## 1pryea2022004 ## Source details **Canonical URL:** [1pryea2022004](https://www.imf.org/-/media/files/publications/cr/2022/english/1pryea2022004.pdf) ## Other formats - [Markdown version](/-/media/files/publications/cr/2022/english/1pryea2022004.pdf.md) - [Structured JSON version](/-/media/files/publications/cr/2022/english/1pryea2022004.pdf.json) --- ### Context and Program Request - Paraguay continuing to recover from the COVID-19 pandemic while facing simultaneous shocks including a severe drought in late 2021/early 2022 and a spike in global inflation exacerbated by Russia’s war in Ukraine. - Authorities requested approval of a two-year program supported by the Policy Coordination Instrument (PCI) to underpin structural reforms and implementation of a reform agenda. - Program period: November 2022–November 2024. - Program objectives grouped under three pillars: (i) ensure macroeconomic stability and resilience; (ii) enhance productivity and foster economic growth; (iii) enhance social protection and inclusiveness. ### Main Policy Commitments and Program Objectives - Ensure Macroeconomic Stability and Resilience - Converge to the 1.5 percent of GDP fiscal deficit ceiling by 2024. - Reform the “Caja Fiscal” and the pension system; prepare transition law and comprehensive pension reform. - Strengthen supervision of SOEs and restore oversight/dashboard for nine public companies. - Enhance revenue collection (electronic invoicing rollout and assessment of tax expenditures). - Maintain a strong reserve position and continue publishing detailed information on foreign exchange operations. - Monetary policy objective - Aim to bring inflation back to the 4 percent target and keep inflation expectations well-anchored. - Commit to using foreign exchange interventions only to address disorderly market conditions. - Enhance productivity and foster economic growth - Strengthen public procurement, civil service, and the government structure. - Improve financial supervision, governance, and control corruption. - Bolster efficient use of public resources and create more favorable conditions for private investment. - Build resilience to climate change. - Enhance social protection and inclusiveness - Improve impact and coverage of social assistance programs, promote formalization, and strengthen financial inclusion. ### Recent Developments (Selected) - Growth and agriculture - 2021 GDP growth: 4.1 percent. - 2019 GDP contraction: -0.4 percent; 2020 GDP contraction: -0.8 percent. - 2022 growth revised down to 0.2 percent due to heatwaves and severe drought reducing soy production by about 57 percent in early 2022. - Inflation and monetary policy - Annual headline inflation: 9.3 percent y-o-y by September 2022. - Central bank policy rate raised cumulatively to 8.5 percent. - Inflation likely to close 2022 at about 9 percent; authorities’ target band: 2-6 percent. - External sector and reserves - External current account deficit expected about 5 percent of GDP in 2022. - End-2021 gross international reserves covered about 8 months of 2022 projected imports; reserves-to-ARA metric ratio: 211 percent. - BCP FX interventions in 2022: about US$400 million; as of October 2022, BCP net international reserves fell by about US$700 million. - Exchange rate depreciated by about 5 percent since the beginning of 2022. - Fiscal developments - Cumulative 12-month fiscal deficit decreased slightly to 3.6 percent of GDP as of August 2022. - Authorities committed to reducing the fiscal deficit to 3 percent of GDP in 2022. - Financial sector - Solvency indicators exceed legal minimum capital requirements; profitability recovered to pre-pandemic levels. - Instant Payment System (SPI) module launched May 2022 to enable 24/7 instant transactions. ### Outlook and Key Projections (selected exact figures) - Real GDP growth (percent): 2022: 0.2; 2023: 4.5; 2024: 3.5; 2025: 3.5; 2026: 3.5; 2027: 3.5. - Consumer prices (end of period, percent): 2022: 8.8; 2023: 4.1; 2024: 4.0; 2025: 4.0; 2026: 4.0; 2027: 4.0. - Central government fiscal balance (percent of GDP): 2022: -3.0; 2023: -2.3. - Public sector debt (percent of GDP): 2022: 39.7; 2023: 39.4; 2024: 39.3; 2025: 38.4; 2026: 37.7; 2027: 36.8. - Gross international reserves (e.o.p., US$ billion): 2022: 9.2; 2023: 9.3; 2024: 9.895; 2025: 10.445; 2026: 10.995; 2027: 11.545. - Reserves in months of next-year imports of goods and services: 2022: 6.8; 2023: 6.5; 2024: 6.7; 2025: 6.8; 2026: 6.9; 2027: 7.0. ### Risks and Adverse Scenario - Risks broadly tilted to the downside; main domestic and external risks include: - Recurrent adverse weather conditions (e.g., continuation of La Niña). - More prolonged than expected inflation pressures and de-anchoring of inflation expectations. - Local COVID-19 outbreaks. - Growth slowdown in trade partners, persistent global inflation, rising advanced-economy interest rates, and higher sovereign spreads. - Fiscal risks from pre-election period actions and policy reversals around April-2023 general election. - Staff-built adverse scenario (assumptions and impacts for 2023): - Assumes 2021/2022 drought repeats in 2022/2023. - Real GDP growth: baseline 4.5 percent; adverse 1.5 percent. - External current account: baseline -1.9 percent of GDP; adverse -4.5 percent of GDP. - Fiscal impact: higher fiscal deficit; stock of debt increases by more than 3 percent of GDP. - No balance of payments need projected even under the adverse scenario. ### Pillar I — Ensure Macroeconomic Stability and Resilience (Key Measures) - Fiscal stance and targets - Authorities committed to converge to a fiscal deficit of 1.5 percent of GDP by 2024. - PCI arrangement includes quantitative ceilings on the fiscal deficit and on primary current expenditure to protect investment; includes a quantitative target on the net change of floating debt. - Caja Fiscal (public servants pension fund) - Caja Fiscal deficit: US$167 million in 2021; expected to increase to US$224 million in 2022. - Current reserves: US$430 million; projected exhaustion within the next three years unless addressed. - Transition law draft to be sent to Congress by end-year; reform target June 2023. - Draft contingency measures for Caja Fiscal estimate average annual savings of approximately US$130 million in the first five years if combined; effect of delaying depletion of accumulated surplus resources by three years; proposed submission to Congress on or before June 2023. - Pension funds supervision - Government to propose creation of a regulatory entity via draft bill (reform target, December 2023). - Revenue mobilization and tax administration - New mandatory electronic invoicing rollout: target to enroll at least 750 medium and large taxpayers by end-June 2023; completion target: October 2024 when 80 percent of invoices nationally will be issued electronically (SIFEN / e-kuatia). - Fiscal Responsibility Law (FRL 2.0) - Proposals to tighten provisions on current primary expenditures and civil servants' salaries; complement deficit ceiling with a staggered debt ceiling; proposed macro-fiscal rule: public sector debt may not exceed 40% of GDP; annual fiscal deficit limits conditional on debt levels (1.5 percent or 1.0 percent of GDP). - Monetary and exchange rate policy - BCP raised policy rate cumulatively by 775 basis points to 8.5 percent by late-September 2022. - Monetary policy aim: bring inflation back to 4 percent over the next 18 months. - Flexible exchange rate to act as shock absorber; BCP committed to maintain strong reserve position and increase FX intervention transparency. ### Pillar II — Enhance Productivity and Foster Economic Growth (Key Measures) - Public procurement reform - Draft law “Ley de Suministro y Contrataciones Públicas” approved by the Senate; regulations to be implemented (reform target, June 2023). - Civil service reform - Draft "Ley de la Función Pública y la Carrera del Servicio Civil" to be sent to Congress (reform target, December 2022). - Reorganization of state structure - Technical Secretariat for Planning legislative proposal to reorganize public administration (reform target, June 2023). - Governance and anti-corruption - Fund-led governance diagnostic assessment finalized and published by end-October 2022 (Prior Action). - Draft law to strengthen National Anti-Corruption Secretariat; national anti-corruption strategy planned. - AML/CFT - 2021 GAFILAT mutual evaluation shows improvements but moderate effectiveness; Fund to support multi-year capacity development. - Business climate and credit access - New legal framework for registration and guaranteeing of movable properties to be submitted to Congress (reform target, December 2022). ### Pillar III — Enhance Social Protection and Inclusiveness (Key Measures) - Formalization of the economy - Draft bill to formalize dependent workers in MSMEs and independent workers; reform target: submit to Congress on or before June 2023. - Social assistance programs - Tekoporã expansion: projected to 170,000 families in 2022 (reform target, December 2022). - “Pension Alimentaria para Adultos Mayores”: coverage to increase by 26,000 beneficiaries in 2022 (reform target, December 2022). - Implementation of SIPEN (Pension System) for non-contributory pensions managed by Directorate of Non-Contributory Pensions (reform target, December 2023). - Financial inclusion - Draft Financial Inclusion Law to mandate salary payments by electronic transfer, guarantee free bank account opening, and at least one non-fee cash withdrawal per month; draft has favorable opinions from two congressional committees. ### Program Modalities, Monitoring, and Conditionality - Program form: PCI; staff analysis indicates no present, prospective, or potential balance of payments need. - Monitoring instruments: - Quantitative Targets (QTs): cumulative semi-annual ceilings on central government fiscal deficit, on current primary expenditure, and on net change of floating debt. - Standard Continuous Targets: non-accumulation of external debt payment arrears (continuous target). - An inflation consultation band based on BCP projections will be a QT, adjustable during periodic revisions. - Given strong reserve position (over 200 percent of the ARA metric), no QT on Net International Reserves (NIR) is included. - Review schedule and timelines: - Reviews scheduled: June 1, 2023; December 1, 2023; June 1, 2024; November 1, 2024. - Program completion of each review subject to QTs and/or Reform Targets being set for the next two scheduled reviews or remaining period of the Instrument. - Selected program quantitative figures (as presented) - Ceiling on the central government fiscal deficit (in billions of guaraníes): end-Dec. 2022: -8,733; end-Jun. 2023: -2,322; end-Dec. 2023: -7,284. - Ceiling on current primary expenditure of the central government (in billions of guaraníes): end-Dec. 2022: 34,746; end-Jun. 2023: 17,432; end-Dec. 2023: 37,926. - Ceiling on the net incurrence of floating debt by the central government: end-Dec. 2022: 500; end-Jun. 2023: -2,100; end-Dec. 2023: 500. - Inflation consultation band (end-period center point and bands): end-Dec. 2022 center point: 8.8 (upper band 10.8; lower band 6.8); end-Jun. 2023 center point: 6.5 (upper band 8.5; lower band 4.5); end-Dec. 2023 center point: 4.1 (upper band 6.1; lower band 2.1). - Memorandum item — Social assistance benefits (cumulative since beginning of calendar year): end-Dec. 2022: 2,906; end-Jun. 2023: 1,434; end-Dec. 2023: 3,338. ### Debt Sustainability and External Sector Assessments (Selected) - External debt (percent of GDP, baseline): 2017: 39.9; 2018: 39.6; 2019: 41.7; 2020: 50.8; 2021: 47.0; 2022: 46.4; 2023: 43.4; 2024: 38.9; 2025: 37.6; 2026: 36.7; 2027: 35.7. - Gross external financing need (in percent of GDP): 2022: 13.3; 2023: 9.6; 2024: 9.6; 2025: 8.0; 2026: 7.8; 2027: 7.0. - Public gross financing needs (percent of GDP): 2021: 8.1; 2022: 8.3; 2023: 5.9; 2024: 4.1; 2025: 2.6; 2026: 2.9; 2027: 3.2. - Assessment highlights - External position in 2021 was substantially stronger than implied by fundamentals; reserves coverage comfortably above Fund metrics. - External debt projected to fall below 40 percent of GDP over the medium term. - Stress tests show sustainability under a range of adverse shocks; public debt remains sustainable under most standard shock scenarios though a constant primary fiscal balance scenario would