## 1pryea2021001

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### The Pandemic’s Impact on Inequality — Overview and Immediate Effects
- Pre-COVID landscape:
  - Between 2002 and 2019 the poverty rate more than halved.
  - Growth drivers: sound macro policies (low inflation and low fiscal deficits and debt), agricultural commodity boom, terms of trade gains.
  - Growth volatility: recoveries with GDP growth of 11 percent in 2010 and 8½ percent in 2013.
  - 2019 shock: severe drought and flooding reduced full-year growth to near zero; inflation fell from 4 percent in 2018 to 2.8 percent in 2019; Central Bank policy rate lowered from 5¼ to 4 percent in five steps.
  - 2019 fiscal deficit rose to almost 3 percent of GDP; deficit widened to 2.8 percent of GDP above the 1½-percent FRL ceiling; FRL emergency escape clause allowed up to 3 percent of GDP.
- Early 2020 (pre-COVID): historical high soybean harvest for 2019–20 season; hydro-energy production rebounded.
- COVID shock — health and containment:
  - Schools closed three days after first domestic case; nation-wide quarantine from March 20 until May 3.
  - Mobility dropped by 60 percent.
  - Main economic activity index in April was 20 percent below February level.
  - Seasonally adjusted Q2 GDP was 10.1 percent below Q1.
  - Public health measures: medical supplies, expanded medical staff, new hospitals, border hostels for quarantines.
- Fiscal and financial response in 2020:
  - New social programs: Pytyvõ, Ñangareko, and temporary expansion of Tekoporã.
    - Pytyvõ payment: 25 percent of the minimum wage; first and second tranches reach about 3 million people.
    - Ñangareko: one-time payments supporting subsistence-economy families.
  - Economic measures: increased public works and social housing investment; reduced VAT on selected goods; deferred corporate income tax payments for three months.
  - FRL temporarily suspended.
  - Monetary policy: policy rate reduced by 325 bps cumulatively, to 0.75 percent.
  - Liquidity measures: lowered legal reserve requirements equivalent to US$957 million (around 6 percent of banks’ short-term liabilities); new liquidity window of US$760 million (about 5 percent of banks’ short-term liabilities).
  - Banking forbearance: banks could renew, refinance, and restructure loans without penalty and with a lower risk weight.
  - MSME support: FOGAPY capitalized; Development Finance Agency relaxed housing refinancing and created MSME credit lines.
- External financing and market access:
  - IMF RFI approved in late April for US$274 million (100 percent of quota).
  - Paraguay issued a US$1 billion sovereign bond (10-year maturity, yield of 4.95 percent).
  - Government later indicated it was no longer planning to draw on the RFI after other financing needs were met.
- Fiscal impact in 2020:
  - Crisis and responses raised fiscal deficit to about 6½ percent of GDP.
  - Emergency spending and accelerated investment increased spending by about 3½ percentage points of GDP in 2020:
    - 1.3 percentage points from social benefits,
    - 0.7 percentage point from medical supplies and other emergency purchases,
    - 0.9 percentage points from higher investment.
  - Spending higher than envisaged at time of RFI, largely due to higher investment and higher social benefits.
- Governance and safeguards:
  - Bicameral commission oversaw COVID-19 spending.
  - Public portal “Rindiendo Cuentas” for reporting COVID-19 expenditures; public tenders reviewed ex-ante and audited ex-post by Contraloría.
  - Contraloría and Auditoría General del Poder Ejecutivo planned audit with results expected in mid-2021.
- Epidemiological and macro developments in 2020:
  - By mid-December death toll rose to 261 per million.
  - Inflation: 2.8 percent y/y in December fell to 0.5 percent in June; increased to 2.2 percent by November.
  - Real effective exchange rate appreciated about 2 percent during first ten months of 2020; reserves increased by US$1.2 billion to 8.9 billion.

### Distributional Effects and Social Protection
- Pre-pandemic inequality: Gini index and top/bottom income ratios declined over two decades.
- Labor-market and sectoral impacts:
  - Female labor: employment rate for women was over 25 percentage points lower than for men pre-crisis; female labor participation fell by 9 percentage points in 2020 versus 4 percentage points for men.
  - Informal sector: over 60 percent of total employment; reduction in informal employment in first two quarters of 2020 was twice that in the formal sector.
  - Sectoral employment Q2 2020: tertiary sector y/y decline >10 percent; primary and secondary sectors had positive employment growth due to agricultural rebound and public works.
  - Public sector employment (~12 percent of total) held up relatively well; private sector employment dropped by 13 percent in Q2 2020.
- Design and reach of temporary programs:
  - Pytyvõ: targets informal and self-employed workers; payment 25 percent of minimum wage; first and second tranches reach about 3 million people; third payment authorization pending.
  - Ñangareko: one-time payments for food security; motivated by nearly 93 percent of Paraguayan informal workers being outside safety net.
  - Tekoporã: increased allocations and a one-off additional payment.
- Safeguards for targeting and delivery:
  - Online/mobile registration improved traceability and excluded households with public employees or other program beneficiaries.
  - Digital payment instruments used; beneficiaries without cell phones reached via national identity cards.
  - Beneficiary lists published online; few instances of fraud/irregularities reported.

### Outlook, Risks, and Staff Projections
- Staff projections:
  - Real GDP: shrink by about 1 percent in 2020; rebound by 4 percent in 2021.
  - Inflation: projected to remain below midpoint of central bank’s target range through 2021.
  - Medium-term potential output growth: estimated at 3½ percent—2 percent in per capita terms.
- Near-term risks:
  - Large upside in daily deaths could suppress mobility and trigger renewed lockdowns.
  - Risk of prolonged epidemic if vaccine roll-out is slow; cross-border trade with Brazil and Argentina dependent on epidemic control there.
  - Weather risks: new La Niña cycle started; rainfall volatility in central Chaco rising.
- Upside possibilities:
  - Strong rise in soybean prices could boost domestic demand.
  - Interest by foreign investors and new projects (paper pulp, clean energy) may support growth if materialized.
- Policy implications if downside risks materialize:
  - Exchange rate should act as shock absorber.
  - Plans to start reducing the deficit would need scaling back.
  - If renewed lockdowns necessary, prioritize direct health spending and income support.
  - Further easing of monetary policy could provide additional, albeit modest, support—interest rates already below 1 percent.

### Recovery Outlook, Growth Prospects, and Structural Transformation
- Near-term priorities:
  - Recover from Covid-19, revive activity, and recover lost ground in social protection, poverty reduction, and education.
  - Avoid premature withdrawal of monetary and fiscal support.
  - Government investment needed to address infrastructure gaps; investments in educational infrastructure may be required.
- Medium-term growth challenges:
  - Traditional growth drivers weaker: agricultural prices off previous highs; agricultural land expansion cannot continue rapidly; dependence on agriculture increases climate vulnerability.
- Structural opportunities (machine learning export-structure analysis):
  - Expand export varieties of agricultural products and primary materials.
  - Increase basic manufacturing exports that process primary materials.
  - Use cheap hydro-electric energy domestically to expand manufacturing of machinery and equipment.
- Diversification: Paraguay less diversified than peers; under-diversification more pronounced when oil exporters excluded.

### Fiscal Policy, Targets, and Risks
- Fiscal stance and medium-term:
  - Deficit in 2020: 6½ percent of GDP.
  - Public debt: exceeding 35 percent of GDP; projected peak at 36 percent of GDP in 2022.
  - Government target for 2021 deficit: 4 percent of GDP.
  - Temporary Covid-19 spending expiration effect: reduce spending by 3 percentage points of GDP in 2021; increase in interest payments of 0.4 percent of GDP partially offsets.
  - Public investment projected fall from 3 to 2.2 percent of GDP.
- If downside risks materialize (worse pandemic, La Niña, weaker tax revenues): slower deficit reduction in 2021 warranted; protect investment.
- Government goal: return deficit to FRL ceiling by 2024; proposed FRL changes include codifying target date and capping current real primary spending increases at 2 percent (previously 4 percent plus inflation); introduce additional ceiling on central government debt (latest proposal envisages debt ceiling of 40 percent of GDP; authorities’ debt concept about 2 percentage points of GDP lower than IMF concept).

### Fiscal Consolidation Strategy, Investment Needs, and Revenue Outlook
- Government intends to bring deficit back toward ceiling through expenditure compression and efficiency gains (state and civil service reform, procurement rationalization).
- Concerns: efficiency gains unlikely to be sufficient without cutting public investment.
- Infrastructure and education investment needs:
  - OECD and Global Infrastructure Outlook estimate US$1 billion to 3 billion per year (3 to 8 percent of GDP).
  - 2017 Article IV: infrastructure investment needs of about 20 percent of GDP over next five years.
  - World Bank: over US$1 billion needed for investment in schools.
- Itaipú revenues:
  - Debt service costs fall from about US$2 billion to zero once debt paid off.
  - If tariff unchanged, windfall equally shared and yield 1½ percent of GDP in additional annual revenue for Paraguay.
  - If tariff adjusted downward, Paraguay benefits mainly via lower domestic electricity tariffs; most windfall benefits could go to Brazil because Paraguay sells 70 percent of its share of Itaipú’s electricity to Brazil.
- Tax revenue: very low by international standards; further curbing tax evasion could help but near-term scope modest; medium-term tax projections do not envisage significant increase in revenue-to-GDP ratio above pre-Covid levels.

### Social Sectors: Education and Pensions
- Education:
  - Despite increased spending, learning outcomes not improved; PISA scores low.
  - Public schools closed March–December 2020; Covid-19 threatens to widen gap with regional peers.
  - Roadmap for educational reform to be developed by end-2021.
  - About half of teachers are due to retire within next five years.
- Pensions:
  - No financial supervision and regulatory oversight of pension fund activities; introducing a pension fund supervisor recommended.
  - Private pension system needs to expand coverage among uninsured informal workers.
  - Parametric adjustments needed to strengthen equity and financial sustainability.
  - Caja Fiscal (public civil servants’ system) severely underfunded and requires urgent reforms.

### Monetary, Exchange Rate, and Financial Sector Conditions
- Monetary policy:
  - Policy rate reduced by 325 bps in 2020 to 0.75 percent; room for further cuts limited as rates already below 1 percent.
  - Inflation fell to historical lows in H1 2020 then rebounded; consumer prices (end of period) 2.3 (2020) with projections 3.5 (2021) onward.
- Exchange rate and reserves:
  - Reserves increased; as of December reserves at 213 percent of IMF reserve metric; gross reserves series: 8,496 (2020), projections rising to 10,096 (2025).
  - Nominal exchange rate depreciated about 8 percent vis-à-vis US dollar since April (text reference).
- Financial sector:
  - Banking system well capitalized; non-performing loan ratio 3.0 percent; Tier I capital-to-asset ratio 14.9 percent (regulatory minimum 8 percent).
  - A third of all loans renewed, refinanced, or restructured; uncertainty on eventual NPL outcome.
  - Supervisory recommendations: continue assessing asset quality, collect information on restructurings, restore capital/liquidity if loans deteriorate, adopt comprehensive stress-testing program.
  - IMF TA planned on bank resolution and deposit guarantee fund in FY21.
- Credit dynamics:
  - Growth of domestic-currency credit around 10 percent.
  - FX-denominated credit decline attributed to demand factors (good harvests repaying FX loans).
  - Bank credit fell in spring but rebounded; central bank liquidity measures may have helped restore flows.

