Paraguay: July 1997
Paraguay's widespread political and economic reforms have furthered its integration into the world trading system. According to the first WTO report on Paraguay's trade policies and practices, this process has been strengthened by the implementation of WTO undertakings and of regional commitments resulting from MERCOSUR membership.
WTO and regional commitments shape Paraguay's integration in the world economy
Paraguay's widespread political and economic reforms have furthered its integration into the world trading system. According to the first WTO report on Paraguay's trade policies and practices, this process has been strengthened by the implementation of WTO undertakings and of regional commitments resulting from MERCOSUR membership.
The WTO Secretariat report and a policy statement prepared by the Government of Paraguay will provide the basis for a discussion, scheduled for 17 and 18 July 1997, on the country's trade policies in the WTO.
The WTO report notes that in recent years Paraguay's economic growth has been variable, barely keeping pace on average with population growth. Foreign investment flows into Paraguay have been stimulated by fiscal incentives, high interest rates, the liberalization of the country's foreign exchange régime and regional integration prospects in the context of MERCOSUR. This has led to real appreciation of the currency and has raised competitiveness concerns. Although progress in privatization has been slow, de-regulation is now favoured in key development sectors (e.g., telecommunications, electricity) where the State is involved. Future growth and economic development will depend on how issues like public finance, infrastructure and social welfare are to be addressed.
According to the report, Paraguay's merchandise trade balance has deteriorated rapidly, from a surplus of US$164 million in 1989 to an estimated deficit of US$1,378 million in 1996, despite rising exports of electricity from Itaipú, the world's largest hydro-electric project. This decline is inter alia related to a steady increase in imports and decreasing world prices for Paraguay's two primary export products, soybeans and cotton. Official trade data, however, do not reflect adequately the magnitude
of receipts from unrecorded trade, which includes re-exports from "shopping tourism" attracted by a lower level of indirect taxation in Paraguay than in neighbouring countries.
The report notes that integration with MERCOSUR has advanced significantly with the progressive phase-out of trade barriers on intra-zone trade and the adoption of the Common External Tariff (CET) in 1995. Since then, border protection has been based exclusively on tariffs which replaced earlier import restrictions on certain agricultural items. However, consular charges of 7.5 per cent and a fixed documentation fee increase the effective rate of taxation on most imports. Convergence to MERCOSUR's CET is expected to raise Paraguay's average MFN tariff rate, from 9.6 per cent in 1995 to 11.1 per cent by 2006. While average tariff protection for the agricultural sector will decrease from 7.6 to 7 per cent, a rise from 9.8 to 11.4 per cent is expected for manufactured goods. In the absence of a developed industrial sector, tariff escalation is to essentially favour industries of other MERCOSUR partners.
The report notes that Paraguay has undertaken reforms to incorporate WTO rules in the domestic legislative framework. New legislation has been passed on customs valuation, preshipment inspection, anti-dumping and safeguards. Efforts have also been made to reinforce the protection of intellectual property rights (IPRs) by inter alia joining major international treaties, launching a campaign against IPR violations and passing new legislation. Paraguay's Congress is considering a new patents law in compliance with the provisions of the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights.
Paraguay has a history of limited sectoral intervention, avoiding costly industrialization based on an inward-looking import substitution strategy. Eighty-five per cent of Paraguay's merchandise exports are agricultural products. There has been limited diversification of crops and export markets, and little progress has been achieved in implementing agrarian reforms. Paraguay's under-developed manufacturing sector, dominated by small firms mainly processing domestic agricultural or forestry products, is faced with structural adjustment challenges. The report notes that Paraguay's services sector, accounting for about half of the GDP and consisting mainly of commerce and financial services, has been partly deregulated. Certain barriers or specific requirements on private or foreign investors remain in force, for example, in the supply of telecommunications, broadcasting, insurance and transportation.
In its conclusions, the WTO report states that Paraguay's political and economic reforms should be consolidated by improved macroeconomic stability and infrastructure as well as efforts to accelerate and deepen public sector and financial reforms. The report also points out that while MERCOSUR membership has helped Paraguay's systemic reforms and improved investment opportunities, it will lead to some applied tariff increases and greater preferences for regional partners. The combination of a rising CET tariff level and duty-free-access to MERCOSUR partners, the report says, may result in trade diversion away from more competitive suppliers.
