International Monetary Fund. Western Hemisphere Dept.
This Selected Issues paper analyzes the spillover effects of key external shocks on Paraguay. It presents an overview of Paraguay’s major economic and financial linkages with the rest world, and quantifies the spillover effects of key external factors on the Paraguayan economy, using a vector autoregression approach. The empirical results suggest that global shocks have a significant impact on Paraguay’s growth rate. The paper also highlights that output and exchange rate shocks stemming from Brazil and Argentina are also important, even after controlling for global factors.
The Paraguayan economy suffered setbacks throughout 2011–12 owing to drought, export ban, and inflation. Recovery measures have been under way with active government intervention in the implementation of a new budget, tax reforms, and new monetary and fiscal policies. The central bank has undertaken measures to increase non-agricultural revenue and strengthen the cooperative sector. Although it commended fiscal prudence, the Executive Board advised on an improved tax regime, promotion of public investment, and the need to devise long-term strategies.
This 2009 Article IV Consultation highlights that the Paraguayan economy performed very well over the past five years, with real GDP growth averaging about 5 percent a year—the best in a generation. The fiscal position strengthened considerably, thereby reducing public debt sharply to relatively low levels. The economy grew by nearly 6 percent in 2008, but growth decelerated in the last quarter of the year. Paraguay’s macroeconomic outlook has also been negatively affected by the deterioration in the global environment.
On May 1, 2009 the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Paraguay. 1
The Paraguayaneconomy performed very well over the past five years, with real GDP growth averaging about 5 percent a year—the best in a generation. The fiscal position strengthened considerably, thereby reducing public debt sharply to relatively low levels. The economy grew by nearly 6 percent in 2008, but growth decelerated in the last quarter of the year. Paraguay’s macroeconomic outlook has been negatively
contracting GDP will result in an overall fiscal deficit of 2½ percent of GDP.
Executive Board Assessment
Directors noted that the Paraguayaneconomy is projected to contract this year as a result of a severe drought. However, a rapid turnaround in activity and strong growth next year are expected, on account of robust domestic demand, strong confidence, and normalization of weather conditions.
Directors agreed that the current mix of macroeconomic policies is appropriately supportive of economic activity and consistent with the inflation target in 2012. Noting