IMF Executive Board Concludes Second Review under the Policy Coordination Instrument and Approves Resilience and Sustainability Facility for Paraguay

IMF News, December 19, 2023

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Canonical URL: IMF Executive Board Concludes Second Review under the Policy Coordination Instrument and Approves Resilience and Sustainability Facility for Paraguay

The Executive Board concluded the Second Review under the Policy Coordination Instrument (PCI) and approved a two-year Resilience and Sustainability Facility (RSF) program for Paraguay.
The two-year program under the RSF allows Paraguay a maximum access of SDR 302.1 million (150 percent of quota).
Paraguay is the first South American country to secure access to the RSF.
The Board granted a request for the extension of the PCI and modification of the end-December 2023 and end-June 2024 targets.
Paraguay’s two-year program under the PCI was approved in November 2022.

2023: The economy is growing strongly, boosted by agriculture and electricity production.
Inflationary pressures have receded; expectations are well anchored to the central bank’s target of 4 percent.
The external current account: a small surplus is projected on the back of strong exports.
Exchange rate: The guarani has been relatively stable in 2023.
Fiscal position: Has deteriorated somewhat from last year, including a need to register and settle previously unrecorded claims to government suppliers.
2024 projection: Economic growth is projected to moderate only slightly to 3.8 percent for 2024, while inflation will stay close to the target.
External current account is expected to remain in a small surplus, barring global and weather-related external shocks.
Banking system: Remains stable and profitable, supported by continued sound supervision.

The PCI supports Paraguay’s macroeconomic policies and structural reforms, aiming to ensure macroeconomic and fiscal stability, foster economic growth, and enhance social protection and inclusion.
The PCI program is performing well despite a few targets missed by narrow margins; most reform targets were met.
Some reform agenda aspects were reprogrammed to reflect the new government’s priorities and to allow time to build consensus on long-standing challenges.
The authorities requested a 12-month extension of the PCI.
Authorities plan to gradually reduce the fiscal deficit back towards the 1.5 percent of GDP ceiling under the fiscal rule by 2026 to boost policy credibility.
Policy priorities highlighted for fiscal sustainability:
- Rebuild fiscal buffers through implementation of long-standing structural reforms.
- Strengthen public sector efficiency as part of a sustainable fiscal strategy.
- Ensure sustainability of the public servants’ pension fund.
- Improve oversight and governance of public enterprises to reduce fiscal risks.
- Streamline social assistance programs through better targeting and efficiency gains.
- Combat corruption and limit reputational risks to improve the investment environment.

The government is committed to enacting a series of adaptation and mitigation measures and to preserve and expand its green energy matrix.
The authorities requested approval of a two-year program under the RSF with maximum access of SDR 302.1 million (150 percent of quota).
Planned RSF-supported reforms include:
- Increasing the resilience of public investments.
- Developing a green taxonomy.
- Containing climate risks to the financial sector.
- Preserving and expanding a clean electricity matrix.
- Decarbonizing the economy.
- Conserving forests.
- Improving waste management.
Timely fulfillment of these commitments, closely coordinated with development partners, will help build the country’s image as a “green” investment destination.

Main risks: adverse climate and external shocks could affect the outlook.
Program performance conditional on timely fulfillment of commitments under the PCI and RSF and coordination with development partners.
The RSF provides affordable long-term financing to countries undertaking reforms to reduce risks to prospective balance of payments stability, including those related to climate change and pandemic preparedness.

Mr. Kenji Okamura, Deputy Managing Director and Acting Chair of the Board, noted:
- High economic growth, lower than expected inflation, strong export performance, and a stable banking system contributed to a recent re-affirmation of the country’s sovereign rating.
- Barring specific events, key economic variables are expected to remain robust in 2024 and beyond.
- The new government is committed to continue reforms underpinned by the PCI focused on macroeconomic stability, fostering economic growth, and enhancing social protection.
Recommended focus areas going forward:
- Reestablish the fiscal deficit rule by 2026 as the government’s key priority.
- Strengthen public sector efficiency.
- Ensure sustainability of pension funds.
- Improve governance and oversight of public enterprises.
- Streamline social assistance for inclusive growth.
- Decisive action against corruption to improve the investment environment.

Footnotes embedded in the original release:
- The PCI is available to all IMF members that do not need Fund financial resources at the time of approval; it is designed for countries seeking to demonstrate commitment to a reform agenda or to unlock and coordinate financing from other official creditors or private investors.
- The Resilience and Sustainability Facility (RSF) provides affordable long-term financing to countries undertaking reforms to reduce risks to prospective balance of payments stability, including those related to climate change and pandemic preparedness.

Press Release No. 23/466 — IMF Communications Department, December 19, 2023