IMF Executive Board Concludes 2017 Article IV Consultation with Paraguay

IMF News, July 24, 2017

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IMF Executive Board Concludes 2017 Article IV Consultation with Paraguay

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Bibliographic details

• Published: July 24, 2017

Background and recent performance

• Economic momentum and growth
  • Real GDP expanded by 6½ percent (y/y) during the first quarter of 2017.
  • Real GDP growth is projected to reach 4.2 percent in 2017.
  • Over the medium term, real GDP growth is expected to remain near potential of just below 4 percent.
  • Growth drivers: record soy harvest, booming construction activity, rebound in the maquila industry, strengthened private investment and consumption, and public investment.
  • Private credit growth remains weak.

• Inflation and monetary policy
  • Inflation remains below the newly lowered target of 4 percent, though underlying inflationary pressures are rising.
  • Monetary policy remains accommodative after two policy rate cuts in mid-2016.
  • Recommendation: monetary accommodation should be gradually removed as underlying inflationary pressures rise and bank credit growth resumes.

• Fiscal policy
  • Fiscal deficit outturn of 1.4 percent of GDP last year complied with the Fiscal Responsibility Law (FRL).
  • Fiscal policy characterized by restraint in current expenditures and a shift towards capital spending.
  • The 2017 budget culminated in an unprecedented presidential veto, indicating need to strengthen the budget process and Public Financial Management (PFM) framework.
  • Recommendation: modify assessment of FRL compliance to include the execution stage as well as the budget approval stage; reform pension and health systems to address imbalances.

• External sector
  • Current account surplus expected to narrow to 1.2 percent of GDP in 2017 from 1.7 percent in the previous year, despite solid export growth.
  • The external position is assessed to be stronger than implied by fundamentals and desirable policies.
  • Recommendation: drain excess liquidity through additional issuance of BCP paper (IRMs) and selling dollar reserves; limit discretionary FX interventions to exceptional circumstances.

Executive Board assessment and policy advice

• Overall assessment
  • Paraguay has grown faster than others in the region, with above-potential growth around 4 percent in 2016 and 2017, outperforming main trading partners and the Latin-American average.
  • Some positive supply shocks (climate-related) acted as tailwinds in agriculture and electricity.

• Monetary policy guidance
  • The IT framework is serving Paraguay well but can be further strengthened.
  • Recommendations:
  • Tighter operation of the policy corridor.
  • Strengthen predictability of foreign exchange operations.
  • Limit discretionary FX interventions to exceptional circumstances (e.g., disorderly market conditions).
  • Increase forward-looking policy guidance in public statements to enhance communications and predictability.
  • Address high credit dollarization, which limits BCP’s ability to affect market interest rates.

• Fiscal and structural policy guidance
  • Strengthen the budget process and PFM framework.
  • Further fiscal reforms needed; pension and health system reforms required to tackle near- and longer-term imbalances.
  • Tax reform advice: rebalance away from indirect taxation, maintain low income tax rates but limit deductions to improve progressivity and finance education, training, and conditional cash transfers.
  • Increase investment in transportation and electricity transmission and distribution to close infrastructure gaps.
  • Strengthen implementation of National Development Plan (NDP) priorities to secure gains in reducing inequality.

Financial sector and supervision

• Banking system soundness and challenges
  • Banking system remains profitable; reported capital ratios appear comfortable.
  • Broad-based measures of loan quality deteriorated and remain at elevated levels; banks have increased provisioning and NPLs remain manageable.
  • Credit from unregulated non-traditional lenders is growing but remains a small fraction of credit.
  • Ongoing adjustment in bank balance sheets will take more time to complete.

• Regulatory and supervisory priorities
  • Progress: ratification of a new banking law in December 2016 and introduction of risk-based bank supervision.
  • Further priorities:
  • Revisions to the BCP organic charter.
  • Establishment of a financial stability council.
  • Implementation of deposit insurance for savings and loan cooperatives.
  • Integrating financial information through a single credit bureau.
  • Approve legislation regarding the Sociedades Anonimas and bearer securities in line with international standards to enhance entity transparency and safeguard correspondent banking relationships.

Data, transparency, and statistical dissemination

• Paraguay implemented an enhanced general data dissemination (e-GDDS) system to make essential macroeconomic data available.
• Executive Directors encouraged completing remaining steps to satisfy Special Data Dissemination Standard (SDDS) requirements.