raise debt significantly (to 48 percent of GDP by 2027). ### Social Outcomes, Formalization, and Inclusion (Selected) - Poverty and social spending - Poverty: declined from 57.7 percent in 2002 to 28 percent in 2008, then to 23.5 percent in 2019; rose to 26.9 percent in 2020 and remained similar in 2021. - Central government social spending: 5.4 percent of GDP in 2003 to 11.9 percent in 2020; 10.6 percent of GDP in 2021. - Pandemic social protection programs estimated to have prevented 233,000 people from falling below the poverty line in 2020 and 139,000 people in 2021. - Coverage and formalization challenges - Population (2021): 7.4 million. - High informality: 63.7 percent of non-agricultural workers worked informally (2019). - Only about 20 percent of employed population contributes to a retirement system; remaining 80 percent have no possibility of accessing retirement benefits. - Draft laws and reform targets to formalize dependent workers of MSMEs and independent workers (reform target, June 2023) and to implement SIPEN for non-contributory pensions (reform target, December 2023). - Social program targets (short-term) - Increase Tekoporã coverage from almost 166,000 families in 2021 to 170,000 families in 2022. - Increase coverage of the Food Subsidy Program for the Elderly by 26,000 people in 2022. - Draft National General Budget for 2023 allocations: US$323 million for the Food Subsidy Program for the Elderly and US$57.5 million for the Tekoporã Program. ### IMF Staff Support, Reviews, and Implementation Risks - Staff support authorities’ request for the two-year PCI-supported program; staff-level agreement reached on October 13, 2022; document date: November 2, 2022. - Review schedule: four reviews (June 1, 2023; December 1, 2023; June 1, 2024; November 1, 2024). - Capacity development: comprehensive strategy focusing on revenue mobilization, public financial management, and AML/CFT. - Implementation risks assessed as low conditional on maintaining political consensus for fiscal discipline and reforms; global economic uncertainties, adverse climate shocks, and 2023 elections pose risks to the baseline. *Source: IMF staff report extract — 1pryea2022004.* ### 2021. However, this year the economy is facing simultaneous shocks, including a severe ### 1pryea2022004 - 2021. However, this year the economy is facing simultaneous shocks, including a severe ### Context - Paraguay continues to recover from the COVID-19 pandemic amidst simultaneous shocks that would lead to flat GDP growth and inflation above the IT range this year. - Shocks cited include a severe drought in late 2021/early 2022 and a spike in global inflation exacerbated by Russia’s war in Ukraine. - Rising social demands within a politicized environment ahead of the 2023 general elections are noted. - The outlook is described as favorable, and the authorities are pursuing policies aimed at a stronger, more resilient, and inclusive development path. - On the back of very positive experiences with Fund-supported programs, the authorities request approval of a two-year program supported by the Policy Coordination Instrument (PCI) to underpin the implementation of needed structural reforms. - Footnote: "The PCI is available to all IMF members that do not need Fund financial resources at the time of approval. It is designed for countries seeking to demonstrate commitment to a reform agenda or to unlock and coordinate financing from other official creditors or private investors. (see https://www.imf.org/en/About/Factsheets/Sheets/2017/07/25/policy-coordination-instrument)" ### Main policy commitments (Program objectives) - Ensure Macroeconomic Stability and Resilience - Converge to the 1.5 percent of GDP fiscal deficit ceiling by 2024. - Reform the “Caja Fiscal” and the pension system. - Strengthen supervision of SOEs. - Enhance revenue collection. - Maintain a strong reserve position and continue publishing detailed information on foreign exchange operations. - Monetary policy objective - Aim to bring inflation back to the 4 percent target and keep inflation expectations well-anchored. - Commit to using foreign exchange interventions only to address disorderly market conditions. - Enhance productivity and foster economic growth - Strengthen public procurement, civil service, and the government structure. - Improve financial supervision, strengthen governance and control corruption, and improve the business climate. - Bolster efficient use of public resources and create more favorable conditions for private investment. - Modernize public institutions and increase government effectiveness. - Build resilience to climate change. - Enhance social protection and inclusiveness - Enhance social protection and inclusiveness programs. - Improve impact of social assistance programs, increase coverage among the vulnerable population, promote formalization of the economy, and strengthen financial inclusion. - Implement policies to reduce informality. ### Risks to the program and outlook - Program risks characterized as low given Paraguay’s positive economic outlook and strong external position. - Downside risks include: - Recurrent adverse weather conditions. - More prolonged than expected inflation pressures. - De-anchoring of inflation expectations. - Local COVID-19 outbreaks. - Potential consequences if risks materialize: - Higher exchange rate (ER) volatility. - Tighter monetary policy. - Lower growth. ### Staff support, approvals, and timeline - Staff support the authorities’ request for a two-year program under the PCI. - Document date: November 2, 2022. - Discussions: - Held in Asunción between August 25 and September 2, 2022 and continued from Washington D.C. - Staff-level agreement reached on October 13 (year implied 2022). - Approved by P. Alonso-Gamo (WHD) and E. Cerutti (SPR). - Staff team composition and participants: - Team head: Mauricio Villafuerte. - Team members: Tobias Roy, Mauricio Vargas, Yuanchen Yang, Manuk Ghazanchyan (all WHD), and Jehann Jack (SPR). - Research and administrative assistance: Jesús Sanchez and Nicolás Landeta (WHD). - Attendee from OED: Jorge Corvalan. - Meetings were held with Central Bank of Paraguay (BCP) President José Cantero, Minister of Finance Óscar Llamosas, other senior government officials, and representatives from the donor community. ### Program modalities and analytical content (document outline and data) - Document sections listed: - CONTEXT; RECENT DEVELOPMENTS; OUTLOOK AND RISKS; POLICY DISCUSSIONS (A. Pillar I. Ensure Macroeconomic Stability and Resilience; B. Pillar II. Enhance Productivity and Foster Economic Growth; C. Pillar III. Enhance Social Protection and Inclusiveness); PROGRAM MODALITIES AND RISKS; STAFF APPRAISAL. - Figures referenced: - 1. Recent Developments - 2. Fiscal Developments - 3. External Sector Developments - 4. Monetary Indicators - 5. Financial Sector Developments - Tables referenced: - 1. Selected Economic Indicators - 2a. Operations of the Central Bank Government (In billions of Guranies) - 2b. Operations of the Central Bank Government (In Percent of GDP) - 3. Balance of Payments - 4. Summary of Accounts of the Central Bank - 5. Summary of Accounts of the Financial System - 6. Gross External Financing Needs and Source 2021-24 *International Monetary Fund. PARAGUAY — REQUEST FOR A TWO-YEAR POLICY COORDINATION INSTRUMENT. November 2, 2022.* ### 7. Financial Soundness Indicators ________________________________________________________________ 30 ### 7. Financial Soundness Indicators ### Context - Paraguay continues to recover from the COVID-19 pandemic while facing simultaneous external shocks, including a severe drought and a spike in global inflation exacerbated by the impact of Russia’s war in Ukraine. - Government pressures to mitigate food and fuel price increases risk undermining fiscal convergence plans given very limited fiscal space. - Pre-electoral cycle toward the general elections in April 2023 increases political sensitivity to fiscal measures. - No immediate balance of payments problem despite shock to agricultural exports; substantial development and public investment gaps remain. - Authorities requested a two-year Fund-supported program under the PCI to: - Converge towards a fiscal deficit ceiling of 1.5 percent of GDP in the medium term (proposed under the Fiscal Responsibility Law (FRL)). - Advance structural reform projects to improve public sector efficiency, business climate, and social assistance programs. ### Recent developments - GDP growth and agriculture: - 2021 GDP growth: 4.1 percent. - 2019 and 2020 GDP contractions: 0.4 (2019) and 0.8 (2020). - 2022 growth revised down to 0.2 percent due to heatwaves and severe drought reducing soy production by about 57 percent in early 2022. - Inflation and monetary policy: - Annual headline inflation: 9.3 percent y-o-y by September 2022. - Central bank policy rate raised cumulatively to 8.5 percent (considered consistent with the neutral rate). - Inflation likely to close 2022 at about 9 percent; authorities’ target band: 2-6 percent. - External sector and reserves: - External current account deficit expected about 5 percent of GDP in 2022, driven by lower agricultural exports and higher fuel imports. - End-2021 gross international reserves covered about 8 months of 2022 projected imports; reserves-to-ARA metric ratio: 211 percent. - BCP FX interventions in 2022: about US$400 million. - As of October 2022, BCP net international reserves fell by about US$700 million; domestic banks reduced liquid external assets. - Exchange rate: depreciated by about 5 percent since the beginning of 2022. - Fiscal developments: - Cumulative 12-month fiscal deficit decreased slightly to 3.6 percent of GDP as of August 2022. - Authorities committed to reducing the fiscal deficit to 3 percent of GDP in 2022. - Fiscal pressures from extended tax reductions on fuel, union salary demands, VAT tax holiday proposals, and initiatives to inflate the 2023 wage bill. - Financial sector: - Solvency indicators exceed legal minimum capital requirements; profitability recovered to pre-pandemic levels. - Transitory forbearance measures target sectors affected by drought. - Instant Payment System (SPI) module launched May 2022 to enable 24/7 instant transactions. ### Outlook and risks - Baseline projections and expectations: - Growth expected to recover to 4.5 percent in 2023, supported by agricultural rebound. - Staff projects reserves to slightly increase to about 7 months of imports over the medium-term. - Reserves-to-ARA metric ratio projected about 195 percent for end-2022 (comfort zone: 100-150 percent). - 2023 fiscal deficit target: -2.3 percent of GDP. - Public debt projected to peak in 2022 at 39.7 percent of GDP and gradually decline thereafter. - Inflation projected to converge to 4 percent in Q1 2024. - Recent stress tests show adequate solvency in the banking system under extreme low-probability shocks. - Risks tilted to the downside: - A new drought (e.g., continuation of La Niña for a third consecutive year) could derail 2023 growth. - Growth slowdown in trade partners (Brazil, Argentina), persistent global inflation, rising advanced-economy interest rates, and sovereign spreads could pressure the exchange rate and external financing. - Inflation may fail to subside, forcing prolonged tight monetary policy. - Resurgence of the pandemic could deepen downturn, erode fiscal buffers, and increase social discontent. - Financial liquidity risks could rise with withdrawal of support measures and higher policy rates. - Fiscal risks from pre-election period actions and uncertainty from April-2023 general election. - Staff-built adverse scenario (assumptions and impacts): - Assumes 2021/2022 drought repeats in 2022/2023 with similar effects. - Adverse scenario results for 2023 (compared to baseline): - Real GDP growth: baseline 4.5 percent; adverse 1.5 percent. - External current account: baseline -1.9 percent of GDP; adverse -4.5 percent of GDP. - Fiscal impact: higher fiscal deficit; stock of debt increases by more than 3 percent of GDP. - No balance of payments need projected even under the adverse scenario. - Key macroeconomic indicator comparisons (selected rows from staff table): - Real GDP growth (in percent): 2022 Current Art.IV 0.2; 2023 Current Art.IV 4.5; 2023 Adverse* 1.5. - Per capita GDP (U.S. dollars, thousands): 2022 Current