## _cr16116

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---

### Recent developments and macroeconomic backdrop
- Staff estimates growth at 3 percent in 2015, cited as “among the strongest in Latin America.”
- Real GDP growth slowed from 6 percent (Q1 2015) to 1.1 percent year-on-year (Q4 2015).
- Real exports contracted by just below 10 percent (y/y) in the first three quarters of 2015.
- Export price movements in 2015:
  - Soybeans: fell 24 percent.
  - Beef: fell 10½ percent.
- Exchange rate:
  - Guaraní depreciated about 25 percent against the U.S. dollar in 2015 (with more modest effective depreciation).
- Inflation and core measures (2015):
  - BCP’s preferred “nucleus” averaged 2.9 percent (y/y) for 2015 and 3.7 percent in December.
  - Core inflation (X1) averaged 3.7 percent for 2015 and 4.9 percent in December.
- Headline inflation in early 2016 remained temporarily elevated due to volatile food prices; staff expects inflation to decline to the mid-point of the central bank’s target range (4½ percent) over the course of 2016.

### Near-term outlook and growth projections
- Staff projections and tabled figures:
  - Prose: “solid growth near 3 percent in 2016 and 3.25 percent in 2017.”
  - Selected Economic and Social Indicators table: Real GDP: 2015 = 3.0; 2016 = 2.9; 2017 = 3.2 (annual percent change).
- Drivers supporting near-term growth:
  - Favorable weather and strong soy harvest.
  - Sound macroeconomic fundamentals, favorable demographics, lower cost of oil imports, and a very competitive electricity sector.
- Risks to outlook:
  - External: further slowdown in Brazil; deeper decline in agricultural commodity prices.
  - Domestic: rapid credit expansion amid slower activity (macrofinancial vulnerability); limited capacity for administering and executing public investments.

### Fiscal policy stance, outcomes, and recommendations
- Fiscal outcome (central government):
  - Fiscal deficit estimated at 1.7 percent of GDP—marginally above the 1.5 percent ceiling set by the fiscal responsibility law (FRL).
  - Estimated positive fiscal impulse: 1.2 percent of potential non-agriculture non-energy GDP.
  - 2015 budget approved by congress exceeded the deficit ceiling by 1.3 percentage points of GDP after modifications.
  - Adjusted fiscal balance for 2015 (staff estimate), excluding capital expenditure financed by sovereign bonds on a one-off basis: -0.6 percent of GDP.
  - Real current primary expenditures growth in 2015: 4.7 percent, exceeding the FRL ceiling of 4 percent (ex-post).
- 2016 budget process and compliance notes:
  - Draft 2016 budget submitted to congress complied with numerical targets of the law.
  - Final approved version respected the deficit ceiling but congressional modifications altered composition of spending.
  - Authorities base FRL compliance on implied growth in current primary expenditures in the approved budget for year t+1 relative to prevailing budget in year t, deflated by the mid-point of the BCP inflation target band—not on fiscal outcomes.
- Policy guidance from directors and staff:
  - Continue to mobilize revenue and contain current expenditure while making space for capital spending, especially on infrastructure.
  - Fully internalize the FRL in the budget process to build a track record and bolster credibility of the fiscal anchor.
  - If amendments to the FRL are sought, changes to grant flexibility should be balanced by safeguards that enhance credibility and be communicated carefully.
  - Staff projects a broadly neutral fiscal stance for 2016; recommends some tightening of current primary expenditures to avoid exceeding the FRL’s deficit ceiling by a wider margin while safeguarding needed public investment.
  - Caution warranted when considering modifications to the fiscal anchor.
- Box 2 — FRL reform options (key points):
  - Golden rule (excluding public investment) associated with highest debt levels in staff simulations; if adopted, strict adherence to current expenditure rule and addition of a debt ceiling would be crucial.
  - Raising the headline deficit ceiling should be paired with stronger budgetary process provisions on sanctions and enforcement.
  - Removing the deficit ceiling and keeping an expenditure rule could compromise debt sustainability without a debt ceiling.
  - Conclusion: Caution warranted; modifications should be accompanied by safeguards, strengthened legal and institutional frameworks, explicit correction mechanisms, clearer sanctions/enforcement, and careful stakeholder engagement.

### Monetary policy, exchange rate, and reserves
- Monetary stance and actions:
  - Monetary policy described as moderately accommodative and appropriate given uncertain international context and contained inflationary pressures.
  - BCP made a 25 basis point interest rate hike in January 2016 to 6 percent; policy rate maintained at 6 percent through March.
  - Interest rate corridor narrowed in 2015 by lifting the floor to 5.5 percent.
  - Recommendation: monetary policy, coupled with a flexible exchange rate, should be the principal tool if growth weakens further, within limits of meeting the central bank’s price stability objective.
  - Recommendation: limit discretionary foreign exchange market interventions to exceptional circumstances of disorderly market conditions to reinforce the inflation targeting regime.
  - Operational improvements advised: deepen interbank markets, widen set of private counterparties for short-term liquidity instruments, improve liquidity analysis and forecasting, and discourage use of overnight facility for excessive reserves.
  - Gradually promote de-dollarization, including considering macro-prudential measures that introduce differential requirements for dollar loans and deposits.
- External position and reserves:
  - Exchange rate and external position assessed as broadly in line with fundamentals.
  - Gross international reserves (millions of U.S. dollars): 2015 = 6,329; 2016 (proj) = 6,360; 2017 (proj) = 6,254.
  - Reserves in months of next-year imports of goods and services: 2015 = 7.1; 2016 (proj) = 6.7; 2017 (proj) = 6.2.
  - BCP reserve position: 23 percent of GDP, covering 7 months of imports.
  - Reserves expected to increase in 2016 partly due to issuance of a US$600 million government bond.
  - Staff view: ample reserve coverage appropriate given openness, significant dollarization, and high vulnerability to weather and commodity price shocks.

### Financial sector soundness, credit, and macroprudential priorities
- Credit growth and composition:
  - Private sector bank credit growth (local currency terms): peaked at 29½ percent in May 2015; about 18 percent by February 2016.
  - When FX credit measured at constant January 2014 exchange rates: growth of total credit to the private sector was 7½ percent in February 2016, down from 22½ percent in March 2015.
  - Credit composition: stagnant FX lending volumes; strong local currency lending; reduced demand for investment loans in largely dollarized agriculture sector.
- Asset quality and provisioning:
  - Nonperforming loans (NPLs): 2.9 percent in February 2016.
  - Loan restructuring and refinancing (outside of NPLs): 2.3 percent of total loans.
  - Reported system-wide tier 1 capital ratio: 11.3 percent.
  - Most banks posted positive net income in 2015, though profitability measures mostly below 2014 levels; higher provisioning expenses reduced profitability but provided ample coverage for NPLs.
- System vulnerabilities and safeguards:
  - Financial system appears sound but vigilance critical given past rapid credit growth.
  - Assets and liabilities split roughly evenly between local and foreign currency denominations.
  - Liquidity risks relevant due to heavy reliance on short-term funding and a relatively small interbank market.
- Policy and supervisory recommendations:
  - Reduce still-elevated financial sector dollarization through macroprudential instruments to limit exchange rate risk.
  - Closely scrutinize banks’ loan classification practices and provisioning, particularly exposures to the agricultural sector.
  - Strengthen supervision of the cooperative sector.
  - Continue progress toward risk-based supervision; upgrade monitoring and analytical capacity and strengthen institutional arrangements for supervision.
  - Consider differentiated risk weightings or provisioning requirements for FX exposures; for deposits, mitigate FX risks by further raising already higher reserve requirements; address rapid credit growth via loan-to-value regulations.
  - Track a broader measure of borrower distress (NPLs plus refinanced and restructured loans).

### Structural reforms, governance, and public investment
- National Development Plan (NDP) 2014–30 axes:
  - (i) poverty reduction and human capital development; (ii) infrastructure and inclusive growth; (iii) insertion of Paraguay into global value chains.
- Structural priorities and actions:
  - Infrastructure: improving electricity distribution and transportation; improved navigability of the Paraguay-Parana Waterway (dredging); investment in port terminals and key road segments; improvements to electricity transmission and distribution.
  - Governance and transparency: implementation of the Law of Free Access to Public Information; online access to public sector payroll and some asset declarations; internal scorecards (“Tablero de control”); merit-based selection processes in 96 institutions (up from 24 in 2013).
  - Anti-corruption / AML/CFT: passage of the law on asset declaration noted positively; work on AML/CFT amendments encouraged.
- Implementation constraints:
  - Limited implementation capacity and political economy constraints could impede reforms aimed at addressing structural weaknesses, reducing poverty, increasing productivity, and promoting inclusive growth.
- Public investment and PPPs:
  - PPP projects already in the pipeline would amount to close to 2.5 percent of GDP.
  - Paraguay’s PPP framework is relatively recent and authorities have limited implementation experience.
  - Staff urged authorities to quantify and mitigate fiscal risks from contingent liabilities and closely monitor project selection and implementation to ensure efficient translation into public capital stock.

### Revenue administration, pensions, and civil service reform
- Revenue measures and administration progress:
  - Introduction of PIT (2013) and income tax on the agricultural sector (IRAGRO, 2014).
  - Extension of VAT to cooperatives (2016); authorities estimate additional revenues of about 0.2 percentage points of GDP from this extension.
  - SET improvements: taxpayers’ registry, organizational improvements, new audit and enforcement strategies.
  - Staff’s medium-term forecast incorporates reforms that could improve tax revenue to GDP ratio by close to 1 percentage point.
  - Staff recommendations: strengthen legal procedures for sanctions on tax evasion; enhance mechanisms to address revenue authority staff corruption; streamline registration and invoice authorization; improve filing procedures; develop single-window system and move towards fully electronic records.
- Pension system challenges:
  - System is fragmented: eight defined-benefit funds, largest are IPS and Caja Fiscal.
  - Actuarial and operational deficits pose substantial contingent liabilities.
  - IPS actuarial study indicates potential operational imbalances as early as 2032.
  - Authorities estimate present value of actuarial deficit of Caja Fiscal would amount to between 40 to 50 percent of GDP.
  - Caja Itaipu and Caja Ande deficits combined would amount to close to 4 percent of GDP.
  - Staff recommendations: enact draft law creating a pension regulator; expand portfolio management options for pension funds; consider parametric reform for long-term sustainability.
- Civil service reform:
  - Authorities working on amending Civil Service act with UNDP support; new salary scale introduced in 2015.

