{ "title": "Paraguay: Staff Concluding Statement of the 2019 Article IV Mission", "publication": "IMF News, March 6, 2019", "sourceUrl": "https://www.imf.org/en/news/articles/2019/03/06/mcs030619-paraguay-staff-concluding-statement-of-the-2019-article-iv-mission", "canonical": "https://www.imf.org/en/news/articles/2019/03/06/mcs030619-paraguay-staff-concluding-statement-of-the-2019-article-iv-mission", "overlayPath": "/en/news/articles/2019/03/06/mcs030619-paraguay-staff-concluding-statement-of-the-2019-article-iv-mission/index.md", "summary": "Paraguay has grown rapidly in the past decade and a half, contributing to a sharp drop in poverty.", "publishDate": "2019-03-06", "sections": [ { "heading": "Summary Overview", "content": "- Paraguay has grown rapidly in the past decade and a half, contributing to a sharp drop in poverty.\n- Prudent macro policies, with low inflation and low government deficits, played an important role.\n- Vulnerabilities have declined, with a significant reduction of both external and public debt.\n- Key challenge: sustain rapid growth as past drivers—including the boom in agriculture commodity prices—may provide less support going forward.\n- Improving the business climate and governance will be key to continued convergence to higher living standards." }, { "heading": "Near-term Outlook", "content": "- GDP grew by around 3¾ percent in 2018, driven by strong domestic demand, fueled by a rebound in credit growth; contribution of net exports was negative.\n- Growth was uneven in 2018: strong first half followed by a weaker second half due to regional financial turbulence.\n- Crisis in Argentina increased regional risk aversion and contributed to a depreciation of the guarani against the dollar, although by less than neighboring countries; the guaraní appreciated sharply vis-à-vis the Argentinean peso and the Brazilian real.\n- Weather-related shocks in agriculture contributed to the slowdown in growth.\n- For 2019, growth is expected to reach around 3½ percent.\n- 2019 downside factor: drought early in the planting season reducing the soybean harvest; partial offset from pickup in tourism and cross-border trade as the real exchange rate shock of 2018 unwinds.\n- Risks to growth are broadly balanced: developments in neighboring countries, agricultural commodity prices, and the strength of domestic demand (dependant on recovery of government investment after government transition).\n- Fiscal policy in 2019 will be neutral, with the deficit changing little from 2018.\n- Nontax revenue estimates in the budget appear overly optimistic and reaching targets will necessitate containing expenditure.\n- Monetary policy: the monetary policy rate was on hold in 2018; inflation fell to 3.2 percent by end-2018. In February 2019, the BCP cut the monetary policy rate from 5¼ to 5 percent citing uncertainty about the external environment and incipient weakening of domestic demand.\n- The current monetary policy stance appears appropriate.\n- Year-on-year Inflation should move back to 4 percent by year’s end (the middle of the central bank’s target range), as last year’s real exchange rate appreciation reverses.\n- Exchange rate flexibility should help absorb shocks; intervention should aim at preventing disorderly market conditions and mitigating excess volatility only." }, { "heading": "Longer-term Growth Challenges", "content": "- Real GDP grew by an average 4½ percent annually in the past decade and a half, well above the Latin America average.\n- Poverty reduced from 58 percent in 2002 to 26 percent currently.\n- Public debt reduced from 52 percent in 2002 to around 20 percent currently.\n- Total external debt of the private and public sector fell from almost 200 percent of GDP in 2002 to 40 percent currently.\n- Agricultural exports in dollar terms are now 5 times what they were in 2003.\n- Sowing areas for the main crops are 2½ times what they were fifteen years go.\n- Economy remains heavily dependent on agriculture; agricultural prices are off previous highs and may decline further as global demand slows; agricultural land expansion cannot continue at past rates.\n- Future growth needs to come increasingly from the non-agriculture/non-electricity export sector, which is growing rapidly but is still small.\n- Higher private sector investment, including from abroad, is needed to support diversification." }, { "heading": "Improving the Business Climate and Governance", "content": "- Low taxes and low energy prices attract investors, but are offset by a weak business climate and governance.\n- Paraguay scores relatively weak on business climate and governance indicators compared to other countries in the Western Hemisphere and Europe.\n- Cross-country data show a strong link between these indicators and GDP per capita.\n- Policy priorities identified:\n - Improve transport infrastructure.\n - Strengthen rule of law.\n - Improve quality of education.\n- Mission welcomes new government initiatives to increase ease of doing business, including:\n - Legislation to simplify small business registration.\n - A new bankruptcy law.\n - Legislation to allow companies to use moveable assets as collaterals.\n - Removal of outdated bureaucratic procedures and increased digitization of government services.