IMF forecasts a good economic year for Paraguay
In a recent report, the International Monetary Fund (IMF) revealed that Paraguay enjoyed robust economic growth in the past decade with an average rate of 4.7 percent a year since 2003. The outlook for this year is positive, thanks to the dynamism in the agricultural sector and rising infrastructure investment.
Despite the acceleration in growth in the 2000s, poverty and inequality in Paraguay remain among the highest in the region.
Activity rebounded to an estimated 13 percent in 2013 as the agricultural sector recovered sharply from the previous year’s severe drought. Rising agricultural output led to higher exports and a surplus of close to 1 percent of GDP in the external current account, despite a deterioration in the terms of trade.
Regarding private sector credit growth, the report says that it has slowed to about 17 percent in nominal terms since end-2012, with loans concentrated on the agricultural sector; consumer credit has also grown rapidly, albeit from a low base. Paraguay´s banking sector remains well capitalized and profitable, with low nonperforming loans.
Macroeconomic policies broadly supported the recovery. Fiscal spending under the stimulus implemented in 2012 decelerated in 2013 due to stricter spending controls, though the central government deficit increased slightly to about 2 percent of GDP from 1.8 percent in 2012 as tax revenue remained modest.
Monetary policy was on hold during much of 2013 until the central bank raised the policy rate by 100 basis points over December 2013 and January 2014, in light of incipient inflationary pressures.
The IMF stressed that the outlook for 2014 is positive and that growth should be strong at 4.8 percent, underpinned by continued dynamism in the agricultural sector and rising infrastructure development. Annual inflation will likely increase to the central bank´s target rate of 5 percent. The fiscal deficit should remain low, under the introduction of the recently approved Fiscal Responsibility Law.
The external current balance would revert to a small deficit amid slightly deteriorating terms of trade and rising import volumes. Overall, the risks to this outlook are balanced. The main downside risks stem from regional growth and global borrowing conditions, while upside risks include faster-than-expected progress in reforms.
February 14, 2014