### External vulnerabilities, spillovers, and risk assessment
- External sector and current account:
  - Current account balance in 2015: –1.8 percent of GDP.
  - Drivers of deterioration: negative terms-of-trade shock; weaker activity in major trading partners (notably Brazil and Russia); lower export receipts (particularly from Asia).
  - Exports to Brazil represent around 30 percent of Paraguay's total exports.
  - Exports of agricultural products represent about 30 percent of GDP.
  - Trade openness: total exports and imports around 80 percent of GDP.
  - Weather-related disruptions can have significant impacts on GDP (up to 4 percent in some cases).
- Spillovers from Brazil:
  - VAR analysis main finding: a 1 percentage point fall in Brazil’s GDP associated with about ½ to ¾ percentage point fall in Paraguay’s GDP on average; estimates are imprecise and confidence intervals may include zero.
  - Cumulative effect 4 quarters after the shock can range from zero to over 1 percentage point; greatest cumulative effect typically about 3 quarters after the shock.
- External debt and reserves:
  - Net international investment position (NIIP) around -40 percent of GDP over last 5 years.
  - Gross external debt rose to about 59.2 percent of GDP in 2015 (Annex II table: 2015 = 59.2).
  - Reserves remain ample (7 months of imports) and exceed IMF adequacy metric for floating exchange rate economies.
- Risk Assessment Matrix — selected policy responses:
  - For external and financial shocks: let automatic stabilizers operate; use floating exchange rate as first line of defense with FX intervention to avoid excessive volatility; let monetary conditions ease consistent with IT framework; accelerate diversification measures; enact macroprudential measures including different capital requirements on dollar-denominated loans.
  - For institutional weaknesses and public investment capacity: accelerate efforts to address institutional weaknesses, improve transparency, and encourage private sector investment.

### Selected key statistics and medium-term projections (as presented)
- Real GDP (annual percent change): 2010 = 13.1; 2011 = 4.3; 2012 = -1.2; 2013 = 14.0; 2014 = 4.7; 2015 = 3.0; 2016 (proj) = 2.9; 2017 (proj) = 3.2.
- Nominal GDP (annual percent change): 2015 = 6.4; 2016 (proj) = 8.1; 2017 (proj) = 6.9.
- Per capita GDP (U.S. dollars, thousands): 2015 = 4.0; 2016 (proj) = 3.8; 2017 (proj) = 3.9.
- Consumer prices (end of period): 2015 = 3.1; 2016 (proj) = 4.5; 2017 (proj) = 4.5.
- Credit to private sector (annual percent change): 2015 = 8.8; 2016 (proj) = 4.6; 2017 (proj) = 5.2.
- Central government net lending/borrowing (percent of GDP): 2015 = -1.7; 2016 (proj) = -2.1; 2017 (proj) = -2.0.
- Central government primary balance (percent of GDP): 2015 = -1.1; 2016 (proj) = -1.3; 2017 (proj) = -0.9.
- Public sector debt (excl. central bank bills, percent of GDP): 2015 = 23.8; 2016 (proj) = 26.5; 2017 (proj) = 27.2.
- Exports (percent of GDP): 2015 = 39.8; 2016 (proj) = 39.6; 2017 (proj) = 39.9.
- Oil imports (percent of GDP): 2015 = -3.2; 2016 (proj) = -2.0; 2017 (proj) = -2.4.
- Current account (percent of GDP): 2015 = -1.8; 2016 (proj) = -1.4; 2017 (proj) = -1.2.
- GDP (US$ billions): 2015 = 28.1.
- Gross international reserves (millions of U.S. dollars): 2015 = 6,329; 2016 (proj) = 6,360; 2017 (proj) = 6,254.
- Reserves in months of next-year imports of goods and services: 2015 = 7.1; 2016 (proj) = 6.7; 2017 (proj) = 6.2.
- Financial soundness indicators (selected, latest observations):
  - Return on Assets: 2015 = 2.3.
  - Tier 1 capital/risk-weighted assets: 2015 = 11.3.
  - NPLs/total loans: 2015 = 2.5.
  - Provisions/NPLs: 2015 = 116.5.

*Source: PARAGUAY STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION (IMF staff report excerpt).*

### 2015. Meanwhile, fiscal policy has been supportive of economic activity. The fiscal deficit at

### _cr16116 - 2015. Meanwhile, fiscal policy has been supportive of economic activity. The fiscal deficit at

### Recent developments and macroeconomic backdrop
- Staff estimates growth at 3 percent in 2015, cited as “among the strongest in Latin America.”
- The economy lost momentum through 2015: real GDP growth slowed to 1.1 percent year-on-year in Q4 2015 from 6 percent in Q1 2015.
- Real exports contracted by just below 10 percent (y/y) in the first three quarters of 2015.
- Prices of major exports in 2015: soybeans fell 24 percent; beef fell 10½ percent.
- Paraguay experienced a 25 percent depreciation of the guaraní against the U.S. dollar in 2015 (with more modest effective depreciation).
- Core inflation measures for 2015:
  - BCP’s preferred “nucleus” averaged 2.9 percent (y/y) for 2015 and 3.7 percent in December.
  - Core inflation (X1) averaged 3.7 percent for 2015 and 4.9 percent in December.
- Headline inflation in early 2016 remained temporarily elevated, mainly due to volatile food prices; staff expects inflation to decline to the mid-point of the central bank’s target range (4½ percent) over the course of 2016.

### Near-term outlook and growth projections
- Staff projects:
  - “solid growth near 3 percent in 2016 and 3.25 percent in 2017.” (prose projection)
- Tabled projections in Selected Economic and Social Indicators:
  - Real GDP: 2015 = 3.0; 2016 = 2.9; 2017 = 3.2 (annual percent change).
- Drivers supporting near-term growth cited:
  - Favorable weather and strong soy harvest (Paraguay’s main agricultural crop).
  - Sound macroeconomic fundamentals, favorable demographics, lower cost of oil imports, and a very competitive electricity sector.
- Downside risks to the outlook:
  - Further slowdown in Brazil.
  - Deeper decline in agricultural commodity prices.
  - Domestic risks: rapid credit expansion in the banking system amid slower activity (macrofinancial vulnerability); limited capacity for administering and executing public investments.

### Fiscal policy stance and recommendations
- Fiscal outcome:
  - Fiscal deficit at the central government level is estimated to have reached 1.7 percent of GDP—marginally above the 1.5 percent ceiling set by the fiscal responsibility law (FRL).
- Directors’ and staff’s policy guidance:
  - Continue to mobilize revenue and contain current expenditure while making space for capital spending, especially on infrastructure.
  - Fully internalize the FRL in the budget process to build a track record and bolster credibility of the fiscal anchor.
  - If amendments to the FRL are sought, changes to grant flexibility should be balanced by safeguards that enhance credibility and be communicated carefully.
  - Staff projects a broadly neutral fiscal stance for 2016; recommends some tightening of current primary expenditures to avoid exceeding the FRL’s deficit ceiling by a wider margin while safeguarding needed public investment.
  - Caution is warranted when considering modifications to the fiscal anchor.

### Monetary, exchange rate, and reserve policy
- Monetary policy:
  - Described as moderately accommodative and appropriate given the uncertain international context and contained inflationary pressures.
  - BCP made a 25 basis point interest rate hike in January 2016 to 6 percent; monetary policy remained somewhat accommodative after an easing cycle over March–July 2015.
  - Recommendation: monetary policy, coupled with a flexible exchange rate, should be the principal tool if growth weakens further, within limits of meeting the central bank’s price stability objective.
  - Limiting discretionary foreign exchange market interventions to exceptional circumstances of disorderly market conditions would reinforce the inflation targeting regime.
  - Reforms to deepen interbank markets and improve liquidity management could strengthen monetary policy transmission.
- External position and reserves:
  - Exchange rate and external position assessed as broadly in line with fundamentals.
  - Ample international reserve cover is considered appropriate given openness, dollarization, and vulnerability to shocks.
  - Gross international reserves (millions of U.S. dollars): 2015 = 6,329; 2016 (proj) = 6,360; 2017 (proj) = 6,254.
  - Reserves in months of next-year imports of goods and services: 2015 = 7.1; 2016 (proj) = 6.7; 2017 (proj) = 6.2.

### Financial sector soundness and safeguards
- Financial system assessment:
  - The financial system appears to be sound despite weaker growth and recent bank performance.
  - Given past rapid credit growth, vigilance over potential vulnerabilities remains critical.
- Policy recommendations and supervisory priorities:
  - Reduce still-elevated financial sector dollarization through macroprudential instruments to limit exchange rate risk and potentially curb the need for FX interventions.
  - Closely scrutinize banks’ loan classification practices and provisioning, particularly exposures to the agricultural sector.
  - Strengthen supervision of the cooperative sector.
  - Continue progress toward risk-based supervision; upgrade monitoring and analytical capacity and strengthen institutional arrangements for supervision.

### Structural reforms and governance priorities
- Directors commended progress on the National Development Plan and structural reform agenda.
- Key priorities highlighted:
  - Infrastructure: improving electricity distribution and transportation.
  - Strengthening government transparency, including implementation of the Law of Free Access to Public Information.
  - Strengthening anti-corruption and AML/CFT measures; recent passage of the law on asset declaration was noted positively.
- Implementation constraints and medium-term challenges:
  - Limited implementation capacity and political economy constraints could impede reforms aimed at addressing structural weaknesses, reducing poverty, increasing productivity, and promoting inclusive growth.

### Selected key statistics (as presented)
- Real GDP (annual percent change): 2010 = 13.1; 2011 = 4.3; 2012 = -1.2; 2013 = 14.0; 2014 = 4.7; 2015 = 3.0; 2016 (proj) = 2.9; 2017 (proj) = 3.2.
- Nominal GDP (annual percent change): 2015 = 6.4; 2016 (proj) = 8.1; 2017 (proj) = 6.9.
- Per capita GDP (U.S. dollars, thousands): 2015 = 4.0; 2016 (proj) = 3.8; 2017 (proj) = 3.9.
- Consumer prices (end of period): 2015 = 3.1; 2016 (proj) = 4.5; 2017 (proj) = 4.5.
- Credit to private sector (annual percent change): 2015 = 8.8; 2016 (proj) = 4.6; 2017 (proj) = 5.2.
- Central government net lending/borrowing (percent of GDP): 2015 = -1.7; 2016 (proj) = -2.1; 2017 (proj) = -2.0.
- Central government primary balance (percent of GDP): 2015 = -1.1; 2016 (proj) = -1.3; 2017 (proj) = -0.9.
- Public sector debt (excl. central bank bills, percent of GDP): 2015 = 23.8; 2016 (proj) = 26.5; 2017 (proj) = 27.2.
- Exports (percent of GDP): 2015 = 39.8; 2016 (proj) = 39.6; 2017 (proj) = 39.9.
- Oil imports (percent of GDP): 2015 = -3.2; 2016 (proj) = -2.0; 2017 (proj) = -2.4.
- Current account (percent of GDP): 2015 = -1.8; 2016 (proj) = -1.4; 2017 (proj) = -1.2.
- GDP (US$ billions): 2015 = 28.1.