### External Position, Reserves, and Debt Sustainability
- External position:
  - Current account in surplus in 2020; capital inflows limited, largely private sector FDI and government bonds.
  - Externally issued government bond debt: US$5.4 billion; 15 percent of GDP.
  - External position in 2019 stronger than implied by fundamentals; for 2020 likely stronger as well though with uncertainty.
- Reserves and import coverage:
  - Import coverage increased from 7.1 to 9.1 months (2019–2020).
  - Staff assessment: import coverage of 9.1 months comfortably above Fund metrics for small open economy.
  - Policy recommendation: flexible exchange rate first line of defense; continue rules-based regular dollar sales; limit discretionary interventions to exceptional disorderly conditions.
- External Debt Sustainability (selected baseline numbers, percent of GDP):
  - External debt: 2019 42.1; 2020 50.2; 2021 49.5; 2022 46.7; 2023 43.5; 2024 38.8; 2025 38.4.
  - Gross external financing need (percent of GDP): 2019 8.4; 2020 9.7; 2021 8.9; 2022 8.1; 2023 9.6; 2024 7.5; 2025 7.5.
  - Key baseline macro assumptions (selected):
    - Nominal GDP (US$ billions): 2019 37.6; 2020 34.1; 2021 34.0; 2022 34.9; 2023 37.2; 2024 39.5; 2025 41.7.
    - Real GDP growth (percent): 2019 0.0; 2020 -2.5; 2021 4.5; 2022 4.0; 2023 4.0; 2024 3.5; 2025 3.5.
- Public Sector Debt Sustainability (selected indicators, percent of GDP):
  - Public gross debt: 2018 15.0; 2019 22.2; 2020 25.6; 2021 34.9; 2022 35.4; 2023 36.3; 2024 36.3; 2025 36.1.
  - Public gross financing needs (percent of GDP): 2018 1.4; 2019 2.5; 2020 4.6; 2021 7.8; 2022 5.3; 2023 4.6; 2024 5.6; 2025 3.5.
  - Primary deficit (percent of GDP): 2018 -0.2; 2019 0.6; 2020 2.5; 2021 5.9; 2022 3.4; 2023 2.2; 2024 1.5; 2025 0.9.

### Governance Challenges and Recommendations
- Key governance weaknesses identified:
  - Weak and fragmented administrative capacity; institutional and procedural fragmentation; perceived impunity due to ineffective judicial system.
  - Tax and customs administrations: institutional weaknesses and corruption risks; outdated customs code; weak inter-agency cooperation to combat smuggling.
  - Public Financial Management vulnerabilities in SOEs and public procurement; lack of effective audit oversight.
  - Smuggling, counterfeiting, money laundering, and weak law enforcement around Triple Frontier.
- Recommendations:
  - Establish medium-term governance strategic plan and legal integrity framework for public service.
  - Review, automate, and integrate governance processes; strengthen internal and external control.
  - Strengthen judicial system; pursue joint executive-judicial anti-corruption approach.
  - Fiscal governance specifics: increase transparency in Tax and Customs administrations; eliminate conflicts of interest in special tax regimes; assess tax regime cost-benefits; reinforce oversight over SOEs (Itaipú and Yacyretá); comprehensive audit on FONACIDE; mandatory use of single treasury account by all 17 provinces.
- Authorities’ actions:
  - SENAC amended Government National Plan on Integrity, Transparency and Anticorruption; new plan presented December 9; capacities and role need further strengthening.
  - Authorities noted measures to ensure integrity of COVID-19 spending have contributed to strengthening governance.

### Risk Assessment Matrix — Selected Risks and Recommended Responses
- External risks:
  - Unexpected shift in Covid-19 (High / ST): Expected impact Medium; recommended response: allow exchange rate adjustment and maintain accommodative monetary policy.
  - Widespread social discontent and political instability (High / ST, MT): Expected impact Medium; recommended response: continue social policies for low-income population and proceed with governance reforms; allow exchange rate depreciation in response to negative demand shocks.
  - Natural disasters/climate change (Medium to Low / MT, LT): Expected impact High on agriculture and hydro energy; recommended response: exchange rate as short-term buffer; diversify exports and reduce concentration.
- Domestic risks:
  - Weather-related shocks (Medium to High / ST): Expected impact Medium to High; response: exchange rate absorption, limited FX interventions to avoid disorderly markets.
  - Deterioration of fiscal sustainability (Medium / ST, MT): Expected impact Medium to High; response: strengthen revenue capacity and control expenditure increases; reform civil service and procurement.

### Staff Appraisal and Priority Recommendations
- Near-term priorities:
  - Recover from Covid-19, revive activity, and recover lost ground in poverty reduction and education.
  - Keep fiscal policy under review to avoid premature withdrawal of support; protect investment if shocks materialize; consider additional health and social protection if pandemic worsens.
  - Further easing of monetary policy could provide modest support, but room limited with policy rates below 1 percent.
- Medium-term priorities:
  - Return deficit to FRL ceiling by 2024 and codify target in updated FRL with stricter limits on current spending growth.
  - Raise tax revenue; improve spending efficiency; reforms to foster growth: improved governance, business climate, human capital, reduced inequality, and climate-risk mitigation.
  - Use more domestic hydro-energy rather than exporting at low prices to add value.
- Financial sector monitoring:
  - Continue monitoring and data collection; continuous assessment of asset quality including under adverse shocks; adopt stress-testing and data on loan restructurings.

### Key Fiscal and Program Numbers (selected, as presented)
- Deficit in 2020: 6½ percent of GDP.
- Public debt: exceeding 35 percent of GDP; projected peak at 36 percent of GDP in 2022.
- Government target for 2021 deficit: 4 percent of GDP.
- Temporary Covid-19 spending expiration effect: reduce spending by 3 percentage points of GDP.
- Increase in interest payments impacting deficit: 0.4 percent of GDP.
- Public investment projected fall: from 3 to 2.2 percent of GDP.
- Infrastructure investment needs: US$1 billion to 3 billion per year (3 to 8 percent of GDP).
- 2017 Article IV infrastructure needs: about 20 percent of GDP over next five years.
- Education investment need per World Bank: over US$1 billion.
- COVAX: Paraguay will receive 4 million doses under COVAX at a price tag of $40 million; negotiating 3 million additional doses.
- Proposed debt ceiling in latest FRL proposal: 40 percent of GDP; authorities’ debt concept about 2 percentage points of GDP lower than IMF concept.
- Itaipú annual debt service costs fall from about US$2 billion to zero when debt is paid off; potential windfall of 1½ percent of GDP if tariff unchanged.

_Italic: Source: IMF staff report excerpt for Paraguay (content unit 1pryea2021001)._

### 1. The Pandemic’s Impact on Inequality __________________________________________________________ 12

### 1. The Pandemic’s Impact on Inequality

### Pre-COVID landscape
- Strong GDP growth over the past two decades contributed to a sharp reduction in poverty; between 2002 and 2019 the poverty rate more than halved.
- Growth drivers and characteristics:
  - Sound macro policies (low inflation and low fiscal deficits and debt) and an agricultural commodity price boom which spilled over to the non-tradable sector.
  - Income growth in the 2000s was further boosted by terms of trade gains.
  - Growth was volatile: previous downturns in 2009 and 2012 were weather-related and were followed by recoveries with GDP growth of 11 percent in 2010 and 8½ percent in 2013.
- 2019 shock:
  - Severe drought and subsequent flooding reduced full-year growth to near zero.
  - Inflation fell from 4 percent in 2018 to 2.8 percent in 2019.
  - The Central Bank lowered its policy rate in five steps from 5¼ to 4 percent.
- Fiscal response in 2019:
  - Fiscal deficit rose to almost 3 percent of GDP.
  - Deficit widened to 2.8 percent of GDP, above the 1½-percent ceiling under the Fiscal Responsibility Law (FRL); parliament approved the FRL’s emergency escape clause allowing up to 3 percent of GDP in case of a “decline in economic activity”.
- Early 2020 conditions before COVID-19:
  - Soybean harvest for 2019–20 season reached a historical high; hydro-energy production rebounded.
  - Negative effects from Argentine peso depreciation were being offset by higher inflation in Argentina.

### The COVID shock: health, social, and economic impacts
- Public health response:
  - Schools closed three days after the first domestic case; nation-wide quarantine from March 20 until May 3.
  - Early lockdown helped keep the death toll per million in the first months among the lowest in the region.
- Economic impact of the lockdown:
  - Mobility dropped by 60 percent.
  - Main economic activity index in April was 20 percent below the February level.
  - Seasonally adjusted second quarter GDP was 10.1 percent below the first quarter level.
- Distributional impact (uneven):
  - Women, informal sector workers, and service sector workers were particularly hard hit; children severely affected by school closures.
  - Large cities affected more than the countryside, reflected in regional mobility divergence.
- Government fiscal, monetary, and financial measures:
  - Health measures: medical supplies, expanded medical staff, new hospitals, and border hostels for quarantines.
  - Social measures: two new temporary social assistance programs (Pytyvõ and Ñangareko) and temporary expansion of Tekoporã.
    - Pytyvõ targeted informal and self-employed workers not previously covered by social security.
    - Ñangareko supported food security of vulnerable subsistence-economy families.
  - Economic measures: increased investment in public works and social housing; reduced VAT rates on selected goods; deferred corporate income tax payments for three months.
  - Fiscal Responsibility Law was temporarily suspended.
  - Monetary policy: policy rate reduced by 325 bps cumulatively, to the current 0.75 percent.
  - Liquidity measures to the financial sector included lowering legal reserve requirements for both domestic and foreign currencies for an amount equivalent of US$957 million (around 6 percent of banks’ short-term liabilities) and creating a new liquidity window of US$760 million (about 5 percent of banks’ short-term liabilities).
  - Banking sector: banks could renew, refinance, and restructure loans without penalty and with a lower risk weight.
  - MSME measures: FOGAPY capitalized to provide credit guarantees on new loans to MSMEs; Development Finance Agency (AFD) relaxed refinancing conditions for housing loans and established new credit lines targeting MSMEs.
- External financing and market access:
  - IMF RFI approved in late April for US$274 million (100 percent of quota).
  - Paraguay issued a US$1 billion sovereign bond at favorable terms (10-year maturity, yield of 4.95 percent).
  - The government indicated it was no longer planning to draw on the RFI after other financing needs were met.
- Fiscal impact in 2020:
  - Crisis and policy responses raised this year’s fiscal deficit to about 6½ percent of GDP.
  - Emergency spending and accelerated investment increased spending by about 3½ percentage points of GDP in 2020, with:
    - 1.3 percentage points from an increase in social benefits,
    - 0.7 percentage point from medical supplies and other emergency purchases,
    - 0.9 percentage points from higher investment.
  - Spending was higher than envisaged at the time of the RFI, largely due to higher investment and higher social benefits.
- Governance and safeguards:
  - Bicameral commission established to oversee COVID-19 spending.
  - Public portal “Rindiendo Cuentas” established for reporting all COVID-19 expenditures.
  - Public tenders reviewed ex-ante by an inter-institutional committee and audited ex-post by the Contraloría.
  - Contraloría and Auditoría General del Poder Ejecutivo planned an audit covering entire COVID-19 spending, with results expected in mid-2021.
  - Efforts to ensure targeting of Ñangareko and Pytyvõ; few instances of fraud or irregularities reported.
- Epidemiological and macro developments in 2020:
  - By mid-December the death toll had risen to 261 per million.
  - Inflation fell from 2.8 percent y/y in December to 0.5 percent in June; inflation increased to 2.2 percent by November as activity picked up and the guaraní depreciated.
  - Current account in surplus; capital inflows limited, consisting largely of private sector FDI and government bonds.
  - Real effective exchange rate appreciated by about 2 percent during first ten months of 2020; reserves increased by US$1.2 billion and are at 8.9 billion.

