## IMF Staff Concludes Visit to Paraguay

_IMF News, November 12, 2019_

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## Bibliographic details
- Published: November 12, 2019

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### Mission context and headline finding
- 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.

### Recent shocks and growth outlook
- Shocks in 2019:
  - Agricultural output hit first by a drought and then by flooding.
  - Hydro-electricity production hurt by low water levels.
  - Exports suffered from economic weakness in Argentina and Brazil and the sharp depreciation of the peso.
- Near-term outlook:
  - Growth in 2019 expected to be near-zero.
  - Growth expected to bounce back to 4 percent next year.
  - Recovery aided by a rebound in agriculture and a pick-up in recent-month momentum.
- Risks:
  - 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).
  - Global risk from ongoing trade tensions between China and the United States.
  - Historical pattern: downturns in Paraguay tend to be followed by strong recoveries—bad weather has only a temporary impact on the economy.

### Inflation and monetary policy
- Headline inflation path:
  - Fallen from 4 percent in August 2018 to 2.4 percent in October 2019.
  - 2.4 percent is below the middle of the target band of 4 +/- 2 percent.
- Monetary policy response:
  - The BCP has lowered the policy rate this year by 125 basis points to 4.00 percent.

### Fiscal developments and the Fiscal Responsibility Law (FRL)
- Fiscal outcomes:
  - Deficit increased from 1.3 percent of GDP in 2018 to an expected 2.5 percent in 2019.
  - Causes: shortfall of tax revenue and a rebound in public investment that mitigated the recession.
- FRL considerations:
  - 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.
  - The FRL has helped keep deficits and public debt at moderate levels and warded off worries about debt sustainability.
  - Abandoning the FRL would jeopardize fiscal credibility and could increase Paraguay’s borrowing costs in international capital markets.
- Policy guidance to return to the FRL ceiling:
  - Returning to the 1.5 percent of GDP deficit ceiling next year will be challenging.
  - Requires keeping spending growth in check—including from the wage bill, which has been growing rapidly in recent years.
  - Any additional spending approved by Congress after the budget is finalized should be offset by spending reductions elsewhere.
  - If tax revenue were to fall short of expectations next year, commensurate spending adjustments will be needed.

### Structural reform, revenue, and expenditure composition
- Long-term growth challenge:
  - To sustain rapid growth over the next fifteen years, the economy needs to diversify as agriculture will likely not provide the same boost.
  - Needed improvements: infrastructure, education, governance, and business climate.
  - Some reforms will require additional resources, putting further pressure on expenditure.
- Revenue and expenditure:
  - Current revenue levels are not sufficient to finance the needed reforms.
  - Scope exists to reprioritize existing spending and make spending more efficient.
  - Recommendation: implement the recommendations by the joint public-private commission for the consolidation of current expenditure.
  - Concern: composition of expenditure has deteriorated, trending towards a higher wage bill and higher interest payments, rather than higher investments.
  - The tax reform recently approved was described as a good first step, but more may be needed to increase revenues.

### Pensions, financial oversight, and governance
- Pensions:
  - Modest parametric changes now are needed to prevent large deficits in the pension sector within the next decade due to demographic changes.
  - Recent increases in retirement benefits for selected groups approved by Congress add to medium- and long-term pressures and go in the wrong direction.
  - Important to establish a pension fund supervisor, similar to supervision for other financial institutions that are custodians of the population’s savings.
  - 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.
- Governance and financial system risks:
  - Paraguay has seen improvements in governance and corruption indicators, both in absolute terms and relative to the region, but more remains to be done.
  - 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.
  - Authorities have taken legal initiatives to tackle emerging money laundering and cybersecurity risks for the financial system including compliance with AML-CFT standards.

### Engagement and acknowledgements
- The IMF mission met with government officials, private sector representatives and academics.
- The mission thanks the authorities for their hospitality and fruitful discussions.

*IMF Communications Department — Press Release No. 19/410, November 12, 2019*

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## References

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_Source: https://www.imf.org/en/news/articles/2019/11/12/pr19410-paraguay-imf-staff-concludes-visit-to-paraguay_