Public Information Notice: IMF Concludes 2007 Article IV Consultation with Paraguay

June 17, 2008

Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. The staff report (use the free Adobe Acrobat Reader to view this pdf file) for the 2007 Article IV Consultation with Paraguay is also available.

Public Information Notice (PIN) No. 08/71
June 17, 2008

On June 29, 2007, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Paraguay.1


After a decade of stagnation and instability, and a quarter of a century of declining living standards, Paraguay has experienced lately some of the best macroeconomic outcomes in recent history. Following the 2002 financial crisis and the implementation of economic reforms supported by the IMF under a Stand-By Arrangement approved in 2003 and renewed in 2006, growth has rebounded to almost twice its long-term average, per capita income increased to its highest level in 8 years, and the number of households living in extreme poverty was reduced by almost one third.

The economy is coming out of a long period of stagnation, as real GDP remained at about the same level during 1996-2002. The expansion that began in 2003 continued in 2006 with real GDP growth rising to about 4 percent, and prospects for strong growth in 2007 are good. On the supply side, growth was led by strong performances in services, stock farming and manufacturing. At the same time agricultural output began to recover as the effects of the previous years' drought began to taper off. On the demand side, growth was driven by a dynamic export sector, particularly beef, and a surge in private investment, especially in telecommunications.

Efforts to reduce inflation continued in 2006 with mixed results. While underlying inflation (excluding fruits and vegetables) was reduced from 10 percent in 2005 to 7 percent, headline inflation increased to 12½ percent. This increase reflected stricter application of sanitary controls on imports of vegetables, which reduced supplies and raised vegetable prices by almost 100 percent, and Paraguay's increased access to beef markets abroad, which pushed domestic beef prices up by over 30 percent. Supply shocks unwound in the first five months of 2007, and the price level actually fell by about 1 percent. For the year as a whole inflation is expected to decline to 5 percent.

Public finances have improved considerably in the last few years, mainly on account of higher tax collections-supported by the 2004 tax reform-and efforts to rein in current spending. Public finances recorded a small surplus in 2006 (0.1 percent of GDP). Tax collections continued to be buoyant and current expenditures remained under control through the implementation of a strict financial plan, the freezing new positions (other than for social sectors), and the under-execution of capital expenditures.

The external position has been favorable in recent years, supported by a benign international and regional environment, and a reflow of previous capital flight. This allowed the Central Bank to triple its level of reserves over the last four years, to US$1.7 billion by end-2006, and a 35 percent strengthening of the guaraní against the U.S. dollar over the same period. During 2006, the external position improved significantly despite a deterioration of the current account-due to a surge in import demand-as the capital account continued improving. The external position strengthened further during the first part of 2007 and the level of reserves exceeded US$2.0 billion at end-May.

Executive Board Assessment

Executive Directors agreed with the thrust of the staff appraisal. They commended the Paraguayan authorities for their continued implementation of sound macroeconomic policies, which have contributed to a rebound of economic growth and an increase in per capita income after a long period of stagnation. Prudent fiscal policies have put public debt on a sustainable path, and the build-up of international reserves in the context of a strengthened currency has enhanced Paraguay's resilience to external shocks. Directors encouraged the authorities to intensify reforms, especially in the financial sector, in order to entrench macroeconomic stability and establish the conditions for sustained growth and poverty reduction.

Directors commended the authorities for their intention to achieve overall fiscal balance in 2007 and to implement the necessary budget cuts. Looking ahead, they stressed the need to maintain fiscal discipline in the face of intensifying pressures during the upcoming pre-electoral period. Directors underscored the importance of locking in last year's improvements in tax and customs administration and modernizing the tax code. They also saw a need for wage restraint and public sector rationalization to make room for more public investment. A strengthening of the budgetary framework would reduce the need to resort to financial plans, and would be a more effective and transparent means of expenditure control.

Directors supported the authorities' tight monetary policy stance, and encouraged them to persevere with their efforts to further reduce inflation. They considered that the Central Bank of Paraguay had struck a reasonable balance between accommodating currency appreciation and accumulating international reserves in the context of the country's floating exchange rate regime. Given the recent volatility of inflation rates, it will, however, be important to monitor the situation closely, and to respond promptly to any signs of underlying inflationary pressures or potential monetary imbalances. Directors encouraged early progress on steps to strengthen the financial position of the central bank.

Directors welcomed the improved soundness of Paraguay's banking system and strengthened confidence in the financial sector, as well as the decline in dollarization. Noting the setbacks that had occurred in 2006, Directors welcomed the authorities' renewed commitment to reinvigorate the reform momentum in this important area, and encouraged them to persevere with measures to strengthen commercial bank loan classification and provisioning requirements. Other financial sector reform priorities in the period ahead should include the development of a medium-term business plan for the publicly-owned development bank BNF, the preparation of a draft for a new payment system law, the formulation of a strategy to develop domestic capital markets, and the development of an effective supervisory and regulatory framework for financial cooperatives. Directors welcomed the steps to enhance compliance with the Basel Core Principles of banking supervision, and implement according to plan the central bank's prudential regulations.

