Press Release: IMF Executive Board Approves US$97 Million Stand-By Arrangement for Paraguay

June 5, 2006

Press Release No. 06/117

The Executive Board of the International Monetary Fund (IMF) has approved a 27-month SDR 65 million (about US$97 million) Stand-By Arrangement for Paraguay to support the country's economic program. The approval makes SDR 25 million (about US$37 million) immediately available. However, the authorities have indicated their intention to treat the arrangement as precautionary.

The main objectives of the arrangement are to reduce vulnerabilities that were exposed during the 2002 crisis, entrench the stability achieved under the previous Stand-By Arrangement by strengthening macroeconomic fundamentals, and to lay the foundation for a gradual increase in economic growth to 4-5 percent per annum on a sustainable basis.

Following the Executive Board discussion on May 31, 2006, Mr. Takatoshi Kato, Deputy Managing Director and Acting Chairman, said:

"Paraguay, under its previous Fund-supported program, successfully stabilized its economy under very difficult conditions. The adoption of a strong policy framework, incorporating well-targeted macroeconomic policies and an ambitious structural reform agenda, enabled the authorities to avert a full-fledged crisis. In this context, government arrears were cleared as part of a prudent fiscal policy, and strengthened financial regulations and a supportive monetary policy restored confidence in the financial system. In this improved policy environment, economic growth resumed, international reserves increased, and inflation and unemployment were reduced.

"While much has been achieved over the past two years, important challenges remain, including the further strengthening of macroeconomic fundamentals and addressing remaining vulnerabilities through institutional reform. This will entail sustaining fiscal consolidation, reinforcing monetary policy, further strengthening the financial system, and structural reforms aimed at removing impediments to growth and alleviating poverty.

"The authorities' program for 2006-08 addresses these challenges, with an objective, over the medium-term, of establishing the foundations for doubling the annual rate of real GDP growth to 4-5 percent. This program will be supported by a new 27-month Stand-By Arrangement.

"Fiscal policy includes as a medium-term objective the further reduction of the debt burden. For 2006, the targeted zero public financial deficit reflects a financial plan that incorporates significant expenditure restraint relative to the approved budget. The realization of fiscal balances targeted for 2007-08 will support a further decline in public debt.

"Monetary policy will be set with the objective of bringing inflation to low single digits by the end of the arrangement. For 2006, the continuation of tight monetary polices is targeted to limit inflation to 7 percent. Important institutional reforms in the fiscal and monetary areas will support the strengthened policy framework encompassed in the program.

"Structural reforms, including reforms of the public and financial sectors, as well as pro-growth policies and a strategy for poverty reduction, constitute important building blocks for the program. Envisaged measures include improving expenditure control, modernizing the tax code, and restructuring of the public enterprises. In the financial sector, enhancements to regulations and legislation and strengthening the balance sheets of the central bank and the national development bank are planned. Measures to improve to Paraguay's business climate and the introduction of a conditional cash transfer mechanism for poor families round out the foreseen structural reforms.

"These policies will help strengthen macroeconomic fundamentals further, and lay the foundations for a gradual increase in economic growth over the medium term, thereby allowing Paraguay to reverse the vicious cycle of low growth and declining per capita income, which prevailed over the last quarter of a century," Mr. Kato said.


Recent developments

Following an acute recession in 2002, which was triggered by a regional crisis and a poor agricultural harvest, Paraguay has been recovering. The country had its the best macroeconomic results in a decade during 2004, with the support of the Stand-By Arrangement agreed with the Fund in December 2003 (See Press Release No. 03/218). The program was highly successful in helping to stabilize Paraguay's economy.

The economy suffered again from a variety of supply shocks in 2005. A drought, higher international oil prices and a rapid strengthening of the Brazilian real led to a reduction in economic growth and an increase in inflation. Notwithstanding these shocks, fiscal discipline was preserved, and reserves continued growing to record levels in 2005. All in all, the main objectives of the previous arrangement were achieved. However, a number of challenges arose in 2006 with the continuation of a drought, persistent inflationary pressures, and a large and under-financed budget approved by Congress.

Program Summary

The key objectives of the 27-month program are securing macroeconomic stability, creating the conditions for sustained high growth, and reducing poverty. Paraguay has to continue strengthening fundamentals and address remaining vulnerabilities. Significant institutional reform efforts are needed to sustain the recent macroeconomic achievements and mitigate vulnerabilities. These efforts include reforms to sustain fiscal consolidation, strengthen monetary policy operations to reduce inflation, further strengthen the financial system, and remove impediments to growth.

