## 1pryea2020001

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### Executive summary — Context and pre-pandemic record
- Economic growth averaged 4½ percent from 2004–18.
- Poverty rate fell from 58 percent of the population in 2002 to 24 percent (2018).
- External debt declined from 215 percent of GDP in 2002 to 43 percent in 2019; public debt from 55 to 26 percent.
- Since 2012 Paraguay has run deficits; a fiscal rule in force since 2015 limits the deficit to 1.5 percent of GDP in normal times.
- Early 2020 signs: January IMEI showed year-on-year growth of 4.5 percent; staff projected full-year growth of at least 4 percent before the pandemic.

### Impact of Covid-19, outlook, and financing needs
- Health and emergency spending assessed at about 2 percent of GDP.
- 2020 real GDP growth projected to be -1 percent, 5 percent below the pre-virus baseline.
- Loss of fiscal revenues from the growth impact on the order of 0.5 percent of GDP.
- Balance of payments financing need assessed at some US$ 1,200 million, 3.2 percent of GDP.
- If absorbed through reserves, reserve loss would be significant and could trigger a loss in confidence.
- Assumption: pandemic over by mid-year would lead to growth rebound in second half of 2020.

### Crisis response measures implemented (costs and composition)
- Emergency package cost about 2½ percent of GDP (late March emergency package cited as 2.4 percent of GDP):
  - about 1.3 percentage point for additional health care spending,
  - 1.0 percentage point for social safety nets,
  - remainder for emergency loans for small enterprises.
- Containment and social measures:
  - Suspended public school sessions, large-scale events; partial border closures; crowd restrictions; night time curfew; total lockdown implemented on March 20.
- Financial and tax measures:
  - Lowered policy rates.
  - Allowed banks to restructure loans to private sector companies in repayment difficulties.
  - Postponed collection of taxes and user fees for 2 months.
- Central Bank (BCP) measures:
  - Reduced legal reserve requirement.
  - Cut interest rates on the BCP’s overnight Liquidity Facility by 100 basis points (and by more on longer-term facilities).
  - Decreased penalty rate for early cancellation of monetary regulation instruments.
  - Allowed renewal, refinancing and restructuring of loans to individuals and legal entities until end-2020 with renewed loans risk-weighted at 50 percent in loan provisioning.

### Fiscal stance, financing plan, and medium-term commitments
- 2020 fiscal deficit will increase to 4½ percent of GDP (higher than Fiscal Responsibility Law ceiling but deemed appropriate).
- Government financed part of increase via reallocation within existing budget; an increase in overall envelope is necessary.
- Authorities intend to return fiscal deficit to below the ceiling of 1.5 percent of GDP after the crisis; timing to be determined in 2021 budget.
- Staff projections on current growth forecasts:
  - Deficit around 3 percent in 2021, 2 percent in 2022, and 1.5 percent in 2023.
- Commitment: if growth is stronger, higher-than-expected revenue will be used for faster deficit reduction.
- Structural measures to sustain lower deficits and free space for investment:
  - Keep growth rate of primary expenditure below that of GDP.
  - Planned revision of the Fiscal Responsibility Law to limit real growth of primary expenditure to 2 percent (down from 4 percent previously); plans to be presented with 2021 budget.
  - Contain wage bill growth; civil service reform under consideration.
  - Increase tax revenue (currently only 10 percent of GDP). A tax reform will boost tax revenue by 0.1 percent of GDP in 2020 and 0.7 until 2023, but additional measures may be needed.

### Identified external budget support and financing gap (selected figures)
- Total Financing Gap: 7,809 bn guaranies | 1,200 mn U.S.$ | 3.1 percent of GDP
- Available financing: 5,998 bn guaranies | 922 mn U.S.$ | 2.4 percent of GDP
- Identified budget support: 5,857 bn guaranies | 900 mn U.S.$ | 2.4 percent of GDP
  - World Bank: 3,254 bn guaranies | 500 mn U.S.$ | 1.3 percent of GDP
  - Inter-American Development Bank (IDB): 1,952 bn guaranies | 300 mn U.S.$ | 0.8 percent of GDP
  - Development Bank of Latin America (CAF): 651 bn guaranies | 100 mn U.S.$ | 0.3 percent of GDP
- Unidentified budget support: 141 bn guaranies | 220 mn U.S.$ | 0.1 percent of GDP
- IMF RFI disbursement: 1,812 bn guaranies | 278 mn U.S.$ | 0.7 percent of GDP

Fiscal financing gap - selected line items (2020):
- Total revenue: 33,300 bn guaranies | 5,117 mn U.S.$ | 13.4 percent of GDP
- Tax revenue: 22,567 bn guaranies | 3,468 mn U.S.$ | 9.1 percent of GDP
- Nontax revenue: 10,733 bn guaranies | 1,649 mn U.S.$ | 4.3 percent of GDP
- Expenditure: 46,426 bn guaranies | 7,134 mn U.S.$ | 18.7 percent of GDP
- Expense: 39,464 bn guaranies | 6,064 mn U.S.$ | 15.9 percent of GDP
- Compensation of employees: 18,671 bn guaranies | 2,869 mn U.S.$ | 7.5 percent of GDP
- Net acquisition of nonfinancial assets: 6,963 bn guaranies | 1,070 mn U.S.$ | 2.8 percent of GDP
- Net lending: -11,246 bn guaranies | -1,728 mn U.S.$ | -4.5 percent of GDP
- Financing: 11,246 bn guaranies | 1,728 mn U.S.$ | 4.5 percent of GDP
- Net domestic financing: 384 bn guaranies | 590 mn U.S.$ | 0.2 percent of GDP
- Net external financing: 3,052 bn guaranies | 469 mn U.S.$ | 1.2 percent of GDP

