LatinFinance - July/August 2014 - Paraguay Supplement - 8

PARAGUAY | Macro-economy

"An export tax would be the easiest
way, but it would not bring all the
benefits that we see by doing what we are
doing. It is harder to do, but at the end of
the day we expect to see better results in
the long term."
But not everybody is impressed.
Ronaldo Dietze, a former agriculture
minister and senator who now heads the
Ecop agro-cooperative, says: "Left wing
parties will insist again in doing so - in
introducing an export tax - but I do not
think they will succeed."

Volatile path
Paraguay GDP growth %
14
12
10
8
6
4
2
0
-2
-4

2007 2008 2009 2010

2011

2012

*Forecast
Source: Government statistics

The World Bank renewed its
recommendation in April to increase
taxes on the agriculture sector, which
accounts for over 20% of GDP but
contributes less than 7% of tax revenues.
"The agricultural sector accounts
for 22% of GDP, but if you take all the
agribusiness industry into account, we
are talking of more than 50%," says
Alessandro Palmero, the European
Union's ambassador to Paraguay.
Paraguay's fiscal policy continues
to be constrained by its limited fiscal
resources, according to the World
Bank. But the low tax haul (12% of GDP)
is more than ever part of Paraguay's
strategy to attract investors, as President
Cartes makes clear in an interview with
LatinFinance (see page 48).
The government knows Paraguay
needs to pursue much more than
agriculture to achieve its ambitions.

8 L ATINFINA NCE.COM - July/August 2014

"Food production will always be the
main driver of economic growth. But we
enthusiastically see other sectors that
contribute to having a more diversified
economy. There are job opportunities
outside the primary sector," says Rojas.
The maquila sector (manufacturing
in free-trade zones) has already attracted
some foreign investment to re-export
goods, and efforts are being made to
include Paraguay in the regional value
chain, mainly through greater integration
with neighboring Brazil.
But this will only
work out if infrastructure
is modernized. "We have
a very aggressive agenda
for the development
of infrastructure that
involves bringing in the
private sector to make
part of the investment
needed," says Ramón
Jiménez, minister of
public works, and
another of Cartes' UStrained young guard.
The government last
October pushed through
a law on public-private
2013 2014*
partnerships, as well as
a project finance law and
a fiscal responsibility
law. All three are designed to strengthen
the legal framework to promote private
investment in public works, says Jiménez.
"Along with the concessions law and
the leasing law, these three laws make for
a proper legal framework to guarantee
private investment in public works."

Economic praise

Paraguay's economic policy stance is
widely praised: fiscal discipline has been
strengthened and the recent fiscal reform
has capped the budget deficit to 1.5% of
GDP; and current expenditures may not
increase by more than 4% in real terms.
Last year, record growth put pressure
on inflation, which nonetheless remained
within the official tolerance margin
(within two percentage points of 5%).
Monetary policy was tightened, and the
inflation rate has declined steadily since
the beginning of the year (from 1.4% in
January to 0.3% in May).

International reserves have increased
tenfold within 10 years and now stand
at around $6 billion, which is equivalent
to 20% of GDP, according to the central
bank. The country is a net creditor, but
is poised to take on more debt to finance
its infrastructure, much of which has not
been modernized for the past 40 years.
Officials argue Paraguay can take
more debt. "In recent years, we
benefitted from some tailwinds thanks
to high commodity prices, but at the
same time we were able to show a strong
commitment to fiscal stability," says
Fernández, the central bank governor.
"This is resulting in fiscal surpluses.
During the last 10 years, we have had
eight years of consecutive overall
surpluses in the fiscal sector. It has
allowed us to reduce external debt
that used to be around 60% of GDP to
something around 10% of GDP".
"Instead of spending all the money
that came through the tailwinds of high
commodity prices, we were saving that.
It means the central bank of Paraguay
was able to accumulate international
assets. So we went from $600 million
before 2003 to more than $6 billion (in
reserves). That is around 20% of GDP.
"The ratio international reserves-toGDP is one of the highest in the region."
Rojas adds: "The level of external
debt is no more than 14% of GDP. We
still have room to increase our debt.
We plan to increase this up to 25% by
issuing bonds, by taking more loans from
multilateral institutions - but this will
be related to specific projects, mostly
infrastructure.
Fernández insists on the commitment
of the administration to sound economic
policies, as it prepares to launch a bond.
He says: "It is an important
commitment for the government because
you have a commitment to put the right
policies in place, because you want to
keep the market open, in case you need
it. For that it is important to maintain
sound economic policies."
So far, implementation of the
programme has been timid. "The process
has been a bit slow. That is what worries
me," says Dietze, as transport bottlenecks
limit economic growth. "The potential is
quite high." LF


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Table of Contents for the Digital Edition of LatinFinance - July/August 2014 - Paraguay Supplement

Contents
LatinFinance - July/August 2014 - Paraguay Supplement - Cover1
LatinFinance - July/August 2014 - Paraguay Supplement - Cover2
LatinFinance - July/August 2014 - Paraguay Supplement - Contents
LatinFinance - July/August 2014 - Paraguay Supplement - 2
LatinFinance - July/August 2014 - Paraguay Supplement - 3
LatinFinance - July/August 2014 - Paraguay Supplement - 4
LatinFinance - July/August 2014 - Paraguay Supplement - 5
LatinFinance - July/August 2014 - Paraguay Supplement - 6
LatinFinance - July/August 2014 - Paraguay Supplement - 7
LatinFinance - July/August 2014 - Paraguay Supplement - 8
LatinFinance - July/August 2014 - Paraguay Supplement - 9
LatinFinance - July/August 2014 - Paraguay Supplement - 10
LatinFinance - July/August 2014 - Paraguay Supplement - 11
LatinFinance - July/August 2014 - Paraguay Supplement - 12
LatinFinance - July/August 2014 - Paraguay Supplement - 13
LatinFinance - July/August 2014 - Paraguay Supplement - 14
LatinFinance - July/August 2014 - Paraguay Supplement - 15
LatinFinance - July/August 2014 - Paraguay Supplement - 16
LatinFinance - July/August 2014 - Paraguay Supplement - Cover3
LatinFinance - July/August 2014 - Paraguay Supplement - Cover4
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