - At 5.5 percent, staff estimates central bank’s policy rate somewhat below the neutral rate, estimated at about 6 percent (nominal).
- Monetary policy recommendations:
  - Gradually remove monetary accommodation via modest hikes in 2017 and 2018 to bring real policy rate in line with neutral.
  - Tighten financial conditions—including raising the interest rate corridor—if economic momentum broadens, bank credit resumes, and domestic spending rises.
  - If downside risks materialize, authorities have policy space to respond.
- Liquidity management:
  - Financial conditions relaxed; liquidity should be reduced.
  - Recent reserve accumulation partly due to purchase of dollar receipts from the binationals not sterilized.
  - Further issuance of IRMs recommended to tighten financial conditions.
  - Increasing dollar sales (compensatory operations) would limit reserve accumulation and absorb market liquidity.
- Authorities’ views:
  - Authorities concurred with staff’s assessment, emphasized external risks and weak credit growth when timing tightening; indicated selling dollars can mop up liquidity.

### Structural policies to raise potential growth and inclusiveness
- Infrastructure gaps:
  - Key bottlenecks: deficiencies in transportation and electricity distribution.
  - Losses in transmission and distribution about 31 percent (well above Latin America average ~14 percent); peak demand growing at 8 percent per year.
  - Improved navigability of Paraguay-Parana rivers, new port terminals, and investment in key road segments would reduce congestion and facilitate trade.
- FDI and investment efficiency:
  - Paraguay attracts gross inflows of about 7 percent of GDP on average; net FDI inflows much lower at around 1½ of GDP, on average.
  - Strengthening project selection and management can yield more infrastructure per dollar; containing cost overruns is key.
  - SNIP and ENEP play roles in aligning investment priorities; authorities stepped up efforts and modernize electricity transmission and distribution.
- Inclusive growth and social policies:
  - Record of reducing poverty and inequality was strong in the past decade; commodity boom contributed and cannot be counted on going forward.
  - Expand well-designed conditional cash transfers (Tekopora and Tenondera); these programs spend less than ½ percent of GDP.
  - Conduct thorough expenditure review to reprioritize spending including for social assistance.
  - Tax reform that preserves low tax rates but limits generous income tax deductions would improve progressivity and provide fiscal resources.
  - Step up efforts to combat high informality; authorities noted initiatives (online registration resources, increased penalties).

### Strengthening fiscal management: framework, revenue, institutions
- Budget process vulnerabilities:
  - 2017 budget culminated in unprecedented presidential veto—need to strengthen budget process.
  - Budgets passed by congress can exceed 1.5 percent deficit ceiling because FRL and annual budget laws have equal legal standing.
  - Prevailing 2016 budget included amendments authorizing a deficit equivalent to 2.8 percent of GDP; for 2017 authorities signaled adherence to FRL limits on an outturns basis which may require restraint in execution.
- Recommended FRL and PFM reforms:
  - Budget formulation: consider pre-budget strategy hearing and procedural rules limiting amendments.
  - Budget control: tighten controls and modify assessment of FRL compliance to include execution stage.
- Revenue mobilization:
  - SET institutional capacity expanded but staffing and legal constraints remain.
  - Staff encouraged: (i) boosting enforcement powers; (ii) addressing HR issues; (iii) increasing resources.
  - DNA (customs) reforms less ambitious; SET and DNA could realize synergies.
  - Tax expenditures estimated at 1.6 percent of GDP; scope to broaden tax base by reducing allowances, exemptions, tax credits.
  - Income tax rate currently 10 percent but revenue collected through income taxes below 3 percent of GDP.
- Fiscal Advisory Council (FC):
  - Introduced late 2016 (Presidential Decree No. 6498/2016 of December 19, 2016); consists of three non-remunerated fiscal experts; effectiveness to be established.
  - Mandate includes assessing executive’s proposed budget and commenting on fiscal and macro implications of legislative amendments.
  - Limitations: no explicit mandate on fiscal outturns or ex-post adherence to FRL; lacks independent staff/secretariat.
  - Fund staff recommended granting human and budgetary resources and a communication strategy including a dedicated website.
- Possible FRL reform sequencing:
  - Tentative plans to introduce structural balance rule left to next administration (elections in 2018).
  - IMF TA highlights that moving to structural balance rule requires careful consideration; TA simulations suggest a “safe” debt anchor range of 30 to 45 percent of GDP; structural deficit of central government should not exceed 2 percent of trend GDP per year.
  - Any FRL modifications should be accompanied by measures to strengthen fiscal institutions and PFM framework.
- Authorities’ views:
  - Authorities agreed with staff principles, welcomed advice, noted pilot program in Ministry of Public Works with IDB support; any change to FRL postponed until next administration though authorities favor structural balance rule; acknowledged FC shortcomings but view FC introduction as first step.

### Pension and health systems: demographics and reform options
- Demographics and long-term projections:
  - Population comparatively young, but lower fertility and longer lifespans signal significant demographic change.
  - Long-term (85-year) projections: population aging would eventually cause deficits for most public pension programs.
  - Overall pension system estimated to have an unfunded liability of nearly 200 percent of GDP (in net present value terms).
  - Caja Fiscal has already exhibited deficits.
  - IPS currently posting operational surpluses; rise in coverage may contribute to deficits after 2045 as new entrants become eligible.
  - Pension investments allocated mainly in local banking system; regional comparators have more diversified portfolios.
- IPS health program:
  - Health expenditures on rising trend; IPS health program recently showing higher underfunding.
  - With still-young population, rise in expenditures appears linked to excess cost growth.
  - Excess cost growth and demographic transition expected to raise IPS health program’s deficit going forward.
- Pension regulation and oversight proposals:
  - Draft legislation to create separate Superintendence of Pensions, develop oversight council, broaden permissible investment instruments, and establish advisory committee for portfolio allocation limits.
  - Staff welcomed greater oversight; reforms could mobilize national savings more efficiently if implemented prudently.
- Parametric pension reform scenarios (Unfunded Liability After Parametric Reforms, present discounted value, 2015-65; percent of current GDP):
  - Scenarios (columns): (1) Retirement at age 65; (2) Benefit cut of 10 pct.; (3) Contribution increase of 10 pct.; (4) Combination (1)-(3)
  - IPS: (1) -22.1; (2) -3.2; (3) 6.8; (4) -37.1
  - Caja Fiscal: (1) 3.7; (2) 20.0; (3) 23.0; (4) -7.3
  - Caja Itaipu: (1) -0.7; (2) 1.1; (3) 1.9; (4) -1.9
  - Caja ANDE: (1) 0.0; (2) 0.6; (3) 0.9; (4) -0.3
  - Caja Bancaria 1/: (1) -7.9; (2) -6.2; (3) -5.8; (4) -9.5
  - Note: Caja Bancaria not found to have an unfunded liability and would remain in balance even without reforms.
- IPS health program recommended reforms:
  - Prompt review to identify pressures; potential reforms include improving cost sharing (co-pays, deductibles), improving procurement, and introducing control systems to manage expenditures.
- Authorities’ views:
  - Passage of pension regulator legislation fundamental; committee could begin reform options after law approval; authorities concurred on health program review.

### Making monetary policy more effective and predictable
- IT framework:
  - IT reduced inflation levels and volatility; BCP recently lowered inflation target.
- Areas to strengthen:
  - Align interbank rates with corridor: BCP narrowed corridor but interbank repo rates usually fall near or below floor, indicating gap between policy rates and liquidity conditions and weakening policy transmission.
  - Staff recommended better liquidity management, including additional issuance of IRMs; note BCP large negative equity position at 2.8 percent of GDP in 2016 and need to address recapitalization costs in IRM issuance estimates.
  - Make pre-announced FX sales more predictable: announce and commit to feasible schedules for dollar sales; continue interventions only in disorderly market episodes.
  - Reduce financial dollarization over time: recommend gradual de-dollarization strategy including higher capital requirements on dollar-denominated loans; consider differentiating reserve requirements by currency and other macroprudential policies.
  - Differential between reserve requirements for FX and Guarani deposits stands at 7 percentage points.
- Communication:
  - Central bank transparency commendable, but market expectation measures suggest public routinely surprised by policy rate changes.
  - Staff recommended enhancing communication by providing policy guidance (policy bias, detailed explanation linking inflation outlook to policy decisions).
- Authorities’ views:
  - Reiterated commitment to IT regime; view high liquidity as market preference buffer; high dollarization seen as risk avoidance by exporters; interventions conducted in exceptional situations; receptive to enhancing communication.

