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PRESS/TPRB/57
10July1997
WTO AND REGIONAL COMMITMENTS SHAPE PARAGUAY 'S
INTEGRATION INTHE WORLD ECONOMY
Paraguay 'swidespread political andeconomic reforms havefurthered itsintegration intothe
world trading system. According tothefirstWTO report onParaguay 'strade policies andpractices,
thisprocess hasbeen strengthened bytheimplementation ofWTO undertakings andofregional
commitments resulting from MERCOSUR membership.
TheWTO Secretariat report andapolicy statement prepared bytheGovernment ofParaguay
willprovide thebasisforadiscussion, scheduled for17and18July1997, onthecountry 'stradepolicies
intheWTO.
TheWTO report notes thatinrecent years Paraguay 'seconomic growth hasbeenvariable,
barely keeping paceonaverage withpopulation growth. Foreign investment flows intoParaguay have
beenstimulated byfiscal incentives, highinterest rates, theliberalization ofthecountry 'sforeign
exchange régime andregional integration prospects inthecontext ofMERCOSUR. Thishasledto
realappreciation ofthecurrency andhasraised competitiveness concerns. Although progress in
privatization hasbeen slow, de-regulation isnow favoured inkeydevelopment sectors (e.g.,
telecommunications, electricity) where theStateisinvolved. Future growth andeconomic development
willdepend onhowissues likepublic finance, infrastructure andsocial welfare aretobeaddressed.
According tothereport, Paraguay 'smerchandise tradebalance hasdeteriorated rapidly, from
asurplus ofUS$164 million in1989toanestimated deficit ofUS$1,378 million in1996, despite rising
exports ofelectricity fromItaipú, theworld 'slargest hydro-electric project. Thisdecline isinteralia
related toasteady increase inimports anddecreasing world prices forParaguay 'stwoprimary export
products, soybeans andcotton. Official trade data,however, donotreflect adequately themagnitude
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ofreceipts from unrecorded trade, which includes re-exports from "shopping tourism" attracted by
alower levelofindirect taxation inParaguay thaninneighbouring countries.
Thereport notes thatintegration withMERCOSUR hasadvanced significantly withthe
progressive phase-out oftrade barriers onintra-zone trade andtheadoption oftheCommon External
Tariff (CET) in1995. Since then,border protection hasbeenbased exclusively ontariffs which replaced
earlier import restrictions oncertain agricultural items. However, consular charges of7.5percent
andafixed documentation feeincrease theeffective rateoftaxation onmostimports. Convergence
toMERCOSUR 'sCET isexpected toraiseParaguay 'saverage MFN tariff rate,from 9.6percent
in1995to11.1percentby2006. While average tariffprotection fortheagricultural sector willdecrease
from 7.6to7percent, arisefrom 9.8to11.4percentisexpected formanufactured goods. Inthe
absence ofadeveloped industrial sector, tariff escalation istoessentially favour industries ofother
MERCOSUR partners.
ThereportnotesthatParaguayhasundertakenreformstoincorporateWTOrulesinthedomestic
legislative framework. Newlegislation hasbeenpassed oncustoms valuation, preshipment inspection,
anti-dumping andsafeguards. Efforts havealsobeenmade toreinforce theprotection ofintellectual
property rights (IPRs) byinteraliajoining major international treaties, launching acampaign against
IPRviolations andpassing newlegislation. Paraguay 'sCongress isconsidering anewpatents law
incompliance withtheprovisions oftheWTO Agreement onTrade-Related Aspects ofIntellectual
Property Rights.
Paraguay hasahistory oflimited sectoral intervention, avoiding costly industrialization based
onaninward-looking import substitution strategy. Eighty-five percentofParaguay 'smerchandise
exports areagricultural products. There hasbeenlimited diversification ofcrops andexport markets,
andlittleprogress hasbeenachieved inimplementing agrarian reforms. Paraguay 'sunder-developed
manufacturing sector, dominated bysmall firms mainly processing domestic agricultural orforestry
products, isfaced withstructural adjustment challenges. Thereport notes thatParaguay 'sservices
sector, accounting forabout halfoftheGDPandconsisting mainly ofcommerce andfinancial services,
hasbeenpartly deregulated. Certain barriers orspecific requirements onprivate orforeign investors
remain inforce, forexample, inthesupply oftelecommunications, broadcasting, insurance and
transportation.
