## 1. Recent Developments

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### Context
- Covid-19 impact and public health:
  - Paraguay avoided the brunt of the first wave through July 2020 due to a strict lockdown and closed borders; cases and deaths picked up from August 2020 with one of the highest counts in Latin America in June 2021.
  - Vaccination campaign was slow to start and vaccination rate continues to lag regional peers; most remaining restrictions have recently been lifted and public life has largely normalized.
  - Schools closed for in-classroom teaching until August 2021 and only recently resumed full operations; low-grade internet connectivity raises concerns about loss of human capital quality.
- Economic performance:
  - After two consecutive years of GDP decline, economy rebounded in 2021:
    - 2019 growth: -0.4 percent.
    - 2020 growth: -0.8 percent.
    - 2021 growth: 4.2 percent.
  - Heatwaves and a severe drought decelerated the recovery and diminished 2022 prospects.
- Social and structural concerns:
  - Pandemic retarded reductions in poverty, gender and income inequality, and informality despite government responses Pytyvõ and Ñangareko and increased allocations to Tekoporã.
  - Structural constraints: weak governance, business climate, and human capital; a 2020 IMF governance diagnostic identified administrative and legal weaknesses, perceptions of corruption, clientelism, and impunity.
  - Severe weather events (droughts, flooding) more frequent, raising climate vulnerability concerns.
- Policy buffers and fiscal stance:
  - Central bank reduced policy rate to 0.75 percent and expanded liquidity during the pandemic; it has begun normalizing policy.
  - Public debt rose from 22 (percent of GDP) in 2018 to nearly 38 by end-2021.
  - Government aims to reduce central government budget deficit to 3 percent of GDP and converge back to a deficit ceiling of 1.5 percent of GDP by 2024; achieving this may require expenditure consolidation and sizable cuts in public investment (or social spending).
- Political context:
  - Intensifying pre-electoral cycle with primary elections in Q4 2022 and general elections in April 2023; pressures from populist proposals to counter rising fuel and food prices.

### Recent developments (macroeconomic and financial)
- Real economy:
  - BCP estimates 2021 economic growth at 4.2 percent driven by services (commerce, restaurants and hotels) and manufacturing; agricultural production and electricity generation contracted in 2021 due to low Paraná River water levels.
- External sector:
  - Exports rose by 21 percent in 2021 with soy and meat main contributors; good 2020 harvest and high soy prices supported exports.
  - Imports rebounded, notably fuels and machinery.
  - Guaraní appreciated slightly against the dollar.
  - Government issued long-term external sovereign bonds for US$800 million in early 2021.
  - Gross international reserves rose by US$594 million to US$10.6 billion (8.9 months of prospective imports) at end-2021.
- Inflation and monetary policy:
  - Annual headline inflation increased in H2 2021 due to higher food (particularly meat) and fuel prices.
  - 12-month inflation peaked in October at 7.6 percent, receded to 6.8 percent in December, then jumped to 10.1 percent in March 2022.
  - Core index (excludes fuels, fruits and vegetables, and meat) increased by 5 percent.
  - BCP raised policy interest rate cumulatively by 650 basis points to 7.25 percent by end-May 2022; BCP considers that level consistent with the neutral rate.
- Financial sector:
  - BCP’s accommodative stance since 2020 cushioned shocks; bank lending rates fell to 11 percent in October 2021 but have started rising again.
  - Credit to the private sector grew by 10.5 percent in 2021.
  - Banking system indicators: NPL ratio 2.3 percent; tier-1 capital asset ratio 15.2 percent.
  - Pandemic regulatory forbearance measures (due to expire in June 2022) were used to refinance, renew, and restructure loans; these loans are trending downward and currently estimated below 10 percent of total loans.
  - High dollarization: FX liabilities 47.6 percent of total liabilities; FX loans 41.3 percent of total assets (loans).
  - Selected Financial Soundness Indicator snapshots:
    - Overall Financial Sector Rating: M (2020Q4 to Latest).
    - Deposit-to-loan ratio: 109.0 (2020Q4) → 106.2 (Latest).
    - FX liabilities % (of total liabilities): 47.4 (2020Q4) → 47.2 (Latest).
    - FX loans % (of total loans): 42.2 (2020Q4) → 42.1 (Latest).
    - Leverage ratio (%): 8.5 → 9.4 (Latest).
    - ROA: 1.7 → 1.8 (Latest).
    - ROE: 14.3 → 14.0 (Latest).
    - NPL ratio: 2.4 → 2.3 (Latest).
- Fiscal developments:
  - Fiscal position improved after 2019 and 2020 shocks; government accelerated public investment to stabilize employment.
  - Receipts from two binational hydroelectric dams declined in 2020 and 2021 due to low river water levels.
  - Fiscal Responsibility Law 1.5 percent of GDP deficit limit suspended in 2019 and 2020; one-off emergency measures expired during 2021.
  - Fiscal deficit: 6.1 percent of GDP in 2020 → 3.7 percent of GDP in 2021.
  - Government used general SDR allocation (SDR 193 million, 0.7 percent of GDP) to finance Covid-19 emergency expenditures; SDR ownership and corresponding external liability were legally transferred to the Ministry of Finance and reported as central government external debt; expenditures recorded above the line added to computed fiscal deficit while disbursement was recorded as financing.

### Key historicals and medium-term projections (selected)
- Real GDP growth: 2019 -0.4; 2020 -0.8; 2021 4.2; 2022 0.3 (Proj.); 2023 4.5; 2024 3.5; 2025 3.5.
- Per capita GDP (U.S. dollars, thousands): 2019 4.9; 2020 5.2; 2021 5.6; 2022 5.9; 2023 6.2; 2024 6.5.
- Consumer prices (end of period; in percent): 2019 2.2; 2020 6.8; 2021 8.0; 2022 4.2; 2023 4.0; 2024 4.0.
- External current account (percent of GDP): 2019 2.7; 2020 0.8; 2021 -2.9; 2022 0.4; 2023 0.5; 2024 0.6.
- Gross international reserves (US$ billion): 2019 10.0; 2020 10.6; 2021 10.1; 2022 10.6; 2023 11.1; 2024 11.7.
- Central government fiscal balance (percent of GDP): 2019 -6.1; 2020 -3.7; 2021 -3.2; 2022 -2.3; 2023 -1.5; 2024 -1.4.
- Public sector debt (percent of GDP): 2019 36.9; 2020 37.0; 2021 39.4; 2022 39.0; 2023 38.6; 2024 37.9.
- Central Government Operations (selected percent of GDP, 2021):
  - Total revenue: 14.0; Tax revenue: 10.0; Nontax revenue: 4.0; Binationals: 0.9.
  - Expense: 14.8; Wages and salaries: 6.8; Goods and services: 2.1; Interest: 1.1; Grants, social transfers, and other expense: 4.9.
  - Net operating balance: -0.7; Net acquisition of non-financial assets: 3.0; Net lending/Borrowing: -3.7.

### Financial inclusion, digitalization, and social impacts (summary)
- Following National Financial Inclusion Strategy (ENIF), approximately 60 percent of adults have access to formal or commercial financial products.
- Draft Financial Inclusion Law submitted to Congress; 24/7 instant payment system planned; objective: provide financial access to 100 percent of households by 2030.
- Digitalization surge during pandemic: internet access associated with higher female employment and lower job loss.
- Pytyvõ cash transfer program effectively prevented a larger erosion of poverty and inequality:
  - Without transfers, poverty incidence would have reached 30 percent in 2020 (a 3.2 percentage points increase from 2019).
  - Extreme poverty would have increased by 2.5 percentage points.
- Recommendation: enhance targeting strategy and build a beneficiary system extendable to other social assistance programs.

### Climate vulnerabilities and policy notes
- Recent extreme weather events (droughts, wildfires) have damaged 2021/22 summer harvest; local sources estimate about 60 percent of the summer soy harvest destroyed, leading to a loss of export revenue by US$3 billion.
- Low water levels in Paraguay and Paraná rivers threaten navigability, shipping costs, and electricity production.
- Paraguay ranked 94th among 181 countries by ND-GAIN; social readiness performs worse than economic and governance readiness.
- Energy and emissions:
  - Electricity generation dominated by binational hydroelectric dams.
  - Much cooking and heating energy derived from biomass, often sourced from deforestation.
  - Methane large contributor from cattle breeding and industrial fertilizers.
- Policy recommendations:
  - Move toward an integrated climate change and adaptation policy framework that considers fiscal and energy policy dimensions.
  - Investigate adaptation and transition investment needs and incorporate into medium- and long-term fiscal planning.
  - Leverage renewable energy potential and deploy price-based and regulatory policies to stop deforestation and reduce agriculture carbon footprint.
  - Enhance international cooperation among countries sharing the same watershed.

