Public Information Notice: IMF Concludes Article IV Consultation with Paraguay

January 29, 1999

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.

On January 8, 1999, the Executive Board concluded the Article IV consultation with Paraguay1.


The economic performance of Paraguay continues to be subdued. After a protracted recession during the 1980s, real GDP growth in the 1990s averaged 2.6 percent, approximately the rate of population growth. Since 1995, economic activity has been adversely affected by repeated difficulties in the banking system, which eroded confidence and, together with a slowdown in demand in trading partners, contributed to reduce real GDP growth to only ½ percent in 1998. Inflation was gradually lowered from 44 percent in 1990 to 6.2 percent at the end of 1997. However, following a depreciation of the guaraní at the beginning of 1998, it picked up to 14.6 percent at the end of the year.

For several years prior to 1997, the nonfinancial public sector achieved surpluses averaging around 2 percent of GDP a year. Beginning in 1997, however, this balance slipped into a deficit caused mainly by weakened tax collection, strong wage growth, and the need to undertake long delayed maintenance investment. At the level of the central government, the deficit reached almost 1½ percent of GDP in 1997, and continued to grow rapidly in the first half of 1998. The new administration that took office in August put in place measures to cut current expenditures, eliminate tax exemptions, and tighten tax administration, managing thereby to contain the deficit at a level somewhat below that of the previous year.

A total of 13 domestic banks (about a third of the banking system) and a number of other financial institutions have failed since 1995. The liberalization of financial markets earlier in the decade took place in an environment of weak supervision and poor enforcement of prudential regulations. Solvency problems first surfaced in 1995 and by mid-1998, only a few domestic banks remained in operation. Most deposits shifted into foreign-owned banks, which are generally healthy. The new government took action by suspending operations of three of the remaining weak banks, and by submitting to Congress a law proposal to clean up the banking system. The cumulative cost of the banking crisis during the period 1995-98 is estimated at most at 13 percent of 1998 GDP. Some 5 percent of this cost remains to be paid, about half of which is expected to be settled with government bonds.

Monetary conditions reflected the increasing financing needs of the public sector and of banks in distress. With the authorities trying to limit the adjustment of the exchange rate to that indicated by the inflation differential with main trading partners, the accelerated growth in the net domestic assets of the central bank led to a substantial loss of foreign reserves. In December 1997, after reserves had declined by close to 40 percent from their peak in 1996, the central bank temporarily abandoned its support for the guaraní, which depreciated by some 20 percent. Since April 1998 the exchange rate was again kept relatively stable, with international reserves recovering to US$890 million. The weakening of domestic economic activity kept inflation below the rate of depreciation and, in real effective terms, the guaraní is estimated to have depreciated by 9 percent during 1998.

The current account deficit narrowed from 5 percent of GDP in 1997 to 3 percent of GDP in 1998. This was mainly the result of a sharp fall in imports, reflecting weak domestic demand and the effects of the exchange rate depreciation. Tighter controls along the border and slowing demand in Brazil led to a marked reduction in cross-border trade. The current account deficit in 1998 was financed by foreign direct investment and net disbursements from multilateral sources.

Executive Board Assessment

Directors observed that the difficult external environment in 1998 had compounded the lackluster performance of Paraguay’s economy in recent years. This weak performance was in great measure the result of persistent difficulties in the financial sector and the failure to implement needed structural reforms. Directors underscored the point that the economic situation remains precarious and that, while the new administration has made progress on a number of fronts, much still remains to be done. While recognizing that the task was complicated by a weak institutional framework and a large informal economy, Directors stressed the need for the authorities to act expeditiously to resolve the problems of the financial sector, restore a balanced financial position to the public sector, and revitalize the structural reform process so as to achieve sustained economic growth.

Directors emphasized that the problems in the financial sector had become a major impediment to growth by diverting scarce financial resources to support ailing banks and increasing uncertainty among investors. They welcomed the authorities’ determined move to close weakfinancial institutions, and the steps taken to modernize the banking and supervisory legislation. In this regard, Directors encouraged the authorities to make use of technical assistance from the Fund and others to strengthen the technical and administrative capabilities of the Banking Superintendency. They also encouraged the authorities to reflect the cost of bank restructuring in the public finances. Directors expressed concern over delays in the approval of legislation to speed up the banking resolution process, and noted the increased moral hazard associated with the proposed excessive deposit insurance coverage of large depositors.