*Source: PARAGUAY STAFF REPORT FOR THE 2016 ARTICLE IV CONSULTATION*

### 1.7 percent of GDP—marginally above the 1.5 percent ceiling set by the fiscal responsibility law

### 1.7 percent of GDP—marginally above the 1.5 percent ceiling set by the fiscal responsibility law

### Fiscal outcomes and FRL compliance
- Estimated deficit: 1.7 percent of GDP—marginally above the 1.5 percent ceiling set by the fiscal responsibility law (FRL).
- Estimated positive fiscal impulse: 1.2 percent of potential non-agriculture non-energy GDP.
- 2015 budget: approved by congress exceeded the deficit ceiling by 1.3 percentage points of GDP after modifications to the executive’s proposal.
- Adjusted fiscal balance for 2015 (staff estimate), excluding capital expenditure financed by sovereign bonds on a one-off basis: -0.6 percent of GDP.
- Real current primary expenditures estimated growth in 2015: 4.7 percent, exceeding the FRL ceiling of 4 percent on an ex-post basis.
- 2016 budget process:
  - Draft 2016 budget submitted to congress complied with the numerical targets of the law.
  - Final approved version respected the deficit ceiling, but congressional modifications altered the composition of spending.
  - Staff expects real current primary expenditure growth for the central government to be below the FRL ceiling when comparing outcomes for 2015 and 2016, but growth would exceed the 4 percent limit when comparing the approved budget to the 2015 outturn.
- Note on compliance metric: authorities base FRL compliance on the implied growth in current primary expenditures for the public sector in the approved budget for year t+1, relative to the prevailing budget in year t, deflated by the mid-point of the BCP inflation target band—not on fiscal outcomes.

### External position and reserves
- Current account balance in 2015: –1.8 percent of GDP.
- Drivers of external deterioration in 2015: negative terms-of-trade shock, weaker activity in major trading partners (notably, Brazil and Russia), and lower export receipts (particularly from Asia).
- Foreign direct investment growth: about 10 percent through Q3 2015 (staff note: more modest than 10-year average).
- Reserves:
  - BCP reserve position: 23 percent of GDP, covering 7 months of imports.
  - Reserves expected to increase in 2016 partly due to issuance of a US$600 million government bond.
  - Reserves assessed to exceed the IMF’s standard adequacy metric for floating exchange rate economies.
  - Staff view: ample reserve coverage appropriate given openness, significant dollarization, and high vulnerability to weather and commodity price shocks.
- External assessment: currency and external positions assessed as broadly in line with fundamentals given external environment changes; REER depreciation more in line with its ten-year average. EBA-lite estimates present mixed results with poor empirical fit.

### Financial sector, credit growth, and asset quality
- Private sector bank credit growth (local currency terms):
  - Peaked at 29½ percent in May 2015.
  - About 18 percent by February 2016 (Table 6).
- When FX credit is measured in constant January 2014 exchange rates:
  - Growth of total credit to the private sector: 7½ percent in February 2016, down from a recent peak of 22½ percent in March 2015.
- Credit composition:
  - Stagnant FX lending volumes; reduced demand for investment loans in largely dollarized agriculture sector.
  - Local currency lending growth remained strong; changes to credit card regulations appear to have restrained consumer lending.
- Credit quality deterioration:
  - Nonperforming loans (NPLs): 2.9 percent in February 2016.
  - Loan restructuring and refinancing (outside of NPLs): 2.3 percent of total loans.
  - Loan classification relaxations were temporarily granted by the BCP to mitigate shocks in agriculture and livestock sectors.
- Banking system soundness:
  - Most banks posted positive net income in 2015, though profitability measures were mostly below 2014 levels.
  - Higher provisioning expenses reduced profitability but provided ample coverage for NPLs.
  - Reported system-wide tier 1 capital ratio: 11.3 percent (Table 8).
  - Equity-to-asset ratio dipped slightly due to share capital issuance by many banks offsetting rapid asset growth.
  - Relative to the region, Paraguay’s banking sector compares favorably on profitability, capitalization, liquidity, and loan quality.

### Near-term outlook and key projections
- Staff growth forecast:
  - 2016: near 3 percent.
  - 2017: 3¼ percent.
- Alternative forecasts (as of March, 2016):
  - BCP Forecast: 3.2 (2016) and .
  - BCP Survey: 3.0 (2016) and 3.8 (2017).
  - Consensus Forecast: 3.4 (2016) and 3.6 (2017).
  - IMF: 2.9 (2016) and 3.2 (2017).
- Growth drivers and expectations:
  - Agriculture and construction to lead growth.
  - Soy harvest likely to see strong growth given favorable weather and strong yields.
  - Consumption expected to remain solid.
  - Investment in agriculture likely to weaken further due to lower prices and tighter margins.
  - Sound macro fundamentals, favorable demographics, lower oil import costs, and competitive electricity sector support near-term growth.
  - Lower credit demand and tighter credit conditions expected to slow credit growth in 2016.

### Risks to the outlook and resilience
- External downside risks predominate:
  - Further slowdown in Brazil and deeper decline in agricultural commodity prices are major risks.
  - VAR analysis: growth spillovers from Brazil estimated at about ½ to ¾ percentage point on domestic growth for a one percentage point shock to Brazil’s growth; cumulative effect 4 quarters after the shock can range from zero to over 1 percentage point; greatest cumulative effect typically about 3 quarters after the shock.
  - Shocks to the VIX index account for about 11 percent of forecast errors at the four quarter horizon and beyond.
  - Argentina developments present uncertain upside risk.
- Domestic risks:
  - Limited administrative capacity to manage and execute public investments could hamper planned infrastructure build-out and depress growth.
  - Rapid credit growth amid slower activity represents a macrofinancial vulnerability that could interact with external shocks.
- Additional vulnerability channels and magnitudes:
  - Trade openness: total exports and imports around 80 percent of GDP.
  - Exports to Brazil represent around 30 percent of Paraguay's total exports.
  - Exports of agricultural products represent about 30 percent of GDP.
  - Weather-related disruptions can have significant impacts on GDP (up to 4 percent, in some cases).
  - About 45 percent of dollar-denominated debt concentrated in the agricultural sector (natural hedges exist).
  - Foreign equity (mainly from Brazil) represents 2.5 percent of system assets.

### Risk Assessment Matrix — selected policy responses
- Common policy responses to external and financial shocks:
  - Let automatic stabilizers operate.
  - Use the floating exchange rate as the first line of defense; FX intervention could be used to avoid excessive volatility.
  - Let monetary conditions ease, consistent with the IT framework.
  - Accelerate measures that promote diversification.
  - Enact macroprudential measures, including imposing different capital requirements on dollar-denominated loans.
- Domestic policy responses to institutional weaknesses and public investment capacity:
  - Accelerate efforts to address institutional weaknesses and improve transparency.
  - Encourage private sector investment.

*Source: IMF staff report excerpt on Paraguay.*

### 1.  Other  includes  cotton  and  woord.

### _cr16116 - 1.  Other  includes  cotton  and  woord.

### Policy discussions: supporting growth through strengthened policy frameworks
- Discussions focused on structural reform priorities and measures to strengthen fiscal, monetary, and financial sector policy frameworks.
- National Development Plan (NDP) for 2014–30 rests on three axes: (i) poverty reduction and human capital development; (ii) infrastructure and inclusive growth; and (iii) insertion of Paraguay into global value chains.
- Monetary policy remains accommodative; the BCP kept interest rates on hold at its policy meeting at the time of the mission—citing a more complex external environment.
- Steps to reinforce credibility of the inflation targeting regime were discussed.
- Fiscal stance appears broadly neutral in 2016, but tax revenues are likely to be weaker than in the budget; tightening current expenditures would be advisable to avoid exceeding the FRL’s deficit ceiling ex-post by a wider margin.
- Improvements to the medium-term fiscal framework and pension reform were still needed.
- Staff and authorities agreed on the need to prioritize infrastructure investment—particularly transportation and electricity distribution— including through PPPs.

### Structural reforms: laying foundations for durable growth
- NDP priorities and specific programs:
  - Poverty reduction: “Sowing Opportunities” umbrella program (includes Tekopora, Tenondera, Tekoha) and improved targeting via the “Ficha Social” survey.
  - Infrastructure: Improved navigability of the Paraguay-Parana Waterway (dredging), investment in port terminals and key road segments, and improvements to electricity transmission and distribution.
  - Governance and accountability: Law of Free Access to Public Information; online access to public sector payroll and some asset declarations; internal scorecards (“Tablero de control”); merit-based selection processes in 96 institutions (up from 24 in 2013).
- Identified bottlenecks constraining productive capacity:
  - Deficiencies in transportation and electricity distribution.
  - Despite Itaipu (shared with Brazil), hydro power represents less than 20 percent of domestic energy consumption.

### Fiscal policy: balancing credibility and flexibility
- Assessment of the Fiscal Responsibility Law (FRL):
  - FRL came into force in 2015; introduced numerical targets, medium-term budgeting elements, and greater transparency.
  - Implementation and design issues: legal ambiguity with annual budget laws; concern that the comparatively low deficit ceiling may constrain capital expenditure despite infrastructure needs; limited escape clauses may limit countercyclical policy space.
  - Staff favored retaining the current deficit rule and establishing a solid track record of compliance, while analyzing alternatives.
- Fiscal outcomes and projections:
  - Staff projects that the deficit will increase to around 2 percent of GDP in 2016, implying a broadly neutral fiscal stance.
  - Table/excerpted fiscal numbers (as presented):
    - 2015 Est. Approved Budget
    - Total Revenue18.118.020.1
    - Expense 17.317.318.4
    - Net Acquisition of non-financial Assets2.62.73.3
    - Net lending/Borrowing -1.7-2.1-1.5
    - Net lending/Borrowing (excl. bond financed capital expenditures)  1 -0.6......
    - Real current primary expenditure growth (percent change), Staff 2 4.72.28.2
    - Real current primary expenditure growth (percent change), Authorities 3 6.2...-2.5
    - Memo items:
      - Nominal GDP, G$ bn.146,566158,409162,819
      - Current primary expenditure (Central Government), G$ bn22,38524,04025,433
  - Note: Article 241 of the 2015 budget law (Ley 5.386/15) states that capital expenditure financed by sovereign bonds can be excluded from the calculation of the deficit ceiling in the FRL.
- Recommendations to preserve credibility if changing the fiscal anchor:
  - Follow a balanced approach to avoid perceptions of dilution of the FRL.
  - Accompany any modification with concrete measures to strengthen fiscal institutions and preserve sustainability (for example, correction mechanisms, strengthened sanctions/enforcement, improved public investment management, and better public accounting).
  - If adopting a “golden rule” (excluding public investment from the deficit ceiling), add a debt ceiling and retain the current expenditure rule to mitigate risks to sustainability.
  - Transition to a new fiscal anchor must be carefully managed and communicated; establishing a longer track record of compliance is preferable to changing the rule immediately.
- On fiscal institutions:
  - Authorities are considering introducing an independent fiscal council to provide non-partisan evaluation of fiscal policy and to evaluate fiscal forecasts undertaken by the Ministry of Finance.
  - International experience suggests that mere establishment of a fiscal council does not guarantee stronger fiscal performance; successful councils require independence, adequate staffing, and media impact.

### Medium-term fiscal framework and revenue mobilization
- Authorities’ three year fiscal plan (with the 2016 Budget) envisages gradual fiscal consolidation via modest increases in tax revenues and significant reductions in grants and fixed investment.
- Staff recommendations and observations:
  - Base broadening measures (e.g., recent extension of the VAT to cooperatives) are welcome; more can be done to mobilize fiscal revenues.
  - The revenue authority (SET) has improved institutional frameworks, taxpayer registries, and administrative capacity, but challenges in tax compliance and enforcement remain.
  - Compensation of employees is a relatively large share of total fiscal expenditures compared to regional peers; civil service reform could create fiscal space for public investment.