### Monetary and exchange rate policy stance
- Guarani depreciated by 2 percent vis-à-vis the US dollar in first three weeks of March but subsequently rebounded.
- Foreign exchange sales to the private sector have been very limited.
- Policy stance:
  - Exchange rate should continue to act as a shock absorber, value determined by market forces.
  - Monetary policy to continue focusing on inflation targeting.
  - Policy rate reduced by 175 basis points to 2.25 percent since early March.
  - Further interest rate cuts could become necessary depending on economic developments.
  - If severe exchange rate pressure occurs, FX intervention may be needed to prevent disorderly conditions and monetary policy may need tightening due to Paraguay’s high level of credit dollarization.
- Additional central bank actions (as of April 7):
  - Net international reserves (NIR) reached USD 8.5 billion (21 percent of GDP), as of April 7.
  - Made accessible legal reserve requirement in national and foreign currencies equivalent to USD 959 million.
  - Created Special Credit Facility: USD 760 million, targeting Micro, Small and Medium-sized Enterprises.
  - Sum of these two actions represents around 4 percent of GDP.

### Financial sector policies and vulnerabilities
- Financial system entering crisis generally adequately capitalized, but targeted supervisory actions may be needed if crisis is more severe/protracted.
- Where capital falls short, banks should submit credible capital restoration plans and execution should be monitored.
- Accurate measurement of NPLs and potential losses and regular reassessment of provisioning levels are critical to avoid moral hazard and transparency issues.
- Temporary measure to support lending: renewal/refinancing/restructuring of loans allowed until end-2020 with 50 percent risk weighting for provisioning purposes.
- Pension funds are not allowed to buy government bonds, complicating domestic financing.

### Modalities of IMF support (RFI) and safeguards
- Staff proposes RFI support of 100 percent of quota (SDR 201.4 million).
- Justification:
  - Urgent BOP need that would cause immediate and severe disruption if unaddressed.
  - Not feasible to put in place a UCT-quality program due to uncertainty about duration and scale of Covid-19 impact.
  - Paraguay assessed to have sustainable debt and capacity to repay the Fund after virus impact.
- Proposed access of 100 percent of quota equals 23 percent of the estimated financing gap.
- RFI purchases to be disbursed to the central bank and on-lent to the government for virus-related spending.
- Authorities commit to:
  - Undergo a safeguards assessment.
  - Provide access to the central bank’s most recently completed external audit reports.
  - Authorize the central bank’s external auditors to hold discussions with staff.
  - Establish a framework agreement between the central bank and the government on responsibilities for servicing financial obligations related to the RFI purchase.
- Disbursement: one disbursement of 100 percent of quota under the RFI in 2020 (201.4 SDR).

### Risks, scenarios, and debt sustainability
- Large uncertainties around the pandemic’s duration and economic impact.
- Downside risks beyond Covid-19:
  - Weather-related shocks could reduce harvests and spill over to broader economy.
  - Sharp falls in agricultural commodity prices, especially if growth in China disappoints.
  - Weaknesses in AML/CFT framework implementation could affect effectiveness and expose financial sector to pressures on correspondent banking relationships.
- Under a more protracted downturn:
  - Fiscal consolidation measures may be necessary to contain the fiscal deficit.
  - Policy interest rates may need to be cut further.
  - Close attention required to ensure banks remain sufficiently capitalized.
- Debt sustainability bottomline: Paraguay’s debt is sustainable, and risks to a sustainable path are low.
- Baseline public debt trajectory (percent of GDP):
  - 2019: 26
  - 2020: 31.8
  - 2021: 31.3
  - 2022: 30.6
  - 2023: 30.3
  - 2024: 30.2
- Public gross financing needs (percent of GDP, selected years):
  - 2019: 2.5
  - 2020: 4.7
  - 2021: 5.7
  - 2022: 4.1
  - 2023: 3.3
  - 2024: 4.2
  - 2025: 2.6
- Stress-test peak under most adverse real GDP shock: debt would peak at 36.8 percent of GDP in 2022 and remain safely below 50 percent.
- Share of foreign-currency denominated debt is high; central bank’s reserves are high; interest-rate risk is limited due to long-term fixed-coupon external sovereign debt with first maturing/refinancing need in 2023.

### Key macroeconomic projections (selected series)
- Real GDP (annual percent change): 5.0 (2017), 3.7 (2018), 0.2 (2019), -1.0 (2020), 4.0 (2021), 4.0 (2022), 4.0 (2023), 3.5 (2024).
- Nominal GDP (annual percent change): 7.2 (2017), 5.9 (2018), -0.1 (2019), 7.0 (2020), 6.0 (2021), 7.6 (2022), 7.0 (2023), 6.6 (2024), 6.2 (2025).
- Consumer prices (end of period): 4.5 (2017), 3.2 (2018), 2.8 (2019), 3.0 (2020), 3.3 (2021), 3.3 (2022), 3.3 (2023), 3.3 (2024), 3.3 (2025).
- Gross international reserves (millions of U.S. dollars): 8,146 (2017), 8,004 (2018), 7,996 (2019), 7,496 (2020), 7,596 (2021), 7,896 (2022), 8,396 (2023), 8,946 (2024), 9,496 (2025).
- Central government net lending/borrowing (overall balance, billions of Guaranies): -11,246 (2020); percent of GDP: -4.5 (2020).
- Consolidated public sector net lending/borrowing (percent of GDP): -5.1 (2020).

