Press Release No. 04/74

The Executive Board of the International Monetary Fund (IMF) completed today the first review of Paraguay's 15-month, SDR 50 million (about US$73.4 million) Stand-By Arrangement (see Press Release No. 03/218), and granted the authorities' request for waivers of non-observance and applicability of performance criteria. The authorities are treating the arrangement as precautionary and do not intend to make a drawing.

Following the Executive Board's review of Paraguay's economic program, Takatoshi Kato, Deputy Managing Director and Acting Chair, stated:

"Paraguay's performance during the early months of the Stand-By Arrangement has been favorable. There is renewed confidence in economic policy management, and the new government has been successful in mobilizing support for its reform agenda. Economic recovery is under way, inflation has fallen, and the regional environment remains positive. These elements, together with continued prudent macroeconomic policies, provide favorable conditions for Paraguay to implement far-reaching economic reforms and lay the groundwork for sustained growth and poverty reduction over the medium term.

"The authorities are committed to attaining the fiscal objectives under the program through intensified efforts to boost tax collections, prudent budget execution, and close attention to debt management. The recent reform of the public pension fund and plans to rationalize the rosters of public employees and pension beneficiaries will help strengthen expenditure control. Progress with tax reform is also essential for sustained fiscal consolidation. The next phase of the agenda gives priority to passage of the Administrative Reorganization and Fiscal Adjustment Law. The clearing of almost all bilateral arrears, ahead of the program schedule, is a welcome step, and efforts should continue to improve debt management.

"Prudent monetary policy and increased confidence have helped boost banking system deposits and central bank international reserves. The authorities intend to maintain this policy stance and strengthen further the capacity of the central bank to implement an independent monetary policy.

"Financial system reforms are progressing well and banking system indicators are improving. Nonetheless, continued efforts are needed to strengthen the banking system. An important challenge in the months ahead will be the passage of the comprehensive public banking reform plan currently before Congress.

"The authorities have made a strong start with their structural reform agenda, including key reforms of the public pension and procurement systems. For the period ahead, approval of the Customs Code and completing external audits of the main public entities will be key priorities-in particular, for the petroleum and cement companies, which have a significant debt service burden.

"The new government has placed a welcome strong emphasis on strengthening governance. New management teams in key institutions such as Tax and Customs Administration, the social security institute, and many public enterprises have made advances in following their mandates to attack corruption and improve efficiency. These essential efforts are underpinned by wider initiatives to enhance transparency and reconstitute the Supreme Court and other legal institutions," Mr. Kato said.

---