### Continuing financial supervisory and regulatory reforms
- Banks adjusting to end of credit boom; stagnant credit growth narrowed credit gap estimates, but pockets of vulnerability remain.
- Broad-based measures of distressed loans elevated; provisioning increased, reducing earnings; regulatory capital ratios have risen.
- Progress and planned measures:
  - New banking law ratified December 2016; BCP developing plan to implement regulations in line with law.
  - Changes in capital regulations (including surcharge for systemic banks) planned.
  - Authorities will begin calculating LCR (for surveillance).
- Staff encouraged advancing:
  - Strengthening BCP enforcement powers (BCP organic charter law in congress).
  - Creating Financial Stability Council (decree; not public yet).
  - Establishing deposit insurance for savings and loan cooperatives (draft to Ministry of Finance in June).
  - Passing strong law regulating Sociedades Anonimas and bearer securities to meet AML/CFT standards.
- Data and monitoring recommendations:
  - Integrate financial information between banks and cooperatives through a single credit bureau.
  - Improve availability of data on non-regulated lenders.
  - Address lack of real estate price data limiting assessment of soy prices on land values.
- Financial soundness indicators (selected; in percent):
  - Tier 1 capital/risk weighted assets: 2013 11.7; 2014 11.3; 2015 11.2; 2015 11.7; 2016 13.4
  - Total capital/risk weighted assets: 2013 16.1; 2014 14.7; 2015 15.2; 2015 16.1; 2016 17.9
  - Return on assets: 2013 2.5; 2014 2.7; 2015 2.6; 2015 2.5; 2016 2.2
  - Return on equity: 2013 27.6; 2014 28.7; 2015 28.0; 2015 27.6; 2016 23.3
  - Nonperforming loans: 2013 2.6; 2014 2.1; 2015 2.0; 2015 2.6; 2016 2.9
  - Risk-weighted/total assets: 2013 65.7; 2014 70.1; 2015 67.4; 2015 65.7; 2016 60.5

### Data dissemination and standards
- Paraguay implemented the enhanced general data dissemination (e-GDDS) system.
- Remaining steps to reach SDDS: compilation of the template on international reserves and foreign currency liquidity and an advance release calendar covering all data categories.
- National Summary Data Page (NSDP) made available online.

### External stability assessment (key points)
- NIIP hovered 40 percent of GDP over last 5 years.
- Gross external debt stable around 59 percent of GDP; projected to decrease as binational portion falls; position sustainable under range of shocks.
- Staff assessments:
  - “The external position strengthened to levels that appear stronger than those implied by fundamentals.”
  - “The exchange rate is assessed as mildly undervalued.”
  - “The external debt position does not raise sustainability concerns.”
- Current account:
  - Averaged 0.7 percent of GDP over last 20 years; 2016 estimated current account at 1.7 percent of GDP.
  - Excluding electricity sales, current account would be just above ½ percent of GDP.
  - Projected to narrow to 1.2 percent of GDP in 2017; medium term close to 1 percent of GDP.
- Reserves and FX intervention:
  - Reserves ample at 7 months of imports; pre-announced sale of part of binationals’ receipts did not proceed; BCP accumulated more than USD 900 million.
  - Staff recommended rules-based regular dollar sales and limiting discretionary interventions to exceptional conditions.

### External debt sustainability (selected figures)
- External debt (percent of GDP): 2012 65.5; 2013 54.5; 2014 53.5; 2015 59.5; 2016 58.8; 2017 58.6; 2018 56.6; 2019 54.1; 2020 52.0; 2021 50.3; 2022 48.8
- Change in external debt (annual): 1.9; -10.9; -1.0; 6.0; -0.8; -0.1; -2.1; -2.5; -2.1; -1.6; -1.5
- Exports (percent of GDP): 50.5; 49.9; 45.3; 43.1; 43.7; 43.8; 44.3; 44.0; 43.4; 42.9; 42.4
- Imports (percent of GDP): 48.8; 44.9; 42.7; 41.9; 39.7; 41.8; 41.6; 40.9; 40.0; 39.3; 38.7
- Key macro assumptions (selected):
  - Real GDP growth (percent): -1.2; 14.0; 4.7; 3.0; 4.1; 5.0; 5.5; 3.3; 3.7; 3.7; 3.7; 3.8
  - Growth of exports (US dollar terms, percent): -7.1; 16.5; -3.2; -16.0; 1.9; 8.1; 19.0; 5.0; 5.6; 5.0; 4.6; 4.7; 4.6

### Public debt sustainability (selected figures and recommendations)
- Nominal gross public debt (percent of GDP): 17.5 (2006–2014 actual period entry), 24.0 (2015), 24.6 (2016), 25.4 (2017), 25.1 (2018), 24.8 (2019), 24.7 (2020), 24.5 (2021), 24.4 (2022).
- Public gross financing needs (percent of GDP): 0.9 (2015), 2.3 (2016), 2.5 (2017), 1.9 (2018), 1.4 (2019), 1.1 (2020), 0.9 (2021), 1.0 (2022).
- Effective interest rate: 5.4 (2006–2014 actual), 5.6 (2015), 5.3 (2016), 3.3 (2017), 3.3 (2018), 3.5 (2019), 3.8 (2020), 4.2 (2021), 4.5 (2022).
- Ratings: Moody’s Ba1; S&Ps BB; Fitch BB.
- Growth and price dynamics used:
  - Real GDP growth (percent): 5.3 (2006–2014 actual), 3.0 (2015), 4.1 (2016), 4.2 (2017), 3.9 (2018), 3.8 (2019), 3.8 (2020), 3.8 (2021), 3.8 (2022).
  - Inflation (GDP deflator, percent): 5.6 (2006–2014 actual), 0.1 (2015), 5.3 (2016), 4.0 (2017), 3.6 (2018), 3.4 (2019), 3.8 (2020), 4.0 (2021), 3.9 (2022).
- Policy recommendations:
  - FRL provides suitable anchor but need to improve budgetary processes and legal/institutional aspects.
  - Strengthen tax administration, reduce exemptions/deductions, and broaden tax base.
  - Implement banking law, strengthen cooperative sector oversight, develop domestic bond market, and adopt new debt management strategy.
  - IMF to support TA on tax administration, risk-based supervision, monetary and FX policy, reserves, and statistics; World Bank to support public expenditure review, SOE/PPP frameworks, governance, and business climate.

### Box 2 — Dollarization in Paraguay (summary)
- Evolution and drivers:
  - Gradual decline in dollarization in early 2000s reversed since global financial crisis; driven by commodity prices, economic activity and exchange rate fluctuations.
  - Credit dollarization closely follows soybean prices and economic activity (IMEAP).
- VAR quantitative impacts:
  - 1 percentage point shock to soybean prices increases dollarization by 3½ ppt cumulatively after one year.
  - 1 ppt depreciation of the guarani associated with a decline in dollarization by 3 ppt.
  - Stable and low inflation helps lower dollarization; increasing marginal RRR on foreign currency deposits lowers credit dollarization.
- Financial stability and policy implications:
  - Agribusiness invoicing and borrowing in dollars weakens monetary transmission and reduces BCP’s lender of last resort capacity.
- Policy recommendations:
  - Continue building track record with IT regime and preserve macro stability.
  - Reduce relative cost of transacting in local currency to increase guaraní use.
  - Monitor financial vulnerabilities (currency mismatches, banks’ net open positions) and strengthen risk-based supervision.

### Annex I — Commodity shock and income inequality (key findings)
- Context and facts:
  - Inequality fell significantly in 2000s but Gini remained at 0.50.
  - Agricultural and livestock commodity prices increased by about 70 percent in 2006–2013.
  - Urban population share grew by 2 percentage points during period.
- Transmission channels:
  - Reallocation to rural areas and labor-intensive sectors; boom favored low-skilled employment and raised lower-skilled wages.
  - Higher revenues used for transfers and expanded in-kind health care.
- Model findings and quantitative impacts:
  - Dynamic general equilibrium model used to simulate 2006–2013 commodity-price increase.
  - Commodity boom accounted for significant share of Gini reduction (2.5 basis points) via higher rural incomes and low-skilled jobs.
  - VAT reform increased indirect tax revenues by 2 percent of GDP but had potential to increase inequality (about 3 Gini basis points), effect muted by informality.
  - Increase in health care spending (about 2 percentage points of GDP) reduced inequality; net modeled impact over 2006–2013: reduction in Gini of about ¼ of a basis point, with commodity boom accounting for larger identifiable share (2.5 basis points).