*Source: IMF staff Executive Summary, Letter of Intent, staff report and Annex I for Paraguay (content unit 1pryea2020001).*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context
- In March 2020, Paraguay was hit by the Covid-19 epidemic, creating fiscal and balance of payments needs.
- Authorities’ policy response has been timely, but limited access to financing and a weakened fiscal position constrain a deeper emergency response.
- Pre-pandemic performance:
  - Economic growth averaged 4½ percent from 2004–18.
  - Poverty rate fell from 58 percent of the population in 2002 to 24 percent (2018).
  - External debt declined from 215 percent of GDP in 2002 to 43 percent in 2019; public debt from 55 to 26 percent.
  - Since 2012 Paraguay has run deficits; a fiscal rule in force since 2015 limits the deficit to 1.5 percent of GDP in normal times.
  - Early 2020 signs: January IMEI showed year-on-year growth of 4.5 percent; staff projected full-year growth of at least 4 percent before the pandemic.

### Impact of COVID-19 and Outlook
- Channels of impact identified:
  - Additional direct health and other expenditures assessed to be on the order of 2 percent of GDP.
  - Loss of output due to demand and supply shocks; 2020 real GDP growth projected to be -1 percent, 5 percent below the pre-virus baseline.
  - Loss of fiscal revenues on the order of 0.5 percent of GDP from the growth impact.
  - Near-cessation of travel and tourism.
- Balance of payments (BOP) financing need:
  - Assessed to be some US$ 1,200 million, 3.2 percent of GDP.
  - If absorbed through reserves, the reserve loss would be significant and could trigger a loss in confidence.
- Assumption for rebound: pandemic over by mid-year would lead to growth rebound in second half of 2020.

### Crisis Response (measures implemented)
- Emergency package:
  - Adapted measures at a cost of about 2½ percent of GDP to boost health care spending, expand social safety net and provide emergency loans for small enterprises.
  - Late March emergency package cited as some 2.4 percent of GDP: about 1.3 percentage point for additional health care spending, 1.0 percentage point for social safety nets, remainder for emergency loans for small enterprises.
- Containment and social measures:
  - Suspended public school sessions, large-scale events; partial border closures; crowd restrictions; night time curfew; total lockdown implemented on March 20.
- Financial and tax measures:
  - Lowered policy rates.
  - Allowed banks to restructure loans to private sector companies in repayment difficulties.
  - Postponed collection of taxes and user fees for 2 months.
- Central Bank (BCP) measures:
  - Reduced legal reserve requirement.
  - Cut interest rates on the BCP’s overnight Liquidity Facility by 100 basis points (and by more on longer-term facilities).
  - Decreased penalty rate for early cancellation of monetary regulation instruments.
  - Allowed renewal, refinancing and restructuring of loans to individuals and legal entities until end-2020 with renewed loans risk-weighted at 50 percent in loan provisioning.

### Fiscal Policy and Financing
- 2020 fiscal outcome and financing:
  - Deficit this year will increase to 4½ percent of GDP (higher than Fiscal Responsibility Law ceiling but deemed appropriate).
  - Government financed part of increase via reallocation within existing budget but an increase in overall envelope is necessary.
- Authorities’ intentions:
  - Return fiscal deficit to below the ceiling of 1.5 percent of GDP after the crisis; timing to be determined in 2021 budget.
  - Staff projections (on current growth forecasts):
    - Deficit around 3 percent in 2021, 2 percent in 2022, and 1.5 percent in 2023.
  - Commitment: if growth is stronger, higher-than-expected revenue will be used for faster deficit reduction.
- Structural fiscal measures to sustain lower deficits and free space for investment:
  - Keep growth rate of primary expenditure below that of GDP.
  - Planned revision of the Fiscal Responsibility Law to limit real growth of primary expenditure to 2 percent (down from 4 percent previously); plans to be presented with 2021 budget.
  - Contain wage bill growth; civil service reform under consideration.
  - Increase tax revenue (currently only 10 percent of GDP). A tax reform will boost tax revenue by 0.1 percent of GDP in 2020 and 0.7 until 2023, but additional measures may be needed.
- Difficulty of domestic financing:
  - Pension funds (bulk of non-bank financial sector) are not allowed to buy government bonds, complicating domestic financing.
- Identified external budget support (text table figures):
  - Total Financing Gap: 7,809 bn guaranies | 1,200 mn U.S.$ | 3.1 percent of GDP
  - Available financing: 5,998 bn guaranies | 922 mn U.S.$ | 2.4 percent of GDP
  - Identified budget support: 5,857 bn guaranies | 900 mn U.S.$ | 2.4 percent of GDP
    - World Bank: 3,254 bn guaranies | 500 mn U.S.$ | 1.3 percent of GDP
    - Inter-American Development Bank (IDB): 1,952 bn guaranies | 300 mn U.S.$ | 0.8 percent of GDP
    - Development Bank of Latin America (CAF): 651 bn guaranies | 100 mn U.S.$ | 0.3 percent of GDP
  - Unidentified budget support: 141 bn guaranies | 220 mn U.S.$ | 0.1 percent of GDP
  - IMF RFI disbursement: 1,812 bn guaranies | 278 mn U.S.$ | 0.7 percent of GDP
  - Fiscal Financing Gap in 2020 (selected line items):
    - Total revenue: 33,300 bn guaranies | 5,117 mn U.S.$ | 13.4 percent of GDP
    - Tax revenue: 22,567 bn guaranies | 3,468 mn U.S.$ | 9.1 percent of GDP
    - Nontax revenue: 10,733 bn guaranies | 1,649 mn U.S.$ | 4.3 percent of GDP
    - Expenditure: 46,426 bn guaranies | 7,134 mn U.S.$ | 18.7 percent of GDP
    - Expense: 39,464 bn guaranies | 6,064 mn U.S.$ | 15.9 percent of GDP
    - Compensation of employees: 18,671 bn guaranies | 2,869 mn U.S.$ | 7.5 percent of GDP
    - Net acquisition of nonfinancial assets: 6,963 bn guaranies | 1,070 mn U.S.$ | 2.8 percent of GDP
    - Net lending: -11,246 bn guaranies | -1,728 mn U.S.$ | -4.5 percent of GDP
    - Financing: 11,246 bn guaranies | 1,728 mn U.S.$ | 4.5 percent of GDP
    - Net domestic financing: 384 bn guaranies | 590 mn U.S.$ | 0.2 percent of GDP
    - Net external financing: 3,052 bn guaranies | 469 mn U.S.$ | 1.2 percent of GDP