Art.IV 5.5; 2023 Current Art.IV 5.8; 2023 Adverse* 5.5. - Consumer prices (end of period; in percent): 2022 Current Art.IV 8.8; 2023 Current Art.IV 4.1; 2023 Adverse* 5.0. - External current account (percent of GDP): 2022 Current Art.IV -4.9; 2023 Current Art.IV -1.9; 2023 Adverse* -4.5. - Gross international reserves (e.o.p., in US$ billion): 2022 Current Art.IV 9.2; 2023 Current Art.IV 9.3; 2023 Adverse* 8.6. - Central government fiscal balance (percent of GDP): 2022 Current Art.IV -3.0; 2023 Current Art.IV -2.3; 2023 Adverse* -2.9. - Public sector debt (percent of GDP): 2022 Current Art.IV 39.7; 2023 Current Art.IV 39.4; 2023 Adverse* 43.0. - Note: *Adverse scenario assumes the agriculture sector hit by a weather-related shock in 2023 similar in magnitude to the 2022 one and assumes higher depreciation and inflation rates. ### Policy discussions — Program pillars and key measures - Program objectives: - Ensure macroeconomic stability and resilience by rebuilding policy buffers. - Enhance productivity and foster economic growth via structural reforms to public sector effectiveness, governance, and business climate. - Enhance social protection and inclusiveness by improving social assistance programs. - Pillar I — Ensure Macroeconomic Stability and Resilience: - Fiscal stance and targets: - Authorities committed to converge to a fiscal deficit of 1.5 percent of GDP by 2024. - PCI arrangement includes quantitative ceilings on the fiscal deficit and on primary current expenditure to protect investment. - Program incorporates a quantitative target on the net change of floating debt. - Expenditure recording and contingent claims: - Unregistered supplier claims reportedly could be around 0.5 percent of GDP; authorities intend to accommodate those claims as part of budget execution in 2023–2025 without adjusting fiscal deficit targets. - Treasury to introduce additional control and information routines to avoid future build-up. - Caja Fiscal (public servants pension fund) risks and measures: - Caja Fiscal deficit: US$167 million in 2021; expected to increase to US$224 million in 2022. - Current reserves: US$430 million; projected exhaustion within the next three years unless addressed. - Government preparing a "transition law" (draft to be sent to Congress by end-year; reform target June 2023) as transitory measures while working on comprehensive pension reform. - Pension funds supervision and investment restrictions: - Pension funds face tight legal restrictions on investment options and lack a comprehensive regulatory framework and dedicated regulator/supervisor. - Government to propose creation of a regulatory entity via draft bill (reform target, December 2023). - Fiscal Risk Report and SOE oversight: - Ministry of Finance producing a Fiscal Risk Report to identify macroeconomic and specific risks; expected publication by end-year. - Directorate General of Public Enterprises to restore control panel system for nine public companies (reform target, December 2022). - Revised Corporate Governance Law to be submitted to Congress (reform target, December 2023). - Domestic revenue mobilization: - Analysis planned of costs and benefits of tax expenditures, special regimes, and exemptions. - New mandatory electronic invoicing rollout: target to enroll at least 750 medium and large taxpayers by end-June 2023; full norm by October 2024. - Fiscal Responsibility Law (FRL) and fiscal protections: - Authorities pushing for a revamped FRL ("FRL 2.0") to tighten growth provisions on current primary expenditures and civil servants' salaries, refine escape clause triggers, and complement deficit ceiling with a staggered debt ceiling. - Government submitted a fiscal protection bill in April 2022 to prohibit initiatives to increase salaries or reduce taxes outside existing budget during electoral periods. - Monetary and exchange rate policy: - BCP raised policy rate cumulatively by 775 basis points to 8.5 percent by late-September 2022. - Monetary policy aim: bring inflation back to 4 percent over the next 18 months. - Flexible exchange rate to act as shock absorber; BCP committed to maintain strong reserve position and increase FX intervention transparency. - Pillar II — Enhance Productivity and Foster Economic Growth: - Public procurement reform: - Draft law “Ley de Suministro y Contrataciones Públicas” approved by the Senate, awaiting Chamber of Deputies (expected December 2022); regulations to be implemented (reform target, June 2023). - Civil service reform: - Draft "Ley de la Función Pública y la Carrera del Servicio Civil" to be sent to Congress (reform target, December 2022) to create merit-based single salary scale and strategic workforce planning. - Reorganization of state structure: - Technical Secretariat for Planning working on legislative proposal to reorganize public administration (reform target, June 2023). - Governance and anticorruption: - Fund-led governance diagnostic assessment finalized and to be published by end-October 2022 (Prior Action). - Draft law to strengthen National Anti-Corruption Secretariat (SENAC); authorities plan a national anti-corruption strategy informed by the diagnostic. - AML/CFT: - 2021 GAFILAT mutual evaluation shows significant improvements but moderate effectiveness in supervision, preventive measures, and financial intelligence; Fund to support multi-year capacity development with specific measures to be identified during PCI first review. - Business climate: - New legal framework for registration and guaranteeing of movable properties (to use as collateral) to be submitted to Congress (reform target, December 2022). - Pillar III — Enhance Social Protection and Inclusiveness: - Formalization of the economy: - Draft bill to formalize dependent workers in micro, small, and medium enterprises and independent workers; plan to send to Congress (reform target, June 2023). - Social assistance programs: - Tekoporã expansion: projected to 170,000 families in 2022 (reform target, December 2022). - “Pension Alimentaria para Adultos Mayores”: coverage to increase by 26,000 beneficiaries in 2022 (reform target, December 2022). - Implementation of SIPEN (Pension System) for non-contributory pensions managed by Directorate of Non-Contributory Pensions (reform target, December 2023), with subsequent expansion to other programs. - Financial inclusion: - Draft Financial Inclusion Law to mandate salary payments by electronic transfer, guarantee free bank account opening, and at least one non-fee cash withdrawal per month; draft has favorable opinions from two congressional committees and awaits National Congress discussion. ### Program modalities and risks - Program form and monitoring: - Paraguay meets criteria for use of the PCI; staff analysis indicates no present, prospective, or potential balance of payments need. - Program monitored via quantitative targets (QTs) and reform targets (RTs): - QTs include cumulative semi-annual ceilings on central government fiscal deficit, on current primary expenditure, and on net change of floating debt. - Non-accumulation of external debt payment arrears is a continuous target. - An inflation consultation band based on BCP projections will be a QT, adjustable during periodic revisions. - Given strong reserve position (over 200 percent of the ARA metric) and flexible exchange rate commitment, no QT on Net International Reserves (NIR) is included. - Prior action: publication of Fund-led Governance Diagnostic Assessment report by end-October (met). - Capacity development: - Program implementation supported by a comprehensive capacity development strategy focusing on revenue mobilization, public financial management, and AML/CFT (Annex IV). - Assessment of implementation risks: - Risks to implementation assessed as low, contingent on maintaining political consensus for fiscal discipline and reforms. - No balance of payments gap expected for next 12 months; adequate financing prospects for program period. - Global economic uncertainties, adverse climate shocks, and 2023 elections pose risks to baseline. ### Staff appraisal - Measures implemented in response to the pandemic and recent external shocks were appropriate to support the economy. - Despite exposure to many risks, recovery is expected to continue into next year. - Although fiscal deficits surged recently, public debt projections show a sustainable downward path starting in (text truncated in source). *Source: IMF staff report extract — 7. Financial Soundness Indicators.* ### 2023. Inflation reached double-digit levels, but there are signs that it is decelerating. The Central ### 1pryea2022004 - 2023. Inflation reached double-digit levels, but there are signs that it is decelerating. The Central ### Inflation and Monetary Policy - Inflation "reached double-digit levels" in 2022 but "there are signs that it is decelerating." - The Central Bank’s "timely and determined tightening of the monetary policy stance" has been effective in anchoring "medium-term inflation expectations." - CPI and core inflation dynamics (as presented): - CPI Inflation: series shown with Target midpoint and Core inflation, ex. fruits,veg,admin.prices,fuel. - Monetary policy rate: "currently at 8.5 percent" as the Central Bank has continuously tightened since August 2021. - Output and exchange rate: - "The output gap is expected to turn negative this year." - "Real exchange rate has stayed almost flat relative to the previous year." ### External Position and External Sector Developments - "Paraguay's external position in 2021 was substantially stronger than the level implied by fundamentals and desirable policies." - Current account and trade: - External current account deteriorated in 2022 "due to lower exports and higher oil prices." - Agricultural products: "make up a large share of exports." - Electricity exports: "continue to shrink due to sluggish generation and higher domestic consumption." - Capital flows and financing: - "Profit remittances are a major source of outward factor payments." - Foreign direct investment and government bond issuances "have been stable sources of capital." - "Foreign direct investment has been on the rise in Paraguay over the last decade." - Selected exact external figures (from tables): - Current Account (millions of U.S. dollars): 2018: -67; 2019: -178; 2020: 959; 2021: 368; 2022: -2,031; 2023: -828; 2024: -1,066; 2025: -444; 2026: -456; 2027: -374. - Gross international reserves (in millions of U.S. dollars): 2018: 7,844; 2019: 7,500; 2020: 9,976; 2021: 10,145; 2022: 9,195; 2023: 9,345; 2024: 9,895; 2025: 10,445; 2026: 10,995; 2027: 11,545. - Exports (fob, values, millions of U.S. dollars): 2018: 13,730; 2019: 12,702; 2020: 11,494; 2021: 14,025; 2022: 12,965; 2023: 15,375; 2024: 16,042; 2025: 17,173; 2026: 17,784; 2027: 18,539. - Imports (cif, values, millions of U.S. dollars): 2018: -12,917; 2019: -12,251; 2020: -10,036; 2021: -13,087; 2022: -13,939; 2023: -15,084; 2024: -15,916; 2025: -16,391; 2026: -16,995; 2027: -17,584. ### Fiscal Policy, Public Finances, and Programmatic Agenda - Government agenda (Program Statement) aims at "rebuilding policy buffers while advancing structural and institutional reforms to enhance macroeconomic stability and resilience." - Fiscal rule and deficit target: - Return to the fiscal deficit ceiling of "1.5 percent" is "essential to guarantee debt sustainability in the medium term." - Staff concurred on policy priorities to preserve fiscal sustainability: - "Enhancing domestic revenue mobilization." - "Reforming the 'Caja Fiscal.'" - "Raising the efficiency of the public sector." - Additional policies: "improving public companies' oversight and safeguarding the fiscal account in electoral times" to reduce fiscal risks. - Fiscal performance and projections (exact figures from tables): - Central Government Fiscal Deficit (In percent of GDP): 2010–2024 series shown with FRL ceiling (since 2013); specific Net Lending/Borrowing (Overall Balance) in billions of Guaranies: 2018: -2,977; 2019: -6,651; 2020: -14,729; 2021: -9,827; 2022: -8,733; 2023: -7,284; 2024: -4,931; 2025: -5,508; 2026: -5,555; 2027: -6,076. - Public Sector Debt (excl. Central Bank Bills, percent of GDP): 2018: 22.3; 2019: 25.8; 2020: 36.9; 2021: 37.2; 2022: 39.7; 2023: 39.4; 2024: 39.3; 2025: 38.4; 2026: 37.7; 2027: 36.8. - Central Government Revenues (percent of GDP): 2018: 14.1; 2019: 14.2; 