Note to Editors:
The WTO Secretariat's report, together with a report prepared by Paraguay will be discussed by the WTO Trade Policy Review Body (TPRB) on 17 and 18 July 1997. The WTO's TPRB conducts a collective evaluation of the full range of trade policies and practices of each WTO member at regular periodic intervals and monitors significant trends and developments which may have an impact on the global trading system. The two reports, together with a report of the TPRB's discussion and of the Chairman's summing up, will be published in due course as the complete Trade Policy Review of Paraguay and will be available from the WTO Secretariat, Centre William Rappard, 154 rue de Lausanne, 1211 Geneva 21.
The reports cover the development of all aspects of Paraguay's trade policies, including domestic laws and regulations, the institutional framework, trade policies by measure and by sector. Since the WTO came into force, the "new areas" of services trade and trade-related aspects of intellectual property rights are also covered. Attached are the summary observations from the Secretariat and government reports. Full reports will be available for journalists from the WTO Secretariat on request.
Since December 1989, the following reports have been completed: Argentina (1992), Australia (1989 & 1994), Austria (1992), Bangladesh (1992), Bolivia (1993), Brazil (1992 & 1996), Cameroon (1995), Canada (1990, 1992, 1994 & 1996), Chile (1991), Colombia (1990 & 1996), Costa Rica (1995), Côte d'Ivoire (1995), Cyprus (1997), the Czech Republic (1996), the Dominican Republic (1996), Egypt (1992), El Salvador (1996), the European Communities (1991, 1993 & 1995), Fiji (1997), Finland (1992), Ghana (1992), Hong Kong (1990 & 1994), Hungary (1991), Iceland (1994), India (1993), Indonesia (1991 and 1994), Israel (1994), Japan (1990, 1992 & 1995), Kenya (1993), Korea, Rep. of (1992 & 1996), Macau (1994), Malaysia (1993), Mauritius (1995), Mexico (1993), Morocco (1989 & 1996), New Zealand (1990 & 1996), Nigeria (1991), Norway (1991 & 1996), Pakistan (1995), Peru (1994), the Philippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore (1992 & 1996), Slovak Republic (1995), South Africa (1993), Sri Lanka (1995), Sweden (1990 & 1994), Switzerland (1991 & 1996), Thailand (1991 & 1995), Tunisia (1994), Turkey (1994), the United States (1989, 1992, 1994 & 1996), Uganda (1995), Uruguay (1992), Venezuela (1996), Zambia (1996) and Zimbabwe (1994).
The Secretariats report: summary
TRADE POLICY REVIEW BODY: PARAGUAY
Report by the Secretariat Summary Observations
(1) The Economic Environment
Since 1989, Paraguay has undertaken widespread political and economic reforms. During the period, economic growth, while positive, has been variable, barely keeping pace on average with population growth. However, inflation has been reduced, particularly since 1993, to around 8 per cent in 1996, the targeted level also for 1997.
Strong direct investment inflows have been stimulated, inter alia, by liberalization of the foreign exchange and investment régimes, fiscal incentives, regional integration prospects under MERCOSUR. High interest rates have also attracted considerable short-term capital flows. This trend, together with growing foreign exchange earnings from the export of electricity from Itaipú, the world's largest hydro-electric project, has led to continuous real appreciation of the currency which has raised concerns about the competitiveness of traditional Paraguayan exports of cotton and soybeans, which also vary according to world prices.
Paraguay's merchandise trade deficit has grown rapidly; however, official data may not accurately reflect the situation because of the magnitude of unrecorded trade, especially re-exports. Such re-exports, largely related to "shopping tourism" stimulated by lower indirect taxation in Paraguay than in neighbouring countries, remain of considerable importance to the domestic economy (including fiscal revenue from value-added tax on such purchases). Faster growth in recorded imports under the liberalization programme, plus improved statistical recording, are factors underlying the increased ratio of trade to GDP.
(2) Trade Policy Features and Trends
(i) International economic integration
Reforms, begun in 1989, rationalized Paraguay's trade régime by simplifying the tariff structure and reducing duty rates. However, this trend will, to some extent, be reversed by progressive convergence with MERCOSUR's Common External Tariff (CET), which will bring about a modest increase in the unweighted average applied m.f.n. rate from 9.6 per cent in 1995 to 11.1 per cent by 2006. In compliance with MERCOSUR and WTO commitments, remaining non-tariff measures, affecting a few agricultural products, were replaced by tariffs in January 1995. To date, Paraguay has never applied safeguard or anti-dumping actions.