### Monetary and Exchange Rate Policy
- Exchange rate developments:
  - Guarani depreciated by 2 percent vis-à-vis the US dollar in first three weeks of March but subsequently rebounded.
  - Foreign exchange sales to the private sector have been very limited.
- Policy stance:
  - Exchange rate should continue to act as a shock absorber, value determined by market forces.
  - Monetary policy to continue focusing on inflation targeting.
  - Policy rate reduced by 175 basis points to 2.25 percent since early March.
  - Further interest rate cuts could become necessary depending on economic developments.
  - If severe exchange rate pressure occurs, FX intervention may be needed to prevent disorderly conditions and monetary policy may need tightening due to Paraguay’s high level of credit dollarization.

### Boosting Potential Output, Governance, and Structural Reforms
- Long-term convergence requires improvements in governance, business climate, and human capital.
- Diagnostic mission (FAD/LEG) assessed vulnerabilities to corruption and identified weaknesses in:
  - Fiscal governance (tax and customs administration, parliamentary budget control, SOE oversight, public procurement, internal and external auditing).
  - Rule of law (perceived high corruption in judicial system).
  - AML/CFT framework (money laundering related to drug trafficking, arms smuggling, other illegal activities in Tri-Border area).
- Authorities will use diagnostic findings to develop a national strategy and action plan to combat corruption and improve governance.
- Covid-19 has catalyzed a push for state reform across executive, legislative, and judicial branches; stalled reforms (e.g., appointment of a pension fund supervisor) are gaining support.

### Financial Sector Policy and Risks to Financial Stability
- Financial system entering crisis generally adequately capitalized, but:
  - Targeted supervisory actions may be needed if crisis is more severe/protracted.
  - Where capital falls short, banks should submit credible capital restoration plans and execution should be monitored.
  - Accurate measurement of NPLs and potential losses and regular reassessment of provisioning levels are critical to avoid moral hazard and transparency issues.
- Temporary measures to encourage continued lending:
  - Renewal/refinancing/restructuring of loans allowed until end-2020 with 50 percent risk weighting for provisioning purposes.

### Modalities of IMF Support (RFI)
- Staff proposes RFI support of 100 percent of quota (SDR 201.4 million).
- Qualifications for RFI financing met:
  - Urgent BOP need that would cause immediate and severe disruption if unaddressed.
  - Not feasible to put in place a UCT-quality program due to uncertainty about duration and scale of Covid-19 impact.
  - Paraguay assessed as having sustainable debt and capacity to repay the Fund after virus impact (see Box 1 and Table 8 in source).
  - Confidence in authorities’ cooperation and appropriate policy stance based on track record.
- Details and conditions:
  - Paraguay does not currently have an IMF arrangement; access of 100 percent of quota is within GRA access limits.
  - Proposed access of 100 percent of quota equals 23 percent of the estimated financing gap.
  - Remaining needs expected to be filled by other donors and policy adjustments.
  - RFI purchases to be disbursed to the central bank and on-lent to the government for virus-related spending.
  - Authorities commit to undergo a safeguards assessment, provide access to central bank’s most recently completed external audit reports, and authorize the central bank’s external auditors to hold discussions with staff.

### Risks and Scenarios
- Large uncertainties around the pandemic’s duration and economic impact.
- Downside risks beyond Covid-19:
  - Weather-related shocks could reduce harvests and spill over to broader economy.
  - Sharp falls in agricultural commodity prices, especially if growth in China disappoints.
  - Medium-term growth depends on non-energy/non-agriculture sector taking off.
  - Weaknesses in AML/CFT framework implementation could affect effectiveness (to be assessed by regional FATF) and expose financial sector to pressures on correspondent banking relationships.
- Under a more protracted downturn:
  - Fiscal consolidation measures may be necessary to contain the fiscal deficit.
  - Policy interest rates may need to be cut further.
  - Close attention required to ensure banks remain sufficiently capitalized.

*Source: IMF staff Executive Summary for Paraguay (April 13, 2020).*

### 28.      Paraguay has been hit hard by the Covid-19 outbreak. The authorities’ policy response to

### 1pryea2020001 - 28.      Paraguay has been hit hard by the Covid-19 outbreak. The authorities’ policy response to

### Impact and policy response
- Paraguay has been hit hard by the Covid-19 outbreak.
- The authorities’ policy response to the epidemic has been forceful and timely.
- The emergency package will:
  - boost health care spending,
  - expand the social safety net,
  - provide emergency loans for small enterprise.
- The cost of the emergency package will raise the fiscal deficit to 4½ percent of GDP, which is difficult to finance domestically.

### Fiscal position and medium-term commitment
- Paraguay has a track record of prudent policies.
- Public and external debt are low.
- Policies have been cautious during good times.
- The authorities are committed to returning the fiscal deficit to the deficit ceiling under the Fiscal Responsibility Law after the crisis is over.

*Source: IMF content unit 1pryea2020001 (paragraphs 28–29).*

### 30.      Staff therefore supports the authorities’ request for a purchase under the Rapid

### 1pryea2020001 - 30.

### Rapid Financing Instrument request and staff assessment
- Staff supports the authorities’ request for a purchase under the Rapid Financing Instrument in the amount of SDR 201.4 million (100 percent of quota).
- Justification: the scale and severity of the Covid-19 shock that has created actual and urgent BOP needs.
- Assessment: Paraguay is assessed to have sustainable debt and adequate capacity to repay the Fund.