\n - Revival of the National Commission for Competition to combat monopolies and improve transparency of industry regulations." }, { "heading": "Fiscal Policy", "content": "- Fiscal space is limited: the deficit is close to the 1.5 percent ceiling under the Fiscal Responsibility Law.\n- Spending needs are large; to create room for investment, revenues need to be increased (revenues are low by international standards).\n- Current headline tax rates are low; effective tax rates are even lower.\n - Personal income tax rate is 10 percent, but this tax yields only 0.1 percent of GDP.\n- Recommendations to raise effective tax rates without changing headline rates:\n - Reduce exemptions and deductions.\n - Improve tax compliance.\n- Mission looks forward to proposals of the tax commission tasked with modernizing and simplifying the tax system.\n- There is scope to reprioritize expenditure within the existing envelope.\n- Spending composition is lopsided: high share of government expenditure going to wages; need to increase infrastructure and social spending, including health and education.\n- Government wage bill in Paraguay is similar as a percent of GDP to other countries in the region, despite a smaller government role.\n- Mission looks forward to recommendations of the expenditure review commission." }, { "heading": "Financial Sector", "content": "- Banking sector is well capitalized and profitable; risk-based supervision is progressing.\n- Supervision of financial cooperatives should continue to be strengthened.\n- There is scope to improve supervision of the casas de credito and casas comerciales; supervision standards for this sector should be adopted quickly.\n- Important to establish a pension fund supervisor: currently pension funds operate under a few, overly rigid rules but without oversight.\n - Supervision would mitigate risks, allow pension funds to invest in a wider range of assets, and facilitate development of a domestic capital market.\n- Restoring long-term sustainability of the pension system is a challenge that should be tackled now through timely and gentle parametric adjustments to pension age, benefits and contribution rates." }, { "heading": "Policy Recommendations and Outlook", "content": "- Continue prudent macroeconomic policies and implement structural reforms to sustain rapid growth and improve living standards.\n- Prioritize reforms to improve business climate and governance to facilitate diversification and productivity growth.\n- Increase revenues through tax base broadening (reduce exemptions/deductions) and better compliance; consider expenditure reprioritization to finance infrastructure and social spending.\n- Strengthen financial sector supervision (cooperatives, casas de credito, casas comerciales) and establish a pension fund supervisor.\n- Implement pension reforms to ensure long-term sustainability before demographic advantages dissipate.\n\nParaguay: Staff Concluding Statement of the 2019 Article IV Mission — March 6, 2019\n\n---\n\n\n References\n\n- Paraguay and the IMF\n- IMF Policy Advice -- A Factsheet\n- Mission Concluding Statements\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2019/03/06/mcs030619-paraguay-staff-concluding-statement-of-the-2019-article-iv-mission" } ], "bullets": [ "[Markdown version](/en/news/articles/2019/03/06/mcs030619-paraguay-staff-concluding-statement-of-the-2019-article-iv-mission/index.md)", "[Structured JSON version](/en/news/articles/2019/03/06/mcs030619-paraguay-staff-concluding-statement-of-the-2019-article-iv-mission/index.json)", "[Bundle manifest](/en/news/articles/2019/03/06/mcs030619-paraguay-staff-concluding-statement-of-the-2019-article-iv-mission/bundle-manifest.json)", "Published: March 6, 2019", "Paraguay has grown rapidly in the past decade and a half, contributing to a sharp drop in poverty.", "Prudent macro policies, with low inflation and low government deficits, played an important role.", "Vulnerabilities have declined, with a significant reduction of both external and public debt.", "Key challenge: sustain rapid growth as past drivers—including the boom in agriculture commodity prices—may provide less support going forward.", "Improving the business climate and governance will be key to continued convergence to higher living standards.", "GDP grew by around 3¾ percent in 2018, driven by strong domestic demand, fueled by a rebound in credit growth; contribution of net exports was negative.", "Growth was uneven in 2018: strong first half followed by a weaker second half due to regional financial turbulence.", "Crisis in Argentina increased regional risk aversion and contributed to a depreciation of the guarani against the dollar, although by less than neighboring countries; the guaraní appreciated sharply vis-à-vis the Argentinean peso and the Brazilian real.", "Weather-related shocks in agriculture contributed to the slowdown in growth.", "For 2019, growth is expected to reach around 3½ percent.", "2019 downside factor: drought early in the planting season reducing the soybean harvest; partial offset from pickup in tourism and cross-border trade as the real exchange rate shock of 2018 unwinds.", "Risks to growth are broadly balanced: developments in neighboring countries, agricultural commodity prices, and the strength of domestic demand (dependant on recovery of government investment after government transition).", "Fiscal policy in 2019 will be neutral, with the deficit changing little from 2018.", "Nontax revenue estimates