Integration with MERCOSUR has advanced significantly with the progressive phase-out of tariffs and the suppression of non-tariff barriers on intra-regional trade, as well as the adoption of the CET. Paraguay is pursuing further expansion of its regional and preferential trading links via MERCOSUR, through the negotiations on the establishment of a Free Trade Area for the Americas as well as with other groups and individual countries. Trade within the region, predominantly with Brazil, has expanded greatly; competition in the domestic market is expected to intensify gradually as remaining tariff protection on imports of sensitive items originating in MERCOSUR countries is phased out by 2000. Decisions remain to be taken within MERCOSUR on duty for sugar and establishment of a common automotive régime.
(ii) Trade policy developments
Paraguay has undertaken a wide-ranging reform of its legislative framework, driven by the adoption of a new Constitution, accession to the GATT and subsequent WTO membership, and the deepening of trade commitments at regional and multilateral levels. New legislation has been adopted in areas such as customs valuation, preshipment inspection, anti-dumping, safeguards, free-trade zones, hydrocarbons, mining, banking, insurance and telecommunications. Further legislative reforms are being considered by Congress, including a law on patents and implementing legislation on MERCOSUR commitments. Paraguay invoked the extended implementation period available for developing countries under the WTO Agreement on Customs Valuation, but no final decision has been made on whether it will seek similar delays on patents under the TRIPS Agreement. Compliance with GATT/WTO notification requirements has improved but there are still some significant gaps, for example, on State trading enterprises. Domestically, a new Ministry of Integration has been established and a number of policy co-ordination or implementation committees have been set up.
Paraguay's border protection now relies exclusively on tariffs; it applies the disperse eleven-tier Common External Tariff (CET) of MERCOSUR, with a simple average of 9.6 per cent and rates of 0, 2, 4, 6, 8, 10, 12, 14, 16, 18 and 20 per cent ad valorem. This protection pattern largely reflects other MERCOSUR members' interests rather than those of Paraguay, whose manufacturing sector is relatively undeveloped. A peak of 30 per cent applies to sugar imports. Within the CET, tariff escalation provides higher effective protection for processing industries than is evident from nominal rates; tariff escalation will, in certain cases, become even more pronounced when full convergence to common rates is accomplished. The entire tariff is bound, generally at a ceiling of 35 per cent, except for 451 items bound at lower levels; WTO bindings on certain items are to be renegotiated, taking into account the level of the CET. Provisions for tariff exemptions or concessions, for example on imported inputs or imports by certain State entities, have been maintained.
Consular charges of 7½ per cent c.i.f. and a fixed documentation fee substantially increase the effective rate of taxation on most imports. Handling charges imposed on a specific-rate basis by the National Shipping and Ports Administration (ANNP) differentiate between imports and exports, as do storage fees, charged on an ad valorem basis.
Remaining sector- or product-specific measures affecting imports comprise import authorizations, licensing and prohibitions maintained for health, environmental or security reasons. Legislative provisions allowing the use of import prohibitions for economic reasons remain in force, but are not currently applied. State involvement in production and trading persists in steel, cement, hydrocarbons, electricity, telecommunications, transportation, banking, port, airport and sanitation services; greater private sector participation in activities reserved to State monopolies (i.e., de-monopolization) is favoured as an alternative to complete privatization. Government procurement conditions give 15 per cent preference to local products and 5 per cent for domestically assembled goods; the establishment of a new register of suppliers is intended to improve transparency of procedures.
Since 1994 export prohibitions have been extended to all un- and semi-processed wood. These restrictions are intended to address the acute problem of deforestation, but may also encourage production by local sawmills. Other export restraints, such as on certain agricultural items, are either based on domestic supply considerations or address compliance with international or bilateral arrangements, such as that governing beef exports to the EU.
Legislation establishing a free-trade-zone régime, including wide-ranging tax concessions, was passed in 1995 but had not been notified to the WTO at the time of completion of this report. Paraguay has until 2003 to bring this legislation into line with obligations. A first project to establish a zone was authorized in 1997. Drawback of VAT is allowed and export promotion facilities are available; no other financial or insurance facilities for exports are available.
Support to domestic production mainly consists of concessional finance for modernization, training, technology transfer, development and environmental projects. Ad hoc assistance to agricultural activities has been provided in various forms. Most public utilities seem to be available at prices that do not cover marginal costs; for example, concessional electricity rates were established in 1994.
Efforts have been made recently to reinforce the legal and institutional framework for the protection of intellectual property rights (IPRs); Paraguay has joined the major international treaties and a bill is in preparation intended to bring domestic legislation into conformity with the provisions of the TRIPS Agreement. Enforcement of IPRs in Paraguay remains subject to several constraints; however, a new National Council for the Protection of Intellectual Property Rights is to implement a campaign against IPR violations. A Consumer Protection Office was established in 1995, and legislation on the implementation of the 1996 MERCOSUR Competition Protection Protocol of 1996 is under preparation. Paraguay has increased its emphasis on environmentally sustainable development by adhering to several international treaties in this area.