### Macroeconomic outlook and key real-side indicators
- Real GDP (annual percent change, selected years): 5.0 (2017), 3.7 (2018), 0.2 (2019), -1.0 (2020), 4.0 (2021), 4.0 (2022), 4.0 (2023), 3.5 (2024).
- Nominal GDP (annual percent change): 7.2 (2017), 5.9 (2018), -0.1 (2019), 7.0 (2020), 6.0 (2021), 7.6 (2022), 7.0 (2023), 6.6 (2024), 6.2 (2025).
- Per capita GDP (U.S. dollars, thousands): 5.7 (2017), 5.7 (2018), 5.2 (2019), 5.3 (2020), 5.4 (2021), 5.7 (2022), 6.0 (2023), 6.3 (2024), 6.5 (2025).
- Consumption (contribution to real GDP growth): 3.1 (2017), 3.1 (2018), -0.2 (2019), -1.8 (2020), 1.6 (2021), 2.4 (2022), 2.7 (2023), 2.8 (2024), 2.1 (2025).
- Investment (contribution to real GDP growth): 2.5 (2017), 2.7 (2018), 0.4 (2019), 0.1 (2020), 1.6 (2021), 1.0 (2022), 1.4 (2023), 1.2 (2024), 1.2 (2025).
- Net exports (contribution to real growth): -0.7 (2017), -2.1 (2018), 0.0 (2019), 0.7 (2020), 0.8 (2021), 0.6 (2022), -0.1 (2023), -0.1 (2024), -3.7 (2025).
- Consumer prices (end of period): 4.5 (2017), 3.2 (2018), 2.8 (2019), 3.0 (2020), 3.3 (2021), 3.3 (2022), 3.3 (2023), 3.3 (2024), 3.3 (2025).
- Nominal exchange rate (Guarani per U.S. dollar, eop): 5,590 (2017), 5,961 (2018), 6,453 (2019).

### External sector and reserves
- Exports (f.o.b., values, percent change): 11.8 (2017), 3.2 (2018), -10.3 (2019), -18.0 (2020), 21.3 (2021), 13.9 (2022), 4.5 (2023), 4.5 (2024), 4.0 (2025).
- Imports (c.i.f., values, percent change): 17.8 (2017), 12.1 (2018), -4.7 (2019), -23.5 (2020), 19.8 (2021), 13.0 (2022), 4.9 (2023), 5.4 (2024), 4.3 (2025).
- External current account (percent of GDP): 3.1 (2017), 0.0 (2018), -1.0 (2019), -0.1 (2020), 0.9 (2021), 1.5 (2022), 1.4 (2023), 1.2 (2024), 1.1 (2025).
- Trade balance (percent of GDP): 4.1 (2017), 1.4 (2018), -0.6 (2019), 0.8 (2020), 1.8 (2021), 2.5 (2022), 2.3 (2023), 1.9 (2024), 1.8 (2025).
- Gross international reserves (in millions of U.S. dollars): 8,146 (2017), 8,004 (2018), 7,996 (2019), 7,496 (2020), 7,596 (2021), 7,896 (2022), 8,396 (2023), 8,946 (2024), 9,496 (2025).
- Reserves in months of next-year imports of goods and services: 6.9 (2017), 7.1 (2018), 8.9 (2019), 7.1 (2020), 6.5 (2021), 6.4 (2022), 6.5 (2023), 6.6 (2024), 6.7 (2025).

### Fiscal accounts (central government) — levels and percent of GDP
- Central government revenues (billions of Guaranies): 28,436 (2016), 31,095 (2017), 32,288 (2018), 33,566 (2019), 33,300 (2020), 36,183 (2021), 40,428 (2022), 44,104 (2023), 47,061 (2024), 50,192 (2025).
- Central government expenditures (billions of Guaranies): 30,650 (2016), 33,483 (2017), 35,511 (2018), 40,322 (2019), 44,546 (2020), 44,060 (2021), 45,714 (2022), 48,559 (2023), 51,789 (2024), 55,226 (2025).
- Net lending/borrowing (overall balance, billions of Guaranies): -2,214 (2016), -2,388 (2017), -3,223 (2018), -6,756 (2019), -11,246 (2020), -7,877 (2021), -5,286 (2022), -4,456 (2023), -4,728 (2024), -5,035 (2025).
- Central government net lending/borrowing (percent of GDP): -1.1 (2016), -1.4 (2017), -2.9 (2018), -4.5 (2019), -3.0 (2021), -1.9 (2022), -1.5 (2023), -1.5 (2024), -1.5 (2025) (see Table 2b for full series including 2020: -4.5).
- Central government primary balance (percent of GDP): -0.5 (2016), -0.7 (2017), -2.1 (2018), -3.7 (2019), -2.1 (2021), -2.1 (2022), -0.9 (2023), -0.5 (2024), -0.6 (2025).
- Public sector debt (excl. central bank bills, percent of GDP): 19.8 (2016), 22.2 (2017), 26.3 (2018), 30.6 (2019), 31.8 (2020), 31.3 (2021), 30.6 (2022), 30.3 (2023), 30.2 (2024).

### Consolidated public sector (selected percent-of-GDP aggregates)
- Revenue: 19.1 (2016), 18.6 (2017), 18.8 (2018), 19.6 (2019), 19.2 (2020).
- Expenditure: 19.5 (2016), 19.5 (2017), 20.5 (2018), 23.5 (2019), 24.3 (2020).
- Net lending/borrowing (overall balance): -0.4 (2016), -0.9 (2017), -1.7 (2018), -3.9 (2019), -5.1 (2020).
- Public sector debt (excl. central bank bills): 19.4 (2016), 19.8 (2017), 22.2 (2018), 26.3 (2019), 30.6 (2020).

