IMF Executive Board Concludes Article IV Consultation with Paraguay | WPN World People News

On April 24, 2019, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Paraguay.

Growth in 2018 was 3.7 percent, which is near potential and in line with the recent past, despite negative spillovers from the region. Growth was driven by strong private investment and household consumption. Exports were affected by the economic crisis in Argentina and the strong depreciation of Paraguay’s neighbors’ currencies. The current account deteriorated but remained in surplus.

Average inflation in 2018 was 3.6 percent—near the mid-point of the central bank’s target range. Inflation fell during the year, from 4.7 percent in January to 3.2 in December, the result of declining food prices and the appreciation of the guaraní vis-à-vis neighboring countries.

Monetary policy rates were on hold in 2018. However, monetary conditions tightened as the real exchange rate appreciated and real interest rates rose. In February and March of 2019, the BCP cut the policy rate twice, from 5¼ to 4¾ percent, citing uncertainty about the external environment and incipient weakening of domestic demand. The fiscal deficit in 2018 amounted to 1.3 percent of GDP, slightly higher than in 2017 but below the ceiling under the Fiscal Responsibility Law.

Growth in 2019 is projected at 3.5 percent. Risks to the outlook are tilted to the downside. External risks include weaker-than-expected growth in Argentina and Brazil, and adverse price movements in the agricultural commodity markets. Domestic risks include weather-related shocks and delays in the execution of public investment.

Over the medium-term, the key challenge is to sustain the rapid growth of real incomes during the past 15 years. Over the past decade, Paraguay has been one of the fastest growing economies in South America, averaging above 4.5 percent real growth per year, but the factors that have propelled this growth—including a boom in agricultural commodity prices—are likely to provide less support going forward.

The consultation focused on the policies needed to promote long-term growth, widen the tax base, improve public spending efficiency, and strengthen financial sector supervision.

Executive Board Assessment

Directors commended the Paraguayan authorities for their prudent macroeconomic policies which have contributed to rapid growth and sharp reduction in poverty. Directors considered that policy priorities ahead should focus on consolidating macroeconomic gains, reducing dependence on the agriculture sector by diversifying the economy, and enhancing productivity to attain sustainable and strong growth as well as further reduce poverty.

Directors commended the authorities’ prudent fiscal policies which have reduced the public debt. However, they noted that with the deficit close to the ceiling under the Fiscal Responsibility Law it is important to take action to create further fiscal space for priority reforms and investment. Directors recommended increasing revenues, particularly by reducing exemptions and deductions, and improving tax compliance. They also encouraged the authorities to reprioritize expenditure within the existing envelope, away from current spending and toward investment in infrastructure, capital, and social spending, including in health and education.

Directors considered that the current accommodative monetary policy stance is appropriate and consistent with inflation objectives. They noted that exchange rate flexibility should continue to be a key shock absorber and that interventions should be limited to mitigate disorderly market conditions.

Directors welcomed that the banking system is well‑capitalized and profitable. They encouraged continued strengthening of supervision of financial cooperatives and adopting supervision standards for the casas de credito and casas comerciales. Directors commended the progress made towards implementing the 2017 Financial Sector Stability Review recommendations and encouraged steps to further strengthen the institutional framework for interagency coordination. They underscored that further strengthening the AML/CFT framework would support financial stability.

Directors encouraged the authorities to reform the pension system to ensure its long‑term sustainability, seizing the opportunity that demographic trends are still favorable. They noted that resuming the effort to establish a pension fund supervisor would be an important step in this regard.

Directors noted that economic diversification and productivity growth are needed to maintain rapid growth. They considered that priority should be given to tackling corruption and strengthening the rule of law, enhancing the business climate, as well as improving transport infrastructure and quality of education.

Source: International Monetary Fund