(3) Sectoral Policy Developments
Nominal tariff protection for agriculture is 7.6 per cent in 1997, below the overall average level; full implementation of the MERCOSUR CET will lead to a slight reduction in tariff protection for the sector. Paraguay has an uncomplicated WTO Schedule, with no tariff quotas, special safeguards, domestic support or export subsidy reduction undertakings. Despite the fundamental importance of agriculture to the economy, government intervention is modest, mainly intended to assist small producers in coping with emergency situations such as harsh weather and credit shortages; it has been limited to temporary or seasonal tariff protection for a few crops, the provision of low-cost short-term credit for cash or sensitive crops, VAT exemption for unprocessed crops and certain sporadic support measures, including writing-off bad debt or free distribution of seeds, mainly for cotton. No progress has been achieved so far in agrarian reforms foreseen under the Constitution, and efforts for crop and export diversification have been limited, focusing mainly on credit-related measures; sectoral reactivation and modernization projects were under preparation in 1995 and 1996. Particular emphasis has been given to strengthening the regulatory framework governing forest exploitation and re-afforestation activities as well as to controlling illegal exports of wood; however, there has been little response, and financial assistance is now used to strengthen the programme.
State involvement affects all electricity generation and distribution activities and a large part of the hydrocarbons trade, although monopoly rights on the latter were eliminated in 1992. The de-monopolization and restructuring of the electricity sector has been under consideration in recent years. Exports of surplus power from the major hydro-electric power plants generate large foreign exchange earnings, and low electricity rates may provide the basis for future development of energy-intensive industries. The construction and operation of these hydro-electric power plants have raised some environmental concerns.
Paraguay has never sought to achieve sectoral development through import substitution policies; manufacturing is thus dominated by small, inward-oriented firms processing domestic agricultural or forestry products, which increasingly face import competition from MERCOSUR partners. However, manufacturing enjoys the highest average tariff protection of any sector; this is expected to rise by 16 per cent to 11.4 per cent by 2006 when MERCOSUR CET rates will apply fully. At present, the food, beverages, tobacco, textiles, leather, wood and furniture industries have the highest average levels of protection. Duty free access to MERCOSUR partners, behind the CET, may encourage purchase of regionally produced capital goods and other inputs, thus creating some trade diversion away from more competitive suppliers and potentially increasing start-up costs for Paraguayan manufacturing. No evidence exists that State involvement in manufacturing and trade of steel and cement has been a major barrier to trade in recent years. The level of interest rates, shortage of credit, liquidity problems and the real appreciation of the exchange rate, as well as competition from imports have been the main factors affecting modernization and growth of manufacturing.
Commerce, particularly related to shopping tourism fostered by sizeable indirect tax differentials with neighbouring countries, and financial services dominate the services sector. Following the 1995 financial crisis, which led to considerable public expenditure on bank rescue operations, steps have been taken to reform the financial system, including the enlargement of domestic investment options. State involvement in key services such as port, airport, telecommunications and electricity distribution seems to have constrained the development of trade and investment. Despite recent deregulation efforts, a number of barriers or specific requirements on private or foreign investors remain in force, for example in the supply of telecommunications, broadcasting, insurance and transport services. Subsidies may be provided for the development of the telecommunications sector were in addition to legislative and institutional changes, a joint venture agreement has been signed to improve the supply of telephone lines. Cargo reserve requirements were relaxed in recent years; in practice, these were never effective due to domestic capacity restraint.
Paraguay's commitments under the General Agreement on Trade in Services cover financial and tourism sectors. No exemptions to m.f.n. treatment under GATS Article II are specified. Therefore, unless GATS Article V is invoked by Paraguay, as is apparently intended, Paraguay must grant service suppliers from all WTO members identical treatment to that extended to its Latin American partners (e.g., on cargo and passenger transport). In the light of MERCOSUR priorities, Paraguay has expressed no interest in participating in negotiations on maritime transport and basic telecommunications services or in signing the Information Technology Agreement, which, is seen as running counter to MERCOSUR's sectoral objectives in this area.
(4) Trade Policies and Foreign Trading Partners
Since the early 1990s, Paraguay's political and economic reforms have been strengthened by the increased security of access resulting from its accession to the GATT and the expansion of its commitments in the Uruguay Round. The process should be consolidated by improved macroeconomic stability, better infrastructure and ongoing public sector and financial reforms, which need to be deepened to pave for higher growth. MERCOSUR has helped to reinforce systemic reforms and is expected to create new investment opportunities; however, it will lead to some applied tariff increases and greater preference for regional partners. The expansion of regional trade should continue as new agreements are forged, although Paraguay is also looking for trade opportunities beyond the region. Full implementation of Uruguay Round commitments and assured access to foreign markets should further strengthen Paraguay's integration in the world economy.Back to top
TRADE POLICY REVIEW BODY: PARAGUAY
Report by the Government
Paraguay has made substantial changes in its economic and social policy since 1989. A complete overhaul of the State has been initiated since then and the conditions are being created for the country's sustainable economic development. Paraguay has unilaterally liberalized its trade, not adopting an import-substitution model.
Against this background of change, Paraguay, together with Argentina, Brazil and Uruguay, is pushing resolutely ahead with the creation of the Southern Common Market (MERCOSUR), thereby gaining access to those countries and generating the conditions necessary for productive activity. Since 1989 Paraguay has focused its growth strategy on attracting domestic and foreign investment through the development of a stable macroeconomic environment, the creation of a simplified tax system and the passing of laws to encourage productive activity.
While helping to set up and consolidate MERCOSUR, Paraguay, together with its partners, is continuing to promote regional integration through the signing of free-trade agreements with Chile and Bolivia and is initiating a series of negotiations with other countries and trading blocs.
2. Main economic reforms
Paraguay has undergone an intensive process of change in both the political and economic fields.
The process started with exchange reform. Exchange controls were abolished and there is now a freely floating exchange rate.
Tax reform is being carried out under Law 125/91, with the 70 taxes that existed under the fiscal system being cut to 7. This has led to greater State efficiency from the point of view of tax collection and simplicity, with consequent benefits to private activity as well.
In 1991 the Treaty of Asunción was signed. This initiated the process of creating a common market between Paraguay, Argentina, Brazil and Uruguay, which has now been converted into a flourishing Customs Union.
Paraguay has also modified its customs tariffs, eliminating excessive dispersion of rates and reducing the 1988 average of 14.8 per cent to 11.1 per cent following the introduction of the Common External Tariff.
Laws 60/90 and 117/91 have been passed, providing a favourable framework for the protection and attraction of domestic and foreign investment. These laws authorize important tax exemptions for imports of capital goods, as well as on profits for five or ten years, in addition to broad latitude for sending remittances abroad.
The National Constitution was amended in 1992 through a Constituent National Assembly composed in balanced form of representatives of all the country's political and social sectors. The main pillar of this constitution is the defence of human rights and freedoms and the establishment of sound, modern institutions designed to meet the needs of the global economy.
Reforms have been carried out in the financial sector. A new General Law on Banks and Financial Institutions has been passed and the Organic Charter of the Central Bank has been modified so as to incorporate preventive supervision aspects and provide the supervisory body with greater autonomy. The criteria of the Basle Convention for the valuation of the net assets of financial bodies have been adopted. Likewise, with a view to greater transparency, comprehensive legislation has been passed to prevent money laundering, in particular Law 1015/97 setting up an executive body, the Secretariat for the Prevention of Money or Goods Laundering.
Reforms in the labour sector include the passing of a new Labour Code, which has expanded welfare benefits in the labour sector with a view to achieving a balance with the business sector.
With regard to privatization, the Government saw to the passing of Law 126/91 laying down the privatization arrangements for State enterprises. The State Airline, the State Alcohol Company and the State Merchant Fleet have been privatized, while the steel industry is in the final stages. Law 642, which will make it possible to proceed with the removal of the telecommunications monopoly, was passed in 1995. The first programmes to expand the telephone services have been successfully carried out on the basis of risk-sharing between ANTELCO and the private sector.
In the forestry sector - an important branch of economic activity - Law 536/95 on the Encouragement of Reforestation has been passed. Its objective is the sustainable exploitation of natural resources, and to this end it grants important tax benefits to reforestation activities.
Paraguay has made special efforts to protect intellectual property. In 1996 it put bills before Congress and set in motion an intensive national campaign for the protection of intellectual property rights. These actions are accompanied by controls, seizures, enhancement of civic awareness and a suitable legal framework.
One of the most outstanding reforms concerns the judiciary, with special reference to the setting up of the Supreme Court of Justice. The entry into force of the Law on the Magistracy Council represents a step towards the full respect for, and observance of, civic rights by the promotion of an autonomous and independent judiciary.
The Government is working on the further development of its detailed structural reforms and is seeking to correct and control a number of macroeconomic variables which could compromise the long-term stability and growth of the economy. The objectives of current economic policy are to:
- Encourage rapid growth of the productive sector;
- maintain the balance of the real exchange rate and avoid sudden fluctuations in the general exchange rate;
- control and restructure public expenditure by restricting current expenditure and liberalizing infrastructure expenditure; hold the level of inflation steady.
3. Economic and trade environment
As a farming country by tradition, Paraguay has historically based its economic growth on agricultural production. Although this economic model is still being followed, the Government has made great efforts as regards agricultural diversification and is encouraging the country's industrialization. The GDP has remained highly sensitive to fluctuations in agricultural production and in 1996 suffered the impact of the 1995 financial crisis. However, a considerable recovery in growth has been achieved in 1997.
The Government has succeeded in continuously reducing levels of inflation from 44.1 per cent recorded in December 1990 to 8.2 per cent in December 1996 (the lowest inflation rate of the last 15 years). The Government has set a target of 8 per cent for 1997.
Productive investment has been increasing since 1989 to date, most of it being of foreign origin. Between 1989 and 1996 the average annual growth in total investment was around 30 per cent, while foreign investment in that period - the most dynamic component - showed an annual average growth of 49 per cent.
The marked increase in imports over the last five years is due mainly to the sharp rise in trade and tourism generated in the frontier cities of Paraguay with Brazil and Argentina, resulting in a trade imbalance. Within MERCOSUR, Paraguay is becoming an important trade centre, with this sector developing important marketing channels to the outside. As a result of the convergence of tariffs within MERCOSUR, considerable pressure in being brought to bear in favour of the relocation and local production of products, leading to major private initiatives like the establishment of industrial parks.
The balance of external public debt fell by about 20 per cent in the period 1990/96, going from nearly US$1,670 million in 1990 to US$1,336.3 million in December 1996. On the latter date the debt balance accounted for 14 per cent of GDP and represented a per capita debt of US$270, which is among the lowest figures in Latin America. This level of debt compares with a per capita GDP of approximately US$1,933 (current rates) in the same year.
The level of international reserves has risen significantly in this decade, from US$675 million at the end of 1990 to US$1,062 million in December 1996 and thus staying at a prudent level (40 per cent of total imports recorded in that year).
|Annual inflation (%)||20 .4||18 .3||10 .5||8 .2|
|Variation in exchange rate (%)||13 .8||5 .3||3 .1||6 .7|
of international reserves
(millions of US$)
|697 .7||1,044 .1||1,106 .5||1,062 .0|
|External public debt (millions of US$)||1,218 .0||1,240 .0||1,328 .0||1,303 .0|
|Central Government (millions of )||-84,029 .0||143,635 .0||-50,227 .0||-140,713 .0|
*The 1996 figures are provisional.
Source: Central Bank of Paraguay and Ministry of Finance.
4. Present outlook for the economy
Although the structural changes in the Paraguayan economy have in many respects been gradual and non-traumatic, they now make for a scenario differing from that prevailing in early 1989. Industrial infrastructure is growing strongly, agricultural diversification is in full swing and the 1995 financial crisis has been overcome with a full recovery in trade operations.
The Government will stick to a prudent debt policy with adequate international reserves. The necessary efforts will be made to maintain the present macroeconomic stability and to strengthen growth in the economy.
The great energy potential available provides the State with substantial revenue from the export of electricity, amounting in 1996 to around 43 per cent of recorded exports of products.
In the light of a growth in central government expenditure of almost zero during the first quarter of 1997 in nominal terms - which amounts to a negative real variation - the greater level of activity has led to a budget surplus, with an accumulated surplus of 114,879 million being recorded during the quarter. This result has enabled the external debt to be amortized up to an amount almost double the outgoings and even to generate an increase in current-account deposits amounting to 106,053 million.
The increase in money supply both before and during the first quarter of 1997 appears to indicate the existence of a greater level of economic activity, since with a money supply greater than in the previous year prices have reacted slightly more quickly. The retail price index shows an increase of 5.3 per cent for the quarter, exceeding the figure of 4.9 per cent for the same period in 1996, whereas producer prices are down owing to the trend of agricultural prices and oil, inter alia.
In addition to being reflected in a greater rise in prices, the higher aggregate demand has led to an increase in the trade-balance deficit which, according to Central Bank projections for the first quarter of 1997, has not resulted in a bigger balance-of-payments current-account deficit thanks to a positive trend in the performance of unrecorded exports and imports. As regards the financing of the current-account deficit, the greater part relates to variations in international reserves. Although there has been a net capital inflow it is less than in the previous year before, but has a more favourable composition, with a greater share of long-term capital and from an increase in direct foreign investment.
5. Development of trade negotiations
Given its small internal market, the Government has encouraged the development of an outward-looking growth model through the opening up of external markets and production switching.
As part of its new foreign-policy strategy, Paraguay has taken an active part in regional integration processes such as MERCOSUR, while at multilateral level it joined GATT in 1993.
Paraguay has been an active partner in the process of setting up the MERCOSUR customs union and in the latter's negotiations with third countries and trading blocs.
After MERCOSUR was set up, a series of renegotiations was initiated covering the bilateral agreements of members of MERCOSUR with the other members of the Latin American Integration Association (LAIA), for the improvement and development of their partial-scope agreements.
5.1 Uruguay Round - World Trade Organization
Paraguay joined GATT in 1993, fulfilling its accession commitments. The Paraguayan National Congress ratified the GATT Accession Protocol by means of Law 260 of 1993.
Paraguay took part in the setting up of the World Trade Organization which emerged from the Uruguay Round. In this connection, it carried out the necessary internal reforms regarding standards and procedures relating to customs valuation, intellectual property, elimination of prohibitions, and mechanisms to counter unfair competition, especially anti-dumping and countervailing measures. Paraguay has reduced its levels of tariff and non-tariff protection.
Paraguayan policy regarding services is very open. It has entered into broad GATS commitments regarding transport, communications, tourism and finance.
Paraguay has taken great interest in environmental matters. At domestic level, it has extensively modified all its procedures regarding anti-dumping mechanisms, agriculture, health standards, plant and animal health standards and technical standards. Nevertheless, the Government is continuing to prepare regulations covering the inclusion in its legislation of other procedures provided for in the WTO framework, for example safeguards.
Paraguay is a founder member of the Southern Common Market (MERCOSUR), in which it has been participating since it signed the Treaty in Asunción in 1991.
Since it signed the Asunción Treaty, Paraguay has encouraged the implementation of a Common External Tariff with levels matching its extensive commercial openness and in a continuing spirit of consensus and analysis.
The MERCOSUR Common External Tariff (CET) has an average level of 11.1 per cent.
The need to adapt to the new tariff structure has necessitated the creation of transitional instruments which allow each signatory State to maintain a national list of exceptions to the CET, which in the case of Paraguay comes to 399 tariff items. The national exceptions are defined individually and a linear convergence timetable has been set for each of them. On 1 January 2006 the items mentioned will reach the tariff levels laid down for the CET.
In addition, MERCOSUR has a common list of capital goods and of informatic and telecommunications goods to which a timetable for convergence with the CET also applies. Under this pre-established timetable, capital goods will have a modal tariff of 14 per cent for Brazil and Argentina in 2001, and for Paraguay and Uruguay in 2006, while in the informatics and telecommunications sectors the CET will be attained in 2006.
A list of products has likewise been drawn up for each MERCOSUR member country involving intra-zonal tariffs, with automatic linear tariff cuts ending in the year 2000, at which date all tariffs will be at zero per cent for products originating in any MERCOSUR member.
Involved as it is in this intensive integration process, Paraguay is working very hard, in accordance with its WTO commitments, and together with its trading partners, on matters such as competition-protection policy, technical standards, consumer protection and intellectual property among others, in order to consolidate and strengthen the Customs Union.
As a result of this integration process, Paraguay has been able to carry out important trading operations with its partners and thus to bring about a continual increase in its exports within MERCOSUR.
As part of its outward-looking development strategy, Paraguay has promoted within MERCOSUR, in conjunction with its trading partners, an external policy aimed at the conclusion of trade agreements with third countries.
In this context, MERCOSUR is taking the first steps towards the signing of a trade agreement with the European Union, the initial results of which are expected to appear towards the end of 1997. Guidelines are also being drawn up concerning the preparation of other trade agreements with Mexico and the Andean Group. In addition, MERCOSUR is also playing an active part in the American Free Trade Area process.
MERCOSUR has signed trade agreements with Chile and Bolivia for the establishment of free-trade areas. The agreements include rules of origin, safeguard mechanisms, and a schedule for the total liberalization of sensitive products over a total of 18 years in both cases.
5.3 Latin American Integration Association (LAIA)
As an instrument for encouraging the integration process, the LAIA has for years confronted major challenges.
As a relatively less economically developed member of the LAIA, Paraguay has been placed by the other members on their market-opening list (NAM), which gives it preferential access to them.
Within the LAIA framework, Paraguay is a signatory to Economic Complementarity Agreement (ECA) No. 18 with Argentina, Brazil and Uruguay, through which the first stage of MERCOSUR comes into force. As a result of the Ouro Preto protocol, MERCOSUR has acquired legal personality under international law.
MERCOSUR as a bloc is currently renegotiating its bilateral and multilateral trade agreements in the LAIA framework with the other members.
6. Institutional and regulatory framework
6.1 Trade protection
In accordance with Paraguay's WTO commitments, the institutions connected with their implementation have been updated and overhauled. Thus, as regards the application of trade-protection measures, Decree 15286/96 set up the Trade Protection Commission, an interministerial body responsible for applying the procedures concerning dumping and subsidies, with the support of an office dealing specifically with trade distortion.
6.2 Intellectual property
In the field of the protection of intellectual property rights, the Government has issued Decree 14870/96 setting up a National Council for the Protection of Intellectual Property Rights, composed of representatives from five Ministries and the three chief municipalities. The Council is launching an intensive and effective national campaign to combat the counterfeiting of products in general and to raise civic awareness.
Paraguay has signed the Agreement on Trade-Related Intellectual Property Rights and within this framework has prepared a reform of its legislation on trade marks, inventions, copyright and related rights, which has been submitted by the Government to Congress for study.
6.3 Competition protection and consumer protection
Following the Presidential Summit in December 1996 in Fortaleza, the process of strengthening MERCOSUR has led to the adoption, together with the other partners, of a Joint Protocol on the Protection of Competition and of a number of resolutions on consumer protection. The Government is working on the introduction of a competition policy and of ad hoc measures for consumer protection, and legislation to this effect is being prepared for submission to Congress.
6.4 Customs modernization
The WTO Agreement on Implementation of Article VII was incorporated in Paraguayan legislation under Law 444/94, "ratifying the Final Act of the GATT Uruguay Round", while Decree 7403/95 sets out the additional rules needed for its full enforcement at internal level. The customs authorities have also introduced an up-to-date computer system named "Sofia" which is making customs administration more flexible and effective.
7. Directions of future policy
In 1997 an effort will be made to strengthen achievements so far in boosting the productive sector, with a view to reaching levels of sustained growth over the long term against a background of price stability. The goals are a real GDP growth of not less than 3 per cent, 8 per cent inflation and maintenance of international reserves at around US$1 billion.
As regards regulating the size of the State administration, the Government is working on labour reforms appropriate to this end.
Regarding geological and energy resources, Paraguay possesses one of the greatest energy potentials in the region and has in operation or under construction a number of hydro-electric dams including that operated by ITAIPU, the greatest undertaking of this type in the world. Paraguay is carrying out substantial reforms aimed at encouraging the private exploration and exploitation of natural resources such as oil, natural gas and various metals. The mining sector in Paraguay has been regarded as relatively new and not very active in the past owing to obstacles in the relevant Paraguayan legislation, but this situation has now been changed following the submission to Congress of a series of contract laws on mining concessions as well as on the exploitation of electricity and natural gas. The hydrocarbons sector has been reformed by Law 779/95 on Hydrocarbons.
In the financial sector, the Government has concentrated its activities on drawing up rules involving significant modifications in the money and capital markets, with the aim of boosting their development and creating favourable conditions for an expansion in domestic savings and for channelling these savings to the various sectors of production. In this context, bills will be introduced proposing the setting-up of a Financial System Consolidation Fund, the purpose of which will be to furnish financial assistance to intermediary institutions experiencing difficulties and provide appropriate measures to minimize the impact of leaving the market for institutions with imbalances and with suitable coverage for liabilities. Bills have also been put before Congress on rules governing securitization, on amendments to the Capital Market Law and on reform of the social insurance market.
With the backing of the private sector, the Government has supported the Maquila (in-bond processing) law which complements the legal arrangements for shifting production towards export.
In the agricultural, livestock and forestry sector, the Government has introduced changes in its institutions and activities aimed at:
- The permanent updating and modernization of scientific research and the transfer of approaches and new methods through autonomous institutes;
- thorough reform of the Rural Welfare Institute, the body dealing with land-reform policy and land-tenure problems, with a view to tackling social problems in the countryside;
- overall reform of the Ministry of Agriculture and Livestock by creating five autonomous institutes from former offices of the Ministry. These institutes will cover requirements regarding breeding and technology transfer, plant and animal health control and the outsourcing of technical assistance, with the Ministry retaining only the role of regulatory body and maker of agricultural policy.
Against the background of its foreign policy, Paraguay sees the American Free Trade Area as a far-reaching initiative which will bring about greatly improved market access and enhanced economic conditions for the region. Back to top