### Box 2 — Paraguay: A Balancing Act: Reform Options for Paraguay’s FRL (key points)
- FRL achievements and issues:
  - Achieved greater transparency and introduced medium-term budgeting.
  - Legal ambiguity with annual budget laws; 2015 budget law excluded capital expenditure financed by sovereign bonds from the deficit ceiling.
  - Concerns that the deficit ceiling may constrain capital expenditure and limit countercyclical policy space.
- Alternatives considered: “golden rule” (exclude public investment), increase headline ceiling, move to a structural balance rule, or change to an expenditure rule.
- Staff analysis:
  - Golden rule associated with highest debt levels in staff simulations; if adopted, strict adherence to current expenditure rule and addition of a debt ceiling would be crucial.
  - Improvements needed in public investment management efficiency and public accounting to ensure correct classification of capital expenditures.
  - Raising the headline deficit ceiling should be paired with stronger budgetary process provisions on sanctions and enforcement.
  - Removing the deficit ceiling and keeping an expenditure rule could compromise debt sustainability without a debt ceiling.
- Conclusion: Caution warranted; modifications should be accompanied by safeguards, strengthened legal and institutional frameworks, explicit correction mechanisms, clearer sanctions/enforcement, and careful stakeholder engagement.

*Source: _cr16116 - 1.  Other  includes  cotton  and  woord.*

### 24.      The mission also encouraged authorities to monitor and mitigate fiscal risks associated

### _cr16116 - 24.      The mission also encouraged authorities to monitor and mitigate fiscal risks associated

### Fiscal risks from public private partnerships (PPPs)
- Projects already in the pipeline under this modality would amount to close to 2.5 percent of GDP.
- Paraguay’s PPP framework is relatively recent and the authorities have limited experience with implementation.
- Staff urged authorities to:
  - accelerate efforts to quantify and mitigate fiscal risks arising from contingent liabilities;
  - closely monitor project selection and implementation to ensure investment efforts are efficiently translated into a higher public capital stock.

### Recent revenue collection measures and tax administration progress
- Broadening of the tax base:
  - Introduction of PIT (2013) and income tax on the agricultural sector or IRAGRO (2014).
  - Extension of VAT to cooperatives (2016).
- Strengthening of tax collection:
  - Improvements in taxpayers’ registry.
  - Organizational improvements in the tax revenue authority (SET).
  - Progress on elaboration of new audit and enforcement strategies.
- Customs administration:
  - Strong information and communications technology (ICT) systems are already in place.
- Staff policy recommendations for tax revenue administration and customs:
  - Strengthen legal procedures for imposing sanctions on tax evasion.
  - Enhance legal mechanism to address revenue authority’s staff corruption.
  - Streamline procedures for registering taxpayers and policies for authorizing invoices.
  - Improve filing procedures to increase compliance.
  - Enhance rules-based control procedures and transparency as well as better risk management for customs.
  - Develop and implement the single-window system and move towards fully electronic records.
  - Revisit administrative budget of the customs authority (DNA) to ensure enough resources for investment in infrastructure.
- Fiscal forecasts and revenue implications:
  - Authorities’ estimates: this extension is expected to yield additional revenues in the order of 0.2 percentage points of GDP.
  - Staff’s medium-term fiscal forecast incorporates reforms in revenue administration and base broadening measures that could lead to an improvement in the tax revenue to GDP ratio of close to 1 percentage point.

### Pension system challenges and recommendations
- Current system characteristics and risks:
  - Paraguay’s fragmented and unregulated pension funds do not effectively mobilize national saving to finance investment or help develop local capital markets.
  - Actuarial and operational deficits pose substantial risks to public finances through contingent liabilities.
  - Given high levels of informality, coverage is estimated to be very low.
  - Currently, most pension fund resources are simply held as deposits in the banking system, in part because of a lack of legal clarity regarding alternative investment options.
- Structural details and quantitative indicators:
  - The system comprises eight defined-benefit funds with independent administrative structures, the largest of which are the Instituto de Prevision Social (IPS) (serving private sector workers through mandatory contributions) and Caja Fiscal (which focuses on civil servants).
  - The actuarial study for IPS indicates that it could face operational imbalances as early as 2032.
  - Authorities estimate that the present value of the actuarial deficit of the Caja fiscal fund would amount to between 40 to 50 percent of GDP.
  - Among the remaining smaller pension funds, Caja Itaipu and Caja Ande also present actuarial deficits that combined would amount to close to 4 percent of GDP.
- Staff recommendations and authorities’ stance:
  - Enact the draft law creating a pension regulator and expand portfolio management options for pension funds.
  - Additional efforts needed to address long-term financial sustainability concerns, including parametric reform.
  - Authorities broadly shared the assessment but noted entrenched interests in the pension industry impede reforms.
  - Authorities opted for a gradual approach: approval of legislation creating the pensions regulator through congress as an important first step, with subsequent policy measures to address longer term sustainability concerns to be contemplated later.

### Fiscal policy stance and civil service reform
- Authorities recognize staff-identified fiscal challenges and remain committed to initiatives despite political economy constraints.
- Civil service reform:
  - Authorities are working on amending the Civil Service act with support from the United Nations Development Program (UNDP) to build on changes initiated with the introduction of the new salary scale in 2015.
- Tax revenue mobilization:
  - The government will continue to pursue efforts to enhance domestic tax revenue mobilization with technical assistance support from the IMF.
  - Authorities pointed to recent successes in combating and dismantling large tax evasion schemes.
- PPPs and contingent liabilities:
  - Authorities acknowledged their limited experience in the management of PPPs and are requesting further technical assistance in quantifying and mitigating risks from contingent liabilities associated with these projects.

### Monetary and exchange rate policy: reinforcing the inflation targeting regime
- Policy rate and stance:
  - The policy rate was maintained at 6 percent through March.
  - Staff assesses the monetary stance as still accommodative considering that the policy rate remains at the lower end of its historical range and is slightly below the BCP’s estimate of the neutral rate.
  - Staff expects inflation to decline to the mid-point of the target range over the course of 2016.
- Operational improvements:
  - During 2015, the interest rate corridor around the monetary policy rate (MPR) was narrowed by lifting the floor to 5.5 percent.
  - The central bank increased issuance of monetary regulation instruments (IRMs), used for repos, and reduced the rejection rate of bids to steer the overnight rate above the floor of the corridor towards the MPR.
- Recommendations to reinforce the framework:
  - Further develop interbank markets to improve monetary policy operations and strengthen the policy transmission mechanism through the MPR.
  - Widen the set of private counterparties (beyond banks) who can trade short-term liquidity instruments.
  - Further discourage the use of the overnight facility where banks allocate their excessive reserves.
  - Improve liquidity analysis and forecasting including of the impact of foreign exchange intervention.
  - Gradually promote de-dollarization, including considering macro-prudential measures that introduce differential requirements for dollar loans and deposits.
- Foreign exchange intervention guidance:
  - Large FX interventions can interact with regular monetary policy operations and objectives.
  - In September 2015, the BCP conducted discretionary interventions to support the guaraní in response to high market volatility, in addition to regular pre-announced sales of dollars associated with the sterilization of government receipts.
  - Staff recommended limiting interventions in the foreign exchange markets to exceptional circumstances (discretionary interventions should be limited to countering possible disorderly market conditions).
  - To reinforce interest rate primacy, the BCP should maintain predictable, rules-based dollar sales of government receipts avoiding frequent adjustments to the amounts to be sold and temporary suspensions.
  - Clear communication of the central bank’s approach to discretionary intervention may help reinforce the primacy of the inflation-targeting regime and reassure markets.
  - Developing a liquid FX market is important for a floating exchange rate regime; avoiding frequent regulatory changes and tight limits on FX operating positions would be helpful.
- Authorities’ view:
  - The BCP agreed on objectives to improve the monetary framework, interbank markets and liquidity forecasting.
  - The central bank stressed it does not target an exchange rate level in its FX interventions, noting the exchange rate depreciated by about 25 percent against the U.S. dollar in 2015.
  - The BCP characterized discretionary interventions as responses to exceptional situations of excessive market volatility.

### Financial sector policy: containing potential risks
- Credit growth and assessment:
  - Paraguay experienced a striking 26½ percent annual average growth in private sector credit over the past decade.
  - Paraguay's 2015 private credit growth was 22.9 percent.
  - Staff notes that while much of the growth reflects improved financial stability and structural factors, in 2015 lending might be running ahead of fundamentals; credit gap estimates have turned strongly positive in recent quarters.
- System characteristics containing risk:
  - Assets and liabilities are split roughly evenly between local and foreign currency denominations, reducing potential for currency mismatches.
  - Natural hedges are broadly evident in sectors that borrowed in FX; modest shares of borrowers reported lacking income in the currency of the loan.
  - Liquidity risks are relevant given banks’ heavy reliance on short-term funding sources, reflected in high-interest margins and a relatively small interbank market; large liquid asset holdings could provide safeguards.
- Strengthening supervision and regulation:
  - Legislation: A draft banking law would grant additional powers to the BCP and facilitate the revised regulatory framework; authorities indicated passage was a priority and expressed optimism that congressional approval could happen this year.
  - Capacity building: The Superintendence of Banks has been receiving technical assistance to better track credit, market, and liquidity risks; assess bank risk profiles; and improve stress testing. Additional resources for staffing and information technology may be necessary.
  - Financial stability council: Plans to introduce a consultative Council of Financial Stability composed of a high-level committee with the heads of the BCP, Ministry of Finance, and INCOOP, and supporting subcommittees for microsupervision, macro-financial stability, and crisis preparedness.
- Vigilance on credit quality and borrower distress:
  - Future shocks (e.g., weather-related) could compound vulnerabilities and boost nonperforming loans.
  - Loan renegotiations aided by BCP’s temporary relaxation of regulations may have provided relief.
  - Staff recommended tracking a broader measure of borrower distress composed of nonperforming loans as well as refinanced and restructured loans.
  - Authorities plan to strengthen risk assessment through systemic stress testing in the context of the financial stability council’s work.
- Macroprudential options:
  - To encourage gradual de-dollarization and reduce currency mismatch risk: consider differentiated risk weightings or provisioning requirements for FX exposures.
  - For deposits: mitigate FX risks by further raising already higher reserve requirements.
  - Address potential vulnerabilities from rapid credit growth by introducing regulations related to loan-to-value measures.
  - Authorities are working on an ongoing project to construct appropriate liquidity ratios for supervised institutions.
- Areas needing closer oversight and data improvements:
  - Cooperatives:
    - Sector reported assets of around 8 percent of GDP as of August 2015.
    - Showed higher rates of credit impairment relative to banks (8.6 percent in the largest cooperatives).
    - Credit unions’ accounting characteristics make it difficult to assess capital adequacy.
    - Authorities continue a project to introduce deposit insurance, which should lead to verifying institutions’ health before joining the deposit guarantee fund.
  - Consumer and corporate lending risks and other credit intermediaries:
    - Ongoing projects, including the Credit Registry, could be leveraged to provide a wider range of indicators to assess household and business sector risks.
    - Increasing use of alternative credit intermediaries operating outside the regulatory perimeter warrants close monitoring due to concerns over consumer protection and risk shifting.
  - Real estate markets:
    - Reports indicated elevated commercial real estate prices, but decreasing agricultural real estate prices.
    - Staff advised addressing data limitations that prevent a full assessment of property valuations, rents, and occupancy rates, given widespread use of real estate to secure loans.
- Authorities’ perspective:
  - Authorities concurred with the need for close financial sector vigilance but viewed rapid credit growth as a lesser risk than staff.
  - They considered continued rapid local currency growth reflective of relative resilience, while FX lending growth was seen as distorted by valuation effects.
  - The banking law’s passage is viewed as broadening the ability to introduce macroprudential measures.
  - Authorities prioritized identifying an appropriate liquidity ratio measure and were open to differentiating risk weights or provisioning requirements; reserve requirements appeared of less relevance to them.
  - On institutional and information sharing agreements, authorities emphasized existing cooperation without the need for formal processes and a consultative process on the draft new banking legislation.

