## 1pryea2023001

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---

### EXECUTIVE SUMMARY — Recent developments and macroeconomic stance
- Growth and activity:
  - Economic growth for 2023 is expected at 4.5 percent following recovery from last year’s severe drought.
  - Estimated growth rate for 2022: 0.1 percent.
  - Q1 y/y GDP: -0.9 percent; Q2 y/y GDP: -3.3 percent; Q3 y/y GDP: 2.9 percent; Q4 y/y GDP: 1.7 percent.
- Inflation:
  - Annual CPI inflation: peaked at 11.8 percent in April 2022; fell to 8.1 percent at end-2022; reached 5.3 percent in April 2023.
  - Adjusted core inflation has decreased more slowly.
  - Inflation expectations: 12-month expectations fell to 4.5 percent in April 2023 (peaked at 5.5 percent a year earlier); 24-month expectations consistent with BCP’s target of 4 percent. April survey shows 5 percent expectations for end-2023.
  - Consumer prices (end of period): 8.1 (2022), 4.5 (2023), 4.0 (2024–2028).
- Monetary policy:
  - BCP tightening from August 2021 to September 2022 raised the policy rate by 775 basis points to 8.5 percent.
  - Policy rate maintained at 8.5 percent since September 2022.
  - Current real policy rate estimated at 3.8 percent given 12-month inflation expectations of 4.5 percent.
  - Estimated real neutral rate is 1–2 percent.
- Exchange rate and FX operations:
  - Guaraní weakened in late 2022 then rebounded in early 2023.
  - BCP allowed temporary weakening and conducted about US$150 million in net FX sales through March 2023.
- External sector:
  - Estimated current account deficit in 2022: 6.5 percent of GDP.
  - External current account deteriorated sharply in 2022; projected modest surplus of approximately 0.4 percent of GDP in 2023.
  - Gross international reserves: US$10,154 million (2022); projected US$10,304 million (2023 proj.), US$10,854 million (2024 proj.).
  - Staff projects reserves to slightly increase to about 7.5 months of imports over the medium-term.
  - Reserves-to-ARA metric ratio estimated at about 195 percent for end-2022.
- Fiscal and public finances:
  - 2022 fiscal deficit: 3 percent of GDP.
  - 2022 central government revenues: 41,094 (billions of Guaranies).
  - 2022 central government expenditures: 49,716 (billions of Guaranies).
  - Net lending/borrowing (Overall Balance) 2022: -8,622 (billions of Guaranies) / -3.0 percent of GDP.
  - Primary balance (2022, memorandum): -5,008 (billions of Guaranies) / -2.5 percent of GDP.
  - Central government debt (2022, percent of GDP): 34.5; Public sector debt (2022, percent of GDP): 40.8.
  - Preliminary fiscal outcome up to April 2023: cumulative fiscal deficit exceeded seasonality-based projections by 0.7 percent of GDP.
- Financial sector:
  - Financial and banking sector stable; solvency indicators exceed legal minimums and profitability recovered to pre-pandemic levels.
  - Financial soundness indicators (2022): Regulatory capital/risk-weighted assets: 17.3; Tier 1 capital/risk-weighted assets: 14.0; NPLs/total loans: 2.9; Return on assets: 2.0; Liquid assets/total assets: 21.8; FX loans/total loans: 45.9.
  - Instant Payment System (SPI) module launched May 2022 enabling instant 24/7 transactions.

### Political context and program modality
- National elections April 30, 2023: Santiago Peña elected President with about 43 percent of votes; Efrain Alegre about 27 percent; Payo Cubas 23 percent.
- Policy Coordination Instrument (PCI):
  - Two-year PCI approved on November 21, 2022 to rebuild fiscal buffers, enhance public sector efficiency, improve governance, and strengthen social assistance.
  - PCI pillars: (1) macroeconomic and fiscal stability; (2) enhance productivity and foster growth; (3) enhance social protection and inclusion.
  - Staff recommends completion of the First Review under the PCI and agreed new program targets for June 2024.
- Mission dates and composition: discussions in Asunción March 27–April 4, 2023; staff team named in report.

### Program performance and reforms (Dec 2022 outcomes)
- Quantitative targets:
  - All except two PCI quantitative targets for December 2022 were met.
  - Ceiling on current primary expenditure exceeded by 0.1 percent of GDP due to an unexpected multilateral loan disbursement used for medicine purchases.
  - End-December 2022 ceiling on floating debt missed because a payment order was issued in late December in advance of an early-2023 sovereign bond redemption; the operation was unwound when the bond repayment was made.
  - Central government fiscal deficit and accumulation of external debt payment arrears met program ceilings.
  - End-year inflation: 8.1 percent, below the programmed center point and inside the inflation consultation band.
- Reform targets for December 2022: all four met, including:
  - Civil service reform bill submitted to Congress on October 21, 2022.
  - National Council of Public Enterprises reestablished mandatory implementation of a control panel for monitoring public enterprises.
  - Draft law on collateral of movable assets submitted to Congress.
  - Social transfer coverage increased well above targets: Ministry of Finance added 18,431 families to Tekoporã (target 4,000); new Food Subsidy Program beneficiaries near 41,000 (programmed 26,000).
  - Law of public procurement approved in late 2022; administrative regulation expected by June 2023.
- Additional milestone: publication of the first annual Fiscal Risk Report incorporating risks related to PPPs, public enterprises, pensions, and climate change.

### Outlook and risks
- Growth and inflation outlook:
  - 2023 growth projected at 4.5 percent, supported by stronger agricultural exports and electricity generation.
  - Inflation expected to decline to about 4.5 percent by end-2023 assuming global prices moderate and no severe weather shocks.
  - Monthly economic activity estimates point to recovery in 2023 driven by rebound in agriculture and electricity and water sectors.
- Key downside risks:
  - Recurrence of severe weather-related shocks and external price volatility.
  - Escalation of Russia’s war in Ukraine or deepening geopolitical tensions.
  - Abrupt global slowdown or recession; monetary policy miscalibration; commodity price volatility.
  - Domestic risks: weather-related shocks; fiscal sustainability concerns; residual unrecorded expenditure claims.
  - Climate risks: extreme climate events damaging infrastructure and agricultural output.
- Program risks and financing:
  - Risks to program implementation assessed to be low.
  - No balance of payments gap for the next 12 months.
  - Good prospects of adequate financing for remaining program period.

### Policy recommendations (selected)
- Macroeconomic and fiscal policy:
  - Continue fiscal consolidation in 2023 and 2024 to rebuild policy buffers and ensure public debt sustainability.
  - Reprogram several fiscal quantitative targets for June and December 2023 as needed while prospects for meeting 2023 targets remain positive.
  - Contain and rationalize public expenditure; prioritize public investments; limit additional current expenditure to those established in law; limit growth of real primary current expenditure to 3.0 percent for 2023–2024.
- Monetary and exchange rate policy:
  - Maintain monetary policy focus on bringing down inflation to the central bank’s target (4 percent).
  - Preserve exchange rate’s role as primary absorber of external shocks; use FX interventions to counteract disorderly market fluctuations given shallow FX markets.
  - If core inflation does not clearly fall, be prepared to raise the policy rate; if inflation converges to 4 percent, room to lower the policy rate gradually in H2 2023.
- Structural reforms and social policy:
  - Implement PCI reform agenda to mitigate fiscal risks, foster growth, and enhance social protection and inclusion.
  - Specific priorities: protect solvency of the public sector’s pension fund (“Caja Fiscal”); enhance domestic revenue mobilization; strengthen supervision of pension funds and public enterprises; modernize state and civil service; improve governance and control corruption; strengthen social protection and reduce informality.
  - Advance public procurement reform and civil service reorganization; approve regulatory decree for Law 7021 by June 30, 2023.

### External sector, reserves, and financing tables (selected figures preserved)
- Balance of payments (millions of U.S. dollars):
  - Current Account: -2,691 (2022 est.), 96 (2023 proj.), -139 (2024 proj.)
  - Trade balance: -2,071 (2022 est.), 748 (2023 proj.), 595 (2024 proj.)
  - Exports: 13,080 (2022 est.), 15,787 (2023 proj.), 16,441 (2024 proj.)
  - Imports: -14,649 (2022 est.), -14,473 (2023 proj.), -15,243 (2024 proj.)
  - Factor income: -1,316 (2022 est.), -1,382 (2023 proj.), -1,518 (2024 proj.)
  - Transfers: 697 (2022 est.), 729 (2023 proj.), 784 (2024 proj.)
  - Gross reserves (millions of U.S. dollars): 10,154 (2022), 10,304 (2023 proj.), 10,854 (2024 proj.)
- Gross External Financing Needs and Sources (millions of U.S. dollars):
  - Gross External Financing Needs: -3,287 (2022), -455 (2023), -735 (2024)
  - Gross External Financing Sources: 3,421 (2022), 605 (2023), 1,285 (2024)
  - Foreign direct investment (net): 474 (2022), 1,765 (2023), 2,059 (2024)
  - Medium and LT debt disbursements: 1,754 (2022), 1,598 (2023), 1,194 (2024)
  - Change in international reserves: -134 (2022), -150 (2023), -550 (2024)
  - Memo: Gross international reserves: 10,154 (2022), 10,304 (2023), 10,854 (2024)

### Program modalities, monitoring, and targets
- Program period: November 21, 2022 – November 20, 2024.
- Monitoring framework:
  - Quantitative targets (QTs), reform targets (RTs), and continuous targets monitored semiannually; inflation consultation band linked to BCP projections.
  - Key QTs (selected, cumulative since start of year) and outcomes:
    - Ceiling on central government fiscal deficit (in billions of guaraníes): -8,733 (target) / -8,622 (Met).
    - Ceiling on current primary expenditure of central government (in billions of guaraníes): 34,746 (target) / 35,075 (Not met).
    - Ceiling on net incurrence of floating debt by the central government: 500 (target) / 738 (Not met).
  - Continuous target: ceiling on accumulation of external debt payment arrears: 0.0 (target) / 0.0 (Met).
  - Inflation consultation band (end-period center point and bounds): center point 8.8 / 8.1 (Met) for 2022; upper/lower band limits and subsequent semester values listed in Program Statement tables.
- Reform targets (selected and status):
  - Implement measures to protect solvency of "Caja Fiscal" — Send law to create national commission — Target Date: End-July 2023 — Status: Modified target.
  - Incorporate at least 750 large and medium-sized taxpayers in SIFEN (Integrated National Electronic Invoicing System) — Target Date: End-June 2023 — Status: In progress.
  - Reestablish control panel with results-based management contracts for Public Enterprises — Target Date: End-December 2022 — Status: Met.
  - Submit Civil Service Law to Congress — Target Date: End-December 2022 — Status: Met.
  - Complete administrative regulation for new procurement law — Target Date: End-June 2023 — Status: In progress.
  - Submit updated insolvency law draft to Congress — Target Date: End-June 2024 — Status: New reform target.
  - Submit bill for formalization of MSME workers and independent workers — Target Date: End-July 2023 — Status: In progress; rescheduled in some references to end-June 2023.

### Public finances, fiscal governance, and structural reforms (selected)
- 2023 approved central government budget authorizes deficit of 2.3 percent of GDP (after 3.0 percent of GDP in 2022).
- Authorities committed to achieving fiscal deficit of 1.5% of GDP in 2024 as established in the Fiscal Responsibility Law.
- Given cumulative April deficit of 1.4 percent of GDP (against expected 0.7 percent), cumulative June deficit will need to be increased by 0.6 percent of GDP; June and December 2023 ceilings on primary current expenditure and June 2023 ceiling on net incurrence of floating debt need slight upward revision.
- Public sector pension (Caja Fiscal) actuarial estimate 2019–2056: deficit of 28.5 percent of 2019 GDP, nominal net present value approximately USD 11.408 billion.
- As of December 2021, cumulative surplus deposited with the BCP: approximately USD 429 million.
- Revenue mobilization:
  - Electronic invoicing (SIFEN/e-kuatia) implementation started April 2022; expected completion October 2024.
  - As of January 2023: more than 100 million electronic invoices issued, involving 542 companies; projected ~1,500 companies using e-invoices by end-2023.
- Public procurement:
  - Law 7021 promulgated December 9, 2022; regulatory decree by Ministry of Finance expected by June 2023.
- Social programs and inclusion:
  - Tekoporã coverage increased from almost 166,000 households in 2021 to more than 184,000 households (target was 170,000).
  - Food Subsidy Program for the Elderly: target 26,000 new beneficiaries; outcome added more than 41,000 new beneficiaries during 2022.
  - 2023 budget allocations: about US$61 million for Tekoporã; about US$320 million for Pensión Alimentaria para Adultos Mayores.
  - SIPEN implementation and extension targets: implement SIPEN to at least one additional program by end-2023 and to a second program by end-June 2024.

### Risk Assessment Matrix — key entries (likelihood / timing)
- Intensification of regional conflict(s): High / ST — Impact: High. Recommended: facilitate access to alternative meat and fertilizer markets.
- Deepening geo-economic fragmentation and geopolitical tensions: High / ST, MT — Impact: High.
- Abrupt global slowdown or recession: Medium / ST — Impact: Medium.
- Monetary policy miscalibration: Medium / ST — Impact: Medium.
- Commodity price volatility: Medium / ST — Expected impact and recommended response: High.
- Social discontent: High / ST, MT — Expected impact: Medium.
- Systemic financial instability: Medium / ST — Expected impact: Medium.
- Extreme climate events: Medium / ST — Expected impact: High.
- Domestic weather-related shocks: Medium to High / ST — Expected impact: Medium to High.
- Fiscal sustainability: Medium / ST, MT — Expected impact: Medium to High.

*Source: EXECUTIVE SUMMARY and selected excerpts, 1pryea2023001.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Recent developments and macroeconomic stance
- Economic growth for 2023 is expected at 4.5 percent following recovery from last year’s severe drought.
- Recovery of agricultural exports is improving the external current account and easing potential exchange rate pressures.
- Inflation developments:
  - Annual CPI inflation: peaked at 11.8 percent in April 2022; fell to 8.1 percent at end-2022; reached 5.3 percent in April 2023.
  - Adjusted core inflation has decreased more slowly.
  - Inflation expectations: 12-month expectations fell to 4.5 percent in April 2023 (peaked at 5.5 percent a year earlier); 24-month expectations are consistent with the BCP’s target of 4 percent.
- Monetary policy:
  - BCP tightening cycle from August 2021 to September 2022 raised the policy rate by 775 basis points to 8.5 percent.
  - The tightening has been paused since September 2022 to assess impacts.
  - The current real policy rate is estimated at 3.8 percent given 12-month inflation expectations of 4.5 percent.
  - Estimated real neutral rate is 1–2 percent.
- Exchange rate and FX operations:
  - The guaraní weakened in late 2022 then rebounded in early 2023.
  - The BCP allowed temporary weakening and conducted about US$150 million in net FX sales through March 2023.
- External sector:
  - Estimated current account deficit in 2022: 6.5 percent of GDP.
  - Gross international reserves increased by US$134 million in 2022.
  - Exports are gradually diversifying with a slow increase in the share of manufactured exports (maquila sector).
- Fiscal and public finances:
  - 2022 fiscal deficit: 3 percent of GDP (aligned with program projections).
  - Non-tax revenue exceeded projections by 0.3 percent of GDP.
  - Preliminary fiscal outcome up to April 2023: cumulative fiscal deficit exceeded seasonality-based projections by 0.7 percent of GDP, driven by weak social security contribution revenue, unusually high investment expenditure, and regularization of payments for medicines and vaccines.
- Financial sector:
  - Financial and banking sector remains stable; solvency indicators exceed legal minimums and profitability recovered to pre-pandemic levels.
  - Instant Payment System (SPI) module launched in May 2022 enabling instant 24/7 transactions.

### Political context and program modality
- National elections held on April 30, 2023: Santiago Peña (Colorado Party) elected President with about 43 percent of the votes; Efrain Alegre obtained about 27 percent; Payo Cubas obtained 23 percent.
- A two-year Policy Coordination Instrument (PCI) was approved on November 21, 2022 to rebuild fiscal buffers, enhance public sector efficiency, improve governance, and strengthen social assistance.
- The PCI focuses on three pillars: (1) ensuring macroeconomic and fiscal stability; (2) enhancing productivity and fostering economic growth; (3) enhancing social protection and inclusion.
- Staff recommends completion of the First Review under the PCI and agreed new program targets for June 2024.
- Mission dates and composition: discussions held in Asunción between March 27 and April 4, 2023; staff team comprised Mauricio Villafuerte (head), Tobias Roy, Mauricio Vargas, Yuanchen Yang, Manuk Ghazanchyan (all WHD), Jehann Jack (SPR), with participation by Maximiliano Appendino (Resident Representative), Diego Gutiérrez, Mariana Bravo, Nicolás Landeta (WHD), and Jorge Corvalan (OED).

### Program performance and reforms
- Quantitative targets: All except two PCI quantitative targets for December 2022 were met.
  - Ceiling on current primary expenditure exceeded by 0.1 percent of GDP due to an unexpected multilateral loan disbursement used for medicine purchases.
  - End-December 2022 ceiling on floating debt was missed because a payment order was issued in late December in advance of an early-2023 sovereign bond redemption; the operation was unwound when the bond repayment was made.
  - Central government fiscal deficit and accumulation of external debt payment arrears met program ceilings.
  - End-year inflation: 8.1 percent, below the programmed center point and inside the inflation consultation band.
- Reform targets for December 2022: all four met.
  - Civil service reform bill submitted to Congress on October 21 proposing modernization and a single salary scale linked to professional development.
  - National Council of Public Enterprises reestablished mandatory implementation of a control panel for monitoring public enterprises.
  - New draft law on collateral of movable assets submitted to Congress to facilitate MSME access to credit.
  - Social transfer coverage increased well above targets: Ministry of Finance added 18,431 families to Tekoporã (target 4,000); new Food Subsidy Program beneficiaries near 41,000 (programmed 26,000).
  - Law of public procurement approved in late 2022, with administrative regulation expected by June 2023 (reform target).
- Additional milestone: publication of the first annual Fiscal Risk Report incorporating specific risks related to PPPs, public enterprises, pension system, and climate change.

### Outlook and risks
- Growth and inflation outlook:
  - 2023 growth projected at 4.5 percent, supported by stronger agricultural exports and electricity generation.
  - Inflation expected to decline to about 4.5 percent by end-2023 assuming global prices moderate and no severe weather shocks; April survey shows 5 percent expectations for end-2023.
- Key downside risks include recurrence of severe weather-related shocks and external price volatility.
- Policy buffers rebuilding through fiscal consolidation in 2023 and 2024 is emphasized to ensure public debt sustainability.

### Policy recommendations
- Macroeconomic and fiscal policy:
  - Continue fiscal consolidation in 2023 and 2024 to rebuild policy buffers and ensure public debt sustainability.
  - Reprogram several fiscal quantitative targets for June and December 2023 as needed while prospects for meeting 2023 targets remain positive.
- Monetary and exchange rate policy:
  - Maintain a monetary policy focus on bringing down inflation to the central bank’s target.
  - Preserve the exchange rate's role as the primary absorber of external shocks, with interventions as appropriate given shallow FX markets.
- Structural reforms and social policy:
  - Implement PCI reform agenda to mitigate fiscal risks, foster economic growth, and enhance social protection and inclusion.
  - Specific reform priorities: protect solvency of the public sector’s pension fund; enhance domestic revenue mobilization; strengthen supervision of pension funds and public enterprises; modernize the state and civil service; improve governance and control corruption; strengthen social protection and implement policies to reduce informality.

*Source: EXECUTIVE SUMMARY, 1pryea2023001.*

### 15.      The external current account is projected to improve in 2023, reflecting recovery in the

### 1pryea2023001 - 15. The external current account is projected to improve in 2023, reflecting recovery in the

### External sector and reserves
- External current account:
  - Projected to improve in 2023 reflecting recovery in agriculture exports, stronger external demand, and lower fuel and fertilizer prices.
  - A sharp rebound in agriculture-related exports and a modest increase in hydro-electricity exports, coupled with marginally lower imports, would substantially improve the trade balance in 2023.
- Reserves and metrics:
  - Staff projects reserves to slightly increase to about 7.5 months of imports over the medium-term, a slightly higher level than in the pre-crisis year of 2018.
  - The reserves-to-ARA metric ratio is estimated at about 195 percent for end-2022, safely above the suggested comfort zone of 100-150 percent.

### Fiscal outlook and budget
- 2023 budget and fiscal targets:
  - The approved central government’s budget for 2023 authorizes a deficit of 2.3 percent of GDP (after 3.0 percent of GDP in 2022).
  - Compared to the administration’s budget proposal, about 0.2 percent of GDP in expenditures were re-programmed by Congress from public investment to salaries.
  - The Ministry of Finance intends to hire the additional personnel mandated in the approved budget only in the second half of 2023 to dampen the impact on the wage bill.
  - Higher-than-expected fiscal deficit in the first four months of 2023 increases pressure for more austere policies to stay within the budget envelope toward a fiscal deficit of no more than 2.3 percent of GDP.
- Medium-term fiscal objective:
  - Authorities committed to achieving a fiscal deficit of 1.5% of GDP in 2024, as established in the Fiscal Responsibility Law (FRL).
  - Under the envisaged scenario, public debt would have peaked in 2022 at about 41 percent of GDP and then gradually decline.
- Near-term revisions and adjustments:
  - Given a cumulative April deficit of 1.4 percent of GDP (against an expected 0.7 percent of GDP), the cumulative June deficit will need to be increased by 0.6 percent of GDP.
  - June and December 2023 ceilings on primary current expenditure need to be revised upward slightly, as well as the ceiling on net incurrence of floating debt (for June 2023 only).
  - Authorities plan to compensate the higher deficit in the first part of the year through a recovery in social contributions’ revenue and a deceleration in public investment.

### Monetary, financial, and exchange rate policy
- Monetary policy stance and inflation objective:
  - Monetary policy aims at bringing inflation back to 4 percent over the next 12 months.
  - Current tight monetary policy stance will be maintained; policy rate is currently 8.5 percent.
  - To the extent inflation converges to the 4 percent target, there will be room to gradually lower the policy rate from its current level of 8.5 percent during the second half of 2023.
  - If core inflation does not clearly fall, authorities should be prepared to raise the policy rate if necessary.
- Exchange rate policy and FX interventions:
  - A flexible exchange rate will continue to act as a primary buffer to shocks; FX interventions will be limited to counteracting disorderly market fluctuations.
  - BCP committed to maintaining a strong reserve position and to publishing detailed information on foreign exchange operations.

### Risks to the outlook
- Domestic risks:
  - Upside: potentially stronger than projected agricultural production; faster implementation of large FDI projects (Paracel and Omega Green pledged US$4 billion in the next few years; construction activities projected to lift off in 2023).
  - Downside: lower public sector construction activity given fiscal austerity bias; residual and possibly additional unrecorded expenditure claims.
- External and global risks:
  - Escalation of Russia’s war in Ukraine or deepening geopolitical tensions could disrupt supply chains and trade or amplify commodity price volatility.
  - Global and domestic disinflation could take longer, forcing central banks to maintain tighter monetary policy for longer, negatively impacting growth and real wages and potentially fueling social discontent and pressures to relax fiscal policy.
- Financial stability risks:
  - Rising real interest rates and international risk premia pose risks, though Paraguay’s long-term external debt profile is mitigating.
- Climate risks:
  - Extreme climate events could damage infrastructure and agricultural output.

### Structural reforms and policy implementation (Policy discussions and Pillars)
- Program monitoring:
  - Policy discussions focused on assessing December 2022 targets, reviewing progress of June and December 2023 reform targets, and revising/proposing new targets for upcoming reviews (LOI and PS; Tables 1–2).
  - Program will be monitored semiannually through quantitative targets (QTs), reform targets (RTs), and standard continuous targets as defined in the Memorandum of Technical Understanding (November 1, 2022).
- Pillar I – Ensure Macroeconomic Stability and Resilience:
  - Fiscal governance:
    - Authorities working to ensure approval of the Fiscal Responsibility Law 2.0 and the proposed Fiscal Safeguards Law for electoral times.
  - Unrecorded expenditure claims:
    - Unrecorded expenditure items discovered in 2022 initially estimated at 0.5 percent of GDP.
    - Ministry of Finance compiled a list of claims totaling US$290 million (about 0.7 percent of GDP) as of December 2022.
    - By end-March 2023, US$110 million of these were resolved and paid.
    - A Presidential decree to facilitate final assessment and clarify authorization rules for accounts receivables financing vehicles is expected by end-May.
- Pillar II – Enhance Productivity and Foster Economic Growth:
  - Public procurement and state reorganization:
    - Public Procurement reform law promulgated on December 9, 2022; regulatory decree by the Ministry of Finance expected by June 2023 (reform target).
    - Legislative proposal to reorder state structure rescheduled to July 2023 (reform target).
  - New structural measures:
    - Completion of the ML/TF National Risk Assessment (NRA), with government approval expected by the end of July 2023 (proposed new reform target).
    - Relaunch of insolvency law reform with intent to prepare and submit a new insolvency bill to the National Congress by June 2024 (proposed new reform target).
  - Anti-corruption:
    - January 2023 draft law submitted to Congress to create the National Integrity and Transparency Secretariat (SENIT), replacing SENAC.
- Pillar III – Enhance Social Protection and Inclusiveness:
  - 2023 budget allocations:
    - About US$61 million for “Tekoporã”.
    - About US$320 million for the “Pensión Alimentaria para Adultos Mayores” program.
  - Beneficiary systems and social program integration:
    - SIPEN (Pension System) implemented and proposal to extend SIPEN to at least one additional program by the end of 2023 (reform target) and to a second program by the end of June 2024 (reform target).
  - Labor informality:
    - Draft bill to facilitate formalization of dependent MIPYMES workers and independent informal workers completed; consultation process before submission to Congress by the end of July 2023 (reform target, rescheduled by one month).

### Program modalities and capacity development
- Quantitative and reform targets:
  - The Program Statement details the authorities' policy commitments and monitoring framework.
  - QTs include semi-annual ceilings on the central government fiscal deficit, on current primary expenditure, and on the net change of floating debt.
  - Non-accumulation of external debt payment arrears is maintained as a continuous target.
  - An inflation consultation band based on BCP projections will remain as a QT, with targets adjusted during periodic comprehensive revisions.
  - Quantitative targets for June and December 2023 on the central government’s fiscal deficit and on primary current expenditure are being modified at the request of the authorities, as well as the QT on the net incurrence of floating debt for June 2023.

*Source: IMF staff report content provided in the supplied PDF excerpt.*

### 40.      Risks to program implementation are assessed to be low. There is no balance of

### Risks to program implementation are assessed to be low.

### Program risks and financing
- Risks to program implementation are assessed to be low.
- There is no balance of payments’ gap for the next 12 months.
- There are good prospects that there will be adequate financing for the remaining program period.

### Capacity development, statistical, and technical priorities
- CD support by the Fund remains closely aligned to the PCI’s priorities, focusing, inter alia, on:
  - public investment management assessment and climate change (C-PIMA),
  - compliance risk management,
  - financial stability and integrity, including the AML/CFT regime.
- The authorities are committed to strengthening balance of payments (BOP) and national accounts statistics.
- The BCP began releasing the BOP estimates under the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6).

### Climate-related issues and diagnostics
- Paraguay is looking closely at climate-related issues following recurrent adverse climate shocks.
- A staff analysis using real-time data to monitor public attitudes shows public support in Paraguay for increasing green investment, among other market- and non-market-based policy instruments, to accelerate climate transition (Annex II).
- The current government engaged in preparation of climate change-related diagnostics with external partners:
  - World Bank’s CCDR (to be completed by June 2023),
  - a recently completed PEFA including a climate change module coordinated by the European Union.
- The decision to access the Resilience and Sustainability Fund (RSF) was left to the newly elected administration, which takes office on August 15.

### Staff appraisal — recent performance and outlook
- Paraguay has shown resilience to recent external shocks, and its policy responses have been effective and appropriate.
- The severe shortfall in export earnings caused by the 2022 drought was successfully weathered due to:
  - the private sector’s capacity to mobilize external resources,
  - moderate exchange rate adjustment,
  - which resulted in a better-than-expected international reserves position at the end of the year.
- Fiscal policy held a steady course despite challenging international shocks to energy and food prices, supporting sustainable public finances going forward.
- The central bank’s early and proactive monetary tightening appears vindicated by a steadily decreasing inflation rate, with a favorable outlook to converge to the midpoint of the inflation target band by end-2023.
- Paraguay's banking system remains stable and solvent.

### Fiscal buffers and structural reform priorities
- For resilience to endure, Paraguay needs to:
  - continue to rebuild its fiscal buffers,
  - advance important structural reforms.
- The significant build-up of public debt in recent years has narrowed the fiscal space and must be reverted by reestablishment of the fiscal deficit rule.
- Structural reforms to strengthen public sector efficiency are necessary for a sustainable fiscal strategy, including:
  - measures to contain the losses from the public servants’ pension fund (“Caja Fiscal”),
  - measures to contain contingent financial risks from unsupervised pension funds,
  - improving public companies' oversight and strategic management to reduce fiscal risks,
  - raising more domestic tax revenue to provide sufficient investment in infrastructure, health, and education to enhance productivity and shared prosperity.

### Governance, business climate, and social program effectiveness
- Structural reforms to modernize public institutions, increase government effectiveness, strengthen governance, control corruption, and improve the business climate will help foster conditions for sustained economic growth.
- Paraguay has benefited from previous technical assistance in public financial management, governance, and financial supervision; staff concurs that the reforms covered by this PCI would strengthen efficient use of public resources and create more favorable conditions for private investment.
- Despite strides in developing social programs, opportunities remain to enhance effectiveness given high informality, inequality, and poverty rates.
- Ongoing measures aim to:
  - improve the efficiency of social expenditure,
  - expand reach to more vulnerable populations,
  - enhance social program targeting,
  - promote greater formalization of the economy,
  - strengthen financial inclusion.

*Source: IMF staff report excerpt (sections 40–46).*

### 47.      Staff supports the completion of the First Review under the PCI and modification of

### 1pryea2023001 - 47.      Staff supports the completion of the First Review under the PCI and modification of

### Program support and near-term conditional targets
- Staff supports the completion of the First Review under the PCI and modification of end-June and end-December 2023 quantitative targets for the fiscal deficit and current primary expenditure and of the end-June 2023 QT on floating debt.
- The authorities' reform agenda was expanded to include reform targets for June 2024.
- Paraguay's track record implies low risks to program implementation.

### Recent economic developments and activity
- Economy contracted in the first half of 2022 as weak agricultural production more than offset positive growth in services and manufacturing.
- From the demand side, private consumption and investment sustained growth in 2022, compensating for the large drop in agricultural exports.
- Exports of soy contracted in 2022, while electricity exports started to recover in the second half of 2022.
- Monthly economic activity estimates point to a recovery of economic activity in 2023, driven mainly by a rebound in agriculture and electricity and water sectors.
- Employment recovered in 2021 and consolidated in 2022, but it is still below pre-pandemic levels.

### Fiscal developments and public finances
- After having breached the FRL ceiling in the past three years, Paraguay plans to converge back by 2024.
- Public debt has increased substantially since the outbreak of the pandemic but is still low compared to other countries in the region.
- Tax revenue has rebounded after the pandemic and is holding up despite the 2022 economic slump, with income and trade taxes leading the way.
- During the pandemic, public investment and social transfers were the main drivers of public expenditure.
- Key central government figures (selected):
  - Central Government Revenues (2022, in billions of Guaranies): 41,094
  - Central Government Expenditures (2022, in billions of Guaranies): 49,716
  - Net Lending/Borrowing (Overall Balance) (2022, in billions of Guaranies): -8,622
  - Primary balance (2022, memorandum, in billions of Guaranies): -5,008
  - Current primary expenditure (2022, memorandum, in billions of Guaranies): 35,075
  - Central government net lending/borrowing (2022, percent of GDP): -3.0
  - Central government primary balance (2022, percent of GDP): -2.5
  - Central government debt (2022, percent of GDP): 34.5
  - Public sector debt (2022, percent of GDP): 40.8
  - Central government gross debt (2022, percent of GDP, Table 2b): 34.5
- Fiscal projections (from medium-term outlook):
  - Central government primary balance: -2.5 (2022), -1.7 (2023), -0.9 (2024), -0.1 (2025), 0.0 (2026–2028)
  - Central government net lending/borrowing: -3.0 (2022), -2.3 (2023), -1.5 (2024–2028)

### External sector and balance of payments
- The external current account deteriorated sharply in 2022 due to lower exports and higher oil prices.
- Agricultural products make up a large share of exports; hydro-electricity and agricultural products are sizable components.
- Profit remittances are a major source of outward factor payments. The foreign investor base is expanding along with the increase in direct investment.
- Other investment was a key source of capital in 2022. Foreign direct investment has been on the rise over the last decade; a large portion invested in agricultural-related industries, manufacturing, and trade.
- Balance of payments key figures (Table 3, in millions of U.S. dollars):
  - Current Account: -2,691 (2022 est.), 96 (2023 proj.), -139 (2024 proj.)
  - Trade balance: -2,071 (2022 est.), 748 (2023 proj.), 595 (2024 proj.)
  - Exports: 13,080 (2022 est.), 15,787 (2023 proj.), 16,441 (2024 proj.)
  - Imports: -14,649 (2022 est.), -14,473 (2023 proj.), -15,243 (2024 proj.)
  - Of which: Fuel products: -2,311 (2022 est.), -2,483 (2023 proj.), -2,209 (2024 proj.)
  - Factor income: -1,316 (2022 est.), -1,382 (2023 proj.), -1,518 (2024 proj.)
  - Transfers: 697 (2022 est.), 729 (2023 proj.), 784 (2024 proj.)
  - Gross reserves (millions of U.S. dollars): 10,154 (2022), 10,304 (2023 proj.), 10,854 (2024 proj.)
- Gross External Financing Needs and Sources (Table 6, in millions of U.S. dollars):
  - Gross External Financing Needs: -3,287 (2022), -455 (2023), -735 (2024)
  - External current account balance: -2,691 (2022), 96 (2023), -139 (2024)
  - Debt amortization: -632 (2021), -596 (2022), -550 (2023), -595 (2024)
  - Gross External Financing Sources: 3,421 (2022), 605 (2023), 1,285 (2024)
  - Foreign direct investment (net): 474 (2022), 1,765 (2023), 2,059 (2024)
  - Medium and LT debt disbursements: 1,754 (2022), 1,598 (2023), 1,194 (2024)
  - Change in international reserves: -134 (2022), -150 (2023), -550 (2024)
  - Memo: Gross international reserves: 10,154 (2022), 10,304 (2023), 10,854 (2024)

### Monetary policy and inflation
- Inflation has been receding since peaking in April 2022, aided by deceleration in food and transport prices.
- A negative output gap is estimated for 2022.
- The real exchange rate depreciated slightly in 2022.
- Given that inflation has been higher than targeted levels, the central bank tightened its policy rate, keeping it at 8.5 percent since September 2022.
- Key monetary indicators and projections:
  - Consumer prices (end of period): 8.1 (2022), 4.5 (2023), 4.0 (2024–2028)
  - Monetary policy rate, year-end (Table 1): 5.2 (2020), 5.2 (2021), data show 8.5 percent policy rate held since September 2022.
  - Gross international reserves (in millions of U.S. dollars): 10,154 (2022), 10,304 (2023), 10,854 (2024)

### Financial sector soundness and monetary aggregates
- Banks are liquid and well capitalized. Bank profitability slightly recovered in 2022.
- Financial deepening has increased in Paraguay. Lending rates increased since Q4 2021 in response to normalization of monetary policy.
- Financial soundness indicators (selected):
  - Regulatory capital/risk-weighted assets: 17.3 (2022)
  - Tier 1 capital/risk-weighted assets: 14.0 (2022)
  - NPLs/total loans: 2.9 (2022)
  - Return on assets: 2.0 (2022)
  - Liquid assets/total assets: 21.8 (2022)
  - FX loans/total loans: 45.9 (2022)
- Monetary and banking aggregates (Table 5, selected, end-of-period in billions of Guaranies or percent):
  - Currency Issued (M0): 18,526 (2022)
  - Money and Quasi-Money (M2): 91,757 (2022)
  - Credit to private sector (percent change, Table 1 / Table 5): 10.5 (2022) and credit to the private sector level 146,452 (2022)
  - Broad Liquidity (M4): 160,148 (2022)
  - Foreign currency deposits: 59,045 (2022)
  - Ratio of foreign currency deposits to M3 (percent): 39.2 (2022)

### Medium-term outlook (selected projections)
- Real GDP growth: 0.1 (2022), 4.5 (2023), 3.5 (2024–2028)
- Output gap: -1.7 (2022), -0.2 (2023), -0.1 (2024–2028)
- Gross domestic investment: 22.6 (2022), 25.8 (2023), 27.4 (2024)
- Gross domestic savings: 16.2 (2022), 26.0 (2023), 27.1 (2024)
- Consumer prices (end of period): 8.1 (2022), 4.5 (2023), 4.0 (2024–2028)
- Gross international reserves (in US$ billion): 10.2 (2022), 10.3 (2023), 10.9 (2024), 11.4 (2025), 12.0 (2026), 12.5 (2027), 13.1 (2028)

*International Monetary Fund — Paraguay staff report excerpts and tables (selected figures and projections).*

### Annex I. Risk Assessment Matrix

### Annex I. Risk Assessment Matrix

### External Risks
- Intensification of regional conflict(s). (High / ST)
  - Expected impact and recommended response: High. Disruptions of trade channels already affected exports of meat to Russia. In addition, the war affected the availability and prices of imported fertilizers, key for soy production. The government should facilitate access to alternative meat and fertilizer markets.
- Deepening geo-economic fragmentation and geopolitical tensions. (High / ST, MT)
  - Expected impact and recommended response: High. Disruptions of trade channels already affected exports of meat to Russia. In addition, the war affected the availability and prices of imported fertilizers, key for soy production. The government should facilitate access to alternative meat and fertilizer markets.
- Abrupt global slowdown or recession. (Medium / ST)
  - Expected impact and recommended response: Medium. A new bout of global financial tightening, possibly combined with volatile commodity prices, could lead to spiking risk premia, debt distress, widening external imbalances, and fiscal pressures. It may dampen external demand, foreign inflows, and border trades. Monetary policy, including exchange rate interventions, should balance the impact of lower activity with volatile prices.
- Monetary policy miscalibration. (Medium / ST)
  - Expected impact and recommended response: Medium. Persistent high inflation could de-anchor inflation expectations. The government should continue to implement a successful data-driven inflation-targeting framework and continue to allow the exchange rate to work as an important shock absorber.
- Commodity price volatility. (Medium / ST)
  - Expected impact and recommended response: High. Persistent global prices could further increase inflation rates in Paraguay. Higher commodity prices would benefit fiscal revenues and trade balance, but supply disruptions could lead to production stoppages. Monetary policy should be calibrated to face scenarios with lower growth and volatile prices.
- Social discontent. (High / ST, MT)
  - Expected impact and recommended response: Medium. Social unrest may exacerbate imbalances, slow growth, and trigger market repricing. Social policies need to continue supporting the most vulnerable population. Governance and anti-corruption reforms need to move forward to strengthen the transparency of public sector operations.
- Systemic financial instability. (Medium / ST)
  - Expected impact and recommended response: Medium. Adverse financial conditions may trigger insolvencies in weak banks or non-bank financial institutions, causing market dislocations. The government should continue enhancing financial system supervision and the AML/CFT regime. Monetary policy should continue to allow the exchange rate to work as an important shock absorber.
- Extreme climate events. (Medium / ST)
  - Expected impact and recommended response: High. This may amplify supply chain disruptions and inflationary pressures, causing water and food shortages and reducing growth. Exchange rate depreciation would serve as a short-term buffer. In the medium term, reducing export concentration, diversifying the mix of clean power generation, and facilitating adaptation in agriculture would be important.

### Domestic Risks
- Weather-related shocks. (Medium to High / ST)
  - Expected impact and recommended response: Medium to High. Shocks to the agriculture sector affect GDP growth, export performance and exchange rate, and the financial sector due to banks' agricultural lending. Shocks to the energy sector would lessen government revenue. The exchange rate could absorb some of the shocks. Foreign exchange interventions can avoid disorderly market conditions.
- Fiscal sustainability. (Medium / ST, MT)
  - Context: After the large deficit spike in 2020 and 2021 due to the pandemic, amid numerous downside risks to the economy, 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 and recommended response: Medium to High. Fiscal stability is the cornerstone of macroeconomic stability in Paraguay, which significantly impacts investor confidence, financing costs, and growth performance. The government needs to strengthen its ability to raise revenues, control expenditure increases, and reform civil services and public procurement processes.

### Note on Likelihood and Scope
- The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path. The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly.

*Source: Annex I. Risk Assessment Matrix, IMF staff assessment.*

### 4.      Paraguay continues to recover from the negative effects of last year’s drought. The

### 4.      Paraguay continues to recover from the negative effects of last year’s drought.

### Economic activity and outlook
- 2022 GDP performance:
  - Q1 year-on-year GDP: -0.9 percent.
  - Q2 year-on-year GDP: -3.3 percent.
  - Q3 year-on-year GDP: 2.9 percent.
  - Q4 year-on-year GDP: 1.7 percent.
  - Estimated growth rate for 2022: 0.1 percent.
- Drivers of recovery:
  - Monthly Economic Activity Indicator for Paraguay (IMAEP) shows recovery from H2 2022, particularly in agriculture and electricity production.
  - 2022–2023 growing season is identified as a driving force for the primary sector, agroindustries, and trade in 2023.
- 2023 projection:
  - Economic expansion of approximately 4.5 percent in 2023, with potential upward revision if other sectors perform more dynamically.
  - Expected moderate expansion in manufacturing, electricity and water, and services.
  - From expenditure side: greater dynamism of net external demand and, to a lesser extent, internal demand.

### External sector and current account
- 2022 external current account:
  - External current account deficit of more than 6 percent of GDP in 2022.
  - Causes: sustained moderation in exports and double-digit growth in imports boosted by high international prices.
- 2023 external current account projection:
  - Exports expected to increase at double-digit rates in 2023.
  - Projected modest current account surplus of approximately 0.4 percent of GDP for 2023, explained primarily by a positive trade balance.

### Inflation and monetary policy
- Inflation outcomes and expectations:
  - Overall inflation at end-2022: 8.1 percent.
  - Year-on-year inflation as of April (year unspecified in text): 5.3 percent.
  - Inflation expectations: 2023: 5 percent; 2024: 4.0 percent.
  - BCP surveys: inflation should return to the center of its target range of 4 percent within the monetary policy horizon (24 months).
- Monetary policy stance:
  - Monetary policy rate maintained at 8.5 percent per annum since September 2022.
  - Rate reflect an increase of 325 basis points since December 2021.

### Fiscal outcomes, targets, and policies
- Fiscal outcomes:
  - 2022 fiscal deficit: 3 percent of GDP.
  - Fiscal deficit reduced by 0.6 percent of GDP relative to prior context (negative growth scenario).
  - Non-tax revenue increased unexpectedly by 0.3 percent GDP, primarily due to increased social contributions that offset the increase in public investment expenditure.
- 2023 and medium-term fiscal targets:
  - Central government budget for 2023 approved with an authorized deficit of 2.3 percent of GDP (0.7 percentage points below the target for 2022).
  - Commitment to reduce the deficit by 0.7 percent of GDP for 2023 (program objective).
  - Target to gradually converge to a deficit of 1.5 percent of GDP by 2024, as provided in the Fiscal Responsibility Law (LRF).
  - Limit growth of real primary current expenditure to 3.0 percent for the period 2023-2024.
  - Primary current expenditure at end-2024 projected at approximately 12 percent of GDP.
  - Public debt of the central government projected at a level of approximately 38 percent of GDP by end-2024 under a baseline scenario without any adverse shocks.
- Fiscal policy measures and priorities:
  - Contain and rationalize public expenditure and prioritize public investments.
  - Constrain additional current expenditure items to those established in current legislation, including adjustments linked to the legal minimum wage (SML).
  - Intensify rational management of goods and services expenditure, prioritizing procurement of medicines and hospital supplies.
  - Maintain low levels of net changes in floating debt at the end of each fiscal year.
  - Quantitative targets for fiscal deficit, primary current expenditure, and net changes in floating debt described in Table 1a (table referenced in source).

### Structural fiscal reforms and pension system
- Public sector pension (Caja Fiscal) situation:
  - Actuarial estimate for Caja Fiscal for 2019-2056 reveals a deficit of 28.5 percent of the 2019 GDP, nominal net present value approximately USD 11.408 billion.
  - As of December 2021, cumulative surplus deposited with the BCP: approximately USD 429 million.
  - Identified causes: insufficient contributions from the National Teacher Corps, the Armed Forces, and the National Police; highly fragmented system and inequities.
- Reform plans and timeline:
  - Establish a high-level National Committee of Experts to draft reform proposals; proposed submission to National Congress by July 2023 (reform target). Commission intended to be established by Law.
  - Work on establishment of a Retirement and Pension Superintendency led by the BCP; proposed submission of draft law to National Congress by December 2023 (reform target).
  - Objective: financial and actuarial sustainability of the pension system in line with convergence plan and Law 5098/13 on Fiscal Responsibility.

### Revenue mobilization, compliance, and fiscal governance
- Electronic invoicing and SIFEN (e-kuatia):
  - Implementation started April 2022; expected completion October 2024.
  - Objective: cover 80 percent of national invoicing with electronic documents.
  - As of January 2023: more than 100 million electronic invoices issued, involving 542 companies.
  - Projected: approximately 1,500 companies using electronic invoices by end-2023.
  - Intermediate objective: include at least 750 large and medium-sized taxpayers in SIFEN by end-June 2023 (reform target).
- Compliance and risk management:
  - Continued development of compliance risk management framework, benefiting from IMF technical assistance.
  - Use of Big Data to identify taxpayer risk factors; IMF training in fiscal behavioral sciences received.
- Fiscal rule and transparency:
  - Continued push for approval of Fiscal Responsibility Law 2.0; draft law submitted to National Congress in December 2020.
  - Publication of the first Fiscal Risk Report for Paraguay corresponding to 2022; published in April 2023.
  - Fiscal risk analysis includes PPPs, public enterprises, pensions, and climate change risks.
- Public financial management improvements:
  - PEFA 2022 assessment: 71% of the 31 indicators assessed earned a "C" grade or higher; 64.5% of indicators have a grade equal to or lower than "C+".
  - Commitment to align public financial management with international best practices and incorporate climate change and gender policies.

### Public enterprises, corporate governance, and payment processes
- Public enterprise management:
  - Ongoing improvements in supervision and management of nine public enterprises.
  - Re-established control panel system to measure enterprise performance; Resolution 28 (National Public Enterprise Council, December 20, 2022) mandates dashboard use, designates DGEP as administrator and regulator.
  - Draft Corporate Governance Law to clarify and strengthen the National Public Enterprise Council and establish common regulatory framework; draft to be submitted to National Congress during H2 2023 (reform target).
- Supplier payments and accrued commitments:
  - Progress in recording accrued commitments and analysis of delayed payments for certain public works contracts.
  - Interim payments to contracting enterprises made through a debt transfer mechanism with commercial banks.
  - Need to strengthen legal tools for administration of credits contracted by State Agencies and Entities (OEE) to ensure sufficient information and resources, establish sustainable payment plans, and respect institutional budget constraints and Fiscal Convergence Plan.

### Risks to the outlook
- External risks:
  - Renewed escalation of the war in Ukraine.
  - Unexpected inflationary developments leading to tightened financial conditions.
  - Greater probability of recession in major advanced economies.
  - Tightening of international financial conditions could bolster the U.S. dollar, adversely affecting capital flows to emerging economies, causing currency depreciation, and pressuring fiscal accounts.
- Domestic and sectoral risks:
  - Climate change and weather conditions affecting agricultural production (noted shortages and high prices of agricultural inputs; high market volatility could negatively influence soybean production and profitability).
  - Logistical factors and oil prices.
  - Water and electricity generation sector outlooks are quite favorable given improved climate conditions in recent months.
- Overall assessment:
  - International environment remains complex with uncertain economic outlook and global inflation prospects; both external and local risks could affect the recovery and fiscal consolidation path.

*Source: IMF publication content provided in the supplied PDF excerpt.*

### 26.      In this regard, the Ministry of Finance has worked on and submitted to the

### 1pryea2023001 - 26.      In this regard, the Ministry of Finance has worked on and submitted to the

### Public procurement and assignment of receivables
- The Ministry of Finance submitted a draft decree to the Presidency to regulate procedures for the assignment of receivables (assignment of credits) derived from contracts linked to public investment projects and contracts for the provision of goods and services concluded under:
  - Law 2051/2003 "ON PUBLIC PROCUREMENT" (still in force on a transitional basis)
  - Law 7021/2021 "ON PUBLIC SUPPLY AND PROCUREMENT"
- Objectives of the draft decree:
  - Allow better control and monitoring by the Ministry of Finance of commitments made.
  - Improve predictability of commitments and provide adequate plans to settle them.
- Key procedural requirements upon entry into force:
  - OEEs that are part of the Executive Branch will require the favorable opinion of the National Economic Team (EEN) to authorize assignments of collection rights (assignment of credits), regardless of whether contracts were entered into under Law No. 7021/2022 or Law No. 2051/2003.
  - Assignments authorized under Article 38 of Law No. 2051/2003 prior to the decree must be reported to the EEN within ten (10) working days counted from the day following the decree’s entry into force.
  - Reports must identify the Assignor Contractor and the Assignee; and determine the net amount of the assigned debt, the term and maturity of the payment obligations.
  - The Internal Audit Unit of the respective OEE must certify amounts of assigned obligations by assigning contractor and date.
  - Once certified, credits will be sent to the Accounting Directorate for registration in the Accounting System (SICO) / Integrated Financial Administration System (SIAF).
  - OEEs must provide for available budgetary appropriations for allocation and subsequent payment of the assigned debts, based on previously established quotas and in coordination with the Ministry of Finance.

### Monetary and foreign exchange policies
- Monetary policy stance:
  - Will consider tightening further monetary policy if inflationary pressures persist.
  - Monetary policy rate has been proactively managed in response to rising inflation and will continue to be calibrated to align inflation projections and expectations in the medium term with the 4 percent inflation target.
- Foreign exchange regime:
  - Will maintain a flexible foreign exchange regime with exceptional interventions during periods of excessive short-term volatility of the guaraní.
  - Exceptional exchange rate interventions are part of monetary policy tools to limit excessive volatility and preserve financial stability.
  - Commitment to maintain and strengthen transparency of foreign exchange market interventions through publication of information on the Central Bank of Paraguay website.

### Pillar II — Improving productivity and promoting economic growth: overview
- Objective: Improve productivity and lay the base for more diversified, inclusive economic growth through structural reforms.
- First review under the PCI includes two reform targets: submission of the Public Service and Professional Civil Service Law and the Law on Collateral of Movable Assets to the National Congress.
- Two outstanding targets remain: (i) streamline public expenditure, and (ii) improve efficiency of government operations.

### Rationalizing public expenditure (public procurement reform)
- Actions taken:
  - Implementing the Public Procurement Reform Law.
  - Prepared a draft law to reorganize procurement procedures using a more consistent, centralized approach.
- Law 7021 on Public Supply and Procurement:
  - Promulgated on December 9, 2022.
  - Updates regulatory texts for the overall public procurement system.
  - Will enter into force on publication of the regulatory decree.
  - Replaces Law 2051/03.
  - Creates the National Public Supply System managed by the Ministry of Finance, Register of Public Procurers, and Register of Government Suppliers (registration mandatory to participate in procurement procedures).
  - Promotes transparency according to principles of economy, effectiveness, and efficiency; enhanced participation of bidders on equal terms; and administrative modernization and simplification.
- Reform target: Draft relevant regulations for adoption by decree by June 30, 2023.

### Civil service reform
- Draft Public Service and Professional Civil Service Law:
  - Proposes changes to Law 1626/00 on the Public Service.
  - Objectives: modern, competitive, merit-based public service with one wage scale, professional development, and more efficient public expenditure.
  - Submitted to the National Congress on October 21, 2022, meeting the reform target set for December 2022.
  - Ministry of Finance and the Civil Service Secretariat to be responsible for regulation and implementation within their respective authorities.

### Reorganizing the government
- Goal: Improve efficiency of government operations, redesign public sector procedures, and reduce bureaucracy.
- Technical Planning Secretariat working on a legislative proposal to establish structure, rules, responsibilities, and regulations for organization of institutions comprising general government.
- Reform target: legislative proposal for reorganization of government institutions by July 2023.

### Improving governance and reducing vulnerability to corruption
- Governance Diagnostic Assessment:
  - Led by the IMF in early 2020; report published at the end of October 2022.
- Anticorruption plan:
  - Developed and adopted a new comprehensive anticorruption plan.
  - End of January 2023: Draft law submitted to Congress to create the National Integrity and Transparency Secretariat (SENIT) to replace the National Anticorruption Secretariat (SENAC).
  - SENIT to emphasize planning and implementation of transparency and integrity policies to prevent acts of corruption and strengthen the authority fighting corruption.

### Strengthening the AML/CFT regime
- 2021 evaluation by Financial Action Task Force of Latin America (GAFILAT):
  - Results discussed and presented for approval in July 2022.
  - Paraguay approved the mutual evaluation process reflecting an adequate level of technical compliance and effectiveness in fighting money laundering, financing of terrorism, and proliferation of weapons of mass destruction.
- Updated ML/TF NRA:
  - Project conducted with Inter-American Development Bank assistance made significant progress.
  - Expected government approval by end-July 2023 (reform target).
  - NRA results to inform risk assessment frameworks for financial and nonfinancial institutions.

### Strengthening the business climate
- Draft Law on Collateral of Movable Assets:
  - Updated version produced by inter-institutional technical effort led by the Central Bank of Paraguay; redrafted to reflect best practices and regional comparative legislation.
  - Aims to promote low-cost credit, increase supply of guaranteed financial credit, and facilitate MSME access to credit by expanding assets usable as collateral (such as accounts receivable, harvests, etc.).
  - Submitted to the National Congress at the end of December 2022, meeting the reform target for the first PCI review.
- Insolvency law reform:
  - Intention to renew initiative to reform legal framework for insolvencies.
  - Earlier attempt failed in Congress; new draft law on insolvency to be submitted by June 2024 (reform target).

### Pillar III — Improving social protection and inclusion: overview
- Social protection is a fundamental pillar for economic and social rights; relevance heightened by the COVID-19 pandemic and inflationary pressures from the war in Ukraine.
- The ¡Vamos! Social Protection System comprises three basic pillars:
  - (i) social integration — universal, selective policies for populations in poverty;
  - (ii) labor and productive integration — labor regulation and inclusion policies;
  - (iii) social security — contributory and noncontributory policies.

### Social programs coverage and budget allocations
- Tekoporã Program:
  - Reform target: increase coverage from almost 166,000 households in 2021 to 170,000 households in 2022.
  - Outcome: broadly exceeded; program now covers more than 184,000 households.
- Food Subsidy Program for the Elderly:
  - Reform target: 26,000 new beneficiaries.
  - Outcome: added more than 41,000 new beneficiaries during 2022.
- 2023 Budget Law provisions:
  - Draft General National Budget includes approximately USD 320 million for the Food Subsidy Program for the Elderly and USD 61 million for the Tekoporã Program.
  - With these allocations:
    - Intend to reach 300,000 beneficiaries with the Food Subsidy.
    - Intend to cover needs of the current number of beneficiary households in the Tekoporã Program.

### Beneficiary identification systems and administration of social programs
- Integrated Social Protection Card (FIPS):
  - Launched in July 2022.
  - Reached 2,732 homes in 10 areas of the city of Villeta.
  - Coordinated by the Technical Unit of the Social Office with consensus of 26 institutions within the ¡Vamos! Social Protection System.
  - Purpose: collect integrated, consistent information on social and economic gaps.
- Pension System (SIPEN):
  - Computer and technological solution developed by the Noncontributory Pensions Directorate of the Ministry of Treasury.
  - Includes processes for data entry, selection, generation of earnings, and control and payment for the Integrated Financial Administration System (SIAF).
  - Integrated into the Government Resource Administration System (SIARE).
  - Implementation plan:
    - Continue ensuring identification, selection, and payment processes for programs managed by the Noncontributory Pensions Directorate are carried out within SIPEN during the year.
    - Extend SIPEN implementation to at least one of the following institutions by the end of 2023 (reform target): (a) Coordination Unit for Miscellaneous Government Obligations (CODE) under the Ministry of Finance; (b) Ministry of Childhood and Adolescence (MINNA); (c) Ministry of Social Development.
    - Medium-term plan: extend coverage of SIPEN to a second institution among the remaining institutions by the end of June 2024 (reform target).

### Formalizing employment
- Informality:
  - Accounts for more than half of Paraguay’s employed workers.
- Draft law for formalization:
  - Targets dependent workers in MSMEs and independent workers in general to promote access to the formal social security system via incentives.
  - Technical staff of the Ministry of Treasury completed the initial Draft Law and a technical report on labor market implications.
  - Next steps: socialization with entities and private sector representatives and submission to the National Congress by the end of June 2023 (reform target).

### Increasing financial inclusion
- Draft Law on Financial Inclusion:
  - Will make mandatory payment of wages by electronic transfer rather than in cash.
  - Requires financial intermediaries to provide workers with free accounts for direct payment of wages and enable at least one free cash withdrawal per month.
  - Includes tax incentives to ensure compliance and promote transparency in financial transactions.
  - Received favorable opinion from two congressional committees; pending approval by the National Congress.
  - Implementing regulation to be drafted following approval.

*Source: Excerpt from the provided IMF content unit.*

### 48.      Quantitative targets, continuous targets, and reform targets will continue to be used

### 48. Quantitative targets, continuous targets, and reform targets will continue to be used

### Overview
- Quantitative targets, continuous targets, and reform targets will be used to monitor progress in the implementation of policies under the program.
- The following quantitative targets are being modified for end-June 2023, end-December 2023 and set for June-2024, as well as a quantitative target to be monitored on an ongoing basis (Tables 1a and 1b of this Program Statement).
- The government and IMF senior management and staff agreed on the reform targets shown in Table 2 of this Program Statement.
- Review schedule:
  - Second review scheduled to be completed by December 1, 2023.
  - Third review scheduled to be completed by June 1, 2024.
  - Fourth review scheduled to be completed by November 1, 2024.
- Definitions are provided in the attached Technical Memorandum of Understanding.

### Quantitative Targets (Table 1a)
I. Quantitative Targets (QT)
- 1 Ceiling on the central government fiscal deficit (in billions of guaraníes) 2/ 3/
  - -8,733-8,622Met-2,322-4,280-7,284-7,345-1,484
- 2 Ceiling on current primary expenditure of the central government (in billions of guaraníes) 2/
  - 34,74635,075Not met17,43217,84937,92638,17818,269
- 3 Ceiling on the net incurrence of floating debt by the central government 4/
  - 500738Not met-2,100-1,617500500-2,117

II. Continuous Targets
- 4 Ceiling on accumulation of external debt payment arrears by the central administration (in millions of U.S. dollar)
  - 0.00.0Met0.00.00.00.00.0

III. Inflation Consultation Band 5/
- Upper band limit (2 percent above center point)
  - 10.8...8.58.56.16.16.1
- End of period inflation, center point 6/
  - 8.88.1Met6.56.54.14.14.1
- Lower band limit (2 percent below center point)
  - 6.8...4.54.52.12.12.1

IV. Memorandum Items
- Social assistance benefits 2/
  - 2,9062,921Met1,4341,4343,3383,3381,666

Notes embedded in the Program Statement:
- 1/ As defined in the Program Statement and the Technical Memorandum of Understanding.
- 2/ Cumulative since the beginning of a calendar year.
- 3/ Refers to the negative of net lending/borrowing (overall balance) as per the GFSM 2001 definition.
- 4/ Cumulative change since the start of each year.
- 5/ Board consultation is required upon breach of the band limits.
- 6/ Defined as the change over 12 months of the end-of-period consumer price index, as measured and published by the Central Bank of Paraguay.

### Standard Continuous Targets (Table 1b)
- 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 which are inconsistent with Article VIII.
- Not to impose or intensify import restrictions for balance of payments reasons.
- Not to accumulate external payments arrears.

