IMF Staff Completes 2017 Article IV Mission to Paraguay
IMF News, June 2, 2017
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- Published: June 2, 2017
Growth outlook and near-term macroeconomic assessment
- Paraguay’s economy is performing robustly, with growth among the highest in Latin America.
- Stronger growth drivers identified: positive supply shocks in key sectors, firmer private spending, and public sector efforts to close infrastructure gaps.
- Signs of the expansion becoming more broad based across sectors.
- Forecast revision: real GDP growth forecast revised upwards to 4.3 percent for 2017.
- Recent wage increases expected to support consumption; investment is picking up, reflecting both public and private sector activity.
- External current account outlook: the external current account surplus is expected to narrow with imports gaining strength relative to last year.
- International reserves remain above standard adequacy measures.
Monetary policy and inflation
- The BCP lowered the inflation target from 4.5 to 4 percent earlier this year.
- Headline inflation has been rising and underlying inflation pressures have edged higher, though still below target.
- Monetary conditions remain accommodative; inflation expectations appear to be well anchored around the lower target.
- Policy guidance and operational recommendations:
- If expansion continues and bank credit growth resumes, monetary policy accommodation should be gradually removed to maintain low inflation.
- Monetary policy effectiveness could be further enhanced by strengthening the central bank’s policy framework and improving predictability.
- For the operation of the interest rate corridor, continue efforts in draining excess liquidity through additional issuance of Instrumentos de Regulación Monetaria to better align targeted policy rates with interbank rates.
- Predictability of foreign exchange operations could be improved, given that dollar sales have not always been implemented as announced; discretionary interventions should continue to be limited to exceptional circumstances such as disorderly market conditions.
- Greater use of forward-looking policy guidance in public statements could strengthen communications, policy signals, and improve the public’s understanding of the BCP’s reaction function.
- Note: credit dollarization remains high.
Fiscal policy, budget process, and public investment
- Fiscal stance: the broadly neutral fiscal stance envisaged for 2017 is appropriate; public sector debt is relatively low and remains on a sustainable path.
- Authorities have shown restraint on the growth of current primary expenditures while accelerating public investment.
- 2017 budget process issue: the 2017 budget culminated in an unprecedented presidential veto, highlighting the need to strengthen the budget process.
- Recommendations to strengthen fiscal credibility and governance:
- Modify the assessment of Fiscal Responsibility Law (FRL) compliance to include the execution stage as well as the budget approval stage.
- Strengthen the budget process with procedural rules requiring any amendments to have an offset to respect a given budgetary envelope.
- Continue a growth-friendly shift in composition towards capital investment to close infrastructure gaps and improve public investment management (to generate more infrastructure for each guaraní spent).
Financial sector health and supervision
- Banking system: remains profitable and well capitalized.
- Credit dynamics and risks:
- Given past rapid credit growth, some sectors need to reduce indebtedness and ongoing adjustment in bank balance sheets will take more time to complete.
- Broad-based measures of loan quality deteriorated last year; banks have increased provisioning and NPLs remain manageable.
- There are signs that credit from unregulated non-traditional lenders is growing, but this remains a small fraction of credit.
- Financial sector reform agenda and recommended initiatives:
- 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.
- Approving legislation regarding the Sociedades Anonimas to bring regulations on bearer securities on par with international standards and help safeguard banking correspondent relationships.
- Note: authorities ratified a new banking law in December 2016; risk-based bank supervision has been introduced.
Revenue mobilization and tax administration
- Progress: over the last decade, essential measures implemented to strengthen tax administration and revenue mobilization with IMF technical assistance; institutional capacity at the revenue authority (SET) has expanded.
- Remaining constraints: staffing, institutional, and legal constraints—including on tax compliance, enforcement, and penalties—present substantial barriers to further efficiency gains.
- Recommendation: strengthen coordination between the SET and the customs administration authority (DNA).
Pensions, health, and social policy
- Pension system challenges:
- Paraguay’s pension system faces near- and longer-term problems and needs to be reformed.
- Containing risks from current and future imbalances in the Instituto de Previsión Social (IPS) is a crucial priority.
- The IPS public health program is underfunded, as is the major public sector retirement program (Caja Fiscal).
- Additional pension programs, including that of the IPS, will experience funding shortfalls as the population ages.
- Policy options and recommendations:
- Consider parametric reforms.
- Consider cost sharing arrangements (e.g., copays, deductibles) for health programs.
- Progress on legislation to introduce a regulator for pension funds could help mobilize saving held there to deepen domestic capital markets.
- Social inclusion: Paraguay’s record on reducing poverty and inequality was strong over the past decade; to sustain and deepen gains, strengthen implementation of National Development Plan (NDP) priorities such as investment in education and training and expansion of conditional cash transfer programs.
- Tax reform suggestion: rebalancing away from indirect taxation and maintaining low income tax rates while limiting deductions could improve progressivity and help finance inclusive growth initiatives.
Structural reforms and infrastructure needs
- Raising potential growth requires addressing key structural issues that constrain productive capacity and public service quality.
- Authorities are advancing the National Development Plan (NDP) for 2014-30.
- Infrastructure priorities and recommendations:
- Additional investment in transport infrastructure to relieve congestion and facilitate trade.
- Improve electricity transmission and distribution, which are inadequate to meet growing energy demand and tap the potential of the binational hydropower plants.
- Improve public investment management to generate more infrastructure for each guaraní spent.
Mission and acknowledgements
- Mission details: a staff team from the IMF, led by Mr. Hamid Faruqee, visited Asunción and Encarnación during May 22 to June 2 for the 2017 Article IV consultation.
- The team met with Central Bank of Paraguay (BCP) President Carlos Fernández, Minister of Finance Santiago Peña, Minister of Public Works and Communications Ramón Jiménez, Minister of Planning José Molinas, Minister of Labor Guillermo Sosa, Social Action Minister Héctor Cárdenas and other senior officials, as well as representatives from the private sector, think tanks, and the donor community.
- Closing remark from mission: “We are grateful to the authorities and all our counterparts for their hospitality and the open and productive dialogue.”
IMF Staff statement following the 2017 Article IV mission to Paraguay.