### Outlook and risks
- Near-term shocks and risks:
  - Drought, heatwaves, low river levels, supply chain obstructions, and war in Ukraine amplified supply shocks given dependence on imports of oil and derivatives.
  - Staff projections: GDP growth 0.3 percent for 2022; 4.5 percent in 2023; 3.5 percent over the medium-term.
  - Inflation projected to converge to authorities’ target of 4 percent by end-2023; end-2022 inflation projected to be about 8 percent (above central bank tolerance corridor of 4 percent +/- 2 percent).
- External financing and market access:
  - Government issued US$500 million sovereign bond at 10-year maturity and 3.85 percent interest in January 2022.
  - Authorities discussing additional financing options with multilateral partners for 2022 and 2023 amid global uncertainty and rising core yields and risk premia.
- Fiscal risks:
  - Authorities reconfirmed fiscal deficit objective of 3.0 percent of GDP for the year; convergence to 1.5 percent of GDP by 2024 remains objective but challenging given shocks, potential revenue declines from binationals, salary pressures, and bills in Congress (fuel subsidy, VAT holidays).
  - Recommendation: reduce reliance on external commercial financing for budget deficit funding.

### Authorities’ views
- Authorities emphasize need to rebuild fiscal buffers, manage pre-electoral pressures, and secure financing including multilateral options.
- BCP considers policy interest rate of 7.25 percent (end-May 2022) consistent with neutral rate and has begun normalizing monetary policy.
- Authorities transferred SDR 193 million (0.7 percent of GDP) to the Ministry of Finance in 2021 to finance Covid-19 emergency plan expenditures; resulting SDR liability reported as central government external debt.
- On FX policy: authorities view exchange rate as an important shock absorber and consider stepping up FX interventions to curb short-term excessive guaraní volatility; staff recommended limited sterilization of monetary impact from targeted FX interventions.

### Staff priorities and recommendations (summary)
- Fiscal policy and credibility:
  - Maintain commitment to the fiscal rule and return to FRL deficit ceiling of 1.5 percent of GDP; codify return in updated Fiscal Responsibility Law.
  - Rebuild fiscal space to meet spending needs in health, education, basic infrastructure, and climate resilience; eliminate waste and raise public spending efficiency; reassess special tax regimes and consider tax reform beyond 2020.
- Monetary and financial sector:
  - Monetary policy should retain tightening bias while avoiding undue strains on financial system and economy; remain responsive to inflation drivers and inflation-expectations feedback.
  - Accelerate FSSR recommendation implementation; introduce risk-based frameworks for cooperatives and insurance; strengthen stress-testing and coordination among regulators; extend supervision to pension system.
- Structural and governance reforms:
  - Step up implementation of governance, business climate, and public sector efficiency reforms; approve and implement public procurement, civil service, and structure-of-state reforms.
- Climate integration:
  - Integrate climate policies into national development planning and medium- and long-term fiscal budgets; leverage hydroelectric matrix for transition to net-zero GHG consumption and production; invest to stop deforestation and habitat degradation.

*Source: IMF staff report excerpts (Content unit: 1pryea2022001).*

### 1. Recent Developments _________________________________________________________________________ 21

### 1. Recent Developments

### Context
- The Covid-19 pandemic had a strong impact on Paraguay; the country avoided the brunt of the first wave through July 2020 due to a strict lockdown and closed borders, but cases and deaths picked up from August 2020 with one of the highest counts in Latin America in June 2021.
- Paraguay’s vaccination campaign was slow to start and its vaccination rate continues to lag regional peers; most remaining restrictions have recently been lifted and public life has largely normalized.
- After two consecutive years of GDP decline, Paraguay’s economy rebounded in 2021:
  - 2019 growth was -0.4 percent (drought and flooding).
  - 2020 growth was -0.8 percent (pandemic impact partially offset by agriculture and emergency package).
  - 2021 growth rebounded to 4.2 percent, though heatwaves and a severe drought decelerated the recovery and diminished 2022 prospects.
- The pandemic has retarded reductions in poverty, gender and income inequality, and informality despite government responses Pytyvõ and Ñangareko and increased allocations to Tekoporã.
- Schools were closed for in-classroom teaching until August 2021 and have only recently resumed full operations; low-grade internet connectivity raises concerns about loss of human capital quality.
- Policy buffers need rebuilding after pandemic responses:
  - Central bank reduced policy rate to 0.75 percent and expanded liquidity during the pandemic; it has begun normalizing policy.
  - Public debt rose from 22 (percent of GDP) in 2018 to nearly 38 by end-2021.
  - Government aims to reduce central government budget deficit to 3 percent of GDP and converge back to a deficit ceiling of 1.5 percent of GDP by 2024; achieving this may require expenditure consolidation and sizable cuts in public investment (or social spending).
- Structural constraints remain: weak governance, business climate, and human capital; a 2020 IMF governance diagnostic identified administrative and legal weaknesses, perceptions of corruption, clientelism, and impunity.
- Severe weather events (droughts, flooding) have become more frequent, raising climate vulnerability concerns.
- Political context: intensifying pre-electoral cycle with primary elections in Q4 2022 and general elections in April 2023; pressures from populist proposals to counter rising fuel and food prices.

