MercoPress. South Atlantic News Agency

IMF okays Paraguay's performance but raises concerns here and there

Paraguay's monetary policy should continue to be data-driven, the IMF suggested

The International Monetary Fund (IMF) approved Paraguay's fifth review of the Policy Coordination Instrument (PCI) and third review of the Resilience and Sustainability Service (RSS), granting access to about US$285 million, with US$195 million requested by authorities.

Although the global credit agency praised Paraguay’s robust economy, driven by strong private consumption and investment, and its commitment to reducing the fiscal deficit to 1.5% of GDP by 2026, it recommended improving tax collection, public spending efficiency, and addressing the public pension system's 43% deficit (US$ 129 million).

The IMF also urged reducing foreign currency debt and strengthening measures against money laundering and terrorist financing. While Paraguay’s economic outlook is favorable, global risks and climate shocks remain concerns, necessitating prudent macroeconomic policies.

The IMF's Board said in a statement that “the Paraguayan economy remains robust,” that “the dynamism of private consumption and gross fixed capital formation offset the negative contribution of net exports,” that the performance of the programs continues to be “very satisfactory,” and that the government remains “committed” to reduce the fiscal deficit to 1.5% of GDP in 2026, and therefore it was approved.

However, the agency subtly hinted at a need to boost tax collection and improve public spending. “The authorities remain committed to advancing the fiscal consolidation plan, with the goal of reducing the deficit to 1.5% of GDP by 2026, the limit set by the Fiscal Responsibility Law. Efforts to boost tax collection and improve the efficiency of public spending should continue to support fiscal consolidation objectives,” said Nigel Clarke, deputy managing director and acting chair of the IMF's Executive Board.

He also suggested looking at the sustainability of the public sector Pension and Retirement System or Fiscal Fund, which, as of May, already has a deficit of 43%, representing a total loss of around US$129 million, and urged the de-dollarization of public debt.

“Addressing the sustainability of the public employee pension fund is essential to mitigate medium-term fiscal risks. The overall risk of sovereign stress is low, and continued efforts to gradually reduce the proportion of foreign currency-denominated debt would help further strengthen the risk profile of public debt,” Clarke said.

While highlighting the Paraguayan authorities' “firm commitment” to implementing “prudent macroeconomic policies and structural reforms” to improve long-term sustainable and inclusive growth, he also warned that local economic outcomes were conditioned “by global risks.”

“The Paraguayan economy remains resilient thanks to its solid macroeconomic fundamentals and the authorities' continued prudent macroeconomic management. The outlook is favorable, and growth is expected to remain robust, but it is subject to elevated global risks and adverse climate shocks. In this context, staying prudent macroeconomic management remains critical to macroeconomic stability,” Clarke recommended.

“With inflation contained within the Central Bank's tolerance range, monetary policy should continue to be data-driven. The exchange rate should continue to act as a buffer. The banking sector is well capitalized, liquid, and profitable, and the authorities plan to deepen and modernize capital markets. It is essential to continue strengthening the frameworks for combating money laundering and terrorist financing, including the prompt completion of the National Risk Assessment,” the expert concluded.