Initsconclusions, theWTO report states thatParaguay 'spolitical andeconomic reforms should
beconsolidated byimproved macroeconomic stability andinfrastructure aswellasefforts toaccelerate
anddeepen public sector andfinancial reforms. Thereport alsopoints outthatwhile MERCOSUR
membership hashelped Paraguay 'ssystemic reforms andimproved investment opportunities, itwill
leadtosome applied tariff increases andgreater preferences forregional partners. Thecombination
ofarising CETtarifflevelandduty-free-access toMERCOSUR partners, thereport says, mayresult
intrade diversion away from more competitive suppliers.
Note toEditors:
TheWTO Secretariat 'sreport, together withareport prepared byParaguay willbediscussed
bytheWTO Trade Policy Review Body (TPRB) on17and18July1997. TheWTO 'sTPRB conducts
acollective evaluation ofthefullrange oftradepolicies andpractices ofeachWTO member atregular
periodic intervals andmonitors significant trends anddevelopments which mayhaveanimpact onthe
global trading system. Thetworeports, together withareport oftheTPRB 'sdiscussion andofthe
Chairman 'ssumming up,willbepublished induecourse asthecomplete Trade Policy Review of
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ParaguayandwillbeavailablefromtheWTOSecretariat,CentreWilliamRappard,154ruedeLausanne,
1211 Geneva 21.
ThereportscoverthedevelopmentofallaspectsofParaguay'stradepolicies,includingdomestic
lawsandregulations, theinstitutional framework, trade policies bymeasure andbysector. Since the
WTO cameintoforce, the"newareas" ofservices tradeandtrade-related aspects ofintellectual property
rights arealsocovered. Attached arethesummary observations fromtheSecretariat andgovernment
reports. Fullreports willbeavailable forjournalists from theWTO Secretariat onrequest.
Since December 1989, thefollowing reports havebeencompleted: 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), theCzech Republic (1996), theDominican Republic (1996),
Egypt(1992),ElSalvador(1996),theEuropeanCommunities(1991,1993&1995),Fiji(1997),Finland
(1992), Ghana (1992), Hong Kong (1990 &1994), Hungary (1991), Iceland (1994), India (1993),
Indonesia (1991 and1994), Israel (1994), Japan (1990, 1992 &1995), Kenya (1993), Korea, Rep.
of(1992 &1996), Macau (1994), Malaysia (1993), Mauritius (1995), Mexico (1993), Morocco (1989
&1996), NewZealand (1990 &1996), Nigeria (1991), Norway (1991 &1996), Pakistan (1995), Peru
(1994), thePhilippines (1993), Poland (1993), Romania (1992), Senegal (1994), Singapore (1992 &
1996), Slovak Republic (1995), South Africa (1993), SriLanka (1995), Sweden (1990 &1994),
Switzerland (1991 &1996), Thailand (1991 &1995), Tunisia (1994), Turkey (1994), theUnited States
(1989, 1992, 1994&1996), Uganda (1995), Uruguay (1992), Venezuela (1996), Zambia (1996) and
Zimbabwe (1994).
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TRADE POLICY REVIEW BODY
PARAGUAY
Report bytheSecretariat -Summary Observations
(1) TheEconomic Environment
Since 1989, Paraguay hasundertaken widespread political andeconomic reforms. During the
period, economic growth, while positive, hasbeenvariable, barely keeping paceonaverage with
population growth. However, inflation hasbeenreduced, particularly since1993, toaround 8percent
in1996, thetargeted levelalsofor1997.
Strong direct investment inflows havebeenstimulated, interalia,byliberalization oftheforeign
exchange andinvestment régimes, fiscal incentives, regional integration prospects under MERCOSUR.
Highinterest rateshavealsoattracted considerable short-term capital flows. Thistrend, together with
growing foreign exchange earnings from theexport ofelectricity from Itaipú, theworld 'slargest
hydro-electric project, hasledtocontinuous realappreciation ofthecurrency which hasraised concerns
about thecompetitiveness oftraditional Paraguayan exports ofcotton andsoybeans, which alsovary
according toworld prices.
Paraguay 'smerchandise trade deficit hasgrown rapidly; however, official datamaynot
accurately reflect thesituation because ofthemagnitude ofunrecorded trade, especially re-exports.
Suchre-exports, largely related to"shopping tourism" stimulated bylower indirect taxation inParaguay
thaninneighbouring countries, remain ofconsiderable importance tothedomestic economy (including
fiscal revenue from value-added taxonsuchpurchases). Faster growth inrecorded imports under
theliberalization programme, plusimproved statistical recording, arefactors underlying theincreased
ratiooftrade toGDP.
(2) Trade Policy Features andTrends
(i) International economic integration
Reforms, begun in1989, rationalized Paraguay 'straderégime bysimplifying thetariffstructure
andreducing dutyrates. However, thistrend will, tosome extent, bereversed byprogressive
convergence withMERCOSUR 'sCommon External Tariff (CET), which willbring about amodest
increase intheunweighted average applied m.f.n. ratefrom9.6percentin1995 to11.1percentby
2006.IncompliancewithMERCOSURandWTOcommitments,remainingnon-tariffmeasures,affecting
afewagricultural products, were replaced bytariffs inJanuary 1995. Todate, Paraguay hasnever
applied safeguard oranti-dumping actions.
Integration withMERCOSUR hasadvanced significantly withtheprogressive phase-out of
tariffs andthesuppression ofnon-tariff barriers onintra-regional trade, aswellastheadoption ofthe
CET. Paraguay ispursuing further expansion ofitsregional andpreferential trading links via
MERCOSUR, through thenegotiations ontheestablishment ofaFreeTrade AreafortheAmericas
aswellaswithother groups andindividual countries. Trade within theregion, predominantly with
Brazil, hasexpanded greatly; competition inthedomestic market isexpected tointensify gradually
asremaining tariff protection onimports ofsensitive items originating inMERCOSUR countries is
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phased outby2000. Decisions remain tobetaken within MERCOSUR ondutyforsugar and
establishment ofacommon automotive régime.
(ii) Trade policy developments
Paraguay hasundertaken awide-ranging reform ofitslegislative framework, driven bythe
adoption ofanewConstitution, accession totheGATT andsubsequent WTO membership, andthe
deepening oftradecommitments atregional andmultilateral levels. Newlegislation hasbeenadopted
inareassuchascustoms valuation, preshipment inspection, anti-dumping, safeguards, free-trade zones,
hydrocarbons, mining, banking, insurance andtelecommunications. Further legislative reforms are
being considered byCongress, including alawonpatents andimplementing legislation onMERCOSUR
commitments. Paraguay invoked theextended implementation period available fordeveloping countries
under theWTO Agreement onCustoms Valuation, butnofinaldecision hasbeenmade onwhether
itwillseeksimilar delays onpatents under theTRIPS Agreement. Compliance withGATT/WTO
notification requirements hasimproved buttherearestillsome significant gaps, forexample, onState
trading enterprises. Domestically, anewMinistry ofIntegration hasbeenestablished andanumber
ofpolicy co-ordination orimplementation committees havebeensetup.
Paraguay 'sborder protection nowrelies exclusively ontariffs; itapplies thedisperse
eleven-tier Common External Tariff (CET) ofMERCOSUR, withasimple average of9.6percent
andratesof0,2,4,6,8,10,12,14,16,18and20percentadvalorem. Thisprotection pattern
largely reflects other MERCOSUR members 'interests rather than those ofParaguay, whose
manufacturing sector isrelatively undeveloped. Apeakof30percentapplies tosugar imports. Within
theCET, tariffescalation provides higher effective protection forprocessing industries thanisevident
fromnominal rates; tariff escalation will,incertain cases, become evenmore pronounced when full
convergence tocommon ratesisaccomplished. Theentire tariff isbound, generally ataceiling of
35percent, except for451items bound atlower levels; WTO bindings oncertain items aretobe
renegotiated, taking intoaccount theleveloftheCET. Provisions fortariffexemptions orconcessions,
forexample onimported inputs orimports bycertain State entities, havebeenmaintained.
Consular charges of7½percentc.i.f. andafixed documentation feesubstantially increase
theeffective rateoftaxation onmostimports. Handling charges imposed onaspecific-rate basis by
theNational Shipping andPorts Administration (ANNP) differentiate between imports andexports,
asdostorage fees,charged onanadvalorem basis.
