IMF Executive Board Concludes 2022 Article IV Consultation with Paraguay
IMF News, June 21, 2022
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- Published: June 21, 2022
Overview
- The Executive Board concluded the Article IV consultation with Paraguay on June 15, 2022 and endorsed the staff appraisal without a meeting on a lapse-of-time basis.
- After two consecutive years of GDP decline, Paraguay’s economy rebounded in 2021, growing by 4.2 percent.
- The Covid-19 pandemic currently appears under control and most remaining restrictions have recently been lifted.
- Annual headline inflation reached 11.8 percent in April 2022, driven primarily by higher food and fuel prices and exacerbated by the war in Ukraine.
- The Central Bank of Paraguay raised its policy rate by a cumulative 650 basis points to 7.25 percent by end-May 2022.
- The fiscal deficit fell from 6.1 percent of GDP in 2020 to 3.7 percent of GDP in 2021, partly due to expiration of one-off emergency measures.
- The authorities remain committed to the medium-term fiscal target of converging back to the 1.5 percent of GDP deficit limit under the Fiscal Responsibility Law.
Recent Macroeconomic Developments
- 2021 real GDP growth: 4.2 percent.
- Contractions in 2021: agricultural production and electricity generation.
- Inflation dynamics: annual headline inflation rose sharply in second half of 2021 and reached 11.8 percent in April 2022.
- Monetary policy response: policy rate increased by 650 basis points to 7.25 percent by end-May 2022.
- Fiscal position: deficit peaked at 6.1 percent of GDP in 2020 and declined to 3.7 percent of GDP in 2021.
Outlook and Projections
- 2022 GDP growth projected at 0.3 percent (diminished by heatwaves and a severe drought).
- 2023 GDP growth projected at 4.5 percent.
- Medium-term growth projected at 3.5 percent.
- End-2022 inflation projected at about 8 percent (above the central bank’s tolerance corridor of 4 percent +/- 2 percent) with convergence back to the authorities’ target by end-2023.
- Table highlights (selected series, actuals and projections):
- Real GDP: 2018: 3.2; 2019: -0.4; 2020: -0.8; 2021: 4.2; 2022: 0.3; 2023: 4.5; 2024: 3.5.
- Nominal GDP (annual percent change): 2018: 5.2; 2019: 2.6; 2020: 1.4; 2021: 10.1; 2022: 10.9; 2023: 8.9; 2024: 7.2; 2025: 8.1; 2026: 7.7; 2027: 7.9.
- Per capita GDP (U.S. dollars, thousands): 2018: 5.7; 2019: 5.3; 2020: 4.9; 2021: 5.6; 2022: 5.9; 2023: 6.2; 2024: 6.5; 2025: 6.8; 2026: 7.1.
- Consumer prices (end of period): 2018: 2.2; 2019: 8.0; 2020: 4.0.
- Nominal exchange rate (Guarani per U.S. dollar, eop): 2018: 5,961; 2019: 6,453; 2020: 6,917; 2021: 6,879.
- Monetary policy rate, year-end: 0.75; 5.25 (years not specified in table snippet).
- Gross international reserves (millions of U.S. dollars): 2018: 8,004; 2019: 7,500; 2020: 9,976; 2021: 10,570; 2022: 10,070; 2023: 11,120; 2024: 11,670; 2025: 12,220; 2026: 12,770.
- Reserves in months of next-year imports of goods and services: 7.0; 8.3; 8.2; 8.4; 8.5.
- Public sector debt (excl. central bank bills): 2018: 22.3; 2019: 25.8; 2020: 36.9; 2021: 37.7; 2022: 39.5; 2023: 39.0; 2024: 38.7; 2025: 37.9; 2026: 37.2; 2027: 36.5.
- Central government revenues (percent of GDP): 14.0; 14.2; 13.5; 13.6; 13.8; 13.7.
- Central government expenditures (percent of GDP): 15.4; 17.0; 19.7; 17.8; 16.7; 16.0; 15.3; 15.2.
- Central government net lending/borrowing (percent of GDP): -1.4; -6.1; -3.7; -3.2; -2.3.
- Central government primary balance (percent of GDP): -0.7; -2.0; -0.9; 0.0; 0.1.
- GDP (billions of Guaranies): 2018: 230,576; 2019: 236,567; 2020: 239,915; 2021: 264,103; 2022: 292,829; 2023: 318,781; 2024: 341,889; 2025: 369,614; 2026: 398,138; 2027: 429,456.
- GDP (US$ billions): 40.2; 35.4; 38.3 (years corresponding to entries in table snippet).
Risks and Vulnerabilities
- Near-term risks include fiscal pressures from demands for salary increases and various bills in Congress.
- Paraguay is vulnerable to climate change over a longer horizon, facing risks from changes in precipitation patterns and the frequency and intensity of severe weather events.
- Recent heatwaves and a severe drought diminished 2022 GDP growth prospects to 0.3 percent.
- External position in 2021 was stronger than implied by fundamentals and desirable policies, but external and global inflationary pressures continue to pose challenges.
Executive Board Assessment
- Executive Directors endorsed the staff appraisal.
- After three years of continuous external shocks, Paraguay faces difficult challenges in 2022 and beyond.
- Countercyclical fiscal policies since 2019 mitigated shocks but raised public debt and depleted fiscal buffers.
- Monetary policy needs to maintain a tightening bias in the face of global inflationary pressures while avoiding undue strains on the financial system and the economy.
- The commitment to the Fiscal Responsibility Law (FRL) fiscal rule should be maintained to protect fiscal credibility.
- Codifying the return to the deficit ceiling in the updated Fiscal Responsibility Law (awaiting discussion in Congress) would be helpful given rocky transition prospects.
Policy Recommendations and Structural Priorities
- Fiscal policy and revenue:
- Rebuild fiscal space to address substantial spending needs in public health, education, basic infrastructure, and climate resilience.
- Eliminate waste and raise public spending efficiency.
- Increase private sector involvement, for example through public-private partnerships.
- Raise more domestic revenue: there is room to increase the tax-to-GDP ratio over the medium term.
- Continue improving tax administration and reassess Paraguay’s special tax regimes for specific sectors and activities.
- Consider a tax reform that goes beyond improvements enacted in 2020.
- Social protection:
- Carry lessons from Covid-19 temporary social assistance programs into upgrading the system of beneficiaries of the overall social safety net.
- Improve targeting of cash transfers where feasible using data collected during the pandemic response.
- Monetary and financial sector policy:
- Return to price stability remains the main objective of the Central Bank; maintain a balanced, patient, and data-dependent approach to monetary policy.
- Further monetary policy adjustments should be flexible and informed by inflation drivers and feedback effects between actual inflation and inflation expectations.
- Continue to deepen and widen financial supervision and implement risk-based supervision.
- Extend the supervisory perimeter to include pension funds and strengthen the independence and integrity of the regulatory agency for financial cooperatives.
- Continue efforts to enhance financial inclusion and follow guidance from the peer evaluation on AML/CFT issues.
- Structural reforms and governance:
- Step up implementation of structural reforms to improve governance, business climate, and public sector efficiency.
- Prioritize reforms of public procurement, the civil service, and the structure of the state—legal bills for these reforms are already largely formulated.
- Integrate policies to counteract climate change into national development planning and the medium- and long-term fiscal budget.
- Leverage Paraguay’s favorable electricity matrix for the transition toward net-zero GHG consumption and production routines.
- Complement transition efforts with further investment in renewable energy supply and revitalized initiatives to stop deforestation and degradation.
Press Release No. 22/217 — IMF Communications Department, June 21, 2022.