IMF Board Wraps Up 2024 Policy Reviews, Consultations in Paraguay

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the 2024 Article IV consultation, Third Review under the Policy Coordination Instrument (PCI), modification of targets, and the First Review of the Arrangement under the Resilience and Sustainability Facility (RSF) for Paraguay on June 26, 2024.[1]^,[2]

In 2023, the economy experienced robust post-drought growth, driven by significant contributions from the agriculture and electricity sectors. Inflationary pressures diminished, with inflation expectations closely aligned with the central bank's 4 percent target. The external current account was in surplus, attributed to solid export performance, while the Guarani maintained relative stability. However, the fiscal outlook worsened, partly due to settlement of previously unrecorded claims suppliers. The economy started this year on a strong footing and risks to the outlook are balanced.

The PCI underpins Paraguay's economic strategy and structural objectives of maintaining macroeconomic stability and promoting social welfare and inclusion. The PCI is yielding positive results, though two targets were missed due to the identification of additional unrecorded healthcare-related expenditure. Three reform targets have been met. Some of the reform targets agreed with the previous government are now being reformulated, namely enhancements to the insolvency framework and property cadaster, and actions with respect to the formalization of labor.

Under the two-year program under the RSF, the government is committed to enacting a series of adaptation and mitigation measures and to preserve and expand its green energy matrix. Three of the four reform measures were completed and aim at expanding clean electricity generation and protecting forests. The establishment of energy efficiency standards will require a more extensive consultation process with the private sector.

Following the Executive Board's discussion, Mr. Kenji Okamura, Deputy Managing Director and Acting Chair of the Board, issued the following statement:

"Paraguayan authorities continue to implement policies aimed at maintaining macroeconomic stability that have translated into robust economic growth, low inflation, thriving exports, and a stable banking system. Risks to the outlook are balanced amid expected robust economic growth in 2024 and the medium term.

"The new government is committed to continuing reforms guided by the PCI and RSF arrangements. It is crucial for Paraguay to rebuild fiscal buffers, ensure the sustainability of the public servants' pension fund and enhance supervision of public enterprises to limit contingent risks. Improving the targeting of social assistance programs, closing gender gaps, and reducing the cost of financial services should also be pursued to promote sustainable growth and inclusion. Taking decisive action against corruption to minimize reputational risks, reducing informality, and increasing international market integration will make Paraguay a significantly more attractive investment destination, including for green projects. Adaptation and mitigation measures should reduce the country's vulnerability to climate change and preserve its substantial natural assets and clean energy matrix."

Executive Board Assessment[3]

Executive Directors agreed with the thrust of the staff appraisal. They welcomed the broadly satisfactory performance under the PCI and RSF arrangements. Directors looked forward to continued efforts to bolster macroeconomic stability, advance structural reforms and strengthen climate resilience, supported by Fund capacity development in collaboration with development partners.

Directors agreed on the importance of fiscal consolidation to rebuild fiscal buffers and safeguard debt sustainability. They called for domestic revenue mobilization, including by enhancing tax collection and considering broadening the tax base and raising tax rates if needed to protect social spending and priority investments. Directors encouraged the authorities to improve spending efficiency, including through better targeting of social assistance programs. They also stressed the need to reform the public pension system and minimize contingent liabilities from planned public‑private partnerships.

Directors noted that Paraguay continues to benefit from a robust inflation targeting framework, complemented by a transparent and flexible exchange rate system. They welcomed the data‑driven approach to monetary policy, with the central bank continuing to respond to inflation dynamics and inflation expectations as needed. Directors also stressed the importance of continuing to limit FX interventions to address disorderly market conditions. While welcoming that the banking sector is profitable and well capitalized, they called for continued efforts to expand financial oversight and inclusion, strengthen deposit protection and banking resolution, and address AML/CFT risks.

Directors agreed that an inclusive growth strategy for Paraguay should prioritize reducing informality, improving governance, and reducing gender gaps. They encouraged efforts to diversify export products and markets, enhance infrastructure, and improve the business climate. Directors stressed the importance of strengthening anti‑corruption measures, governance, and transparency to further boost growth potential and attract foreign investment.

Directors welcomed the role that the PCI and RSF arrangements continue to play in signaling the authorities' macroeconomic and structural reform objectives and supporting their climate change policy agenda. They stressed the importance of corrective public financial management actions that are being adopted to prevent the recurrence of unrecorded claims. Directors also acknowledged the authorities' preference for a more extensive consultation process before establishing energy efficiency standards.

It is expected that the next Article IV consultation with Paraguay will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.

[1] 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 (see Policy Coordination Instrument).

[2] 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 (see IMF Resilience and Sustainability Trust)

[3] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm.