## 1pryea2024001

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### Executive summary and recent developments
- GDP growth: set to grow at around 4.5 percent in 2023, led by robust agricultural production and exports and high electricity generation; agriculture and electricity sectors expanding by 23 and 14 percent, respectively.
- Inflation and monetary policy:
  - Inflation receded rapidly; inflation was 4.2 percent as of end-June (y/y) and 3.5 percent in October; 3.2 percent in November 2023.
  - BCP trimmed 12-month inflation projection for end-2023 from 4.1 to 3.8 percent; 2024 expectation stable at 4.0 percent.
  - Policy rate reduced from 8.5 to 7.25 percent since August (four reductions totaling 125 basis points); earlier note reports TPM at 7.75 percent after three 25 bps cuts.
- External accounts:
  - Current account reversed into a surplus: projected surplus of 0.2 percent of GDP in 2023 (from a deficit of 7.2 percent of GDP in 2022).
  - Exports of goods and services growing by about 26 percent; hydro-electricity export receipts: 2,038 (US$ millions) in 2023.
- Political transition: President Santiago Peña took office in August.

### PCI program implementation and review recommendation
- Quantitative targets (QTs) for June: most were narrowly missed.
  - Breaches (margins): primary current expenditure by 0.04 percent of GDP; fiscal deficit by 0.01 percent of GDP; floating debt ceiling by 0.001 percent of GDP.
  - Continuous target of zero accumulation of external debt payment arrears was met.
  - Inflation was below the programmed consultation band (4.5 - 8.5 percent).
- Reform targets (RTs): most met, including:
  - Legislation submitted to establish a national commission for comprehensive reform of “Caja Fiscal”.
  - 842 large and medium taxpayers added to SIFEN (target floor 750).
  - Administrative regulation for new procurement law enacted on August 11.
  - Draft law to reorder state structure presented to Congress on July 31.
  - NRA update not completed; new government to finalize by June-2024.
  - Draft bill for formalization of dependent workers within MSMEs missed July 2023 test date; planned submission by end-March 2024.
- Staff recommendation: complete the Second Review given minor deviations and government transition.
- Authorities requested: extension of the PCI by 12 months through November 2025 and modification of end-December 2023 and end-June 2024 targets.

### RSF request and staff position
- Authorities committed to adaptation and mitigation measures and expanding green energy generation and exports.
- Staff supports RSF request with maximum access: "150 percent of quota" (SDR 302.1 million).
- RSF financing purpose:
  - Address anticipated climate-related balance of payment needs.
  - Amplify external safeguards, strengthen contingency plans, and catalyze private investment in green industries.
- Proposed RSF disbursement sequencing across reviews with specific SDR tranches tied to RM completion (total 302.101 Million of SDR, 150.00 Percent of Quota; Quota 201.40).

### Policy recommendations and priorities
- Fiscal:
  - Persevere with fiscal consolidation to rebuild buffers while preserving space for social and infrastructure spending.
  - Authorities aim to achieve the 1.5 percent of GDP target by 2026 as prescribed in the Fiscal Responsibility Law (FRL), relying mostly on compression in investment after completion of large road projects.
  - New government will not increase taxes but will enhance revenue administration (including fusion of tax department with customs) and tackle tax expenditures and exemptions.
- Monetary:
  - Monetary policy should be data-driven regarding further easing, considering important external risks.
  - Current real policy rate estimated at 3-4 percent vs neutral real rate around 1–2 percent.
- Structural and governance:
  - Focus on growth, inclusion, governance improvements, and control of corruption.
  - Priority reforms: ensure sustainability of “Caja Fiscal”; improve efficiency of public enterprises; increase government effectiveness; streamline social assistance.
- Climate:
  - Implement ambitious, coordinated climate-related reforms to enhance Paraguay’s image as a “green” investment destination.

### Fiscal stance, public debt, and near-term numbers
- Central government fiscal deficit:
  - Deficit of 4.1 percent of GDP in 2023 (weaker than 1st PCI review projections).
  - End-October annualized cash-basis deficit: 3.2 percent of GDP with overruns in current primary spending and interest payments (0.2 percent of GDP) and weaker tax revenue and social contributions (0.4 percent of GDP).
  - New government paid outstanding claims of 1.1 percent of GDP to suppliers; registered as 2023 expenses and financed through borrowing.
- Projections and selected macro indicators (Proj. series):
  - Real GDP growth (percent): -0.8, 4.0, 0.1, 4.5, 3.8, 3.8, 3.5 (for 2020, 2021, 2022, 2023, 2024, 2025, 2026).
  - External current account: 3.6, -0.8, -7.2, 0.2, 0.5, 1.5, 1.3.
  - Gross international reserves (US$ billion): 10.0, 10.1, 10.2, 10.3, 10.9, 11.4, 12.0.
  - Central government fiscal balance: -6.1, -3.6, -3.0, -4.1, -2.6, -1.9, -1.5.
  - Public sector debt: 36.9, 37.5, 40.8, 40.4, 42.8, 40.9, 40.2.
- Treasury and revenue details (selected):
  - Revenue (Gs bn): 43,454 (2023) with projections to 56,055 (2026).
  - Taxes (Gs bn): 31,760 (2023) projected to 40,798 (2026).
  - Central government net lending/borrowing (percent of GDP): -4.1 (2023) projected -1.5 (2026).
  - Public debt metrics: Central government gross debt 34.5 (2022); projected 38.1 (2024) and 37.1 (2026).

### Financial sector and stability
- Banking system: stable, well-capitalized, liquid; profitability recovering.
- Deposits and credit growth: 12 and 10 percent y/y in September (source section).
- NPLs edged up slightly partly due to expired forbearance from drought.
- Monetary easing expected to reduce financial risks tied to debt repayment capacity.
- BCP reporting and supervision: ongoing upgrades; BCP began releasing BoP estimates under BPM6.

### Outlook and risks
- Baseline growth: project to hover around 3.5–4 percent in 2024 and over the medium term.
- Demand drivers: external demand for soy and electricity; private investment projects; lower interest rates supporting investment and consumption.
- Inflation: projected to remain around 4 percent from 2024 onwards.
- Reserve adequacy and external outlook:
  - Current account projected to record modest surpluses (~1 percent of GDP) with higher FDI and investment in forestry and manufacturing.
  - International reserves coverage ratio expected to increase slightly to around 8 months of imports; reserves estimated at about 198 percent for end-2023 and not expected to breach ARA comfort zone of 100-150 percent over medium term.
- Main risks:
  - External: intensification of conflicts, geo-economic fragmentation, abrupt global downturns, monetary policy missteps.
  - Domestic: hot temperatures and delayed rains affecting planting, agricultural output, balance of payments; preliminary census shows a 16 percent downward revision in population estimates (final results expected summer 2024), requiring recalibration of per capita and poverty estimates.
  - Climate-related: El Niño impacts assumed moderate in baseline; downside risk from delayed rains.

### Medium-term external and financing projections (selected)
- Current account (percent of GDP): 3.6 (2020), -0.8 (2021), -7.2 (2022), 0.2 (2023), 0.5 (2024), 1.5 (2025), 1.3 (2026).
- Gross international reserves (US$ mn): 10,304 (2023), 10,854 (2024), 11,404 (2025).
- Gross Financing Requirements (US$ mn): -3,539 (2022), -421 (2023), -123 (2024), 322 (2025).
- Financing sources (US$ mn, selected): Foreign direct investment (net): 1,765 (2023), 2,059 (2024); Medium and LT public sector debt disbursements: 1,709 (2023), 1,009 (2024); Official creditors: 1,209 (2023), 280 (2024).

### RSF climate-related reform matrix (overview of key RMs and timings)
- RM1 — Public investment resilience:
  - Objective: incorporate climate aspects across public investment cycle.
  - Availability/diagnostic: November 15, 2024; PEFA++; Roadmap with WB; NDC.
  - IMF CD Input: IMF C-PIMA; Dev partners: WB TA; IADB TA.
- RM2 — Green taxonomy:
  - Action: MEF and BCP to publish green taxonomy aligned with NDC.
  - Availability date: November 15, 2024; Dev partner: IADB TA.
- RM3 — Climate-related financial risk tools:
  - BCP to establish reporting requirements, data repository, monitoring framework, and supervisory guidelines.
  - Availability date: May 23, 2025; Diagnostics: WB TA.
- RM4–RM8 — Preserve and expand clean electricity matrix:
  - RM4 (regulation for non-hydro renewable energy law 6977/2023): Availability date: June 3, 2024.
  - RM5 (external audit of ANDE): Availability date: November 15, 2024.
  - RM6 (tariff methodology and adjustments): Availability date: May 23, 2025.
  - RM7 (energy efficiency standards for three appliances): Availability date: June 3, 2024.
  - RM8 (loss reduction and smart meters): Actions include installing 20,000 smart meters; Availability date: November 15, 2024.
- RM9 — Carbon tax (transport and residential emissions):
  - Action: MEF/DNIT to adopt explicit carbon tax replacing existing excise taxes on liquid fuels.
  - Availability date: May 23, 2025.
  - Design note: carbon tax to create institutional framework; authority commit to periodic assessments.
  - Carbon tax rate specified in TMU: equivalent to Guarani 250.000 per ton of CO2-eq.
- RM10 — Electromobility and EV infrastructure:
  - Availability date: November 15, 2024; actions include regulation of Electromobility Law 6925/2023, fiscal incentive adjustments, additional public charging infrastructure, and selection of operating model for electric public transport.
- RM11–RM13 — Forest protection and methane containment:
  - RM11 (industrial biomass registry & joint intervention protocols): replace Decree 4056 of 2015 by June 3, 2024.
  - RM12 (strengthen INFONA & MRV): change normative framework and create National Directorate by June 3, 2024.
  - RM13 (regulation of law 7014/2022 on plastic containers reuse/recycling): enact by May 23, 2025.

### RSF sequencing, access modality, and program modalities
- Proposal: extend PCI by 12 months to November 2025 with semi-annual reviews; QTs and RTs to be refined progressively.
- RSF access recommendation: 150 percent of quota (SDR 302.1 million), distributed across 13 RMs over three reviews; phasing ensures not exceeding 50 percent of quota per review.
- Justification: ambition of measures, Paraguay’s repayment capacity, reserve coverage (almost 8 months of prospective imports 2024–2026).
- Development financing rationale: concessional RSF assistance considered more viable than expensive domestic financing for environmental management investments; expected to catalyze private and PPP financing.

### Program monitoring, TMU definitions, and reporting
- Monitoring instruments:
  - Semi-annual QTs and RTs; continuous targets; RMs per TMU.
  - Quantitative ceilings: central government fiscal deficit; current primary expenditure; net change of floating debt.
  - Continuous target: no accumulation of external debt payment arrears.
  - Inflation consultation band remains a QT and will be adjusted in periodic revisions.
- Reporting and deadlines (selected):
  - Monthly provisional fiscal reports within 30 days after month-end; final data no later than two months after provisional reporting.
  - Central Bank to provide monthly balance sheets with maximum lag of one month; consolidated banks’ balance sheet within two months.
  - For all RMs, authorities to share relevant material for IMF comment at least 3 months prior to program reviews.

### Capacity development and technical support priorities
- CD priorities: fiscal sustainability (FRL, revenue administration, procurement, fiscal risks, pensions), AML/CFT, financial sector supervision (risk-based supervision, macroprudential), and statistical reporting (move toward SDDS).
- Specific CD inputs tied to RSF RMs: C-PIMA, WB TA and IADB TA on energy, green taxonomy, and climate financial risk diagnostics.

### Climate impacts, adaptation needs, and investment requirements (Annex highlights)
- Climate exposure and economic concentration:
  - Sectors linked to natural resources account for about one-third of GDP, 80 percent of exports, and 40 percent of jobs.
  - Forests cover about 40 percent of Paraguay’s surface; 15 percent protected areas.
- Historical and projected impacts:
  - 2019 and 2022 droughts and COVID yielded growth of 0.7 percent for 2019–2022 vs 4.4 percent average 2003–2018.
  - Soy, 40 percent of all exports, declined by 70 percent in 2022.
  - Central bank assessment (2001–2020): a one standard deviation increase in drought index led within two quarters to GDP -0.8 percent, investment -2.4 percent, consumption -0.6 percent.
- GHG emissions and NDC:
  - Emissions 2019: 62.7 MtCO2e; LULUCF 47.8 percent; agriculture 33.7 percent; energy 8.2 percent.
  - NDC mitigation target: reduce emissions by 10 percent (or 20 percent conditional on international finance) by 2030 relative to BAU.
- Investment needs:
  - ANDE Master Plan cost through 2030: US$6,512.5 million; about one third secured.
  - SDG-related infrastructure need through 2030: US$22.6 billion (breakdown includes roads US$8.3 billion; water and sanitation US$4.2 billion; electricity generation and transmission US$3.1 billion).
  - Estimated adaptation costs and scenarios: staff estimates of annual agricultural sector losses due to climate change US$20 to US$200 million per year by 2030 (2020 reference); adverse impacts could deteriorate trade balance by 1.6 percent of GDP in 2030 vs baseline.
- Data and institutional gaps:
  - Public access to reliable climate data limited; national GHG inventory differs from Climate Watch and needs methodological harmonization.
  - Climate change not yet institutionalized in fiscal and PIM frameworks; irrigation coverage only 2.8 percent.
- Priority climate policy actions:
  - Integrate climate into macro and fiscal frameworks; institutionalize climate risk assessment in public finance and PIM.
  - Strengthen electricity sector governance to preserve low-emissions matrix.
  - Mobilize private and public finance; develop green taxonomy and green bond framework; strengthen financial disclosure and stress-testing capacity.
  - Enhance forest protection, MRV systems, and nature-based solutions.

### Debt sustainability, long-term risks, and staff assessment
- Staff view: debt sustainable at overall low risk level; medium-term risk index classified as low.
- Long-term modules flag moderate risks from demographics (pensions and health) and climate adaptation and mitigation costs.
- Long-term projections:
  - Under baseline fiscal path (deficit ceiling 1.5 percent of GDP from 2026), debt-to-GDP: 39.5 percent in 2028 and 35.3 percent in 2032.
  - Demographic/pension adjustments needed to keep pension assets positive: 2.1 percent (30 years), 4.8 percent (50 years), 8.9 percent (until 2100).
- Long-term climate fiscal scenarios:
  - Adaptation standardized: additional annual adaptation costs ~1 percent of GDP; customized: 0.2 percent of GDP for ten years.
  - Mitigation standardized: average cost 5.7 percent of GDP; customized: 1.0 percent of GDP for ten years then adopt standardized parameters.
  - Results show potentially significant debt impacts; high sensitivity to assumptions.
- Fund obligations and repayment capacity:
  - No BoP gap for next 12 months; adequate financing prospects for program period.
  - Outstanding Fund credit projected to rise to 150 percent of quota (0.8 percent of forecasted GDP) by 2025 once RSF fully disbursed.
  - Obligations to Fund expected to stay at or below: 0.3 percent of exports of goods and services, 0.6 percent of government revenue, 0.5 percent of gross international reserves throughout repayment period.

*Source: IMF staff report material provided in the supplied content unit.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Recent developments
- Paraguay's economy is set to grow at around 4.5 percent in 2023, led by robust agricultural production and exports combined with high electricity generation.
- Inflation has receded rapidly allowing for a reduction of the monetary policy rate to the current 7.25 percent.
- The fiscal position of the central government is weaker than projected during the 1st PCI review, with a deficit of 4.1 percent of GDP in 2023, not least due to settlement of outstanding claims.
- The external current account reversed into a surplus (projected surplus of 0.2 percent of GDP in 2023, from a deficit of 7.2 percent of GDP in 2022).
- President Santiago Peña took office in August.

### PCI program implementation
- Most PCI quantitative targets (QTs) for June were missed, albeit narrowly.
  - The central government fiscal deficit, the current primary expenditure, and the net incurrence of floating debt limits were breached by very small margins (breach of primary current expenditure by 0.04 percent of GDP; breach of fiscal deficit by 0.01 percent of GDP; breach of floating debt ceiling by 0.001 percent of GDP).
  - The continuous target of zero accumulation of external debt payment arrears was met.
  - Inflation was 4.2 percent as of end-June, year-on-year, below the programmed inflation consultation band (4.5 - 8.5 percent).
- Most of the reform targets (RTs) were met.
  - Legislation to establish a national commission for comprehensive reform of the public pension system ("Caja Fiscal") was submitted to Congress.
  - The number of large and medium-sized taxpayers added to the Integrated National Electronic Invoicing System (SIFEN) reached 842 against the targeted floor of 750.
  - The administrative regulation for the new procurement law was signed by the President and enacted on August 11.
  - The draft law to reorder the structure of the state was presented to Congress on July 31 as planned.
  - The updated National Risk Assessment (NRA) has not been completed; the new government decided to review its details and finalize it by June-2024.
  - A draft bill for formalization of dependent workers within MSMEs and independent workers missed the July 2023 test date and is planned to be submitted to Congress by end-March 2024.
- Given minor deviations and the fact that a new government is taking office, staff recommends completion of the Second Review.
- The authorities requested an extension of the PCI by 12 months through November 2025 with proposed new targets, and a modification of the end-December 2023 and end-June 2024 targets.

### RSF request
- The government is committed to enacting a series of adaptation and mitigation measures and further expanding generation and exports of green energy.
- Given the strength and breadth of the proposed reforms and Paraguay’s sound capacity to repay the Fund, staff supports the request for the RSF with maximum access (150 percent of quota).
- The RSF financing would help address anticipated climate-related balance of payment needs by amplifying external safeguards, strengthening contingency plans, and catalyzing private investment in green industries.

### Policy recommendations
- Persevere with fiscal consolidation to rebuild buffers while leaving room for important social and infrastructure spending.
  - The authorities aim at achieving the 1.5 percent of GDP target by 2026 as prescribed in the Fiscal Responsibility Law (FRL), relying mostly on a compression in investment spending after completion of large road construction projects.
  - The new government has announced it will not increase taxes or introduce new taxes but will focus on enhancing revenue administration (including fusion of tax department with customs) and tackling tax expenditures and exemptions.
- Monetary policy should be data-driven with respect to further easing and consider important external risks.
- Structural reform agenda should focus on fostering growth and inclusion and improving governance and the control of corruption.
- Implement an ambitious matrix of climate-related reforms, closely coordinated with development partners, to enhance Paraguay’s image as a “green” investment destination.

### Context and structural features
- Paraguay is highly reliant on water availability; more frequent extreme weather events pose significant challenges to economic activity and external accounts.
- The primary sector has accounted, on average, for about 11 percent of total GDP since 2010 and 61 percent of total exports; electricity generation has accounted for about 9 and 24 percent, respectively.
- The new administration is expected to uphold prudent macroeconomic policies and focus on catalyzing private investment, especially in green industries.
- The RSF would help implement climate-centric reforms focused on reducing vulnerabilities to climate change and developing green industries and protecting natural assets.

### Recent economic developments and sectoral highlights
- GDP growth is projected to rebound to 4.5 percent in 2023, with agriculture and electricity sectors expanding by 23 and 14 percent, respectively.
- Exports of goods and services are growing by about 26 percent.
- Domestic demand is dampened by a slowdown in investment; construction projected to fall by 4 percent.
- Headline inflation was 3.5 percent in October, below the 4 percent target; core inflation remained at 4.9 percent.
- The BCP trimmed its 12-month inflation projection for end-2023 from 4.1 to 3.8 percent.
- Since August, the BCP reduced the policy interest rate four times (totaling 125 basis points) from 8.5 to 7.25 percent.
- Commercial banks have begun to rebuild net foreign assets; the Guarani remained relatively stable in nominal terms.
- From December 14, Paraguay will be able to export meat to the United States (USA) after a 25-year break.
- Fitch affirmed Paraguay’s sovereign rating at one notch below investment grade (BB+) and upgraded the country ceiling to 'BBB-'.

### Fiscal stance and public debt
- As of end-October (annualized, cash basis), the central government fiscal deficit stood at 3.2 percent of GDP, with overruns in current primary spending and interest payments (0.2 percent of GDP), and weaker tax revenue and social contributions (0.4 percent of GDP).
- VAT collection reportedly affected by increased contraband mainly from Argentina (-0.2 percent of GDP); corporate income tax receipts suffered (-0.1 percent of GDP).
- The new government decided to pay outstanding claims (1.1 percent of GDP) to suppliers to the Ministries of Public Works and Health; these will be registered as expenses for 2023 and financed through borrowing.
- For the year, the deficit is projected at 4.1 percent against the original target of 2.3 percent of GDP, and public debt at about 40 percent of GDP.
- An estimate of the accrued fiscal deficit (distributing the 1.1 percent of GDP outstanding claims back to 2021–22) indicates sustained negative fiscal impulses since 2020.

### Financial sector
- The financial sector remains stable with strong solvency and profitability indicators; the banking system is liquid.
- Deposits and credit grew 12 and 10 percent year-on-year in September, respectively.
- NPLs have edged up slightly from end-2022, in part due to expired forbearance measures introduced during the drought.
- Reductions in the policy rate should help reduce financial risks associated with household and business debt repayment capacity.

### Outlook and risks
- Baseline: Growth projected to hover around 3.5–4 percent in 2024 and over the medium term, supported by agricultural production, construction, and strong electricity generation.
- Demand-side support: Solid external demand for soy and electricity; investment and consumption expected to accelerate due to significant private investment projects and lower interest rates.
- Climate and commodity risks: Baseline assumes a natural climate phenomenon (El Niño) would have a moderate impact; downside risks stem from delayed rains.
- Inflation is projected to remain around the target of 4 percent from 2024 onwards.
- Medium-term risk index conveys a low-risk signal; long-term assessment modules identify moderate risks from demographics (pensions and health) and from climate adaptation and mitigation costs.

*Source: IMF staff Executive Summary (December 4, 2023).*

### 13.      The current account surplus is expected to slightly increase in the medium term. It is

### 13.      The current account surplus is expected to slightly increase in the medium term. It is

### Medium-term external outlook and reserves
- The current account is projected to record modest surpluses (around 1 percent of GDP) with higher FDI and investment inflows in the forestry and manufacturing sectors.
- The international reserves’ coverage ratio is expected to increase slightly to around 8 months of imports.
- Reserves are estimated at about 198 percent for end-2023 and they are not expected to breach the reserve adequacy ratio (ARA) metric’s comfort zone of 100-150 percent over the medium term.
- Projections (selected macroeconomic indicators, Proj.):
  - Real GDP growth (in percent): -0.8, 4.0, 0.1, 4.5, 3.8, 3.8, 3.5 (for 2020, 2021, 2022, 2023, 2024, 2025, 2026)
  - Per capita GDP (U.S. dollars, thousands): 4.9, 5.4, 5.6, 5.8, 6.1, 6.3, 6.7
  - Consumer prices (end of period; in percent): 2.2, 6.8, 8.1, 4.1, 4.1, 4.0, 4.0
  - Terms of trade (annual percent change): 2.2, -1.5, 0.4, 5.7, -1.3, 3.9, 1.3
  - External current account: 3.6, -0.8, -7.2, 0.2, 0.5, 1.5, 1.3
  - Gross international reserves (in US$ billion): 10.0, 10.1, 10.2, 10.3, 10.9, 11.4, 12.0
  - Central government fiscal balance: -6.1, -3.6, -3.0, -4.1, -2.6, -1.9, -1.5
  - Public sector debt: 36.9, 37.5, 40.8, 40.4, 42.8, 40.9, 40.2
- Sources for table: Central Bank of Paraguay; Ministry of Finance; and IMF staff estimates and projections.

### Risks to the outlook
- Overall assessment: Risks to the outlook are balanced.
- External risks:
  - Intensification of conflicts and heightened geo-economic fragmentation could induce significant commodity price fluctuations.
  - An abrupt global downturn or monetary policy missteps by major central banks could further strain the global economy.
- Domestic risks:
  - Hot temperatures and delayed rains could lead to protracted planting, lower agricultural output, and higher costs in some regions, significantly impacting the balance of payments and growth.
  - Preliminary census results point to a 16 percent downward revision in population estimates; final results expected in the summer of 2024. Preliminary assessment suggests measurement issues with previous two censuses; a recalibration of economic estimates (income per capita, poverty rates, and GDP) will be conducted upon finalization.

### Fiscal policy and fiscal risks
- Adjustments and fiscal targets:
  - The end-December 2023 QT for the overall fiscal deficit needs to be increased by about 5,900 billion guaranies (1.8 percent of GDP).
  - The QT on primary current expenditure would be raised by about 1,550 billion guaranies, or 0.5   percent of GDP.
  - QTs for June and December 2024 have been reset to reflect the new government’s budget and policy plans for 2024, including strengthening social assistance.
- Drivers of fiscal path changes:
  - Need to address previously unrecorded claims reflecting under-provisioning for goods and services in previous budgets.
  - 2024 budget prioritizes health, social transfers, and security and allocates an increase of spending equivalent to 0.3 percent of GDP to purchases of goods and services compared to previous forecasts.
  - Projected interest expense revised upward by 0.5 percent of GDP.
  - Expected tax revenue conservatively budgeted at 10 rather than 10.4 percent of GDP (base effect of lower tax revenue collection in 2023).
- Implications and recommendations:
  - These factors explain a 2024 fiscal deficit of 2.6 (rather than 1.5) percent of GDP, followed by a targeted deficit of 1.9 percent of GDP in 2025.
  - Convergence to the 1.5 percent of GDP deficit ceiling under the fiscal rule would be achieved by 2026 rather than 2024.
  - Staff endorses the cautious fiscal policy stance and continued convergence toward the deficit ceiling.
  - In the absence of significant revenue measures, fiscal consolidation will require a gradual compression of spending on public investment.
  - Completion of large roads construction projects and increased reliance on private sector-financed projects (e.g., public-private partnerships) are planned, with attention to associated financial risks.
  - Further strengthening of the Public Financial Management (PFM) system is instrumental, including upcoming technical assistance from FAD.

### Monetary and external sector policies
- Monetary policy:
  - The central bank plans to continue to gradually reduce its policy rate.
  - Recent rapid reduction in inflation has been partly due to the BCP’s proactive policies.
  - Current monetary stance remains somewhat tight given a real policy rate of 3-4 percent against a neutral real rate estimated at around 1–2 percent.
  - The BCP will base future policy rate decisions on the evolution of inflation expectations, which so far remain well-anchored around the BCP’s target of 4 percent.
  - Fluid global developments and high interest rates in advanced countries justify a cautious approach.
- Exchange rate and reserves management:
  - A flexible exchange rate remains a key element of the macroeconomic policy framework.
  - The Guarani’s performance this year evidences the exchange rate’s flexibility to respond to external developments.
  - The authorities have not intervened in the foreign exchange market to counteract disorderly market fluctuations since earlier in the year; the BCP has limited itself to intermediating hard currency obtained by government entities.
  - The BCP remains committed to maintaining a strong reserve position and fostering transparency in foreign exchange interventions, including by continuing to publish detailed information on its foreign exchange operations.

### Structural reforms and policy conditionality under the PCI
- Main PCI policy discussion points:
  - Assessing completion of June 2023 QTs and RMs; reviewing progress on December 2023 and June 2024 RMs; revising existing QTs and agreeing on new RMs; request for extension of the current PCI arrangement; and request for an RSF focused on greening public financial management, enhancing financial system resilience, mobilizing sustainable climate financing, enhancing sustainable energy, and protecting strategic assets.
- Fiscal and governance reforms:
  - A new version of the pension fund supervision law (creating a new supervisory agency) submitted to Congress (reform target for December 2023); public protests prompted the government to suspend proceedings and pursue further consultations. An agreement with major stakeholders was reached on November 21st.
  - Progress with this reform will guide reforms for the pension system of public employees (“Caja Fiscal”).
  - Submission of a new "Corporate Governance Law" deferred; authorities plan to pursue objectives through regulation of existing law (modified reform target).
  - Proposed new reform targets include:
    - Conducting an analysis of tax expenditures through special tax regimes to strengthen legal frameworks.
    - Improvements in implementation of the central government’s integrated financial management information system (SIARE) by increasing coverage of expenditure items at the commitment stage within SAByS to help avoid recurrence of unrecorded expenditure claims.
- Governance, anti-corruption, and investment climate:
  - Comprehensive Anti-Corruption Strategy made available for public consultation on November 23 (to be concluded by end-2023).
  - Planned measures include a new health information system to increase accountability and centralized information on acts of violence against women.
  - Standardization of inconsistent definitions between the ministry of health and IPS regarding medicine purchases is expected to address cost concerns (proposed new reform target).
  - Other proposed targets:
    - Modifications of the law on public-private partnerships to leverage private infrastructure investment (to be informed by an upcoming C-PIMA mission).
    - Development of a plan to enhance the integrity of the public land cadaster to reduce legal uncertainty and improve conditions for foreign investment.
  - Identifying and understanding AML/CFT risks remains a top priority; an updated NRA will support national and institutional policies and controls.

### Social protection and inclusiveness
- Institutional changes and program delivery:
  - Most social programs will be consolidated under the authority of the Ministry of Social Development.
  - The Ministry of Economy and Finance will improve information systems of social programs to better monitor implementation and targeting through SIPEN (unified beneficiary system of the Pension System).
  - Existing reform targets for December 2023 and June 2024 have been streamlined to clarify which programs will be included in SIPEN (CODE and MINNA, respectively).
  - The December 2023 target’s test date will be reset to March 2024.
  - The government plans to finalize an action plan to operationalize the National Care Policy to promote caregivers’ interests and protect identified vulnerable groups requiring care.

### RSF and climate resilience (Building Resilience to Climate Change)
- Climate risks and impacts:
  - Paraguay is prone to droughts and other climate-related natural hazards that impose large costs to the economy and welfare (e.g., the 2021/22 drought).
  - Heat stress can impact labor productivity, electricity generation, and fluvial transportation.
  - Staff estimates suggest that annual losses for the agricultural sector due to climate change can range from US$20 to US$200 million per year by 2030 (with 2020 as a reference year).
  - Adverse climate impacts on main agricultural exports (soy, maize, cassava, rice, wheat, and beef production) and on electricity exports could result in a deterioration of the trade balance by 1.6   percent of GDP in 2030 compared to the baseline scenario.
  - Forests cover about 40 percent of Paraguay’s surface.
- Mitigation and adaptation opportunities:
  - Under the 2017 Framework Law on Climate Change and the NDC updated in 2021, Paraguay is set to implement a comprehensive set of adaptation and mitigation measures.
  - The government emphasizes continued adaptation given considerable climate-related risks and Paraguay’s contribution to global mitigation via forests and a clean energy matrix.
  - The new government presents Paraguay as a “green, predictable and profitable investment destination” focusing on:
    - Further developing fully sustainable electricity generation capacity.
    - Attracting green hydrogen and biofuels industries.
    - Boosting the forestry sector.

*Source: Central Bank of Paraguay; Ministry of Finance; and IMF staff estimates and projections.*

### 24.      The RSF aims to support the authorities’ ambitious efforts tackling several key

### The RSF aims to support the authorities’ ambitious efforts tackling several key challenges

### Improving public investment resilience to climate events (RM1)
- Objective: Expand alignment of public financial management with green practices; incorporate climate aspects at each stage of public investment project development (appraisal, selection, external audit, etc.) (RM1).
- Recent actions: With World Bank and IADB support, strengthened assessment of fiscal risks by incorporating analysis of climate shocks and started to introduce green tagging to the budget.
- Planned support: Upcoming IMF Climate Public Investment Management Assessment (C-PIMA) mission.
- Availability date/diagnostics: November 15, 2024; PEFA++; Roadmap with WB; NDC.
- IMF CD Input: IMF C-PIMA.
- Development partner role: WB TA; IADB TA.
- Climate objective: Mitigation (M) & adaptation (A).
- Expected outcome: Improve efficiency of climate-related government spending and taxation.

### Enhancement of regulation to finance climate investment (RM2, RM3)
- RM2 (green taxonomy):
  - Action: MEF and BCP to publish a green taxonomy aligned with Paraguay’s NDC.
  - Availability date: November 15, 2024.
  - Diagnostics: NDC; IADB TA.
  - Development partner role: IADB TA.
  - Climate objective: Mitigation & adaptation (M&A).
  - Expected outcome: Facilitate mobilization of climate financial resources.
- RM3 (climate-related financial risk tools):
  - Action: BCP to (i) establish reporting requirements and a data repository for material climate-related exposures of banks; (ii) adopt a framework to monitor and assess climate-related financial risks for banking sector; and (iii) issue supervisory guidelines for banking sector to incorporate climate-related risks to their risk management frameworks, along with timelines for the adoption of the guidelines.
  - Availability date: May 23, 2025.
  - Diagnostics: WB TA.
  - Climate objective: Mitigation & adaptation (M&A).
  - Expected outcome: Increase robustness of financial sector to climate-related shocks.
- Additional measure: Authorities plan to enact the regulatory framework for the issuance and trading of green bonds on top of the existing framework for sustainable bonds.