### Distributional effects and social protection (Box 1)
- Pre-pandemic inequality trends:
  - Paraguay had made significant progress in reducing income inequality over the past two decades: the Gini index and the income ratio for top/bottom income tiers both dropped.
- Pandemic’s unequal impacts:
  - Female labor:
    - Employment rate for women was over 25 percentage point lower than for men pre-crisis.
    - Labor participation rate for women dropped by 9 percentage points in 2020, compared with a 4-percentage-point drop for men.
    - Pandemic raised unemployment for both genders, with a sharper increase for female workers.
  - Informal sector:
    - Paraguay has a large informal sector (over 60 percent of total employment).
    - Reduction in informal employment in the first two quarters of 2020 was twice as big as in the formal sector.
  - Sectoral impact:
    - Tertiary sector employment saw a y/y decline of more than 10 percent in Q2 2020.
    - Primary and secondary sectors had positive employment growth in 2020 due to agricultural rebound and public works boosting construction employment.
  - Public vs private sector:
    - Public sector employment (around 12 percent of total employment) held up relatively well.
    - Private sector employment dropped by 13 percent in Q2 2020.
- New temporary social assistance programs (design and reach):
  - Pytyvõ:
    - Target: informal and self-employed workers affected by the crisis.
    - Payment: 25 percent of the minimum wage.
    - Announced as a one-off payment, but repeated a second time; authorization of a third payment pending in Congress.
    - First and second tranches collectively reach about 3 million people.
  - Ñangareko:
    - Supports food security of vulnerable families in the subsistence economy through one-time payments.
    - Motivated by the fact that nearly 93 percent of Paraguayan informal workers are outside the safety net system.
  - Tekoporã:
    - Increased allocations and a one-off additional payment to beneficiaries.
- Safeguards for program effectiveness and targeting:
  - Online/mobile registration improved traceability, transparency, and avoided mass gatherings.
  - Digital registration helped exclude households with public employees or beneficiaries of other programs.
  - Disbursements used digital payment instruments; recipients without cell phones reached by tying benefits to national identity cards.
  - Beneficiary lists published online.

### Outlook and risks
- Staff projections:
  - Real GDP to shrink by about 1 percent in 2020 and rebound by 4 percent in 2021.
  - Inflation projected to remain below the midpoint of the central bank’s target range through 2021.
  - Medium-term potential output growth estimated at 3½ percent—2 percent in per capita terms.
- Near-term risks:
  - Dominated by the economic impact of the Covid-19 epidemic: an explosion of daily deaths could suppress mobility and trigger renewed lockdowns.
  - Risk of prolonged epidemic if vaccine roll-out is slow.
  - Cross-border trade with Brazil and Argentina dependent on epidemic control in those countries.
  - Weather risks: a new La Niña cycle has started; rainfall volatility in the central Chaco region is rising.
- Upside possibilities:
  - Strong rise in soybean prices in recent months could boost domestic demand.
  - Interest by foreign investors and new projects (e.g., paper pulp and clean energy) may support growth if materialized.
- Policy implications if downside risks materialize:
  - Exchange rate should act as a shock absorber.
  - Plans to start reducing the deficit would need to be scaled back.
  - If renewed lockdowns are necessary, priority should be direct health spending and income support.
  - Further easing of monetary policy could provide additional, albeit modest, support—interest rates are already below 1 percent.

### Authorities’ views
- Authorities’ projections (at mission time and later adjustment):
  - Initially projected a GDP decline of 1.5 percent in 2020 and 4 percent growth in 2021; estimated potential growth around 3.6–3.8 percent.
  - In late December, adjusted forecasts to -1 percent in 2020 and 4 percent in 2021.
  - Recognized significant downside risks from the pandemic and weather.
- Authorities’ view on low inflation in Q2 2020:
  - Argued that unusually low inflation was largely explained by large depreciations of neighboring countries’ currencies, suppressing import prices.
  - Expected inflation to rebound as exchange rates normalize.

*Source: Paraguay authorities and IMF staff estimates.*

### 25.      In the coming months, the emphasis will be on recovering from Covid-19, trying to

### 1pryea2021001 - 25. In the coming months, the emphasis will be on recovering from Covid-19, trying to

### Recovery outlook and near-term priorities
- Emphasis in the coming months will be on recovering from Covid-19, reviving activity, and recovering lost ground in social protection, poverty reduction, and education.
- The government introduced new benefits for previously uncovered workers which mitigated the impact (Box 1), but social damage has been considerable and children’s education was affected by the almost full year closing of all schools.
- Policies should prepare for a scenario where the recovery from Covid-19 is slower than expected due to logistical, financial, and socioeconomic bottlenecks in vaccine rollout.
- Withdrawing monetary and fiscal support prematurely may hinder both the recovery and medium-term growth prospects.
- Government investment is needed to address infrastructure gaps; investments in educational infrastructure may be required to boost long-term human capital.

### Growth prospects, diversification, and structural transformation
- Key medium-term question: how to sustain rapid growth of real incomes as past growth drivers are likely to provide less support going forward.
- Risks to traditional growth drivers:
  - Agricultural prices are off previous highs and may come under further pressure as China’s demand growth slows.
  - Agricultural land cannot continue to expand rapidly.
  - Dependence on agriculture increases vulnerability to climate change and extreme weather events.
- Structural opportunities identified by a machine learning export-structure analysis:
  - Expand export varieties of agricultural products and primary materials.
  - Increase basic manufacturing exports that process primary materials.
  - Use more cheap and abundant hydro-electric energy domestically to expand manufacturing of machinery and equipment.
- Paraguay is less diversified than countries of similar income levels; under-diversification is more pronounced when oil exporters are excluded.

### Policy framework and reforms to foster growth
- Continued focus on macroeconomic stability plus improvements in governance, business climate, and human capital are required for sustained convergence.
- The deficit needs to be brought back to the Fiscal Responsibility Law (FRL) ceiling to ensure favorable debt dynamics and to build buffers for future shocks.
- The government’s Economic Recovery Plan (finalized in October) focuses on:
  - Boosting public investment spending, ensuring financing for the private sector, and removing supply-side bottlenecks.
  - Protecting the vulnerable by further raising social benefit spending in the year.
  - Implementing a new Fiscal Responsibility Law.
- Reform proposals in the plan include:
  - Updating the Fiscal Responsibility Law (codifying new target date for return to the deficit ceiling and stricter limits on growth of current spending); creation of a unit for proactive and risk-based public debt management (law approved by Congress shortly after the plan).
  - Reforms of the state and civil service system and improvements in public procurement to increase efficiency.
  - New insolvency and factoring laws; improvements in approval procedures and training to foster business creation and formalization.
  - Roadmap for educational reform to be developed by end-2021; plans to restructure the health system; attempt to establish a law for pension fund supervision and regulation.

### Fiscal policy: status, targets, and risks
- Fiscal stance in 2020 and medium term:
  - The deficit is now at 6½ percent of GDP while public debt is exceeding 35 percent of GDP.
  - Public debt is sustainable under the authorities’ plan, peaking at 36 percent of GDP in 2022 and gradually declining thereafter (Annex III).
  - For 2021, the government targets a deficit of 4 percent of GDP.
  - The decline in the deficit for 2021 is the result of expiration of most temporary Covid-19 expenditures, which would reduce spending by 3 percentage points of GDP, partially offset by an increase in interest payments of 0.4 percent of GDP.
  - Public investment would remain high, similar to levels of 2019 and 2020.
- If downside risks materialize (worsening pandemic, La Niña reducing harvests, weaker tax revenues), a slower reduction of the deficit in 2021 would be called for; protect investment and keep deficit reduction commensurately smaller.
- Government goal to return the deficit to the FRL ceiling by 2024 is appropriate to ensure favorable debt dynamics, credibility of the fiscal framework, and buffers.
- Proposed Fiscal Responsibility Law changes:
  - Codify the target date for return to the deficit ceiling by 2024.
  - Cap increases in current real primary spending at 2 percent (previously 4 percent plus inflation).
  - Introduce an additional ceiling on central government debt.
  - Latest proposal envisages a debt ceiling of 40 percent of GDP, with lower deficit ceilings once debt exceeds 36 percent of GDP; the authorities’ debt concept is about 2 percentage points of GDP lower than the IMF concept.

### Fiscal consolidation strategy, investment needs, and revenue outlook
- Government plans to bring the deficit back toward the ceiling through expenditure compression only, focusing on making spending more efficient via state and civil service reform and procurement rationalization.
- Concerns:
  - These efficiency gains are unlikely to be sufficient to meet targets without cutting public investment.
  - Current medium-term fiscal projections envisage a fall in public investment from 3 to 2.2 percent of GDP.
- Infrastructure and education investment needs:
  - OECD and Global Infrastructure Outlook estimate total infrastructure investment needs at US$1 billion to 3 billion per year (3 to 8 percent of GDP).
  - The 2017 Article IV report identified infrastructure investment needs of about 20 percent of GDP over the next five years for electricity distribution, roads, sanitation, and large transportation projects.
  - The World Bank estimated over US$1 billion is needed for investment in schools.
- Revenues from Itaipú:
  - Debt service costs for Itaipú fall from about US$2 billion to zero once the debt is paid off.
  - If the tariff remains unchanged, the windfall would be equally shared and yield 1½ percent of GDP in additional annual revenue for Paraguay.
  - If the tariff is adjusted downward to reflect reduced debt service, Paraguay would mainly benefit through lower tariffs on electricity it consumes and there would be no additional fiscal revenue.
  - Most windfall benefits could go to Brazil because Paraguay sells 70 percent of its share of Itaipú’s electricity to Brazil.
- Tax revenue:
  - Tax revenue in Paraguay is very low by international standards.
  - Further curbing tax evasion could help but near-term scope is likely modest; Paraguay has worked for the past decade and a half on improving tax administration with IMF Technical Assistance.
  - The government’s medium-term tax projections do not envisage a significant increase in the revenue-to-GDP ratio above pre-Covid levels.