### Staff appraisal — key findings and priority recommendations
- Growth and outlook:
  - Paraguay grew faster than regional peers with above-potential growth around 4 percent in 2016 and 2017; momentum broadening beyond agriculture and electricity.
- Fiscal and monetary policy:
  - Policy mix adequate and broadly supportive; recommend gradual removal of monetary accommodation as inflation pressures rise and credit growth resumes.
  - Fiscal policy expected neutral this year; adhere to FRL on outturns and maintain compositional shift toward capital spending.
  - Drain excess liquidity via additional IRM issuance and dollar sales to align policy and interbank rates.
- Fiscal framework and pensions:
  - Strengthen budget process and PFM framework; modify FRL compliance assessment to include execution stage.
  - Pension and health systems face near- and long-term imbalances and need reform.
- Monetary policy communications and dollarization:
  - Strengthen operation of policy corridor and predictability of FX operations; limit discretionary FX interventions to exceptional circumstances.
  - Gradual de-dollarization recommended and greater use of forward-looking policy guidance.
- Financial sector stability and supervision:
  - Advance revisions to BCP organic charter; establish financial stability council; implement deposit insurance for cooperatives; integrate financial information via single credit bureau; approve Sociedades Anonimas and bearer securities legislation to meet international standards.
- Structural reforms and inclusiveness:
  - Continue implementing National Development Plan priorities in education, training, conditional cash transfers; tax reform to rebalance away from indirect taxation while preserving low income tax rates and limiting deductions.
- Data and surveillance:
  - Complete steps to satisfy SDDS standards following e-GDDS implementation.
- Consultation timeline:
  - Staff proposes next Article IV consultation on standard 12-month cycle.

*Source: IMF staff report (text provided).*

### 1. Risk Assessment Matrix ____________________________________________________________________________ 23

### 1. Risk Assessment Matrix

### Recent Developments
- Growth:
  - The economy expanded by 6½ percent (y/y) during the first quarter of 2017.
  - The expansion has become more broad based across sectors, with robust construction, favorable border trade, a rebound in the maquila industry, and a particularly good soy harvest.
- Supply and demand drivers:
  - Investment: Private investment and public sector investment strengthened; investment related to construction and agriculture financed largely from non-bank sources including FDI and firms’ cash.
  - Consumption: Private consumption bolstered by the increase in minimum wages in late 2016 and growth in labor-intensive sectors (services and maquila).
- Inflation:
  - The BCP reduced its inflation target by 50 basis points to 4±2 percent in February.
  - Headline CPI edged down from 3.4 to 2.9 percent (June).
  - Core CPI inflation has been rising to 5.3 percent.
- Fiscal:
  - 2016 deficit outturn was 1.4 percent of GDP, complying with the Fiscal Responsibility Law.
  - The authorities offset weakening revenues and higher investment with current expenditure cuts, especially compensation; public sector wage bill continues to fall as a share of GDP (data to May 2017).
  - Staff estimates: the estimated structural balance (excluding royalties and grants) points to a negative fiscal impulse of about 1.4 percent of potential non-agriculture non-energy GDP; a cyclically-adjusted primary balance suggests a negative fiscal impulse of 0.8 percent of potential GDP in 2016.
- Credit and banking:
  - Bank lending activity has been stagnant after rapid credit growth over 2004–15.
  - Bank FX credit has decreased since last year; guaraní credit growth has slowed; consumption credit has been weak.
  - Higher NPLs and higher provisioning have caused banks to be cautious; lenders’ sentiment recently turned positive.
  - Non-traditional unregulated lenders show signs of growth but remain a small fraction of credit.

### External Balance
- Trade and current account:
  - 2016 current account was a 1.7 percent of GDP surplus.
  - May data point to continued strong exports driven by a bumper soy crop and robust re-exports; imports grew vigorously in January–May.
- Reserves and exchange rate:
  - Reserves reached 26 percent of GDP—above standard benchmarks (e.g., 190 percent of the ARA metric).
  - The BCP announced dollar sales of binational electricity receipts but often chose to accumulate reserves instead.
  - The guaraní REER appreciated 1.7 percent through June.
  - Staff assesses the REER is somewhat undervalued even after adjusting for windfall electricity exports.
- Electricity:
  - Electricity production reached record production of 48 million GWh (noted as edging above historical averages in 2016).

### Outlook and Risks
- Staff baseline:
  - 2017 growth projected at 4.2 percent.
  - Near-term drivers: investment (including major infrastructure projects), consumption (higher minimum wages raised again in July 2017), employment gains, strong exports.
  - Current account surplus expected to narrow to 1.2 percent of GDP in 2017.
  - Year-end inflation expected to be around 4 percent (y/y) due to electricity-price hikes, services inflation, and lower deflation in volatile components.
  - Monetary conditions: policy rate below neutral levels; interbank rates below policy rate; policy rate expected to gradually rise towards year-end.
  - Medium-term: real GDP growth near potential of just below 4 percent; fiscal expenditures growing in line with GDP implying little change in overall budget deficits; current account projected to narrow toward balance; inflation consistent with target.
  - The monthly activity indicator (IMAEP) shows signs of deceleration: cumulative growth for Jan–April of 4.8 percent compared with 7 percent in Q1.
- Risks (RAM):
  - Downside external risks: heightened political uncertainty in Brazil, fragile Argentina recovery, faster-than-expected Fed normalization, weaker-than-expected commodity prices.
  - Domestic risks: climate-related shocks to agriculture, construction and livestock; financial risks from a larger-than-expected retrenchment of credit if bank liquidations of foreclosed properties trigger declines in land prices and collateral values.
- Authorities’ view on outlook and risks:
  - Authorities broadly shared staff’s views; expected acceleration in 2017 driven by investment-led growth; main near-term risk seen as political uncertainty in Brazil, especially for border-town trade if further Brazilian currency depreciation occurs.

### Macro-Financial Linkages
- Key vulnerabilities:
  - A bank-based financial system that is highly dollarized and exposed to a volatile agriculture sector.
- Exchange rate channel:
  - A sharp dollar appreciation could impact bank and borrowers’ balance sheets and profits, curtail investment, and damp growth.
  - Major FX borrowers appear naturally hedged; bank assets and liabilities are broadly balanced; static simulations suggest banks could withstand moderate guaraní depreciations.
  - Larger depreciations (e.g., exceeding 30 percent) could noticeably reduce capital buffers and constrain lending if banks must raise capital and higher capital requirements on dollar-denominated loans are absent.
- Agriculture channel:
  - Rising bank holdings of repossessed collateral (including land) will likely be sold in the next 1–2 years.
  - Staff expects limited impact on land prices in baseline, but a deeper downturn or combined large negative agricultural and exchange rate shocks could cause an adverse feedback loop among land values, bank losses, borrower creditworthiness, credit supply, and investment—reducing GDP growth.
- Regulations and practices:
  - Regulations require banks to sell repossessed collateral within 2 years or provision the full assessed property value; these costs make sale of properties likely.
- Historical and scenario indicators cited:
  - Capital/asset ratios under scenarios of current, 10% depreciation, 25% depreciation, 33% depreciation (data as of May 2017).
  - Banks’ holdings of assets to be liquidated reported as percent of total assets (net of provisions) over 2009–2016 periods.
  - FX Credit/GDP series and agricultural capital goods imports (Mil $) shown as indicators of linkage between credit dollarization and agricultural investment.

*PARAGUAY: AN EXPANSION ABOVE PAR*

### 13.      The authorities did not see significant stability risks originating from the financial

### 13.      The authorities did not see significant stability risks originating from the financial sector.

### Financial sector stability: assessment and key facts
- Banks are well capitalized and had taken prudent measures last year, retrenching from some segments, such as agriculture, that had experienced strong growth during the commodity boom.
- High credit dollarization is closely related to business operations in key sectors mainly taking place in dollars and therefore did not signal significant risk of currency mismatches.
- NPLs remain low despite lower commodity prices for agriculture and bank provisioning has been adequate.
- Very low exposure of banks to the construction sector is a mitigating factor for financial stability risks.

### Macroeconomic policies: stance, estimates, and policy guidance
Findings and staff estimates
- The current policy mix has been broadly appropriate.
- A relatively neutral fiscal stance for this year is warranted given the cyclical position of the economy.
- Staff supports the authorities’ commitment to achieve a 1½ percent of GDP deficit, as stipulated by the FRL, and to maintain the compositional shift toward capital expenditures.
- At 5.5 percent, staff estimates that the central bank’s policy rate is somewhat below the neutral rate, estimated at about 6 percent (nominal).
- Monetary policy accommodation supported the economic recovery towards the end of last year given sluggish domestic demand, including fiscal tightening, and weak credit growth.

Policy recommendations and scenarios
- Going forward, monetary accommodation should be gradually removed.
- Staff expects the authorities will gradually tighten policy with modest hikes in 2017 and 2018—bringing the real policy rate in line with staff and BCP’s estimates of the neutral rate.
- Given interbank rates persistently at or below the floor of the policy rate corridor, broadening economic momentum, resuming bank credit growth, and rising domestic spending would necessitate tightening financial conditions, including raising the interest rate corridor by hiking the policy rate.
- If downside risks to growth materialize, the authorities have policy space to respond.

Liquidity and financial conditions
- Financial conditions are relaxed and liquidity in the banking system should be reduced.
- Recent rise in liquidity can be partly related to weak lending activity by banks and to the purchase of dollar receipts from the binationals leading to reserve accumulation that has not been sterilized.
- Higher issuance of BCP paper (IRMs) has partly countered the effect of reserve accumulation on liquidity.
Policy actions to tighten conditions
- Further issuance of IRMs is needed to tighten financial conditions to achieve the targeted monetary stance.
- From the asset side, increasing dollar sales (i.e., compensatory operations) would limit reserve accumulation, help reduce the central bank’s balance sheet, and absorb market liquidity.

