IMF Staff Concludes Visit to Paraguay
November 12, 2019
End-of-Mission press releases include statements of IMF staff teams that convey preliminary findings after a visit to a country. The views expressed in this statement are those of the IMF staff and do not necessarily represent the views of the IMF’s Executive Board. This mission will not result in a Board discussion.
An International Monetary Fund (IMF) staff team led by Mr. Bas Bakker
visited Asuncion during November 6-12, 2019 to discuss recent economic
developments and policies. At the conclusion of the visit, Mr. Bakker
issued the following statement:
“Paraguay’s economy has been impacted by several shocks this year.
Agricultural output was first hit by a drought and then by flooding.
Hydro-electricity production was hurt by low water levels. Exports suffered
from economic weakness in Argentina and Brazil and the sharp depreciation
of the peso. And all these shocks spilled over to the rest of the economy.
As a result, we now expect growth in 2019 to be near-zero.
“However, our expectation is for growth to bounce back to 4 percent next
year. The recovery that has been visible in recent months should pick up
steam, aided by a rebound in agriculture.
“There are regional and global risks to economic growth in 2020. An
important source of risk is developments in Paraguay’s main regional
trading partners. Risks from Argentina not only pertain to low growth, but
also to a further decline of the peso, which would hurt cross-border trade.
At the global level, the ongoing trade tensions between China and the
United States are weighing on global growth prospects. However, downturns
in Paraguay tend to be followed by strong recoveries—bad weather has only a
temporary impact on the economy.
“Headline inflation has fallen from 4 percent in August 2018 to 2.4 percent
in October 2019, below the middle of the target band of 4 +/- 2 percent. In
this setting, the BCP has appropriately lowered the policy rate this year
by 125 basis points to 4.00 percent.
“The economic downturn has resulted in a shortfall of tax revenue. Together
with a rebound in public investment (which mitigated the recession), this
has resulted in an increase in the deficit from 1.3 percent of GDP in 2018
to an expected 2.5 percent in 2019. While this is above the 1.5 percent
deficit ceiling stipulated in the Fiscal Responsibility Law, the FRL does
allow a temporary excess of the deficit over the ceiling in case of a fall
in domestic economic activity, and credibility will be maintained if strong
efforts are made to return to the ceiling.
“In the past fifteen years, sound macroeconomic policies have played a key
role in sustaining rapid growth and reducing poverty. Sound fiscal
policies, together with the inflation targeting framework of the central
bank, contributed to avoiding the boom-bust cycles that other countries in
the region have experienced. The FRL has been an important anchor to keep
fiscal policy sound. It has helped keep deficits and public debt at
moderate levels and warded off worries about debt sustainability. In this
context, abandoning the FRL would jeopardize the hard-won fiscal
credibility that took various governments years to build. It could also
increase the borrowing costs for Paraguay in international capital markets.
It is important therefore that the deficit continues to abide by the rules
spelled out in the FRL.
“Returning to the 1.5 percent of GDP deficit ceiling next year will be
challenging and will require keeping spending growth in check—including
from the wage bill, which has been growing rapidly in recent years. It will
also be important that any additional spending approved by Congress after
the budget has been finalized will be offset by spending reductions
elsewhere. If tax revenue were to fall short of expectations next year,
commensurate spending adjustments will be needed.
“A paramount issue facing Paraguay is to ensure that the rapid growth of
the past fifteen years will continue in the next fifteen years. For this to
occur the economy will need to diversify, as agriculture will likely not be
able to provide the boost it has in the past. Improvements in
infrastructure, education, governance and business climate would all
contribute to this important goal. Some of these needed reforms will
require additional resources, putting further pressure on expenditure.
“Current revenue levels are not sufficient to finance these reforms. There
is certainly some scope to reprioritize existing spending and make spending
more efficient, so it will be important to implement the recommendations by
the joint public-private commission for the consolidation of current
expenditure. These efforts are all the more warranted given that the
composition of expenditure has deteriorated, trending towards a higher wage
bill and higher interest payments, rather than higher investments. But
revenues will need to increase as well. The tax reform that has recently
been approved was a good first step, but more may be needed.
“Fiscal sustainability would also benefit from pension reform. Modest
parametric changes now are needed to prevent that large deficits will
emerge in the pension sector within the next decade, as a result of
demographic changes. Unfortunately, the recent increases in retirement
benefits for selected groups that were approved by Congress go in the wrong
direction, as they add to existing medium- and long-term pressures from
demographic trends. It is also important to establish a pension fund
supervisor, just as 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.
“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 the government
analyze the problem and develop a strategy, which will be discussed in the
Article IV report next year. The authorities have also taken legal
initiatives to tackle the emerging money laundering and cybersecurity risks
for the financial system including compliance with AML-CFT standards.”
The IMF mission met with government officials, private sector
representatives and academics during its stay. It wishes to thank the
authorities for their hospitality and fruitful discussions
IMF Communications Department
PRESS OFFICER: Raphael Anspach
Phone: +1 202 623-7100Email: MEDIA@IMF.org