IMF approves US$274mn emergency support for Paraguay amid COVID-19 battle

By IMF

21 April 2020

Washington, DC – The Executive Board of the International Monetary Fund (IMF) approved a disbursement in the amount of SDR 201.4 million (US$ 274 million, 100 percent of quota) for Paraguay under the Rapid Financing Instrument (RFI). These resources will help meet the urgent balance of payment needs stemming from the outbreak of the COVID-19 pandemic, preserve resources for essential COVID-19-related health expenditure and social safety net spending and catalyze multilateral donor support.

To contain the outbreak and mitigate the impact on the economy, Paraguay has adopted an emergency package that will boost health care spending, expand the social safety net and provide emergency loans for small enterprises. It has also allowed banks to restructure loans to private sector companies that are in repayment difficulties, and postponed collection of taxes and user fees for 2 months. The central bank has lowered policy rates and increased liquidity provision.

Before the outbreak struck, there were signs of a strong recovery from the weather induced recession in 2019. However, because of the epidemic, Paraguay’s economy will shrink by an estimated 1% in 2020. As a result of the recession and the government’s emergency package, the fiscal deficit is expected to increase to 4½ percent of GDP this year.

Following the Executive Board discussion of Paraguay’s request, Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair, made the following statement:

“The COVID-19 pandemic has hit the Paraguayan economy very hard and created an urgent balance of payments need. All sectors are impacted as significant measures are being taken to stop the spread of the virus. The authorities’ policy response has been forceful and timely to contain the pandemic and mitigate its impact on the economy.

“A temporary widening of the budget deficit is appropriate. In the short run, the priority is to increase spending on health care and the social safety net, as well as to provide support to small businesses and workers. Once the crisis abates, the budget deficit will need to be reduced, and Paraguay should reestablish its fiscal rule, which has successfully anchored macroeconomic stability in the past five years.

“The Central Bank has appropriately lowered its policy rate and provided additional liquidity to the financial system. The exchange rate should continue to act as a shock absorber, with its value determined by market forces, while monetary policy should continue to focus on inflation targeting.

“Fund emergency support under the Rapid Financing Instrument would help address balance of payments pressures, boost confidence, and create fiscal space for essential pandemic-related expenditures and catalyze donor support.”

For information on the emergency financing requests approved by the IMF Executive Board, please see a link to the IMF Lending Tracker: https://www.imf.org/en/Topics/imf-and-covid19/COVID-Lending-Tracker.

For upcoming discussions on the emergency financing requests, please see a link to the calendar of the IMF Executive Board meetings: https://www.imf.org/external/NP/SEC/bc/eng/index.aspx.