Remainingsector-orproduct-specificmeasuresaffectingimportscompriseimportauthorizations,
licensing andprohibitions maintained forhealth, environmental orsecurity reasons. Legislative
provisions allowing theuseofimport prohibitions foreconomic reasons remain inforce, butarenot
currently applied. Stateinvolvement inproduction andtrading persists insteel, cement, hydrocarbons,
electricity, telecommunications, transportation, banking, port,airport andsanitation services; greater
privatesectorparticipationinactivitiesreservedtoStatemonopolies(i.e.,de-monopolization)isfavoured
asanalternative tocomplete privatization. Government procurement conditions give15percent
preference tolocalproducts and5percentfordomestically assembled goods; theestablishment of
anewregister ofsuppliers isintended toimprove transparency ofprocedures.
Since 1994export prohibitions havebeenextended toallun-andsemi-processed wood. These
restrictionsareintendedtoaddresstheacuteproblemofdeforestation,butmayalsoencourageproduction
bylocalsawmills. Other export restraints, suchasoncertain agricultural items, areeither based on
domestic supply considerations oraddress compliance withinternational orbilateral arrangements,
suchasthatgoverning beefexports totheEU.
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Legislation establishing afree-trade-zone régime, including wide-ranging taxconcessions, was
passed in1995buthadnotbeennotified totheWTO atthetimeofcompletion ofthisreport. Paraguay
hasuntil2003 tobring thislegislation intolinewithobligations. Afirstproject toestablish azone
wasauthorized in1997. Drawback ofVAT isallowed andexport promotion facilities areavailable;
noother financial orinsurance facilities forexports areavailable.
Support todomestic production mainly consists ofconcessional finance formodernization,
training,technologytransfer,developmentandenvironmentalprojects.Adhocassistancetoagricultural
activities hasbeenprovided invarious forms. Most public utilities seem tobeavailable atprices that
donotcover marginal costs; forexample, concessional electricity rateswere established in1994.
Efforts havebeenmade recently toreinforce thelegal andinstitutional framework forthe
protection ofintellectual property rights (IPRs); Paraguay hasjoined themajor international treaties
andabillisinpreparation intended tobring domestic legislation intoconformity withtheprovisions
oftheTRIPS Agreement. Enforcement ofIPRsinParaguay remains subject toseveral constraints;
however, anewNational Council fortheProtection ofIntellectual Property Rights istoimplement
acampaign against IPRviolations. AConsumer Protection Office wasestablished in1995, and
legislation ontheimplementation ofthe1996MERCOSUR Competition Protection Protocol of1996
isunder preparation. Paraguay hasincreased itsemphasis onenvironmentally sustainable development
byadhering toseveral international treaties inthisarea.
(3) Sectoral Policy Developments
Agriculture
Nominal tariff protection foragriculture is7.6percentin1997, below theoverall average
level; fullimplementation oftheMERCOSUR CETwillleadtoaslight reduction intariffprotection
forthesector. Paraguay hasanuncomplicated WTO Schedule, withnotariffquotas, special safeguards,
domestic support orexport subsidy reduction undertakings. Despite thefundamental importance of
agriculturetotheeconomy,governmentinterventionismodest,mainlyintendedtoassistsmallproducers
incoping withemergency situations suchasharsh weather andcredit shortages; ithasbeenlimited
totemporary orseasonal tariff protection forafewcrops, theprovision oflow-cost short-term credit
forcashorsensitivecrops,VATexemptionforunprocessedcropsandcertainsporadicsupportmeasures,
including writing-off baddebtorfreedistribution ofseeds, mainly forcotton. Noprogress hasbeen
achieved sofarinagrarian reforms foreseen under theConstitution, andefforts forcropandexport
diversification havebeenlimited, focusing mainly oncredit-related measures; sectoral reactivation
andmodernization projects wereunder preparation in1995 and1996. Particular emphasis hasbeen
given tostrengthening theregulatory framework governing forest exploitation andre-afforestation
activities aswellastocontrolling illegal exports ofwood; however, there hasbeenlittleresponse,
andfinancial assistance isnowusedtostrengthen theprogramme.