The country's main weaknesses identified by the IMF staff included: (i) political instability that translated into economic policy instability; (ii) governance problems that led to corruption and kept growth low; (iii) a weak financial system beset by a series of crises; (iv) inefficient public enterprises in key sectors that depressed efficiency and economic performance; (v) low and falling productivity which resulted in low growth; (vi) high poverty and unemployment with limited social protection. The 2006-08 program has been tailored to address these economic weaknesses.

A strong macroeconomic program needs to be entrenched to avoid previous problems. Although macroeconomic management has improved, over the past decade, weak policy responses have exacerbated the impact of external shocks on output, employment and inflation, and have undermined confidence, leading to a number of financial crises.

The public sector reform is designed to address remaining fiscal vulnerabilities and rigidities, including tackling deficiencies in budgetary planning and expenditure control, institutionalize improvements in tax collections and reduce rigidities in current expenditures.

Reforming the financial sector is key. Over the last decade, public confidence in the banking system declined due to a number of banking crises. Consequently, financial sector assets and liabilities are short-term, constraining financial intermediation and long-term investment.

Paraguay has experienced long-term low growth and thus needs to further a pro-growth agenda. Per capita GDP fell by 7 percent in real terms over the last 25 years. Shocks and structural impediments hamper growth and restrain employment. To reinvigorate growth, there is a need to embrace reform in many diverse areas.

The latest IMF-supported program seeks to alleviate widespread poverty, and mitigate the social costs of reform. Lack of access to water and sanitary resources are one of the main concerns and attempts are being made to resolve this issue. About a third of the population is poor and about a sixth of the population lives under conditions of extreme poverty.

Paraguay joined the IMF on December 28, 1945; its quota is SDR 99.9 million (about US$146 million), and it has no outstanding use of IMF credits.

Paraguay: Economic and Financial Indicators


      Est. Prog.


2002 2003 2004 2005 2006

(Annual percentage change)

National accounts and prices


GDP at current prices

10,0 22,5 16,4 11,1 13,1

GDP at constant prices

0,0 3,8 4,1 3,0 3,5

Per capita GDP (in thousand U.S. dollars)

0,9 1,0 1,2 1,3 1,4

GDP deflator

10,0 18,0 11,8 7,9 9,2

Consumer prices (average)

10,5 14,2 4,3 6,8 9,0

Consumer prices (end-of-period)

14,6 9,3 2,8 9,9 2.5-7.5

Real effective exchange rate


Average (depreciation -)

-11,1 -6,7 4,1 -7,0 ...

End-of-period (depreciation -)

-11,5 7,9 -7,9 2,4 ...
(In millions of U.S. dollars)

External sector


Exports, f.o.b.

1.852 2.163 2.751 3.033 3.264

Imports, c.i.f.

2.134 2.443 3.156 3.665 3.863

Current account

93 131 14 -190 -180

(in percent of GDP)

1,8 2,4 0,2 -2,5 -2,2

Capital account

53 201 127 133 226

Overall balance

-83 211 269 121 46

Terms of trade (deterioration -)

7,5 7,3 2,5 -12,7 4,3
(In percent of GDP)

Public sector


Central government primary balance

-1,9 1,0 2,7 1,9 1,0

Central government overall balance

-2,5 -0,3 2,0 0,6 0,0

Consolidated public sector primary balance 1/

-1,4 2,6 3,1 2,7 1,7

Consolidated public sector overall balance 1/

-3,4 0,0 1,8 0,9 0,0

Public sector debt (end-of-year)

57,6 55,0 42,5 37,8 33,1


50,3 49,7 38,6 34,4 30,5


7,3 5,3 3,9 3,3 2,6
(Annual percentage change)

Money and credit


Currency issue

2,2 29,9 12,7 17,6 8,5


-2,2 24,9 24,6 16,1 8,5

M5 2/

-18,5 17,7 11,7 7,7 8,2

Credit to the private sector

-20,9 -18,4 13,9 14,1 11,9

Velocity of M2

7,5 8,3 7,7 7,1 7,2

Memorandum items:


International reserves (in millions of U.S. dollars)

641 983 1.168 1.297 1.317

(in months of imports)

2,8 3,4 3,5 3,6 3,6

GDP (in billions of guaranies)

29.105 35.666 41.522 46.135 52.156






Sources: Paraguayan authorities; and IMF staff estimates.


1/ Consolidated public sector, including the quasi-fiscal operations of the BCP.


2/ Foreign currency items are valued at a constant exchange rate.



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