in the budget appear overly optimistic and reaching targets will necessitate containing expenditure.", "Monetary policy: the monetary policy rate was on hold in 2018; inflation fell to 3.2 percent by end-2018. In February 2019, the BCP cut the monetary policy rate from 5¼ to 5 percent citing uncertainty about the external environment and incipient weakening of domestic demand.", "The current monetary policy stance appears appropriate.", "Year-on-year Inflation should move back to 4 percent by year’s end (the middle of the central bank’s target range), as last year’s real exchange rate appreciation reverses.", "Exchange rate flexibility should help absorb shocks; intervention should aim at preventing disorderly market conditions and mitigating excess volatility only.", "Real GDP grew by an average 4½ percent annually in the past decade and a half, well above the Latin America average.", "Poverty reduced from 58 percent in 2002 to 26 percent currently.", "Public debt reduced from 52 percent in 2002 to around 20 percent currently.", "Total external debt of the private and public sector fell from almost 200 percent of GDP in 2002 to 40 percent currently.", "Agricultural exports in dollar terms are now 5 times what they were in 2003.", "Sowing areas for the main crops are 2½ times what they were fifteen years go.", "Economy remains heavily dependent on agriculture; agricultural prices are off previous highs and may decline further as global demand slows; agricultural land expansion cannot continue at past rates.", "Future growth needs to come increasingly from the non-agriculture/non-electricity export sector, which is growing rapidly but is still small.", "Higher private sector investment, including from abroad, is needed to support diversification.", "Low taxes and low energy prices attract investors, but are offset by a weak business climate and governance.", "Paraguay scores relatively weak on business climate and governance indicators compared to other countries in the Western Hemisphere and Europe.", "Cross-country data show a strong link between these indicators and GDP per capita.", "Policy priorities identified:", "Mission welcomes new government initiatives to increase ease of doing business, including:", "Fiscal space is limited: the deficit is close to the 1.5 percent ceiling under the Fiscal Responsibility Law.", "Spending needs are large; to create room for investment, revenues need to be increased (revenues are low by international standards).", "Current headline tax rates are low; effective tax rates are even lower.", "Recommendations to raise effective tax rates without changing headline rates:", "Mission looks forward to proposals of the tax commission tasked with modernizing and simplifying the tax system.", "There is scope to reprioritize expenditure within the existing envelope.", "Spending composition is lopsided: high share of government expenditure going to wages; need to increase infrastructure and social spending, including health and education.", "Government wage bill in Paraguay is similar as a percent of GDP to other countries in the region, despite a smaller government role.", "Mission looks forward to recommendations of the expenditure review commission.", "Banking sector is well capitalized and profitable; risk-based supervision is progressing.", "Supervision of financial cooperatives should continue to be strengthened.", "There is scope to improve supervision of the casas de credito and casas comerciales; supervision standards for this sector should be adopted quickly.", "Important to establish a pension fund supervisor: currently pension funds operate under a few, overly rigid rules but without oversight.", "Restoring long-term sustainability of the pension system is a challenge that should be tackled now through timely and gentle parametric adjustments to pension age, benefits and contribution rates.", "Continue prudent macroeconomic policies and implement structural reforms to sustain rapid growth and improve living standards.", "Prioritize reforms to improve business climate and governance to facilitate diversification and productivity growth.", "Increase revenues through tax base broadening (reduce exemptions/deductions) and better compliance; consider expenditure reprioritization to finance infrastructure and social spending.", "Strengthen financial sector supervision (cooperatives, casas de credito, casas comerciales) and establish a pension fund supervisor.", "Implement pension reforms to ensure long-term sustainability before demographic advantages dissipate.", "[Paraguay and the IMF](http://www.imf.org/external/country/PRY/index.htm)", "[IMF Policy Advice -- A Factsheet](https://www.imf.org/en/about/factsheets/imf-surveillance)", "[Mission Concluding Statements](https://www.imf.org/en/news/searchnews)", "[PRESS CENTER](http://presscenter.imf.org/)", "[https://www.imf.org/en/home](https://www.imf.org/en/home)" ], "alternates": { "markdown": "/en/news/articles/2019/03/06/mcs030619-paraguay-staff-concluding-statement-of-the-2019-article-iv-mission/index.md", "json": "/en/news/articles/2019/03/06/mcs030619-paraguay-staff-concluding-statement-of-the-2019-article-iv-mission/index.json", "bundleManifest": "/en/news/articles/2019/03/06/mcs030619-paraguay-staff-concluding-statement-of-the-2019-article-iv-mission/bundle-manifest.json" }, "generatedAtUtc": "2026-09-25T22:34:33.323Z" }