2020: 13.5; 2021: 13.9; 2022: 13.9; 2023: 14.2; 2024: 14.5; 2025: 14.4; 2026: 14.3; 2027: 14.3. - Central Government Expenditures (percent of GDP): 2018: 15.4; 2019: 17.0; 2020: 19.7; 2021: 17.5; 2022: 16.9; 2023: 16.5; 2024: 16.0; 2025: 15.9; 2026: 15.7; 2027: 15.8. - Primary balance (percent of GDP): 2018: 11.6; 2019: 12.2; 2020: 14.2; 2021: 12.6; 2022: 12.1; 2023: 12.2; 2024: 11.8; 2025: 11.6; 2026: 11.5; 2027: 11.3. - Program support and financing: - The requested two-year Fund-supported PCI "would provide an appropriate timeframe" to implement reforms and targets. - "Paraguay meets the criteria for use of the PCI" and "the current analysis does not indicate a present, prospective, or potential balance of payments need." - Staff supports the authorities’ request for a PCI-supported program. ### Structural Reforms, Governance, and Social Programs - Structural reform priorities: - "Modernize public institutions." - "Increase government effectiveness." - "Improve governance and control corruption." - "Improve the business climate" to foster sustained growth. - IMF staff view: - Paraguay benefited from prior technical assistance in "public financial management, governance, financial supervision, and the transition to a sustainable and green economy." - Staff concurs that reforms included in the PCI "would strengthen the efficient use of public resources and create more favorable conditions for private investment." - Social safety net and inclusion: - COVID-19 revealed significant gaps in Paraguay’s social safety net. - Challenges: "High informality, inequality, and poverty" remain relevant policy challenges. - The PCI proposes measures to: - "Improve the impact of social assistance programs." - "Increase their coverage among the vulnerable population." - "Foster the formalization of the economy." - "Strengthen financial inclusion." ### Financial Sector Stability and Banking System - Banking system status: - "The banking system remains stable and liquid." - Opportunity to continue authorities' "financial inclusion agenda." - Financial soundness and trends (exact indicators): - Regulatory capital/risk-weighted assets: 2018: 15.2; 2019: 16.1; 2020: 17.9; 2021: 18.3; 2022M6: 19.6. - NPLs/total loans: 2018: 2.0; 2019: 2.6; 2020: 2.9; 2021: 2.8; 2022M6: 3.1. - Return on assets: 2018: 2.6; 2019: 2.5; 2020: 2.2; 2021: 2.3; 2022M6: 2.0. - Liquid assets/total assets: 2018: 30.8; 2019: 31.8; 2020: 29.5; 2021: 25.2; 2022M6: 21.6. - Interest rate developments: - Lending rates increased since the last quarter of 2021 in response to normalization of monetary policy. - Lending Rate and Interest Rate Spread series shown; Interest spread and average lending rate plotted. ### Key Statistics and Projections (selected exact figures) - Macroeconomic projections (Real GDP growth, percent): - 2018: 3.2; 2019: -0.4; 2020: -0.8; 2021: 4.1; 2022: 0.2; 2023: 4.5; 2024: 3.5; 2025: 3.5; 2026: 3.5; 2027: 3.5. - Consumer prices (end of period, percent): - 2018: 3.2; 2019: 2.8; 2020: 2.2; 2021: 6.8; 2022: 8.8; 2023: 4.1; 2024: 4.0; 2025: 4.0; 2026: 4.0; 2027: 4.0. - Monetary policy rate, year-end: - 2018: 5.3; 2019: 4.0; 2020: 0.75; 2021: 5.25; 2022: ...; later projections: ... - Social and demographic 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 - GDP per capita (US$, 2021): 5,207 - Central government fiscal aggregates (percent of GDP): - Central government revenues: 2022: 13.9; 2023: 14.2. - Central government expenditures: 2022: 16.9; 2023: 16.5. - Central government net lending/borrowing: 2022: -3.0; 2023: -2.3. - Reserves and adequacy: - Gross international reserves (millions of U.S. dollars): 2022: 9,195; 2023: 9,345. - Reserves in months of next-year imports of goods and services: 2022: 6.8; 2023: 6.5; 2024: 6.7; 2025: 6.8; 2026: 6.9; 2027: 7.0. *Source: IMF staff report for Paraguay (content unit: 1pryea2022004).* ### Annex I. Risk Assessment Matrix ### Annex I. Risk Assessment Matrix ### External Risks - Intensifying spillovers from Russia’s war in Ukraine (High / ST) - Expected impact: High. Disruptions of trade channels already affected a large share of exports of meat to Russia; availability and prices of imported fertilizers (key for soy production) were affected. - Recommended response: The government should facilitate access to alternative meat and fertilizer markets. - Local Covid-19 outbreaks (Medium / ST) - Expected impact: Outbreaks in slow-to-vaccinate countries or emergence of more contagious vaccine-resistant variants force new lockdowns or inhibit commerce, resulting in extended supply chain disruptions, slower growth, capital outflows, and debt distress in some EMDEs. - Abrupt growth slowdown in China due to Covid-19 lockdowns, rising geopolitical tensions, a sharper-than-expected slowdown in the property sector (Medium / ST) - Expected impact: Medium. Global pandemic persistence and/or abrupt Chinese deceleration may dampen external demand, foreign inflows, and border trades. - Recommended response: Monetary policy, including exchange rate interventions, should balance the impact of lower activity with high-inflation scenarios. - De-anchoring of inflation expectations and stagflation (Medium / ST) - Expected impact: Medium. Tighter monetary policy in AEs could lead to capital outflows, currency depreciation and higher borrowing costs in Paraguay. - Recommended response: Assure fiscal stability; calibrate foreign exchange interventions to smooth the impact of depreciation on domestic prices. - Commodity price shocks - Expected impact: High. Persistent global prices could further increase inflation rates in Paraguay; higher commodity prices would benefit fiscal revenues but supply disruptions could lead to production stoppages. - Recommended response: Monetary policy should be calibrated to face scenarios with lower growth and high prices. - Systemic social unrest (High / ST, MT) - Expected impact: Rising inflation, declining incomes, and worsening inequality amplify social unrest and political instability, causing capital outflows, slowing economic growth, and economically damaging populist policies. - Deepening geo-economic fragmentation and geopolitical tensions (High / ST, MT) - Expected impact: Medium. Social unrest in the region may disrupt external demand from trading partners and raise risk premia on financial assets, tightening financial conditions for Paraguay. - Recommended response: Continue social policies supporting the most vulnerable (including informal workers); advance governance and anti-corruption reforms to strengthen transparency, equity and effectiveness of public sector operations. - Natural disasters related to climate change - Expected impact: High. Agriculture and hydro-energy production are most affected; natural disasters amplify supply chain disruptions and inflationary pressures, causing water and food shortages and reducing medium-term growth. - Recommended responses: Short-term buffer via exchange rate depreciation; medium-term measures to reduce export concentration, diversify the mix of clean power generation, and facilitate adaptation in agriculture. ### Domestic Risks - Weather-related shocks (Medium to High / ST) - Expected impact: Medium to High. Shocks to agriculture affect GDP growth, export performance, exchange rate, and the financial sector due to banks' agricultural lending. Energy-sector shocks would lessen government revenue. - Recommended response: Exchange rate could absorb some shock; foreign exchange interventions can avoid disorderly market conditions. - Fiscal sustainability (Medium / ST, MT) - Context: After large deficit spikes in 2020 and 2021 due to the pandemic, the proposed path for returning to the FRL stipulated deficit ceiling by 2024 is near the threshold to guarantee fiscal and debt sustainability. - Expected impact: Medium to High. Fiscal stability significantly impacts investor confidence, financing costs, and growth. - Recommended responses: Strengthen ability to raise revenues and control expenditure increases; reform civil services and public procurement processes. ### Annex II. External Sector Assessment — Overall Findings and Policy Responses - Overall assessment: The external position of Paraguay in 2021 was substantially stronger than the level implied by fundamentals and desirable policies. - The EBA-Lite current account (CA) model points to a 4.4 percent gap in 2021, higher than the last assessment’s gap and slightly above the threshold for the same classification of the overall assessment. - External stability risks remain contained given Paraguay’s sizable reserve buffers. - Potential policy responses: - Improve governance and reduce vulnerabilities to corruption. - Improve the business climate. - Diversify the energy mix. - Formalize the economy. - These policies aim to enhance Paraguay’s attractiveness for foreign direct investment and capital inflows. ### Foreign Assets and Liabilities: Position and Trajectory (selected statistics) - 2021 (% GDP): NIIP: -23; Gross Assets: 43; Debt Assets: 17; Gross Liab.: 66; Debt Liab.: 19. - NIIP improved moderately to -23 percent of GDP in 2021 from -24 percent of GDP in 2020. - Gross liabilities increased by 3 percent; gross assets declined marginally (0.1 percent). - External public debt rose to 32.6 percent of GDP in 2021 from 31.9 percent of GDP in 2020. - Public external debt as at end-August 2022: $13.4 billion (up from $12.6 billion at end-2021). - Public external debt composition: 86 percent USD-denominated; primarily sovereign bond liabilities (48 percent) and multilateral debt (47 percent). - Assessment: External debt is expected to decline going forward; external position remains sustainable under a range of adverse shocks with gross international reserves coverage ratio expected to be comfortably within the recommended range of the ARA metric. ### Current Account: Background and Assessment - Historical context: - CA averaged 1.2 percent of GDP per year for 2017-2021. - CA balance was 2.7 percent of GDP in 2020 (from -0.5 percent in 2019) largely due to a sharp decline in imports, lower oil prices, and a large increase in soybean prices. - In 2021, CA surplus is estimated at 0.9 percent of GDP, primarily due to rebound of imports and higher oil prices. - As at end-July 2022, registered imports rose by 33 percent y/y; registered exports fell by 1 percent y/y. - Medium-term outlook: CA balance expected to remain at just under 1 percent of GDP, reflecting rebound in soybean production, stabilization of international oil prices, and phase-out in interest payments linked to the binational loan. - Assessment details: - The CA gap increased to 4.4 percent of GDP in 2021 (from an estimated 2.7 percent). - The current account gap components: policy gap 1.8 percent of GDP; residual from CA regression model 2.6 percent of GDP. - Staff’s preferred approach nets out amortization to binationals, giving a qualified adjusted CA gap of 2.6 percent of GDP. - The REER model finds a CA gap of 1.6 percent of GDP, reflecting a REER undervaluation of 6.5 percent. ### Model Estimates for 2021 (in percent of GDP) - CA-Actual: 0.9 - CA minus amortization to binationals: -0.9 - Cyclical contributions (from model): (-) -0.4 (both columns) - COVID-19 adjustor: 0.0 (both columns) - Natural disasters and conflicts: -0.2 (both columns) - Adjusted CA: 1.6 and -0.3 (two columns shown in source) - CA Norm (from model): -2.8 (with adjustments 0.0) → Adjusted CA Norm: -2.8 - CA Gap: 4.4; 2.6; 1.6 (three-model presentation) - o/w Relative policy gap: 1.8; 0.0 - Elasticity: -0.25; -0.25 - REER Gap (in percent): -17.6; -10.4; -6.5 ### Real Exchange Rate - Background: In 2021, the REER appreciated modestly (1 percent), largely driven by differences in inflation. The REER appreciated in each of the last 7 years except 2018 (depreciated by 3.2 percent). - Assessment: REER gap derived from the EBA-Lite CA model and elasticity -0.25 resulted in -17.6 percent. Qualified adjustments and the EBA-Lite REER model suggest REER gaps of -10.4 percent and -6.5 percent, respectively. - Cross-partner differences: Real exchange rate vis-à-vis Argentina depreciated by 18 percent; real exchange rate vis-à-vis Brazil appreciated by 0.9 percent. ### Capital and Financial Accounts: Flows and Policy Measures - Background: - Sovereign bond issuances and FDI have been major sources of inflows. - Government bond placements: about $500 million each year in 2018 and 2019; $1,450 million total in 2020 (including a $1,000 million issuance); $826 million in 2021 (net issuance $495 million after $330 million used to pre-pay a bullet payment). - FDI: about 0.3 percent of GDP in 2021; projected to pick up to over 1 percent of GDP in 2022 and 4-4.5 percent of GDP in 2023 and 2024 owing to private investment in a new pulp mill (Paracel). - Assessment: Paraguay has a fully open capital and financial account but still shallow financial markets. Vulnerabilities remain contained given government external borrowing reception and FDI prospects. ### FX Intervention and Reserves Level - Background: - Gross international reserves increased from roughly $8 billion in 2019 to about $10 billion at end-2021. - Reserves increased by over $2 billion in 2020, reflecting sovereign bond issuances and FX interventions early that year. - In 2021, FX interventions declined; the Guaraní closed the year with slight appreciation. - As at end-August 2022, reduced agricultural exports and elevated import prices generated higher FX market volatility, triggering FX interventions by the BCP of about US$400 million. - Assessment: - Reserves coverage: 8.1 months of imports in 2021 (fluctuated from 8.3 and 8.6 in 2019 and 2020 to 8.1 in 2021). - The reserves level for 2021 is comfortably above the Fund’s metrics for a small open economy. - Policy recommendation: Maintain a flexible exchange rate as the first line of defense to absorb external shocks; limit discretionary interventions to exceptional situations of disorderly market conditions. *Source: Annex I. Risk Assessment Matrix and Annex II. External Sector Assessment (IMF Country Report content provided).