### Social sectors: education and pensions
- Education:
  - Despite significant increases in education spending over the last decade, learning outcomes have not improved and PISA scores are low.
  - Covid-19 threatens to further widen the gap with regional peers; public schools were closed from March 2020 until December 2020.
  - Education reform needs to address qualification criteria for new teachers, training, and performance assessment.
  - About half of Paraguay’s teachers are bound to retire within the next five years — a potential window for reform — but supply of qualified teachers and the need to reduce students-per-teacher ratio are concerns.
- Pensions:
  - There is no financial supervision and regulatory oversight of pension fund activities; introducing a pension fund supervisor and abolishing outdated legal restrictions would help safeguard long-term savings and channel savings into investment.
  - The private-sector pension system needs to expand coverage among uninsured informal workers.
  - Parametric adjustments are needed to strengthen equity and financial sustainability.
  - The system insuring public civil servants (Caja Fiscal) is severely underfunded and requires urgent reforms.

### Authorities’ views and macro-financial conditions
- Authorities’ view:
  - Fiscal policies successfully mitigated economic and social impact of Covid-19 via targeted social transfers and accelerated public investment execution.
  - Emphasized importance of bringing fiscal deficit back to the FRL ceiling through expenditure consolidation enabled by state and civil service reforms.
  - Noted the 2019 tax reform’s revenue impact was modest and would be felt gradually; further revenue measures to be considered after spending-side reforms.
  - Preparing reform roadmaps for Caja Fiscal and broader private-sector pension system.
- Monetary and exchange rate policy:
  - Room for further policy rate cuts is limited as policy rates are already below 1 percent; further cuts could depress bank profitability.
  - In a large downside scenario, fiscal policy would be a more important instrument for alleviating downturns.
  - Inflation has been increasing since June and is projected to return to the target band in 2021, aided by rebound in activity and depreciation of the guarani; inflation likely close to the lower bound of the target as it has been most of the time since 2015.
  - The exchange rate did not come under pressure during global markets turmoil in March and April, but depreciated by about 8 percent vis-à-vis the US dollar since April.
  - Severe risk premium shock in the spring with a sharp rise in the EMBIG sovereign spread and a 300 basis point jump in the yield on US-dollar denominated government bonds; interest rates on foreign currency-loans to the private sector rose sharply in April.
  - Bank credit fell in the spring but has since rebounded; central bank liquidity-provision measures may have helped restore credit flows as the economy reopened.

### Key fiscal and program numbers (as presented in the text and tables)
- Deficit in 2020: 6½ percent of GDP.
- Public debt: exceeding 35 percent of GDP; projected peak at 36 percent of GDP in 2022.
- Government target for 2021 deficit: 4 percent of GDP.
- Temporary Covid-19 spending expiration effect: reduce spending by 3 percentage points of GDP.
- Increase in interest payments impacting deficit: 0.4 percent of GDP.
- Public investment projected fall: from 3 to 2.2 percent of GDP.
- Infrastructure investment needs: US$1 billion to 3 billion per year (3 to 8 percent of GDP).
- Infrastructure needs identified in 2017 Article IV: about 20 percent of GDP over the next five years.
- Education investment need per World Bank: over US$1 billion.
- COVAX: Paraguay will receive 4 million doses under COVAX at a price tag of $40 million; negotiating 3 million additional doses.
- Proposed debt ceiling in latest proposal: 40 percent of GDP; authorities’ debt concept about 2 percentage points of GDP lower than IMF concept.
- Itaipú annual debt service costs to fall from about US$2 billion to zero when debt is paid off; potential windfall of 1½ percent of GDP if tariff unchanged.
- Table excerpt (Operations of the Central Government, percent of GDP, selected items, projections):
  - Revenue: 2018 13.9, 2019 14.1, 2020 13.1, 2021 13.1, 2022 13.7, 2023 13.9, 2024 13.9
  - Tax revenue: 2018 9.9, 2019 9.9, 2020 9.2, 2021 9.3, 2022 9.9, 2023 10.0, 2024 10.1
  - Expenditure: 2018 15.3, 2019 16.9, 2020 19.6, 2021 17.1, 2022 16.5, 2023 16.0, 2024 15.4
  - Primary current expenditure: 2018 12.6, 2019 13.2, 2020 15.6, 2021 13.0, 2022 12.5, 2023 12.2, 2024 11.8
  - Social benefits: 2018 2.3, 2019 2.4, 2020 3.8, 2021 2.6, 2022 2.6, 2023 2.7, 2024 2.7
  - Interest: 2018 0.7, 2019 0.8, 2020 1.0, 2021 1.3, 2022 1.4, 2023 1.4, 2024 1.4
  - Investment expenditure: 2018 2.0, 2019 2.9, 2020 3.0, 2021 2.8, 2022 2.6, 2023 2.4, 2024 2.2
  - Net lending/borrowing (overall balance): 2018 -1.4, 2019 -2.8, 2020 -6.5, 2021 -4.0, 2022 -2.8, 2023 -2.1, 2024 -1.5
  - Public debt: 2018 22.2, 2019 25.6, 2020 34.9, 2021 35.4, 2022 36.3, 2023 36.3, 2024 36.1

*Source: IMF staff summary of the provided chapter text.*

### 49.      Foreign exchange sales by the central bank this year largely consisted of on-selling of

### 49.      Foreign exchange sales by the central bank this year largely consisted of on-selling of

### Foreign exchange operations and reserves
- Foreign exchange sales by the central bank largely consisted of on-selling of the government’s dollar-denominated revenue and bonds proceeds.  
- The BCP is the Treasurer for the government’s foreign exchange proceeds. When the government issues a foreign currency denominated bond or when it receives FX income from the Binationals, the dollar proceeds are deposited at the central bank. Over time, the proceeds are sold to the private sector. The BCP refers to these sales as the “ventas compensatorias.”  
- Foreign exchange sales aimed at preventing disorderly market conditions are referred to as “ventas complementarias.” In practice, the difference between the types of sales is not clear-cut, as the timing of the “ventas compensatorias” also depends on market conditions.  
- The foreign exchange market is shallow (daily transactions average around US$50 million only), and the central bank’s declared policy is to intervene only to prevent disorderly market conditions.  
- Reserves increased as a result of the two sovereign bond issuances and, as of December, were at 213 percent of the IMF’s reserve metric.

### External position and risks
- Paraguay’s external position in 2019 was stronger than implied by economic fundamentals and desirable policies.  
- From a saving-investment perspective, the lower current account deficit than the norm is the result of lower investment levels—not higher saving. If economic reforms improve the business climate and governance, capital inflows and investment would pick up and the gap with the current account “norm” would close.  
- For 2020, the external position is likely to be stronger than implied by economic fundamentals as well, though data limitations and the impact of the Covid-19 shock make this judgment subject to large uncertainty.  
- External stability risks remain contained. The net international investment position deteriorated somewhat in 2019. Externally issued government bond debt currently stands at US$5.4 billion; 15 percent of GDP.  
- The external debt sustainability analysis shows that the debt trajectory is overall robust to standard shocks.

### Authorities’ views on monetary, FX, and credit developments
- Authorities viewed strong monetary policy actions during the Spring as important in mitigating the impact of Covid-19 and considered the policy stance to provide sufficient stimulus for the recovery, while leaving some room to further reduce interest rates if downside risks materialized. They were not concerned about the compression of interest rate margins and did not expect margins to bounce back.  
- The authorities explained the decline in FX-denominated credit growth was mainly demand-driven: a good harvest led the agricultural sector to pay back outstanding FX loans and use other funding sources (such as trade credit). Reduced imports due to lower aggregate demand also dampened demand for FX credit.  
- Growth of domestic currency-denominated credit was relatively stable, growing at around 10 percent.  
- Authorities attributed exchange rate stability in the Spring to FX sales from sovereign debt issuances and expected the exchange rate to move in line with underlying fundamentals.

### Financial sector policy and conditions
- According to FSI indicators, the banking system is well capitalized and NPLs are low, but policy actions to secure the flow of finance during the crisis make it difficult to assess the underlying situation.  
- Key indicators: non-performing loan ratio is 3.0 percent; Tier I capital-to-asset ratio is 14.9 percent—well above the regulatory minimum of 8 percent.  
- Underlying concerns: a third of all loans has been renewed, refinanced, or restructured, and it is unclear how many will eventually become nonperforming, especially if the pandemic impact lingers. The restructuring, refinancing and renewing occurred not only during the Covid-19 epidemic but also during the bad harvest in 2019.  
- Supervisory priorities and recommendations:
  - Continue assessing underlying asset quality, including under adverse shocks, to ensure future capital and liquidity buffers are appropriate.  
  - Collect information on loan restructurings to assess rescheduled or delayed payments once forbearance ends.  
  - If restructured loans deteriorate, supervisors should focus on restoring capital and liquidity positions of financial institutions.  
  - Adopt a comprehensive stress-testing program that delineates solvency risks.  
- Progress and remaining gaps:
  - Progress implementing FSSR recommendations: establishment of the National Financial Stability Committee (decree July 2019); SIB consolidated risk-based supervision, documented Supervisory Policy and Process (SPP), revised supervisory risk matrix, finalized internal guidelines; strengthened stress-testing framework and training for INCOOP.  
  - Delays due to Covid-19 in reorganizing and strengthening supervision in the Superintendency of Insurance; delays in upgrading systemic risk assessments, crisis resolution, and AML systems as IMF TA was postponed.  
  - Extension of supervision to the non-bank financial sector (casas de crédito) is a work in progress; a central bank study to evaluate scope and feasibility is underway. Grouping many institutions into one association for supervision may be more effective.  
  - IMF will provide TA on bank resolution and the deposit guarantee fund in FY21.  
- AML/CFT:
  - Several AML-CFT laws have been passed in preparation for the upcoming GAFILAT assessment, which is delayed owing to the COVID-19 crisis and will focus mainly on effectiveness of the AML/CFT regime. Authorities have been concerned about impacts on correspondent banking relationships.  
- Pension funds:
  - Pension fund supervision is lacking; there is currently no regulatory oversight. Legal restrictions prohibit investment in government bonds, leading to low-yielding pension fund investments mainly short-term claims on banks. Recommendations include introducing a pension fund supervisor and abolishing legal restrictions to better channel long-term savings into investment and boost the domestic capital market.