### Preservation and expansion of the clean electricity matrix (RM4–RM8)
- Context: By early next decade, Paraguay will face a shortage of installed electricity capacity due to rising demand for energy; multipronged approach needed to preserve and expand clean energy mix.
- RM4 (enact regulation for non-hydro renewable energy law 6977/2023):
  - Action: MOPC and VMME to enact regulation including specification/rationalization of economic incentives and technical procedures to open grid participation to private sector.
  - Availability date: June 3, 2024.
  - Diagnostics: Columbia-CAF Energy Sector Report; ANDE Master Plan; IRENA Renewable Readiness Assessment.
  - IMF CD Input: WB TA.
  - Expected outcome: Support expansion of renewable energy, improve electricity generation capacity, energy security co-benefit.
- RM5 (external audit of ANDE):
  - Action: ANDE to publish an external audit and a study of international benchmarks for its costs at different segments of its operations and efficiency parameters by an internationally reputed firm.
  - Availability date: November 15, 2024.
  - Diagnostics: Columbia-CAF Energy Sector Report; ANDE Master Plan.
  - Development partner role: WB TA.
  - Expected outcome: Improve governance and encourage efficiency.
- RM6 (tariff methodology and adjustments):
  - Action: ANDE to develop, publish, and gradually adopt transparent and well-specified methodologies for adapting electricity tariffs in line with Law 966/64, accounting for operating costs, financial costs of projected capital spending needs for preserving and expanding the clean electricity matrix, and efficiency gains based on RM5 and RM8.
  - Availability date: May 23, 2025.
  - Expected outcome: Improve governance and electricity generation capacity, contain electricity consumption; institutionalize electricity tariff setting.
- RM7 (energy efficiency standards):
  - Action: MOPC/VMME and MIC to establish by decree energy efficiency standards for the three appliances that represent the largest share of household electricity consumption in line with International Organization for Standardization benchmarks.
  - Availability date: June 3, 2024.
  - Expected outcome: Increase energy efficiency and reduce electricity demand.
- RM8 (loss reduction and smart meters):
  - Actions:
    - ANDE and MOPC/VMME to develop, publish, and gradually implement a plan for ANDE loss reduction with quantitative targets.
    - Install 20,000 smart meters to reduce non-technical electricity losses.
    - ANDE to implement progressively hourly/dynamic tariffs.
    - ANDE to increase inspections against electricity theft by 10 percent above same period in 2023.
  - Availability date: November 15, 2024.
  - Diagnostics: WB report on ANDE's loss reduction; Columbia-CAF Energy Sector Report; ANDE Master Plan.
  - Expected outcome: Reduce non-technical losses and improve efficiency of electricity demand by better managing intra-day variations, energy security co-benefit.
- Noted historical point: After more than a decade of flat nominal tariffs, they were adjusted last by 20 percent in 2017. The tariff rate is significantly below the Latin America’s average while technical and non-technical losses are one of the highest.

### Carbon emissions from the transport and residential sectors (RM9, RM10)
- RM9 (carbon tax):
  - Action: MEF, in coordination with DNIT, to adopt an explicit carbon tax replacing existing excise taxes on liquid fuels.
  - Availability date: May 23, 2025.
  - IMF CD Input: IMF TA.
  - Expected outcome: Improve emission targeting. Establish administrative framework to expand emission coverage in the future.
  - Design note: Adoption of an explicit carbon tax would create the institutional framework to contain emissions from transportation and residential LPG use and would not impact prices immediately; authorities commit to periodic assessments to ensure effective carbon price does not decrease relative to introduction.
- RM10 (electromobility regulation and EV infrastructure):
  - Actions:
    - MOPC/VMME-VMT, MIC and MEF to enact regulation of the Electromobility Law 6925/2023 and adjust fiscal incentives in favor of electric vehicles.
    - MIC, MOPC/VMT and ANDE to install additional electric public charging infrastructure.
    - VMT to lead selection of operational model and develop regulations for electric public transportation in the metropolitan area of Asuncion and set targets for an increased share of electric buses.
  - Availability date: November 15, 2024.
  - Diagnostics: Columbia-CAF Energy Sector Report; NDC.
  - Development partner role: WB TA; IADB TA.
  - Expected outcome: Increase share of EVs and more fuel-efficient vehicles, reduce fuel imports, decrease local air pollution.

### Protection of forests and methane containment (RM11–RM13)
- RM11 (biomass registry and joint intervention protocols):
  - Actions:
    - INFONA, MADES, MOPC/VMME, and MAG to replace Decree 4056 of 2015 to create the registry of industrial biomass users and establish prerequisites for the use of biomass.
    - INFONA, MADES, National Police and SENAD will regulate and implement a decree to create joint intervention protocols for land use change using the National Forest Monitoring System; coordinating institutions will include the Attorney General.
  - Availability date: June 3, 2024.
  - Diagnostics: Columbia-CAF Energy Sector Report; NDC.
  - Development partner role: UNEP.
  - Expected outcome: Reduce deforestation.
- RM12 (strengthen INFONA and monitoring):
  - Action: INFONA to change its normative framework to strengthen institutional and financial capacities to protect native forests and respond to deforestation alerts, including creation of a National Directorate for the National Forest Monitoring System and adoption of emissions’ Monitoring, Reporting and Verification system in line with UNFCCC standards with independent party verification.
  - Availability date: June 3, 2024.
  - Diagnostics: NDC.
  - Development partner role: UNEP; GCF; IADB TA.
  - Expected outcome: Reduce deforestation, improve access to voluntary carbon markets, strengthen the National Forestry Institute.
- RM13 (plastic containers reuse/recycling):
  - Action: MIC to enact regulation of the law 7014/2022 that promotes reutilization, recycling, and use of plastic (polyethylene terephthalate) containers.
  - Availability date: May 23, 2025.
  - Diagnostics: NDC; National Plan for the Comprehensive Management of Urban Solid Waste.
  - Development partner role: UNEP; GCF.
  - Expected outcome: Reduce methane emissions.

### Program modalities, access, and capacity development
- PCI extension and review schedule:
  - Proposal: Extend duration of current PCI by 12 months, shifting program conclusion from November 2024 to November 2025, with continued semi-annual reviews.
  - Rationale: Provide new government sufficient time to execute economic plans and implement ambitious RSF measures; PCI appropriate given good economic prospects and strong international reserves position forecasted for the program duration.
  - Additional conditionality: QTs and RTs to be fleshed out progressively and fine-tuned to authorities’ priorities and implementation capacity.
- RSF financing proposal:
  - Recommendation: RSF-supported program for Paraguay with an access level of 150 percent of quota (SDR 302.1 million) for a period concurrent with the remaining period of the PCI.
  - Distribution: Access at 150 percent of quota will be distributed across 13 RMs over the course of three reviews; phasing uneven to prevent exceeding 50 percent quota access per review.
  - Justification: Strength and ambition of RSF-supported measures; Paraguay’s sound capacity to repay the Fund; alignment with diagnostic reports.
  - Long-run risks: Prospective risks to BoP given rainfall variability linked to climate change impacting agriculture and hydro energy and transportation for international trade.
  - Reserve adequacy: International reserves are forecasted to cover almost 8 months of prospective imports between 2024 and 2026—aligning with the upper end of reserve adequacy measures.
  - Development financing note: Concessional assistance under the RSF considered more viable than more expensive domestic financing given substantial investment required for environmental management; expected to catalyze further financing and private-sector investment and public-private collaborations.

*Source: IMF staff summary of RSF measures and associated program modalities.*

### 27.      Risks to program implementation are assessed to be low and Paraguay's capacity to

### 1pryea2024001 - 27.      Risks to program implementation are assessed to be low and Paraguay's capacity to repay the Fund is sound.

### Program implementation risks and repayment capacity
- Risks to program implementation are assessed to be low and Paraguay's capacity to repay the Fund is sound.
- There is no balance of payments’ gap for the next 12 months, and there are good prospects that there will be adequate financing for the remaining program period.
- Paraguay does not have current credit with the Fund, and its outstanding credit is projected to rise to 150 percent of quota (or 0.8 percent of forecasted GDP) by 2025 once the RSF arrangement is completely disbursed (Table 9a).
- Paraguay's ability to service this debt is assessed as robust, anchored by:
  - forecasted steady debt ratios over the medium term;
  - a moderate risk profile concerning external and total public debt distress;
  - the government's history of implementing reforms and prudent macroeconomic management.
- Obligations to the Fund are expected to stay at or below:
  - 0.3 percent of exports of goods and services,
  - 0.6 percent of government revenue,
  - 0.5 percent of gross international reserves
  throughout the repayment period.
- Paraguay’s current and prospective obligations to the Fund are well below the median of other GRA-only borrowing countries (Table 9b).
- The BCP and the Ministry of Economy and Finance stand clear on the respective responsibilities for the timely servicing of the financial obligations with the IMF under the RSF arrangement.

### Safeguards assessment
- An update of safeguards assessment of the BCP has been initiated. The most recent safeguards assessment was carried out in 2021.
- The 2021 assessment found that the BCP had progressed in strengthening its safeguards framework and autonomy through legal reform and had auditing and financial reporting procedures that are in line with international norms.
- Governance arrangements need improvement due to the lack of an independent oversight body.
- With no Fund credit outstanding, the BCP has not been subject to safeguards monitoring since the 2021 assessment, but the authorities confirmed that they are actively addressing the recommendations outlined in the report.
- The BCP and Ministry of Economy and Finance have signed a Memorandum of Understanding (MOU) specifying their respective responsibilities for the timely servicing of financial obligations to the Fund under the RSF arrangement.

### Quantitative and reform targets; program monitoring
- The attached Program Statement (PS) details the authorities' policy commitments.
- The program will continue to be monitored on a semi-annual basis through:
  - QTs,
  - standard continuous targets,
  - reform targets (RTs) (Tables 1a, 1b, and 2 of Appendix I, Attachment I),
  - RMs, as defined in the Memorandum of Technical Understanding (TMU).
- Policy implementation will be evaluated through review-based monitoring, considering evolving circumstances and policy needs.
- The set of QTs comprises semi-annual ceilings on:
  - the central government fiscal deficit,
  - current primary expenditure,
  - the net change of floating debt (Table 1a of Appendix I, Attachment I).
- Non-accumulation of external debt payment arrears is maintained as a continuous target.
- Additional standard continuous targets also remain (Table 1b of Appendix I, Attachment I).
- An inflation consultation band based on the BCP’s inflation projections will also remain as a QT, with targets to be adjusted in the course of the periodic comprehensive revisions.
- The quantitative targets for December 2023 and June 2024 on:
  - the central government’s fiscal deficit,
  - primary current expenditure,
  - net incurrence of floating debt
  have been modified (Table 1a of Appendix I, Attachment I).
- A proposed new QTs has a date of December 2024.

### Capacity development support
- Capacity development support by the Fund remains closely aligned with the programs’ priorities (Annex IV).
- Focus areas include:
  - climate public investment management assessment (C-PIMA),
  - revenue administration,
  - financial stability and integrity, including the AML/CFT regime.
- The authorities are committed to strengthening BoP and national accounts statistics.
- Recently, the BCP began releasing the BoP estimates under the sixth edition of the Balance of Payments and International Investment Position Manual (BPM6).

### Staff appraisal, risks, and policy recommendations
- Paraguay has rebounded strongly in 2023 due to more favorable weather and the subsequent pick-up in domestic demand.
- The external current account balance has reversed into a surplus due to a rebound in agricultural exports.
- Together with the easing of global commodity prices, the BCP’s proactive monetary policy has led to a significant reduction in inflation, which is already below the BCP’s inflation target.
- Paraguay's banking system remains stable and solvent.
- While the fiscal outcome was weaker than expected, this was a result of one-off factors, and the fiscal position remains sustainable.
- The new government is committed to fiscal prudence and to persevere with long-standing structural reforms.
- While risks to debt sustainability are low, fiscal buffers will need to be rebuilt following the increase in deficits and debt in response to several external shocks in recent years.
- Priority reforms and actions identified:
  - Ensure the sustainability of the public servants’ pension fund (“Caja Fiscal”).
  - Improve the efficiency of public enterprises.
  - Increase government effectiveness.
  - Strengthen governance.
  - Streamline the social assistance programs.
- Reforms under the PCI contribute to creating more favorable conditions for both public and private investment.
- Staff supports the completion of the Second Review under the PCI, which entails:
  - a modification of end-December 2023 and end-June 2024 quantitative targets for the fiscal deficit, current primary expenditure, floating debt,
  - a consultation with the Executive Board on the inflation band,
  - the extension of the PCI by 12 months.
- The authorities' reform agenda was expanded to include reform targets for December 2024.

*International Monetary Fund — Paraguay: selection from staff report.*

### 34.      Staff also supports Paraguay’s request for a program under the RSF with maximum

### 1pryea2024001 - 34.      Staff also supports Paraguay’s request for a program under the RSF with maximum

### RSF program support and climate-related reform matrix
- Staff supports Paraguay’s request for a program under the RSF with maximum access.
- Maximum access under the RSF is specified as "150 percent of quota."
- The authorities commit to implement an ambitious matrix of climate-related reforms consistent with maximum access.
- The agreed RSF matrix covers measures to:
  - increase the resilience of public investments,
  - develop a green taxonomy,
  - contain climate risks to the financial sector,
  - preserve and expand the country’s clean electricity matrix,
  - decarbonize its economy,
  - conserve its forests.
- Reform measures will be closely coordinated with international development partners.
- A memo item on social transfers is also monitored.

### Recent economic developments (Figure 1 summary)
- The economy expanded in 2023 driven by:
  - robust agricultural production,
  - high electricity generation.
- Aggregate demand was bolstered by net exports and public spending, offsetting adverse impact of investment.
- Total exports continued to recover due to the post-drought rebound in key export sectors.
- Monthly indicators point to a robust economic expansion in the current year, driven mainly by an exceptional agricultural fall season.
- The unemployment rate increased slightly, while employment remains just below its pre-pandemic level.

### Fiscal developments (Figure 2 and Tables 4a/4b highlights)
- Paraguay aims to reach the FRL ceiling by 2026.
- The 2023 deficit was affected greatly by the settling of previously unrecorded claims.
- Public debt increased substantially after the pandemic but is stabilizing and remains low compared to other countries in the region.
- In 2023 central government figures (Table 4a, Table 4b):
  - Revenue (billions of Guaranies): 43,454 (2023) with projections to 56,055 (2026).
  - Taxes (billions of Guaranies): 31,760 (2023) projected to 40,798 (2026).
  - Central Government Net Lending/Borrowing (percent of GDP): -4.1 (2023) and projected -1.5 (2026).
  - Central government primary balance (percent of GDP): -2.5 (2023) and projected 0.1 (2026).
  - Central government gross debt (percent of GDP): 34.5 (2022), 38.1 (2024), projected 37.1 (2026).
- Composition details (2023):
  - Compensation of employees (billions): 20,643; as percent of GDP: 6.5 (2023).
  - Net acquisition of nonfinancial assets (billions): 8,826; percent of GDP: 2.8 (2023).
  - "Itaipu-Yacyreta" receipts (billions): 3,321 (2023); percent of GDP: 1.0 (2023).
- Public external disbursements and debt service:
  - Foreign loans disbursements (billions): 12,236 (2023).
  - Amortizations (billions): 4,162 (2023).
  - Table note: "of which: RSF disbursement" shows zeros for earlier years and later entries with "...1,993...1,0220" in Table 4a (explicit formatting retained from source).