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

### 40.      Authorities have advanced their structural reform agenda in several areas and

### 40.      Authorities have advanced their structural reform agenda in several areas and important steps have been taken to strengthen transparency and governance.

### Structural reforms and governance
- Progress tracked through internal scorecards measuring delivery of final goods or services toward meeting social objectives.
- Priority infrastructure areas: improving electricity distribution and transportation.
- Implementation of the Law of Free Access to Public Information has:
  - Established greater transparency in public processes.
  - Increased engagement with civil society.
  - Been identified as an important step to improve the quality of institutions in Paraguay on a lasting basis.

### Monetary policy and external position
- Monetary policy remains appropriately accommodative given the uncertain international context and contained inflationary pressures.
- Staff expects inflation to decline to the mid-point of the inflation target range by the end of 2016.
- Current account balance is projected to remain in deficit due to:
  - Lower commodity export prices.
  - Weaker economic activity in trading partners weighing on export performance.
- Assessment: currency and external position broadly in line with fundamentals, given changes in the external environment.
- Reserves:
  - Remain broadly adequate.
  - Exceed the IMF’s standard adequacy metric for floating exchange rate economies.
  - Ample reserve coverage is appropriate given: economy’s openness, significant dollarization, and high vulnerability to weather and commodity price shocks.

### Fiscal framework and fiscal responsibility law (FRL)
- Clear signs of increased effectiveness of the fiscal responsibility law, but important that its ceilings are fully internalized in the budget process to:
  - Establish a track record.
  - Solidify the credibility of the fiscal framework.
- 2016 outlook:
  - Tax revenues are likely to be weaker than expected in the budget.
  - Investment expenditure is expected to be under executed due to persistent implementation capacity constraints.
  - Staff projects a broadly neutral fiscal stance for the year (although the fiscal deficit will exceed the FRL limit).
- Policy recommendation:
  - Tightening current primary expenditures would be advisable to avoid exceeding the FRL’s deficit ceiling by a wider margin, while safeguarding public investment.
- On amendments to the FRL:
  - Caution warranted given potentially important reputational costs and the short track record of compliance.
  - If amendments are sought, follow a balanced approach and accompany modifications that make rules more flexible with safeguards that enhance the credibility of the fiscal anchor.
  - Transition management: changes to the fiscal anchor should be managed and communicated carefully and accompanied by concrete measures to strengthen fiscal institutions and preserve public finance sustainability.
  - Operational improvement: introduce explicit correction mechanisms to address deviations from the fiscal rules, as well as a path back to compliance.

### Monetary policy tools and market development
- Monetary policy coupled with a flexible exchange rate should be the principal tool if growth weakens further, within limits of meeting the central bank’s price stability objective.
- Reforms to reinforce monetary policy effectiveness:
  - Create conditions for expansion of interbank and secondary markets to improve transmission of monetary operations.
  - Limit foreign exchange market interventions to exceptional circumstances to reinforce the primacy of the inflation-targeting regime and reassure markets.

### Financial sector supervision and stability
- Financial system appears to be sound.
- Authorities progressing on enhancing financial supervision, including introducing legislation to strengthen risk-based supervision.
- Progress includes developing monitoring tools and strengthening capacity to monitor credit and liquidity risk.
- Key priorities going forward:
  - Continue upgrading monitoring and analytical capacity.
  - Strengthen institutional arrangements.
  - Ensure adequate resources to perform supervisory functions.

### Macroprudential measures and dollarization
- Actions to contain market, liquidity and credit risks in challenging external conditions:
  - Reduce still-elevated financial sector dollarization gradually, including through macroprudential instruments (such as raising capital and provisioning requirements for foreign currency loans).
  - Gradual reduction of dollarization could help limit financial risks from exchange rate fluctuations and possibly curb the need for foreign exchange interventions.
  - Heightened scrutiny of banks’ loan classification and provisioning to ensure stronger buffers against somewhat weaker credit quality.
  - Strengthen supervisor of the cooperative sector.

### Anti-corruption and AML/CFT
- Authorities continue to strengthen anti-corruption and AML/CFT measures to improve the business climate.
- Recent developments:
  - Passage of laws on freedom of information and asset declaration noted as positive.
- Recommendations:
  - Robust use of AML/CFT tools related to politically exposed persons and suspicious transaction reporting to support efforts to address corruption risks.
  - Authorities encouraged to progress on amendments to the AML/CFT law in line with international standards.

*PARAGUAY 24 INTERNATIONAL MONETARY FUND*

### 48.      It is recommended that the next Article IV consultation be held on the standard 12-

### _cr16116 - 48.      It is recommended that the next Article IV consultation be held on the standard 12-

### Real sector: developments, output, inflation, and labor markets
- Growth moderated in 2015 but remained positive and "still buoyed by relatively strong domestic demand."
- Economy is "still slightly above potential."
- Real GDP growth (selected series from Table 1):
  - 2010: 13.1
  - 2011: 4.3
  - 2012: -1.2
  - 2013: 14.0
  - 2014: 4.7
  - 2015 (Est.): 3.0
  - 2016 (Proj.): 2.9
  - 2017 (Proj.): 3.2
- Core GDP (excludes agriculture, livestock and forestry as well as energy and water) and Core GDP growth tracked above agricultural/energy volatility in the period shown.
- Headline inflation was above the 4.5 percent target midpoint but within the target range as of Mar-16.
- Consumer prices (end of period):
  - 2010: 7.2
  - 2011: 4.9
  - 2012: 4.0
  - 2013: 3.7
  - 2014: 4.2
  - 2015 (Est.): 3.1
  - 2016 (Proj.): 4.5
  - 2017 (Proj.): 4.5
- Labor market remained "robust" with continued real wage growth; unemployment rate (2014): 6.0, under-employment and unemployment exhibited improvement through 2015-Q4.

### Monetary developments and exchange rates
- Inflation expectations remained anchored; actual and expected inflation series plotted against target range.
- Central bank policy: BCP has "only partly reversed its easing" and altered the interest rate corridor to improve monetary policy efficiency.
- Interest rate pass-through (April 2011–January 2016) shows incomplete transmission: regression reported as y = 0.16x + 0.07 (change over 3-month period, in percentage points).
- Dollarization: high shares of foreign currency loans and deposits; dollarization of loans and deposits series plotted (in percent of total, computed at constant Nov. 2014 exchange rate).
- Monetary aggregates (year/year percent):
  - Currency in circulation, M2, and credit to the private sector series shown; credit rapid expansion slowed from its peak earlier in the year.
- Exchange rate and FX intervention:
  - Periodic rises in volatility increased FX market intervention; guarani depreciated in 2015.
  - Volatility measured as rolling 15-day std. dev. of exchange rate changes reported for 2014–2016.

### Fiscal sector: balances, composition, debt, and projections
- Central government switched into deficit in 2012 after a period of fiscal surpluses.
- Accelerated spending execution in 2015 and lower-than-expected tax revenue widened the headline deficit.
- Central government net lending/borrowing (GFSM 2001, percent of GDP):
  - 2010: 1.3
  - 2011: 1.0
  - 2012: -1.7
  - 2013: -1.7
  - 2014: -1.1
  - 2015: -1.7
  - 2016 (Est.): -2.1
  - 2017 (Proj.): -2.0
- Central government primary balance (GFSM 2001, percent of GDP):
  - 2010: 1.7
  - 2011: 1.3
  - 2012: -1.4
  - 2013: -1.4
  - 2014: -0.7
  - 2015: -1.1
  - 2016 (Est.): -1.3
  - 2017 (Proj.): -0.9
- Staff expects the fiscal stance to be tightened over the medium term.
- Public sector debt (excl. central bank bills, percent of GDP):
  - 2010: 15.6
  - 2011: 13.0
  - 2012: 16.2
  - 2013: 17.0
  - 2014: 20.2
  - 2015: 23.8
  - 2016 (Est.): 26.5
  - 2017 (Proj.): 27.2
- Revenue structure (2014 medians and comparisons):
  - Paraguay's tax revenue is modest by international standards and tilted toward indirect taxes.
  - Expenditure structure shows wages account for an outsized share of expenditure; Compensation of employees notable share.

### External sector: trade, current account, reserves, and financing
- Current account deficit widened in 2015, driven by slowdown in commodity exports and re-exports and lower soy prices.
- Current account (in millions of U.S. dollars, Table 4):
  - 2011: 110
  - 2012: -50
  - 2013: 1478
  - 2014: -127
  - 2015 (Est.): -512
  - 2016 (Proj.): -363
  - 2017 (Proj.): -322
- Trade balance (millions of U.S. dollars):
  - 2015 (Est.): 906
  - 2016 (Proj.): 1,017
- Exports (fob, millions of U.S. dollars):
  - 2014: 13,105
  - 2015 (Est.): 11,189
  - 2016 (Proj.): 10,614
- Soy is Paraguay's main export product; soy export values and series shown:
  - Soy figures in exports: 2014: 2,425 (of which soy), 2015: 1,766, 2016 (Proj.): 1,723
- Gross international reserves (millions of U.S. dollars):
  - 2011: 4,984
  - 2012: 4,994
  - 2013: 5,871
  - 2014: 6,891
  - 2015 (Est.): 6,329
  - 2016 (Proj.): 6,360
- Reserve adequacy:
  - Reserves somewhat exceed the typical adequacy range, but "less so than in other partially dollarized economies in the region."
  - Adequacy metrics plotted: 100% of short-term debt, 3 months of imports, IMF's reserve adequacy metric (100%-150%).

