IMF Executive Board Concludes 2020 Article IV Consultation with Paraguay

Washington, DC : On February 12, 2021, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Paraguay.

In early 2020, Paraguay was rebounding strongly from the bad weather induced downturn in 2019 and full-year growth was forecast at over 4 percent. The Covid-19 epidemic halted the recovery. An early lockdown, which kept the death toll among the lowest in the region, led to a sharp economic contraction, with women, informal sector workers and service workers particularly hard hit.

Swift and forceful government action helped contain the health, social and economic impact of the crisis. To mitigate the health impact, the government quickly expanded medical resources. To alleviate the social impact the government started two new and temporary social assistance programs and temporarily expanded a third. And to dampen the economic impact, the government increased investment and other spending, while the central bank lowered interest rates, increased liquidity provision, and allowed banks to renew, refinance and restructure loans without penalty. Emergency spending, together with a fall in tax revenues, led to a further increase of the deficit to 6½ percent of GDP, well above the ceiling set by the Fiscal Responsibility Law

Real GDP is likely to have shrunk by about 1 percent in 2020 and to rebound by 4 percent in 2021, but downside risks are significant, with the Covid-19 epidemic posing the highest risk. Inflation hit a historical low in mid-2020 before recovering to 2.2 percent in December 2020 and is projected to remain below the midpoint of the central bank’s target range through 2021.

Executive Board Assessment [2]

Directors commended the Paraguayan authorities for their response to the COVID-19 pandemic, which limited the number of cases and deaths and mitigated the negative economic and social impact. Downside risks remain substantial, however, including from a worsening of the COVID-19 pandemic and negative weather shocks. In this context, Directors encouraged the authorities to pursue policies geared toward supporting macroeconomic stability, strengthening governance and transparency, improving the business climate to promote diversification, and developing human capital.

Directors agreed that the widening of the fiscal deficit in 2020 had been appropriate. They noted that fiscal support should not be withdrawn prematurely, in particular if risks such as a worsening of the COVID-19 pandemic or negative weather shocks were to materialize. It would be important to uphold health and social spending while protecting public investment. Directors encouraged a gradual return to lower deficits once the pandemic abates, to maintain fiscal sustainability. In this regard, they welcomed the authorities’ plan to return to the deficit ceiling under the fiscal responsibility law by 2024. Directors agreed that improving expenditure efficiency and transparency and domestic tax revenue mobilization would be important to cover Paraguay’s social and investment spending needs.

Directors noted that monetary and financial sector policies were appropriately accommodative. They encouraged the authorities to closely monitor the financial sector stability while gradually phasing out emergency measures. Exchange rate flexibility should be allowed in line with fundamentals, and foreign exchange interventions should be limited to prevent disorderly market conditions.

Directors emphasized the need to press ahead with structural reforms to improve governance, business climate, and human capital. In this regard, they welcomed the authorities’ reform agenda as formulated in their Economic Recovery Plan.

Directors commended the authorities’ efforts to safeguard the integrity of the use of COVID-19 funds for social transfers and emergency spending. They took note of the newly adopted anti-corruption plan, which is partly based on recommendations from the staff’s governance assessment project. Directors also welcomed recent progress in the AML/CFT regulatory framework and encouraged the authorities to further strengthen their institutional capacity for its effective implementation.

Paraguay: Selected Economic Indicators