Directors commended the authorities for taking a multi-pronged approach to structural reform, which will remain key to enhancing productivity and achieving higher economic growth on a sustainable basis. They encouraged them to maintain their commitment to implement the ambitious structural reform agenda in 2007 and over the medium term.

Regarding public sector reform, Directors welcomed the authorities' plans to draft implementing regulations for the tax procedures code, develop an action plan for pension reform, design a public investment system, and establish an expenditure control system at the commitment level. Implementation of the authorities' plan to improve the business climate will enhance the prospects for high growth. Public enterprises will be strengthened and the monitoring of their performance improved through the introduction of results-oriented contracts for their management. Directors also looked forward to steps to buttress the social safety net by broadening the coverage of the conditional cash transfer program and strengthening program evaluation mechanisms.

Paraguay Selected Economic Indicators
  2002 2003 2004 2005   2006 2007
          Prog. Est. Proj
Annual percent change; unless otherwise specified

National accounts and prices


GDP at current prices

10.0 22.5 16.4 11.2 13.1 12.7 10.6

GDP at constant prices

0.0 3.8 4.1 2.9 3.5 4.0 4.0

Per capita GDP (U.S. dollars, thousands)

0.9 1.0 1.2 1.3 1.4 1.6 1.9

GDP deflator

10.0 18.0 11.8 8.1 9.2 8.3 6.3

Consumer prices (end-of-period)

14.5 93 2.8 9.9 2.5-7.5 12.5 2.5-7.5

Real effective exchange rate 2/


Average (depreciation -)

-11.1 -6.7 3.7 -6.5 ... 12.5 ...

End-of-period (depreciation -)

-11.5 8.0 -8.4 4.6 ... 16.7 ...
In millions of U.S. dollars

External sector


Exports, f.o.b. (percentage change)

-1.6 16.8 32.0 14.9 7.8 45.8 13.3

Imports, c.i.f. (percentage change)

-14.6 14.4 27.0 22.5 5.4 50.4 10.2

Current account

93 125 139 -26 -180 -14.1 -146

(in percent of GDP)

1.8 2.3 2.0 -0.4 -2.2 -1.5 -1.3

Capital account

53 178 38 348 226 320 257

Overall balance

-81 211 270 130 46 402 244

Terms of trade (percentage change)

3.0 1.5 0.0 -15.6 4.3 -8.4 4.8
In percent of GDP

Savings-investment balance


Gross domestic investment

18.7 19.9 20.8 19.6 23.8 21.4 22.8

Private sector

12.2 14.8 16.1 14.6 18.8 16.6 17.2

Public sector

6.4 5.1 4.7 5.0 5.0 4.8 5.6

Gross national savings

20.5 22.2 22.8 19.2 21.6 19.9 21.5

Private sector

18.3 17.6 16.3 13.4 16.7 14.8 15.9

Public sector

2.2 4.6 6.5 5.8 4.9 5.1 5.6

Public sector


Central government primary balance

-1.9 1.0 2.7 1.9 1.0 1.5 0.9

Central government overall balance

-2.5 -0.3 2.0 0.6 0.0 0.1 0.0

Consolidated public sector primary balance 1/

-1.9 2.5 3.2 2.8 1.7 3.1 1.9

Consolidated public sector overall balance 1/

-3.8 0.0 1.8 0.9 0.0 0.4 0.0

Public sector debt (end-of-year) 2/

71.7 52.6 45.1 37.7 34.1 27.5 25.4


62.7 47.6 40.9 34.3 31.5 25.1 23.1


9.0 5.0 4.2 3.4 2.6 2.4 2.3

Consolidated public sector debt 3/

74.0 55.6 48.8 42.7 38.3 33.9 32.8
Annual percent change

Money and credit


Monetary base

-1.0 57.7 17.6 4.3 6.0 13.0 11.1


-2.2 24.9 24.6 16.1 8.5 15.3 12.0

M5 3/

-185 17.7 11.7 7.7 8.2 7.9 11.9

Credit to the private sector 4/

-20.9 -18.4 13.9 14.1 11.9 6.8 6.3

Velocity of M2

7.5 8.3 7.7 7.2 7.2 7.0 6.8



Memorandum items:


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

641 983 1,168 1,297 1,317 1,703 1.920

(In months of imports)

2.8 3.5 3.4 2.5 3.6 3.0 3.2

GDP (in billions of guaranies)

29,105 35,666 41,522 46,169 52,156 52,020 57,520

Sources: Paraguayan authorities; and Fund staff estimates.

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

2/ Nonfinancial Public Sector. Based on end-of-period exchange rate conversion of U.S. dollar-denominated debt.

3/ Includes Central Bank Bills (LRMs).

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


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