Authorities’ views (summary)
- Authorities broadly concurred with staff’s assessment of macroeconomic policies and reiterated commitment to the FRL.
- They emphasized the importance of considering external risks (including political uncertainty in Brazil) and remaining weak credit growth when examining possible tightening and timing.
- Authorities indicated that selling dollars can be an effective way to mop up liquidity.

### Structural policies: raising potential growth and inclusiveness
Infrastructure gaps and effects
- Key structural bottlenecks include deficiencies in transportation and electricity distribution; existing electricity transmission and distribution systems are inadequate to meet growing demand.
- Losses in transmission and distribution are in the order of 31 percent, well above the average for Latin America (about 14 percent), while peak demand is growing at a sustained pace of 8 percent per year.
- Improved navigability of the Paraguay-Parana rivers, including new port terminals, and investment in key road segments would reduce congestion and facilitate trade.
- Paraguay attracts significant foreign capital, with gross inflows of about 7 percent of GDP on average; however, only a small share remains reinvested in the country, and net FDI inflows are much lower at around 1½ of GDP, on average.

Public investment efficiency and project management
- Strengthening project selection and management can reap more infrastructure for each dollar spent, given that Paraguay ranks below its peers in investment efficiency.
- Containing projects’ cost overruns is a key element.
- The Sistema Nacional de Inversion Publica (SNIP) and Equipo Nacional de Estrategia País (ENEP) have played roles in aligning investment priorities and ensuring continuity.
- Authorities have stepped up efforts on key strategic projects to improve viability and to modernize the electricity transmission and distribution system.

Inclusive growth and social policies
- Paraguay’s record on reducing poverty and inequality was strong over the past decade; the commodity boom contributed to this and cannot be counted on going forward.
- Expanding well-designed conditional cash transfers, such as Tekopora and Tenondera, would strengthen a limited social safety net.
- These programs are very small, with spending at less than ½ percent of GDP, compared to similar programs elsewhere in the region.
- A thorough expenditure review to identify spending re-prioritization including for social assistance programs would be helpful.
- Tax reform that preserves low tax rates but limits generous income tax deductions would improve progressivity and provide greater fiscal resources.
- Stepping up efforts to combat high levels of informality would complement efforts to make growth more inclusive.

Authorities’ views (summary)
- Authorities consider continued progress on structural reforms a high priority and noted delayed infrastructure projects will proceed.
- They welcomed staff suggestions on tax reform and rebalancing toward income taxes to the extent it preserves Paraguay’s low tax regime.
- On reducing informality, authorities mentioned initiatives including creating online resources for registration of small businesses, increasing penalties, and initiatives for graduating to the formal sector.

### Strengthening fiscal management: framework, revenue, and institutions
Budget process and vulnerabilities
- The 2017 budget culminated in an unprecedented presidential veto, highlighting the need to strengthen the budget process.
- Key issues: budgets passed by congress (including amendments requested by the Ministry of Finance) can exceed the 1.5 percent deficit ceiling because the FRL and annual budget laws have equal legal standing.
- In 2016, the prevailing budget included substantial spending amendments authorizing a deficit equivalent to 2.8 percent of GDP and required budget under execution to respect the deficit ceiling in terms of fiscal outturns.
- For 2017, authorities signaled they will adhere to the FRL limits on an outturns basis which may require considerable restraint at the budget execution stage.

Recommended reforms to the fiscal framework
- Budget formulation: consider options to improve the budget process including a pre-budget strategy hearing to build congressional-executive agreement on key aggregates and procedural rules limiting amendments to the budget.
- Budget control: tighten budget control and modify the assessment of FRL compliance to include the execution stage as well as the budget approval stage.

Revenue mobilization
- Institutional capacity at the Revenue Authority (SET) has expanded, but staffing and legal constraints—including on enforcement and penalties—present barriers to further efficiency gains.
- Staff encouraged the authorities to extend recent improvements at SET by (i) boosting enforcement powers; (ii) addressing HR issues; and (iii) increasing resources.
- In the customs service (DNA), reforms have been less ambitious; DNA and SET could realize synergies from improved cooperation.
- Tax expenditures are estimated at 1.6 percent of GDP, and there is significant scope to broaden the tax base by reducing allowances, exemptions, and tax credits on income taxes.
- Currently, the income tax rate is 10 percent but revenue collected through income taxes stands at below 3 percent of GDP.

Fiscal Advisory Council (FC)
- The authorities introduced a Fiscal Advisory Council (FC) in late 2016 (established by Presidential Decree No. 6498/2016 of December 19, 2016; consists of three non-remunerated fiscal experts), though its effectiveness remains to be established.
- FC mandate includes assessing the executive’s proposed budget and commenting on fiscal and macroeconomic implications of legislative amendments to the draft budget.
- Limitations: no explicit mandate to comment on fiscal outturns nor on ex-post adherence to the FRL; lacks an independent dedicated staff or secretariat.
- Fund staff recommended granting human and budgetary resources to support high-quality analysis, building the council’s reputational standing, and devising a communication strategy including a dedicated website for public reports.

Possible FRL reform and sequencing
- Tentative plans to introduce a structural balance rule will be left to the next administration given elections in 2018.
- Recent IMF TA highlighted that moving to a structural balance rule would require careful consideration of issues with estimating structural revenues and selecting prudent deficit targets, with an explicit debt anchor set at safe levels to ensure sustainability.
- TA simulations suggest a “safe” level for the debt anchor in Paraguay could lie in the range of 30 to 45 percent of GDP; linked to the debt anchor, a structural deficit of the central government should not exceed 2 percent of trend GDP per year.
- Any modifications of the FRL should be accompanied by concrete measures to strengthen fiscal institutions and the PFM framework.

Authorities’ views (summary)
- Authorities agreed with staff’s principles on the fiscal framework, welcomed advice on improving budget processes and public investment management, and noted a pilot program within the Ministry of Public Works establishing a project execution unit with IDB support.
- Any change to the FRL will be postponed until the next administration, though authorities favor a structural balance rule.
- Authorities acknowledged shortcomings with the FC’s design and resources but view the council’s introduction as an important first step.

### Pension and health systems: demographic challenges and long-term projections
Demographic context and risks
- Paraguay’s population remains comparatively young, though lower fertility and longer lifespans signal significant demographic change in the future.

Pension system projections and facts
- Under staff’s long-term (85-year) projections, population aging would eventually cause deficits for most public pension programs.
- Overall, the pension system is estimated to have an unfunded liability of nearly 200 percent of GDP (in net present value terms).
- Caja Fiscal has already exhibited deficits.
- The program administered by the Instituto de Previsión Social (IPS) is currently posting operational surpluses; however, a rise in coverage may contribute to deficits after 2045 as new entrants become eligible for pension benefits.
- Pension investments are allocated mainly in the local banking system, while regional comparators have more diversified portfolios.

Health expenditures and IPS health program
- Paraguay’s health expenditures have been on a rising trend, while the IPS health program has been recently showing higher underfunding.
- With Paraguay’s still-young population, the rise in expenditures appears linked to non-demographic factors (excess cost growth).
- Excess cost growth and demographic transition are expected to raise the IPS health program’s deficit further going forward.

*Source: IMF staff report (text provided).*

### 29.      Staff and the authorities discussed reform options for public pensions and the IPS

### 29.      Staff and the authorities discussed reform options for public pensions and the IPS

### Pension regulation and oversight
- The authorities presented draft legislation to congress to reform regulation of pension programs.
- The law aims to:
  - create a separate Superintendence of Pensions,
  - develop an oversight council,
  - broaden permissible investment instruments,
  - establish an advisory committee empowered to dictate portfolio allocation limits.
- Staff welcomed greater oversight and noted that reforms could help mobilize national savings more efficiently, if implemented prudently.

### Parametric pension reforms — illustrative scenarios and results
- Staff presented illustrative scenarios to demonstrate possible savings. In each program, some configuration of reforms eliminated estimated funding gaps. Other reform options would need to be considered in some programs with already high contribution rates.
- Examples of reform options include raising the number of years’ wages in the benefits calculation, as recently proposed by the IPS.
- Illustrative Scenarios: Unfunded Liability After Parametric Reforms (present discounted value, 2015-65; percent of current GDP)
  - Scenarios (columns): (1) Retirement at age 65; (2) Benefit cut of 10 pct.; (3) Contribution increase of 10 pct.; (4) Combination (1)-(3)
  - IPS: (1) -22.1; (2) -3.2; (3) 6.8; (4) -37.1
  - Caja Fiscal: (1) 3.7; (2) 20.0; (3) 23.0; (4) -7.3
  - Caja Itaipu: (1) -0.7; (2) 1.1; (3) 1.9; (4) -1.9
  - Caja ANDE: (1) 0.0; (2) 0.6; (3) 0.9; (4) -0.3
  - Caja Bancaria 1/: (1) -7.9; (2) -6.2; (3) -5.8; (4) -9.5
- Note: Green shading in the source indicates that reform eliminates liability.
- 1/ Caja Bancaria is not found to have an unfunded liability and would remain in balance even without reforms. It is included in the table for completeness.
- Source: Fund staff estimates.