### Reform Targets (Table 2) — Policy objectives, reform actions, target dates, status
- 1 Implement measures to protect the solvency of the Public Sector Pension System ("Caja Fiscal")
  - Send to Congress a law to create a national commission that will devise and propose measures for a fundamental reform of the "Caja Fiscal".
  - Target Date: End-July 2023
  - Status: Modified target; new date proposed.
- 2 Enhance domestic revenue mobilization
  - Incorporate at least 750 large and medium-sized taxpayers in the Integrated National Electronic Invoicing System (SIFEN).
  - Target Date: End-June 2023
  - Status: In progress.
- 3 Improve the monitoring and supervision of Public Enterprises
  - Reestablish the control panel with results-based management contracts for one year (2023).
  - Target Date: End-December 2022
  - Status: Met.
- 4 Strengthen the oversight and strategic management of Public Enterprises
  - Review and send to Congress the "Corporate Governance Law", which will clarify and strengthen the role of the SOE supervisory board.
  - Target Date: End-December 2023
  - Status: In progress.
- 5 Strengthen financial supervision
  - Send a new version of the pension fund supervision law, which will create a new supervisory agency, to one of the two chambers of Congress.
  - Target Date: End-December 2023
  - Status: In progress.
- 6 Civil service reform
  - Submit to Congress the new "Ley de la Función Pública y Carrera del Servicio Civil" (civil service law).
  - Target Date: End-December 2022
  - Status: Met.
- 7 Rationalize public spending
  - Complete and enact the administrative regulation for the new procurement law.
  - Target Date: End-June 2023
  - Status: In progress.
- 8 Improve the efficiency of government operations
  - Complete work on the law draft that orders the structure of the state and submit the draft to one of the two chambers of Congress.
  - Target Date: End-July 2023
  - Status: In progress; new date proposed.
- 9 Improve the business climate
  - Submit to Congress a new version of the law on collateral of movable assets ("ley de garantías mobiliarias").
  - Target Date: End-December 2022
  - Status: Met.
- 10 Strengthen the AML/CFT regime
  - Complete and approve the updated version of the National Risk Assessment.
  - Target Date: End-July 2023
  - Status: New reform target
- 11 Improve the business climate
  - Complete work on the new version of the Insolvency Law law and submit the draft to one of the two chambers of Congress.
  - Target Date: End-June 2024
  - Status: New reform target
- 12 Formalize MSME workers and independent workers
  - Submit to the National Congress a Bill for the formalization of dependent workers of MSMEs and independent workers in general.
  - Target Date: End-July 2023
  - Status: In progress; new date proposed.
- 13 Reduce the coverage gap of the social transfer programs.
  - Increase the number of beneficiaries of the "Tekoporã" and "Food Pension for Elderly Adults" programs by 4,000 families (from 166,000 to 170,000 families) and 26,000 new annual beneficiaries, respectively.
  - Target Date: End-December 2022
  - Status: Met.
- 14 Integrate the information system for beneficiaries of social programs
  - Implement the guidelines of decree No. 6833 of March 2022 "SIPEN" (Pension Information System), Article 1, subsection b to one of the following state institutions: Coordination of Various State Obligations (CODE); Ministry of Children and Adolescents (MINNA); or Ministry of Social Development (MDS).
  - Target Date: End-December 2023
  - Status: Modified reform target; in progress.
- 15 Integrate the information system for beneficiaries of social programs
  - Implement the guidelines of decree No. 6833 of March 2022 "SIPEN" (Pension Information System), Article 1, subsection b to a second of the two remaining state institutions after successful completion of target 14: Coordination of Various State Obligations (CODE); Ministry of Children and Adolescents (MINNA); or Ministry of Social Development (MDS).
  - Target Date: End-June 2024
  - Status: New reform target

Pillar mapping provided in the Program Statement:
- Pillar I: Ensure Macroeconomic Stability and Protect the Fiscal Policy Framework
- Pillar II: Enhance Productivity and Foster Economic Growth
- Pillar III: Enhance Social Protection and Inclusiveness

### Reviews of the Policy Coordination Instrument (Table 3)
- Program Review
  - Review Date: November 21, 2022
  - Test Date: ...
  - Board Discussion of the PCI Request: November 21, 2022
- First Review
  - Review Date: June 1, 2023
  - Test Date: December 31, 2022
- Second Review
  - Review Date: December 1, 2023
  - Test Date: June 30, 2023
- Third Review
  - Review Date: June 1, 2024
  - Test Date: December 31, 2023
- Fourth Review
  - Review Date: November 1, 2024
  - Test Date: June 30, 2024

### Technical Memorandum of Understanding — Key definitions and reporting obligations
- Program period defined: November 21, 2022 – November 20, 2024.
- “Government” refers to the central budgetary government of the Republic of Paraguay (excludes central bank, financial and non-financial public companies, departmental and municipal governments).
- “Public sector” refers to government, local governments, and all entities owned or majority controlled by the government.

Ceiling on the Central Government Fiscal Deficit (Program Definition)
- Definition: The financing capacity/need ratio or the global fiscal balance (also called “net loan / net indebtedness”) is the difference between total income and total expenditure of the government (total obligated expenditure plus net acquisition of non-financial assets). Definition consistent with GFSM 2001. Obligated public spending is defined on the basis of payment orders accepted by the Treasury, as well as those executed with external resources.
- Information requirements:
  - Authorities will report to IMF staff, on a monthly basis, provisional data on the overall fiscal balance (program definition) and its components, with a delay of no more than 30 days after the end of each month.
  - Final data will be shared as soon as final Treasury account balances are available, but no later than two months after the provisional data has been reported.

Ceiling on Current Primary Expenditure of the Central Government (Program Definition)
- Definition: 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) and other current expenses. Equivalent definition: total obligated expense less interest expense, less capital grants and other capital expenses. Quantitative target is a ceiling for primary current spending accumulated since the beginning of the year.
- Information requirements:
  - Authorities will report to IMF staff, on a monthly basis, provisional data on central government current primary expenditure (program definition) and its components, with a delay of no more than 30 days after the end of the month.

Ceiling on the Net Incurrence of Floating Debt by the Central Government (Program Definition)
- Definition: Floating debt = difference between the expense recorded on an obligated basis and the amounts transferred for its payment by the Treasury (based on SICO and SITE). In SITUFIN, change in stock of floating debt is recorded as the balance of net changes in floating debt attributable to the current budget year and the change attributable to the previous year (repayment). Quantitative target: ceiling for accumulated net change since beginning of the year.
- Information requirements:
  - Monthly data will be provided to the Fund with a lag of no more than 30 days after the end of each month.

Ceiling on Accumulation of External Debt Payment Arrears by the Central Government
- Definition: External debt service arrears = overdue debt service arising from obligations contracted directly or guaranteed by the central government, except for debt subject to rescheduling or restructuring. Program requires that no new external arrears be accumulated at any time under the arrangement.
- Information requirements:
  - Reports of external arrears by creditor (if any), with detailed explanations, will be transmitted monthly, within 30 days after the end of the month.

Inflation Consultation Band Linked to Central Bank Projections
- Definition: Inflation = 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.
- Information requirements:
  - Reports on inflation and its components must be transmitted monthly, within two weeks after the end of the month.
- Failure to meet the inflation consultation band limits at the end of a semester would trigger discussions with IMF staff and require a consultation with the IMF Board of Directors.

Social Assistance Benefits
- Definition: Follow GFSM 2001 classification; defined as the Social Assistance Benefits subcomponent of the Social Benefits account of the central government spending accounts of SITUFIN. This target is a memorandum item (not formal conditionality) but reporting is requested to compare execution with original projection.
- Information requirements:
  - Reports and components must be transmitted monthly, within 30 days after the end of each month.

Additional reporting and monitoring obligations (selected items and exact lags)
- Authorities will transmit to Fund staff, in electronic format if possible:
  - Three days after implementation: any decree, decision, circular, edict, supplemental appropriation order, ordinance, or law that has economic or financial implications for the current program (including supplementary allocation orders, cancellations of budget allocations, creation of new agencies or funds).
  - Within a maximum period of 30 days (unless otherwise specified), preliminary data on:
    - Tax receipts and tax and customs settlements by category, with corresponding revenue on a monthly basis.
    - The monthly number of expenditure committed, certified, or for which payment orders have been issued.
    - The four-monthly report by the DGIP, based on the SNIP system on investment projects, with their progress and execution.
    - The complete monthly table of the financial situation of the central government based on the accounts of the Treasury (SITUFIN), including the breakdown of tax revenues by type of tax.
    - The monthly statistical report of public debt included in the SIGADE system, by creditor category, and breakdown of debt service by amortization and interest payments, providing this information no later than six weeks after the end of the month.
    - A quarterly update of the projected public debt service, with breakdown by amortization and interest payments, both by creditor category (internal debt: loans, treasury bonds, and others (if any); external debt: multilateral, bilateral, treasury bonds, and others (if any)).
    - A monthly report on the price structure of fuel products, including an estimate of subsidies involved, if any.
  - Final data will be provided as soon as final Treasury account balances are available, but no later than one month after reporting of provisional data.

Central Bank of Paraguay reporting to Fund staff
- The monthly balance sheet of the central bank, with a maximum lag of one month.
- The monthly consolidated balance sheet of banks with a maximum lag of two months.
- The quarterly depository corporations survey (consolidated monetary survey), with a maximum lag of two months.
- The lending and deposit interest rates of commercial banks, on a monthly basis.
- Indicators of prudential supervision and financial soundness of banking financial institutions, on a quarterly basis, with a maximum delay of two months.

*Source: Program Statement and Technical Memorandum of Understanding (Attachment II) from the Policy Coordination Instrument documentation.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2023/english/1pryea2023001.pdf_