### Balance of payments (millions of U.S. dollars, selected items)
- Current account: 1,305 (2016), 1,214 (2017), 9 (2018), -375 (2019), -56 (2020), 340 (2021), 659 (2022), 631 (2023), 559 (2024), 542 (2025).
- Trade balance: 1,976 (2016), 1,599 (2017), 568 (2018), -231 (2019), 290 (2020), 700 (2021), 1,054 (2022), 1,031 (2023), 933 (2024), 911 (2025).
- Exports (f.o.b., levels): 11,984 (2016), 13,396 (2017), 13,819 (2018), 12,394 (2019), 10,161 (2020), 12,325 (2021), 14,037 (2022), 14,663 (2023), 15,320 (2024), 15,927 (2025).
- Imports (levels): -9,787 (2016), -11,524 (2017), -12,918 (2018), -12,311 (2019), -9,412 (2020), -11,273 (2021), -12,740 (2022), -13,360 (2023), -14,082 (2024), -14,681 (2025).
- Overall balance: 957 (2016), 877 (2017), -183 (2018), -8 (2019), -1,700 (2020), -16 (2021), 133 (2022), 338 (2023), 405 (2024), 408 (2025).
- Gross reserves (in millions of U.S. dollars): 7,144 (2016), 8,146 (2017), 8,004 (2018), 7,996 (2019), 7,496 (2020).

### Monetary and financial sector indicators
- Currency issued (end-period, billions of Guaranies): 11,457 (2016), 12,954 (2017), 13,757 (2018), 14,349 (2019), 14,846 (2020), 15,806 (2021).
- Net international reserves (billions of Guaranies): 31,789 (2016), 36,329 (2017), 36,085 (2018), 34,468 (2019), 36,343 (2020), 38,218 (2021).
- Credit to private sector (annual percent change): 4.5 (2016), 6.2 (2017), 11.5 (2018), 6.4 (2019), 1.5 (2020), 7.8 (2021).
- Broad liquidity (M4, end-period, billions of Guaranies): 82,981 (2016), 93,222 (2017), 98,177 (2018), 105,194 (2019), 107,739 (2020), 111,942 (2021).
- Money and quasi-money (M2, end-period, billions of Guaranies): 51,026 (2016), 60,374 (2017), 65,254 (2018), 69,254 (2019), 71,724 (2020), 74,668 (2021).

### External vulnerability and debt indicators
- Current account (percent of GDP): -0.4 (2015), 3.6 (2016), 3.1 (2017), 0.0 (2018), -1.0 (2019), -0.1 (2020), 0.9 (2021), 1.5 (2022), 1.4 (2023), 1.2 (2024), 1.1 (2025).
- External public debt (percent of GDP): 14.1 (2015), 15.4 (2016), 15.8 (2017), 18.0 (2018), 21.8 (2019), 26.3 (2020), 27.7 (2021), 27.7 (2022), 27.0 (2023), 26.8 (2024), 26.6 (2025).
- Total external debt (percent of GDP): 49.0 (2015), 44.1 (2016), 40.1 (2017), 40.9 (2018), 44.0 (2019), 44.9 (2020), 43.1 (2021), 40.0 (2022), 36.7 (2023), 32.6 (2024), 32.5 (2025).
- International reserves (millions of U.S. dollars): 6,200 (2015), 7,144 (2016), 8,146 (2017), 8,004 (2018), 7,996 (2019), 7,496 (2020), 7,596 (2021), 7,896 (2022), 8,396 (2023), 8,946 (2024), 9,496 (2025).
- Ratio of reserves to short-term external debt (private and public with residual maturity ≤ 1 year): 1.9 (2015), 2.3 (2016), 2.6 (2017), 2.2 (2018), 2.2 (2019), 2.0 (2020), 2.0 (2021), 1.7 (2022), 2.1 (2023), 2.7 (2024), 5.6 (2025).

### Capacity to repay IMF obligations (Table 8)
- Fund obligations based on existing and prospective credit (in millions of SDR): 2.2 (2020), 2.2 (2021), 2.25 (2022), 2.4 (2023), 101.9 (2024), 50.5 (2025).
  - Principal: 50.4 (2024), 100.7 (2025), 50.4 (2026) — see table context for sequencing.
  - Charges and interest (in millions of SDR): 2.2 (2020), 2.2 (2021), 2.2 (2022), 2.1 (2023), 1.2 (2024), 0.2 (2025).
- Total obligations based on existing and prospective credit (in millions of US dollars): 3.1 (2020), 3.0 (2021), 3.0 (2022), 73.2 (2023), 142.6 (2024), 71.0 (2025).
- Outstanding Fund credit (in millions of SDR): 201.4 (2020), 201.4 (2021), 201.4 (2022), 151.1 (2023), 50.4 (2024), 0.0 (2025).
- Outstanding Fund credit (in millions of US dollars): 278.2 (2020), 279.4 (2021), 280.4 (2022), 210.9 (2023), 70.5 (2024), 0.0 (2025).
- Outstanding Fund credit (percent of gross international reserves): 3.7 (2020), 3.7 (2021), 3.6 (2022), 2.5 (2023), 0.8 (2024), 0.0 (2025).
- Outstanding Fund credit (percent of quota): 100.0 (2020), 100.0 (2021), 100.0 (2022), 75.0 (2023), 25.0 (2024), 0.0 (2025).
- Net use of Fund credit (in millions of SDR): 201.4 (2020), 0.0 (2021), 0.0 (2022), -50.4 (2023), -100.7 (2024), -50.4 (2025).
- Disbursements: 201.4 (one disbursement of 100 percent of quota under the RFI in 2020).
- Repayments and Repurchases: 0.0 (2020), 0.0 (2021), 0.0 (2022), 50.4 (2023), 100.7 (2024), 50.4 (2025).
- Memorandum items: Nominal GDP (in millions of US dollars): 38,131 (2020), 39,935 (2021), 42,724 (2022), 45,522 (2023), 48,143 (2024), 50,587 (2025).
- Exports of goods and services (in millions of US dollars): 11,111 (2020), 13,330 (2021), 15,094 (2022), 15,772 (2023), 16,484 (2024), 17,148 (2025).
- Gross International Reserves (in millions of US dollars): 7,496 (2020), 7,596 (2021), 7,896 (2022), 8,396 (2023), 8,946 (2024), 9,496 (2025).
- Debt service (in millions of US dollars): 1,933 (2020), 1,999 (2021), 2,115 (2022), 2,931 (2023), 2,235 (2024), 1,669 (2025).
- Quota (in millions of SDRs): 201.4 (2020–2025).