* ### Annex III. Debt Sustainability Assessment ### Annex III. Debt Sustainability Assessment ### A. External Debt Sustainability Analysis - Recent developments - External debt in Paraguay has recently increased to about 47 percent of GDP driven by the economic impact of the COVID-19 crisis. - The government issued international bonds for about US$2.8 billion in the last three years, mainly to finance COVID-19 related health expenditures and the pre-payment of international bonds falling due in 2023. - Most of the external debt is owed by the public sector (about 35 percent of GDP). - Baseline projections and outlook - External debt is projected to fall below 40 percent of GDP over the medium term. - The external position remains sustainable under a range of adverse shocks, mainly reflecting large improvements in the non-interest current account going forward. - Gross external financing needs will remain at comfortable levels going forward, supported by lower debt repayment needs, improved non-interest current account balance, and higher real GDP growth. - Key baseline indicators (selected values from Table 1) - Baseline: External debt: 2017: 39.9; 2018: 39.6; 2019: 41.7; 2020: 50.8; 2021: 47.0; 2022: 46.4; 2023: 43.4; 2024: 38.9; 2025: 37.6; 2026: 36.7; 2027: 35.7 (in percent of GDP) - Change in external debt: 2017: -3.0; 2018: -0.4; 2019: 2.1; 2020: 9.1; 2021: -3.8; 2022: -0.6; 2023: -3.1; 2024: -4.5; 2025: -1.2; 2026: -0.9; 2027: -1.0 - Current account deficit, excluding interest payments: 2017: -4.5; 2018: -1.4; 2019: -1.2; 2020: -4.5; 2021: -2.7; 2022: 3.0; 2023: 0.0; 2024: 0.4; 2025: -0.3; 2026: -0.2; 2027: -0.3 (in percent of GDP) - Net non-debt creating capital inflows (negative): 2017: -1.3; 2018: -0.8; 2019: -0.4; 2020: -0.3; 2021: -0.3; 2022: -1.2; 2023: -4.0; 2024: -4.5; 2025: -1.4; 2026: -1.0; 2027: -1.0 (in percent of GDP) - External debt-to-exports ratio (in percent): 2017: 109.8; 2018: 108.4; 2019: 116.0; 2020: 148.7; 2021: 126.6; 2022: 140.1; 2023: 118.1; 2024: 106.4; 2025: 102.7; 2026: 102.2; 2027: 100.9 - Gross external financing need (in billions of US dollars): 2017: 1.4; 2018: 2.6; 2019: 3.1; 2020: 2.0; 2021: 3.0; 2022: 5.5; 2023: 4.2; 2024: 4.4; 2025: 3.9; 2026: 4.1; 2027: 3.8 - Gross external financing need (in percent of GDP): 2017: 3.5; 2018: 6.6; 2019: 8.1; 2020: 5.5; 2021: 7.7; 2022: 13.3; 2023: 9.6; 2024: 9.6; 2025: 8.0; 2026: 7.8; 2027: 7.0 - Macroeconomic assumptions (selected) - Nominal GDP (US dollars): 2017: 39.4; 2018: 40.2; 2019: 37.9; 2020: 35.4; 2021: 39.5; 2022: 41.1; 2023: 43.7; 2024: 45.9; 2025: 49.0; 2026: 51.7; 2027: 54.6 (billions of US dollars) - Real GDP growth (in percent): 2017: 4.8; 2018: 3.2; 2019: -0.4; 2020: -0.8; 2021: 4.1; 2022: 0.2; 2023–2027: 4.5; 3.5; 3.5; 3.5; 3.5 - Nominal external interest rate (in percent): 2017: 3.8; 2018: 3.9; 2019: 3.9; 2020: 4.0; 2021: 3.9; 2022: 4.4; 2023: 4.3; 2024: 4.6; 2025: 3.2; 2026: 3.2; 2027: 3.2 - Growth of exports (US dollar terms, in percent): 2017: 11.4; 2018: 2.4; 2019: -7.2; 2020: -11.1; 2021: 21.0; 2022: -7.1; 2023: 17.9; 2024: 4.4; 2025: 7.0; 2026: 3.6; 2027: 4.2 - Growth of imports (US dollar terms, in percent): 2017: 16.9; 2018: 11.5; 2019: -4.9; 2020: -20.1; 2021: 29.5; 2022: 7.4; 2023: 8.2; 2024: 5.5; 2025: 3.2; 2026: 3.8; 2027: 3.5 - Stress tests and shocks - Shocks to growth, non-interest current account balance, a real depreciation shock, and a combined shock have only negligible impacts on the baseline debt sustainability (Figure 1). - Individual shocks are permanent one-half standard deviation shocks. Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. One-time real depreciation of 30 percent occurs in 2010 (as an example used in the figure notes). - Scenario with key variables at their historical averages: 47.5; 47.5; 42.4; 41.7; 38.6; 37.8; 36.4; 35.2; -0.1 (table values shown across projection years). ### B. Public Sector Debt Sustainability Analysis - Recent developments and baseline trajectory - Paraguay’s public debt increased significantly during the 2019-2022 external shocks due to a vigorous countercyclical fiscal response. - Since 2018 (the last pre-crisis year), gross public debt rose from 22.3 percent of GDP to 37.2 percent of GDP (2021). - Growth of public debt has decelerated in line with the government’s fiscal consolidation path toward the fiscal deficit ceiling mandated by the fiscal rule (1.5 percent of GDP). - Public debt is projected to peak at 39.7 percent in 2022 and to gradually decline to just below 37 percent of GDP in the medium term in the baseline scenario. - Sustainability under alternative scenarios - Public debt remains sustainable under most alternative standard shock scenarios. - Constant primary fiscal balance scenario (continuation of high recent deficits) produces the steepest public debt increase, rising to 48 percent of GDP by 2027. - Historical scenario (real growth rates, real interest rates, and primary balances at historical averages over the past ten years) produces a debt trajectory very similar to the baseline scenario. - A standard real interest rate shock based on historical maximum interest rates produces similar results to the baseline. - Note: medium-term interest rate risks appear low as no sovereign bond refinancing is due until 2026. - Key baseline public sector indicators (selected values from Figures/Tables) - Nominal gross public debt (percent of GDP): 2020: 17.5; 2021: 36.9; 2022: 37.2; 2023: 39.7; 2024: 39.4; 2025: 39.3; 2026: 38.3; 2027: 37.6; 36.8 - Public gross financing needs (in percent of GDP): 2020: 2.0; 2021: 8.1; 2022: 8.3; 2023: 5.9; 2024: 4.1; 2025: 2.6; 2026: 2.9; 2027: 3.2; 3.4 - Real GDP growth (in percent): 2020: 3.6; 2021: -0.8; 2022: 4.1; 2023: 0.2; 2024: 4.5; 2025–2027: 3.5 each year - Inflation (GDP deflator, in percent): 2020: 3.3; 2021: 2.3; 2022: 7.1; 2023: 6.9; 2024: 3.7; 2025: 3.1; 2026: 5.4; 2027: 4.2; 4.4 - Nominal GDP growth (in percent): 2020: 7.0; 2021: 1.4; 2022: 11.5; 2023: 7.1; 2024: 8.4; 2025: 6.7; 2026: 9.0; 2027: 7.8; 8.0 - Effective interest rate (in percent): 2020–2027 path (selected): 2020: 5.3; 2021: 5.6; 2022: 4.8; 2023: 1.6; 2024: 1.8; 2025: 2.1; 2026: 2.5; 2027: 2.9; 3.3 - Contribution to changes in public debt (selected flows) - Change in gross public sector debt (cumulative): 2020: 1.5; 2021: 11.1; 2022: 0.3; 2023: 2.4; 2024: -0.3; 2025: -0.1; 2026: -0.9; 2027: -0.7; -0.8; -0.4 - Identified debt-creating flows: 2020: 2.0; 2021: 12.5; 2022: 0.1; 2023: 1.6; 2024: -0.7; 2025: -0.8; 2026: -1.7; 2027: -1.4; -1.5; -4.4 - Primary deficit (in percent of GDP): 2020: 0.3; 2021: 5.7; 2022: 4.5; 2023: 3.5; 2024: 2.1; 2025: 0.9; 2026: 1.0; 2027: 1.0; 1.0; 9.6 (table lists cumulative or series values) - Primary (noninterest) revenue and grants (in percent of GDP): 2020: 18.2; 2021: 18.7; 2022: 18.9; 2023: 19.0; 2024: 19.8; 2025: 20.3; 2026: 20.0; 2027: 19.8; 19.7; 118.6 (table lists series) - Primary (noninterest) expenditure (in percent of GDP): 2020: 18.4; 2021: 24.4; 2022: 23.4; 2023: 22.5; 2024: 21.9; 2025: 21.2; 2026: 21.1; 2027: 20.8; 20.7; 128.2 (table lists series) - Stress tests (Figure 4: scenarios and outcomes) - Primary Balance Shock: assumed primary balance path: 2022: -3.5; 2023: -3.2; 2024: -1.9; 2025: -1.0; 2026: -1.0; 2027: -1.0. Result: larger debt increase relative to baseline. - Real GDP Growth Shock: real GDP growth path: 2022: 0.2; 2023: 1.5; 2024: 0.5; 2025–2027: 3.5 each year. - Real Interest Rate Shock: effective interest rate path: 2022: 1.6; 2023: 1.8; 2024: 2.8; 2025: 3.5; 2026: 4.1; 2027: 4.7. - Real Exchange Rate Shock and Combined Shock tested; combined macro-fiscal shock shows higher debt trajectories but overall results indicate sustainability under most shocks. - Composition and maturity (selected insights) - Charts indicate composition by maturity (medium and long-term vs short-term) and by currency (local currency-denominated vs foreign currency-denominated) for 2011–2027, showing predominance of medium and long-term and a mix of local and foreign currency denomination in projections. - Key assumptions used across scenarios (examples) - Baseline underlying assumptions: Real GDP growth, Inflation (GDP deflator), Primary Balance, Effective interest rate as listed in the scenario tables for Baseline, Historical, and Constant Primary Balance scenarios. *Source: IMF staff estimates and projections as presented in Annex III. Debt Sustainability Assessment.* ### 1. Re iew Schedule. Paraguay’s implementation of the Program will be assessed by the Fund ### 1pryea2022004 - 1. Re iew Schedule. Paraguay’s implementation of the Program will be assessed by the Fund ### Review schedule and modalities - Reviews are scheduled to be conducted by June 1, 2023, December 1, 2023, June 1, 2024, and November 1, 2024, subject to paragraphs 7(b) and (c) of the PCI Decision. - Completion of each review will be subject to Quantitative Targets or Reform Targets, or both, where established, having been set for the shorter of (a) the next two scheduled reviews, or (b) the remaining period of the Instrument. - A review will be completed only if the Fund is satisfied that the Program is on track to achie e its objecti es, based on rele ant factors such as: - Paraguay’s observance of the Standard Continuous Targets set forth in Table 1b of the Program Statement; - the Quantitative Targets and Reform Targets set forth in Tables 1a and 2 of the Program Statement and further specified in the TMU; - consultation under the inflation consultation band as set forth in Table 1a of the Program Statement and further specified in paragraphs 12, 13, and 14 of the TMU; - Paraguay’s policy understandings for the future. - Paraguay will provide the Fund with such information as the Fund requests in connection with Paraguay’s progress in implementing the policies and reaching the objectives of the Program. - During the period of this Instrument, Paraguay will consult with the Fund on the adoption of any measures that may be appropriate at the initiative of Paraguay or whenever the Managing Director of the Fund requests such a consultation; consultations may include correspondence and visits of officials. ### Program overview and objectives (Program Statement, November 1, 2022) - Program period: November 2022–November 2024. - Three pillars: - (i) ensuring macroeconomic stability and resilience; - (ii) improving productivity and fostering economic growth; - (iii) strengthening social protection and inclusion. - Monitoring instruments: quantitative targets, standard continuous targets, reform targets, and an inflation consultation clause linked to Central Bank of Paraguay (BCP) projections, described in the Program Statement and the Technical Memorandum of