### External sector developments (Figure 3 and Tables 5, 8)
- Current account trajectory:
  - Current account (in millions of U.S. dollars): 902 (2023), 297 (2024), 176 (2025), 72 (2026) (Table 5).
  - Current account in percent of GDP: 0.4 (2019), 3.6 (2020), -0.8 (2021), -7.2 (2022), 0.2 (2023), 0.5 (2024), 1.5 (2025), 1.3 (2026) (Table 5).
- Trade and export structure:
  - Trade balance (millions of U.S. dollars): 870 (2023), 1,111 (2024), 1,530 (2025), 1,417 (2026).
  - Exports (millions of U.S. dollars): 15,902 (2023), 16,880 (2024), 17,850 (2025), 18,373 (2026).
  - Hydro-Electricity export receipts (millions): 2,038 (2023), 2,272 (2024), 2,122 (2025), 1,982 (2026).
  - Agricultural products exports (millions): 5,803 (2023), 6,022 (2024), 6,072 (2025), 6,242 (2026).
- Financing and reserves:
  - Gross international reserves (in millions of U.S. dollars): 10,304 (2023), 10,854 (2024), 11,404 (2025) (Table 8 memo).
  - Gross Financing Requirements and Sources (Table 8, in millions of U.S. dollars):
    - Gross Financing Requirements: -3,539 (2022), -421 (2023), -123 (2024), 322 (2025).
    - Sources of Financing: 3,867 (2022), 421 (2023), 123 (2024), -322 (2025).
    - Foreign direct investment (net): 1,765 (2023), 2,059 (2024), 710 (2025).
    - Medium and LT debt disbursements (public sector): 1,709 (2023), 1,009 (2024), 914 (2025).
    - Official creditors (bi-and multilateral): 1,209 (2023), 280 (2024), 450 (2025).
    - External sovereign bond financing: 500 (2023), 729 (2024), 464 (2025).
    - "IMF: RSF financing" is listed as 0 for the years shown in Table 8.

### Monetary and price dynamics (Figure 4, Tables 6–7)
- Inflation and central bank actions:
  - Inflation receded rapidly and as of October 2023 stood below the BCP’s target midpoint of 4 percent; consumer prices (end of period) series: 4.1 (2022), 4.5 (2023), 4.0 (2024–2026 projections).
  - The central bank recently reduced its policy interest rate given subdued inflation pressures.
- Monetary aggregates and central bank accounts (Table 6):
  - Currency Issued (end-period, billions of Guaranies): 19,742 (2023), 21,039 (2024), 22,420 (2025), 23,892 (2026).
  - Net International Reserves (billions of Guaranies): 68,858 (2023), 77,051 (2024), 79,883 (2025), 85,530 (2026).
  - Monetary policy rate, year-end (Table 3 statistical series): 4.0 (2019), 0.75 (2020), 5.25 (2021), 8.5 (2022) — later entries shown as ".................." in source.
- Financial sector indicators (Table 7):
  - Banks are liquid and well-capitalized; bank profitability has risen since the pandemic.
  - Credit to the private sector (annual percent change): 9.9 (2019), 7.7 (2020), 10.0 (2021), 11.6 (2022), 7.0 (2023), 10.4 (2024), 8.9 (2025), 7.4 (2026), 8.9 (2027) — series presented across tables.
  - Broad Liquidity (M4, end-period, billions of Guaranies): 158,475 (2023), 169,788 (2024), 178,219 (2025), 189,685 (2026).
  - Foreign currency deposits (billions of Guaranies): 56,525 (2023), 62,523 (2024), 64,878 (2025), 69,709 (2026).

### Medium-term outlook and capacity to repay (Tables 9–11)
- Real GDP growth (percent): 4.5 (2023), 3.8 (2024), 3.8 (2025), 3.5 (2026–2028 projected steady 3.5).
- Output gap (percent of potential GDP): -0.3 (2023), 0.2 (2024), 0.5 (2025–2028 projections).
- Public finances (medium-term in percent of GDP):
  - Central government primary balance: -2.5 (2023), -0.7 (2024), -0.1 (2025), 0.1 (2026).
  - Central government net lending/borrowing: -4.1 (2023), -2.6 (2024), -1.9 (2025), -1.4 (2026).
  - Central government debt: 34.5 (2022), 38.1 (2024), projected 37.1 (2026).
- Capacity to repay indicators (Table 11a highlights):
  - Fund obligations based on existing and prospective credit (in millions of SDR): shows a multi-year profile including values such as 11.1 (2024), 20.9 (2025), and later multi-decade trajectories. (Table contains detailed year-by-year SDR and USD conversions and ratios to reserves, exports, debt service, government revenue, GDP, and quota.)
  - Outstanding Fund credit (in millions of SDR and USD) and net use of Fund credit series are tabulated through 2045 with detailed values in the table.

### Key social and development indicators (Table 3 highlights)
- Population 2021: 7.0 (millions).
- Gini index (2021): 43.1.
- Unemployment rate (2022): 6.3.
- Life expectancy at birth (2020): 73.
- Percentage of population below the poverty line (2021): 26.9.
- Adult literacy rate (2020): 94.5.
- Rank in UNDP development index (2021): 105 of 191.
- GDP per capita (US$, 2022): 5,598.

*Source: IMF staff report material provided in the supplied content unit.*

### Annex I. Building Resilience to Natural Disasters and Climate

### Annex I. Building Resilience to Natural Disasters and Climate Change

### A. Climate Change Impact on Paraguay’s Economy
- Paraguay’s economy relies heavily on natural resources: sectors linked to natural resources (agriculture and livestock, agro-processing, and hydropower) account for about one-third of GDP, 80 percent of exports, and 40 percent of jobs.
- Water supply from the Rio de la Plata transboundary river basin is key for electricity generation, waterway transportation, farming, and ecosystems.
- Land use change and deforestation have increased flood severity and reduced wetland water retention, adding pressure on the water cycle.
- Historical impacts of climate-related hazards:
  - Between 1965 and 2021, on average, 3 percent, and up to 25 percent of Paraguay's population were affected by droughts, floods, and other natural disasters in the years they struck.
  - Persistent droughts in 2019 and 2022 and the COVID-19 pandemic resulted in economic growth of just 0.7 percent for 2019–2022, compared with an average growth of 4.4 percent from 2003 to 2018.
  - The soybean harvest (40 percent of all exports) declined by 70 percent in 2022.
  - Droughts decreased hydropower production and exports and raised transportation costs by impeding navigation on major waterways.
- Central bank assessment (2001–2020): an increase in the drought index by one standard deviation (0.76 percent) led to average declines within two quarters of:
  - GDP: -0.8 percent
  - Investment: -2.4 percent
  - Consumption: -0.6 percent
  - Effects are temporary, with activity returning to trend levels in a short period.
- Agricultural sector vulnerabilities:
  - Agriculture accounts for two thirds of export revenues, employs 20 percent of the labor force, and contributes 16 percent to GDP.
  - Agricultural water usage is about 80 percent of total water use; irrigation coverage is 2.8 percent.
  - Agriculture is dominated by smallholder family farms that are predominantly rain-fed; agricultural employment is mostly informal (surpassing 90 percent).
- Projected climate impacts:
  - By 2050, temperatures are projected to grow across all emissions scenarios in the range of 0.8-2.1°C compared to 1995-2014 reference period depending on scenario and climate model applied.
  - By 2030, estimated annual losses from projected yield for different agricultural products (soy, maize, cassava, rice, wheat) due to climate change and extreme weather events can amount to US$200 million per year.
  - Paraguay River and key watersheds in Chaco will be most exposed to natural hazards.
  - Rising temperatures may increase demand for air conditioning and electricity, and may affect labor productivity.
  - Volatility of water supply will likely increase volatility of electricity generation.
  - Extreme weather may aggravate transmission and distribution failures; existing electricity losses are already 26.2 percent.
  - Increased temperatures may affect carrying capacity of electric power cables, contributing to technical losses.
- Electricity losses detail (2021, ANDE):
  - Total losses: 26.2 percent
  - Transmission losses: 4.7 percentage points
  - Distribution losses: 21.5 percentage points
  - About one third of all losses are non-technical, mostly due to illegal connections.

### B. Paraguay’s GHG Emissions, Climate Policy, and Investment Needs
- Emissions profile:
  - Land use change and forestry: 47.8 percent of greenhouse gas emissions.
  - Agriculture (notably cattle ranching and soy): 33.7 percent.
  - Energy use: 8.2 percent (electricity generation is 99.9 percent emissions-free).
  - Within energy emissions, 89 percent come from the transport sector.
  - Waste: 8.1 percent; industrial processes: 2.2 percent.
  - Carbon dioxide: 55 percent of total annual emissions; methane: 31.2 percent.
- Global and comparative metrics:
  - Paraguay’s share in global emissions (accounting for land-use change and forestry) does not exceed 0.2 percent.
  - Per capita emissions are 2.2 times the world average and 1.8 times the regional average.
  - Per GDP emissions are almost 5 times the global average if accounting for land-use and forestry emissions, and 2.6 times higher if not.
- Policy framework and targets:
  - 2017: Framework Law on Climate Change (Ley Nacional de Cambio Climático - N°5875/2017).
  - 2021: Updated Nationally Determined Contribution (NDC) covering 25 objectives for adaptation across seven priority sectors and outlining mitigation plans and emissions baselines for five sectors.
  - NDC mitigation target: reduce emissions by 10 percent (or 20 percent conditional upon access to international finance) by 2030 relative to a business-as-usual scenario. This corresponds to a 3 percent increase (or a 9 percent decrease in case of conditional NDC) in emissions relative to 2021.
  - Paraguay has not yet developed a long-term decarbonization strategy or expanded participation in global efforts (for example, joining the Global Methane Pledge).
- International support and financing:
  - World Bank active loans: US$775 million (focus: public primary health care, transport connectivity, agricultural markets, economic management support, and green and resilient growth).
  - Inter-American Development Bank active portfolio: US$2.936 million (priority areas: transport, governance, energy, financial markets, water and sanitation, agriculture and rural development).
  - CAF active portfolio: US$2.206 million (focus: infrastructure, transportation, water and wastewater, energy and productive transformation).
- Electricity sector outlook and investment needs:
  - ANDE projects an electricity shortage by 2033 due to increased domestic consumption, primarily from higher penetration of air conditioning.
  - ANDE’s Master Plan proposes investments in transmission and generation, including solar power plants, electric batteries, small hydroelectric plants.
  - Total estimated cost of the Plan until 2030: US$6,512.5 million; about one third is secured.
  - Implementation contingent on improved governance of ANDE, enhanced transparency, and cooperation with government entities.
  - ANDE expects a generation reserve margin of 12 percent by 2033 (minimum acceptable is 10 percent).
- Broader infrastructure investment needs to meet SDGs by 2030 (IADB estimates):
  - Road infrastructure: New infrastructure US$3.4 billion; Maintenance and asset replacement US$4.9 billion; Total US$8.3 billion.
  - Mass transportation infrastructure: Total US$1.5 billion.
  - Water and sanitation: New infrastructure US$2.9 billion; Maintenance and asset replacement US$1.3 billion; Total US$4.2 billion.
  - Electricity generation and transmission: New infrastructure US$2.9 billion; Maintenance and asset replacement US$0.2 billion; Total US$3.1 billion.
  - Electricity access: New infrastructure US$0.3 billion; Maintenance and asset replacement US$0.7 billion; Total US$0.9 billion.
  - Telecommunication: Total US$4.5 billion.
  - Total SDG-related infrastructure investment needed through 2030: US$22.6 billion.
- Data, monitoring, and transparency challenges:
  - Public access to reliable climate data and emissions information is limited.
  - Recent GHG inventory improvements exist, but national inventory emissions are 1.5 times less than Climate Watch data; differences are twofold for land use change and forestry and 3.8-fold for waste.
  - Data inconsistencies may stem from methodological differences (emissions factors, accounting for forest fires, satellite imagery detail).
  - Municipal-level institutions often lack motivation, technical know-how, and resources to acquire and oversee environmental data.
- Institutional gaps:
  - Climate change is not yet integrated into long-term planning, risk management, public finance, and fiscal policies.
  - Public investment projects do not systematically account for climate impacts; public finance lacks acknowledgement and quantification of climate risks.
  - Institutional emphasis on climate change matters is limited, constraining coordination and effectiveness.

### C. Priority Areas for Climate Policy Action — Macro, Fiscal, Financial, and Structural Policies
- Integrate climate change into macroeconomic and fiscal frameworks:
  - Institutionalize assessment and quantification of climate risks within public finance and long-term planning.
  - Ensure public investment projects systematically account for climate impacts.
- Strengthen the electricity sector to preserve a low-emissions matrix and close projected supply gaps:
  - Implement ANDE’s Master Plan investments in transmission and generation (including solar, batteries, small hydro).
  - Secure financing for the US$6,512.5 million Plan (one third currently secured).
  - Improve governance, transparency, and financial accounting at ANDE.
- Mobilize infrastructure investment to meet SDGs by 2030:
  - Prioritize investments identified by IADB and others to close a US$22.6 billion infrastructure gap through 2030.
- Improve data, monitoring, and transparency:
  - Enhance national GHG inventory consistency with international datasets and address methodological differences.
  - Build municipal capacity for environmental data acquisition, oversight, and accountability.
- Advance sectoral mitigation and adaptation:
  - Leverage forestry and agriculture potential for mitigation and adaptation while addressing land use change drivers of emissions.
  - Increase irrigation coverage and technological adoption in agriculture to reduce vulnerability (current irrigation coverage: 2.8 percent).
- Expand international cooperation and conditional financing access:
  - Pursue conditional NDC support to achieve a 20 percent emissions reduction by 2030 relative to business-as-usual, and consider broader participation in global initiatives.
- Build financial sector resilience and protect strategic natural and physical assets:
  - Prepare public financial management systems to account for climate risks and associated contingent liabilities.
  - Strengthen financial sector capacity to manage climate-related risks to credit, liquidity, and asset quality.

*Source: Annex I. Building Resilience to Natural Disasters and Climate Change (IMF PDF).*

### 16.      To strengthen the macroeconomic resilience to climate change, Paraguay may foster

### 1pryea2024001 - 16.      To strengthen the macroeconomic resilience to climate change, Paraguay may foster

### Macroeconomic resilience and structural change
- Objective: foster diversification and stimulate structural changes to achieve higher productivity, reduced dependence on climate-sensitive sectors (particularly, agriculture), lower informality of employment and enhanced social safety nets.
- Policy implications:
  - Sustain public investment.
  - Further deepen the financial sector.
  - Enhance access to public infrastructure and services.
  - Promote sustainable practices in agriculture, develop the forest industry, and preserve and expand clean energy production capacity to make Paraguay a “green, profitable, and predictable destination for investments” as stated by the new government.
  - Consider increasing emissions reduction ambition within the next NDC submission to the UNFCCC while accounting for possible negative impacts on carbon-intensive industries (such as agriculture) critically important for Paraguayan economy and society.

### Institutionalizing climate in fiscal and public investment policy
- Required measures:
  - Strengthen national framework for incorporating climate-related risks into fiscal risks and debt sustainability analyses.
  - Develop guidelines and a taxonomy for publicly funded climate projects.
  - Implement comprehensive climate budget tagging.
- Suggested supports and inputs:
  - Acknowledge recommendations from the climate component of the recent PEFA++ analysis (supported by the EU and IADB).
  - Use the Roadmap for Greening the Fiscal Sector developed by the Ministry of Economy and Finance in consultation with the WB.
  - Leverage an upcoming C‑PIMA IMF mission.

### Financial system resilience and sustainable climate finance
- Context: climate investment needs exceed public resources.
- Priority policy areas:
  - Incorporate climate-related risks into financial sector risk assessments (building on preliminary collection of necessary data).
  - Enhance financial sector reporting and disclosure of climate risks in line with international standards, including those of the International Sustainability Standards Board and the Task Force on Climate-Related Financial Disclosures.
  - Develop a framework for scenario analysis needed for stress testing by banks (a long-term policy goal requiring several prerequisites).
  - Develop a green taxonomy and a regulatory framework for issuance and trading of green bonds in addition to the existing framework for sustainable bonds.
  - Use IMF RSF “signaling” role along a National Climate Finance Strategy to catalyze private capital for climate investment projects.
- Ancillary actions: data collection, capacity building on stress testing, interagency collaboration for conducting climate-related risk assessment.

### Decarbonization and sustainable energy — electricity sector
- Role: Paraguay’s electricity sector is vital for mitigation given growing energy consumption needs.
- Key policy actions:
  - Reduce technical and non-technical electricity losses through new investments and legal enforcement.
  - Increase energy efficiency.
  - Improve transparency and accountability of ANDE in close cooperation with the Ministry of Economy and Finance and Vice ministry of Mines and Energy.
  - Adopt a transparent methodology for electricity tariffs accounting for operating costs, the financial costs of projected capital spending needs, and efficiency gains in line with international best practices.
  - Enhance tariff policy to smooth electricity demand peaks and increase incentives for private non-conventional renewable energy generators to enter the grid in line with ANDE’s Master Plan.