*Source: IMF staff estimates and projections as presented in the provided content.*

### Annex I. Public Debt Sustainability

### Annex I. Public Debt Sustainability

### Bottomline
- Paraguay’s debt is sustainable, and risks to a sustainable path are low.

### Baseline projections and drivers
- Baseline public debt stood at 26 percent of GDP as of 2019.
- Public debt trajectory:
  - 2019: 26 percent of GDP
  - 2020: 31.8 percent of GDP
  - 2021: 31.3 percent of GDP
  - 2022: 30.6 percent of GDP
  - 2023: 30.3 percent of GDP
  - 2024: 30.2 percent of GDP
- Main driver: the fiscal response to the Covid-19 crisis in 2020, followed by gradual consolidation over the next three years.
- Public gross financing needs (selected years):
  - 2019: 2.5 percent of GDP
  - 2020: 4.7 percent of GDP
  - 2021: 5.7 percent of GDP
  - 2022: 4.1 percent of GDP
  - 2023: 3.3 percent of GDP
  - 2024: 4.2 percent of GDP
  - 2025: 2.6 percent of GDP

### Stress tests and vulnerabilities
- Most adverse shock: a real GDP shock.
  - Under this shock, debt would peak at 36.8 percent of GDP in 2022 and remain safely below 50 percent.
- A one-time real-exchange rate shock of similar magnitudes as of 2015 would have debt peak at 36.1 percent in 2021.
- Real GDP growth volatility:
  - Driven by shifting weather conditions on agriculture.
  - Agricultural commodity price fluctuations are the most important source of real-exchange rate shocks.
- Currency and market risks:
  - Share of foreign-currency denominated debt is high.
  - Short-term capital flows are low.
  - Central Bank’s reserves are high.
  - Interest-rate risk is limited: external sovereign debt consists of long-term fixed-coupon bonds, first maturing/refinancing need in 2023.

### Assumptions used in the baseline
- Growth:
  - 2020: -1.0 percent (negative growth)
  - 2021: 4 percent
  - Medium-term potential output growth: 3.5 to 4.0 percent
- Fiscal balance:
  - Fiscal deficit projected to leap to 4.5 percent of GDP in 2020 and converge to 1.5 percent by 2023.
- Projection notes:
  - Growth assumption for 2020 described as very conservative given early agricultural output.
  - Projected contraction of services and manufacturing is described as very sharp, with strong rebound expected in 2021.
- Selected macro and debt indicators (table excerpts):
  - Real GDP growth: 2018: 4.5; 2019: 3.7; 2020: 0.2 / -1.0; 2021–2024: 4.0; 2025: 3.5 (percent)
  - Inflation (GDP deflator): 2018: 3.7; 2019: 2.1; 2020: -0.3 / 8.1; 2021: 1.9; 2022: 3.5; 2023: 2.9; 2024: 2.5; 2025: 2.6 (percent)
  - Nominal GDP growth: 2018: 8.3; 2019: 5.9; 2020: -0.1 / 7.0; 2021: 6.0; 2022: 7.6; 2023: 7.0; 2024: 6.6; 2025: 6.2 (percent)
  - Effective interest rate: 2018: 4.9; 2019: 5.8; 2020: 5.8 / 2.6; 2021: 2.5; 2022: 2.8; 2023: 2.9; 2024: 3.3; 2025: 3.6 (percent)

### Contribution to debt changes and fiscal dynamics
- Change in gross public sector debt (selected years):
  - 2018: 0.6 percent of GDP
  - 2019: 2.3 percent of GDP
  - 2020: 4.1 percent of GDP
  - 2021: 4.3 percent of GDP
  - 2022: 1.2 percent of GDP
  - 2023: -0.5 percent of GDP
  - 2024: -0.6 percent of GDP
  - 2025: -0.3 percent of GDP
- Identified debt-creating flows (selected years):
  - 2018: 0.7 percent of GDP
  - 2019: 3.3 percent of GDP
  - 2020: 5.6 percent of GDP
  - 2021: 4.0 percent of GDP
  - 2022: 1.0 percent of GDP
  - 2023: -0.6 percent of GDP
  - 2024: -0.7 percent of GDP
  - 2025: -0.5 percent of GDP
- Primary deficit (percent of GDP):
  - 2018: -0.2
  - 2019: 0.6
  - 2020: 2.6
  - 2021: 3.9
  - 2022: 2.4
  - 2023: 1.2
  - 2024: 0.6
  - 2025: 0.6
- Primary (noninterest) revenue and grants (percent of GDP):
  - 2018: 17.3
  - 2019: 18.8
  - 2020: 19.6
  - 2021–2025: 19.2 / 19.6 / 20.0 / 20.0 / 20.0 (as reported)
- Primary (noninterest) expenditure (percent of GDP):
  - 2018: 17.1
  - 2019: 19.4
  - 2020: 22.2
  - 2021: 23.1
  - 2022: 21.6
  - 2023: 20.8
  - 2024: 20.6
  - 2025: 20.6