Selected economic and social indicators (selected exact figures from report)

• Social and demographic indicators
  • Population 2016 (millions): 6.8
  • Gini index (2015): 47.1
  • Unemployment rate (2016): 6.0
  • Life expectancy at birth (2015): 73.0
  • Percentage of population below the poverty line (2016): 28.9
  • Adult illiteracy rate (2015): 4.5
  • Rank in UNDP development index (2015): 110 of 186
  • GDP per capita (US$, 2016): 4,003

• Selected economic indicators (annual percent change, unless otherwise indicated)
  • Real GDP: 2016 = 4.1; 2017 (Proj.) = 4.2; 2018 (Proj.) = 3.9
  • Nominal GDP: 2016 = 9.6; 2017 (Proj.) = 8.4; 2018 (Proj.) = 7.7
  • Consumer prices (end of period): 2016 = 3.7; 2017 (value not listed)
  • Nominal exchange rate (Guarani per U.S. dollar, eop): 2011 = 4,440; 2012 = 4,289; 2013 = 4,524; 2014 = 4,626; 2015 = 5,807; 2016 = 5,767
  • Credit to private sector 1/: 2011 = 25.6; 2012 = 15.8; 2013 = 19.7; 2014 = 19.8; 2015 = 8.7; 2016 = 1.2; 2017 (Proj.) = 0.7; 2018 (Proj.) = 2.3
  • Monetary policy rate, year-end: 2011 = 7.3; 2012 = 5.5; 2013 = 5.8
  • Exports (fob, values): 2011 = 20.7; 2012 = -7.8; 2013 = 16.7; 2014 = -3.7; 2015 = -16.8; 2016 = 2.4
  • Imports (cif, values): 2011 = 22.9; 2012 = -5.9; 2013 = 7.8; 2014 = 1.1; 2015 = -14.6; 2016 = -5.1; 2017 (Proj.) = 6.6; 2018 (Proj.) = 7.9
  • Terms of trade: 2011 = 14.3; 2012 = -10.2; 2013 = 11.4; 2014 = 9.8; 2015 = -4.9; 2016 = 3.5; 2017 (Proj.) = -4.3
  • Current account (in percent of GDP): 2011 = 0.4; 2012 = -2.0; 2013 = 1.7; 2014 = -0.4; 2015 = -1.1; 2016 = 0.1; 2017 (Proj.) = 1.2 (noted earlier in text)
  • Exports (in percent of GDP): 2011 = 50.3; 2012 = 47.4; 2013 = 47.0; 2014 = 42.4; 2015 = 39.9; 2016 = 40.7; 2017 (Proj.) = 40.4
  • Imports (in percent of GDP): 2011 = -46.9; 2012 = -45.1; 2013 = -41.2; 2014 = -39.1; 2015 = -37.8; 2016 = -35.7; 2017 (Proj.) = -35.9; 2018 (Proj.) = -36.4
  • Gross international reserves (in millions of U.S. dollars): 2011 = 4,984; 2012 = 4,994; 2013 = 5,871; 2014 = 6,891; 2015 = 6,200; 2016 = 7,143; 2017 (Proj.) = 8,128; 2018 (Proj.) = 8,244
  • Gross domestic investment (in percent of GDP): 2011 = 17.1; 2012 = 15.1; 2013 = 15.4; 2014 = 16.3; 2015 = 16.8; 2016 = 18.0; 2017 (Proj.) = 20.2; 2018 (Proj.) = 20.6
  • Gross national saving (in percent of GDP): 2011 = 13.0; 2012 = 21.4
  • Central government revenues (in percent of GDP): 2011 = 19.0; 2012 = 17.9; 2013 = 18.7; 2014 = 18.3
  • Of which: Tax revenues (in percent of GDP): 2011 = 12.6; 2012 = 12.7; 2013 = 12.5
  • Central government expenditures (in percent of GDP): 2011 = 17.0; 2012 = 18.8; 2013 = 20.5; 2014 = 19.5; 2015 = 19.6
  • Of which: Compensation of Employees (in percent of GDP): 2011 = 9.4; 2012 = 8.8; 2013 = 9.3; 2014 = 8.5; 2015 = 8.3
  • Of which: Net Acquisition of Non Financial Assets (in percent of GDP): 2011 = 2.6
  • Central government net lending/borrowing (in percent of GDP): 2011 = -1.7; 2012 = -1.4; 2013 = -1.5
  • Central government primary balance (in percent of GDP): 2011 = 1.3; 2012 = -0.7; 2013 = -0.8
  • Public sector debt (excl. central bank bills, in percent of GDP): 2011 = 16.2; 2012 = 24.0; 2013 = 24.6; 2014 = 25.4; 2015 = 25.1
  • Of which: Foreign currency (in percent of GDP): 2011 = 11.0; 2012 = 20.8
  • Of which: Domestic currency (in percent of GDP): 2011 = 5.4
  • Memorandum items:
  • GDP (billions of Guaranies): 2011 = 105,203; 2012 = 108,832; 2013 = 125,152; 2014 = 137,798; 2015 = 142,003; 2016 = 155,603; 2017 (Proj.) = 168,691; 2018 (Proj.) = 181,666
  • GDP (US$ billions): 2011 = 29.0; 2012 = 30.9; 2013 = 27.3; 2014 = 27.4

Source: IMF press release — July 24, 2017. Executive Board concluded the 2017 Article IV consultation with Paraguay and considered and endorsed the staff appraisal without a meeting.

References

• The Executive Board
• Paraguay and the IMF
• Press Releases
• PRESS CENTER
• https://www.imf.org/en/home