Press Release No. 22/350

IMF Reaches Staff-Level Agreement on Paraguay’s Policy Coordination Instrument

October 13, 2022

• The IMF team and the Paraguayan government reached a staff-level agreement on a set of macroeconomic policies and structural reforms that would underpin the approval of a new program under the PCI.
• The economic recovery from the pandemic has been set back by the impact of weather adverse shocks, a sharp increase in domestic prices, and the war in Ukraine, but the medium-term economic outlook remains favorable.
• The requested PCI is articulated around three main pillars: (i) ensure macroeconomic stability and resilience, (ii) enhance productivity and foster economic growth, and (iii) enhance social protection and inclusiveness.

Washington, DC: An International Monetary Fund (IMF) team led by Mr. Mauricio Villafuerte held discussions over recent weeks in Asunción and Washington D.C. in response to the authorities’ request for support under the Policy Coordination Instrument (PCI).

At the conclusion of the discussions, Mr. Villafuerte issued the following statement:

“I am pleased to announce that the Paraguayan authorities and the IMF mission team have reached a staff-level agreement on economic and structural policies and reforms that would underpin a two-year arrangement under the non-financial Policy Coordination Instrument (PCI). The staff-level agreement is subject to IMF management approval and Executive Board consideration, which is expected in the coming weeks. The program will support the authorities in ensuring macroeconomic stability while advancing the modernization of the state and enhancing social assistance programs for the most vulnerable.

“Paraguay continues to recover from the COVID-19 pandemic and is facing simultaneous external shocks, including a severe drought that contracted agricultural production this year and a spike in global inflation exacerbated by the impact of the war in Ukraine. The fiscal, monetary, and financial sector measures implemented in response to those shocks were appropriate to support the economy, though they have led to reduced fiscal buffers as reflected in higher public debt. The external current account deficit is estimated to widen this year, owing largely to lower agricultural exports and a sharp rise in fuel imports. Inflation reached double-digit levels, but there are signs that it is decelerating in the context of a continued tightening of the monetary policy stance. The authorities have continued implementing a successful inflation-targeting framework while letting the exchange rate act as an important shock absorber. Financial sector solvency indicators comfortably exceed the legal minimum capital requirements and banks’ profitability has recovered to pre-pandemic levels.

“The IMF-supported home-grown program aims to secure macroeconomic sound policies and advance a reform agenda that would foster strong, durable, and inclusive growth in Paraguay. The authorities’ reform efforts will be anchored by three key pillars: (i) ensure macroeconomic stability and resilience by making efforts to rebuild fiscal buffers and ensure fiscal sustainability going forward, while continuing to implement a data-dependent and forward-looking monetary policy; (ii) enhance productivity and foster economic growth by advancing structural reforms to improve the effectiveness of the government, modernize the public sector and improve the business climate, and; (iii) enhance social protection and inclusiveness through augmenting coverage and efficiency of Paraguay's social assistance programs, and implementing reforms to pull informal workers into the formal economy.

“Paraguay had very positive experiences with Fund-supported programs. Two successive Stand-By Arrangements between 2003 and 2008 helped the country resolve major macroeconomic imbalances, including through deep and long-lasting structural reforms, ushering in fifteen years of transformative growth that raised income levels and had a lasting positive impact on poverty reduction. The PCI request aims to address the current challenges and foster policy continuity, eventually serving as a bridge that would encompass both the last year of the current and the first year of the next administration.

“The team met with Central Bank of Paraguay (BCP) President José Cantero, Minister of Finance Óscar Llamosas, other senior government officials, and representatives from the multilateral financial institutions. The staff team is grateful for the authorities’ excellent cooperation and candid and constructive discussions and reaffirms the IMF’s support for the government’s efforts to implement its economic reform program.”