IMF Executive Board Concludes 2020 Article IV Consultation with Paraguay

IMF News, March 4, 2021

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IMF Executive Board Concludes 2020 Article IV Consultation with Paraguay

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• Published: March 4, 2021

Pandemic shock, policy response, and social impact

• Paraguay was rebounding from a bad weather induced downturn in 2019 with full-year growth forecast at over 4 percent in early 2020; the Covid-19 epidemic halted the recovery.
• An early lockdown kept the death toll among the lowest in the region but led to a sharp economic contraction, with women, informal sector workers and service workers particularly hard hit.
• Government measures:
  • Health: quickly expanded medical resources.
  • Social: started two new and temporary social assistance programs and temporarily expanded a third.
  • Economic: increased investment and other spending; central bank lowered interest rates, increased liquidity provision, and allowed banks to renew, refinance and restructure loans without penalty.
• Fiscal outcome: emergency spending together with a fall in tax revenues led to a further increase of the deficit to 6½ percent of GDP, well above the ceiling set by the Fiscal Responsibility Law.

Macroeconomic developments and outlook

• Real GDP:
  • Likely shrunk by about 1 percent in 2020.
  • Projected to rebound by 4 percent in 2021.
• Inflation:
  • Hit a historical low in mid-2020.
  • Recovered to 2.2 percent in December 2020.
  • Projected to remain below the midpoint of the central bank’s target range through 2021.
• Key downside risk: the Covid-19 epidemic poses the highest risk to the outlook.

Executive Board assessment — key findings and policy guidance

• Commendation:
  • Directors commended the authorities for their response to the COVID-19 pandemic, which limited the number of cases and deaths and mitigated negative economic and social impacts.
• Risks:
  • Downside risks remain substantial, including from a worsening of the COVID-19 pandemic and negative weather shocks.
• Fiscal policy:
  • Directors agreed the widening of the fiscal deficit in 2020 had been appropriate.
  • Fiscal support should not be withdrawn prematurely, particularly if risks such as a worsening of the COVID-19 pandemic or negative weather shocks materialize.
  • Important to uphold health and social spending while protecting public investment.
  • Encouraged a gradual return to lower deficits once the pandemic abates to maintain fiscal sustainability.
  • Welcomed authorities’ plan to return to the deficit ceiling under the fiscal responsibility law by 2024.
  • Improving expenditure efficiency and transparency and domestic tax revenue mobilization would be important to cover social and investment spending needs.
• Monetary and financial sector policy:
  • Noted that monetary and financial sector policies were appropriately accommodative.
  • Encouraged close monitoring of financial sector stability while gradually phasing out emergency measures.
  • Recommended allowing exchange rate flexibility in line with fundamentals and limiting foreign exchange interventions to prevent disorderly market conditions.
• Structural reforms and governance:
  • Emphasized need to press ahead with structural reforms to improve governance, business climate, and human capital.
  • Welcomed the authorities’ reform agenda as formulated in their Economic Recovery Plan.
  • Commended efforts to safeguard integrity of COVID-19 funds for social transfers and emergency spending.
  • Took note of the newly adopted anti-corruption plan, partly based on staff’s governance assessment project recommendations.
  • Welcomed recent progress in the AML/CFT regulatory framework and encouraged further strengthening of institutional capacity for effective implementation.

Paraguay: Selected economic and social indicators (selected figures preserved exactly)