### Recent Developments (macroeconomic and financial)
- Real economy:
  - BCP estimates economic growth for 2021 at 4.2 percent driven by services (commerce, restaurants and hotels) and manufacturing; agricultural production and electricity generation contracted in 2021 due to low Paraná River water levels.
- External sector:
  - Exports benefited from a good 2020 harvest and high soy prices in 2021; total export proceeds rose by 21 percent in 2021 with soy and meat as main contributors.
  - Imports rebounded, notably fuels and machinery.
  - Guaraní appreciated slightly against the dollar.
  - In early 2021, the government issued long-term external sovereign bonds for US$800 million.
  - Gross international reserves rose by US$594 million to US$10.6 billion (8.9 months of prospective imports) at end-2021.
- Inflation and monetary policy:
  - Annual headline inflation increased in H2 2021 due to higher food (particularly meat) and fuel prices.
  - 12-month inflation appeared to peak in October at 7.6 percent, receded to 6.8 percent in December, then jumped to 10.1 percent in March 2022.
  - Core index (excludes fuels, fruits and vegetables, and meat) increased by 5 percent.
  - BCP raised its policy interest rate cumulatively by 650 basis points to 7.25 percent by end-May 2022; BCP considers that level consistent with the neutral rate.
- Financial sector:
  - BCP’s accommodative stance since 2020 cushioned shocks; bank lending rates fell to 11 percent in October 2021 but have started rising again.
  - Credit to the private sector grew by 10.5 percent in 2021.
  - Banking system indicators: NPL ratio 2.3 percent; tier-1 capital asset ratio 15.2 percent.
  - Regulatory forbearance measures used during the pandemic (due to expire in June 2022) were used to refinance, renew, and restructure loans; these loans are trending downward and currently estimated below 10 percent of total loans.
  - High dollarization: FX liabilities 47.6 percent of total liabilities; FX loans 41.3 percent of total assets (loans).
  - Financial Soundness Indicator snapshots (selected):
    - Overall Financial Sector Rating: M (2020Q4 to Latest)
    - Deposit-to-loan ratio: 109.0 (2020Q4) → 106.2 (Latest)
    - FX liabilities % (of total liabilities): 47.4 (2020Q4) → 47.2 (Latest)
    - FX loans % (of total loans): 42.2 (2020Q4) → 42.1 (Latest)
    - Leverage ratio (%): 8.5 → 9.4 (Latest)
    - ROA: 1.7 → 1.8 (Latest)
    - ROE: 14.3 → 14.0 (Latest)
    - NPL ratio: 2.4 → 2.3 (Latest)
- Fiscal developments:
  - Fiscal position improved after 2019 and 2020 shocks; government accelerated public investment to stabilize employment.
  - Receipts from two binational hydroelectric dams declined in 2020 and 2021 due to low river water levels.
  - Wages rose in 2020 for additional medical and security personnel but were contained afterwards.
  - Fiscal Responsibility Law 1.5 percent of GDP deficit limit was suspended in 2019 and 2020; one-off emergency measures expired during 2021.
  - Fiscal deficit: 6.1 percent of GDP in 2020 → 3.7 percent of GDP in 2021.
  - In 2021, the government used the general SDR allocation (SDR 193 million, 0.7 percent of GDP) to finance Covid-19 emergency expenditures; SDR ownership and corresponding external liability were legally transferred to the Ministry of Finance and reported as central government external debt; expenditures recorded above the line added to computed fiscal deficit while disbursement was recorded as financing.
- Key tabulated medium-term projections and historicals (selected):
  - Real GDP growth: 2019 -0.4; 2020 -0.8; 2021 4.2; 2022 0.3 (Proj.); 2023 4.5; 2024 3.5; 2025 3.5
  - Per capita GDP (U.S. dollars, thousands): 2019 4.9; 2020 5.2; 2021 5.6; 2022 5.9; 2023 6.2; 2024 6.5
  - Consumer prices (end of period; in percent): 2019 2.2; 2020 6.8; 2021 8.0; 2022 4.2; 2023 4.0; 2024 4.0
  - Terms of trade (annual percent change): 2019 -0.5; 2020 -2.6; 2021 3.8; 2022 -1.7; 2023 -0.5; 2024 2.1
  - External current account: 2019 2.7; 2020 0.8; 2021 -2.9; 2022 0.4; 2023 0.5; 2024 0.6
  - Gross international reserves (in US$ billion): 2019 10.0; 2020 10.6; 2021 10.1; 2022 10.6; 2023 11.1; 2024 11.7
  - Central government fiscal balance: 2019 -6.1; 2020 -3.7; 2021 -3.2; 2022 -2.3; 2023 -1.5; 2024 -1.4
  - Public sector debt: 2019 36.9; 2020 37.0; 2021 39.4; 2022 39.0; 2023 38.6; 2024 37.9
- Central Government Operations (selected percent of GDP):
  - Total revenue: 2018 14.1; 2019 14.2; 2020 13.5; 2021 14.0
    - Tax revenue: 2018 10.0; 2019 10.0; 2020 9.5; 2021 10.0
    - Nontax revenue: 2018 4.1; 2019 4.2; 2020 4.1; 2021 4.0
      - Binationals: 2018 1.4; 2019 1.7; 2020 1.2; 2021 0.9
  - Expense: 2018 13.4; 2019 14.1; 2020 16.1; 2021 14.8
    - Wages and salaries: 2018 6.6; 2019 7.0; 2020 7.3; 2021 6.8
    - Goods and services: 2018 1.3; 2019 1.3; 2020 1.4; 2021 2.1
    - Interest: 2018 0.7; 2019 0.8; 2020 1.1; 2021 1.1
    - Grants, social transfers, and other expense: 2018 4.8; 2019 5.0; 2020 6.2; 2021 4.9
  - Net operating balance: 2018 0.7; 2019 0.1; 2020 -2.5; 2021 -0.7
  - Net acquisition of non-financial assets: 2018 2.0; 2019 2.9; 2020 3.6; 2021 3.0
  - Net lending/Borrowing: 2018 -1.3; 2019 -2.9; 2020 -6.1; 2021 -3.7

### Outlook and Risks
- Near-term outlook marked by multiple negative shocks:
  - 2021/22 summer harvest damaged by sustained drought conditions and heatwaves; local sources estimate about 60 percent of the summer soy harvest destroyed, leading to a loss of export revenue by US$3 billion.
  - Supply chain obstructions causing scarcities and sharp price increases for vital import products.
  - Low water levels in Paraguay and Paraná rivers threaten navigability, shipping costs, and electricity production.
  - War in Ukraine amplified supply shocks given Paraguay’s dependence on imports of oil and derivatives.
- Staff projections:
  - GDP growth projected at 0.3 percent for 2022, 4.5 percent in 2023, and 3.5 percent over the medium-term.
  - Inflation projected to converge back to the authorities’ target of 4 percent by end-2023; end-2022 inflation projected to be about 8 percent (above the central bank’s tolerance corridor of 4 percent +/- 2 percent).
- Fiscal policy:
  - Authorities remain committed to medium-term fiscal targets but face risks: potentially lower revenue from binational hydroelectric dams and agro producers; announced limited support measures for small and medium agricultural producers; salary increase pressures; various bills in Congress that put fiscal stability at risk (including initiatives for fuel subsidy and VAT holidays).
  - External current account projected to record a sharp temporary deterioration in 2022 due to severe drop in export volumes more than offsetting higher export prices and higher imports linked to elevated prices for fuels, shipping, and agricultural inputs.
- External financing and market access:
  - For 2022, the government locked in external financing by issuing a US$500 million sovereign bond at 10-year maturity and 3.85 percent interest in January.
  - Authorities are discussing additional financing options with multilateral partners for 2022 and 2023 amid global uncertainty about future financial conditions and rising core yields and risk premia.
- Climate risks:
  - Paraguay is vulnerable to climate change: rising average temperatures threaten agricultural yields and population health and welfare; risks intensify over time with uncertainty in precipitation patterns and severe weather frequency and intensity.
  - Potential “tipping points,” such as deforestation of the Amazon, have poorly understood impacts.
  - Recent extreme weather events (droughts, wildfires) serve as warnings; these events may increase financial system risks.
  - BCP implemented measures to extend banks’ grace periods for affected loans, but a more systematic approach to manage risks from extreme weather events, and better integration of climate adaptation, transition, and mitigation into policy frameworks is advisable.

### Authorities’ Views
- The authorities view the need to rebuild fiscal buffers and manage pre-electoral pressures while seeking to lock in financing and discuss multilateral financing options.
- The BCP considers the policy interest rate of 7.25 percent (end-May 2022) consistent with the neutral rate and has taken steps to normalize monetary policy.
- Authorities transferred SDR 193 million (0.7 percent of GDP) to the Ministry of Finance in 2021 to finance Covid-19 emergency plan expenditures; the resulting SDR liability is reported as central government external debt.

*Source: IMF staff report sections "Recent Developments", "Context", and "Outlook and Risks" (Paraguay).*

### 18. The authorities acknowledged the challenges brought about by more recurrent shocks.

### 1pryea2022001 - 18. The authorities acknowledged the challenges brought about by more recurrent shocks.

### Shocks, outlook, and risks
- Previously expected positive economic prospects for 2022 were derailed by a drought, the war in Ukraine, and continued low water levels in the Paraná River.
- Authorities judged downside risks over the near- and medium-terms to be significant, including potential new outbreaks of Covid-19 variants and weather-related shocks.
- External factors were identified as the main drivers of the current high inflation, which started in 2021 and was exacerbated by spillovers from the war in Ukraine.
- The authorities expect inflation to moderate by the second half of the year and to slowly decline towards the 4 percent inflation target.

### Fiscal policy: creating fiscal space, sustainability, and buffers
- Converging back to the 1.5 percent of GDP deficit ceiling by 2024 remains appropriate to ensure public debt sustainability.
- Public debt is now close to 40 percent of GDP.
- Fiscal buffers are largely depleted amid large development gaps, relatively low fiscal revenue, and needs for climate change adaptation investment and transition management.
- Reaching fiscal targets will be challenging in light of ongoing external shocks and fiscal pressures from proposed fuel subsidy, salary increases, and tax exemptions.
- Recommendation: Paraguay should further reduce its reliance on external commercial financing for funding its budget deficit.

Key fiscal numbers and rules referenced
- 1.5 percent of GDP: deficit ceiling target by 2024.
- 40 percent of GDP: public debt ceiling proposed in new FRL draft (“FRL 2.0”).
- 2 percent: cap on real current expenditure increase in FRL 2.0 transition rules.
- 3.0 percent of GDP: fiscal deficit objective reconfirmed by the authorities for this year.

### Development needs and SDG spending gaps
- Staff’s standardized FAD-based benchmarking estimates indicate SDG spending gaps above 5 percent of GDP per year for Paraguay.
- Largest estimated spending gaps:
  - Education: 2.9 percent of annual additional investment of the estimated 2030 GDP.
  - Road infrastructure: 2.3 percent.
  - Water and sanitation: 0.2 percent.

### Domestic revenue mobilization and tax policy
- Paraguay’s tax-to-GDP ratio is relatively low compared with comparator groups and a regression linking tax revenue to per-capita GDP.
- Tax system characteristics:
  - VAT, corporate income tax, and personal income tax rates at 10 percent.
  - The 2020 tax reform left tax rates unchanged; expected long-term yield estimated at 0.8 percent of GDP.
- Revenue losses from tax expenditures amount to about 1.4 percent of GDP despite very low tax rates.
- Recommendation: Reassess the impact of tax expenditures, publish cost estimates as part of budget reporting, and consider trimming them.

