{
  "title": "IMF Staff Concludes Visit to Paraguay",
  "publication": "IMF News, November 12, 2019",
  "sourceUrl": "https://www.imf.org/en/news/articles/2019/11/12/pr19410-paraguay-imf-staff-concludes-visit-to-paraguay",
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  "summary": "Mission dates: November 6-12, 2019.",
  "publishDate": "2019-11-12",
  "sections": [
    {
      "heading": "Mission context and headline finding",
      "content": "- Mission dates: November 6-12, 2019.\n- Statement issued by Mr. Bas Bakker.\n- The mission will not result in a Board discussion.\n- The views expressed are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board.\n- Main headline: growth in 2019 expected to be near-zero; expectation for growth to rebound to 4 percent in 2020."
    },
    {
      "heading": "Recent shocks and growth outlook",
      "content": "- Shocks in 2019:\n  - Agricultural output hit first by a drought and then by flooding.\n  - Hydro-electricity production hurt by low water levels.\n  - Exports suffered from economic weakness in Argentina and Brazil and the sharp depreciation of the peso.\n- Near-term outlook:\n  - Growth in 2019 expected to be near-zero.\n  - Growth expected to bounce back to 4 percent next year.\n  - Recovery aided by a rebound in agriculture and a pick-up in recent-month momentum.\n- Risks:\n  - Regional risk from developments in Paraguay’s main regional trading partners, particularly Argentina (low growth and potential further decline of the peso affecting cross-border trade).\n  - Global risk from ongoing trade tensions between China and the United States.\n  - Historical pattern: downturns in Paraguay tend to be followed by strong recoveries—bad weather has only a temporary impact on the economy."
    },
    {
      "heading": "Inflation and monetary policy",
      "content": "- Headline inflation path:\n  - Fallen from 4 percent in August 2018 to 2.4 percent in October 2019.\n  - 2.4 percent is below the middle of the target band of 4 +/- 2 percent.\n- Monetary policy response:\n  - The BCP has lowered the policy rate this year by 125 basis points to 4.00 percent."
    },
    {
      "heading": "Fiscal developments and the Fiscal Responsibility Law (FRL)",
      "content": "- Fiscal outcomes:\n  - Deficit increased from 1.3 percent of GDP in 2018 to an expected 2.5 percent in 2019.\n  - Causes: shortfall of tax revenue and a rebound in public investment that mitigated the recession.\n- FRL considerations:\n  - The 1.5 percent of GDP deficit ceiling in the FRL has been breached in 2019, but the FRL allows a temporary excess in case of a fall in domestic economic activity.\n  - The FRL has helped keep deficits and public debt at moderate levels and warded off worries about debt sustainability.\n  - Abandoning the FRL would jeopardize fiscal credibility and could increase Paraguay’s borrowing costs in international capital markets.\n- Policy guidance to return to the FRL ceiling:\n  - Returning to the 1.5 percent of GDP deficit ceiling next year will be challenging.\n  - Requires keeping spending growth in check—including from the wage bill, which has been growing rapidly in recent years.\n  - Any additional spending approved by Congress after the budget is finalized should be offset by spending reductions elsewhere.\n  - If tax revenue were to fall short of expectations next year, commensurate spending adjustments will be needed."
    },
    {
      "heading": "Structural reform, revenue, and expenditure composition",
      "content": "- Long-term growth challenge:\n  - To sustain rapid growth over the next fifteen years, the economy needs to diversify as agriculture will likely not provide the same boost.\n  - Needed improvements: infrastructure, education, governance, and business climate.\n  - Some reforms will require additional resources, putting further pressure on expenditure.\n- Revenue and expenditure:\n  - Current revenue levels are not sufficient to finance the needed reforms.\n  - Scope exists to reprioritize existing spending and make spending more efficient.\n  - Recommendation: implement the recommendations by the joint public-private commission for the consolidation of current expenditure.\n  - Concern: composition of expenditure has deteriorated, trending towards a higher wage bill and higher interest payments, rather than higher investments.\n  - The tax reform recently approved was described as a good first step, but more may be needed to increase revenues."
    },
    {
      "heading": "Pensions, financial oversight, and governance",
      "content": "- Pensions:\n  - Modest parametric changes now are needed to prevent large deficits in the pension sector within the next decade due to demographic changes.\n  - Recent increases in retirement benefits for selected groups approved by Congress add to medium- and long-term pressures and go in the wrong direction.\n  - Important to establish a pension fund supervisor, similar to supervision for other financial institutions that are custodians of the population’s savings.\n  - Strengthened oversight would mitigate risks, allow pension funds to invest in a wider range of assets, and facilitate the development of a domestic capital market.\n- Governance and financial system risks:\n  - Paraguay has seen improvements in governance and corruption indicators, both in absolute terms and relative to the region, but more remains to be done.\n  - At the request of the government, the IMF is helping analyze the problem and develop a strategy to be discussed in the Article IV report next year.\n  - Authorities have taken legal initiatives to tackle emerging money laundering and cybersecurity risks for the financial system including compliance with AML-CFT standards."
    },
    {
      "heading": "Engagement and acknowledgements",
      "content": "- The IMF mission met with government officials, private sector representatives and academics.\n- The mission thanks the authorities for their hospitality and fruitful discussions.\n\nIMF Communications Department — Press Release No. 19/410, November 12, 2019\n\n---\n\n\n References\n\n- Paraguay and the IMF\n- Press Releases\n- PRESS CENTER\n- https://www.imf.org/en/home\n\nSource: https://www.imf.org/en/news/articles/2019/11/12/pr19410-paraguay-imf-staff-concludes-visit-to-paraguay"
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    "Published: November 12, 2019",
    "Mission dates: November 6-12, 2019.",
    "Statement issued by Mr. Bas Bakker.",
    "The mission will not result in a Board discussion.",
    "The views expressed are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board.",
    "Main headline: growth in 2019 expected to be near-zero; expectation for growth to rebound to 4 percent in 2020.",
    "Shocks in 2019:",
    "Near-term outlook:",
    "Risks:",
    "Headline inflation path:",
    "Monetary policy response:",
    "Fiscal outcomes:",
    "FRL considerations:",
    "Policy guidance to return to the FRL ceiling:",
    "Long-term growth challenge:",
    "Revenue and expenditure:",
    "Pensions:",
    "Governance and financial system risks:",
    "The IMF mission met with government officials, private sector representatives and academics.",
    "The mission thanks the authorities for their hospitality and fruitful discussions.",
    "[Paraguay and the IMF](http://www.imf.org/external/country/PRY/index.htm)",
    "[Press Releases](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)"
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