### Governance challenges and recommendations
- Governance has improved over two decades but levels remain low, including by regional standards. Key institutions and processes are incipient and fragmented; political influence has hampered progress in strengthening civil service rules and procedures.  
- Identified governance problems:
  - Weak and fragmented administrative capacity; institutional and procedural fragmentation creates red-tape, poor coordination, and loopholes, undermining control over public funds and anti-money-laundering efforts.  
  - Perception of impunity due to an ineffective judicial system, creating distrust and lenient norms toward corruption.  
  - Tax and customs administrations afflicted by institutional weaknesses and corruption due to a discretionary legal framework; outdated customs code and weak inter-agency cooperation to combat smuggling.  
  - Public Financial Management vulnerabilities in SOEs and public procurement and lack of effective oversight from audit institutions.  
  - Smuggling, counterfeiting, money laundering, trade of illicit goods, and weak law enforcement facilitate corruption and laundering related to the Triple Frontier.  
- Recommendations to address fragmentation and strengthen governance:
  - Establish a medium-term governance strategic plan to increase coordination across governance agencies.  
  - Promote transparency and efficiency of governance procedures; establish a legal integrity framework for the whole public service.  
  - Review, automate, and integrate governance processes across public administration; strengthen internal and external control.  
  - Strengthen the judicial system to ensure effective control of administrative acts and regulations; pursue a joint executive-judicial approach to fighting corruption.  
- Specific fiscal governance recommendations:
  - Tax and Customs Administration: make access to management positions more transparent; make internal control more independent; simplify processes; reduce ad-hoc interventions; avoid transactions outside IT systems; increase information exchange to combat smuggling; strengthen enforcement collection.  
  - Special Tax Regimes: eliminate private sector representatives with conflicts of interest from councils deciding on tax benefits; assess cost-benefits of existing tax regimes; establish all core tax elements in law instead of delegating discretion to the executive.  
  - Public Financial Management: reduce institutional fragmentation; increase coordination across procurement and investment governing entities; establish a fiscal risk unit; reinforce oversight over State Owned Enterprises (SOE) in particular Itaipú and Yacyretá; undertake a comprehensive audit on FONACIDE; improve information exchange between the two binational SOEs and the Ministry of Finance on the use and beneficiaries of the “social funds”; establish mandatory use of the single treasury account by all 17 provinces.  
- Governance plan and authorities’ actions:
  - SENAC amended the Government National Plan on Integrity, Transparency and Anticorruption, incorporating many IMF Governance Assessment recommendations at strategic and institutional levels. The new plan was presented by the government to the public on December 9. SENAC’s capacities and role need further strengthening.  
  - Authorities agreed on the need to continue reforms and noted measures taken to ensure integrity of COVID-19 spending have contributed to strengthening governance. The new Plan for Integrity, Transparency and Anticorruption is expected to ensure further progress over the medium term.

### Staff appraisal, policy priorities, and recommendations
- Pre-Covid context: before the pandemic Paraguay’s economy was rebounding from the 2019 downturn and growth was expected to be strong in 2020. An early lockdown kept the death toll low by regional standards but halted the recovery and led to a sharp drop in activity. Swift government action helped contain health, social, and economic impacts. Paraguay’s external position is stronger than implied by fundamentals and desirable policies, and external stability risks are contained.  
- Near-term focus:
  - Recover from Covid-19, revive activity, and recover lost ground in poverty reduction and education. The social damage will likely be considerable; children’s education was affected by almost a full year’s school closures.  
  - Keep fiscal policy under review to avoid withdrawing fiscal support prematurely. If Covid-19 significantly worsens, more health and social protection spending would be needed; a negative weather shock could reduce tax revenues. Protect investment and ensure any deficit reduction in 2021 is commensurately smaller if shocks materialize. Further easing of monetary policy could provide additional, albeit modest, support.  
- Medium-term and structural recommendations:
  - Returning the deficit to the Fiscal Responsibility Law ceiling by 2024 is appropriate and important for macroeconomic stability; codify the new target date in an updated Fiscal Responsibility Law with stricter limits on growth of current spending.  
  - Raise tax revenue; making government spending more efficient is appropriate but may not be sufficient to reduce the deficit or create fiscal space for education and infrastructure. Further curbing tax evasion would help but near-term scope is likely modest.  
  - Foster growth through macroeconomic stability, improved governance, better business climate, human capital improvements, reduced social inequality, and addressing climate change risks to diversify away from agricultural dependence. Using more domestic hydro-energy rather than exporting at low prices would add greater value.  
  - The government’s Economic Recovery Plan appropriately focuses on near-term recovery (social protection, continued high public investment, financing for the private sector) and reforms to boost longer-term growth (improve governance, increase public spending efficiency, improve business climate, facilitate business creation and formalization).  
  - Continue addressing governance weaknesses and corruption; measures to monitor emergency fund use and IMF governance recommendations are being implemented to reform civil service and public procurement and strengthen fiscal institutions and processes.  
- Financial sector monitoring:
  - Continued monitoring and data collection of the banking system are needed to better assess the crisis’ impact. A continuous assessment of asset quality, including under adverse shocks, will help ensure future capital and liquidity buffers remain appropriate.

*Source: IMF staff report excerpt for Paraguay.*

### 77.      The pension system requires supervision and needs to be reformed. Introducing a

### The pension system requires supervision and needs to be reformed.

### Supervision
- Introducing a pension fund supervisor would help safeguard the public’s long-term savings.

### Reform needs and timing
- In the medium term, the pension systems for both private and public employees require parametric adjustments.
- The private pension system can be reformed taking advantage of Paraguay’s demographic window of opportunity.
- The public pension system is severely underfunded and requires even more urgent reforms.

*Source: 1pryea2021001 - 77. The pension system requires supervision and needs to be reformed.*

### 78.      Staff proposes that the next Article IV consultation with Paraguay follows the standard

### 1pryea2021001 - 78.      Staff proposes that the next Article IV consultation with Paraguay follows the standard

### Covid-19 progression and health outcomes
- Case number was initially low, but has picked up since July.
- New death count has increased substantially.
- Although total deaths are still much lower than Paraguay’s larger neighbors, deaths per million is one of the lowest in the LAC region.
- Sources cited: Global mobility report, Google open data, John Hopkins University; and IMF staff calculations.

### Recent economic developments (Q2 2020 and recovery)
- The pandemic had a significant impact on growth in Q2, 2020, especially in services and manufacturing.
- Private consumption and investment were both hard hit.
- The recovery in agricultural exports mitigated the negative growth impact of COVID-19.
- The economy started to bounce back in May, 2020; the recovery seems broad-based across all sectors.
- Unemployment increased sharply during the pandemic while labor force participation went down.
- Sources: BCP, Ministry of Finance and IMF staff calculations.

### External sector and capital flows
- The current account has been stable as agricultural exports are holding up.
- Profit payments continue to be the major source of outward factor payments.
- Government overseas bond issuance has become a significant source of foreign capital in the last few years and in 2020.
- The foreign investor base is expanding along with the increase in direct investment.
- A large portion of foreign capital has invested in agricultural related industries, from production to trade.

Key external figures (selected)
- Current Account Balance (In percent of GDP) series shown across 2005–2020 in figure.
- Composition of Goods Export Revenue highlights Hydro-Energy and Agricultural Products as major components.
- Number of Countries Invested in Paraguay and Direct Investment in Paraguay (percent of GDP; RHS) shown increasing from 2004–2018.

### Fiscal developments: revenue, expenditure, and debt
- Fiscal revenue was badly hit by the pandemic, mostly on behalf of tax revenue.
- Current expenditure growth remains at high levels and there has been a jump in public investment.
- The rise in wages during the pandemic extends a trend that started earlier; purchases of goods and services have stabilized.
- Social expenditure increased as a response to the pandemic; public investment also increased.
- With rising debt, the interest bill has been increasing; other expenditure went down on behalf of a decrease in transfers to the public sector.
- Source: WEO database; CEIC database.

Selected fiscal aggregates (from Tables)
- Central government revenues: range around 13.1–14.2 percent of GDP across years shown.
- Central government expenditures: 15.3 (2016), 15.3 (2017), 15.3 (2018), 16.9 (2019), 19.6 (2020), projections thereafter.
- Central government net lending/borrowing: -1.1 (2016), -1.4 (2017), -2.8 (2018), -6.5 (2020), projected -4.0 (2021), -2.8 (2022), -2.1 (2023), -1.5 (2024), -1.4 (2025).
- Central government primary balance: -0.5 (2016), -0.7 (2017), -2.0 (2019), -5.5 (2020), projected -2.7 (2021), -2.7 (2022), -1.4 (2023), -0.7 (2024), -0.1 (2025).
- Central government gross debt: 16.0 (2016), 15.9 (2017), 17.8 (2018), 20.7 (2019), 28.6 (2020), projected 29.5 (2021), 30.7 (2022), 30.8 (2023), 30.8 (2024), 30.6 (2025).
- Public sector debt (excl. central bank bills): 19.4 (2016), 19.8 (2017), 22.2 (2018), 25.6 (2019), 34.9 (2020), projected 35.4 (2021), 35.4 (2022), 36.3 (2023), 36.3 (2024), 35.7 (2025).

### Monetary conditions and inflation
- Inflation declined to historical lows in the first two quarters of 2020, before bouncing back in June.
- The drop was led by significant declines in food and fuel prices.
- The large negative output gap also suppressed inflation; appreciation against regional trade partners in the first half of the year contributed to low inflation.
- The uptick in soybean prices may help boosting inflation to some extent going forward.
- The central bank lowered the monetary policy rate to historic lows in 2020.
- Monetary policy rate, year-end: 5.3 (2016), 5.3 (2017), 4.0 (2018) [table notes indicate further periods with dots].

Selected price and exchange indicators
- Consumer prices (end of period): 4.5 (2017), 3.2 (2018), 2.8 (2019), 2.3 (2020), projections 3.5 (2021), 3.5 (2022), 3.5 (2023), 3.5 (2024), 3.5 (2025).
- Nominal exchange rate (Guarani per U.S. dollar, eop): 5,590 (2016), 5,961 (2017), 6,453 (2018) with further periods indicated by dots.

### Financial sector and stability
- According to FSI indicators banks are liquid and well capitalized.
- Bank profitability has fallen in 2020.
- Private sector credit declined in the first part of the year but has since rebounded.
- Lending and interest rate spreads continue to come down.

Selected financial indicators
- Regulatory Tier 1 capital to risk-weighted assets and Liquid Assets to Short Term Liabilities series shown across 2014M3–2020M6.
- Return on equity and Return on assets series shown across 2014–2020 periods indicating a fall in profitability.
- Private sector credit and deposits (percent of GDP) series and Lending Rate and Interest Rate Spread (In percent) shown with recent declines in spreads.