• Social and demographic (2018 unless noted):
  • Population 2018 (millions): 7.1
  • Gini index (2018): 46.2
  • Unemployment rate (2019): 6.5
  • Life expectancy at birth (2018): 74.1
  • Percentage of population below the poverty line (2018): 24.2
  • Adult literacy rate (2018): 94.0
  • Rank in UNDP development index (2019): 98 of 189
  • GDP per capita (US$, 2019): 5,451
• Selected economic series (annual percent change unless otherwise indicated; columns: 2017, 2018, 2019, 2020, 2021, 2022, 2023, 2024, 2025 where provided):
  • Real GDP: 5.0; 3.4; 0.0; -0.9; 4.0; 3.5
  • Nominal GDP: 7.2; 5.6; 2.8; 2.9; 9.5; 6.9; 7.6; 6.8
  • Per capita GDP (U.S. dollars, thousands): 5.7; 5.3; 5.2; 5.5; 6.0; 6.2
  • Consumption (contribution to real GDP growth): 3.1; 0.4; -2.2; 4.4; 3.9; 2.7; 2.4
  • Investment (contribution to real GDP growth): 2.5; -0.4; -0.1; 1.4; 0.7; 0.9; 0.8; 1.0
  • Net Exports (contribution to real growth): -0.7; -1.8; -0.6; -1.5
  • Consumer prices (end of period): 4.5; 3.2; 2.3
  • Nominal exchange rate (Guarani per U.S. dollar, eop): 5,590; 5,961; 6,453; …
  • Credit to private sector 1/: 4.9; 14.1; 9.7; 8.1; 5.4
  • Exports (fob, values): 11.8; -9.3; -13.7; 27.0; 7.3; 7.5; 4.1
  • Imports (cif, values): 17.8; 12.1; -4.6; -23.5; 30.2; 12.6
  • External current account (percent of GDP): 1.5; 0.6
  • Trade balance (percent of GDP): -0.3; 1.6; 2.1; 1.9; 1.7
  • Exports (percent of GDP): 34.3; 34.2; 32.9; 29.8; 36.0; 36.4; 36.7; 36.3; 35.9
  • Of which: Electricity: 4.3; 4.2; 3.8
  • Imports (percent of GDP): -29.5; -32.0; -32.3; -26.0; -32.2; -34.1; -33.9; -33.7; -33.5
  • Of which: Oil imports: -4.0; -3.5; -2.5; -2.8; -2.7
  • Gross international reserves (in millions of U.S. dollars): 8,145.7; 8,004.0; 7,996.1; 8,496.1; 8,996.1; 9,546.1; 10,096.1
  • In months of next-year imports of goods and services: 8.9; 6.7; 6.4; 6.6
  • Ratio to short-term external debt: 2.6; 1.8
  • Gross domestic investment (percent of GDP): 21.2; 22.8; 22.4; 22.3; 22.2
  • Gross domestic saving (percent of GDP): 24.3; 21.8; 23.6; 23.7; 23.0; 22.7
  • Central government revenues (percent of GDP): 14.2; 13.9; 13.1; 13.7; 14.0
  • Of which: Tax revenues: 9.9; 9.2; 9.3; 10.0; 10.1; 10.2
  • Central government expenditures (percent of GDP): 15.3; 16.9; 19.6; 17.1; 16.5; 16.0; 15.4
  • Of which: Compensation of Employees: 6.3; 6.1; 5.8
  • Of which: Net Acquisition of Nonfinancial Assets: 2.0; 3.0
  • Central government net lending/borrowing (percent of GDP): -1.1; -1.4; -6.5; -2.1
  • Central government primary balance (percent of GDP): -2.0; -5.5
  • Public sector debt (excl. central bank bills, percent of GDP): 19.8; 25.6; 34.9; 35.4; 36.1; 35.7
  • Of which: Foreign currency: 15.8; 18.0; 30.1; 30.6; 31.4; 31.2; 31.0
  • Of which: Domestic currency: 4.8; 4.7; 5.1
• Memorandum items:
  • GDP (billions of Guaranies) 3/: 219,188; 231,489; 238,054; 244,955; 268,105; 286,678; 308,567; 329,550; 351,880
  • GDP (US$ billions): 39.4; 40.4; 38.1

Sources noted in original material: Central Bank of Paraguay; Ministry of Finance; and IMF staff estimates and projections.

Source: IMF Communications Department press release, March 4, 2021.

References

• https://www.imf.org/-/media/images/imf/bios/imfboard.jpg
• The Executive Board
• IMF COVID-19 Hub
• Policy Tracker
• Financial Assistance
• Questions & Answers
• Paraguay and the IMF
• Press Releases
• PRESS CENTER
• http://www.IMF.org/external/np/sec/misc/qualifiers.htm
• https://www.imf.org/en/home