### Financial system: structure, soundness, and vulnerabilities
- Financial system is dominated by commercial banks; banking system concentrated with foreign banks having substantial presence.
  - Banking system assets at December 2015: Two largest foreign banks 28%, Two largest domestic banks 32%, State-owned 6%, Other foreign banks 14%, Other domestic banks 20%.
- Balance sheets are heavily dollarized: FX loans/total loans around 49.5 percent (2015 data), FX liabilities/total liabilities around 49.6 percent (2015).
- Financial soundness indicators (selected, latest observations):
  - Return on Assets: 2.4 (2013), 2.4 (2014), 2.3 (2015)
  - Tier 1 capital/risk-weighted assets: 11.1 (2013), 11.2 (2014), 11.3 (2015)
  - NPLs/total loans: 2.0 (2013), 1.8 (2014), 2.5 (2015)
  - Provisions/NPLs: 135.7 (2013), 135.0 (2014), 116.5 (2015)
- Recent deterioration: loan quality deteriorated a bit and profitability declined, reflecting added provisioning expenses, while net interest margins remain high.
- Financial deepening and credit:
  - Credit to the private sector (percent of GDP) and growth series shown; credit expanded rapidly over the past decade but slowed from peak earlier in the year.
  - Credit composition: significant share directed to agriculture and livestock.

### Long-term growth, social outcomes, and structural weaknesses
- Over the last 35 years Paraguay "has fallen behind its peers in terms of GDP per capita" but "has been catching up" more recently with improvements in many areas.
- GDP per capita (PPP-adjusted, 1980–2015 chart) shows Paraguay below several peers; Gini coefficient (1998–2012) and poverty rate (2006–2013) both show improvements:
  - Gini index (2014): 48.0
  - Percentage of population below the poverty line (2014): 22.6
- Structural weaknesses noted: relatively poor property rights, low quality of infrastructure and electricity supply, low levels of quality of education and health.
- Improvements reported in Global Competitiveness percentile rankings for property rights, infrastructure, electricity, health, and education in 2006–14.

### Credit developments and sectoral allocation
- Credit growth was strong across most sectors; a recent credit card law may have slowed consumer credit growth.
- Credit to the private sector (Table 6 monetary survey; percent change and levels):
  - Credit to the private sector (annual percent change series in multiple tables): 37.9 (2010), 25.6 (2011), 15.8 (2012), 19.4 (2013), 19.9 (2014), 8.8 (2015)
  - Credit to the private sector (percent of GDP, Table 7 memorandum): increased over the decade and now "in line with peers with similar levels of per-capita income."
- Sectoral distribution of credit (Dec. 2015):
  - Agriculture and livestock: ~24.4 percent of total
  - Industry: ~10.0 percent
  - Wholesale, retail, & services: ~15.0 percent
  - Consumption: ~13.7 percent
  - Financial sector and export credit: ~8.7 percent

### Selected baseline projections and medium-term outlook (tables and projections)
- Medium-term macro projections (Table 9, selected):
  - Real GDP growth (in percent): 2016: 2.9, 2017: 3.2, 2018: 3.5, 2019: 3.7, 2020: 3.9, 2021: 4.0
  - Consumer prices (end of period): 2016–2021: 4.5 (each year)
  - Central government primary balance (percent of GDP): 2016: -1.3, 2017: -0.9, 2018: -0.5, 2019: -0.2, 2020: 0.1, 2021: 0.3
  - Central government net lending/borrowing (percent of GDP): 2016: -2.1, 2017: -2.0, 2018: -1.8, 2019: -1.8, 2020: -1.7, 2021: -1.5
  - Central government debt (percent of GDP): 2016: 20.9, 2017: 21.8, 2018: 23.0, 2019: 23.9, 2020: 24.9, 2021: 25.5
  - Public sector debt (percent of GDP): 2016: 26.5, 2017: 27.2, 2018: 28.1, 2019: 28.8, 2020: 29.5, 2021: 29.9
  - Current account (percent of GDP): 2016: -1.4, 2017: -1.2, 2018: -0.9, 2019: -0.8, 2020: -0.7, 2021: -0.5
  - Gross international reserves (US$ billion): 2016: 6.4, 2017: 6.5, 2018: 6.8, 2019: 7.1
- Tables present detailed fiscal (Tables 2–3), balance of payments (Table 4), central bank accounts (Table 5), financial system accounts (Table 6), indicators of external vulnerability (Table 7), financial soundness indicators (Table 8), and medium-term outlook (Table 9).

### Key issues highlighted and policy implications (as presented)
- Fiscal policy: need to tighten fiscal stance over the medium term to address the widening headline deficit and rising public debt.
- Monetary policy and transmission: strengthen framework to improve monetary policy transmission and efficiency of the interest rate corridor; partial reversal of easing to date.
- De-dollarization: a stronger framework to improve monetary policy transmission may help encourage gradual de-dollarization in the banking sector, which currently reports large shares of foreign currency loans and deposits.
- Financial stability: monitor rising provisioning expenses and recent deterioration in loan quality and profitability; maintain adequate capitalization and liquidity in the banking system.
- External resilience: maintain reserve buffers given the current account deficit widening and exposure to commodity price shocks (notably soy).

*Source: IMF staff calculations and country authorities data presented in the IMF staff report excerpt.*

### Annex I. Implementation of Past Fund Policy Advice

### _cr16116 - Annex I. Implementation of Past Fund Policy Advice

### Implementation of Past Fund Policy Advice
- Directors commended authorities’ efforts in increasing tax collection and recommended extending these to achieve lasting improvements in public services.
- Authorities’ actions and IMF-supported technical measures:
  - Extension of the VAT to cooperatives.
  - Strengthening institutional frameworks at the tax revenue authority (SET).
  - SET undertook significant organizational improvements and advanced in the elaboration of new audit and enforcement strategies.
  - SET enhanced taxpayers’ registries and implemented online collection through bank and other similar entities.
- Fiscal policy:
  - Directors noted the need for a stronger budget process and a prudent medium-term fiscal plan incorporating some buffer against adverse shocks.
  - Signs of increased effectiveness of the fiscal responsibility law; draft 2016 budget submitted to congress complied with the numerical targets of the law.
  - Final approved budget respected the deficit ceiling but congressional modifications altered composition of spending.
  - Over the medium-term, authorities’ plans fully conform to the numerical targets.
- Monetary and exchange rate policy:
  - Directors recommended further enhancing the effectiveness of the inflation targeting regime.
  - During 2015, the interest rate corridor around the monetary policy rate (MPR) was narrowed to establish the policy rate as the main anchor.
  - The monetary authority increased issuance of monetary regulation instruments (IRMs), used for repos, and reduced the rejection rate of bids to steer the overnight rate above the floor of the corridor towards the MPR.
- Financial sector policy:
  - Directors argued that revision of central bank and banking laws is essential to put risk-based regulation and supervision on a robust legal basis.
  - A draft banking law has been presented to congress and is under review; legislation would grant additional powers to the BCP and facilitate risk-based supervision.
- Transparency:
  - Authorities consented to publication of the mission’s concluding statement and arranged a press conference.

### External Assessment — Overall and External Position
- Net international investment position (NIIP):
  - Paraguay's NIIP has hovered around -40 percent of GDP over the last 5 years.
  - Negative FDI position reflects large inflows in agriculture sector and maquila-related businesses; more recently construction sector attracted FDI.
  - Negative net asset position related to loans due to large projects financed by multinationals and government bond issuance on international markets.
- External debt and sustainability:
  - Gross external debt rose from about 55 percent to about 59 percent of GDP in the last couple of years, driven by multilateral loans and bonds component.
  - Assessment: external debt position remains sustainable under a range of adverse shocks.
  - The external position and the exchange rate are broadly consistent with medium-term fundamentals; external debt position does not raise concerns of sustainability.

### Current Account
- Background:
  - Paraguay's current account averaged 0.4 percent of GDP over the past 20 years.
  - In recent years balance turned negative mainly due to low agricultural commodity prices.
  - Projected to remain in deficit over the medium term as commodity prices are not expected to recover and fuel import prices will increase starting in 2017.
  - National savings stable as share of GDP; investment decreased in the last 2 years due to low prospects in commodity production sectors.
- Assessment and projections:
  - The current account is estimated to have reached -1.8 percent of GDP in 2015, the largest imbalance since 2012.
  - The current account is projected to remain in negative balance moving towards -0.5 percent in the medium term, below its 20-year average current account balance (0.4 percent), mainly due to permanently lower commodity export prices and reverting import prices.

### Real Exchange Rate and Competitiveness
- Background:
  - Paraguay's real effective exchange rate (REER) is highly correlated with commodity prices.
  - Amidst lower commodity export prices and a negative terms-of-trade shock, the REER depreciated by 5 percent during 2015, primarily reflecting nominal depreciation.
  - Inflation remained tame during 2015, with exception of December as import prices remained low.
- Assessment:
  - The EBA approach delivered inconclusive and mixed results on the equilibrium REER.
  - Staff sees the rate moving in line with fundamentals, with adjustment smoothed by BCP interventions.

### Capital and Financial Accounts
- Background:
  - Current account deficit financed by FDI and external loans, with multilaterals playing an important role.
  - Government increased international market access with two bond placements in 2015 and a placement of USD 600 million in the current year.
- Assessment:
  - Paraguay has a fully open capital and financial account but financial markets are not deep or developed yet.
  - Despite regional adverse conditions, Paraguay enjoyed stable FDI flows.
  - Vulnerabilities from regional financial market linkages are limited, with foreign asset holdings below 1 percent of total financial system assets.

### FX Intervention and Reserves
- Background:
  - During Fall 2015, in addition to regular sales of government dollar receipts, the BCP enacted discretionary interventions; reserves dropped by over USD 500 million.
- Assessment:
  - Reserves remain ample at 7 months of imports and above the Fund metrics for a small open economy.
  - A flexible exchange rate is the first line of defense against external shocks.
  - Staff recommendation: continue rules-based approach for regular dollar sales and limit discretionary interventions to exceptional situations of disorderly market conditions.

### Annex II — External Debt Sustainability Framework (selected figures)
- Baseline external debt (in percent of GDP), selected years:
  - 2010: 78.8
  - 2011: 62.2
  - 2012: 65.3
  - 2013: 55.2
  - 2014: 54.9
  - 2015: 59.2
  - 2016: 64.9
  - 2017: 62.2
  - 2018: 58.8
  - 2019: 55.2
  - 2020: 51.7
  - 2021: 48.4
- Identified external debt-creating flows (aggregate) for projection years include values such as -0.7, -1.4, -2.0, -2.3, -2.4, -2.4, -2.3 (presented in the table).
- Current account deficit, excluding interest payments (percent of GDP), selected years:
  - 2010: -3.2
  - 2011: -3.1
  - 2012: -0.5
  - 2013: -3.6
  - 2014: -1.5
  - 2015: -0.3
  - 2016: -1.1
  - 2017: -1.6
  - 2018: -2.0
  - 2019: -2.3
  - 2020: -2.5
  - 2021: -2.6
- Exports and imports (percent of GDP), selected years:
  - Exports 2014: 45.3; 2015: 42.9; 2016: 42.7; 2017: 43.1; 2018: 43.3; 2019: 43.4; 2020: 43.1; 2021: 42.8
  - Imports 2014: 42.7; 2015: 40.7; 2016: 40.0; 2017: 41.0; 2018: 41.0; 2019: 40.9; 2020: 40.7; 2021: 40.4
- External debt-to-exports ratio (in percent), selected years:
  - 2010: 141.9
  - 2011: 116.8
  - 2012: 129.4
  - 2013: 110.6
  - 2014: 121.0
  - 2015: 137.9
  - 2016: 152.1
  - 2017: 144.5
  - 2018: 135.7
  - 2019: 127.1
  - 2020: 119.8
  - 2021: 113.0
- Gross external financing need (in billions of US dollars), selected years and percent of GDP:
  - Reported sequence: 0.8, 0.6, 1.3, 0.3, 0.9, 1.2, 1.1, 1.0, 1.0, 0.9, 0.9, 1.0 (table formatting preserved as presented).