### Balance of payments and reserves
- Current account (in millions of US dollars) shows: 1,305 (2016), 1,214 (2017), 9 (2018), -229 (2019), 498 (2020), -337 (2021), 559 (2022), 109 (2023), 349 (2024), 268 (2025), 213 (projection column formatting).
- Exports and imports (values) show notable swings in 2020: Exports 10,818 (2020), Imports -9,428 (2020).
- Gross reserves (in millions of U.S. dollars): 7,144 (2016), 8,146 (2017), 8,004 (2018), 7,996 (2019), 8,496 (2020), projected 8,496 (2021), 8,496 (2022), 8,496 (2023), 8,996 (2024), 9,546 (2025), 10,096 (projection listing).
- Current account in percent of GDP: 3.6 (2016), 3.1 (2017), 0.0 (2018), -0.6 (2019), 1.4 (2020), -1.0 (2021), 1.5 (2022), 0.3 (2023), 0.8 (2024), 0.6 (2025), 0.4 (projection formatting).

### Medium-term outlook and projections
- Real GDP growth (annual percent): 5.0 (2017), 3.4 (2018), 0.0 (2019), -0.9 (2020), projected 4.0 (2021), 4.0 (2022), 4.0 (2023), 3.5 (2024), 3.5 (2025).
- Output gap (percent of potential GDP): 0.1 (2017), -0.4 (2018), -1.8 (2019), -2.1 (2020), -1.3 (2021), -0.7 (2022), -0.1 (2023), -0.1 (2024), -0.1 (2025).
- Gross international reserves (in US$ billion): 8.1 (2017), 8.0 (2018), 8.0 (2019), 8.5 (2020), 8.5 (2021), 8.5 (2022), 9.0 (2023), 9.5 (2024), 10.1 (2025).

### Key social and demographic indicators (selected)
- Population 2018 (millions): 7.1
- Gini index (2018): 46.2
- Unemployment rate (2019): 6.5
- Life expectancy at birth (2018): 74.1
- Percentage of population below the poverty line (2018): 24.2
- Adult literacy rate (2018): 94.0
- Rank in UNDP development index (2019): 98 of 189
- GDP per capita (US$, 2019): 5,451

*Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1pryea2021001.pdf*

### Annex I. Recommendations on FRL

### Annex I. Recommendations on FRL

### Overview and historical performance
- Since it came into force in 2015, Paraguay’s Fiscal Responsibility Law (FRL) has served the country well and formalized the commitment to sound fiscal policy by setting a deficit ceiling of 1.5 percent of GDP.
- The law and its successful implementation have bolstered the credibility of Paraguay’s macro framework, including with international bond investors.

### Identified design weaknesses and operational problems
- The FRL lacked a technical definition of a “fall in economic activity,” creating ambiguity when invoking the escape clause.
- The law did not distinguish clearly between “ex-ante” vs. “ex-post” compliance with the deficit ceiling:
  - Article 11 (law 5098) implied congressional approval was mainly needed when the ex-ante formulation of the budget exceeded the deficit ceiling, which effectively pegged budgeted deficits to the 1.5-percent ceiling and converted the intended “ceiling” into a “target.”
  - Mid-fiscal year budget corrections (authorizing additional spending when revenue exceeds expectations) pulled targeted deficits back toward the ceiling and introduced pro-cyclicality.
  - Fiscal shortfalls not covered by escape clauses tended to be addressed by expenditure cuts—mainly in the public investment program.
- Escape clauses were insufficiently specified, creating risk of either excessive rigidity or excessive flexibility and potential weakening of rule credibility.

### Recommendations on well-defined escape clauses
- Escape clauses should be specified along three dimensions:
  - The nature and the size of the triggers. Balance rigidity and flexibility; avoid overly rigid formulas and overly flexible open-ended triggers.
  - The authority and procedures to activate and monitor the escape clause. Activation typically requires parliamentary approval, subject to endorsement by an independent fiscal council.
  - The procedure for returning to rule compliance. Predefine the timeframe for (i) re-instating rule compliance and/or (ii) correcting for the cumulative deviation attained during the rule suspension.

### Assessment of the new draft FRL (proposed amendments)
- The draft FRL provides significant improvements:
  - Adds clearer guidance on transition back to compliance after a breach or invocation of the escape clause.
  - Strengthens the legal standing of the Fiscal Council.
  - Better specifies activation conditions when economic activity is below historical trends.
  - Introduces a fiscal stabilization fund able to build assets based on eventual undershooting of the deficit below the ceiling.
- Noted implementation challenges:
  - The fiscal position needed to return the deficit below its ceiling within the transition period may differ from the fiscal position needed to return debt below the new debt ceiling; debt convergence may require a tighter fiscal path, potentially introducing procyclicality.
  - The stabilization fund’s potential to collect surpluses will be weak while mid-year budgetary revisions prevent emergence of fiscal space through automatic stabilizers.
  - The language on sanctions for non-compliance by officials could benefit from further strengthening.

### Key proposals in the draft FRL (selected aspects and exact provisions)
- Deficit and debt ceilings:
  - Existing FRL: The fiscal deficit of the Central Government cannot exceed 1.5 percent of GDP, as estimated at the time of budget preparation.
  - Proposed new FRL: Public Sector Debt is capped at 40 percent of GDP. Only if the escape clause is triggered, can public debt temporarily exceed this ceiling. If public debt exceeds 36 percent of GDP, the fiscal deficit ceiling will be further restricted and cannot exceed 1.0 percent of GDP.
  - Escape clause upper limit: Under no circumstances can the deficit exceed 3 percent of GDP when the escape clause is invoked.
- Escape clause triggers and transition:
  - Existing FRL: In cases of national emergency, an international crisis, or a fall in domestic economic activity, Congress may suspend application of the expenditure and deficit rule; under no circumstances can the deficit exceed 3 percent of GDP.
  - Proposed new FRL (submitted to Congress December 2020): The escape clause is triggered by (i) a Declaration of National Emergency by Congress or (ii) the BCP estimates real GDP growth at 75 percent less than the average of the preceding 10 years. After invocation, the fiscal deficit must be gradually reduced and return to or below the 1.5-percent ceiling within three years. During the transition period, current primary expenditure and civil servant salary levels will be frozen. If public debt exceeds the 40-percent ceiling, the Minister of Finance, together with the Fiscal Council, will present a convergence plan, to be approved by the Congress.
- Transition rules after Covid-19:
  - Proposed: Given the severity of the Covid-19 crisis and the emergency law of March 2020, the convergence period to compliance with the fiscal deficit ceiling and the debt ceiling is exceptionally extended from three years to four years. Current primary expenditure and civil servant salary levels will be frozen during the transition period.
- Salaries:
  - Existing FRL: Salaries cannot rise by more than the increase of the minimum wage in the previous year.
  - Proposed new FRL: Salaries cannot rise by more than the increase of the minimum wage in the previous year. In fiscal years after the escape clause was triggered, there can be no salary increase at all.
- Stabilization Fund:
  - Existing FRL: None.
  - Proposed new FRL: Creates a new Sovereign Wealth Fund to contribute to national economic stability. The Law stipulates a rule by which eventual budget surpluses and resources from other special laws feed into the Fund.
- Fiscal Council:
  - Existing FRL: Not part of the 2013 FRL; the Fiscal Council was regulated by a separate presidential decree from 2016.
  - Proposed new FRL: Reconfirms the Fiscal Council, composed by three idoneous experts in the field of macroeconomics and fiscal policy, to monitor fiscal policy and adherence to the FRL and to provide findings to Congress and the public.
- Sanctions and congressional bills with fiscal implications:
  - Existing FRL: Failure to comply by responsible officials will be considered poor performance and sanctions in relevant legal provisions will be applied.
  - Proposed new FRL: Any Congress bill with fiscal implication must have a favorable technical report from the Ministry of Finance for consideration. Should Congress proceed without such favorable assessment, the Law must contain measures that ensure financing either by additional revenue or by re-programming expenditures. Sanctions remain the same as in existing Law.
- Medium-term budget rule and debt analysis:
  - Existing FRL: A three-year medium-term budget must be presented to Congress with the annual budget. The medium-term average deficit of the central government cannot exceed 1.0 percent of GDP.
  - Proposed new FRL: A three-year medium-term budget must be presented to Congress together with the annual budget and must be accompanied by a debt-sustainability analysis consistent with the debt ceiling.
- Expenditure and election-year rules:
  - Existing FRL: The annual increase of primary current expenditure cannot exceed the rate of 4 percent plus the annual inflation rate.
  - Proposed new FRL: The annual increase of primary current expenditure cannot exceed the rate of 2 percent plus the annual inflation rate.
  - Election-year spending: In years of general national elections, primary current expenditure between January and July cannot exceed 60 percent of the envelope approved by the budget for this year (same as in existing Law).

*Annex I. Recommendations on FRL.*

### 12.      Measured in prospective months of imports, reserves increased significantly in 2019

### 12.      Measured in prospective months of imports, reserves increased significantly in 2019

### Reserves and external position: key findings and policy recommendations
- Reserves increased significantly in 2019 compared to 2018, owing to the sharp decline in imports in 2020 as part of the economic lockdown and border closures.
- Import coverage increased from 7.1 to 9.1 months.
- Assessment: import coverage of 9.1 months is comfortably above the Fund’s metrics for a small open economy.
- Policy recommendations:
  - A flexible exchange rate should remain the first line of defense against external shocks.
  - Staff recommends continuing with a rules-based approach for regular dollar sales and to limit discretionary interventions to exceptional situations of disorderly market conditions.