Energy
State involvement affects allelectricity generation anddistribution activities andalarge part
ofthehydrocarbons trade, although monopoly rights onthelatter were eliminated in1992. The
de-monopolization andrestructuring oftheelectricity sector hasbeenunder consideration inrecent
years. Exports ofsurplus power from themajor hydro-electric power plants generate large foreign
exchange earnings, andlowelectricity rates mayprovide thebasis forfuture development of
energy-intensive industries. Theconstruction andoperation ofthese hydro-electric power plants have
raised some environmental concerns.
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Manufacturing
Paraguay hasnever sought toachieve sectoral development through import substitution policies;
manufacturing isthusdominated bysmall, inward-oriented firms processing domestic agricultural or
forestry products, which increasingly faceimport competition fromMERCOSUR partners. However,
manufacturing enjoys thehighest average tariff protection ofanysector; thisisexpected toriseby
16percentto11.4percentby2006when MERCOSUR CETrateswillapply fully. Atpresent, the
food, beverages, tobacco, textiles, leather, wood andfurniture industries havethehighest average levels
ofprotection. Duty freeaccess toMERCOSUR partners, behind theCET, mayencourage purchase
ofregionally produced capital goods andother inputs, thuscreating some trade diversion away from
more competitive suppliers andpotentially increasing start-up costs forParaguayan manufacturing.
Noevidence exists thatState involvement inmanufacturing andtrade ofsteelandcement hasbeen
amajor barrier totradeinrecent years. Thelevelofinterest rates, shortage ofcredit, liquidity problems
andtherealappreciation oftheexchange rate,aswellascompetition fromimports havebeenthemain
factors affecting modernization andgrowth ofmanufacturing.
Services
Commerce,particularlyrelatedtoshoppingtourismfosteredbysizeableindirecttaxdifferentials
withneighbouring countries, andfinancial services dominate theservices sector. Following the
1995 financial crisis, which ledtoconsiderable public expenditure onbankrescue operations, steps
havebeentakentoreformthefinancialsystem,includingtheenlargementofdomesticinvestmentoptions.
Stateinvolvement inkeyservices suchasport,airport, telecommunications andelectricity distribution
seems tohaveconstrained thedevelopment oftradeandinvestment. Despite recent deregulation efforts,
anumberofbarriersorspecificrequirementsonprivateorforeigninvestorsremaininforce,forexample
inthesupply oftelecommunications, broadcasting, insurance andtransport services. Subsidies may
beprovided forthedevelopment ofthetelecommunications sector wereinaddition tolegislative and
institutional changes, ajointventure agreement hasbeensigned toimprove thesupply oftelephone
lines. Cargo reserve requirements wererelaxed inrecent years; inpractice, thesewerenever effective
duetodomestic capacity restraint.
Paraguay 'scommitments under theGeneral Agreement onTrade inServices cover financial
andtourismsectors.Noexemptionstom.f.n.treatmentunderGATSArticleIIarespecified.Therefore,
unless GATS Article Visinvoked byParaguay, asisapparently intended, Paraguay mustgrant service
suppliersfromallWTOmembersidenticaltreatmenttothatextendedtoitsLatinAmericanpartners(e.g.,
oncargo andpassenger transport). InthelightofMERCOSUR priorities, Paraguay hasexpressed
nointerest inparticipating innegotiations onmaritime transport andbasictelecommunications services
orinsigningtheInformationTechnologyAgreement,which,isseenasrunningcountertoMERCOSUR's
sectoral objectives inthisarea.
(4) Trade Policies andForeign Trading Partners
Since theearly 1990s, Paraguay 'spolitical andeconomic reforms havebeenstrengthened by
theincreased security ofaccess resulting from itsaccession totheGATT andtheexpansion ofits
commitments intheUruguay Round. Theprocess should beconsolidated byimproved macroeconomic
stability,betterinfrastructureandongoingpublicsectorandfinancialreforms,whichneedtobedeepened
topaveforhigher growth. MERCOSUR hashelped toreinforce systemic reforms andisexpected
tocreate newinvestment opportunities; however, itwillleadtosome applied tariffincreases andgreater
preference forregional partners. Theexpansion ofregional tradeshould continue asnewagreements
areforged, although Paraguay isalsolooking fortrade opportunities beyond theregion. Full
implementation ofUruguay Round commitments andassured access toforeign markets should further
strengthen Paraguay 'sintegration intheworld economy.