Additional revenue-related notes
- Non-tax revenue from binational hydroelectric dams (Itaipú and Yacyretá) averaged about two percent of GDP over the past decade; this contribution is expected to decrease with a rise in Paraguay’s energy demand.
- A renegotiation of Itaipú tariffs is due by 2023, when Itaipú’s long-term debt is repaid, though the fiscal windfall implications are unclear.

### Spending efficiency and public sector composition
- Paraguay’s public sector spends less on wages than the LAC average in terms of GDP, but more in terms of total expenditure, leaving less room for public investment and social services.
- Regional estimates from a 2018 IADB study suggest “waste” in public purchases of goods and services of about 1 to 1.3 percent of GDP that could be salvaged through better procurement and oversight.
- The public employees’ pension system (“Caja Fiscal”) is running growing deficits and needs urgent overhaul.
- A new procurement law was approved by one chamber of Congress in December 2021.

### Social assistance and Pytyvõ cash transfer program
- The Pytyvõ cash transfer program targeted informal sector workers affected by the COVID-19 shock.
- Staff (with the World Bank) found Pytyvõ effectively prevented a larger erosion of poverty and inequality:
  - Without the transfers, poverty incidence would have reached 30 percent in 2020 (a 3.2 percentage points increase from 2019).
  - Extreme poverty would have increased by 2.5 percentage points.
- Recommendation: Enhance targeting strategy, for example through a beneficiary system extendable to other social assistance programs.

### Authorities’ fiscal views and actions
- Authorities committed to bringing the fiscal deficit back to the FRL ceiling despite drought and price shocks.
- They reconfirmed a fiscal deficit objective of 3.0 percent of GDP for this year.
- To resist rising fiscal pressures from Congress, authorities submitted a law that would protect fiscal execution in pre-electoral periods from such pressures (suspending salary increases beyond the original budget and prohibiting policy initiatives that reduce tax collection during the five quarters before the general election).
- Authorities updated the National Development Plan 2030 and expressed openness to analyze and reform special tax regimes, reform the “Caja Fiscal,” and enhance spending efficiency via pending procurement and civil service reforms.
- Authorities agreed with staff on strengthening social protection and implementing a more suitable beneficiary system for cash transfers.

### Monetary policy and exchange rate
- The BCP substantially increased the monetary policy rate since mid-2021 and is appropriately considering further tightening should inflationary pressures persist.
- Inflation expectations have started to slightly surpass the 4 percent target over the 2-year monetary policy horizon.
- Staff recommendation: Further monetary policy adjustments should remain responsive to new information, especially on inflation drivers and feedback between actual inflation and expectations.
- Exchange rate policy notes:
  - Exchange rate depreciated by about 7 percent in 2020; FX interventions to prevent excessive volatility amounted to US$133 million in 2020.
  - In 2021, BCP FX interventions amounted to US$356 million as the guaraní regained strength.
  - Diminished harvest and rising import prices in the current year might generate depreciation pressures and higher FX volatility.
  - Staff analysis suggests BCP FX interventions have been effective to avoid disorderly market conditions linked to very short-term exchange rate volatility; daily volatility lower than other non-highly dollarized Latin American countries, but similar over longer periods.
  - Given the tightening bias, staff recommended that the BCP not (or only partially) sterilize the monetary impact of any targeted FX interventions (FXI).

### External position
- Paraguay’s external position in 2021 continued to be stronger than implied by fundamentals and desirable policies.
- The external current account position will deteriorate substantially in 2022 but is projected to return to small surpluses over the medium-term.
- Stronger-than-norm current account balances reflect low investment levels; closing the gap should come from increased capital inflows and FDI as a result of business climate and governance reforms.
- External stability risks remain contained with an improving net international investment position in 2021 due to amortization of the binational hydroelectric company’s external debt.
- External debt sustainability analysis shows debt trajectory is overall robust to standard shocks.

### Financial sector policies and supervision
- Financial soundness indicators suggest the banking system remains well capitalized and profitable.
- Critical monitoring is needed as pandemic-related forbearance measures unwind (due to expire in June 2022), focusing on asset quality under adverse shocks and ensuring appropriate capital and liquidity buffers.
- Recommendations and priorities:
  - Accelerate implementation of FSSR recommendations, primarily on consolidated and risk-based supervision.
  - Introduce risk-based regulatory frameworks and supervisory risk-matrix for cooperatives and insurance companies.
  - Strengthen institutional stress-testing capability and coordination among regulatory bodies.
  - Extend supervision to the pension system; current legislation subjects pension funds to asset holding restrictions rather than financial supervision, undermining long-term capital market development.
  - Strengthen supervision in the financial cooperatives sector.
- Progress noted:
  - BCP began publishing audited financial statements under IFRS and underwent a safeguards assessment.
  - An FSAP is scheduled to start in late 2022 to assess FSSR recommendation progress and broader financial sector issues.
- Financial inclusion:
  - Following the National Financial Inclusion Strategy (ENIF), approximately 60 percent of adults have access to formal or commercial financial products.
  - A draft Financial Inclusion Law has been submitted to Congress to foster digital payments in local currency and allow traceability; a 24/7 instant payment system is planned.
  - Objective: provide financial access to 100 percent of households by 2030.
  - Caution: limit financial integrity risks and regulatory arbitrage.
- AML/CFT:
  - A GAFILAT mutual evaluation report (MER) identified technical shortcomings and effectiveness issues; final MER to be presented in July.
  - LEG established a capacity development project to strengthen AML/CFT in three areas: legal/regulatory framework, risk-based supervision, and financial intelligence unit capabilities; TA will be coordinated with IADB for other areas.

### Authorities’ views on monetary and financial policies
- Authorities consider the hawkish monetary policy stance since August 2021 appropriate to respond to inflation pressures and are ready to continue responding with monetary policy tools.
- They noted temporary use of forward guidance in late 2021 helped reduce uncertainty.
- Authorities acknowledged monetary tightening impact of unsterilized FX sales but calibrated actions based on overall financial system liquidity.
- Authorities emphasized the exchange rate’s role as an important shock absorber and agreed on the appropriateness of stepping up FX interventions to curb short-term excessive guaraní volatility stemming from recent shocks.
- Authorities highlighted progress on risk-based supervision, macroprudential tools, crisis preparedness frameworks, and steps to create a pension system supervisory entity.

*International Monetary Fund — Paraguay staff report excerpts*

### 38. The authorities aim at increased financial inclusion as a key instrument to reduce

### 38. The authorities aim at increased financial inclusion as a key instrument to reduce

### Financial inclusion and payment system
- Authorities highlighted progress implementing the National Financial Inclusion Strategy.
- Draft Financial Inclusion Law and rollout of the 24/7 instant payment system are expected to further facilitate access to financial services.
- Authorities remain actively engaged with the banking sector to discuss the new system’s cost distribution and risk-sharing.
- Authorities’ efforts to enhance financial inclusion are welcome and should continue.

### Structural and governance issues — summary of status and reforms
- Pandemic exposed longstanding structural deficiencies in health, education, and transport infrastructure.
- Authorities committed to publishing by end-June the governance diagnostic report prepared by the IMF with IADB participation.
- Government focus areas to address vulnerabilities identified in the report:
  - Anti-corruption
  - Public procurement
  - Fiscal responsibility
  - Civil service reform
  - Pension reform and supervision
  - Reform of the structure of the state to reduce fragmentation and improve coordination, oversight, and control
- Improved governance and reduced corruption are necessary for economic diversification and productivity growth in Paraguay.

### Legislative and implementation progress
- Progress toward implementation of reforms has been slow.
- Draft laws submitted to Congress and pending approval:
  - Public procurement law (draft submitted)
  - Civil service reform (draft submitted)
  - Fiscal responsibility law (draft submitted)
- Law to reform the structure of the state has not yet been sent to Congress.
- Assisted by the IADB, a new anti-corruption law was drafted and submitted to Congress; it:
  - Enhances the roles and investigative competences of the National Anti-corruption Secretariat (SENAC)
  - Strengthens anti-corruption and transparency units within each government agency
- A new Transparency and Anti-Corruption National Plan 2021-2025 was developed with USAID assistance and approved in 2020.
- Formal registries for legal persons/arrangements and beneficial ownership information have been established.

### Public finances, oversight, and procurement reforms
- Integration improvements:
  - Annual budgetary law requires all social spending funded with resources from binational hydro-electric companies to be included in government entities’ budgetary proposals, though this provision has not been fully observed.
  - A 2021 law established that accounts of the binational hydro-electric companies are subject to external control by the Court of Accounts (Contraloría General de la República).
- Fiscal management tools and coverage:
  - A fiscal risk statement is being elaborated with technical assistance support from FAD.
  - The results-based budget was used for the first time in 2021.
  - The treasury single account’s coverage has not been expanded to provinces yet.
  - The certification system of public works has not been extended beyond the Ministry of Public Works.
- Procurement and audit processes:
  - Intended reinforcement of pre- and post-procurement phases to better integrate DNCP and Ministry of Finance activities.
  - Automatization and integration of planning and budget allocations within the integrated financial management information system are planned.
  - Extension of the procurement system to the entire public sector is intended.
  - Currently, all public procurements (including COVID-19 contracts) are processed and awarded by the National Directorate of Procurement (DNCP), which verifies required provider information, including beneficial ownership, before contract approval.
  - Independent verification of procurement activities is conducted by the Comptroller General through yearly audits; audit reports were presented to Congress for 2020 and 2021.

### Gender, digitalization, and social impacts
- Pandemic effects on employment:
  - The pandemic disproportionately affected female employment; male employment has recovered more quickly.
- Digitalization trends:
  - Paraguay is experiencing a digitalization spurt, with women digitalizing more rapidly than men.
  - Women with no education continue to have the lowest digitalization levels.
  - Staff and World Bank analysis suggests women having internet access recorded higher employment and lower job loss, reinforcing the importance of promoting digitalization in Paraguay.
- Social assistance:
  - Paraguay responded to the pandemic with timely cash transfers delivered through digital and mobile systems, which prevented a larger spike in poverty.
  - Programs could have been better targeted in hindsight; lessons and data should upgrade the system of beneficiaries of the overall social safety net.

### Authorities’ views on structural and climate matters
- Authorities will continue to press Congress for discussion and approval of substantial legislation prepared by the government (public procurement law, civil service reform, fiscal responsibility law).
- Authorities agreed with staff on importance of strengthening the anti-corruption framework and fostering digitalization, particularly for women.
- Authorities reported increasing inclusion of climate change challenges in policy and development planning, presented analytical work and policy initiatives, and expressed interest in continued dialogue and further support.

### Climate change policies and observations
- Paraguay’s ND-GAIN position:
  - Paraguay stands in the middle ground of climate change adaptability and vulnerability, ranked 94th among 181 countries by ND-GAIN.
  - Relatively low score explained by failure of readiness to compensate for significant vulnerability.
- Emissions and energy:
  - Paraguay’s clean electricity matrix and relatively large non-CO2 emissions stand out in terms of contributions to GHG emissions.
  - Electricity generation dominated by binational hydroelectric dams.
  - A lot of cooking and heating energy is derived from biomass, often sourced from deforestation.
  - Methane is released in large quantities from cattle breeding and from the use of industrial fertilizers.
- Existing plans and gaps:
  - National Adaptation Plan formulated in 2016 focused mainly on public awareness and environmental capacity-building; proposed measures were neither costed nor embedded in medium- and long-term fiscal planning and budget formulation.
  - Paraguay has submitted and continuously updated its Nationally Defined Contributions (NDC) starting in 2015; latest NDC update (2021) significantly pulled down the GHG values of the baseline scenario.
- Policy recommendations for climate action:
  - Mitigation measures should focus on leveraging renewable energy potential and on price-based and regulatory policies to stop deforestation and reduce the carbon footprint of agriculture and animal husbandry.
  - Paraguay should move toward an integrated climate change and adaptation policy framework that considers fiscal and energy policy dimensions.
  - Investigate the impact on public investment plans of adaptation and transition investment needs and incorporate these into a credible fiscal path.
  - Analyze ways to engage private firms and households to take advantage of hydroelectric energy potential.
  - International cooperation among countries sharing the same watershed may be required to adapt to changing water flows.
  - Further investment in renewable energy supply and revitalized initiatives to stop deforestation and degradation in vulnerable habitats are recommended.

### Staff appraisal — key messages and policy recommendations
- Economic setting and policy stance:
  - After three years of continuous external shocks, Paraguay faces difficult challenges in 2022 and beyond; recent drought and international price shocks have halted economic expansion.
  - Countercyclical fiscal policies since 2019 mitigated shocks, but raised public debt and depleted fiscal buffers.
  - Monetary policy should maintain a tightening bias in the face of global inflationary pressures while avoiding undue strains on the financial system and the economy.
  - External position in 2021 was stronger than the level implied by fundamentals and desirable policies.
- Fiscal rule and credibility:
  - Commitment to the fiscal rule should be maintained to protect fiscal credibility.
  - Government goal to return to the FRL’s deficit ceiling remains appropriate; transition path is rocky amid ongoing fiscal pressures during a pre-electoral period.
  - Codifying the return to the deficit ceiling in the updated Fiscal Responsibility Law (still awaiting discussion in Congress) would be helpful.
- Rebuilding fiscal space and revenue mobilization:
  - Rebuilding fiscal space is critical given substantial spending needs in health, education, basic infrastructure, and climate resilience.
  - Eliminate waste and raise public spending efficiency; increase private sector involvement (e.g., public-private partnerships).
  - Over the medium term, room exists to increase the tax-to-GDP ratio; authorities should reassess special tax regimes and consider another tax reform beyond 2020 improvements.
- Financial sector supervision:
  - Banking system remains well-capitalized and profitable.
  - Continue deepening and widening financial supervision; implement risk-based supervision work plan.
  - Extend supervisory perimeter to include pension funds; strengthen independence and integrity of regulatory agency for financial cooperatives.
  - Continue following peer-evaluation guidance on AML/CFT issues.
- Structural reforms and governance:
  - Step up implementation of structural reforms on governance, business climate, and public sector efficiency.
  - Approve and implement matured reform bills (public procurement, civil service, structure of the state) to reduce corruption risks and unleash growth potential in non-traditional sectors.
- Climate integration:
  - Integrate climate policies fully into national development planning and medium- and long-term fiscal budgets.
  - Leverage Paraguay’s favorable electricity matrix for transition toward net-zero GHG consumption and production; complement with investments to stop deforestation and habitat degradation.

*Source: IMF staff report excerpt (Content unit: 1pryea2022001).*

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

### 1pryea2022001 - 58. Staff proposes that the next Article IV consultation with Paraguay follows the standard

### Recent developments
- Economy expanded by 4.2 percent in real terms in 2021.
- Robust growth in services, manufacturing and construction contributed to the economy’s expansion in 2021Q2 and Q3, more than offsetting the 2020 contraction.
- Private consumption and investment sustained economic growth from the demand side.
- After a fall in 2020, agricultural exports rebounded in 2021 supported by high international prices of soy.
- Labor force participation recovered in 2021 but it is still below pre-pandemic levels.
- Sources cited: BCP, Ministry of Finance and IMF staff calculations.

### Fiscal developments
- Public debt has increased substantially since the outbreak of the pandemic but is still low compared to other countries in the region.
- After having breached the FLR ceiling in the past three years, Paraguay plans to converge back by 2024.
- Rebounding tax revenue drove the recovery of government revenue, led by income taxes and VAT.
- During the pandemic, public investment and social transfers were the main drivers of public expenditure.
- Central government revenues and expenditures (percent of GDP):
  - Central government revenues: 14.0 (2018), 14.2 (2019), 13.5 (2020), 14.0 (2021), 13.5 (2022), 13.6 (2023), 13.8 (2024), 13.8 (2025), 13.7 (2026), 13.7 (2027).
  - Central government expenditures: 15.4 (2018), 17.0 (2019), 19.7 (2020), 17.8 (2021), 16.7 (2022), 16.0 (2023), 15.3 (2024), 15.2 (2025), 15.2 (2026), 15.3 (2027).
- Central government net lending/borrowing (overall balance): -1.4 (2018), -2.9 (2019), -6.1 (2020), -3.7 (2021), -3.2 (2022), -2.3 (2023), -1.5 (2024), -1.4 (2025), -1.5 (2026), -1.5 (2027).
- Central government gross debt: 17.9 (2018), 20.8 (2019), 31.0 (2020), 32.3 (2021), 33.3 (2022), 33.2 (2023), 33.0 (2024), 32.5 (2025), 32.2 (2026), 31.8 (2027).
- Memorandum: Primary balance and output gap shown in Table 2 (see detailed figures above).