### Non-hydro renewables, electrification, and energy-sector decarbonization
- Strategy:
  - Diversify the energy mix by investing in solar, wind, and battery storage.
  - Enact new legislation on modern renewable energy sources to maintain the clean energy mix amid growing energy demand, increased hydropower variability, and exposure to natural hazards.
- Feasibility:
  - Recent assessments show Paraguay can feasibly reach zero emissions in the energy sector by 2050 if an appropriate policy framework is enforced to modernize and expand generation, distribution, and transmission and develop modern renewable energy sources.
- Household electrification and biofuels:
  - Implement policies supporting electrification of energy use processes, particularly households that still heavily rely on fuel wood and charcoal for cooking and heating in rural areas.
  - Update and enforce regulation for the use of biomass; reduced reliance on traditional biofuels can bring co-benefits including decreased local pollution and lower mortality rates (Using the IMF Climate Policy Assessment Tool, it is estimated that biomass used for residential cooking resulted in 2,299 deaths in 2019).

### Decarbonization of transport
- Rationale: transport electrification can reduce dependence on imported oil products and potentially reduce consumer costs in the medium-term.
- Policy instruments:
  - Exempt electric vehicles from custom duties and VAT.
  - Introduce regulations (e.g., reduction of permissible age of imported cars) and fiscal incentives (e.g., explicit carbon taxation or feebates).
- Caveat: efficiency and feasibility of such mechanisms depend on alignment with the country’s development agenda and consideration of potential negative implications for vulnerable households.

### Building resilience and protecting natural assets
- Priority sectors: water, forestry, and land use require strong management policies for adaptation and disaster risk management.
- Measures:
  - Develop climate change adaptation and disaster risk management plans covering water-reliant agriculture, transport, and electricity generation.
  - Improve transparency in forestry and land use via enhanced legal framework for land use changes and forestry, and strengthen monitoring and enforcement capacities, including use of national cadaster data.
  - Enhance government oversight, legal enforcement, inter-agency coordination, and data collection for agriculture and forestry emissions.
  - Build emissions regulation in land use sectors on a credible monitoring, reporting, and verification (MRV) system supplementing the National Forest Monitoring System.
  - Promote productivity-increasing agricultural practices (including livestock), such as no-till farming, and policies to transition from deforestation to afforestation to reduce CO2 and methane emissions and mitigate transitional risks from deforestation-free regulations in trading partner markets (such as the EU).

### Water resources, agriculture resilience, and nature-based solutions
- Adaptation measures for water and agriculture:
  - Adopt a new action plan for water resources management in line with the newly adopted Law of Water Resources.
  - Invest in reservoirs and irrigation, conserve wetlands, and cultivate drought-resistant crops.
  - Undertake capital dredging and accumulate knowledge on riverbed structure to adapt waterways to future water level fluctuations.
  - Conduct adequate cost-benefit analyses to inform investment needs in water supply and distribution infrastructure.
  - Monitor climate and hydrological trends and accumulate climate-related data for long-term policy planning.
- Nature-based solutions:
  - Implement restoration and reforestation projects for key watersheds, conserve and restore wetlands and streams, and adequately implement the First National Plan for Forest Restauration.
  - Develop green urban corridors (including ongoing projects in Asuncion's metropolitan area) to mitigate flooding.
  - Nature-based projects may support participation in global voluntary carbon markets and attract foreign investment, notably in the Chaco region, but require strong additionality, reputed international verifiers, and a strong national MRV system to avoid emissions leakage or double counting.
  - Development of existing environmental services legislation and recent corporate plans (by Paracel and Atenil Paraguay S.A.) for afforestation and conservation indicate potential to scale-up restoration and preservation efforts, contingent on government support and stronger environmental and climate commitment.

### Engagement with development partners
- Active partners: World Bank Group, IADB, CAF, EU, UNEP, WWF among others.
- World Bank engagement (selected points):
  - Green and Resilient DPL in 2022.
  - Preparation of a climate policy roadmap for MEF and estimates of total carbon pricing.
  - Country Climate and Development Report (CCDR) and technical assistance on climate budget tagging and green PIM.
  - Support to MADES on costing of NDC adaptation objectives and technical report on agriculture risk financing options.
  - Technical assistance to ANDE and BCP on climate-related topics.
  - Asuncion Riverfront Urban Resilient Project (approved in November 2022) to improve municipal preparedness for extreme weather events.
- Other partners and focal areas (selected):
  - European Union: PEFA++ Climate Action Plan (with IADB), Forest for Life Program, support for sustainable production; EIB supports renewable energy and ANDE Master Plan.
  - Inter-American Development Bank: PEFA++ Climate Action Plan (with EU), electromobility strategy and legislation, ANDE Master Plan support, pilot smart meters, IADB-Climate Pilot water and wastewater projects with nature-based solutions.
  - CAF: adaptation infrastructure pre-feasibility studies, renewable energy projects including Green Hydrogen Plant financing, support for green bond issuance program, ecosystem regeneration including plantation of 270,000+ hectares of eucalyptus.
  - United Nations Environmental Program: National Forest Strategy for Sustainable Growth (ENBCS), National Climate Change Fund support, water security and transboundary governance efforts, support for transparent climate information reporting to meet Paris Agreement requirements.
  - World Wildlife Fund: land use management, protection of forests in the Chaco, sustainable production practices, jaguar conservation programs, reduction of deforestation through private sector engagement, support for sustainable finance platforms and DCF-related capacity building.
- Ongoing analytical work and technical assistance (2023): sustainable urban mobility, climate-smart agriculture, the bioeconomy, greening the financial sector, renewable energy and energy efficiency.

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

### 31.      On the private sector side, the International Finance Corporation has supported

### 1pryea2024001 - 31.      On the private sector side, the International Finance Corporation has supported

### Private sector support and tools for sustainable investment
- The International Finance Corporation (IFC) supported the commercial agricultural sector to adopt sustainable farming practices.
- The Sustainable Beef Advisory Services project supported development of a self-evaluation system called SAGAS (Sistema de Autoevaluación de Ganadería Sostenible) for sustainable meat production.
- IFC collaborated with the Smithsonian Institution to create ASIST-Chaco, a biodiversity mapping tool to guide sustainable private investments in the Chaco eco-region (expected to be available by September 2024).  
  - Purpose: make scientific information for land use planning and decision-making purposes more accessible.

### Sovereign risk and debt sustainability analysis — overview
- After a series of external shocks in the past five years, Paraguay is projected to embark on a fiscal consolidation path that will stabilize and gradually decrease public debt over the next ten years.
- Various realism assessments do not flag major concerns, and the medium-term risk index conveys a low-risk signal.
- Long-term assessment modules flag moderate risks from demographics (pensions and health) and from climate adaptation and mitigation costs.

### Public debt trajectory under the baseline scenario
- Revised fiscal deficit forecasts for 2023 and 2024 lead to a higher initial debt level (above 40 percent of GDP) than projected in previous DSAs.
- Under the baseline fiscal policy path (adherence to an overall fiscal deficit compliant with the fiscal rule’s deficit ceiling of 1.5 percent of GDP from 2026 going forward), the debt-to-GDP ratio projections:
  - 39.5 percent in 2028
  - 35.3 percent in 2032

### Coverage and composition of public debt
- Paraguay’s national debt definition (SIGADE) records debt endorsed by Congress and legally guaranteed by the Paraguayan State.
- IMF methodology adds further liabilities not covered under SIGADE, including ALADI liabilities, PETROPAR pending commercial debt with Venezuela, fiscal use of the 2021 SDR allocation, and a few other items.
- These additional liabilities are described as very unlikely to augment repayment risks, and sinking funds have been created for some of them.
- Paraguay’s international reserves: 24 percent of GDP at end-2022, or 63 percent of total debt — described as providing a high level of protection.
- Debt composition notes:
  - Sovereign bond issuances in international markets, ranging from 10 to 30 years maturity, now make up the largest share of financing instruments.
  - Financing from official (multi- and bilateral) creditors is the next-largest share.
  - Share of bond financing in domestic currency is expected to increase gradually as authorities take measures to deepen the domestic capital market and the international market for guaraní-denominated bonds.

### Tabled public debt measurements (2022) — exact figures preserved
- I. Public debt recorded and reported under the SIGADE: 105,116 Gs. bn; 15,054 U.S.$ mn; 36.1 percent of GDP
- II. Public debt recorded under the IMF methodology: 113,098 Gs. bn; 16,197 U.S.$ mn; 38.8 percent of GDP
- Items included in IMF debt not covered by SIGADE: 7,981 Gs. bn; 1,143 U.S.$ mn; 2.7 percent of GDP
  - BCP long-term liability with ALADI: 2,928 Gs. bn; 419 U.S.$ mn; 1.0 percent of GDP
  - ANDE long-term liability with foreign commercial banks: 999 Gs. bn; 143 U.S.$ mn; 0.3 percent of GDP
  - Historical debt of PETROPAR with PDVSA (Venezuela): 2,238 Gs. bn; 320 U.S.$ mn; 0.8 percent of GDP
  - Fiscal use of 2021 SDR allocation: 1,817 Gs. bn; 260 U.S.$ mn; 0.6 percent of GDP
- Memo item: Central bank net international reserves: 70,798 Gs. bn; 10,139 U.S.$ mn; 24.3 percent of GDP

### Realism assessments — key findings
- Forecast track record: fairly even distribution of weakly pessimistic and optimistic parameters, except the primary deficit where forecasts had been overly pessimistic over the 5-year horizon relative to the peer group.
- Debt-creating flows comparison (past five years vs next five years) shows a stark difference driven by unique external shocks in the past five years (droughts in 2019 and 2022; COVID pandemic in 2020 and 2021) that produced low real growth, high primary deficits, and exchange rate depreciation.
- Outlook for the next five years is more favorable due to a new government committing to fiscal consolidation and auspicious prospects for private investment and growth.
- Bond issuances tool: does not flag realism issues, but shows moderate volatility in the spread vs. 10-year U.S. treasuries over the next five years. Explanation: technical factors (long-term official creditor debt with interest rates indexed to short-term rates) that may cause a 2024 spike in the spread followed by compression in 2025–27 as short-term rates are expected to decrease.
- Real GDP growth path: raises no realism concern, though consistency with the proposed fiscal adjustment path may appear questionable. The fiscal multiplier in Paraguay is estimated to be low, given the relatively small share of the public sector in the economy.

### Risk classification and medium-term assessment
- Staff assessment: Paraguay’s debt is sustainable at an overall low risk level.
  - Baseline debt trajectory: stabilizing trend, supported by authorities’ commitment to strengthen fiscal performance and converge to compliance with Paraguay’s fiscal rule (deficit ceiling of 1.5 percent of GDP).
  - Medium-term risk assessment: low risk.
- Mechanical fan chart module: signals moderate risk; associated risk index of 1.6 (middle between low-risk boundary of 1.1 and high-risk boundary of 2.1). Main contributors:
  - Width of the fan chart (possibly induced by extraordinary volatility in public debt during the COVID-19 pandemic).
  - Relatively low score of institutional quality.
  - Debt level predicted for five years ahead.
- Gross financing needs (GFN) module: yields a mechanical low-risk signal.
- Combined medium-term risk index: classified as low.

### Long-term risks: demographics, pensions, health, and climate
- Long-term simulation modules examine fiscal risks from demographics (pension, social security, and health care expenditures), long-term debt amortization, and climate change (cost of adaptation).
- Demographic projections use ECLAC’s Latin American Demographic Center data, which are closer to the 2022 preliminary census results than the outdated national estimate.
- Pension and health systems: long-term projections reveal substantial increases in pension financing needs over the next 30 years.
  - If unaddressed, public debt could increase to about 70 percent of GDP in 30 years (figure 6a).
  - Rising healthcare costs with an aging population pose a long-term fiscal risk; this effect would be compounded when assuming that costs of medical treatment grow excessively (figure 6b).

### Policy-relevant points and actions highlighted
- Adherence to an overall fiscal deficit compliant with the fiscal rule’s deficit ceiling of 1.5 percent of GDP from 2026 onward is central to the baseline debt-stabilizing path.
- Authorities are taking measures to deepen the domestic capital market and the international market for guaraní-denominated bonds to increase domestic-currency bond financing.
- Sinking funds have been created for some liabilities included in the IMF debt definition but not covered by SIGADE.
- Commitment to strengthen fiscal performance and converge to compliance with Paraguay’s fiscal rule underpins the low-risk staff assessment.

*Source: IMF staff analysis as presented in the supplied content.*

### 9.      Long-term amortization and climate risks. The long-term module for large amortization

### 9.      Long-term amortization and climate risks. The long-term module for large amortization

### Long-term amortization module: findings and limitations
- The long-term module for large amortization triggers a risk signal, but "it is not entirely clear which factors are driving the process."
- "Data for long-term amortization schedules are not available, so the module uses internal amortization and refinancing assumptions."
- The module’s outputs include multiple risk signals from the long-term (large amortization) assessment (figure 7), but the lack of long-term amortization data limits interpretability of what is driving those signals.
- The medium-term extrapolation scenario assumes:
  - Real GDP growth: 3.5%
  - Primary Balance-to-GDP ratio (custom scenario column): 0.2% for 2028 and 0.9% for 2032 to 2036 average
  - Real depreciation: -1.9% (2028) and -1.8% (2032 to 2036 average)
  - Inflation (GDP deflator): 3.9%

### Demographics: pensions and health long-term fiscal risks
- Pension projections:
  - "Long-term demographic projections reveal that Paraguay's pension financing needs will grow substantially over the next 30 years."
  - If unaddressed, "public debt could increase to about 70 percent of GDP in 30 years."
  - Permanent adjustment needed in the pension system to keep pension assets positive for:
    - 30 years: 2.1%
    - 50 years: 4.8%
    - Until 2100: 8.9%
- Health projections:
  - "Rising healthcare costs with an aging population also poses a long-term fiscal risk."
  - The effect is compounded under the assumption that "costs of medical treatment grow excessively (ECG)."

### Climate-related fiscal scenarios and sensitivity
- Adaptation scenarios (figure 8a):
  - Standardized scenario: additional annual adaptation costs of about 1 percent of GDP.
  - Customized scenario: adaptation costs of 0.2 percent of GDP through the next 10 years; "From 2035 throughout the rest of the projection period, the customized scenario uses the dame parameters as the standardized model."
  - Results show adaptation costs have "a significant impact on the level of debt," but "the simulations shown in these charts are somewhat speculative" because costs for Paraguay could not be fully quantified.
- Mitigation scenarios (figure 8b):
  - Standardized scenario: average cost of mitigation measures of 5.7 percent of GDP.
  - Customized approach: annual mitigation costs of 1.0 percent of GDP for the ten-year projection period, then adopts standardized parameters for the remainder of the projection period.
  - Under the standardized scenario, "the net zero emission steady-state is reached by 2039," whereas the customized approach "postpones this objective by ten years."
  - Both adaptation and mitigation modules indicate a "potentially significant impact" on public debt, and "the results are highly sensitive to underlying assumptions."

### Medium-term risk assessment and overall debt sustainability
- Staff assessment summary:
  - "Staff assesses Paraguay’s debt as sustainable, at an overall low risk level."
  - The baseline debt trajectory exhibits a stabilizing trend, supported by expectations of narrowing primary deficits consistent with the fiscal rule (deficit ceiling of 1.5 percent of GDP) and continued real growth at potential.
- Mechanical and module signals:
  - The mechanical Fan chart module signals "moderate" risk, though staff view this as overstating risks given recent external shocks that are receding.
  - Medium-term risk modules:
    - Debt fanchart index (DFI): 1.6 — Risk signal: Moderate (per note: low if DFI < 1.13; high if DFI > 2.08)
    - GFN financeability index (GFI): 2.3 — Risk signal: Low (per note: low if GFI < 7.6; high if GFI > 17.9)
    - Combined medium-term index: classified as Low
  - Final fanchart: Fanchart width 57.7 (pct of GDP); Probability of debt non-stabilization 13.4 (percent)
  - Final assessment statistics:
    - "Prob. of missed crisis, 2023-2028, if stress not predicted: 9.1 pct."
    - "Prob. of false alarms, 2023-2028, if stress predicted: 56.8 pct."