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TRADE POLICY REVIEW BODY
PARAGUAY
Report bytheGovernment
1. Introduction
Paraguay hasmade substantial changes initseconomic andsocial policy since1989. Acomplete
overhaul oftheStatehasbeeninitiated sincethenandtheconditions arebeing created forthecountry 's
sustainable economic development. Paraguay hasunilaterally liberalized itstrade, notadopting an
import-substitution model.
Against thisbackground ofchange, Paraguay, together withArgentina, Brazil andUruguay,
ispushing resolutely ahead withthecreation oftheSouthern Common Market (MERCOSUR), thereby
gaining access tothose countries andgenerating theconditions necessary forproductive activity. Since
1989Paraguay hasfocused itsgrowth strategy onattracting domestic andforeign investment through
thedevelopment ofastable macroeconomic environment, thecreation ofasimplified taxsystem and
thepassing oflawstoencourage productive activity.
While helping tosetupandconsolidate MERCOSUR, Paraguay, together withitspartners,
iscontinuing topromote regional integration through thesigning offree-trade agreements withChile
andBolivia andisinitiating aseries ofnegotiations withother countries andtrading blocs.
2. Main economic reforms
Paraguay hasundergone anintensive process ofchange inboththepolitical andeconomic fields.
Theprocess started withexchange reform. Exchange controls were abolished andthere is
nowafreely floating exchange rate.
Taxreform isbeing carried outunder Law125/91, withthe70taxes thatexisted under the
fiscal system being cutto7.Thishasledtogreater State efficiency from thepoint ofview oftax
collection andsimplicity, withconsequent benefits toprivate activity aswell.
In1991 theTreaty ofAsunción wassigned. Thisinitiated theprocess ofcreating acommon
market between Paraguay, Argentina, Brazil andUruguay, which hasnowbeen converted intoa
flourishing Customs Union.
Paraguay hasalsomodified itscustoms tariffs, eliminating excessive dispersion ofratesand
reducing the1988average of14.8percentto11.1percentfollowing theintroduction oftheCommon
External Tariff.
Laws 60/90 and117/91 havebeenpassed, providing afavourable framework fortheprotection
andattraction ofdomestic andforeign investment. These lawsauthorize important taxexemptions
forimports ofcapital goods, aswellasonprofits forfiveortenyears, inaddition tobroad latitude
forsending remittances abroad.
TheNational Constitution wasamended in1992 through aConstituent National Assembly
composed inbalanced form ofrepresentatives ofallthecountry 'spolitical andsocial sectors. The
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main pillar ofthisconstitution isthedefence ofhuman rights andfreedoms andtheestablishment of
sound, modern institutions designed tomeettheneeds oftheglobal economy.
Reforms havebeencarried outinthefinancial sector. AnewGeneral LawonBanks and
Financial Institutions hasbeenpassed andtheOrganic Charter oftheCentral Bank hasbeenmodified
soastoincorporate preventive supervision aspects andprovide thesupervisory body withgreater
autonomy. Thecriteria oftheBasle Convention forthevaluation ofthenetassets offinancial bodies
havebeenadopted. Likewise, withaviewtogreater transparency, comprehensive legislation hasbeen
passed toprevent money laundering, inparticular Law1015/97 setting upanexecutive body, the
Secretariat forthePrevention ofMoney orGoods Laundering.
Reforms inthelabour sector include thepassing ofanewLabour Code, which hasexpanded
welfare benefits inthelabour sector withaviewtoachieving abalance withthebusiness sector.
With regard toprivatization, theGovernment sawtothepassing ofLaw126/91 laying down
theprivatization arrangements forState enterprises. TheState Airline, theState Alcohol Company
andtheState Merchant Fleet havebeen privatized, while thesteelindustry isinthefinalstages.
Law642,which willmake itpossible toproceed withtheremoval ofthetelecommunications monopoly,
waspassed in1995. Thefirstprogrammes toexpand thetelephone services havebeensuccessfully
carried outonthebasis ofrisk-sharing between ANTELCO andtheprivate sector.
