Since joining the World Bank’s Reserve Advisory and Management Partnership (RAMP) in 2017, the Central Bank of Paraguay has continued to enhance its approach to managing international reserves. Working with RAMP, the Central Bank continues to make substantial strides in diversifying its reserve portfolio, modernizing its investment practices, and fortifying its operational framework—resulting in better long-term profitability, improved liquidity and security of their portfolio, and a stronger financial position of the Central Bank and country.
A Transformative Journey
When the Central Bank of Paraguay joined RAMP in 2017, its international reserves had reached $7.8 billion, more than triple their size from a decade prior. However, the portfolio’s composition reflected an overreliance on bank deposits, constituting over 80 percent of the reserves. Compared to other central banks, Paraguay’s portfolio did not have adequate exposure to instruments such as government debt, money market instruments, and bonds from supranational and agencies—all of which offer higher returns while maintaining liquidity and security.
To address these challenges, the World Bank RAMP and the Central Bank of Paraguay embarked on collaborative engagement to strengthen reserve management practices. The key to this effort was developing a comprehensive project plan to diversify the reserve portfolio while adhering to robust risk management standards. This process involved multiple dimensions of improvement, each supported by RAMP’s advisory services, executive training, and a global network of public asset managers.
Modernizing Investment Policies and Guidelines & Improved Diversification
RAMP’s first step was supporting the Central Bank of Paraguay in revising its investment policies and guidelines. These foundational documents should clearly define strategic objectives, risk tolerance, and eligible asset classes. RAMP enabled the Central Bank’s team to design and implement modernized policies through training sessions and hands-on workshops. In 2021, their board approved a new investment policy, paving the way for a structured diversification process.
Developing a Strategic Asset Allocation Framework
A critical component of modernization involved establishing a strategic asset allocation framework. With RAMP’s guidance, they developed differentiated tranches for its portfolio: working capital, liquidity, and investment tranches, each tailored to specific liquidity needs and investment horizons. With training, they used quantitative tools to determine and introduce the appropriate benchmark for each tranche using government bond indices, helping optimize returns while maintaining liquidity and security.
Strengthening Portfolio Management
Portfolio management is the implementation of the investment policies and guidelines along with the strategic asset allocation. RAMP’s support in portfolio management began with training officials to replicate benchmark portfolios, a vital step in building capacity for active portfolio management. Within several years, the Central Bank had begun investing in higher-quality instruments, such as bonds issued by agencies, supranationals, and sovereign entities with high credit ratings. These efforts have significantly diversified the portfolio, with bank deposits constituting less than 10 percent of total investments (down substantially from 80% in 2017).
Measuring and Monitoring Risk
Effective risk management is essential to any investment management framework and RAMP’s advisory services. Through week-long technical workshops, RAMP trained the Central Bank’s staff in financial and operational risk management, equipping them to measure and monitor risks using quantitative metrics. These enhancements have strengthened internal reporting by implementing new risk metrics and informed the development of sound investment guidelines.
Improving Operational and IT Systems
Trading and information systems support investment decision-making by providing accurate and timely data and analysis on investment performance, risk exposure, and other relevant factors. RAMP facilitated improvements in operational processes and information systems, enabling the Central Bank to adopt electronic platforms for trading, recording, and settling transactions. This modernization aligns with international financial industry standards and enhances the efficiency and accuracy of reserve management operations. Additionally, RAMP trains its members to select private providers that support this type of work, such as custodians or providers of operational investment management (i.e., front-to-back) IT systems.