### Policy-relevant implications and recommended responses (drawn from Risk Assessment Matrix)
- External and macro policies:
  - "The government should continue facilitating access to alternative meat and fertilizer markets." (in response to supply and fertilizer price risks)
  - Monetary policy: "continue to implement a successful data-driven inflation-targeting framework and continue to allow the exchange rate to work as an important shock absorber."
  - Exchange rate interventions: "Foreign exchange interventions can avoid disorderly market conditions."
- Fiscal and structural policies:
  - Strengthen revenue mobilization and control expenditures to return to the fiscal rule trajectory (deficit ceiling of 1.5 percent of GDP).
  - "There is a need for reforming civil services, public procurement processes, and address pension system imbalances."
- Financial sector and contingency management:
  - "Continue enhancing financial system supervision and the AML/CFT framework."
  - Monitor banking exposures: initial banks' claims on general government shown (value 2.3, contrib 0.8 in figure 5) and stress testing for financing provided by banks.
- Climate and disaster policy:
  - For extreme climate events and weather-related shocks: "reducing export concentration, diversifying the mix of clean power generation, and facilitating adaptation in agriculture would be important."
  - Adaptation and mitigation planning should account for high sensitivity of debt outcomes to scenario assumptions; prioritize realistic costing and phasing given fiscal constraints.

*Source: IMF staff (Paraguay country report content provided).*

### Annex IV. Capacity Development Strategy for FY23/24

### Annex IV. Capacity Development Strategy for FY23/24

### Background
- Over the past 15 years the Fund provided advice in areas including tax reform, revenue administration, establishing a fiscal rule, transitioning to inflation targeting, and development of the statistical system.
- In 2017 Paraguay undertook an FSSR, which informed MCM’s CD measures in banking supervision, stress testing, and insurance regulation and oversight.
- The Central Bank and the Ministry of Economy and Finance (main recipients of Fund TA) have upgraded their institutional and operational capacity over the past two decades.
- Collaboration with other partners has been strong, particularly with the World Bank and the IADB (e.g., in the 2020 governance diagnostic assessment mission).

### CD Priorities Going Forward
- The CD program prioritizes four areas:
  - Re-enforcing fiscal sustainability through stronger institutions, rules, and procedures via:
    - an improved FRL;
    - increasing domestic revenue collection (tax policy and revenue administration);
    - strengthening the public procurement system;
    - improving management of fiscal risks and liabilities;
    - civil service and pension reform.
  - Continuing to strengthen Paraguay’s overall AML/CFT regime:
    - a comprehensive CD project, financed by the Thematic Trust Fund, was recently established to strengthen technical aspects and overall effectiveness of Paraguay’s legal, regulatory, and supervisory regimes;
    - additional CD needed to further strengthen the anti-corruption framework in line with recommendations from the 2020 Governance Diagnostic Assessment report.
  - Further enhancing financial sector supervision:
    - continue work to enhance risk-based supervision at the Superintendence of Banks;
    - CD to strengthen supervision of financial cooperatives, insurance companies, and shadow banking activity;
    - strengthen systemic risk monitoring and macroprudential policy formulation (identified in FSSR);
    - continued technical assistance in bank resolution framework, strengthening the deposit guarantee fund, and cybersecurity.
  - Strengthening the statistical reporting framework:
    - graduating from the e-GDDS towards the Special Data Dissemination Standard (SDDS) could alleviate financing costs;
    - required improvements include select data granularity and timeliness of some data in the National Summary Data Page;
    - IMF staff shared with the authorities the list of data missing to move to SDDS, including general government data and monetary and financial statistics.

### Consultation with the Authorities
- Staff and the authorities agree on the CD priorities.
- Proposed workstreams represent areas with strong overlaps between the authorities’ and surveillance priorities.

### Political Appetite for Reforms
- The government is committed to a structural reform agenda to enhance state efficiency and public spending.
- Growing public awareness of the need for governance reforms provides a window of opportunity to implement these reforms, supported by CD delivery.

### Program Statement — Key Macroeconomic Outcomes and Projections
- GDP growth:
  - Expected GDP growth for 2023: 4.5 percent.
  - GDP growth drivers: agricultural production, electricity generation, services, and manufacturing; rebound after the 2021/2022 drought.
- Inflation:
  - Year-on-year inflation at end-June 2023: 4.2 percent (below the consultation band stipulated in the PCI).
  - Inflation projection for year-end 2023: 3.8 percent.
  - Inflation expectations for 2024 (as of October): well anchored to inflation target of 4.0 percent.
  - Monetary Policy Committee reduced the monetary policy interest rate by 75 basis points since August (three consecutive reductions of 25 basis points) to a level of 7.75 percent.
- Foreign exchange and reserves:
  - FX policy: currency flexibility.
  - As of October 2023, gross international reserves had increased by US$367 million compared to end-2022.
- Fiscal outcomes and targets:
  - Budget deficit for 2023 expected: 4.1 percent of GDP.
  - At end-October (annualized) budget deficit: 3.2 percent of GDP.
  - Allocation in 2023 for regularization of supplier claims: US$500 million (1.1 percent of GDP).
  - Government requests changes to quantitative targets (QTs) for end-December 2023 and end-June 2024, and approval of QTs for end-December 2024 as presented in Table 1a (tables not reproduced here).
- External current account:
  - Projected external current account surplus in 2023: 0.2 percent of GDP (compared with -7.2 percent in 2022), driven by agricultural export recovery and lower global fuel prices.
- Risks:
  - International: US economic resilience and energy price rebound could keep US rates high; tighter global financial conditions; commodity price volatility due to global slowdown, supply cuts, and geopolitical shocks.
  - Regional: uncertainty in trading partners, notably Argentina’s electoral process.
  - Local: weather risks, including a possible more intense than expected "El Niño" event affecting agriculture, construction, and livestock.

### Strategic Objectives under the PCI — Pillar I: Ensuring Macroeconomic Stability and Resilience
- Commitment to gradually reduce the budget deficit to the Fiscal Responsibility Law (LRF) cap of 1.5 percent of GDP in the medium term, with a postponement to 2026.
- Fiscal framework for 2024:
  - National General Budget for fiscal 2024 authorizes a deficit of 2.6 percent of GDP.
  - Drivers of the 2024 deficit projection:
    - An increase in expenditure equivalent to 0.3 percent of GDP for purchase of goods and services over previous provisions.
    - Projected interest revised upward by 0.5 percent of GDP.
    - Tax revenue assumption revised downward to 10.0 percent of GDP (from 10.4 percent of GDP).
  - Projected budget deficits:
    - 2024: 2.6 percent of GDP.
    - 2025: 1.9 percent of GDP.
    - Convergence to 1.5 percent of GDP targeted for 2026.
- Fiscal policy priorities:
  - Maintain efficiency in allocation of resources, particularly in health and education.
  - Reduce growth of public debt in terms of GDP in the medium term to restore fiscal buffer.
  - Maintain low levels of net change in floating debt at the end of each fiscal year.
  - Corresponding quantitative targets for fiscal deficit, primary current expenditure, and net changes in floating debt set forth in Table 1a (tables not reproduced here).

*Source: Annex IV. Capacity Development Strategy for FY23/24; Attachment I. Program Statement (November 2023 – November 2025).*

### 11.      Despite a complex fiscal background, we aim to press ahead with structural fiscal

### 11.      Despite a complex fiscal background, we aim to press ahead with structural fiscal

### Institutional changes and governance
- Created the Ministry of Economy and Finance by incorporating functions of the Ministry of Finance, the Technical Secretariat for Planning (STP), and the Secretariat of the Civil Service.
- Structured the ministry with a Vice Ministry of Economy and Planning (assumes STP responsibilities) and a Vice Ministry of Finance.
- Reformed tax collection agencies by establishing the National Directorate of Tax Revenues (DNIT) to combine the Undersecretariat of State of Taxation and the National Directorate of Customs to enable information exchange between domestic tax revenues and those from foreign trade.
- Announced clear regulations to guide operations and responsibilities of the Ministry of Economy and Finance and the DNIT to ensure efficiency, transparency, and accountability.

### Reform of the public sector retirement system (Caja Fiscal)
- Sent draft law to National Congress to create the National Commission for the study of the Comprehensive Reform of the Public Sector Retirement and Pension System.
- Identified insufficient contributions from the National Teacher’s Union, the Armed Forces, and the National Police resulting in recurring deficits financed by the treasury or by pensions from surplus sectors; described the system as fragmented and unequal.
- Proposed a commission composed of representatives of the three branches of government, civil and noncivil contributory sectors, academia, and the wider public to develop a single regulatory framework addressing financial and actuarial sustainability.
- Pursuing establishment of a Superintendency of Retirement and Pensions; a specialized team is completing the draft law with lessons learned and recommendations.
- Expected submission of the revised proposal to the National Congress at end-2023.

### Improving mobilization of national public revenue
- Implementing integrated national electronic invoicing (e-kuatia, SIFEN) since April 2022; planned completion in October 2024 with the goal that 80 percent of national invoicing will be carried out using electronic documents.
- Met initial target of incorporating at least 750 large and medium-sized taxpayers in SIFEN by end-June 2023.
- Proposing review of special tax regimes, including Law 60/90, to optimize alignment of tax incentives with sustainable growth and inclusive development priorities (new reform target proposed, June 2024).

### Fiscal governance and convergence plan
- Committed to measures ensuring compliance with the new fiscal convergence plan, proposing gradual convergence to the limit established in the Fiscal Responsibility Law (1.5 percent of GDP) in 2026.
- A review was proposed in the fiscal convergence plan to adapt fiscal strategies due to unexpected challenges.

### Consolidating supervision and management of public enterprises
- Continuing improvements in supervision and governance of nine public enterprises; reestablished a dashboard system to measure company performance toward a results-based management model (goal met for December 2022).
- Committed to reforms in the Regulation of Law 5058/13 “Creating the National Council of Public Companies (SOEs)” through a new regulatory decree to clarify and strengthen the role of the National Council of Public Companies (reform target, December 2023).

### Consolidating supplier payment processes and recording of public investment
- Identified 2022 delays in payments for public works contracts; contracting companies received payments through a debt assignment mechanism with commercial banks.
- Promulgated Decree No. 9537/23 in June to strengthen economic team control over debt assignment operations.
- Propose structural reforms to improve management of public resources, including registration of committed and accrued expenses within the new State Resource Management System (SIARE) (new reform targets, June and December 2024).

### Monetary and foreign exchange policies
- Reported inflation controlled and lying below the inflation consultation band set for this review (Attachment II); current inflation and medium-term inflation expectations are in line with target of 4 percent.
- Continue commitment to a flexible exchange rate system; intervene in foreign exchange market only in exceptional circumstances to dampen extreme short-term volatility in the guaraní.
- Will provide greater transparency on interventions via the Central Bank of Paraguay website.

### Pillar II — Improving productivity and promoting growth: completed targets
- Met two reform targets for this PCI review:
  - Implementation of the administrative regulation for the Law on Public Supply and Procurement (Decree 9823 dated August 11, 2023).
  - Completion and submission of the draft law proposal enabling reorganization of government institutional structure.

### Streamlining public expenditure and reorganizing government structure
- Enacted Law 7021 on Public Supply and Procurement and issued implementing regulation to centralize and update procurement procedures; National Directorate for Public Procurement (DNCP) tasked to regulate and supervise the Annual Procurement Plan (PAC).
- Submitted draft law regulating administrative organization of government to modernize institutional areas, introduce legal instruments for creation/modification of government organizations, classify organizational functions, and regulate ministerial powers relating to sectoral coordination.

### Improving governance, anticorruption, and AML/CFT
- Committed to strengthening the anticorruption framework guided by the National Anti-Corruption Strategy published on November 23; propose standardizing inconsistent definitions between the ministry of health and the social security institute (IPS) regarding purchases of medicine to make required-medicine standards more consistent (new reform target, December 2024).
- Continued strengthening of AML/CFT framework following the 2021 evaluation by GAFILAT; Paraguay approved the mutual evaluation process and remains under GAFILAT’s intensified monitoring program.
- Target of finalizing and approving the updated National Risk Assessment was not met as planned; now planned for completion by June 2024 (new reform target). Government approval expected by end-July 2023 remained pending.

### Strengthening the business climate and infrastructure reforms
- Intend to renew reform of the legal framework for insolvencies; aim to present a revised and improved draft law to Congress by June next year (reform target) with a goal of approval during 2024.
- Proposing significant revision to the Law on Public-Private Partnerships; preparing amendments to submit to Congress by June 2024 (new reform target) to attract private sector participation.
- Propose comprehensive upgrade of land ownership rights framework to enhance the integrity of the property register of public land; new reform target proposed to be met by December 2024 (new reform target).

*Source: 1pryea2024001 - 11. Despite a complex fiscal background, we aim to press ahead with structural fiscal*

### 32.      We are moving forward with restructuring the administration of social programs. A

### 1pryea2024001 - 32.      We are moving forward with restructuring the administration of social programs. A

### Restructuring administration of social programs
- Transfer of the Program for Senior Citizens from the Ministry of Finance to the Ministry of Social Development (MDS), approved with slight changes by the Commission for Social Equity and Gender.
- MDS will supervise and monitor implementation of Law 3.728/09 guaranteeing a maintenance payment for senior citizens in poverty to provide more focused attention to this vulnerable segment.

### Strengthening core social programs
- Tekoporã program adjustments:
  - Benefits increased by 25 percent for vulnerable families.
  - Payments shifted from bimonthly to monthly to improve household budget management.
  - Increase applied retroactively from July for current beneficiaries, effective from September 1st.
  - Expected to benefit 183,000 families.
- Objective: offset losses from increases in the cost of basic goods and break the cycle of poverty through efficient resource management.

### Systems for the administration of social programs
- Implementation of the Pension System (SIPEN), a technological tool to harmonize administration of social programs:
  - Target: implement SIPEN by end-2023 (reform target).
  - Proposal to extend step-by-step implementation of SIPEN to programs managed by: (a) Coordination Unit for Miscellaneous Government Obligations (CODE) under the Ministry of Finance; and (b) Ministry of Childhood and Adolescence (MINNA) (reform target).
- Ongoing priority: integration and optimization to improve efficiency, transparency, and effectiveness.

### Strengthening social inclusion and care policy
- National Care Policy (PNCUPA) – 2030 led by the Ministry for Women:
  - Focus on persons in situations of dependency and those responsible for their care.
  - Promote co-responsibility among families, government, private sector, and community.
  - Protect employment rights of caregivers (mostly women).
  - Action Plan for the national care policy to be approved by the Interinstitutional Care Commission by June 2024 (new reform target).

### Formalizing employment
- Continued efforts to reduce informal employment among MSMEs and self-employed workers.
- Previous target missed: draft law and technical report prepared but discussions and submission to National Congress were not completed by end-June 2023.
- New timeline: reviewing parameters for a new proposal to be submitted to the National Congress by March 2024.

### Climate change vulnerability and opportunities
- Exposure and impacts:
  - Droughts in 2019 and 2022 had severe impacts on agriculture and renewable energy generation (including Acaray), and hindered river navigation for trade.
- Natural assets:
  - Native forests cover 40 percent of the country’s surface area.
  - 15 percent of surface area is in protected areas.
  - Laws prohibit deforestation in the eastern region and regulate it in the western region.
  - Laws on carbon credits and environmental services provide market incentives for forest preservation and planting.
  - “First Forest Restoration Plan” to guide forest protection and restoration.
  - Paraguay has a completely green electrical grid.
- Strategic aim: preserve and expand the green grid and use it for new sustainable energy production, such as green hydrogen.

### Climate commitments and emissions targets
- Alignment:
  - Measures will follow the Nationally Determined Contribution (NDC) updated in 2021 and the Framework Law on Climate Change of 2017.
- Focus on adaptation given Paraguay’s small contribution to global emissions and high vulnerability.
- NDC identifies seven areas for adaptation efforts: resilient communities and cities; health and epidemiology; ecosystems and biodiversity; energy; agricultural and forestry production and food security; water resources; and transport.
- Emissions reduction commitment:
  - Reduce by 10 percent the projected emissions under the Business as Usual (BAU) scenario for 2030 unconditionally.
  - Additional 10 percent reduction conditioned on international support.
- Five key sectors to reach goals: agriculture; land use; changes in land use change and forestry; use of industrial products and processes; waste; and energy.

### Resilience and Sustainability Facility (RSF) — four reform areas
- Area 1: Incorporate climate considerations in public investment management:
  - Continue analysis of fiscal risks from climate impacts and associated debt sustainability assessments.
  - Classify national budget expenditures taking into account climate considerations.
- Area 2: Strengthen financial system and climate-related financing:
  - Develop a green taxonomy.
  - Include climate issues in financial institutions’ risk management and reporting.
  - Promote issuance of green bonds and pursue sovereign green bonds in 2024.
- Area 3: Preserve and expand green electricity and mitigate transport CO2 emissions:
  - Regulate and implement laws on nonconventional renewable energies and electromobility.
  - Replace selective taxes on fuels with explicit carbon taxes.
  - Reform ANDE operations to reduce losses and adjust electricity tariffs following audit and technical study; introduce energy efficiency standards.
- Area 4: Protect strategic natural and physical assets:
  - Improve forest conservation.
  - Enhance measurement, reporting, and verification (MRV) systems.
  - Reduce methane emissions through sustainable waste management.