### Annex III — External Stability and Bound Tests
- Figure summary:
  - Bound tests present scenarios including interest rate shock, CA shock, combined shock, and real depreciation shock.
  - Baseline external debt level cited as 52 (in chart context) with scenarios showing increases under shocks (examples: CA shock 64; combined shock 63; 30% depreciation combined shock 70).
  - Gross financing need under baseline shown on right scale in the figure.

### Annex IV — Public Sector Debt Sustainability Analysis (selected figures)
- Nominal gross public debt (percent of GDP), selected years:
  - 2014: 18.4
  - 2015: 20.2
  - 2016: 23.8
  - 2017: 26.5
  - 2018: 27.2
  - 2019: 28.1
  - 2020: 28.8
  - 2021: 29.5
  - 2021 (alternate): 29.9 (table lists both 29.5 and 29.9 in sequence)
- Public gross financing needs (percent of GDP), selected years:
  - 2014: 0.9
  - 2015: 1.7
  - 2016: 3.4
  - 2017: 3.6
  - 2018: 3.2
  - 2019: 2.6
  - 2020: 2.6
  - 2021: 3.0
  - 3.3 (additional value listed)
- Real GDP growth (percent), projections:
  - 2014: 5.0
  - 2015: 4.7
  - 2016: 3.0
  - 2017: 2.9
  - 2018: 3.2
  - 2019: 3.5
  - 2020: 3.7
  - 2021: 3.9
- Inflation (GDP deflator, percent), projections:
  - 2014: 6.1
  - 2015: 5.1
  - 2016: 3.3
  - 2017: 5.0
  - 2018: 3.5
  - 2019: 3.7
  - 2020: 3.6
  - 2021: 3.9
- Nominal GDP growth (percent), selected years:
  - 2014: 11.4
  - 2015: 10.1
  - 2016: 6.4
  - 2017: 8.1
  - 2018: 6.9
  - 2019: 7.4
  - 2020: 7.5
  - 2021: 7.9
- Effective interest rate (percent), projections:
  - 2014: 5.3
  - 2015: 5.3
  - 2016: 5.5
  - 2017: 4.4
  - 2018: 4.4
  - 2019: 5.0
  - 2020: 5.7
  - 2021: 6.3
- Contribution to changes in public debt (selected entries):
  - Change in gross public sector debt (cumulative) listed as -1.9, 3.2, 3.6, 2.7, 0.7, 0.9, 0.7, 0.7, 0.4, 6.1
  - Identified debt-creating flows sequence includes -2.7, 3.3, 6.8, 2.1, 0.3, 0.5, 0.4, 0.3, 0.0, 3.6
  - Primary deficit (percent of GDP) sequence: -1.8, -0.1, 1.4, 1.4, 1.0, 0.5, 0.2, -0.1, -0.4, 2.6
  - Primary (noninterest) revenue and grants sequence: 21.3, 22.8, 22.0, 21.8, 22.0, 22.0, 22.1, 22.1, 22.1, 32.1
  - Primary (noninterest) expenditure sequence: 19.5, 22.7, 23.4, 23.1, 23.0, 22.5, 22.2, 22.0, 21.8, 34.7
- Notes on other identified debt-creating flows:
  - NFPS asset accumulation entries include 0.9, 3.9, 1.8, 1.5, -0.1, 0.6, 0.7, 0.9, 0.7, 4.3

### Annex IV — Alternative Scenarios (selected assumptions)
- Baseline scenario assumptions (selected):
  - Real GDP growth: 2.9 (2016), 3.2 (2017), 3.5 (2018), 3.7 (2019), 3.9 (2020), 4.0 (2021)
  - Inflation: 5.0 (2016), 3.5 (2017), 3.7 (2018), 3.6 (2019), 3.9 (2020), 4.0 (2021)
  - Primary Balance: -1.4 (2016), -1.0 (2017), -0.5 (2018), -0.2 (2019), 0.1 (2020), 0.4 (2021)
  - Effective interest rate: 4.4 (2016), 4.4 (2017), 5.0 (2018), 5.7 (2019), 6.3 (2020), 7.0 (2021)
- Historical scenario assumptions (selected):
  - Real GDP growth: 2.9, 5.1, 5.1, 5.1, 5.1, 5.1 (2016–2021 sequence)
  - Inflation: same as baseline in table
  - Primary Balance: -1.4 (2016) then 1.2 repeatedly for 2017–2021
  - Effective interest rate: 4.4, 4.4, 4.8, 5.1, 5.3, 5.6 (2016–2021)

### Annex V — Spillovers from Brazil
- Main finding:
  - When Brazil GDP falls by 1 percentage point, on average this is associated with a fall in Paraguay’s GDP by about ½ to ¾ percentage points; however estimates are often imprecise and confidence intervals may include zero.
- Methodology:
  - A set of Vector Autoregressions (VARs) estimated to identify Paraguay GDP response to a shock to Brazil growth.
  - Models include three sets of variables: global, regional, and domestic.
  - Global variables: VIX volatility index, 10-year U.S. Treasury bond yield, world price of soy, Paraguay-specific commodity terms of trade index.
  - Regional variable: Brazil GDP.
  - Domestic variables: Paraguay GDP and Paraguay REER.
  - Data: quarterly from 1994Q1 to 2015Q3, with two lags; variables expressed in quarter-on-quarter growth (seasonally adjusted for GDP), except VIX and U.S. interest rate expressed in levels.
  - Ordering: global variables first, followed by Brazil GDP, then domestic variables; VIX, U.S. interest rate and Brazil GDP do not respond to Paraguay contemporaneously in the ordering.
  - Alternative specification: VIX and U.S. interest rate treated as exogenous; produced similar results.
- VAR model results (Table 1 excerpts — response of PRY GDP to 1pp rise in BRA GDP and related statistics):
  - At quarter of largest cumulative effect: examples include "8 quarters after BRA shock" and "4 quarters after BRA shock" depending on specification.
  - Response coefficients (selected values from table matrix):
    - 0.77, 0.69, 0.69
    - 0.59, 0.52, 0.48
    - 0.68, 0.59, 0.58
    - 0.68, 0.58, 0.54
    - 0.78, 0.66, 0.64
    - 0.58, 0.51, 0.45
    - 0.61, 0.5
    - 0.40, 0.51
  - While a shock to Brazil’s GDP can have a sizeable effect on Paraguay, the effect is often not statistically different from zero; confidence intervals for cumulative effect after 4 quarters range from no effect to well over 1 percentage point.
- Contextual note:
  - Paraguay growth is very volatile due to prominence of agriculture and electricity sectors dependent on weather.
  - The current crisis in Brazil impacted Paraguay mainly through diminished activity in border towns and smaller re-exports, while other sectors remain relatively resilient even as Brazil experienced extended negative growth.

*Source: IMF staff report — Annexes I–V as presented in the supplied content.*

### References

### References

### Cited Works
- Gruss, B. (2014) “After the Boom-Commodity Prices and Economic Growth in Latin America and the Caribbean” IMF Working Paper 14/154. (Washington: International Monetary Fund).
- International Monetary Fund (2012) “Spillovers from Large Neighbors in Latin America” Chapter 4 in Regional Economic Outlook: Western Hemisphere, Washington, April.

### Fund Relations (As of March 31, 2016)
- Membership Status: Joined: December 28, 1945; Article: VIII
- General Resources Account (SDR Million; % Quota)
  - Quota: 201.40 (100.00)
  - IMF's Holdings of Currency (Holdings Rate): 154.55 (76.74)
  - Reserve Tranche Position: 46.85 (23.26)
- SDR Department (SDR Million; % Allocation)
  - Net cumulative allocation: 95.19 (100.00)
  - Holdings: 95.68 (100.51)
- Outstanding Purchases and Loans: None
- Latest Financial Arrangements
  - Stand-By: Date of Expiration May 31, 2006 – Aug 31, 2008; Amount Approved (SDR Million) 30.00; Amount Drawn (SDR Million) 0.00
  - Stand-By: Date of Expiration Dec 15, 2003 – Nov 30, 2005; Amount Approved (SDR Million) 50.00; Amount Drawn (SDR Million) 0.00
- Projected Payments to Fund (SDR Million; based on existing use of resources and present holdings of SDRs)
  - Forthcoming 2015 2016 2017 2018
  - Principal: (no amounts reported)
  - Charges/Interest: 0.00 0.00 0.00 0.00
  - Total: 0.00 0.00 0.00 0.00
- Exchange Arrangement
  - Currency: Paraguayan guaraní; exchange arrangement: floating; exchange rate determined by supply and demand.
  - Central Bank of Paraguay (BCP) objective under Article 3 of Organic Law No. 489/95: preserve and safeguard the stability of the currency and promote the efficiency and stability of the financial system.
  - Article 50: BCP foreign currency trading aims to smooth seasonal fluctuations and offset erratic capital flows and speculative movements.
  - Article 47: exchange rate determined by market forces.
  - BCP publishes information on foreign exchange interventions on its website and intervenes occasionally to smooth undue fluctuation.
  - BCP implements program effective July 1, 2013: preannounced sales of the U.S. dollars it purchases from the government—program indicates in advance the nature, frequency, and size of BCP’s foreign exchange transactions.
  - Paraguay has accepted the obligations of Article VIII, Sections 2(a), 3, and 4 of the Fund’s Articles of Agreement. Exchange system is free of restrictions on payments and transfers for current international transactions.
- Article IV Consultation: Executive Board concluded the 2014 Article IV consultation in February 2015.
- Safeguards Assessment: A full safeguard assessment of the BCP was completed in October 2006 in respect to the arrangement approved on May 31, 2006; report noted progress since 2003 but vulnerabilities remain in areas such as financial reporting and program data reporting to the Fund.
- Resident Representative: Mr. Alejandro Santos has been the regional resident representative since December 2014. He is based in Lima, Peru.