### External Debt Sustainability Framework — selected baseline numbers (2015–2025)
- Baseline: External debt (in percent of GDP)
  - 2015: 43.8
  - 2016: 43.0
  - 2017: 39.9
  - 2018: 39.4
  - 2019: 42.1
  - 2020: 50.2
  - 2021: 49.5
  - 2022: 46.7
  - 2023: 43.5
  - 2024: 38.8
  - 2025: 38.4
- Change in external debt
  - 2015: 3.2
  - 2016: -0.8
  - 2017: -3.0
  - 2018: -0.5
  - 2019: 2.7
  - 2020: 8.2
  - 2021: -0.8
  - 2022: -2.8
  - 2023: -3.3
  - 2024: -4.6
  - 2025: -0.4
- Identified external debt-creating flows (4+8+9)
  - 2015: -1.8
  - 2016: 0.1
  - 2017: -4.2
  - 2018: -3.8
  - 2019: -0.8
  - 2020: 1.7
  - 2021: -2.9
  - 2022: -3.5
  - 2023: -3.6
  - 2024: -3.0
  - 2025: -2.7
- Current account deficit, excluding interest payments
  - 2015: -1.4
  - 2016: -5.4
  - 2017: -4.6
  - 2018: -1.5
  - 2019: -1.1
  - 2020: -1.0
  - 2021: -2.1
  - 2022: -2.8
  - 2023: -2.8
  - 2024: -2.6
  - 2025: -1.7
- Exports (percent of GDP)
  - 2015: 33.0
  - 2016: 35.4
  - 2017: 36.4
  - 2018: 36.6
  - 2019: 35.9
  - 2020: 31.0
  - 2021: 36.6
  - 2022: 38.8
  - 2023: 38.7
  - 2024: 38.3
  - 2025: 37.9
- Imports (percent of GDP)
  - 2015: 31.5
  - 2016: 30.0
  - 2017: 32.3
  - 2018: 35.2
  - 2019: 36.2
  - 2020: 30.8
  - 2021: 35.2
  - 2022: 36.8
  - 2023: 36.7
  - 2024: 36.5
  - 2025: 36.2
- Net non-debt creating capital inflows (negative)
  - 2015: -1.1
  - 2016: -0.8
  - 2017: -1.1
  - 2018: -1.3
  - 2019: -1.3
  - 2020: -0.4
  - 2021: -0.8
  - 2022: -1.0
  - 2023: -1.2
  - 2024: -1.0
  - 2025: -1.0
- Automatic debt dynamics 1/
  - 2015: 0.7
  - 2016: 6.4
  - 2017: 1.5
  - 2018: -1.0
  - 2019: 1.5
  - 2020: 3.1
  - 2021: 0.1
  - 2022: 0.3
  - 2023: 0.3
  - 2024: 0.7
  - 2025: 0.0
- Contribution from nominal interest rate
  - 2015: 1.6
  - 2016: 2.0
  - 2017: 1.6
  - 2018: 1.5
  - 2019: 1.6
  - 2020: 2.0
  - 2021: 2.2
  - 2022: 2.2
  - 2023: 2.1
  - 2024: 2.1
  - 2025: 1.3
- Contribution from real GDP growth
  - 2015: -1.2
  - 2016: -2.1
  - 2017: -2.1
  - 2018: -1.3
  - 2019: 0.0
  - 2020: 1.1
  - 2021: -2.2
  - 2022: -1.9
  - 2023: -1.7
  - 2024: -1.4
  - 2025: -1.3
- Residual, incl. change in gross foreign assets (2-3)
  - 2015: 5.0
  - 2016: -1.0
  - 2017: 1.1
  - 2018: 3.3
  - 2019: 3.5
  - 2020: 6.5
  - 2021: 2.1
  - 2022: 0.7
  - 2023: 0.4
  - 2024: -1.7
  - 2025: 2.3
- External debt-to-exports ratio (in percent)
  - 2015: 132.9
  - 2016: 121.4
  - 2017: 109.8
  - 2018: 107.8
  - 2019: 117.1
  - 2020: 162.1
  - 2021: 135.4
  - 2022: 120.5
  - 2023: 112.2
  - 2024: 101.3
  - 2025: 101.4
- Gross external financing need (in billions of US dollars)
  - 2015: 2.7
  - 2016: 1.3
  - 2017: 1.3
  - 2018: 2.6
  - 2019: 3.1
  - 2020: 3.3
  - 2021: 3.1
  - 2022: 2.8
  - 2023: 3.6
  - 2024: 3.0
  - 2025: 3.1
- Gross external financing need (in percent of GDP)
  - 2015: 7.4
  - 2016: 3.5
  - 2017: 3.4
  - 2018: 6.3
  - 2019: 8.4
  - 2020: 9.7
  - 2021: 8.9
  - 2022: 8.1
  - 2023: 9.6
  - 2024: 7.5
  - 2025: 7.5

### Key macroeconomic assumptions underlying the baseline (selected)
- Nominal GDP (US dollars)
  - 2015: 36.3
  - 2016: 36.3
  - 2017: 39.4
  - 2018: 40.4
  - 2019: 37.6
  - 2020: 34.1
  - 2021: 34.0
  - 2022: 34.9
  - 2023: 37.2
  - 2024: 39.5
  - 2025: 41.7
- Real GDP growth (in percent)
  - 2015: 3.1
  - 2016: 4.3
  - 2017: 5.0
  - 2018: 3.4
  - 2019: 0.0
  - 2020: -2.5
  - 2021: 4.5
  - 2022: 4.0
  - 2023: 4.0
  - 2024: 3.5
  - 2025: 3.5
- GDP deflator in US dollars (change in percent)
  - 2015: -0.8
  - 2016: -12.9
  - 2017: -4.4
  - 2018: 3.1
  - 2019: 0.2
  - 2020: -6.9
  - 2021: -4.5
  - 2022: -1.5
  - 2023: 2.5
  - 2024: 2.7
  - 2025: 2.1
- Nominal external interest rate (in percent)
  - 2015: 4.0
  - 2016: 4.1
  - 2017: 3.8
  - 2018: 3.9
  - 2019: 4.1
  - 2020: 4.4
  - 2021: 4.6
  - 2022: 4.7
  - 2023: 4.8
  - 2024: 5.1
  - 2025: 3.5
- Growth of exports (US dollar terms, in percent)
  - 2015: -14.5
  - 2016: 7.5
  - 2017: 11.4
  - 2018: 3.0
  - 2019: -8.5
  - 2020: -19.7
  - 2021: 21.5
  - 2022: 13.0
  - 2023: 6.7
  - 2024: 4.5
  - 2025: 4.2
- Growth of imports (US dollar terms, in percent)
  - 2015: -13.4
  - 2016: -4.6
  - 2017: 16.9
  - 2018: 11.5
  - 2019: -4.2
  - 2020: -20.9
  - 2021: 18.0
  - 2022: 11.2
  - 2023: 6.6
  - 2024: 5.0
  - 2025: 4.7
- Current account balance, excluding interest payments (in percent of GDP)
  - 2015: 1.4
  - 2016: 5.4
  - 2017: 4.6
  - 2018: 1.5
  - 2019: 1.1
  - 2020: 1.0
  - 2021: 2.1
  - 2022: 2.8
  - 2023: 2.8
  - 2024: 2.6
  - 2025: 1.7
- Net non-debt creating capital inflows
  - 2015: 1.1
  - 2016: 0.8
  - 2017: 1.1
  - 2018: 1.3
  - 2019: 1.3
  - 2020: 0.4
  - 2021: 0.8
  - 2022: 1.0
  - 2023: 1.2
  - 2024: 1.0
  - 2025: 1.0

### Public Sector Debt Sustainability — selected indicators (as of December 08, 2020; percent of GDP unless otherwise indicated)
- Nominal gross public debt
  - 2018: 15.0
  - 2019: 22.2
  - 2020: 25.6
  - 2021: 34.9
  - 2022: 35.4
  - 2023: 36.3
  - 2024: 36.3
  - 2025: 36.1
  - 2025 (alternate): 35.7
- Public gross financing needs (in percent of GDP)
  - 2018: 1.4
  - 2019: 2.5
  - 2020: 4.6
  - 2021: 7.8
  - 2022: 5.3
  - 2023: 4.6
  - 2024: 5.6
  - 2025: 3.5
  - 2025 (alternate): 3.6
- Real GDP growth (in percent)
  - 2018: 4.5
  - 2019: 3.4
  - 2020: 0.0
  - 2021: -0.9
  - 2022: 4.0
  - 2023: 4.0
  - 2024: 4.0
  - 2025: 3.5
  - 2025 (alternate): 3.5
- Inflation (GDP deflator, in percent)
  - 2018: 3.7
  - 2019: 2.2
  - 2020: 2.9
  - 2021: 3.8
  - 2022: 5.2
  - 2023: 2.8
  - 2024: 3.5
  - 2025: 3.2
  - 2025 (alternate): 3.2
- Nominal GDP growth (in percent)
  - 2018: 8.3
  - 2019: 5.6
  - 2020: 2.8
  - 2021: 2.9
  - 2022: 9.5
  - 2023: 6.9
  - 2024: 7.6
  - 2025: 6.8
  - 2025 (alternate): 6.8
- Effective interest rate (in percent) 2/
  - 2018: 4.9
  - 2019: 5.8
  - 2020: 5.8
  - 2021: 2.6
  - 2022: 2.8
  - 2023: 3.2
  - 2024: 3.5
  - 2025: 3.9
  - 2025 (alternate): 4.2
- Sovereign spreads (EMBIG (bp))
  - EMBIG (bp): 221
  - Y CDS (bp): ...
- Ratings
  - Moody's: Ba1 / Ba1
  - S&Ps: BBBB
  - Fitch: BB+ / BB+
- Cumulative change in gross public sector debt
  - 2018: 0.6
  - 2019: 2.4
  - 2020: 3.4
  - 2021: 9.2
  - 2022: 0.5
  - 2023: 0.9
  - 2024: 0.0
  - 2025: -0.2
  - cumulative 2018–2025: -0.4 / 10.1
- Identified debt-creating flows
  - 2018: 0.7
  - 2019: 3.3
  - 2020: 4.8
  - 2021: 7.3
  - 2022: 0.3
  - 2023: 0.7
  - 2024: -0.3
  - 2025: -0.6
  - cumulative: -0.8 / 6.7
- Primary deficit (percent of GDP)
  - 2018: -0.2
  - 2019: 0.6
  - 2020: 2.5
  - 2021: 5.9
  - 2022: 3.4
  - 2023: 2.2
  - 2024: 1.5
  - 2025: 0.9
  - cumulative: 14.5
- Primary (noninterest) revenue and grants (percent of GDP)
  - 2018: 17.3
  - 2019: 18.9
  - 2020: 19.1
  - 2021: 17.8
  - 2022: 17.9
  - 2023: 18.4
  - 2024: 18.5
  - 2025: 18.4
  - cumulative: 109.5
- Primary (noninterest) expenditure (percent of GDP)
  - 2018: 17.1
  - 2019: 19.4
  - 2020: 21.6
  - 2021: 23.7
  - 2022: 21.3
  - 2023: 20.5
  - 2024: 20.0
  - 2025: 19.3
  - cumulative: 124.0
- Automatic debt dynamics 3/
  - 2018: -0.3
  - 2019: 1.1
  - 2020: 2.2
  - 2021: -0.1
  - 2022: -2.1
  - 2023: -1.2
  - 2024: -1.4
  - 2025: -1.0
  - cumulative: -0.9 / -6.7
- Interest rate/growth differential 4/
  - 2018: -0.4
  - 2019: 0.0
  - 2020: 0.6
  - 2021: -0.1
  - 2022: -2.1
  - 2023: -1.2
  - 2024: -1.4
  - 2025: -1.0
  - cumulative: -0.9 / -6.7
- Of which: real interest rate
  - 2018: 0.2
  - 2019: 0.7
  - 2020: 0.6
  - 2021: -0.3
  - 2022: -0.8
  - 2023: 0.1
  - 2024: -0.1
  - 2025: 0.2
  - cumulative: 0.3 / -0.6
- Of which: real GDP growth
  - 2018: -0.6
  - 2019: -0.6
  - 2020: 0.0
  - 2021: 0.2
  - 2022: -1.3
  - 2023: -1.3
  - 2024: -1.3
  - 2025: -1.2
  - cumulative: -1.2 / -6.1
- Exchange rate depreciation 5/
  - 2018: 0.2
  - 2019: 1.0
  - 2020: 1.5
  - 2021–2025: ...
- Other identified debt-creating flows
  - 2018: 1.1
  - 2019: 1.7
  - 2020: 0.1
  - 2021: 1.5
  - 2022: -1.0
  - 2023: -0.3
  - 2024: -0.3
  - 2025: -0.5
  - cumulative: -0.6 / -1.2
- NFPS asset accumulation 6/
  - 2018: 1.1
  - 2019: 1.7
  - 2020: 0.1
  - 2021: 1.5
  - 2022: -1.0
  - 2023: -0.3
  - 2024: -0.3
  - 2025: -0.5
  - cumulative: -0.6 / -1.2
- Residual 7/
  - 2018: -0.1
  - 2019: -0.9
  - 2020: -1.4
  - 2021: 1.9
  - 2022: 0.2
  - 2023: 0.3
  - 2024: 0.3
  - 2025: 0.4
  - cumulative: 0.4 / 3.4