### Sustainable management of public investment (RM1)
- Public investment approach emphasizing economical and environmentally sustainable projects.
- MEF to revise Decree 4436/20 to include climate aspects in design, selection, and evaluation of public investment projects.
- Results to be published on the MEF website by November 2024 (reform measure).

### Resilient financial sector and mobilization of climate finance (RM2, RM3)
- RM2 — Green Taxonomy:
  - MEF and Central Bank of Paraguay (BCP) to implement a Green Taxonomy by November 2024 aligned with NDCs (reform measure).
- RM3 — Inclusion of climate-related risks in financial sector risk assessment:
  - BCP to adopt a climate-related financial risk assessment and monitoring framework for the banking sector including reporting requirements and a data warehouse for significant climate-related financial risks.
  - BCP to issue supervisory guidelines by May 2025 with deadlines for banks to incorporate climate-related risks in their risk management frameworks (reform measure).

### Policies for a sustainable energy sector (RM4–RM8)
- RM4 — Nonconventional renewable energy:
  - Establish regulatory framework to include alternative renewable sources in the national electricity system.
  - Incorporate interconnection rules, set tariffs for additional electricity fed into the National Electricity System, specify tax exemptions for key inputs to install solar and wind, and specify permits governing relations between generators and ANDE (reform measure).
  - Context: Paraguay’s renewable electricity exports accounted for 4 percent of GDP in 2022; surplus production expected to disappear around 2031-2032.
- RM5 — Independent audit for ANDE:
  - Independent audit by November 2024 led by an international firm of good standing (reform measure).
  - Firm to provide a study to establish ANDE costs by business segment and comparisons.
- RM6 — Tariff adjustment mechanism:
  - Using audit and study inputs, ANDE to develop, publish, and gradually adopt transparent methodologies to adjust electricity tariffs by May 2025 (reform measure).
  - Tariff methodology to be in force when ANDE must buy variable renewable electricity from generators, reflecting higher average costs.
  - Long-term governance aim: separate generation, transmission, and distribution and establish a transmission network manager.
  - End goal: ANDE able to access capital markets without sovereign guarantee and be protected from negative financial impacts as alternative renewables are included.
- RM7 — Energy efficiency:
  - Establish efficiency standards for household appliances (lighting, air conditioning, refrigeration, electric transformers, and electric motors) by June 2024 (reform measure).
  - Work groups led by the Vice Ministry of Energy and the Ministry of Industry and Commerce to set standards based on ISO best practice.
  - Potential savings: up to 5,500GWh, equivalent to US$396 million for 2030.
  - Long-term support for households to replace old appliances with more efficient ones.
- RM8 — Reduction of losses and dynamic electricity tariffs:
  - Develop, publish, and gradually adopt a plan to reduce ANDE's technical and nontechnical losses by November 2024 (reform measure).
  - Implement at least 20,000 smart meters as initial phase.
  - ANDE estimates roll out of 350,000 smart meters could reduce losses from 26 percent to 15-18 percent.
  - Smart meter rollout to prioritize consumers accounting for a high percentage of income and consumption.
  - Increase inspections by about 10 percent to reduce electricity theft; ANDE carried out about 16,000 inspections in 2022.

### Reduction of residential and transport sector emissions (RM9, RM10)
- RM9 — Carbon tax on liquid fuels:
  - Transport sector accounts for 90 percent of energy-related emissions.
  - Introduce explicit carbon tax by changing taxable base from liters to carbon content (per ton of CO2 equivalent) on liquid fuels by May 2025 (reform measure).
  - Carbon tax will be based on the level of the current tax on diesel and also applied to gasoline and LPG.
  - Selective taxes on gasoline and LPG will be reduced so total effective tax rate on each fuel does not change.
  - Carbon tax rate to be reviewed and adjusted based on periodic published technical analysis from MEF and BCP and in accordance with Paraguay's climate ambition.
- RM10 — Electrification of private transport and electric public buses:
  - Goal to retain benefits of clean generation internally and reduce balance of payments needs from fuel imports (imports of oil and fuel accounted for 5.5 percent of GDP in 2022).
  - Restrict tariff exemption to electric vehicles (limit fiscal cost; previously applied to electric and hybrid vehicles under the Law on Electromobility).
  - Roll out public charging infrastructure and develop regulations to select operating model for electric public transportation by November 2024 (reform measure), led by the Vice Ministry of Transport (VMT) and the electromobility work group.

*Source: IMF staff report excerpt for Paraguay (content unit 1pryea2024001).*

### 51.      Register of industrial biomass users and Joint Intervention Protocols (RM11). We

### 1pryea2024001 - 51.      Register of industrial biomass users and Joint Intervention Protocols (RM11). We

### Register of industrial biomass users and Joint Intervention Protocols (RM11)
- Finding: "We estimate that 90 percent of the industrial sector consumes biomass at some point in its value chain."
- Information gap: No current information on the number of biomass consumers.
- Reform measure: RM11 will replace Decree 4056 of 2015 by June 2024 to:
  - set up a register of industrial biomass users, and
  - lay down the requirements for the use of biomass.
- Institutional implementation and coordination:
  - INFONA, MADES, the National Police, and SENAD will regulate and implement a decree to provide joint intervention protocols for change of land use based on the National Forest Monitoring System.
  - The protocols will enable coordination among public agencies to ensure more effective responses to illegal change of land use, "including coordination with the Public Prosecutor’s Office."

### Institutional reform to strengthen INFONA (RM12)
- Recent role: INFONA has led protection of native forests, processed data, and developed a deforestation early warning system.
- Reform measure RM12 (target date): change INFONA's structure by June 2024 to build institutional and financial capacity to:
  - protect native forests, and
  - respond to deforestation alerts.
- Specific institutional change: creation of a National Directorate for the National Forest Monitoring System (reform measure).
- Measurement and reporting: adopt the system for Measurement, Reporting, and Verification of emissions in accordance with the United Nations Framework Convention on Climate Change (UNFCC) standards to increase transparency in emissions accounting, "including independent third-party verification."

### Methane emission capture and law 7014/2022
- Law: law 7014/2022 promotes the reutilization, recycling, and use of plastic (polyethylene terephthalate) containers; is part of the National Plan for the Comprehensive Management of Urban Solid Waste developed with UNDP and GEF support.
- Purpose: law establishes targets for private sector sustainable management and reutilization of plastic containers aligned with Paraguay’s NDC and economic incentives supported by the national Climate Change Fund.
- Implementation: the private sector arm of a regional development bank plans to support efforts once the law is in force.
- Reform measure and timetable: MIC will enact the regulation of law 7014/2022 by May 2025 (reform measure) to facilitate the project and contribute to better waste management and containment of methane emissions.

### Program monitoring, quantitative targets, review schedule, and RSF links
- Monitoring framework:
  - Uses quantitative targets, continuous targets, and reform targets to monitor program implementation.
  - Proposed quantitative targets for end-December 2023, end-June 2024, and end-December 2024, and a quantitative target to be monitored on an ongoing basis.
  - Definitions are provided in the attached Technical Memorandum of Understanding (Attachment III).
- Review schedule:
  - Third review: scheduled to be completed by June 1, 2024.
  - Fourth review: scheduled to be completed by November 1, 2024.
  - Fifth review: scheduled to be completed by May 2025.
  - Sixth review: scheduled to be completed by November 2025.
- Selected quantitative target examples (as presented in Table 1a):
  - "Ceiling on the central government fiscal deficit (in billions of guaraníes)" entries shown include: -8,733 1,746 Met; -4,280 -4,300 Not met; -7,345 -13,264 -1,484 -3,249 -9,106.
  - "Ceiling on current primary expenditure of the central government (in billions of guaraníes)" entries shown include: 34,746 35,075 Not met; 17,849 17,964 Not met; 38,178 39,733 18,269 18,896 41,345.
  - "Ceiling on the net incurrence of floating debt by the central government" entries shown include: 500 738 Not met; -1,617 -1,614 Not met; 500 1,643 -2,117 -1,800 -1,500.
  - Inflation consultation band details (Table 1a): Upper band limit (2 percent above center point) 10.8 ... 8.5 ... 6.1 6.1 6.1 6.1 6.0; End of period inflation, center point 8.8 8.1 Met 6.5 4.2 Actual is below band 4.1 4.1 4.1 4.1 4.0; Lower band limit (2 percent below center point) 6.8 ... 4.5 ... 2.1 2.1 2.1 2.1 2.0.
  - Memorandum item: "Social assistance benefits" entries shown include 2/2,906 2,921 Met; 1,434 1,466 Met; 3,338 3,376 1,666 1,817 3,975.
- RSF reform measures (Table 4) relevant to conservation and emissions (selected):
  - Reform measure 11 (3rd Review): INFONA, MADES, MOPC/VMME, and MAG to replace Decree 4056 of 2015 to create the registry of industrial biomass users and establish prerequisites for biomass use; INFONA, MADES, National Police and SENAD to regulate and implement a decree to create joint intervention protocols for land use change using the National Forest Monitoring System; institutions to coordinate with other institutions of the Estate, including the Attorney General.
  - Reform measure 12 (3rd Review): INFONA to change its normative framework to strengthen institutional and financial capacities; includes creation of a National Directorate for the National Forest Monitoring System.
  - Reform measure 13 (5th Review): "MIC to enact regulation of the law 7014/2022 that promotes the reutilization, recycling, and use of plastic (polyethylene terephthalate) containers."
- Proposed RSF access and conditions (Table 5) — selected entries:
  - June 1, 2024 25.175 Million of SDR 12.50 Percent of Quota — Completion of RSF review of reform measure 4 implementation.
  - June 1, 2024 25.175 Million of SDR 12.50 Percent of Quota — Completion of RSF review of reform measure 7 implementation.
  - June 1, 2024 25.175 Million of SDR 12.50 Percent of Quota — Completion of RSF review of reform measure 11 implementation.
  - June 1, 2024 25.175 Million of SDR 12.50 Percent of Quota — Completion of RSF review of reform measure 12 implementation.
  - November 1, 2024 20.14 Million of SDR 10.00 Percent of Quota — Completion of RSF review of reform measure 1 implementation.
  - November 1, 2024 20.14 Million of SDR 10.00 Percent of Quota — Completion of RSF review of reform measure 2 implementation.
  - November 1, 2024 20.14 Million of SDR 10.00 Percent of Quota — Completion of RSF review of reform measure 5 implementation.
  - November 1, 2024 20.14 Million of SDR 10.00 Percent of Quota — Completion of RSF review of reform measures 8 implementation.
  - November 1, 2024 20.14 Million of SDR 10.00 Percent of Quota — Completion of RSF review of reform measure 10 implementation.
  - May 22, 2025 25.18 Million of SDR 12.50 Percent of Quota — Completion of RSF review of reform measure 3 implementation.
  - May 22, 2025 25.18 Million of SDR 12.50 Percent of Quota — Completion of RSF review of reform measure 6 implementation.
  - May 22, 2025 25.18 Million of SDR 12.50 Percent of Quota — Completion of RSF review of reform measure 9 implementation.
  - May 22, 2025 25.16 Million of SDR 12.50 Percent of Quota — Completion of RSF review of reform measure 13 implementation.
  - Total 302.101 Million of SDR 150.00 Percent of Quota; Memorandum item: Quota 201.40.

### Key policy implications and operational notes
- Establishing the industrial biomass registry (RM11) and joint intervention protocols aims to close the current information gap on biomass consumers and to improve interagency response to illegal land use change.
- Strengthening INFONA (RM12) is intended to improve forest protection, operational response to deforestation alerts, and compliance with UNFCC Measurement, Reporting, and Verification standards, including independent third-party verification.
- Enacting regulation for law 7014/2022 by May 2025 is framed as a key step to contain methane emissions via better waste management and private sector engagement.
- Progress on these reforms is explicitly tied to RSF disbursement conditions scheduled across June 1, 2024; November 1, 2024; and May 22, 2025.

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

### 3.      In addition to lower pressures from the external environment, the tight monetary policy

### 3.      In addition to lower pressures from the external environment, the tight monetary policy stance and inflation expectations in line with target were relevant factors in explaining the deceleration of inflation in Paraguay.

### Policy responses
- Recent inflation dynamics:
  - October year-on-year CPI inflation: 3.5 percent.
  - June year-on-year CPI inflation: 4.2 percent.
  - IPCSAE year-on-year rate fell from 5.1 percent to 4.6 percent between June and October.
  - Inflation expectations have remained in line with the target of 4.0 percent.
- Monetary Policy Committee (MPC) actions:
  - Reduced the Monetary Policy Rate (TPM) by 25 basis points at each of the August, September, and October meetings.
  - Resulting TPM level: 7.75 percent.
  - MPC rationale: prudent, gradual reduction given persistent risks mainly from the external environment that could impact local prices.
- Central Bank stance:
  - The BCP will continue to monitor the impact of policy measures and global and domestic developments and stands ready to take additional measures as necessary to meet its price stability objective.

/s/  
Carlos Carvallo Spalding  
President  
Central Bank of Paraguay

### Inflation outlook
- Forecast revisions and projections:
  - Inflation forecast for 2023 changed from 4.1 percent in July to 3.8 percent in October.
  - Inflation forecast for 2024 remains at 4.0 percent.
  - Expected path: in absence of new shocks, inflation should continue toward convergence with the center of the target range, hoped to converge around 4 percent from the third quarter of 2024.
- Recent drivers:
  - Domestic moderation driven mainly by food and energy prices.
  - Marginal rebound in September explained by specific CPI basket products, but observed data were below expectations leading to a cut in the year-end forecast.
- Main risks to domestic inflation:
  - Slower convergence of global inflation.
  - International interest rates remaining high for longer.
  - Lower risk appetite.
  - Uncertainty relating to the development of the oil price.

### TMU (Technical Memorandum of Understanding) — program scope, monitoring, and reporting
- Program duration and review schedule:
  - Program period: November 21, 2022 –   November 20, 2025.
  - Review schedule: third review evaluates targets at end-December 2023; fourth review at end-June 2024; fifth review at end-December 2024; last review at end-June 2025.
- Key definitions:
  - “Government”: central budgetary government of the Republic of Paraguay (excludes central bank, public companies, departmental and municipal governments).
  - “Public sector”: government, local governments, and entities owned or majority controlled by the government.
- Fiscal targets and reporting requirements (program definitions):
  - Ceiling on Central Government Fiscal Deficit (global fiscal balance / net loan / net indebtedness): difference between total income and total expenditure (total obligated expenditure plus net acquisition of non-financial assets); revenue and expenditure broadly consistent with GFSM 2001.
  - Provisional monthly reporting on overall fiscal balance and components with a delay of no more than 30 days after the end of each month; final data no later than two months after provisional reporting.
  - Ceiling on Current Primary Expenditure: defined components include (i) compensation of employees; (ii) expenses for the use of goods and services; (iii) subsidies; (iv) current grants; (v) social benefits; (vi) other current expenses. Quantitative target: ceiling on accumulated primary current spending since the beginning of the year. Monthly provisional data to IMF within 30 days after month-end.
  - Ceiling on Net Incurrence of Floating Debt: floating debt defined as difference between obligated expense and amounts transferred for payment by the Treasury (SICO and SITE); monthly data within 30 days after month-end.
  - Ceiling on Accumulation of External Debt Payment Arrears: program requires no new external arrears be accumulated at any time; monthly reports of external arrears by creditor within 30 days after month-end.
- Inflation consultation band:
  - Inflation defined as 12-month change in CPI, base index (December 2017=100), published by the Central Bank of Paraguay.
  - Reports on inflation and components transmitted monthly within two weeks after the end of the month.
  - Failure to meet semester limits triggers discussions with IMF staff and a consultation with the IMF Board of Directors.
- Social assistance benefits:
  - Defined per GFSM 2001 as the Social Assistance Benefits subcomponent of Social Benefits in SITUFIN; reporting requested monthly within 30 days after month-end (memorandum item, not formal conditionality).