### Scenarios and alternative paths
- Baseline scenario real GDP growth and fiscal variables (selected):
  - Real GDP growth: 2020: -1.0; 2021–2024: 4.0; 2025: 3.5 (percent)
  - Inflation: 2020: 8.1; 2021: 1.9; 2022: 3.5; 2023: 2.9; 2024: 2.5; 2025: 2.6 (percent)
  - Primary Balance (percent of GDP): 2020: -3.9; 2021: -2.4; 2022: -1.2; 2023: -0.6; 2024: -0.6; 2025: -0.6
  - Effective interest rate (percent): 2020: 2.6; 2021: 2.5; 2022: 2.8; 2023: 2.9; 2024: 3.3; 2025: 3.6
- Historical scenario (selected differences):
  - Real GDP growth: 2020: -1.0; 2021–2025: 4.4 (percent in historical scenario)
  - Primary Balance (historical scenario): 2021–2025: -0.2 (percent of GDP)
  - Effective interest rate (historical scenario): 2021–2025: 2.5 / 3.7 / 3.9 / 4.6 / 4.9 (percent)
- Constant Primary Balance scenario:
  - Primary Balance set at -3.9 percent of GDP for 2020–2025.
  - Effective interest rate path: 2020: 2.6; 2021: 2.5; 2022: 3.5; 2023: 3.6; 2024: 4.1; 2025: 4.4 (percent)

### Coverage and contingent liabilities
- Debt coverage: consolidated public sector; all domestic key entities and liabilities included.
- Public sector debt excludes liabilities of binational entities Itaipú and Yacyretá.
- There are no known contingent liabilities.

*Source: Fund staff estimates and projections as presented in Annex I. Public Debt Sustainability.*

### 12.      We will continue with our policy of letting the exchange rate absorb shocks, and have its

### 1pryea2020001 - 12.      We will continue with our policy of letting the exchange rate absorb shocks, and have its

### Exchange rate regime and external policy
- Continue policy of letting the exchange rate absorb shocks, with value determined by market forces.
- Intervention only to address disorderly market conditions.
- Authorities do not intend to impose new or intensify existing:
  - restrictions on the making of payments and transfers for current international transactions;
  - trade restrictions for balance-of-payments purposes;
  - multiple currency practices;
  - bilateral payments agreements inconsistent with Article VIII of the Fund’s Articles of Agreement.
- Request for a purchase under the Rapid Financing Instrument (RFI) in the amount of SDR 201.4 million (100 percent of quota).

### Monetary policy and inflation targeting
- Monetary policy will continue to focus on inflation targeting.
- Policy rate lowered by 175 basis points, to 2.25 percent.
- Further interest rate cuts will be considered depending on economic developments.

### Growth challenges, structural issues, and governance
- Recognition that growth challenges are not just cyclical; rapid convergence with advanced countries is challenging.
- Factors that drove past growth (including the agricultural commodity prices boom) are unlikely to provide support going forward.
- To boost investment and convergence, the following need improvement:
  - governance;
  - business climate;
  - human capital.
- An IMF and IDB mission assessed vulnerabilities to corruption; findings will be used to develop a strategy to combat corruption and improve governance.

### Fiscal position, pre- and post-COVID-19 developments
- 2019:
  - Initial GDP growth forecast for 2019: 4.0 percent of annual GDP growth.
  - Latest revision in December 2019: 0.2 percent.
  - Fiscal deficit of 2019: around 2.9 percent of GDP.
  - Public investment in 2019: around 3.0 percent of GDP.
- Early 2020:
  - Initial 2020 GDP forecast: 4.1 percent.
  - Current projection (after COVID-19): abrupt contraction of GDP to negative territories (-1 percent).
  - Fiscal deficit projected to inch up from estimated 2 percent to 4.5 percent of GDP.
- Emergency law in March with measures totaling 2.4 percent of GDP:
  - Allocations: USD 515 million to the health sector; USD 408 million to social protection; remainder for State operations, transitory subsidies of some public services, and loans to Micro, Small, and Medium-sized Enterprises.
- Resulting financial fiscal gap for 2020: around 3.1 percent of GDP, with limited domestic debt market access.

### Central Bank actions and financial sector measures
- Net international reserves (NIR) reached USD 8.5 billion (21 percent of GDP), as of April 7.
- Central Bank (BCP) monetary and financial measures to mitigate impact:
  - Made accessible legal reserve requirement in national and foreign currencies equivalent to USD 959 million.
  - Created Special Credit Facility: USD 760 million, targeting financing needs of Micro, Small and Medium-sized Enterprises.
  - Sum of these two actions represents around 4 percent of GDP.
  - Reduced penalty rates for cancellation of Letters of Monetary Regulation and reduced interest rates for short-term liquidity facilities.
  - Allowed financial entities to renew, refinance, or restructure loans to private-sector companies and extend term of foreclosed assets sales to maintain asset values and facilitate credit supply.

### Transparency, safeguards, and IMF cooperation
- Government values cooperation with the IMF and commits to obligations.
- Commitments:
  - Undergo a safeguards assessment.
  - Provide staff with access to the central bank’s most recently completed external audit reports.
  - Authorize central bank’s external auditors to hold discussions with IMF staff.
  - Establish a framework agreement between the central bank and the government on responsibilities for servicing financial obligations related to the RFI purchase.
- Auditing and oversight of crisis-mitigation spending:
  - Court of accounts of Congress, the office of the Comptroller, and the anti-corruption Secretariat will audit all crisis-mitigation spending and make it public to enhance transparency and accountability.

### Policy intent and appeal for support
- Authorities do not intend to introduce measures that would compound balance-of-payments difficulties.
- Authorities seek international financial community support to contain the epidemic and restore the economy.
- Authorities look forward to early approval of financial assistance by the IMF.
- Authorities authorize the Fund to publish this Letter of Intent and the staff report for the request for disbursement under the RFI.

*Source: Content unit 1pryea2020001 (Paraguay Letter of Intent and associated staff statement).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2020/english/1pryea2020001.pdf_