### IPS health program and health reforms
- For accounting purposes, IPS’s finances consolidate pension, health, and administrative program operations. However, operationally, the surplus in the pension component may not be used to finance the health component.
- Staff advised prompt action on the IPS health program, beginning with a thorough review to identify pressures.
- Potential reforms for the IPS health program could include:
  - improving cost sharing, such as co-pays and deductibles,
  - improving procurement processes,
  - introducing control systems to manage expenditures.

### Authorities’ views on pensions and health
- The authorities noted that passage of legislation creating the pension regulator was fundamental.
- Following the law’s approval, a committee could begin to look at reform options for the pension programs.
- For the health program, the authorities broadly concurred with staff that a review would be an important element of the process as well as introducing control systems to manage expenditures.

### Making monetary policy more effective and predictable (Section D)
- The inflation targeting (IT) framework has reduced inflation levels and volatility; the BCP has recently lowered its inflation target.
- Areas to strengthen monetary policy effectiveness and ensure primacy of the price stability mandate:
  - Aligning interbank rates with the corridor:
    - The BCP has narrowed the interest rate corridor, but interbank repo rates usually fall near or below the floor of the corridor, indicating a gap between policy rates and liquidity conditions and weakening policy transmission.
    - Staff recommended better liquidity management, including through additional issuance of IRMs, while stressing the need to address the BCP’s financial position.
    - The large negative equity position of the BCP stood at 2.8 percent of GDP in 2016 and remains a vulnerability that authorities acknowledge should be addressed.
    - Any cost associated with greater IRM issuances should be incorporated in estimates of recapitalization needs.
  - Making pre-announced FX sales more predictable:
    - Staff advised announcing and committing to feasible schedules for dollar sales to avoid complicating the public’s understanding of the role of the exchange rate in the monetary framework.
    - On discretionary interventions, the BCP should continue to intervene only in episodes of disorderly market conditions.
  - Reducing financial dollarization over time:
    - Staff recommended a gradual de-dollarization strategy, including through higher capital requirements on dollar-denominated loans.
    - A market-based approach could include further differentiating reserve requirements by currency and considering other macroprudential policies for credit.
    - The differential between reserve requirements for FX and Guarani deposits stands at 7 percentage points.
- Communication and predictability:
  - Central bank transparency is commendable (preannounced meetings, press releases, published minutes), but market expectation measures suggest the public is routinely surprised by policy rate changes.
  - Staff recommended enhancing central bank communication by providing policy guidance when warranted, such as presenting a policy bias or a more detailed explanation linking the outlook for inflation and inflation risks to policy decisions, to strengthen linkages between policy and market rates and enhance central bank credibility.

### Authorities’ views on monetary policy
- The authorities reiterated their commitment to the IT regime.
- The central bank viewed high liquidity as a preference of market participants using it as a buffer.
- High dollarization is seen as a way for exporters receiving dollar revenues to avoid currency risk.
- On interventions in currency markets, the monetary authority explained that those are conducted during exceptional situations of excessive market volatility.
- The authorities were receptive to staff advice to enhance central bank communication with stronger policy signals when warranted.

### Continuing financial supervisory and regulatory reforms (Section E)
- Banks are still adjusting to the end of the credit boom; stagnant credit growth has narrowed staff estimates of the credit gap, but pockets of vulnerability in bank balance sheets remain.
- Broad-based measures of distressed loans remain at elevated levels; banks have increased provisioning, reducing earnings. Regulatory capital ratios have risen, partly reflecting decreased risk appetite.
- Progress and planned measures:
  - The government ratified a new banking law in December 2016; the BCP developed a plan to implement regulations in line with the new law.
  - Changes in capital regulations (including a surcharge for systemic banks) were being planned.
  - The authorities will begin calculating the Liquidity Coverage Ratio (LCR), although for surveillance purposes.
- Staff encouraged advancement on additional reforms:
  - Strengthening BCP enforcement powers (BCP organic charter law currently in congress).
  - Creating a Financial Stability Council (decree; not public yet).
  - Establishing deposit insurance for savings and loan cooperatives (new law; draft to Ministry of Finance in June).
  - Passing a strong law regulating Sociedades Anonimas and bearer securities in line with international AML/CFT standards to enhance entity transparency and help safeguard correspondent banking relationships.
- Data and monitoring recommendations:
  - Improve data collection: integrate financial information between banks and cooperatives through a single credit bureau.
  - Improve availability of data on non-regulated lenders to enable closer supervisory monitoring.
  - Address lack of available real estate price data, which limits assessment of impacts of soy prices on land values and monitoring of credit risks.
- Financial soundness indicators (selected; in percent)
  - Tier 1 capital/risk weighted assets: 2013 11.7; 2014 11.3; 2015 11.2; 2015 11.7; 2016 13.4
  - Total capital/risk weighted assets: 2013 16.1; 2014 14.7; 2015 15.2; 2015 16.1; 2016 17.9
  - Return on assets: 2013 2.5; 2014 2.7; 2015 2.6; 2015 2.5; 2016 2.2
  - Return on equity: 2013 27.6; 2014 28.7; 2015 28.0; 2015 27.6; 2016 23.3
  - Nonperforming loans: 2013 2.6; 2014 2.1; 2015 2.0; 2015 2.6; 2016 2.9
  - Risk-weighted/total assets: 2013 65.7; 2014 70.1; 2015 67.4; 2015 65.7; 2016 60.5

### Data dissemination and standards
- Paraguay recently implemented the enhanced general data dissemination (e-GDDS) system to make essential macroeconomic data available online.
- Remaining steps to reach SDDS include compilation of the template on international reserves and foreign currency liquidity and an advance release calendar covering all data categories.
- The National Summary Data Page (NSDP) was made available online by the authorities.

### Authorities’ views on financial stability and reform sequencing
- The authorities attached high importance to financial stability.
- Securing passage of a robust Sociedades Anonimas law addressing bearer securities was a fundamental priority to be settled during the current administration to avoid risks to correspondent banking relationships for smaller domestic banks.
- The electoral cycle could delay some legislative action, but authorities expected to make progress on implementing additional regulations under the new Banking Law.

### Staff appraisal — key findings and recommendations
- Growth and outlook:
  - Paraguay grew faster than others in the region with above-potential growth around 4 percent in 2016 and this year.
  - Momentum is broadening beyond agriculture and electricity to other sectors and domestic demand.
- Fiscal and monetary policy:
  - The policy mix has been adequate and broadly supportive, but monetary accommodation should be gradually removed as underlying inflation pressures rise and bank credit growth resumes.
  - Fiscal policy is expected to be neutral this year, maintaining the compositional shift towards capital spending and adhering to the FRL on the basis of budget outturns.
  - Draining excess liquidity through additional issuance of BCP paper (IRMs) and selling dollar reserves would help better align targeted policy rates with interbank rates.
- Fiscal framework and pensions:
  - Authorities strove to comply with the FRL, but there is room for further fiscal reforms.
  - The 2017 budget culminated in an unprecedented presidential veto, highlighting the need to strengthen the budget process and reform the PFM framework.
  - To enhance credibility of the fiscal anchor, it would be desirable to modify FRL compliance assessment to include the execution stage as well as the budget approval stage.
  - The pension and health system faces near- and longer-term imbalances and needs reform.
- Monetary policy communications and dollarization:
  - IT framework is serving Paraguay well but can be further strengthened through tighter operation of the policy corridor and more predictable foreign exchange operations.
  - Discretionary interventions in the foreign exchange market should be limited to exceptional circumstances.
  - High credit dollarization limits the BCP's ability to affect market interest rates; staff recommends gradual de-dollarization and greater use of forward-looking policy guidance in public statements.
- Financial sector stability and supervision:
  - The financial sector appears sound, though banks need to continue strengthening balance sheets after rapid credit growth.
  - Authorities should advance: (i) revisions to the BCP organic charter; (ii) establishment of a financial stability council; (iii) implementation of deposit insurance for savings and loan cooperatives; and (iv) integrating financial information through a single credit bureau.
  - Approving Sociedades Anonimas and bearer securities legislation in line with international standards should enhance transparency and help safeguard correspondent banking relationships.
- Structural reforms and inclusiveness:
  - Progress on the National Development Plan (NDP) has been achieved, but further effort is needed on institutional barriers to combat tax evasion and on investment in transportation and electricity transmission and distribution.
  - To secure gains in terms of reduced inequality, stronger implementation of NDP priorities in education, training and expansion of conditional cash transfers is needed.
  - A tax reform that rebalances away from indirect taxation and maintains low income tax rates but limits deductions could improve progressivity and help finance inclusive growth initiatives.
- Data for surveillance:
  - Paraguay implemented e-GDDS; staff encouraged completing remaining steps to satisfy SDDS standards.
- Consultation timeline:
  - Staff proposes to hold the next Article IV consultation on the standard 12-month cycle.