Understanding (TMU). - Four reviews to be conducted every six months to assess progress and determine additional measures. ### Recent economic developments and near-term outlook - 2020 GDP change: contracted by 0.8 percent. - 2021 GDP change: rebounded by 4.1 percent. - Severe drought between late 2021 and early 2022 caused significant crop losses of soybeans and other agricultural commodities. - GDP growth projections for 2022: around 0.2 percent. - Demand-side projections for 2022: - private consumption growth: 2.6 percent; - investment growth: 3.6 percent; - public consumption expected to fall by 5.5 percent. - Real exports: projected to contract at double-digit growth rates. - Current account balance for 2022: expected deficit of about 5.0 percent of GDP. - Inflation projections: - 2022: 8.8 percent; - 2023: 4.1 percent; - inflation expected to converge to the inflation target during the first quarter of 2024. - Observed inflation: - September (year-on-year): 9.3 percent; - through the ninth month of the year recorded a change of 7.1 percent. - Monetary policy: Monetary Policy Committee increased the monetary policy rate to 8.5 percent per annum at its September meeting, reflecting an increase of 325 basis points from December 2021. - Fiscal position as of August (cumulative): - fiscal deficit: 1.2 percent of GDP; - public investment: 1.6 percent of GDP; - operating income: 0.4 percent of GDP; - cumulative growth rate in tax revenues as of August: 18.4 percent. - Fiscal target: commitment to reduce the deficit by 0.7 percent of GDP (relative to prior target) remains unchanged. ### Key risks highlighted - Global risks: - further escalation of the conflict between Russia and Ukraine; - tightening of financial conditions and accelerated monetary policy normalization in advanced economies; - increased likelihood of recession in major advanced economies; - new variants of COVID-19. - Domestic risks: - recurrent climatic shocks (including likelihood of another drought "la Niña" for the 2022/2023 soybean season); - availability of fertilizers (recent import volumes below historical averages). - External price shocks could exert further upward pressure on inflation (e.g., oil, wheat, corn). ### Growth outlook - 2023 GDP growth estimate under normal weather conditions: 4.5 percent. - Growth drivers in 2023: recovery of the primary sector, agro-industries, and trade; recovery of exports; increased dynamism in consumption and investment. ### Pillar I — Ensuring macroeconomic stability and resilience (fiscal and monetary stance) - Fiscal objective: gradually reduce the fiscal deficit to the original ceiling of 1.5 percent of GDP set in the Fiscal Responsibility Law (LRF). - Monetary and exchange rate policy: aimed at ensuring low and stable inflation and exchange rate flexibility. - Fiscal convergence plan: - National General Budget for fiscal year 2023 authorized a deficit of 2.3 percent of GDP (0.7 percentage point lower than the 2022 target), consistent with gradual convergence to 1.5 percent of GDP by 2024. - Return to public investment levels of 2.0 percent of GDP by 2024 (investments equal to US$1 billion per year). - Expenditure control measures: - maintain a ceiling on primary current expenditure growth of 4 percent in real terms; - current spending projected to reach 13 percent of GDP by the end of 2024. - Public debt projection (central government) under baseline with no adverse shocks: - public debt level of 32.8 percent of GDP at the end of 2024. - Commitment to keep central government floating debt’s net changes at low levels at the close of each fiscal year. - Corresponding quantitative targets for the fiscal deficit, primary current expenditure, and floating debt’s net changes described in Table 1a (Table content not reproduced here). ### Structural fiscal policies and reforms - Government proposes a Transformation of the State package, including reform of the Public Sector Retirement and Pension System, to contribute to financial and actuarial sustainability and align with Law No. 5098/13 ON FISCAL RESPONSIBILITY. - Rationale: maintain macroeconomic stability and resilience while supporting sustainable development and improved social protection and inclusion. ### Reform of the Public Sector Retirement Regime (Caja Fiscal) - Assessment: the Public Sector Retirement and Pension Regime is not sustainable in the medium term. - Cumulative deficit in 2021: US$167 million. - Contributors to insufficient contributions in 2021: - National Teachers Corps under the Civilian Program: -US$93.4 million; - Armed Forces under the Non-Civilian Program: -US$74.1 million; - National Police under the Non-Civilian Program: -US$63.3 million. - Estimated deficit for the current year: approximately US$224 million, of which: - Non-Civilian Contributory Program: US$153 million; - Civilian Contributory Program: US$71 million (mainly due to the deficit of the National Teachers’ Sector). - Coverage and equity concerns: - only about 20 percent of the employed population contributes to a retirement system; remaining 80 percent have no possibility of accessing retirement benefits; - about 16,000 retirees of the public security services each year absorb more than US$150 million from tax resources. - Actuarial calculation for 2019–2056: presents a deficit of 28.5 percent of the 2019 GDP, which in nominal terms is approximately US$11,408 million at present value. - Accumulated surplus deposited with the BCP as of December 2021: approximately US$429 million. - Projected cash flow deficit for the Civilian Contributory Program: expected to reach a total of close to US$800 million by 2026. - Policy implication: essential to move forward with reforms to the “Caja Fiscal” to restore sustainability. *Source: Program Statement and Appendix I, Paraguay — Program Statement for the Period of November 2022–November 2024 (as provided).* ### 18. A draft law on contingency measures for the Caja Fiscal will be presented, aimed at ### 1pryea2022004 - 18. A draft law on contingency measures for the Caja Fiscal will be presented, aimed at ### Contingency measures for the Caja Fiscal (pensions) - A draft law on contingency measures for the Caja Fiscal will be presented to introduce the most urgent and necessary adjustments to achieve the financial sustainability of the system in the medium term, until the comprehensive reform is carried out. - The preliminary draft law has the general objective of establishing contingency measures mainly for those sectors in deficit, aimed at the stability and sustainability of the Fiscal Fund. - Estimated financial impact if these measures are combined: - Average annual savings of approximately US$130 million in the first five years of implementation. - Effect of delaying the depletion of accumulated surplus resources by three years. - Proposed date for submission to the National Congress: on or before June 2023 (reform target). - Continued work on a comprehensive reform of the pension system. ### Retirement and Pension Supervisory Agency - Design of a Retirement and Pension Supervisory Agency will be continued; it will be constituted as a technical body specializing in the supervision and oversight of retirement and pension funds, with emphasis on technical, actuarial, operational, legal, and financial supervision. - Rationale: absence of a supervisory and regulatory body is a major weakness; current system is fragmented and lacks adequate institutional oversight, regulatory and risk diversification mechanisms for investment management. - Proposed date for submission to the National Congress: on or before December 2023 (reform target). ### Improve mobilization of national public revenues - A comprehensive diagnostic assessment will be prepared to improve mobilization of national public revenues. - Context: Tax revenues in Paraguay are relatively low; need to review opportunities to increase tax revenues and reduce tax expenditures. - Assessment will include: - Estimates of revenue losses due to current tax incentives and informal employment. - Identification of areas to reduce tax expenditures, including the Maquila regime and the Law 60/90. - Electronic invoicing (SIFEN / e-kuatia): - Implementation since April 2022. - Completion target: October 2024 when 80 percent of invoices nationally will be issued through electronic documents. - Intermediate objective: incorporation of approximately 800 large and medium taxpayers in SIFEN by the end of June 2023 (reform target). - Compliance risk management framework: - Implementation will review recommendations from previous technical assistance missions on customs and revenue administration. - Customs code will be updated; cooperation and information exchange between tax and customs administrations will be strengthened. ### Improve fiscal governance through a stricter fiscal rule - Work to update the Fiscal Responsibility Law (Fiscal Responsibility Law 2.0) submitted to National Congress in December 2020. - Key proposals in the new law: - Maintain same deficit ceiling. - Tighten rules on primary current spending and salary increases for civil servants. - Improve triggers for the exception clause; establish rules and transitional periods if deficit ceiling is exceeded. - Strengthen role of the Fiscal Council; create a sovereign stabilization fund. - Supplement deficit ceiling with a graduated debt ceiling. - Proposed macro-fiscal rules: - Public sector debt may not exceed the maximum limit of 40% (forty percent) of the gross domestic product estimated for the respective fiscal year. - The annual fiscal deficit of the central government, including transfers, shall not exceed: - a) 1.5 percent of GDP, if the public debt is less than 36 percent of GDP; - b) 1.0 percent of GDP if the public debt is equal to or greater than 36 percent of GDP. - The annual increase in the primary current expenditure of the central government and the public sector may not exceed the year-on-year inflation rate plus 2% (two percent). ### Strengthen institutional fiscal risk management and SOE oversight - Fiscal Risk Report: - Ministry of Finance is working to present Paraguay’s first Fiscal Risk Report in the last quarter of this year; the report incorporates analysis of macroeconomic and specific risks (public enterprises, public-private partnerships, “Caja Fiscal”) and risks related to climate change (publication October 2022). - State-owned enterprises (SOEs): - Improved oversight and governance of the nine SOEs is proposed to address contingent fiscal risks and improve public sector efficiency. - By end-December this year: re-establish the dashboard system to measure companies' performance toward results-based management contracts covering 2023 (reform target). - Draft Corporate Governance Law will clarify and strengthen the role of the SOE Supervisory Board; draft law to be submitted to the National Congress in the second half of 2023 (reform target). ### Fiscal safeguards in pre-election periods - Draft law submitted in April 2022 to establish special rules for government behavior in fiscal and administrative matters during election periods. - Purpose: maintain stability and sustainability of public finances during election periods by prohibiting initiatives that would increase salaries or reduce taxes outside existing budget scope during election periods; grants special powers to the National Economic Team, chaired by the Minister of Finance. - Scope and timing: - Applies to the three branches of government, government agencies and institutions, and corporations with majority government stake. - Election periods run from the fiscal year prior to the year in which national elections are held through the first quarter of the fiscal year in which the elections are held. - Suspensions during electoral period (legislative consideration postponed until end of electoral period): - i) draft laws that involve salary increases or increases in supplementary remuneration; - ii) proposals to increase current or capital expenditures without technical support; - iii) draft laws that affect the tax system. - Non-compliance by responsible officials will be considered a violation of duties and subject to corresponding sanctions. ### Strengthen payment to suppliers’ processes and recording of public investment - Public investment response to shocks: - Annual average public investment increased to 3.2 percent of GDP (2019-2021), compared to 2.1 percent during the previous five years. - Extraordinary expense in accrued public investment will be corroborated by end of 2022 fiscal year. - Government committed to accommodate payments related to these operations within budgetary execution of public investment of 2022 and following years within goals of convergence of the fiscal deficit to 1.5 percent of GDP by 2024. - Measures to strengthen recording of accrued commitments: - Working on a supplementary legal-financial tool based on debt transfer operations with commercial banks for outstanding commitments to contractors of the Ministry of Public Works and Communications. - New regulatory framework to allow the Ministry of Finance to control and monitor commitments, providing greater predictability and plans for settlement. ### Monetary and exchange rate policies - Monetary policy: - Expect monetary policy tightening to continue if inflationary pressures persist. - Monetary policy rate proactively managed in response to rising inflation; will continue to adjust until inflation projections and medium-term inflation expectations are in line with the 4 percent inflation target. - Exchange rate policy: - Continue with a flexible exchange rate regime, with exceptional interventions during periods of excessive short-term volatility of the guaraní. - Exceptional exchange rate interventions used to smooth excessive volatility and preserve financial stability. - Commitment to maintain and enhance transparency in foreign exchange interventions through publication of related data on the Banco Central del Paraguay’s website. ### Pillar II: Improving productivity and fostering economic growth (structural reforms) - Objectives: improve productivity, diversify and make growth more inclusive through structural reforms to increase efficiency of public spending, modernize civil service, streamline government structure, improve oversight of pension funds, strengthen AML/CFT regimes, reduce governance and corruption vulnerabilities, and strengthen the business climate. - Streamline public spending / public procurement reform: - Draft law to reorganize procurement procedures, create the National Public Supply System, regulate the National Public Procurement System as part of the Integrated Public Supply Chain. - Focus on planning, linkage with the budget, administration of goods/services, and evaluation; shift procurement focus from cheapest to value for money. - Creation of a Procurement Unit within the National Directorate of Public Procurement (DNCP) to make mandatory joint purchases and standardize goods and services. - Senate has approved the law; awaiting approval by the Chamber of Deputies. - Upon approval, associated regulations to be drafted and adopted by decree on or before June 30 of 2023 (reform target). - Civil service reform: - Reform to establish a general legal framework for civil service integrity; amend and update the Public Service and Professional Civil Service Law. - Aim: modern, competitive civil service based on meritocracy, with a single salary scale and professional development. - Bill submitted to congressional committee; draft law to be submitted to the National Congress before the end of December 2023 (reform target). - Ministry of Finance together with the Civil Service Secretariat will work on regulation and implementation. - Reorganize government structure: - Technical Secretariat for Planning is working on a legislative proposal to establish structure, rules, responsibilities, and regulations for organization of government institutions to integrate responsibilities and avoid conflicts and duplication. - Reform target: June, 2023. - Governance and anti-corruption: - Governance Diagnostic Assessment led by the IMF was finalized and expected for publication before the end of October 2022 (Prior Action). - Adopted a new comprehensive anti-corruption plan (National Integrity, Transparency, and Anti-Corruption Plan for 2021-2025). - Draft law submitted to Congress to strengthen the powers, functions, and responsibilities of the National Anti-Corruption Secretariat (SENAC). - Strengthening AML/CFT framework guided by the results of the 2021 GAFILAT assessment; final report published in September will guide next steps. - Strengthening the business climate: - Work on facilitation of credit access for MSMEs via a draft law on movable asset-based financing (assets such as accounts receivable, crops). - Draft law to be submitted to the National Congress before the end of December 2022 (reform target). ### Pillar III: Improving social protection and inclusion - Social protection policy underscored as fundamental for economic and social rights, gaining relevance due to COVID-19 and inflationary pressures exacerbated by the armed conflict between Russia and Ukraine, which have increased inequalities and vulnerabilities. *Source: IMF country document excerpt provided.* ### 41. Macroeconomic stability contributed to the improvement of socio-economic variables. ### 41. Macroeconomic stability contributed to the improvement of socio-economic variables. ### Macroeconomic stability and social outcomes - Macroeconomic stability and economic growth up to 2018 enabled progress in social protection, contributing to improvements in indicators of health, education, and living conditions, as well as poverty reduction, which has stagnated as a result of the impact of the COVID-19 crisis. ### Poverty trends - Since 2002, total poverty declined from 57.7 percent to 28 percent in 2008, then more slowly to 23.5 percent in 2019. - The pandemic halted poverty reduction: poverty rose to 26.9 percent in 2020 and remained at a similar level in 2021. ### Social spending and impact on poverty - Central government social spending increased from 5.4 percent of GDP in 2003 to 11.9 percent in 2020, driven by COVID-19 response measures. - Social spending remained high in 2021 at 10.6 percent of GDP. - Pandemic social protection programs are estimated to have prevented 233,000 people from falling below the overall poverty line in 2020 and 139,000 people in 2021. ### Social Protection System ("Vamos") - Decree No. 4775/2021 established the "Vamos" Social Protection System and approved a strategic framework and prioritization for the 2019-2023 multi-year planning. - Objective: protect the population from conception to old age. - Ongoing challenges: coverage and financing, given the recent establishment and life-cycle approach. ### Structure of "Vamos" - The system consists of three pillars: - i) social integration: universal and selective policies aimed at the population living in poverty; - ii) labor and productive integration: inclusion and labor regulation policies; - iii) social security: contributory and non-contributory policies. ### Key non-contributory programs and coverage targets - Highest-coverage non-contributory programs: - Tekoporã (conditional transfer program) — implemented by the Ministry of Social Development (MDS). - Food Subsidy Program for Vulnerable Elderly Adults — implemented by the Non-Contributory Pension Directorate of the Ministry of Finance. - Tekoporã objectives: improve quality of life, facilitate rights to food, health, and education, increase use of basic services, strengthen social networks, break intergenerational cycle of poverty; components: social, family, and community support plus cash transfers. - Short-term coverage commitments (targets to be met by December 2022): - Increase Tekoporã coverage from almost 166,000 families in 2021 to 170,000 families in 2022. - Increase coverage of the Food Subsidy Program for the Elderly by 26,000 people in 2022. - Draft National General Budget for 2023 allocations: - US$323 million for the Food Subsidy Program for the Elderly. - US$57.5 million for the Tekoporã Program. - Expected reach: 300,000 beneficiaries through the food subsidy program and 175,000 families through conditional cash transfers. ### Beneficiary identification and program management - Multiple administrators across government lead to duplication of beneficiary data collection and difficulty in registering/reporting beneficiaries accessing multiple programs. - Ministry of Finance developed the Benefits System (SIPEN) for managing non-contributory benefits (Food Subsidy Program for Vulnerable Elderly Adults), including processes for entry of information, selection, generation of benefits, control, and payment to the Integrated Financial Administration System (SIAF). - SIPEN is integrated with linked systems of the Government Resources Administration System (SIARE) and expected to strengthen transparency and efficiency in the non-contributory sector. ### SIPEN implementation and reform target - Decree 6833 (March) provides that non-contributory pensions and other programs involving transfers to individuals may be integrated into SIPEN. - Reform target: formal implementation of SIPEN in the Non-Contributory Pensions Directorate on or before the end of 2023, with subsequent expansion to other social assistance programs. ### Informal employment and social coverage gaps - Informal employment context: - Latin America and the Caribbean average informal employment: 51 percent in 2012 and similar in 2017-2019. - Paraguay (2019, EPHC): 63.7 percent of workers in non-agricultural activities (1.75 million people) worked informally. - Occupational composition of informal workers: - 44 percent are private sector wage earners (more than 774,000 people). - 37 percent are independent workers (more than 651,000 people), mostly self-employed, followed by employers/proprietors and public sector contractors. - These groups account for 81 percent of informal workers. - Social security and health coverage gaps: - 64 percent of private sector wage earners do not contribute to social security. - 99.8 percent of independent workers do not contribute to social security. - 57 percent of private wage earners do not have any type of health insurance coverage. - 84.7 percent of independent workers do not have any type of health insurance coverage. - Pressure on Ministry of Public Health and Social Welfare (MSPBS) and social programs: Program for Elderly Adults beneficiaries grew from 25,000 in 2011 to more than 256,000 in January 2022. ### Formalization reforms - Draft law under preparation to formalize dependent workers of MSMEs and independent workers, promoting access to formal social security via incentives. - Institutional roles: - Dependent workers of MSMEs: Ministry of Industry and Commerce (MIC), Ministry of Labor, Employment, and Social Security (MTESS), and the Social Security Institute (IPS). - Independent workers: Ministry of Finance through the Tax Administration, together with IPS, to prepare a plan for gradual incorporation and regulations. - Proposed submission to National Congress: June 2023 (reform target). ### Financial inclusion measures - Draft Financial Inclusion Law provisions: - Require employers to pay wages by electronic transfer instead of in cash. - Require financial intermediaries to provide workers with free payroll direct deposit accounts and at least one free cash withdrawal per month. - Contemplate tax incentives to ensure compliance and promote transparency in financial transactions. - Legislative status: favorable opinion from two congressional committees; awaiting start of discussions in the National Congress. Implementing regulations to be drafted after approval. ### Program monitoring, quantitative targets, and reform schedule - Monitoring instruments: quantitative targets, continuous targets, and reform targets. - Quantitative targets set for end-December 2022, end-June 2023, end-December 2023, and a continuous target to be monitored on an ongoing basis. - Review schedule: - First review: complete by June 1, 2023. - Second review: complete by December 1, 2023. - Third review: complete by June 1, 2024. - Fourth review: complete by November 1, 2024. - Program quantitative figures (selected from Tables 1a/1b as presented): - Ceiling on the central government fiscal deficit (in billions of guaraníes): -8,733 (end-Dec. 2022), -2,322 (end-Jun. 2023), -7,284 (end-Dec. 2023). - Ceiling on current primary expenditure of the central government (in billions of guaraníes): 34,746 (end-Dec. 2022), 17,432 (end-Jun. 2023), 37,926 (end-Dec. 2023). - Ceiling on the net incurrence of floating debt by the central government: 