Press Release: IMF Approves 15-Month US$73 Million Stand-By Arrangement for Paraguay
IMF News, December 15, 2003
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- Published: December 15, 2003
Approval and financing
- The Executive Board approved a 15-month SDR 50 million (about US$73 million) Stand-By Arrangement for Paraguay.
- Immediate release: SDR 30 million (about US$44 million).
- The authorities indicated their intention to treat the arrangement as precautionary.
Executive Board statement (Shigemitsu Sugisaki, Deputy Managing Director and Acting Chairman)
- Program purpose:
- Stabilize the economy.
- Begin structural reform to raise growth, reduce poverty, and improve governance.
- Improve efficiency and transparency of government operations.
- Fiscal agenda commitments:
- Eliminate the fiscal deficit in 2004.
- Undertake lasting reform of public sector institutions.
- Restructure and reduce debt and clear all payment arrears.
- Revenue measures to be implemented:
- Increase key excise tax rates.
- Broaden the base of the value-added tax and the income tax.
- Implement a new vehicles tax.
- Strengthen tax and customs administration.
- Expenditure and public sector measures:
- Spending austerity and redirect spending to social sectors and public investment.
- Reform the public employees' pension plan.
- Contain losses of public enterprises through efficiency enhancement and adequate pricing policy for fuel and utilities.
- Implement the recently approved Public Procurement Law and undertake external audits of public institutions.
- Creditor and institutional reforms:
- Normalize relations with external and domestic creditors.
- Prepare reforms of the civil service, the social security system, and public enterprises.
- Monetary and financial sector measures:
- Monetary policy geared to controlling inflation and allowing a freely floating exchange rate.
- Central bank institutional reforms to improve independent monetary policy.
- Restructure public banks; strengthen bank resolution framework, regulation and supervision of financial entities (including cooperatives); require independent credit ratings of banks.
- Expected outcome with resolute implementation:
- Greater economic stability and more robust growth.
- Contribution to reducing poverty and addressing social challenges.
Recent economic developments (2002–2003)
- 2002 recession drivers:
- Regional crisis, poor harvest, and lack of political consensus to implement reforms.
- 2002 outcomes:
- Real GDP fell by nearly 2½ percent.
- Inflation accelerated from 8½ percent to 14½ percent.
- The guaraní lost 34 percent of its value relative to the U.S. dollar.
- Accumulation of large payment arrears, including to some multilateral institutions, and default on some domestic bonds.
- Open unemployment rose from 7.6 percent in 2000 to 10.8 percent in 2002.
- 2003 developments:
- Projected real GDP increase of around 2 percent for the year (driven by a good harvest, improved regional situation, and first steps of the authorities' program).
- Annual inflation below 10 percent in October 2003, down from the peak of 21 percent in April 2003.
- Significant remaining imbalances: large financing gaps in the public sector and a recovering banking system leave the economy vulnerable to shocks.
Program summary: objectives, projections, and measures
- Program objectives:
- Create conditions for sustained economic growth and poverty reduction.
- Address governance problems by improving efficiency and transparency of government operations.
- Stabilize fiscal situation and initiate structural reforms in the public sector and banking system.
- Macroeconomic projections:
- Growth projected to rise to around 2½ percent in 2004 and climb to around 3½ percent in the medium term.
- Underlying inflation projected to fall from 9 percent in 2003 to 6½ percent in 2004.
- The current account would remain broadly in surplus.
- Fiscal policy and debt dynamics:
- Fiscal package intended to close fiscal financing gap, pay off arrears, and place public debt on a more sustainable path.
- Fiscal adjustment measures already implemented will produce an improvement of at least 1½ percent of GDP on an annual basis.
- Measures to be implemented during the program would yield an additional 2-2½ percent of GDP annually.
- Adjustment expected to bring the overall balance into slight surplus and initiate a decline in the debt/GDP ratio toward around 30 percent of GDP by the end of the decade, while accommodating increased capital spending and social investment.
- Revenue strategy: raise revenues while minimizing increases in tax rates.
- Monetary policy stance for 2004:
- Geared toward controlling inflation while maintaining exchange rate flexibility.
- Program establishes targets on net domestic assets to bring money supply growth down to a rate consistent with single-digit inflation in the medium term, while allowing recovery in private lending.
- Central bank to develop technical and statistical capabilities to move eventually to an inflation targeting regime.
- Financial sector reforms:
- Enhance bank supervision and resolution capabilities.
- Pass legislation to introduce a deposit insurance system (already taken).
- Plan to reform public banks and modernize regulatory requirements for all financial institutions.
- Structural reform agenda:
- Strengthen public sector efficiency and governance.
- Initiate public sector reform (public enterprises, central bank, social security institute) and enact a public banking law to improve the institutional environment for stability and growth.
Key statistics (selected figures from Table 1: Paraguay: Selected Economic Indicators, 1999-2004)
- GDP at current prices (annual percent change): 3.0 (1999), 11.5 (2000), 4.4 (2001), 13.7 (2002), 16.7 (2003), 9.3 (2004).
- GDP at constant prices (annual percent change): 0.5 (1999), -0.4 (2000), 2.7 (2001), -2.3 (2002), 2.0 (2003), 2.4 (2004).
- Consumption (annual percent change): -3.6 (1999), 0.8 (2000), 6.2 (2001), -5.1 (2002), 2.8 (2003), 1.5 (2004).
- Investment (annual percent change): -3.8 (1999), -0.7 (2000), -17.5 (2001), -11.0 (2002), -4.6 (2003), 7.6 (2004).
- Exports, f.o.b. (in millions of U.S. dollars): 2,307 (1999), 2,322 (2000), 1,876 (2001), 1,878 (2002), 2,102 (2003), 2,111 (2004).
- Imports, c.i.f. (in millions of U.S. dollars): 2,750 (1999), 2,864 (2000), 2,495 (2001), 2,159 (2002), 2,339 (2003), 2,398 (2004).
- Current account (in millions of U.S. dollars): -165 (1999), -163 (2000), -278 (2001), 92 (2002), 83 (2003), 26 (2004).
- Central government primary balance (in percent of GDP): -2.8 (1999), -1.7 (2000), 1.0 (2001).
- Consolidated public sector primary balance 1/ (in percent of GDP): -1.8 (1999), -2.6 (2000), -1.3 (2001), 1.2 (2002), 2.2 (2003).
- Consolidated public sector overall balance 1/ (in percent of GDP): -3.2 (1999), -0.6 (2000), 0.3 (2001).
- Public sector external debt (end-of-year, percent of GDP): 28.9 (1999), 30.6 (2000), 33.5 (2001), 42.9 (2002), 44.3 (2003), 40.5 (2004).
- International reserves (in millions of U.S. dollars): 988 (1999), 772 (2000), 723 (2001), 641 (2002), 818 (2003), 855 (2004).
- GDP (in billions of guaranies): 24,144 (1999), 26,921 (2000), 28,119 (2001), 31,977 (2002), 37,302 (2003), 40,779 (2004).
International Monetary Fund press release, December 15, 2003.