Press Release No. 10/363

Press Release: Statement by an IMF Mission to Paraguay

September 29, 2010

Mr. Lisandro Ábrego, chief of an International Monetary Fund mission (IMF) to Paraguay that visited Asunción from September 22–28, issued the following statement today in Asunción:

“Paraguay’s economy has rebounded from last year’s drought and from the impact of the international financial crisis more strongly than previously anticipated. Real GDP is expected to grow by 9-10 percent in 2010, reflecting a record agriculture harvest, supportive macroeconomic policies, and particularly buoyant economic conditions in key trading partners. The external current account is projected to register a moderate deficit of around 1.5 percent of GDP this year, which would be financed by private capital inflows. Net international reserves would increase to over US$ 4 billion, providing—together with exchange rate flexibility—a reassuring buffer against the possibility of external shocks.

“Regarding 2011, provided that climate conditions are broadly neutral, GDP is expected to grow by 5 percent, somewhat above trend growth, aided by continued solid domestic demand growth and supportive external conditions. In this context, the external current account deficit would increase somewhat.

“Macroeconomic policies in 2010 have appropriately intended to support the economic recovery while withdrawing part of the stimulus provided last year. Given the strength of economic activity, which has used up the remaining slack, policies will need to continue normalizing to avoid a pro-cyclical tone and sustain growth.

“Monetary policies implemented in 2009 and continued through 2010 have maintained interest rates on BCP sterilization bills at low levels, which enabled commercial banks to increase their loan portfolio by about 40 percent on an annual basis in recent months. The Central Bank of Paraguay (BCP) started to gradually raise interest rates in the second quarter of 2010. Under the baseline scenario, continued normalization of monetary policy would be required to keep the inflation rate close to the center of the target. Macro-prudential tools may usefully complement a tighter monetary policy stance.

“Available information points to a broadly-neutral fiscal stance in 2010 and to a small surplus by the central government. Revenues have fared better than expected this year, owing to the buoyant economic activity and improvements in tax and customs administration. For 2011, continued healthy growth of revenue is expected while expenditure growth would accelerate, contributing to domestic demand growth and to some weakening of the fiscal balances. Against this background, it would be advisable to contain the growth of current expenditures to leave sufficient room for the expansion of highly-needed public investment. This would help maintain a neutral fiscal stance and lower domestic demand pressures.

“As discussed in the last Article IV consultation, higher public investment and the extension of well-targeted social programs need to be increasingly financed by a higher tax yield and by cutting back on subsidies resulting from tax exemptions. The implementation of the personal income tax would strengthen the tax base and foster the formalization of the economy, while contributing to a fairer tax system.

“The banking system remains sound. Nonperforming loans are low, profitability is high, and capital levels seem adequate. However, the rapid pace of credit expansion calls for a further strengthening of prudential regulations and supervision. Advances have been made in the supervision of financial cooperatives, but there remain gaps compared to the regulatory standards of the banking system. Going forward, it will be important to enhance the cooperation and coordination of the financial system’s regulatory agencies, and converge to a comprehensive and modern approach toward financial system regulation and supervision, in line with international standards while taking into account country-specific features.

“The IMF mission wishes to thank the authorities of Paraguay for friendly, open and fruitful discussions, and for their warm hospitality.”