Directors commended the new administration on the progress it had made over the past few months in containing the deterioration of the fiscal accounts and improving tax administration. They noted nonetheless that there was still considerable room for broadening the tax base. Directors expressed concern about the downside risks associated with some of the assumptions underlying the 1999 budget, and encouraged the authorities to consider contingent tax and expenditure measures to ensure attainment of their overall budget target. They agreed with the authorities on the need to reorder budgetary priorities so as to reorient expenditure toward spending in health, education, and investment in basic infrastructure. Directors also underscored the importance of addressing the legal and administrative rigidities impeding a reduction in the public sector workforce, and stressed the need to restrain wage adjustments in the public sector.

Directors noted that the large central bank outlays stemming from the bank cleanup had added to the difficulties in managing monetary policy. They cautioned the authorities to manage liquidity conditions carefully in order to lower inflation and avoid a further loss of international reserves. In this regard, it will be crucial to allow for flexibility in the use of the interest rate and the exchange rate instruments to attain these objectives.

Directors encouraged the authorities to pursue their economic diversification efforts through improvements in the overall economic and business environment, but expressed concern over the slow progress of structural reform. They encouraged the authorities to implement their plans to allow private participation in the equity and management of public enterprises, including major utilities companies. At the same time, Directors underscored the importance of sequencing structural reforms appropriately while proceeding with the necessary changes in the civil service and the social security system. They also expressed concern over the high level of the minimum wage vis-à-vis Paraguay’s major trading partners, and noted that the rigidities embodied in present labor market arrangements would become more evident as the economy opened itself to world trade. Directors therefore urged the authorities to proceed with the necessary labor reforms.

Directors expressed concern that, despite recent efforts to correct deficiencies in a number of areas, basic economic and financial data in Paraguay are still deficient and are hampering the meaningful discussion of macroeconomic policy. They urged the authorities to intensify their efforts to improve the coverage and timeliness of the country’s statistics.

Paraguay: Selected Economic Indicators

1994 1995 1996 1997 1998

Real economy (change in percent)
GDP 3.1 4.7 1.3 2.6 0.6
GDP per capita 0.5 2.1 -1.3 0.0 -2.0
CPI (end of period) 18.3 10.5 8.2 6.2 14.6
CPI (period average) 20.7 13.5 9.8 8.3 11.9
Gross national savings (percent of GDP) 22.6 19.9 20.0 18.5 17.9
Gross domestic investment (percent of GDP) 23.4 23.9 23.3 23.6 21.0
Public finance (percent of GDP)
Nonfinancial public sector savings 4.9 7.8 6.1 6.7 5.6
Nonfinancial public sector overall balance 1.5 2.5 1.7 -0.8 -1.2
Money and interest rates
Money (M1) (change in percent) 32.8 21.0 2.0 13.4 11.2
Broad money (M2) (change in percent) 38.4 30.5 13.3 7.3 1.8
Broad money incl. foreign currency deposits 2.4 18.6 20.1 11.2 16.4
(M3) (change in percent)
Interest rates (average, in percent per annum)
Domestic currency deposits1 18.3 14.7 13.0 7.6 7.5
Domestic currency loans1 34.4 33.3 30.6 27.1 30.8
Balance of Payments (in millions of US$)
Merchandise exports 3,422 4,231 4,004 3,768 3,600
Merchandise imports -3,604 -4,493 -4,382 -4,215 -3,660
Current account balance -56 -364 -317 -483 -265
(percent of GDP) -0.7 -4.1 -3.3 -5.0 -3.1
Net international reserves (end of period) 1,043 1,128 1,097 917 890
External public debt (end of period) 1,241 1,328 1,336 1,448 1,490
(percent of GDP) 15.9 14.7 13.8 15.0 17.3

Sources: Central Bank of Paraguay, IMF staff estimates.

1Weighted average of different maturities.

1Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of directors, and this summary is transmitted to the country's authorities. In this PIN, the main features of the Board's discussion are described.


Public Affairs    Media Relations
E-mail: E-mail:
Fax: 202-623-6278 Phone: 202-623-7100