### Additional monitoring and information transmission
- Authorities will transmit to IMF staff:
  - Within three days after implementation: any decree, decision, circular, edict, supplemental appropriation order, ordinance, or law with economic or financial implications for the program (including actions that modify budget allocations or create new agencies/funds).
  - Within a maximum of 30 days (except where otherwise specified), preliminary data on:
    - Tax receipts and tax and customs settlements by category, with corresponding monthly revenue.
    - Monthly number of expenditures committed, certified, or with payment orders.
    - Four-monthly DGIP report (SNIP) on investment projects with progress and execution.
    - Complete monthly SITUFIN table including tax revenue breakdown by type.
    - Monthly public debt statistical report from SIGADE by creditor category and debt service breakdown, no later than six weeks after month-end.
    - Quarterly update of projected public debt service with amortization and interest breakdown by creditor category.
    - Monthly report on fuel price structure, including estimate of subsidies if any.
  - Final data provided as soon as final Treasury balances are available, but no later than one month after reporting provisional data.
- Central Bank of Paraguay reporting to IMF:
  - Monthly central bank balance sheet with maximum lag of one month.
  - Monthly consolidated balance sheet of banks with maximum lag of two months.
  - Quarterly depository corporations survey (consolidated monetary survey) with maximum lag of two months.
  - Monthly lending and deposit interest rates of commercial banks.
  - Quarterly indicators of prudential supervision and financial soundness of banking financial institutions with maximum delay of two months.

### Reform Measures (RSF) — selected RM specifics and implementation timings
- General requirement:
  - For all reform measures, authorities will share relevant material for IMF comment at least 3 months prior to program reviews. Content must align with IMF staff technical recommendations, including TA as applicable.
- RM5 (ANDE audit and technical study):
  - Audit to cover and verify ANDE's costs, revenues, administrative and capital expenditures, following standard international accounting practices.
  - Technical study to cover costs by business segment: generation, transmission, distribution and marketing; provide comparators and determine benchmark of efficient costs by segment to input tariff adjustment mechanism.
  - Results of audit and technical study to be made public when delivered by the reputable international firm.
- RM6 (regulation for rate adjustments):
  - Regulation to include mandate, timelines, principles for transparency, and specify:
    - Responsible entity (lead agency) and procedures to resolve impasses.
    - Public availability of inputs: methodology to use public and verifiable information to establish fee tiers considering operating costs, financial costs of projected capital expenditure needs, and efficiency gains.
    - Frequency of adjustment: quarterly, semi-annual or annual.
    - Smoothing mechanism (moving average) to reduce impact of cost volatility.
    - Cost efficiency: methodology to compare ANDE's performance with comparators and determine cost recovery rates; specify loss reduction trajectory in accordance with RM8.
  - ANDE to share preliminary methodology with IMF at least 3 months prior to program review and establish plan for gradual tariff increases in consultation with Vice Ministry of Mines and Energy and National Council of Public Enterprises.
- RM7 (efficiency standards for household appliances):
  - Focus on 3 household appliances; UNEP recommends prioritizing residential refrigerators, air conditioners and industrial electric motors.
  - Efficiency standards to be set through participatory approach, including the National Institute of Technology, Normalization and Methodology, producers, importers, and retailers, and aligned with International Standardization Agency best practices.
- RM8 (smart meters and inspections):
  - Installation and commissioning of at least 20,000 smart meters by October 1, 2024, to reduce transmission and distribution losses and enable progressive establishment of hourly rates.
  - Smart meter strategy to prioritize consumers accounting for a high percentage of electricity sales and consumption.
  - By October 1, 2024, ANDE to progressively establish hourly rates.
  - Cut-off date to assess the one-year increase in inspections: October 1, 2024.
  - ANDE to increase inspections by 10 percent over those carried out the previous year to reduce electricity theft.
  - ANDE reported around 16,000 inspections in 2022; objective of this reform measure is 13,200 inspections before October 1, 2024, with the aim of reaching 17,600 inspections in 2024.
- RM9 (carbon tax replacing selective fuel taxes):
  - Carbon tax rate: equivalent in local currency to Guarani 250.000 per ton of CO2-eq.
  - Applies to diesel, gasoline and LPG.
  - Carbon tax rate in local currency to be reviewed periodically considering annual technical report by MEF and BCP taking into account evolution of the PCI, fuel prices, and exchange rate; draft decree to be shared with the IMF in advance.
  - Fuel tax table (values as presented):
    - Diesel: Tax per liter (Guarani per liter) 680; Proposal Carbon tax (Guarani per ton of CO2-eq) 250,000; Carbon tax (Guarani per liter) 680; Supplementary tax (Guarani per litre) 0
    - Naphtha up to 88 octane: Tax per liter 828; Carbon tax 250,000; Carbon tax per liter 680; Supplementary tax 148
    - Supernaphtha (between 88 and 96 octane): Tax per liter 2516; Carbon tax 250,000; Carbon tax per liter 680; Supplementary tax 1836
    - LPG: Tax per liter 1100; Carbon tax 250,000; Carbon tax per liter 680; Supplementary tax 420

*International Monetary Fund — Paraguay: excerpt from the Policy Coordination Instrument documentation and TMU.*

### 2. Climate change could exacerbate the impact of extreme weather events that

### 2. Climate change could exacerbate the impact of extreme weather events that

### Climate risks and projected economic impacts
- Paraguay has regularly experienced extreme weather events such as floods and droughts; climate change is expected to make these events more frequent and intense, particularly along the Paraguay River and key watersheds in the Chaco region.
- Climate change is projected to produce more unpredictable rainfall (affecting agriculture and hydropower) and higher temperature increases than the global average.
- World Bank CCDR estimates for Paraguay (to 2050):
  - GDP could be reduced by 0.5 to 3.1 percent from the baseline projection in a high global emissions scenario (RCP 8.5).
  - GDP could be reduced by 0.1 to 1.1 percent from the baseline projection in a low emissions scenario.
- Caveats:
  - These GDP estimates exclude the impact of climate change on livestock and thus could be higher.
  - They could be lower if Paraguay accelerates economic diversification away from commodity exports and invests more in adaptation.

### Poverty, health, and vulnerable populations
- World Bank CCDR estimates that the national poverty rate could be 0.05–1.19 percentage points higher than the baseline projection by 2050 due to climate change (depending on climate scenario and modelling approach).
- Primary channels increasing poverty:
  - Crop yield losses from droughts.
  - Labor productivity losses from heat stress.
- Geographic and demographic vulnerability:
  - Natural hazards disproportionately impact at-risk populations in the north, southwestern and central departments, and the Chaco.
  - Poor households have relatively few and undiversified assets, less savings, and are more likely to live in flood-prone areas, reducing coping capacity.
- Health impacts for all Paraguayans may include aggravated epidemics, increased air pollution from forest fires, and more deaths from extreme temperatures.

### Government policies and commitments — Adaptation
- Key policy milestones:
  - Ratified the Paris Agreement in 2016.
  - Approved Framework Law on Climate Change (Ley Nacional de Cambio Climático 5875/2017) in 2017, creating the National Climate Change Commission.
  - Updated nationally determined contributions (NDC) submitted in July 2021.
- NDC adaptation structure:
  - 25 objectives for adaptation across seven prioritized sectors: (i) resilient communities and cities; (ii) health and epidemiology; (iii) ecosystems and biodiversity; (iv) energy; (v) agriculture, livestock, forestry, and food security; (vi) water resources; and (vii) transport.
  - Six cross-cutting areas: (i) risk management, (ii) normative aspects, (iii) gender vulnerability, (iv) indigenous peoples, (v) actions to empower climate action, and (vi) technology and development.
- Planning instruments:
  - Plan Nacional de Adaptación al Cambio Climático (National Climate Change Adaptation Plan) 2022-2030.
  - Hoja de Ruta de Adaptación al Cambio Climático (2030 Adaptation Roadmap) with strategic actions, reference schedules, and implementation needs per sector.

### Investment needs and resilience measures
- Estimated investment needs to implement adaptation measures listed in NDCs: US$ 6.5 billion until 2030.
- Investment concentration: mostly in energy, transport, and agriculture; would require increases in public and especially private financing.
- Recommended resilience measures (from World Bank CCDR and analyses):
  - Promote adoption of climate-smart agricultural technologies.
  - Invest in forest restoration and other nature-based solutions to protect water resources.
  - Adapt waterways to climatic shocks.
  - Increase reliability of energy sources.
  - Strengthen social protection and prepare education and health systems for climate extremes.
  - Promote economic diversification to reduce climate vulnerability.
- World Bank CCDR estimate for long-run investment scaling:
  - Annual increases in investments of about 2.1 percent of GDP from now until 2050 needed to meet Paraguay’s sustainable development and climate goals.
- Historical climate finance and financing gaps:
  - Total climate finance received between 2019 and 2021 estimated at $181 million or 0.4 percent of GDP (by MADES).
  - Total projected increase in climate-related investments is small compared to annual investments required to achieve infrastructure-related SDG targets by 2030.
  - Roughly 55 percent of these investments (mostly in public transport) are assumed to be privately financed before 2030; this share increases to 75 percent after 2030.

### Mitigation commitments and emissions profile
- 2019 net emissions: 62.7 million tons of carbon dioxide equivalent (MtCO2e).
- Emissions by source (2019):
  - Agriculture: 40 percent.
  - Land use, land use change and forestry (LULUCF): 41.2 percent.
  - Energy: 13.3 percent.
  - Waste: 3.4 percent.
  - Industrial processes: 2.1 percent.
- Greenhouse gas composition (2019):
  - Carbon dioxide (CO2): 54.6 percent of net emissions.
  - Methane: 38 percent.
- Trends and drivers:
  - Emissions have been falling since 2010 due to decreases in LULUCF emissions, while emissions from agriculture, energy, waste, and industrial processes have increased.
  - Although electricity generation is fully renewable (hydropower), energy emissions increased almost 60 percent between 2010 and 2019, reflecting transport’s reliance on fossil fuels.
  - Transport is responsible for 89 percent of total energy emissions.
- NDC mitigation target:
  - Reduce emissions relative to business-as-usual by 10 percent by 2030 (20 percent conditional on international financing).
  - Mitigation Plans across five sectors: Agriculture; LULUCF; Use of Products and Industrial Processes; Waste; and Energy, proposing 45 specific measures.

### Decarbonization opportunities and policy instruments
- Forest conservation and restoration prioritized for decarbonization:
  - Law 7190 on Carbon Credits establishes basis for a national carbon credit registry to promote private investment in forest conservation and restoration.
  - Priority mitigation areas: plantation forestry for industrial use, increasing biomass availability for energy, and electromobility.
- Economic opportunities:
  - Use surplus clean energy to decarbonize transport and industry.
  - Explore green hydrogen and ammonia to reduce reliance on imported fertilizer.
  - Expand sustainable and climate-smart agricultural practices (e.g., agroforestry, reducing deforestation from cattle ranching) to access premium export markets.
  - Long-term goal: shift from raw agriculture and energy commodity exports to more sophisticated manufacturing and services exports to build resilience to climate shocks.
- Whole-of-economy reforms to mobilize finance:
  - Potential to raise domestic public revenues for climate action through property and environmental taxes, and feebates.
  - Strengthen countercyclical fiscal policies (e.g., increase social transfers to poor households during downturns).
  - Ensure fiscal rule supports sustained higher public investment while maintaining macroeconomic stability.
  - Deepen and green the financial sector to mobilize private climate finance.
  - Current constraints: credit-to-GDP ratio 51.3 percent in 2022 (lower than regional and upper middle-income peers); small capital markets and limited access to institutional investments (pension funds).
  - Policy priorities: accelerate pension reforms, improve access to finance for micro, small, and medium-sized enterprises, improve verification and certification of green investments, and strengthen rule of law, property rights, and governance on environmental standards.
- Recent government actions:
  - Steps to improve national forest monitoring system and to reform the pension system.

### World Bank engagement and proposed RSF-related reforms
- World Bank areas of engagement:
  - Identifying green growth opportunities and providing technical assistance on energy efficiency, climate-smart agriculture, and sustainable urban mobility; assessment of bioeconomy value chains; commercial forestry lending project pipeline.
  - Building resilience: US$240 million Paraguay Green and Resilient Development Policy Loan (P178285) approved July 2022; US$105 million “Franja Costera” project approved November 2023 to make Asunción coastline more resilient to floods.
  - Analytical work: forthcoming Country Economic Memorandum chapter on agriculture competitiveness and resilience; studies on agriculture risk financing mechanisms for family farmers; follow-up study to accelerate adoption of Climate Smart Agriculture.
  - Mainstreaming climate in public/private finance: climate policy roadmap for MEF; estimate of effective carbon price; costing exercise for adaptation measures in the NDC; support for climate change budget tagging and public investment environmental analysis; work with Central Bank to quantify climate impact on financial sector.
- RSF program commitments and reforms (authorities’ commitments):
  - A. Include climate aspects in design, selection, and evaluation of public investment projects (MEF).
  - B. Implement Green taxonomy (MEF and Central Bank), aligned with NDCs; Central Bank to issue supervisory guidelines for banks to incorporate climate-related risks.
  - C. Energy efficiency: independent audit of ANDE to lay foundations for transparent electricity tariff adjustment; install 350,000 smart meters to cut electricity losses from 26 percent to 18 percent; encourage households to replace outdated appliances with energy-efficient models.
  - D. Implement an explicit carbon tax on liquid fuels (diesel, gasoline, liquid petroleum gas) while reducing selective taxes so total effective tax rate is not affected; advance electrification of private transport and public buses under electromobility law with forthcoming operating model regulations.
  - E. Forest conservation: joint intervention protocols to monitor land use change; strengthen INFONA to protect native forests, process data, and develop deforestation early warning system; register industrial biomass users and set biomass use requirements.
  - F. National plan for comprehensive management of urban solid waste to promote re‑utilization, recycling, and use of plastic containers to contain methane emissions.
- Partnerships and financing:
  - Maximum RSF access expected to be amplified by alliances with InterAmerican Development Bank, World Bank, and UN Environmental Program to advance green energy production and exports.

*Source: 1pryea2024001 - 2. Climate change could exacerbate the impact of extreme weather events that*

### 3.2 percent in November 2023, below the 4 percent target. The BCP revised its end-2023

### 3.2 percent in November 2023, below the 4 percent target.

### Inflation and Monetary Policy
- Inflation was 3.2 percent in November 2023, below the 4 percent target.
- The BCP revised its end-2023 inflation projection from 4.1 to 3.8 percent, aligning with recent surveys.
- The BCP reduced the policy interest rate from 8.5 to 7.25 percent since August.
- The 2024 inflation expectation is stable at 4 percent.
- Future policy rate decisions will be data driven and dependent on the evolution of inflation expectations.
- Authorities remain committed to a flexible exchange rate system, fostering transparency in foreign exchange interventions and preserving the strong international reserve position.

### Fiscal Outlook
- The projected budget deficit aligns with the fiscal responsibility law.
- The budget deficit is projected to decrease gradually from 4.1 percent in 2023 to 1.5 percent of GDP by 2026.
- The extended consolidation from 2024 to 2026 reflects primarily the one-off adjustment in expenses from the Ministries of Public Works and Health in 2023 and the need for caution amid global uncertainties (high interest rates, fluctuating commodity prices, and geopolitical tensions).

### Economic Growth and External Developments
- Paraguay's GDP is projected to grow by 4.5 percent in 2023, primarily driven by the recovery in agriculture and increased electricity generation.
- Positive assessments from international rating agencies, such as Fitch and Moody's, reflect an optimistic economic outlook.
- The resumption of meat exports to the United States after more than two decades is noted as a significant development, further opening global markets to Paraguayan products.

### Financial Policy, Stability, and Supervision
- The financial system remains stable, solvent, and well-capitalized, surpassing minimum regulatory requirements.
- Liquidity and non-performing loan (NPL) ratios are at healthy levels.
- Profitability is recovering, though still below pre-pandemic levels.
- Loan growth in both local and foreign currencies, along with deposits, continued through 2023.
- The BCP credit survey shows optimism for future loan grants across all economic sectors.
- Progress in integrated financial system supervision: the new Securities Superintendency replaced the National Securities Commission to regulate the Stock Market, under the BCP's umbrella.

### Payment System Developments
- Significant advancements include the interconnection of the Paraguayan Payment System (SIPAP) with the Stock Exchange's Electronic Trading System, enhancing sophistication in local public debt securities trading.
- Recent months have seen notable improvements in the Instant Payments System's functionalities.

### Acknowledgements
- The report expresses gratitude for the insights and support from Mission Chief Mauricio Villafuerte and his team.
- Contributions from the Fund’s Residence Representative office are noted as crucial in supporting Paraguay's socio-economic agenda.

*Source: IMF content unit 1pryea2024001.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1pryea2024001.pdf_