Press Release No. 04/165

Press Release: IMF Executive Board Completes Second Review Under Paraguay Stand-By Arrangement

August 2, 2004

The Executive Board of the International Monetary Fund (IMF) has completed the second review under a SDR 50 million (about US$72.9 million) 15-month Stand-By Arrangement for Paraguay (see Press Release No. 03/218), which the authorities are treating as precautionary.

In completing the second review, the Executive Board agreed to the authorities' request for waivers of the nonobservance of March 2004 quantitative performance criterion on the ceiling of the wage bill, a May 2004 structural performance criterion on the approval by Congress of the Administrative Reorganization and Fiscal Adjustment Law, and a waiver of the continuous performance criterion on the nonaccumulation of new external payments arrears.

Following the Executive Board's discussion of Paraguay's economic performance, Takatoshi Kato, Deputy Managing Director and Acting Chair, said:

"Paraguay's economic performance has improved substantially over the past year. Growth rebounded in 2003 due to strength in the agricultural sector, and in 2004 the nonagricultural economy has begun to recover, while inflation has fallen below this year's target. External vulnerability has been reduced significantly as a result of the higher-than-expected accumulation of international reserves, a resolution of the external payments difficulties, and the initiation of important fiscal and structural reforms.

"The Paraguayan authorities have shown their continued strong commitment to follow through on the reform agenda supported by the current Stand-By Arrangement, as evidenced by the recent passage of the Administrative Reorganization and Fiscal Adjustment Law and the Customs Code. This legislation provides a sound basis for fiscal consolidation in the medium term, and will help generate resources for essential capital investment in high-quality projects and increased social spending.

"The authorities have achieved remarkable progress in raising the efficiency of tax and customs collections. They plan to institutionalize these gains by restructuring the tax and customs authorities. Current expenditures have been tightly controlled, and it will be important to continue to resist pressures for increases and maintain prudent wage policies. Steps have been taken to improve the performance of the public enterprises, including the completion of external audits of the main firms, but further efforts are required. Over the medium term, greater private participation in the investment and management of the public enterprises should be permitted.

"Improved monetary policy management has resulted in lower inflation and higher reserves, and the authorities are encouraged to continue to strengthen their monetary policy strategy with a view to moving to formal inflation targeting. Passage of the Public Bank Reform Law will be a key objective for the authorities in the period ahead as part of their efforts to further strengthen the banking system. Other important goals will be the approval of comprehensive banking legislation, the extension of a supervisory regime to cooperatives, and mandatory introduction of international risk classifications in all banks.

"Continued structural reform and human capital development—along with support from the international community—will be needed to raise GDP growth, reduce poverty, and enable Paraguay to move towards the Millennium Development Goals. The authorities are to be commended for making an impressive start on these endeavors, and have shown strong leadership and commitment in implementing difficult reforms, including in the governance area," Mr. Kato said.