500 (end-Dec. 2022), -2,100 (end-Jun. 2023), 500 (end-Dec. 2023). - Ceiling on accumulation of external debt payment arrears by the central administration (in millions of U.S. dollar): 0.0 (continuous for each period). - Inflation consultation band (end-period center point and bands): - End of period inflation, center point: 8.8 (end-Dec. 2022), 6.5 (end-Jun. 2023), 4.1 (end-Dec. 2023). - Upper band limit (2 percent above center point): 10.8, 8.5, 6.1 respectively. - Lower band limit (2 percent below center point): 6.8, 4.5, 2.1 respectively. - Memorandum item — Social assistance benefits (cumulative since beginning of calendar year): 2,906 (end-Dec. 2022), 1,434 (end-Jun. 2023), 3,338 (end-Dec. 2023). - Policy non-eversion commitments: - Not to impose or intensify restrictions on the making of payments and transfers for current international transactions. - Not to introduce or modify multiple currency practices. - Not to conclude bilateral payments agreements inconsistent with Article VIII. - Not to impose or intensify import restrictions for balance of payments reasons. - Not to accumulate external payments arrears. ### Prior actions and reform targets (selected) - Prior actions and reform targets with target dates (as presented): - Send to Congress the transition law draft with measures to contain the deficit of the "Caja Fiscal" — End-June 2023. - Incorporate at least 750 large and medium-sized taxpayers in the Integrated National Electronic Invoicing System (SIFEN) — End-June 2023. - Reestablish the control panel with results-based management contracts for one year (2023) — End-December 2022. - Review and send to Congress the "Corporate Governance Law" to strengthen the role of the SOE supervisory board — End-December 2023. - Send a new version of the pension fund supervision law to one chamber of Congress — End-December 2023. - Submit the new "Ley de la Función Pública y Carrera del Servicio Civil" to Congress — End-December 2022. - Complete and enact the administrative regulation for the new procurement law — End-June 2023. - Complete work on the law draft that orders the structure of the state and submit to one chamber of Congress — End-June 2023. - Submit to Congress a new version of the law on collateral of movable assets ("ley de garantías mobiliarias") — End-December 2022. - Submit to the National Congress a Bill for the formalization of dependent workers of MSMEs and independent workers in general — End-June 2023. - Increase Tekoporã families from 166,000 to 170,000 and add 26,000 beneficiaries to the Food Pension for Elderly Adults — End-December 2022. - Implement the guidelines of Decree No. 6833 of March 2022 "SIPEN", Article 1, subsection a — End-December 2023. *Source: 1pryea2022004 - 41. Macroeconomic stability contributed to the improvement of socio-economic variables.* ### 6. Definition. For the purposes of the program, the balance of current primary expenditure ### 1pryea2022004 - 6. Definition. For the purposes of the program, the balance of current primary expenditure ### Fiscal definitions and quantitative targets - Balance of current primary expenditure includes: - (i) compensation of employees; - (ii) expenses for the use of goods and services; - (iii) subsidies; - (iv) current grants to foreign governments, international organizations and other general government units; - (v) social benefits; - (vi) other current expenses. - Equivalent definition: total obligated expense less interest expense, less capital grants and other capital expenses. - Quantitative target: ceiling for primary current spending accumulated since the beginning of the year. ### Ceilings and definitions for floating debt and domestic payment delays - Domestic payment delays (floating debt) defined as difference between expense recorded on an obligated basis and amounts transferred for its payment by the Treasury (based on SICO and SITE). - In SITUFIN, change in stock of floating debt recorded as balance of net changes in floating debt attributable to the current budget year and change attributable to previous year (repayment). - Quantitative target: ceiling for accumulated net change in total floating debt since the beginning of the year. ### External debt service arrears - Definition: overdue debt service arising from obligations contracted directly or guaranteed by the central government, except for debt subject to rescheduling or restructuring. - Program requirement: no new external arrears be accumulated at any time under the arrangement. ### Inflation consultation band - Inflation measure: change over 12 months in the consumer price index (CPI) at the end of the period, base index (December 2017=100), published by the Central Bank of Paraguay. If official press release differs from the index calculation, the index calculation will be used. - Failure to meet inflation consultation band limits at the end of a semester triggers discussions with IMF staff and a consultation with the IMF Board of Directors. ### Social assistance benefits (memorandum item) - Definition follows GFSM 2001 classification; defined as Social Assistance Benefits subcomponent of Social Benefits account of central government spending accounts in SITUFIN. - Target status: not part of formal conditionality but reporting requested to compare execution with original projection. ### Information and reporting requirements (timelines and items) - Monthly reporting by authorities to IMF staff on central government current primary expenditure and components: provisional data with delay of no more than 30 days after the end of the month. - Monthly reports on floating debt: data provided with a lag of no more than 30 days after the end of each month. - Monthly reports of external arrears by creditor (if any), with detailed explanations, transmitted monthly, within 30 days after the end of the month. - Inflation reports and components: transmitted monthly, within two weeks after the end of the month. - Social assistance benefits and components: transmitted monthly, within 30 days after the end of each month. - Additional reporting to Fund staff (electronic format, within specified deadlines): - Within 3 days after implementation: any decree, decision, circular, edict, supplemental appropriation order, ordinance, or law with economic or financial implications for the program (including supplementary allocation orders, cancellation of budget allocations, creation of new agency or new fund). - Within a maximum period of 30 days (except where otherwise indicated), preliminary data on: - Tax receipts and tax and customs settlements by category, with corresponding monthly revenue; - Monthly number of expenditure committed, certified, or for which payment orders have been issued; - Four-monthly DGIP report (SNIP) on investment projects, with progress and execution; - Complete monthly table of the financial situation of the central government based on Treasury accounts (SITUFIN), including breakdown of tax revenues by type of tax; - Monthly statistical report of public debt included in SIGADE, by creditor category, and breakdown of debt service by amortization and interest payments, no later than six weeks after the end of the month; - Quarterly update of projected public debt service, with breakdown of debt service by amortization and interest payments, by creditor category (internal: loans, treasury bonds, and others (if any); external: multilateral, bilateral, treasury bonds, and others (if any)); - Monthly report on price structure of fuel products, including an estimate of subsidies involved, if any. - Final data: provided as soon as final balances of Treasury accounts are available, but no later than one month after reporting of provisional data. - Central Bank of Paraguay reporting to Fund staff: - Monthly balance sheet of the central bank, maximum lag of one month; - Monthly consolidated balance sheet of banks, maximum lag of two months; - Quarterly depository corporations survey (consolidated monetary survey), maximum lag of two months; - Lending and deposit interest rates of commercial banks, on a monthly basis; - Indicators of prudential supervision and financial soundness of banking financial institutions, quarterly, maximum delay of two months. ### Policy and governance elements in the proposed PCI program - Program pillars: - Pillar I: ensuring macroeconomic stability and resilience. - Pillar II: improving productivity and fostering economic growth. - Pillar III: improving social protection and inclusion. - Examples of governance measures: - Revamped Fiscal Responsibility Law (FRL) aim: maintain deficit ceiling at 1.5 percent of GDP, reduce provisions on current primary expenditure growth and civil servants’ salaries, strengthen fiscal council participation, complement deficit ceiling with a staggered debt ceiling. - Draft law to safeguard fiscal policy in pre-electoral times to restrain initiatives to increase salaries or reduce taxes during electoral periods. - Corporate governance law under revision to strengthen State-Owned Enterprises supervisory board. - AML/CFT improvements following 2021 GAFILAT mutual evaluation; multi-year capacity development project planned. - Implementation of law on public procurement approved by Senate and Chamber of Deputies to enhance planning, transparency, and effectiveness. - Civil service reform bill submitted to Congress to modernize civil service and reinforce meritocracy. - Plans to strengthen Pension System (SIPEN) to harmonize procedures and use Ministry of Finance technological solution to expand management of pensions in non-contributory sector and other social assistance programs. ### Economic outlook, developments, and key statistics - GDP and growth: - Current GDP growth projection for 2022: 0.2 percent. - Initial GDP growth forecast for 2022: 3.7 percent. - GDP contracted 2.2 percent in the first semester of the year. - GDP (excluding agriculture and the hydro electrical bi-national entities) grew by 1.6 percent in the first semester. - Initial expectations: economic growth rate of above 4 percent in 2023. - Agriculture and shocks: - Severe drought registered between the end of 2021 and beginning of 2022 significantly affected agriculture (soybeans and other farm crops). - Foreign direct and direct investment: - 2021 net flow of Direct Investments (DI) reached USD192 million. - This represented a 74 percent increase compared to figures observed during the pandemic. - For 2023 and 2024 the country will receive its largest Foreign Direct Investments (FDI) projects in recent history: a paper pulp from eucalyptus foresting and a biofuels project have pledged to invest around USD4 billion in the coming years. - Labor market (second quarter 2022): - Employment grew by 47,239 positions compared to same period in 2021, representing an increase of 1.4 percent y-o-y. - Number of unemployed persons decreased by 69,001. - Unemployment rate dropped from 8.6 percent in the second quarter of 2021 to 6.7 percent in the second quarter of 2022. - Sectoral shifts: increase in tertiary sector employment (trade, restaurants, hotels); inter-annual reduction in primary and secondary sectors. - Occupational shift: improvement in wage-earning workers offset by decrease in self-employment. - Inflation and monetary policy: - Total inflation forecast: 8.6 percent for 2022, decreasing to 4.1 percent for 2023. - Central Bank of Paraguay Monetary Policy Rate (MPR) adjustments: - Between March and June 2022: MPR revised upward by 200 basis points. - Between July and September 2022: MPR increased 75 basis points to stand at 8.50 percent annually. - Banking and financial system: - Loans in U.S. dollars expanded 25.2 percent inter-annually in August 2022. - Loans in Paraguayan guaranies registered a growth rate of 7.8 percent y-o-y. - Financial soundness indicators remain at satisfactory levels; solvency ratios well above minimum required levels; profitability indexes started to increase in recent months compared to reductions since beginning of 2020. - Payments system: - Instant Payments System (SPI) launched in May 2022 to allow 24x7 inter-bank transfer services; gradual incorporation of financial institutions underway. *Source: 1pryea2022004 - 6. Definition. For the purposes of the program, the balance of current primary expenditure* --- _Source: https://www.imf.org/-/media/files/publications/cr/2022/english/1pryea2022004.pdf_