IMF Executive Board Concludes First Review Under the Policy Coordination Instrument for Paraguay

IMF News, June 8, 2023

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Paraguay experienced a four-year period of multiple adverse shocks, including the impact of the Covid-19 pandemic and a severe drought in early 2022.
Economic growth is rebounding, mainly on behalf of the recovering agricultural sector.
Inflation peaked in 2022 but has since declined following a proactive and persistently tight monetary policy stance that helped anchor inflation expectations close to the central bank’s target.
The fiscal deficit was reduced to 3.0 percent of GDP in 2022 due to strengthening revenue and expenditure constraint.
The negative impact of lower exports on the external current account was absorbed by private-sector financing and a flexible exchange rate.

Economic growth is projected at 4.5 percent for 2023.
The external current account is projected to improve notably.
The rate of inflation is expected to converge back to the central bank’s target of four percent in the first half of 2024 at the latest.
The banking system is projected to remain stable, assuming continued sound supervision and healthy internal safeguards.
Paraguay is exposed to various external risks, but their potential impact appears moderate in the near-to-medium term.
Continued sound and credible fiscal policies will be critical to safeguard the favorable scenario.

The Executive Board concluded the First Review under the Policy Coordination Instrument for Paraguay on June 7, 2023, endorsing the staff appraisal on a lapse-of-time basis.
The two-year program under the PCI was approved in November 2022; the program supports macroeconomic policies and structural reforms to ensure macroeconomic and fiscal stability, foster economic growth, and enhance social protection and inclusion.
The program is performing well; all but two of the program’s targets for December 2022 were met.
The Board found Paraguay’s policy responses effective and appropriate:
- The shortfall in export earnings caused by the 2022 drought was weathered through private sector mobilization of external resources and moderate exchange rate adjustment, yielding a better-than-expected international reserves position at year-end.
- Fiscal policy held a steady course despite challenging international shocks to energy and food prices.
- The central bank’s early and proactive monetary tightening corresponded with a steadily decreasing inflation rate, with a favorable outlook to converge to the midpoint of the inflation target band by end-2023.
- Paraguay's banking system remains stable and solvent.

Rebuild fiscal buffers and reverse the significant build-up of public debt by reestablishing the fiscal deficit rule.
Advance structural reforms to strengthen public sector efficiency as part of a sustainable fiscal strategy.
Contain losses from the public servants’ pension fund (“Caja Fiscal”) and address contingent financial risks from unsupervised pension funds.
Improve public companies' oversight and strategic management to reduce fiscal risks.
Raise more domestic tax revenue to provide sufficient investment in infrastructure, health, and education to enhance productivity and shared prosperity.
Continue implementation of the structural reform agenda to modernize public institutions, increase government effectiveness, strengthen governance, control corruption, and improve the business climate.
Maintain sound supervision and healthy internal safeguards to preserve banking system stability.

Paraguay has made significant strides in developing social programs but still faces high informality, inequality, and poverty rates.
Recommended measures include improving the efficiency of social expenditure, expanding reach to more vulnerable populations, enhancing social program targeting, promoting greater formalization of the economy, and strengthening financial inclusion.
IMF staff concurs that reforms covered by this PCI would strengthen the efficient use of public resources and create more favorable conditions for private investment.

IMF Press Release No. 23203, June 8, 2023