*Source: IMF staff and Paraguayan authorities discussions, as presented in the provided document.*

### Box 2. Dollarization in Paraguay

### Box 2. Dollarization in Paraguay

### Evolution and drivers
- Paraguay experienced a gradual decline in dollarization in the early 2000s as macroeconomic stability improved and inflation declined; progress on de-dollarization has reversed since the global financial crisis, driven by fluctuations in commodity prices, economic activity and the exchange rate.
- Paraguay’s credit dollarization (measured in average 2010 exchange rate) closely follows soybean prices, its major export item, and economic activity (IMEAP).
- A vector autoregression model (VAR) suggests credit dollarization is:
  - positively affected by soybean prices, economic activity (IMEAP), and inflation;
  - negatively affected by exchange rate depreciation and an increase in the marginal rate of the reserve requirement ratio (RRR) on foreign currency deposits.
- Based on time series estimates and a historical decomposition simulation, soybean prices, fluctuations in economic activity, and the exchange rate have been the most prominent factors explaining the uptick in dollarization in recent years.

### Quantitative impacts (VAR results and simulations)
- A 1 percentage point (ppt) shock to soybean prices leads to higher economic activity, increasing dollarization by a 3½ ppt, cumulatively after one year.
- A 1 ppt depreciation of the guarani is associated with a decline in dollarization by 3 ppt.
- Stable and low inflation helps to lower dollarization.
- An increase in the marginal RRR on foreign currency deposits effectively lowers credit dollarization.

### Financial stability and policy implications
- The prominence of the agribusiness industry, which invoices and borrows domestically in dollars, weakens monetary transmission and reduces the BCP’s lender of last resort capacity.
- Reducing dollarization would strengthen the effectiveness of monetary policy and reduce financial risk.

### Policy recommendations
- Continue to build a track record of performance with the IT regime and preserve overall macroeconomic stability.
- Reduce the relative cost of transacting in local currency to increase the use of the guarani.
- Closely monitor financial vulnerabilities, including currency mismatches and banks’ net open positions.
- Strengthen risk-based supervision of banks.

*International Monetary Fund — Box 2. Dollarization in Paraguay (from cr17233).*

### Annex I. Commodity Shock and Income Inequality in Paraguay

### Annex I. Commodity Shock and Income Inequality in Paraguay

### Background and context
- Inequality fell significantly in Paraguay in the 2000s, during the commodity boom, although inequality remained elevated with a Gini coefficient at 0.50.
- Paraguay performed robustly during mid-2000s, above peers in the region, in terms of output and income per-capita growth.
- Falling inequality during the 2000s was common in Latin America and fell disproportionately more in commodity exporters; most faced commodity export price changes of "40-50 percent on average."
- For Paraguay, agricultural and livestock commodity prices increased by about 70 percent in the period 2006-2013.
- The share of population living in urban areas grew by 2 percentage points during the period considered (concurrent migration from rural areas).

### Identified transmission channels from the commodity boom to lower inequality
- Reallocation to rural areas and more labor-intensive sectors:
  - Employment grew relatively more in rural areas, where agriculture and livestock are more prominent.
- Favoring low-skilled employment:
  - The boom favored more low-skilled jobs than high-skilled jobs; wages increased relatively more for lower skilled labor.
- Public revenues used for transfers:
  - Higher revenues (e.g., from royalties related to commodity sectors) were in some countries used to support cash transfer programs that reduced poverty.

### Data evidence for Paraguay (2006–2013)
- Employment and skills:
  - Employment grew relatively more in rural areas.
  - Skills among the labor force exogenously increased, supporting a reduction of the skill premium.
- Public finances and policies:
  - A VAT reform in 2004 extended the tax base even to basic goods, increasing revenue from indirect taxes, which surged by 2 percent of GDP.
  - Transfer programs increased but remained relatively small (below ½ of GDP).
  - The government expanded and hired significantly more workers, whose salaries are generally higher than other sectors, "with only some exclusions."
  - In-kind transfers such as health care grew by 2 percentage points of GDP in the period 2006–2013.

### Model used and simulation approach
- A dynamic general equilibrium model with heterogeneous agents and sectors was used to study the relative strength of the commodity-boom channels and other exogenous shocks and policies.
  - The model captures differences between rural (mostly agriculture) and urban (manufacturing and services) areas and differentiates workers by skill.
  - The model was used to simulate the increase in agricultural and livestock commodity prices in 2006-2013 and the other exogenous shocks and policies.
- Model provenance:
  - Model recently developed by IMF staff; applied previously in Article IV consultations for Bolivia 2016 and Republic of Congo 2016; showcased in SDN “Macro-Structural Policies and Income Inequality in Low-Income Developing Countries” (January 2017).
  - Reference: Ravi Balakrishnan, Sandra Valentina Lizarazo, Adrian Peralta-Alva, Marina Mendes Tavares, 2017, Commodity Boom and Bust and Income Inequality, IMF Working Paper, forthcoming.

### Key quantitative findings (model and data)
- Contribution to Gini reduction (2006–2013):
  - The commodity boom accounted for a significant share of the reduction in the Gini coefficient between 2006–2013 (2.5 basis points), via higher rural incomes and increased low-skilled jobs and incomes.
  - Migration and higher skills in the labor force contributed to a reduction of inequality.
- Policy impacts on inequality:
  - The increase of indirect taxes had the potential to increase inequality by a large magnitude (about 3 Gini basis points). However, since most of the rural informal sector does not pay VAT, this impact is significantly muted.
  - The increase in health care spending had the effect of reducing inequality, although its impact was mitigated by the concentration of health care centers in urban areas.
  - Combining all policies, the increase in health care dominates the negative impact of the VAT reform on measures of income inequality and the net impact is a reduction of the Gini by about ¼ of a basis point.
- Health care spending distribution assumption (model caveat):
  - Data on the distribution of health care as in-kind transfers by income percentiles were not available; assumptions made:
    - The increase in health care spending provided by the central government (Ministry of Health) — "most of the increase, 1.7 percent of GDP" — is assumed to benefit disproportionately low income categories.
    - The increase observed at the Instituto de Prevision Social (0.3 percent of GDP) is assumed to benefit the relatively better-off.
    - Geographical distribution: two thirds of health care centers located in urban cities, affecting urban/rural distribution of benefits.

### Narrative conclusions
- The commodity price boom (notably a ~70 percent rise in agricultural and livestock prices in 2006-2013) materially contributed to reducing income inequality in Paraguay through rural income gains and expansion of low-skilled employment.
- Concurrent structural changes — migration to urban areas and rising skills — also supported reductions in inequality.
- Policy changes produced offsetting distributional effects: VAT-base expansion raised revenues (surged by 2 percent of GDP) but risked increasing inequality; scaling up public health spending (increase of 2 percentage points of GDP during 2006–2013) reduced inequality overall when combined with other measures.
- Net modeled impact over 2006–2013: a small reduction in the Gini coefficient (about ¼ of a basis point), with the commodity boom accounting for a larger identifiable share (2.5 basis points).

*Prepared by Marika Santoro (WHD) from joint analytical work with Sandra Lizarazo, Angelica Martinez Leyva and Marina Mendes Tavares (all SPR).*

### Annex IV. Implementation of Past Fund Policy Advice

### Annex IV. Implementation of Past Fund Policy Advice

### Fiscal and structural policy implementation
- Directors emphasized continued efforts to mobilize revenue and contain current expenditure while making space for capital spending, especially on infrastructure.
- Directors suggested authorities should continue to build a track record in implementing the current FRL before undertaking changes to the fiscal framework.
- 2016 fiscal outturns fully adhered to the FRL ceilings and were marked by a compositional shift towards capital spending.
- Current primary expenditure, especially compensation of employees, contracted in real terms in 2016.
- Proposals to change the FRL are still tentative and are expected to be implemented by the next administration.
- Authorities were commended for progress on the National Development Plan; infrastructure remains a key priority, especially electricity distribution and transportation.
- Authorities implemented a “map of investments” to strengthen monitoring of projects by public servants and civil society.
- Authorities maintained commitment to transparency by consenting to publication of the mission’s concluding statement.

