* Previous growth forecast was 8.5 pct
* IMF says planned bond issue should boost economy
* Government should be 'vigilant' on inflation: IMF
WASHINGTON, Dec 4 (Reuters) - The International Monetary Fund raised its forecast for Paraguay's economic growth to 11 percent next year, as good weather bumps up farm production and a planned bond issue is likely to fill government coffers.
The IMF previously forecast that Paraguay, the world's No. 4 soybean exporter, would grow 8.5 percent in 2013 after contracting this year.
But inflation next year is likely to rise "substantially" along with growth, and the government should be ready to raise rates to protect macroeconomic stability, the IMF said after a visit to the country.
"The authorities will need to be vigilant and stand ready to adjust policies accordingly," IMF team leader Gabriel Lopetegui said in a statement.
"Assuming an appropriate response, including allowing some appreciation of the guarani as agricultural exports rebound, we expect inflation to rise only slightly to 5 percent in 2013," he said.
Paraguay, one of South America's poorest countries, was hit this year by a drought that slashed soybean output, a key economic driver. Outbreaks of foot-and-mouth disease devastated the beef sector.
The IMF forecast gross domestic product will shrink 1.5 percent in 2012, with inflation at 4 percent.
But a projected bumper crop and re-opening of regional meat markets after the outbreaks should turn the economy around.
The government plans to sell up to $550 million worth of bonds abroad in February, its first international debt issue since 2000, in order to finance long-term public projects and reduce reliance on multilateral lenders.
But the IMF said Paraguay's government still has problems with planning and implementation, and should be careful in deciding which infrastructure projects to fund based on their social and economic benefits.
The IMF also called on Paraguay to boost its tax revenues, which are below those of its neighbors, especially by raising taxes on the agricultural and financial sectors.