### Consolidated public sector developments
- Consolidated public sector revenue: 18.9 (2018), 19.2 (2019), 18.7 (2020), 19.2 (2021), 18.7 (2022), 18.9 (2023), 19.2 (2024), 19.3 (2025), 19.2 (2026), 19.1 (2027).
- Consolidated public sector expenditure: 20.6 (2018), 23.0 (2019), 25.9 (2020), 25.3 (2021), 23.9 (2022), 22.9 (2023), 22.0 (2024), 21.9 (2025), 21.7 (2026), 21.6 (2027).
- Net lending/borrowing (overall balance): -1.6 (2018), -3.8 (2019), -7.2 (2020), -6.2 (2021), -5.2 (2022), -4.0 (2023), -2.8 (2024), -2.5 (2025), -2.5 (2026), -2.5 (2027).
- Public sector debt (excl. central bank bills): 22.3 (2018), 25.8 (2019), 36.9 (2020), 37.7 (2021), 39.5 (2022), 39.0 (2023), 38.7 (2024), 37.9 (2025), 37.2 (2026), 36.5 (2027).

### External sector developments
- Current account (millions of U.S. dollars): -67 (2018), -178 (2019), 959 (2020), 311 (2021), -1,217 (2022), 181 (2023), 222 (2024), 325 (2025), 320 (2026), 381 (2027).
- Trade balance (millions of U.S. dollars): 479 (2018), 126 (2019), 1,333 (2020), 700 (2021), -638 (2022), 794 (2023), 928 (2024), 1,054 (2025), 1,050 (2026), 1,148 (2027).
- Exports (fob, millions of U.S. dollars): 13,730 (2018), 12,702 (2019), 11,494 (2020), 14,025 (2021), 12,432 (2022), 14,678 (2023), 15,194 (2024), 15,814 (2025), 16,282 (2026), 16,890 (2027).
  - Agricultural Products: 5,547 (2018), 4,582 (2019), 5,280 (2020), 7,049 (2021), 5,221 (2022), 6,626 (2023), 6,878 (2024), 7,096 (2025), 7,343 (2026), 7,599 (2027).
  - Hydro-Electricity: 2,109 (2018), 1,722 (2019), 1,736 (2020), 1,609 (2021), 1,503 (2022), 1,406 (2023), 1,315 (2024), 1,229 (2025), 1,150 (2026), 1,075 (2027).
- Imports (cif, millions of U.S. dollars): -12,917 (2018), -12,251 (2019), -10,036 (2020), -13,087 (2021), -12,838 (2022), -13,629 (2023), -13,995 (2024), -14,472 (2025), -14,927 (2026), -15,417 (2027).
  - Of which: Fuel products: -1,631 (2018), -1,423 (2019), -1,048 (2020), -1,531 (2021), -2,886 (2022), -2,283 (2023), -2,018 (2024), -1,947 (2025), -1,931 (2026), -1,953 (2027).
- Capital and financial account (millions of U.S. dollars): 662 (2018), 539 (2019), 1,103 (2020), 1,139 (2021), 1,317 (2022), 290 (2023), 340 (2024), 206 (2025), 208 (2026), 133 (2027).
  - Direct investment: 156 (2018), 225 (2019), 120 (2020), 122 (2021), 500 (2022), 1,765 (2023), 2,059 (2024), 719 (2025), 525 (2026), 556 (2027).
- Gross international reserves (millions of U.S. dollars): 8,004 (2018), 7,500 (2019), 9,976 (2020), 10,570 (2021), 10,070 (2022), 10,570 (2023), 11,120 (2024), 11,670 (2025), 12,220 (2026), 12,770 (2027).
- Current account in percent of GDP: -0.2 (2018), -0.5 (2019), 2.7 (2020), 0.8 (2021), -2.9 (2022), 0.4 (2023), 0.5 (2024), 0.6 (2025), 0.6 (2026), 0.7 (2027).

### Monetary indicators
- Inflation and prices:
  - Consumer prices (end of period): 3.2 (2018), 2.8 (2019), 2.2 (2020), 6.8 (2021), 8.0 (2022), 4.2 (2023), 4.0 (2024), 4.0 (2025), 4.0 (2026), 4.0 (2027).
  - After hitting a bottom in mid-2020, inflation went steadily up in 2021, led by significantly higher food and fuel prices.
- Output gap: -0.5 (2018), -2.3 (2019), -2.2 (2020), 0.4 (2021), -1.3 (2022), -0.3 (2023), 0.0 (2024), 0.0 (2025), 0.0 (2026), 0.0 (2027).
- Exchange rate:
  - Nominal exchange rate (Guarani per U.S. dollar, eop): 5,961 (2018), 6,453 (2019), 6,917 (2020), 6,879 (2021).
  - Real effective exchange rate and nominal effective exchange rate indices presented (2010=100) in Figures.
- Monetary policy:
  - In view of domestic prices growing at a rate above the target level, the central bank reacted and rapidly tightened its policy rate since August 2021, currently at 7.25 percent (as reported in the figures section).
  - Monetary policy rate, year-end: 5.3 (2018), 4.0 (2019), 0.7 (2020), 5.2 (2021) [table shows earlier series; figure notes current rate at 7.25 percent].

### Financial sector developments
- Banks are liquid and well capitalized; bank profitability has gone down recently.
- Financial deepening has increased in Paraguay; lending rates and interest rate spreads have come down over time.
- Key financial aggregates (selected):
  - Credit to private sector: 14.1 (2018), 9.7 (2019), 8.1 (2020), 10.5 (2021), 9.4 (2022), 8.6 (2023), 9.0 (2024), 8.9 (2025), 9.0 (2026), 9.0 (2027).
  - Broad liquidity (M4, billions of Guaranies): 106,792 (2018), 118,406 (2019), 139,125 (2020), 150,182 (2021), 157,521 (2022), 164,238 (2023), 173,355 (2024), 184,456 (2025), 196,338 (2026), 209,054 (2027).
  - Money and quasi-money (M2): 65,254 (2018), 69,949 (2019), 81,678 (2020), 87,701 (2021), 91,162 (2022), 94,915 (2023), 99,630 (2024), 105,406 (2025), 111,517 (2026), 117,984 (2027).
- Financial soundness indicators (selected):
  - Regulatory capital/risk-weighted assets: 14.7 (2013), 15.2 (2014), 16.1 (2015), 17.9 (2016), 18.3 (2017), 17.5 (2018), 17.2 (2019), 19.1 (2020), 18.8 (2021).
  - NPLs/total loans: 2.1 (2013), 2.0 (2014), 2.6 (2015), 2.9 (2016), 2.8 (2017), 2.5 (2018), 2.6 (2019), 2.4 (2020), 2.3 (2021).
  - Return on assets: 2.7 (2013), 2.6 (2014), 2.5 (2015), 2.2 (2016), 2.3 (2017), 2.3 (2018), 2.4 (2019), 1.7 (2020), 1.8 (2021).

### Key social, demographic, and macro indicators
- Population 2021 (millions): 7.4
- Gini index (2021): 43.1
- Unemployment rate (2021): 7.7
- Life expectancy at birth (2020): 74
- Percentage of population below the poverty line (2021): 26.9
- Adult literacy rate (2020): 95.0
- Rank in UNDP development index (2019): 103 of 189
- GDP per capita (US$, 2021): 5,207 (Prel.)
- Real GDP growth (percent): 3.2 (2018), -0.4 (2019), -0.8 (2020), 4.2 (2021), 0.3 (2022), 4.5 (2023), 3.5 (2024), 3.5 (2025), 3.5 (2026), 3.5 (2027).

### Medium-term outlook (selected projections)
- Real GDP growth: 0.3 (2022), 4.5 (2023), 3.5 (2024), 3.5 (2025), 3.5 (2026), 3.5 (2027).
- Central government primary balance: -2.6 (2021), -2.6 (2022), -1.9 (2023), -0.9 (2024), 0.0 (2025), 0.1 (2026), -0.1 (2027).
- Public sector debt (excl. central bank bills): 39.5 (2022), 39.0 (2023), 38.7 (2024), 37.9 (2025), 37.2 (2026), 36.5 (2027).
- Gross international reserves (in US$ billions): 10.57 (2021), 10.07 (2022), 10.57 (2023), 11.12 (2024), 11.67 (2025), 12.22 (2026), 12.77 (2027).

*Source: IMF staff report material for Paraguay (figures, tables, and text supplied).*

### Annex I. Status of Past Article IV Recommendations

### Annex I. Status of Past Article IV Recommendations

### Fiscal Policy
- Fund recommendation: Return the fiscal deficit to the FRL ceiling of 1.5 percent of GDP by 2024.
- Progress:
  - Ongoing. The government aims to reduce the central government’s budget deficit to 3 percent of GDP in 2022 as part of its plan to converge back to a deficit ceiling of 1.5 percent of GDP by 2024.
  - The current shock to the agriculture sector prevents a larger fiscal consolidation this year.
  - Tax revenue needs to be raised. While further curbing tax evasion would help create additional resources, the near term scope is likely to be modest.
  - Pending. Steady improvements are being made in the area of tax and customs administration, with technical assistance from the Fund.
- Pension system recommendation:
  - Introduce a pension fund supervisor and implement parametric adjustments for private and public employees.
- Progress on pensions:
  - Ongoing. Draft legislation to introduce a pension fund supervisor is still in Congress.
  - The government has undertaken a study on the financial prospects of the Caja Fiscal to inform a reform proposal.

### Monetary Policy
- Fund recommendation: Further easing of monetary policy to provide additional, albeit modest, support.
- Progress:
  - Not applicable anymore given the rebound of the economy in 2021 and the sharp rise in inflation.
- Fund recommendation: Foreign exchange interventions should continue to be limited to exceptional circumstances such as disorderly market conditions. Exchange rate should act as a shock absorber.
- Progress:
  - Implemented. Quantitative evidence suggests that BCP FX interventions contributed to reducing the short-term volatility of the exchange rate.

### Financial Sector
- Fund recommendation: Continued monitoring and data collection of the banking system are needed to better assess the crisis’ impact.
- Progress:
  - Ongoing. Financial soundness indicators continue to suggest that the banking system remains well capitalized and profitable.
  - There has been progress in financial reporting to the supervisor by non-depository credit providers (“casas de crédito”).

### Structural Reforms
- Fund recommendation: Continue addressing Paraguay’s governance weaknesses and tackle corruption, including plans to reform civil service and public procurement process.
- Progress:
  - Ongoing. The authorities committed to publishing by end-June the governance diagnostic report prepared by the IMF and IADB.
  - The government has prepared draft legislation on anti-corruption, public procurement, fiscal responsibility, civil service reform, pension reform and supervision, and a reform of the structure of the state. They are still to be approved by Congress.
- Fund recommendation: Improve business climate, and human capital policies to foster growth.
- Progress:
  - Ongoing. Health and education reforms remain on the agenda, as well as continued public investment in transport infrastructure.
  - Effective social assistance programs were implemented to protect the vulnerable population during the pandemic.

*Annex I. Status of Past Article IV Recommendations — IMF staff summary as presented in the source document.*

### Annex IV. Public Sector Debt Sustainability Analysis

### Annex IV. Public Sector Debt Sustainability Analysis

### Baseline scenario — key indicators (As of April 27, 2022)
- Nominal gross public debt: 17.5 (2020); 36.9 (2021); 37.7 (2022); 39.5 (2023); 39.0 (2024); 38.7 (2025); 37.9 (2026); 37.2 (2027); 36.5 (2027 labeled again in table)
- Public gross financing needs: 2.0 (2020); 8.1 (2021); 8.4 (2022); 6.2 (2023); 4.4 (2024); 3.1 (2025); 3.1 (2026); 3.4 (2027); 3.6 (2027)
- Real GDP growth (in percent): 3.6 (2020); -0.8 (2021); 4.2 (2022); 0.3 (2023); 4.5 (2024); 3.5 (2025); 3.5 (2026); 3.5 (2027); 3.5 (2027)
- Inflation (GDP deflator, in percent): 3.3 (2020); 2.3 (2021); 5.6 (2022); 10.5 (2023); 4.2 (2024); 3.6 (2025); 4.5 (2026); 4.1 (2027); 4.2 (2027)
- Nominal GDP growth (in percent): 7.0 (2020); 1.4 (2021); 10.1 (2022); 10.9 (2023); 8.9 (2024); 7.2 (2025); 8.1 (2026); 7.7 (2027); 7.9 (2027)
- Effective interest rate (in percent): 5.2 (2020); 5.6 (2021); 4.8 (2022); 1.6 (2023); 1.9 (2024); 2.3 (2025); 2.7 (2026); 3.1 (2027); 3.4 (2027)
- Sovereign spreads: EMBIG (bp) 270 (as of table); 5Y CDS (bp) ...

### Contributions to change in gross public sector debt (levels in percent of GDP)
- Cumulative Change in gross public sector debt: 1.5 (2011-2019 cumulative); 11.1 (2020); 1.0 (2021); 0.8 (2022); 1.7 (2023); -0.4 (2024); -0.4 (2025); -0.8 (2026); -0.7 (2027); -0.7 (projection beyond); -1.2 (cumulative projection)
- Identified debt-creating flows (annual): 2.0 (2011-2019 cumulative); 12.5 (2020); 0.7 (2021); 0.7 (2022); -0.7 (2023); -1.0 (2024); -1.4 (2025); -1.3 (2026); -1.3 (2027); -4.9 (cumulative projection)

### Primary balance and fiscal aggregates (percent of GDP)
- Primary deficit: 0.3 (2011-2019 cumulative); 5.7 (2020); 4.5 (2021); 3.8 (2022); 2.4 (2023); 1.2 (2024); 0.9 (2025); 0.9 (2026); 1.0 (2027); 10.2 (cumulative)
- Primary (noninterest) revenue and grants: 18.1 (2011-2019); 18.7 (2020); 19.2 (2021); 18.7 (2022); 18.9 (2023); 19.2 (2024); 19.3 (2025); 19.2 (2026); 19.1 (2027); 114.4 (cumulative)
- Primary (noninterest) expenditure: 18.4 (2011-2019); 24.4 (2020); 23.7 (2021); 22.5 (2022); 21.3 (2023); 20.4 (2024); 20.2 (2025); 20.1 (2026); 20.1 (2027); 124.7 (cumulative)

### Automatic debt dynamics and components (percent of GDP)
- Automatic debt dynamics (cumulative): 0.4 (2011-2019); 2.7 (2020); -1.9 (2021); -3.2 (2022); -2.5 (2023); -1.8 (2024); -1.9 (2025); -1.6 (2026); -1.5 (2027); -12.6 (cumulative)
- Interest rate / growth differential: -0.2 (2011-2019); 1.1 (2020); -1.8 (2021); -3.2 (2022); -2.5 (2023); -1.8 (2024); -1.9 (2025); -1.6 (2026); -1.5 (2027); -12.6 (cumulative)
  - Of which: real interest rate: 0.3 (2011-2019); 0.8 (2020); -0.4 (2021); -3.1 (2022); -0.9 (2023); -0.5 (2024); -0.7 (2025); -0.4 (2026); -0.3 (2027); -5.9 (cumulative)
  - Of which: real GDP growth: -0.5 (2011-2019); 0.2 (2020); -1.4 (2021); -0.1 (2022); -1.6 (2023); -1.3 (2024); -1.3 (2025); -1.2 (2026); -1.2 (2027); -6.7 (cumulative)
- Exchange rate depreciation contribution: 0.6 (2011-2019); 1.6 (2020); -0.2 (2021); (other years shown as dotted)

### Other identified debt-creating flows and residual (percent of GDP)
- Other identified debt-creating flows: 1.3 (2011-2019); 4.1 (2020); -1.9 (2021); 0.1 (2022); -0.6 (2023); -0.4 (2024); -0.3 (2025); -0.6 (2026); -0.8 (2027); -2.6 (cumulative)
  - NFPS asset accumulation (same entries as other identified flows): 1.3; 4.1; -1.9; 0.1; -0.6; -0.4; -0.3; -0.6; -0.8; -2.6
- Residual: -0.5 (2011-2019); -1.4 (2020); 0.2 (2021); 1.0 (2022); 0.3 (2023); 0.6 (2024); 0.6 (2025); 0.6 (2026); 0.6 (2027); 3.7 (cumulative)

### Decomposition and narrative findings from figures
- Contribution to changes in public debt (annual projection components shown in figure): primary deficit, real GDP growth, real interest rate, exchange rate depreciation, other debt-creating flows, and residual.
- Debt-creating flows are dominated in the short-term by a large identified flow in 2020–2021 and then projected negative identified flows from 2023 onward, supporting a gradual decline in debt ratios.
- Public gross financing needs peak in 2021–2022 and decline thereafter to single-digit percent-of-GDP levels in projections.