### Monetary, exchange rate, and liquidity management
- Directors argued that limiting discretionary foreign exchange market interventions to exceptional circumstances of disorderly market conditions would reinforce the inflation targeting regime.
- Directors recommended reforms to enhance liquidity management.
- The BCP continues to limit discretionary interventions to exceptional circumstances.
- The central bank increased issuance of monetary regulation instruments (IRMs) to mitigate excess liquidity in the interbank market.

### Financial sector policy and supervision
- Directors welcomed progress towards introducing risk-based supervision and encouraged continued upgrading of monitoring and analytical capacity and strengthening institutional arrangements.
- Authorities ratified a new banking law in December 2016, granting additional powers to the BCP and facilitating the revised regulatory framework.
- As the law is implemented, the central bank should also receive enhanced powers to implement macroprudential measures to better manage future credit cycles.
- The BCP continues to receive technical assistance from the IMF to implement risk-based supervision.

---

### Annex V. External Stability Assessment — Paraguay: Overall Assessment

### Foreign asset and liability position
- Background: Paraguay's net international investment position (NIIP) has hovered 40 percent of GDP over the last 5 years.
- The negative FDI position reflects large inflows of capital in the agricultural sector and in businesses related to the maquila; more recently the construction sector was another repository of FDI.
- Negative net asset position related to loans mostly due to large projects financed by multinationals and more recently to bond issuance by the government on international markets.
- Assessment: Gross external debt has remained quite stable in the last two years around 59 percent of GDP, as a result of two offsetting forces: the debt of the binational hydroelectric company (ITAIPU) decreasing and multilateral loans and bonds increasing liabilities.
- Going forward debt is expected to decrease as the binational portion continues to fall and the position remains sustainable under a range of adverse shocks.
- Staff assessment statements:
  - “The external position strengthened to levels that appear stronger than those implied by fundamentals.”
  - “The exchange rate is assessed as mildly undervalued.”
  - “The external debt position does not raise sustainability concerns.”

### Current account
- Background: Paraguay's current account has been in surplus over the last 20 years averaging 0.7 percent of GDP.
- In recent years the average balance turned negative, mainly due to low agriculture commodity prices.
- Projected to return to positive balance as commodity (especially soy) prices rebound in 2017 and fuel import prices increase only mildly.
- Assessment and figures:
  - Current account is estimated to have reached 1.7 percent of GDP in 2016, boosted by positive shocks to crops and low fuel prices; electricity exports were exceptionally high due to temporary record generation.
  - Excluding those electricity sales, the current account would be just above ½ percent of GDP.
  - The current account surplus is projected to narrow this year to 1.2 percent of GDP as strong pickup in agricultural investment and imports related to construction partly offset strong growth in exports and re-exports.
  - Towards the medium term, the current account balance is expected to move close to 1 percent of GDP, in line with the historical average.

### Real exchange rate and competitiveness
- Background: Paraguay's real effective exchange rate (REER) is highly correlated with commodity prices.
- REER depreciated 2 percent in 2015 and 1 percent in 2016, primarily reflecting nominal depreciation.
- Inflation remained tame as import prices stayed low and domestic activity cooled.
- Assessment: EBA results suggest a mild undervaluation of the REER and staff views the rate moving in line with fundamentals, though adjustment to permanently lower commodity prices may not be completed.

### Capital and financial accounts
- Background: The current account deficit is financed by FDI and external loans; IADB loan of USD 200 million in December 2016 played an important role.
- The government tapped international markets with placements of bonds in 2016 and this year for USD 500 million each year.
- Assessment:
  - Paraguay has a fully open capital and financial account but financial markets are not deep or developed.
  - Despite adverse regional conditions, Paraguay enjoyed stable FDI flows.
  - Remittances grew very rapidly in 2016 by about 20 percent, the largest increase in the last 5 years.
  - Vulnerabilities from regional financial market linkages are limited, with foreign asset holding below 1 percent of total financial system assets.

### FX intervention and reserves level
- Background: Exceptional dollar sales of the binationals last year were one of the main causes of reserve accumulation at the BCP.
- A pre-announced sale of part of these reserves did not proceed as announced; as a result the BCP accumulated reserves for more than USD 900 million.
- Assessment:
  - Reserves remain ample at 7 months of imports and above the Fund metrics for a small open economy.
  - A flexible exchange rate is the first line of defense against external shocks.
  - Staff recommended continuing a rules-based approach for regular dollar sales and limiting discretionary interventions to exceptional disorderly market conditions.

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### External Debt Sustainability and Projections (selected figures from Table 1)
- Baseline: External debt (in percent of GDP) by year:
  - 2012: 65.5
  - 2013: 54.5
  - 2014: 53.5
  - 2015: 59.5
  - 2016: 58.8
  - 2017: 58.6
  - 2018: 56.6
  - 2019: 54.1
  - 2020: 52.0
  - 2021: 50.3
  - 2022: 48.8
- Change in external debt (annual): 1.9; -10.9; -1.0; 6.0; -0.8; -0.1; -2.1; -2.5; -2.1; -1.6; -1.5
- Identified external debt-creating flows (4+8+9): 1.4; -11.8; -4.1; 7.2; -1.9; -1.5; -2.6; -2.9; -3.0; -3.0; -3.2
- Current account deficit, excluding interest payments (percent of GDP): -0.5; -3.6; -1.5; -1.2; -3.0; -1.0; -2.0; -2.6; -2.8; -2.9; -3.3
- Exports (percent of GDP): 50.5; 49.9; 45.3; 43.1; 43.7; 43.8; 44.3; 44.0; 43.4; 42.9; 42.4
- Imports (percent of GDP): 48.8; 44.9; 42.7; 41.9; 39.7; 41.8; 41.6; 40.9; 40.0; 39.3; 38.7
- Net non-debt creating capital inflows (negative): -1.9; -0.2; -1.1; -0.9; -1.0; -1.0; -1.0; -1.0; -1.0; -1.0; -1.0
- Automatic debt dynamics: 3.9; -7.9; -1.5; 9.3; 2.0; 0.5; 0.4; 0.7; 0.8; 0.9; 1.0
  - Contribution from nominal interest rate: 2.6; 1.9; 1.9; 2.3; 2.4; 2.4; 2.5; 2.6; 2.7; 2.8; 2.8
  - Contribution from real GDP growth: 0.8; -7.8; -2.4; -1.8; -2.4; -1.9; -2.1; -2.0; -1.9; -1.9; -1.8
  - Contribution from price and exchange rate changes: 0.5; -2.1; -1.0; 8.9; 2.1; … (table shows dots thereafter)
- Residual, incl. change in gross foreign assets: 0.6; 0.9; 3.1; -1.2; 1.1; 1.3; 0.5; 0.5; 0.9; 1.4; 1.7
- External debt-to-exports ratio (percent): 129.7; 109.3; 118.1; 138.1; 134.5; 133.9; 127.8; 123.0; 119.8; 117.4; 115.0
- Gross external financing need (in billions of US dollars): 1.3; 0.3; 0.9; 1.0; 0.6; 1.2; 0.9; 0.7; 0.7; 0.7; 0.6
- Gross external financing need (in percent of GDP): 5.1; 0.9; 2.9; 3.7; 2.2; 10-Year; 10-Year; 4.0; 3.0; 2.3; 2.0; 1.8; 1.5 (table layout shows labeling; values preserved as presented)

### Key macroeconomic assumptions underlying baseline (selected series)
- Real GDP growth (percent): -1.2; 14.0; 4.7; 3.0; 4.1; 5.0; 5.5; 3.3; 3.7; 3.7; 3.7; 3.8
- GDP deflator in US dollars (change in percent): -0.8; 3.3; 1.8; -14.2; -3.4; 5.7; 13.9; 1.4; 0.7; 1.9; 2.2; 2.0; 1.9
- Nominal external interest rate (percent): 4.0; 3.5; 3.7; 3.7; 4.0; 4.2; 0.5; 4.2; 4.5; 4.9; 5.3; 5.6; 5.9
- Growth of exports (US dollar terms, percent): -7.1; 16.5; -3.2; -16.0; 1.9; 8.1; 19.0; 5.0; 5.6; 5.0; 4.6; 4.7; 4.6
- Growth of imports (US dollar terms, percent): -5.3; 8.3; 1.4; -13.4; -4.6; 9.7; 23.0; 10.3; 3.8; 3.8; 3.8; 4.2; 3.9
- Current account balance, excluding interest payments: 0.5; 3.6; 1.5; 1.2; 3.0; 4.0; 3.3; 1.0; 2.0; 2.6; 2.8; 2.9; 3.3
- Net non-debt creating capital inflows: 1.9; 0.2; 1.1; 0.9; 1.0; 1.2; 0.6; 1.0; 1.0; 1.0; 1.0; 1.0; 1.0

*Source: IMF staff assessment as presented in Annex IV and Annex V of the mission documents.*

### Annex VI. Public Debt Sustainability Analysis

### Annex VI. Public Debt Sustainability Analysis

### Debt indicators and market metrics
- Nominal gross public debt (in percent of GDP): 17.5 (2006–2014 actual period entry), 24.0 (2015), 24.6 (2016), 25.4 (2017), 25.1 (2018), 24.8 (2019), 24.7 (2020), 24.5 (2021), 24.4 (2022).
- Public gross financing needs (in percent of GDP): 0.9 (2015), 2.3 (2016), 2.5 (2017), 1.9 (2018), 1.4 (2019), 1.1 (2020), 0.9 (2021), 1.0 (2022), 1.2 (cumulative/projection).
- Sovereign spreads: EMBIG (bp) = 218 (date as of June 15, 2017).
- 5Y CDS (bp): ...
- Effective interest rate (defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year): 5.4 (2006–2014 actual period entry), 5.6 (2015), 5.3 (2016), 3.3 (2017), 3.3 (2018), 3.5 (2019), 3.8 (2020), 4.2 (2021), 4.5 (2022).
- Ratings: Moody’s Ba1; S&Ps BB; Fitch BB.