### Technical Assistance 2010–16 (department; purpose; date of delivery)
- FAD: Debt Management — February 2010
- MCM: First Issuance Sovereign Bond — March 2010
- STA: Monetary and Financial Statistics — April 2010
- MCM: Banking Supervision — April 2010
- STA: National Accounts — August 2010
- MCM and WB: FSAP/FSSA — November 2010
- FAD: Tax and Customs Administration — December 2010
- FAD: Public-Private Partnerships — February 2011
- STA: National Accounts Statistics — March–April 2011
- FAD: Medium-Term Macro-Fiscal Framework and Public Investment Management — March–April 2011
- MCM: Monetary Policy, Central Bank Operations, and Accounting — April 2011
- FAD: Public Transport Subsidies — June-July 2011
- MCM: Financial Soundness Indicators and Financial Oversight — November 2011
- FAD: Improve Fiscal Projections and Financial Planning — December 2011
- FAD: Modernization of the Customs Administration — December 2011
- FAD: Debt and Cash Management — March 2012
- FAD: Tax Policy — March 2012
- MCM: Monetary Policy, Central Bank Operations, and Accounting — April 2012
- FAD: Tax and Custom Administration — December 2012
- FAD: Debt and Public Investment Management — May 2013
- MCM/LEG: Launch of the AML/CFT — June 2013
- MCM: Inflation Targeting and Central Bank Operations — August 2013
- FAD: Revenue Administration — September 2013
- FAD: Tax Administration — December 2013
- STA: ROSC — February 2014
- FAD: Tax and Customs Administration — Apr, May, Jul, Sep 2014
- MCM: Bank Supervision and Regulation — July 2014
- MCM: Monetary and FX Policy — July 2014
- LEG: Anti Money Laundering Activities — May, Jun, Sep 2014
- FAD: Public Financial Management — July 2014
- STA: Producer Price Index Statistics — August 2014
- STA: Balance of Payments and IIP Statistics — September 2014
- MCM: Central Bank Monetary and Foreign Exchange Operations — October 2014
- MCM: Insurance Supervision — December 2014
- FAD: Budget Preparation and Execution — December 2014
- LEG: Anti Money Laundering Activities — February 2015
- STA: Government Financial Statistics Mission — March 2015
- MCM: Risk-Based Bank Supervision — April 2015
- LEG: Anti Money Laundering Activities — April 2015
- FAD: Customs Administration — May 2015
- MCM: Bank Stress testing — May 2015
- FAD: Tax Revenue Administration — July 2015
- MCM: Risk-Based Bank Supervision — August 2015
- LEG: Anti Money Laundering Activities — September 2015
- MCM: Risk-Based Bank Supervision — November 2015
- LEG: Anti Money Laundering Activities — December 2015
- MCM: Foreign Exchange Operations — February 2016
- FAD: Tax Revenue Administration — March 2016
- FAD: Fiscal Responsibility Law — March 2016
- LEG: Anti Money Laundering Activities — March/April 2016

### Relations with the World Bank under JMAP
- Teams met in January 2016 to exchange views on economic developments and the macroeconomic outlook and discuss work plans.
- Outlook assessment: challenging given the regional context; requires policies to consolidate macroeconomic stability and address structural problems.
- Achievements and challenges:
  - Paraguay enjoyed strong growth over 2003–14 and achieved significant progress in poverty reduction.
  - Persisting barriers: large infrastructure gaps, limited capacity to execute public investment projects, deep-rooted institutional weaknesses.
- Macro-critical reform areas identified:
  - Fiscal and public financial management framework: fiscal responsibility law provides anchor; scope to improve budgetary processes and legal and institutional aspects; address potential fiscal risks, including private sector participation in infrastructure.
  - Tax revenue administration: strengthen administration and enforcement; strengthen sanctions against evasion; reduce exemptions; explore broadening tax base.
  - Infrastructure: improve transport, electricity, and water and sanitation; boost pro-poor delivery of public goods and services including education and health.
  - Financial system: new banking and central bank laws should provide basis for risk-based regulation and supervision; strengthen prudential oversight of cooperative sector; foster cooperation among regulatory authorities.
- Division of labor (Fund vs Bank)
  - Fund: tax revenue administration, fiscal responsibility law, government finance statistics, TA on fiscal responsibility law (spring 2016), support for transition to GFSM 2001 and move towards accrual accounting.
  - Fund: TA on risk-based bank supervision and regulation; follow-up on stress testing of insurance sector; develop monitoring tools to reduce contagion risk between banking and insurance sectors.
  - Fund: TA to BCP on foreign exchange operations and steps to strengthen rules-based approach to FX interventions.
  - Bank: Paraguay Job Diagnostic—comprehensive multi-sector job diagnostic analysis.
  - Bank: TA on state-owned enterprises and PPPs—improve corporate governance, eliminate payment arrears, technical oversight of SOEs, strengthen PPP institutional framework; support assessment of fiscal risks and contingent liabilities from SOEs.
  - Bank: Governance and Business Climate—support to strengthen institutional capacity, improve governance and transparency, boost competitiveness and investment climate.
- Work programs (selected timing)
  - Bank work program includes programmatic TA on strengthening Governance, Finance and Markets, Improved Territorial Development, WTO Trade Facilitation Agreement (June 2016), programmatic TA on Fiscal equity and efficiency (December 2016), TA on Improving investment climate (December 2016), TA on Institutional strengthening for PPP program (December 2016), TA on strengthening Agriculture Risk Management System (December 2016), Programmatic TA on poverty Jobs Diagnostic Analysis (June 2017).
  - Fund work program includes Article IV Consultation (Board Date February 2016; Expected Delivery April 2016), TA on Risk-based Bank Supervision & Regulation (November 2015), TA on Anti Money Laundering Activities (December 2015; April 2016), TA on Foreign Exchange operations (February 2016), TA on Tax Revenue Administration (Spring 2016), TA on Fiscal Responsibility Law (March 2016), TA on Government Finance Statistics (April 2016), TA on Insurance Supervision: Follow-up on Stress Testing and Contagion Risk (April 2016).

### Relations with the Inter-American Development Bank (IADB)
- IMF and IADB teams met in November 2015 to exchange views and discuss work plans.
- IADB Country Strategy with Paraguay (2014–2018) approved in 2014; sovereign-guaranteed lending under program expected to reach approximately US$1 billion.
- IADB priority sectors: (i) transportation and connectivity; (ii) water and sanitation; (iii) energy; (iv) productive development; (v) financial sector; (vi) public management. Social sector supported via priority sectors and investment of FONACIDE resources targeting education and health.
- As of November 30, 2015:
  - Bank’s active portfolio: loans for financing of 21 projects.
  - Lending portfolio: US$850 million, of which US$447 million are pending disbursement.
  - Disbursements in 2015 expected to total US$41 million.
  - Current portfolio sectoral distribution: transportation (51 percent), energy (10 percent), social sector (2 percent), financial sector (8 percent), education (4 percent), agriculture (3 percent), others (22 percent).
  - Portfolio includes 6 projects pending legislative ratification amounting to US$395 million, and one project pending signature amounting to US$20 million.
  - Portfolio includes 18 loans to the private sector for US$98 million, mostly in the financial sector.
- Financial Relations with the IADB (In millions of U.S. dollars; only loans with sovereign guarantee are considered)
  - Disbursement by year: 2006: 67.2; 2007: 67.8; 2008: 85.6; 2009: 91.3; 2010: 24.0; 2011: 39.1; 2012: 41.0; 2013: 102.8; 2014: 142.4; 2015: 81.4 41.0 (formatted in source as a sequence)
  - Amortization by year: 2006: 66.7; 2007: 88.1; 2008: 94.3; 2009: 91.3; 2010: 96.2; 2011: 94.5; 2012: 91.0; 2013: 83.9; 2014: 97.7; 2015: 132.4
  - Net Loan Flows by year: 2006: 0.5; 2007: -20.3; 2008: -8.7; 2009: 144.1; 2010: -3.1; 2011: 11.8; 2012: 58.5; 2013: -16.3; 2014: -91.4
  - Source: Inter-American Development Bank

### Statistical Issues (As of April 2016)
- General assessment: Data provision has some shortcomings but is broadly adequate for surveillance. Paraguay made significant improvements but some shortcomings persist. Data ROSC mission in February 2014 assessed six datasets (national accounts, CPI, PPI, GFS, monetary, and balance of payments and IIP) against the 2012 DQAF; authorities’ response and recommendations published on August 18, 2014. Country is a GDDS participant.
- National Accounts
  - Estimates broadly consistent with 1993 SNA; released in 2005.
  - Program under development to change outdated base year (1994=100) and implement relevant 2008 SNA recommendations.
  - Production boundary broadly in line with 1993 SNA; recently included two binational hydroelectric enterprises following 2008 SNA.
  - No independent estimates of the non-observed economy after 1997; mineral exploration and own-account production mostly excluded.
  - Source data insufficient for nonfinancial services, household consumption, and changes in inventories.
  - Major deviations from 1993 SNA concepts: investment in in-house software development; investment in mineral exploration; investment in military expenses in fixed assets; estimation of output by market, nonmarket, and own final use components; inclusion of work-in-progress in forestry and livestock; partial inclusion of non-observed economy.
  - Annual GDP meets GDDS recommendations; QNA meets DSSD timeliness requirements (90 days).
- Labor Market
  - Regular household survey introduced in 1998; coverage and quality improved.
  - Since 2010, data released quarterly, but quarterly series covers Asuncion area only.
  - Last available observation for quarterly series: fourth quarter of 2015.
- Price Statistics
  - CPI and PPI reported regularly and timely.
  - Since January 2008, BCP uses CPI based on 2005–06 household budget survey.
  - CPI geographic coverage limited to Greater Asunción; expenditure weights representative of urban household consumption patterns.
  - PPI base weight period: June 2010; basket: 185 items representative of national output; electricity, water, and gas not covered.
- Resources and capacity
  - Data ROSC mission found resources insufficient for real sector statistics, constraining further development and full adoption of 1993 SNA.
  - Authorities addressing resource shortcomings via compilation of new CPI and production of QNA series.
- Government Finance Statistics (GFS)
  - GFS for internal purposes and reporting to WHD broadly consistent with GFSM 2001.
  - Early 2015: Ministry of Finance introduced GFSM 2001 classifications and presentation for monthly budgetary central government statistics (published regularly on Ministry’s website).
  - Asset position of social security system available daily.
  - Central administration statistics include Postal Service Directorate (a nonfinancial public corporation); nonfinancial public sector statistics include data of financial public corporations—four employer social insurance schemes (treated as financial corporations in monetary and financial accounts).
  - Data on medium- and long-term external debt reliable and available monthly.
  - Deficiencies remain in recording short-term supplier and commercial credit of public sector.
  - Latest available data for general government and subsectors in 2014 GFS Yearbook are for 2013.
  - Since 1994 no outstanding debt data and no breakdowns for expenditure by function provided for publication in GFS Yearbook.
  - Monthly and quarterly data are not reported for publication in IFS.
- Balance of Payments
  - Classification follows BPM5.
  - Quarterly balance of payments and IIP data available from 2001 and reported to STA for IFS publication.
  - Improvements in external sector statistics: coverage of FDI and recording of external debt transactions; some deficiencies remain.
  - STA mission on External Sector Statistics assisted BCP in September 2014 to implement ROSC recommendations.
  - Recommendation to submit quarterly balance of payments and IIP data on a BPM6 basis has not been implemented yet.
- Monetary and Financial Statistics
  - Paraguay reports monetary data for central bank and other depository corporations (ODCs) using the standardized report forms (SRFs).
  - An integrated monetary database meeting BCP, STA, and WHD needs is in operation.
  - Coverage of ODC survey is complete, including data on credit cooperatives.
  - Superintendence of Banks reports 11 of the 12 core and 7 of the 13 encouraged financial soundness indicators for deposit takers to STA on a monthly basis.

*Prepared by The Western Hemisphere Department (In consultation with other departments), April 14, 2016.*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16116.pdf_