### Alternative scenarios and composition (selected)
- Baseline scenario underlying assumptions (in percent)
  - Real GDP growth (2020–2025): -0.9; 4.0; 4.0; 4.0; 3.5; 3.5
  - Inflation (2020–2025): 3.8; 5.2; 2.8; 3.5; 3.2; 3.2
  - Primary Balance (2020–2025): -5.9; -3.4; -2.2; -1.5; -0.9; -0.7
  - Effective interest rate (2020–2025): 2.6; 2.8; 3.2; 3.5; 3.9; 4.2
- Historical scenario underlying assumptions (in percent)
  - Real GDP growth (2020–2025): -0.9; 4.4; 4.4; 4.4; 4.4; 4.4
  - Inflation (2020–2025): 3.8; 5.2; 2.8; 3.5; 3.2; 3.2
  - Primary Balance (2020–2025): -5.9; -0.2; -0.2; -0.2; -0.2; -0.2
  - Effective interest rate (2020–2025): 2.6; 2.8; 3.3; 3.4; 4.1; 4.3
- Constant Primary Balance scenario (in percent)
  - Primary Balance (2020–2025): -5.9; -5.9; -5.9; -5.9; -5.9; -5.9
  - Effective interest rate (2020–2025): 2.6; 2.8; 3.5; 3.9; 4.5; 4.9

_International Monetary Fund — Paraguay: selected DSA tables and figures (excerpts)._

### Annex IV. Risk Assessment Matrix

### Annex IV. Risk Assessment Matrix

### External risks: key risks, expected impacts, and recommended responses
- Unexpected shift in the Covid-19 pandemic (High / ST)
  - Expected impact: Medium. If the pandemic lingers on globally for extended periods of time, it may further dampen external demand, foreign inflows, and border trades. Potential output may take a permanent hit with more firm exits, lower labor force participation and reduced TFP.
  - Recommended response: The exchange rate should be allowed to adjust, and monetary policy should remain accommodative.
- Widespread social discontent and political instability (High / ST, MT)
  - Expected impact: Medium. Social unrest in the region may disrupt external demand from neighboring countries. It may also lead to higher risk premium of financial assets in the region, resulting in tighter financial conditions for Paraguay.
  - Recommended response: Social policies need to continue supporting the low-income population most affected by the pandemic, including informal workers. Governance reforms need to move forward to strengthen the transparency, equity and effectiveness of public sector operations. Exchange rate should be allowed to depreciate in response to negative demand shocks. Though if commodity prices increase from higher global uncertainties, terms of trade may improve.
- Intensified geopolitical tensions and security risks (High / ST, MT)
  - Expected impact: (descriptive) socio-economic and political disruption, disorderly migration, higher commodity prices (if supply is disrupted), and lower confidence.
  - Recommended response: (see above for policy emphasis on social support and governance)
- Higher frequency and severity of natural disasters related to climate change (Medium to Low / MT, LT)
  - Expected impact: High. Agriculture and hydro energy production would be the sectors most affected by climate change.
  - Recommended response: Exchange rate depreciation would serve as a short-term buffer for climate-related production shocks. More accommodative monetary conditions can also help. In the medium term, reducing export concentration and diversifying into non-energy, non-commodity tradable sectors would be important.

### Domestic risks: key risks, expected impacts, and recommended responses
- Weather-related shocks (Medium to High / ST)
  - Expected impact: Medium to High. Shocks to the agriculture sector not only affect GDP growth, export performance and exchange rate, but also the financial sector, due to banks’ agricultural lending. Shocks to the energy sector will negatively affect government revenue.
  - Recommended response: The exchange rate could absorb much of the shock. Foreign exchange interventions can be used to avoid disorderly market conditions.
- Deterioration of fiscal sustainability (Medium / ST, MT)
  - Expected impact: Medium to High. Fiscal stability is the cornerstone of macroeconomic stability in Paraguay, which significantly impacts investor confidence, financing costs, and growth performance.
  - Recommended response: The government needs to strengthen its ability to raise revenues and control expenditure increases, reform civil services and public procurement processes.

### Fiscal and macro-financial context, key figures and policy actions
- Pandemic and recent shocks
  - GDP growth: initial forecast for 2020 was 4.1 percent; actual 2020 outturn was a contraction of GDP (-0.9 percent).
  - Fiscal deficit: 2019 fiscal deficit inched up to 2.8 percent of GDP. Fiscal deficit reached 6.5 percent of GDP in 2020.
  - Public debt: 35.4 percent of GDP.
  - Gross international reserves: US 8.5 billion (or the equivalent of 6.7 months of imports).
- IMF support and market access
  - RFI request in April 2020: SDR 201.4 million (100 percent of quota). Authorities advised the Fund of their plan not to draw on the RFI.
  - Sovereign bond issuance: Paraguay managed to issue a US$ 1 billion sovereign bond at favorable terms following the RFI approval; last sovereign bond issuance was in January 2021, with a maturity of 12 years and 2.7 percent yield.
- Monetary policy and financial sector measures
  - Monetary policy rate: reduced by 325 bps cumulatively in 2020 to the current rate of 0.75 percent.
  - Monetary/financial stimulus: overall size represented roughly 4 percent of GDP in 2020.
  - Financial sector actions: liquidity provision strengthened; banks allowed to renew, refinance, and restructure loans without penalty and with a lower risk weight. MSMEs Guarantee Fund (FOGAPY) capitalized. Development Finance Agency (AFD) eased housing financing and created new credit lines for MSMEs. Legal reserve requirement partially made accessible and a special liquidity window created.
- Authorities’ fiscal commitments and targets
  - 2021 policy stance: continuing accommodative fiscal, monetary, and financial policies to promote an environment for economic recovery of 4.0 percent.
  - Fiscal Responsibility Law (FRL): gradual return envisaged with 1.5 percent of the GDP deficit ceiling by 2024. Proposal under consideration to add more stringent measures on current expenditure and a debt ceiling mechanism in the FRL.
- Structural and governance priorities
  - Focus areas: governance, transparency, civil service system, public procurement, FRL update, digital agenda for the public sector, and enhancing inclusive growth to reduce poverty and informality.
  - Anti–money laundering and countering financing of terrorism (AML/CFT): Implementation underway of more than ten new laws related to AML/CFT mitigation risks, including specialized court sentencing, criminal appeal processes and creation of punishable acts of transnational bribery.

### Fund relations, data, safeguards, and technical assistance highlights
- Membership and quotas
  - Joined: December 28, 1945.
  - Quota: 201.40 SDR Million (100.00 percent of quota).
  - IMF's Holdings of Currency (Holdings Rate): 154.55 (76.74 percent of quota).
  - Reserve Tranche Position: 46.85 (23.26 percent of quota).
- SDR Department
  - Net cumulative allocation: 95.19 SDR Million (100.00 percent).
  - Holdings: 96.84 SDR Million (101.73 percent).
- Outstanding purchases and loans: None.
- Recent RFI and financial arrangements
  - RFI drawn: April 21, 2020 — Amount Approved SDR 201.40; Amount Drawn 0.00.
- Exchange arrangement
  - De jure arrangement: floating as Article 47 of Law No. 489/95 establishes rate determined by market forces.
  - De facto classification: “crawl like” under IMF exchange rate arrangement classification system.
  - Central bank interventions: BCP intervenes occasionally to smooth undue fluctuation; BCP exchanges U.S. dollars from royalties/compensation from binational hydroelectric entities for guaranies at the request of the government for public expenditures.
- Safeguards assessment
  - Last safeguards assessment for Banco Central del Paraguay (BCP): finalized in 2006.
  - Under the RFI approved in April 2020, authorities committed to undergoing a safeguards assessment and to provide specific audit and framework documents; these documents have not yet been received by FIN staff.
- Data adequacy and dissemination (as of January 19, 2021)
  - General assessment: data provision has some shortcomings, but is broadly adequate for surveillance.
  - National accounts: rebased to base year 2014; series cover 1991 to 2019.
  - CPI/PPI: CPI geographic coverage limited to urban households in Greater Asunción; PPI metadata indicates inclusion of imported items which are out of scope for a PPI — need to review and confirm PPI compilation methods.
  - Government finance statistics: broadly consistent with GFSM 2001 for central government; deficiencies remain in recording short-term supplier and commercial credit of the public sector.
  - Monetary and financial statistics: reports use SRFs; integrated monetary database in operation; coverage of ODC survey complete including credit cooperatives; Superintendence of Banks reports 11 of 12 core and 7 of 13 encouraged FSI for deposit takers monthly.
  - External sector statistics: quarterly balance of payments and IIP data follow BPM5 from 2000 onwards; BCP needs to improve compilation of some financial account components (intercompany lending, external deposits of the non-financial private sector, external debt liabilities of banks) per May 2017 TA recommendations.
  - Data dissemination: Paraguay participates in e-GDDS (since September 25, 2001) and published a National Summary Data Page on March 2, 2017; disseminates 14 of 15 data categories recommended under the IMF’s enhanced GDDS.
- Technical assistance (2011–20): multiple missions across FAD, STA, MCM, LEG and other departments covering topics such as Public-Private Partnerships, National Accounts, Monetary Policy, Financial Soundness Indicators, Tax Policy, Debt and Cash Management, Customs Administration, Bank Supervision and Regulation, IFRS adoption, AML/CFT, Fiscal Responsibility Law, Government Finance Statistics, Balance of Payments, and Governance assessments (detailed missions and dates listed in the source).

*Source: Annex IV. Risk Assessment Matrix — Staff Report for the 2020 Article IV Consultation (Paraguay).*

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_Source: https://www.imf.org/-/media/files/publications/cr/2021/english/1pryea2021001.pdf_