### Growth and price dynamics used in the DSA
- Real GDP growth (in percent): 5.3 (2006–2014 actual period entry), 3.0 (2015), 4.1 (2016), 4.2 (2017), 3.9 (2018), 3.8 (2019), 3.8 (2020), 3.8 (2021), 3.8 (2022).
- Inflation (GDP deflator, in percent): 5.6 (2006–2014 actual period entry), 0.1 (2015), 5.3 (2016), 4.0 (2017), 3.6 (2018), 3.4 (2019), 3.8 (2020), 4.0 (2021), 3.9 (2022).
- Nominal GDP growth (in percent): 11.2 (2006–2014 actual period entry), 3.1 (2015), 9.6 (2016), 8.4 (2017), 7.7 (2018), 7.3 (2019), 7.7 (2020), 7.9 (2021), 7.9 (2022).

### Contribution to changes in public debt (percent of GDP)
- Change in gross public sector debt: -0.9 (2006–2014 actual period entry), 4.2 (2015), 0.6 (2016), 0.8 (2017), -0.3 (2018), -0.3 (2019), -0.1 (2020), -0.2 (2021), -0.2 (2022), cumulative -0.3.
- Identified debt-creating flows: -1.6 (2006–2014), 7.4 (2015), 0.5 (2016), 0.6 (2017), -0.6 (2018), -0.5 (2019), -0.4 (2020), -0.6 (2021), -0.5 (2022), cumulative -2.0.
- Primary deficit (percent of GDP): -1.5 (2006–2014), 0.3 (2015), 0.0 (2016), 0.0 (2017), -0.3 (2018), -0.6 (2019), -0.8 (2020), -0.8 (2021), -0.8 (2022), cumulative -3.3.
- Primary (noninterest) revenue and grants (percent of GDP): 21.7 (2006–2014), 24.0 (2015), 23.7 (2016), 23.6 (2017), 23.7 (2018), 23.9 (2019), 24.0 (2020), 24.0 (2021), 24.0 (2022), cumulative 143.2.
- Primary (noninterest) expenditure (percent of GDP): 20.2 (2006–2014), 24.3 (2015), 23.7 (2016), 23.6 (2017), 23.4 (2018), 23.3 (2019), 23.2 (2020), 23.2 (2021), 23.2 (2022), cumulative 139.9.

### Automatic debt dynamics and components (percent of GDP)
- Automatic debt dynamics 3/: -1.6 (2006–2014), 4.2 (2015), -1.1 (2016), -1.2 (2017), -1.0 (2018), -0.9 (2019), -0.9 (2020), -0.9 (2021), -0.8 (2022), cumulative -5.6.
- Interest rate/growth differential 4/: -0.9 (2006–2014), 0.5 (2015), -0.9 (2016), -1.2 (2017), -1.0 (2018), -0.9 (2019), -0.9 (2020), -0.9 (2021), -0.8 (2022), cumulative -5.6.
  - Of which: real interest rate: -0.1 (2006–2014), 1.1 (2015), 0.0 (2016), -0.2 (2017), -0.1 (2018), 0.0 (2019), 0.0 (2020), 0.0 (2021), 0.1 (2022), cumulative -0.2.
  - Of which: real GDP growth: -0.8 (2006–2014), -0.6 (2015), -0.9 (2016), -1.0 (2017), -0.9 (2018), -0.9 (2019), -0.9 (2020), -0.9 (2021), -0.9 (2022), cumulative -5.4.
- Exchange rate depreciation 5/: -0.6 (2006–2014), 3.7 (2015), -0.1 (2016), ... (ellipsis in source).

### Other identified and residual flows (percent of GDP)
- Other identified debt-creating flows: 1.4 (2006–2014), 3.0 (2015), 1.5 (2016), 1.8 (2017), 0.7 (2018), 0.9 (2019), 1.3 (2020), 1.1 (2021), 1.1 (2022), cumulative 6.9.
- NFPS asset accumulation 6/: 1.4 (2006–2014), 3.0 (2015), 1.5 (2016), 1.8 (2017), 0.7 (2018), 0.9 (2019), 1.3 (2020), 1.1 (2021), 1.1 (2022), cumulative 6.9.
- Residual 7/: 0.7 (2006–2014), -3.2 (2015), 0.2 (2016), 0.2 (2017), 0.3 (2018), 0.3 (2019), 0.3 (2020), 0.3 (2021), 0.3 (2022), cumulative 1.7.

### Baseline and alternative scenario projections (underlying assumptions)
- Baseline scenario projections (selected variables):
  - Real GDP growth: 4.2 (2017), 3.9 (2018), 3.8 (2019), 3.8 (2020), 3.8 (2021), 3.8 (2022).
  - Inflation: 4.0 (2017), 3.6 (2018), 3.4 (2019), 3.8 (2020), 4.0 (2021), 3.9 (2022).
  - Primary Balance (percent of GDP): 0.0 (2017), 0.3 (2018), 0.6 (2019), 0.8 (2020), 0.8 (2021), 0.8 (2022).
  - Effective interest rate: 3.3 (2017), 3.3 (2018), 3.5 (2019), 3.8 (2020), 4.2 (2021), 4.5 (2022).
- Historical scenario (alternative):
  - Real GDP growth: 4.2 (2017), 5.0 (2018–2022 each year).
  - Primary Balance: 0.0 (2017), 1.0 (2018–2022 each year).
  - Effective interest rate: 3.3 (2017), 3.3 (2018), 3.4 (2019), 3.7 (2020), 4.1 (2021), 4.3 (2022).
- Constant Primary Balance scenario:
  - Real GDP growth and inflation as per baseline.
  - Primary Balance: 0.0 (2017–2022 each year).
  - Effective interest rate: 3.3 (2017), 3.3 (2018), 3.5 (2019), 3.9 (2020), 4.4 (2021), 4.7 (2022).
- Footnote on assumptions 8/: Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.

### Composition of public debt and financing needs (presentation in DSA)
- Gross nominal public debt and public gross financing needs are shown by maturity (medium and long-term vs short-term) and by currency (local currency-denominated vs foreign currency-denominated) across 2015–2022 in the DSA charts and tables (figures in source).
- Public gross financing needs (in percent of GDP) and gross nominal public debt (in percent of GDP) are projected across scenarios in the DSA.

### Policy recommendations and macro-critical reform areas (from associated analysis)
- Fiscal and public financial management framework:
  - The fiscal responsibility law provides a suitable anchor for fiscal sustainability, but there is scope to adopt measures to improve budgetary processes and strengthen legal and institutional aspects of the fiscal framework.
  - Authorities should ensure that any eventual changes to the fiscal framework, such as the adoption of a structural balance rule or the creation of a sovereign wealth fund to save part of the extra revenue from the Itaipu hydroelectric dam, which are expected to materialize after 2023, are implemented in a coherent manner to avoid conflicts among the different fiscal rules.
- Tax revenue administration:
  - Strengthen tax administration to mobilize revenues and enhance efficiency and equity; measures include strengthening sanctions against evasion, reducing exemptions and deductions, and exploring possibilities to broaden the tax base.
- Financial system:
  - Implement the recently enacted banking law to provide a robust legal basis for risk-based regulation and supervision.
  - Strengthen prudential oversight of the cooperative sector and foster cooperation among different regulatory authorities.
  - Develop the domestic bond market; a new debt management strategy by the Ministry of Finance with support from the World Bank could be instrumental.
- Division of labor for technical assistance:
  - IMF to support tax revenue administration, risk-based bank supervision, financial sector stability review, and continued TA on monetary and FX policy, reserves, and statistics.
  - World Bank to continue multi-sector job diagnostic, public expenditure review, support for SOEs and PPP institutional framework, and work on governance and business climate.

*Source: Fund staff estimates and projections; Annex VI. Public Debt Sustainability Analysis, as of June 15, 2017.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2017/cr17233.pdf_