### Composition of public debt and alternative scenarios (Figure 2 — underlying assumptions)
- Baseline underlying assumptions (selected):
  - Real GDP growth: 0.3 (2022); 4.5 (2023); 3.5 (2024); 3.5 (2025); 3.5 (2026); 3.5 (2027)
  - Inflation: 10.5 (2022); 4.2 (2023); 3.6 (2024); 4.5 (2025); 4.1 (2026); 4.2 (2027)
  - Primary Balance: -3.8 (2022); -2.4 (2023); -1.2 (2024); -0.9 (2025); -0.9 (2026); -1.0 (2027)
  - Effective interest rate: 1.6 (2022); 1.9 (2023); 2.3 (2024); 2.7 (2025); 3.1 (2026); 3.4 (2027)
- Historical scenario assumptions (selected):
  - Real GDP growth: 0.3 (2022); 3.1 (2023); 3.1 (2024); 3.1 (2025); 3.1 (2026); 3.1 (2027)
  - Inflation: same as baseline
  - Primary Balance: -3.8 (2022); -1.5 (2023); -1.5 (2024); -1.5 (2025); -1.5 (2026); -1.5 (2027)
  - Effective interest rate: 1.6 (2022); 1.9 (2023); 2.6 (2024); 3.3 (2025); 4.0 (2026); 4.5 (2027)
- Constant Primary Balance scenario assumption:
  - Primary Balance: -3.8 for 2023–2027 (constant)
  - Effective interest rate: 1.6 (2022); 1.9 (2023); 2.5 (2024); 3.0 (2025); 3.5 (2026); 3.7 (2027)

### Debt composition metrics (figures discussed)
- Gross Nominal Public Debt projected composition by maturity: medium and long-term versus short-term shares shown for 2020–2027.
- By currency composition: local currency-denominated versus foreign currency-denominated shares shown for 2020–2027.
- Public Gross Financing Needs depicted in percent of GDP for 2020–2027 under projection.

*Source: Fund staff estimates and projections.*

### 3. By the standards of ND-GAIN

### 3. By the standards of ND-GAIN

### ND-GAIN assessment and sectoral vulnerabilities
- Paraguay is ranked 94th out of 184 countries in the overall ND-GAIN index based on 2019 data.
- Paraguay’s relatively low ND-GAIN score compared to the (unweighted) average of all countries is explained by the failure of readiness to compensate for vulnerability.
- Regional positioning:
  - Paraguay’s vulnerability is in the middle range of its South American peers, with comparable exposure and a somewhat higher sensitivity to climate change, partly compensated by adaptive capacity.
- Sectoral components (2019):
  - Human habitat, food, and health are found to be relatively vulnerable.
- Readiness sub-indices (2019):
  - Social readiness performs worse than economic and governance readiness.
  - The social readiness sub-index is particularly impacted by Paraguay’s low scores of education and of innovation.

### National policy framework
- Paraguay’s first National Adaptation Plan (NAP) was formulated in 2016.
  - The NAP is closely aligned with the government’s National Development Plan 2014–30 toward reaching the country’s SDGs.
  - The National Development Plan originally focused on three pillars: (1) Poverty reduction and social development; (2) Inclusive economic growth; and (3) Insertion of Paraguay in global markets.
  - The plan has recently been revised and updated under the lead of Paraguay’s Technical Secretariate of Planning; it now includes the strengthening of public institutions as a fourth pillar.
- The NAP, formulated under the auspices of Paraguay’s Secretariate of the Environment (SEAM), focuses on measures related to raising climate-change awareness and capacity building within and across government institutions.
- Paraguay has submitted and continuously updated its Nationally Defined Contributions (NDCs):
  - First NDCs communicated in 2015.
  - Unconditional commitment to reduce greenhouse gases (GHG) by 10 percent, with a commitment to reduce GHG by another 10 percent conditional on external financing.
  - In the latest NDC update (2021) Paraguay significantly reduced the GHG emission values of the baseline BAU scenario, effectively lowering the target for future GHG emission levels.

### Climate change policy recommendations and energy transition
- Policy integration:
  - To improve climate change adaptation policies, Paraguay should strive to move toward an integrated policy framework that aligns development policy goals with climate policy goals and medium and long-term fiscal planning.
  - Recent positive steps include moves toward performance budgeting and strengthened links between the Secretariate of Planning and the Ministry of Finance.
  - Issuance of guidelines for environmental risk management by financial institutions regulated by the banking superintendency aims to promote sustainable financing practices.
- Energy sector decarbonization:
  - Paraguay’s hydro-based electricity matrix provides a favorable starting point for decarbonizing the energy sector.
  - A recent study by the Columbia Center on Sustainable Investment found that the transition to a zero-emissions energy sector is feasible, provided an appropriate policy framework is put in place.
  - Required actions include enhanced long-term investment in renewable energy sources, transmission systems, technologies that boost energy efficiency, and better regulation and alignment of public and private sector incentives toward electrification of energy uses.

### Digitalization in Paraguay and COVID-19’s differential impact on female employment — Stylized facts
- Regional digitalization context:
  - Nearly half of LAC countries register a moderate momentum measured by the digital evolution index across four drivers: supply, demand, institutional environment, and innovation.
  - Countries advancing rapidly include Chile, Costa Rica, Paraguay, Uruguay, Mexico, and Colombia.
- Paraguay’s digitalization indicators (2019):
  - Internet penetration rate in LAC is about 68 percent; Paraguay’s rate is 69 percent.
  - Over 77 percent of female Paraguayans with 7 to 12 years of formal education use the internet.
  - Female usage rate with 13 to 18 years of education: 95.9 percent (nearly the same as for men).
  - Lowest usage rate among women without any formal education: 5.7 percent.

### Pandemic impacts on employment by gender and the role of internet access
- Job loss and recovery (May 2020, onset of pandemic):
  - More than half of women reported having lost their jobs, compared to 35 percent for men.
  - Men’s employment recovered more quickly.
- By June 2021:
  - Women’s employment was higher and job loss was lower for those women who had internet access.
  - Digitalization appears to matter less for men’s employment and job loss, possibly due to men’s occupational concentration in less internet-intensive sectors (including construction and mining).
- Unpaid work and inactivity:
  - Almost half (48.1. percent) of women who are inactive report that they do not work or look for a job because they do household chores and housekeeping.
  - For men, less than 1 in 10 report inactivity for this reason.
  - In rural households (40 percent of the population), women, representing about 53.9 percent, spent 16.2 more hours in household chores and childcare than their male counterparts (World Bank, 2020).
- Occupational distribution:
  - Women are over-represented in unskilled and informal employment, with 27 percent concentrated in unskilled occupations (as opposed to 17 percent of men).
  - Many women work as domestic workers.
- Interaction of digitalization, childcare, and employment:
  - Job loss for women who had children and who were responsible for their education was much higher than for those without those responsibilities.
  - The employment gap between men and women having children for those with internet access is much lower than for those with no internet access.
  - Job loss for women with internet access is much lower compared to men despite them having children.

*Source: IMF staff summary of chapter "3. By the standards of ND-GAIN" (Paraguay). *

### 8. For Paraguay, the increased use of technological solutions has been reinforced by the

### 8. For Paraguay, the increased use of technological solutions has been reinforced by the COVID-19 crisis

### Digital transition and behavioral change
- Almost two years of lockdowns triggered a transition towards digital interactions, including remote work, online education, and digital health among others.
- Increased use of technological solutions has been reinforced by the COVID-19 crisis.

### Gendered impacts and constraints
- Awareness of women’s additional chores in Paraguay in terms of large gaps in household chores, unpaid work, and childcare has become extremely important.
- Unpaid work for women contributes to informality and limits women’s participation in digitalization.

### Key policy recommendations
- Reduce the gender gap in sectoral employment and increase labor market flexibility to enhance women's share in digitalization.
- Reduce informality (unpaid work for women) to help increase the share of women in digitalization and reduce the impact of the COVID-19 and other crises on women.
- Give more prominence to the Ministry of Women Affairs to lead initiatives for women, including at the legislative level.

*PARAGUAY — STAFF REPORT FOR THE 2022 ARTICLE IV CONSULTATION—INFORMATIONAL ANNEX*

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_Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1pryea2022001.pdf_