IMF Staff Concludes Visit to Paraguay

IMF News, November 15, 2018

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GDP is likely to grow by around 4¼ percent this year.
Paraguay has grown at an average rate of 4½ percent since 2003.
Inflation, at around 4 percent, is near the mid-point of the central bank’s target range.
The depreciation of the guaraní vis-à-vis the dollar this year has been modest compared with other countries in the region.
The strong performance reflects both the commodity-price boom and consistently prudent macroeconomic policies.

IMF projection: growth of 4 percent in 2019, and similar growth rates over the medium term.
Downside risks stem from external developments, including economic developments in Brazil and Argentina.
Paraguay has demonstrated resilience to past recessions in these neighboring countries.

Policy rate is 5¼ percent, described as supportive.
Credit growth has accelerated and is now growing by 14 percent year on year, boosting domestic demand.
Monetary policy will need to balance supporting the economy and preventing overheating.

Fiscal policy remains well anchored by the fiscal responsibility law (FRL).
The proposed 2019 budget targets a deficit of 1½ percent of GDP, which is in line with the FRL’s ceiling.
Achieving the target requires keeping spending growth in line with revenue increases.

Sustaining rapid and inclusive growth requires shifting from extensive growth to intensive growth based on productivity increases.
Government actions recommended to foster private investment and productivity:
- Address large infrastructure gaps (including through PPPs).
- Improve governance and transparency.
- Reform the justice system.
- Provide more effective public services in health and education, where Paraguay trails.
- Implement policies to make growth more inclusive to address income and wealth inequality.
- Strengthen the financial sector, including reforming the pension system while the population is still young, to support the private sector and mobilize private savings.

Some reforms will require additional resources.
Options to broaden fiscal space without raising tax rates:
- Broaden the tax base by reducing exemptions and boosting compliance.
- Increase non-tax revenue, including from the upcoming revision of the Itaipú treaty.
- Use existing funds more efficiently to expand the fiscal envelope for reforms.

The IMF staff team led by Mr. Bas Bakker visited Asuncion during November 12-15, 2018 to discuss recent economic developments and policies.
The mission met with government officials, private sector representatives and academics.
The mission thanked the authorities for their hospitality and fruitful discussions.

Source: IMF Staff Concludes Visit to Paraguay (Press Release No. 18/427, November 15, 2018).