Public Information Notice: IMF Concludes Article IV Consultation with Paraguay
IMF News, May 18, 2001
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- Published: May 18, 2001
Background
- Real GDP per capita fell by over 5 percent during 1990-2000.
- Growth patterns and shocks:
- Moderate growth early in the decade; credit-driven expansion in mid-1990s.
- Banking crisis in 1996 halted expansion; sustained contraction thereafter.
- Steep decline in investment, falling terms of trade, slow growth among trading partners, and contraction of the re-export business reduced real GDP first in per capita terms and, since 1998, in absolute terms.
- Social outcomes:
- Poverty deepened, especially in rural areas, and income distribution became more unequal.
- Fiscal developments:
- Structural reforms and a comprehensive adjustment in 1990 produced fiscal surpluses in the first half of the decade and reduced the debt burden.
- Fiscal position deteriorated in the second half of the decade as the public wage bill and pension payments rose and the public sector assumed costs of a major banking crisis.
- Public enterprises’ cash flow was squeezed by tariffs not adjusted to costs.
- Social security system lost its surplus after half of its assets were frozen in intervened banks and ceased to earn interest.
- Public sector deficit reached more than 5½ percent of GDP in 2000, when spending surged and was financed by a large injection of external debt.
- Debt and external accounts:
- Public external debt doubled over the last five years to about 32 percent of GDP at end-2000.
- Virtually all external debt owed to multilateral agencies or foreign governments with relatively long residual maturity.
- Public sector net domestic position: net asset of around 2 percent of GDP, mainly from former social security surpluses.
- External current account: surpluses early in the decade; swung into deficit during mid-1990s expansion; deficit around 4 percent of GDP in 2000 after sharp increases in public spending.
- Monetary and exchange rate policy:
- Adjustable peg of the Guaraní vis-à-vis the US dollar maintained throughout the decade.
- Monetary policy focused on exchange rate control; early-1990s surpluses absorbed foreign inflows without domestic liquidity pressure.
- Monetary growth accelerated mid-1990s when the central bank assisted ailing banks.
- Widening public deficits late in the decade led to progressive loss of international reserves and higher frequency of exchange rate adjustments.
- Exchange rate anchor contributed to lowering inflation from over 40 percent in 1990 to single digits by decade’s end.
- Financial sector:
- Deregulation in early 1990s followed by a boom-bust cycle; prudential supervision was not strengthened contemporaneously.
- Credit expanded rapidly during upswing; real lending rates and spreads declined.
- Strains emerged mid-1990s; during 1995-98 several banks representing a third of total deposits were closed.
- Private sector credit contracted sharply; real interest rates rose to around 25 percent; depositors shifted to U.S. dollar assets.
- Foreign banks’ market share increased to over 80 percent.
- Recession since 1998 and banking crisis led to a sharp rise in non-performing loans and reluctance to extend credit.
- Capital flight increased during the last two years, reflecting deep lack of confidence and compounding credit shortages.
Executive Board Assessment
- Attribution of weak performance:
- Directors observed that adverse terms of trade and unfavorable external environment contributed to lackluster performance, but policy slippages bore large responsibility.
- Endorsement of authorities' program:
- Directors welcomed authorities' resolve to restore macroeconomic discipline and proceed with structural reforms in the context of a staff monitored program.
- Emphasized strict and timely implementation to restore investor confidence and pave the way for sustainable growth.
- Fiscal concerns and guidance:
- Concern over rapid deterioration of Paraguay's fiscal position.
- Noted weak economy reduced revenue but sharp expenditure increases were the determining factor in widening fiscal deficit.
- Welcomed authorities' intention to reduce the fiscal deficit in 2001 significantly to a lower level; encouraged by performance through end-April but stressed need to adhere to ambitious target.
- Observed limited scope for significant revenue improvement aside from curbing tax evasion and extending the tax base given low economic activity.
- Emphasized that reduction in deficit will require significant curtailment of expenditure, particularly current expenditure.
- Pointed to urgency of correcting growing imbalance in public sector employees' pension scheme.
- Recommended strengthening the tax base over the medium term along the Fund's Fiscal Affairs Department recommendations of 1999 to finance infrastructure and social services.
- Noted recent rapid public debt increase and significant unrecorded liabilities require vigilance; welcomed decision to prepare consolidated public sector debt accounts.
- Structural and enterprise sector recommendations:
- Stressed importance of structural reforms for stability and efficiency.
- Expressed concern over deterioration in Social Security Institute finances; urged elimination of direct lending by the Institute, separation of health and pension sections, and avoidance of concentration of its deposits in any single financial institution.
- Noted delays in tariff adjustments led to deterioration in public enterprise finances; suggested smaller but more frequent tariff changes to better cover costs while being more socially acceptable.
- Welcomed progress in privatization of telecommunications and water and sewage companies; encouraged completion this year, privatization of additional enterprises, and improved efficiency of remaining state enterprises.
- Cautioned against using privatization proceeds to finance public expenditure overruns.
- Encouraged planned reforms of the central administration.
- Monetary and financial sector guidance:
- Price stability should remain objective of monetary policy; importance of preserving and, if possible, increasing international reserves.
- Welcomed intention to allow market a larger role in determining the exchange rate and to act on interest rates if necessary to counter inflationary pressures.
- Agreed strict fiscal adjustment would help prevent large exchange rate and interest rate movements and safeguard banks' loan portfolio quality.
- Encouraged further strengthening of bank supervision.
- Specific institutional concerns:
- Welcomed commitment to address the National Development Bank problem by year-end.
- Concern over government plan to reschedule nonperforming loans to the industrial sector; urged regard for moral hazard risks and additional fiscal costs.
- Statistics and data:
- Welcomed marked improvement in statistical base (balance of payments, money, central government finances) but noted remaining weaknesses in national accounts calculations and statistical coverage of public enterprise operations and external tariffs.
- Recommended addressing data limitations per recent technical assistance recommendations by the Fund's Statistics Department.
- Encouraged progress toward meeting the General Data Dissemination Standard (GDDS).
Paraguay: Selected Economic Indicators (Prel. 1996–2000)
- Real economy (change in percent)
- GDP: 1.3; 2.6; -0.4; 0.5
- GDP per capita: -1.3; 0.0; -3.0; -2.1
- CPI (period average): 9.8; 7.0; 11.5; 6.8; 9.0
- CPI (end of period): 8.2; 6.2; 14.6; 5.7; 8.6
- Savings and investment (percent of GDP)
- Gross national savings: 19.7; 16.7; 21.0; 21.9; 19.0
- Gross domestic investment: 23.4; 23.6; 22.9; 23.0; 23.2
- Public finance (percent of GDP)
- Public sector savings: 6.1; 4.9; 3.3
- Public sector overall balance: -2.3; -1.0; -4.7; -5.7
- Money and interest rates
- Money (M1) (change in percent): 3.0; 13.5; 7.5; 9.5; 15.0
- Broad money (M2) (change in percent): 0.2; 5.5; -2.9; 10.7; 2.2
- Broad money incl. foreign currency deposits (M3) (change in percent): 12.8; 12.4; 8.8; 17.6; 3.6
- Interest rates (average, in percent per annum)
- Domestic currency deposits 1/: 13.0; 7.6; 6.7; 8.1
- Domestic currency loans 1/: 40.0; 36.0; 39.5; 39.2; 35.8
- Balance of payments (in millions of US$)
- Merchandise exports: 3,797; 3,328; 3,549; 2,673; 2,251
- Merchandise imports: 4,383; 4,192; 3,942; 3,042; 2,837
- Current account balance: -353; -650; -160; -86; -315
- Current account balance (percent of GDP): -3.7; -6.8; -1.9; -1.1; -4.2
- Net international reserves (end of period): 1062; 846; 875; 998; 772
- External public debt (end of period): 1,398; 1,444; 1,596; 2,108; 2,354
- External public debt (percent of GDP): 14.9; 16.1; 19.3; 28.9; 31.8
- Sources cited in PIN: Central Bank of Paraguay, Ministry of Finance; and Fund staff estimates.
- Note: 1/ Weighted annual average.
Public Information Notice: IMF Concludes Article IV Consultation with Paraguay (May 18, 2001).