Intheforestry sector -animportant branch ofeconomic activity -Law536/95 onthe
Encouragement ofReforestation hasbeenpassed. Itsobjective isthesustainable exploitation ofnatural
resources, andtothisenditgrants important taxbenefits toreforestation activities.
Paraguay hasmade special efforts toprotect intellectual property. In1996 itputbillsbefore
Congress andsetinmotion anintensive national campaign fortheprotection ofintellectual property
rights. These actions areaccompanied bycontrols, seizures, enhancement ofcivicawareness anda
suitable legalframework.
Oneofthemostoutstanding reforms concerns thejudiciary, withspecial reference tothesetting
upoftheSupreme Court ofJustice. Theentry intoforce oftheLawontheMagistracy Council
represents asteptowards thefullrespect for,andobservance of,civicrights bythepromotion ofan
autonomous andindependent judiciary.
TheGovernment isworking onthefurther development ofitsdetailed structural reforms and
isseeking tocorrect andcontrol anumber ofmacroeconomic variables which could compromise the
long-term stability andgrowth oftheeconomy. Theobjectives ofcurrent economic policy areto:
- Encourage rapid growth oftheproductive sector;
- maintain thebalance oftherealexchange rateandavoid sudden fluctuations inthe
general exchange rate;
- control andrestructure public expenditure byrestricting current expenditure and
liberalizing infrastructure expenditure; holdthelevelofinflation steady.
3. Economic andtrade environment
Asafarming country bytradition, Paraguay hashistorically based itseconomic growth on
agricultural production. Although thiseconomic model isstillbeing followed, theGovernment has
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madegreateffortsasregardsagriculturaldiversificationandisencouragingthecountry'sindustrialization.
TheGDPhasremained highly sensitive tofluctuations inagricultural production andin1996suffered
theimpact ofthe1995financial crisis. However, aconsiderable recovery ingrowth hasbeenachieved
in1997.
TheGovernment hassucceeded incontinuously reducing levels ofinflation from44.1percent
recorded inDecember 1990 to8.2percentinDecember 1996 (thelowest inflation rateofthelast
15years). TheGovernment hassetatarget of8percentfor1997.
Productive investment hasbeenincreasing since1989todate,mostofitbeing offoreign origin.
Between 1989 and1996 theaverage annual growth intotalinvestment wasaround 30percent,while
foreign investment inthatperiod -themostdynamic component -showed anannual average growth
of49percent.
Themarked increase inimports overthelastfiveyears isduemainly tothesharp riseintrade
andtourism generated inthefrontier cities ofParaguay withBrazil andArgentina, resulting inatrade
imbalance. Within MERCOSUR, Paraguay isbecoming animportant trade centre, withthissector
developing important marketing channels totheoutside. Asaresult oftheconvergence oftariffs within
MERCOSUR, considerable pressure inbeing brought tobearinfavour oftherelocation andlocal
production ofproducts, leading tomajor private initiatives liketheestablishment ofindustrial parks.
Thebalance ofexternal public debtfellbyabout 20percentintheperiod 1990/96, going from
nearly US$1,670 million in1990 toUS$1,336.3 million inDecember 1996. Onthelatter datethe
debtbalance accounted for14percentofGDP andrepresented apercapita debtofUS$270, which
isamong thelowest figures inLatin America. Thislevelofdebtcompares withapercapita GDP
ofapproximately US$1,933 (current rates) inthesame year.
Thelevelofinternational reserves hasrisensignificantly inthisdecade, fromUS$675 million
attheendof1990toUS$1,062 million inDecember 1996andthusstaying ataprudent level(40percent
oftotalimports recorded inthatyear).
Macroeconomic situation
Indicators 1993 1994 1995 1996*
Annual inflation (%) 20.4 18.3 10.5 8.2
Variation inexchange rate(%) 13.8 5.3 3.1 6.7
Balance ofinternational reserves
(millions ofUS$)697.7 1,044.1 1,106.5 1,062.0
External public debt(millions ofUS$) 1,218.0 1,240.0 1,328.0 1,303.0
Central Government (millions ofG/) -84,029.0 143,635.0 -50,227.0 -140,713.0
*The 1996 figures areprovisional.
Source: Central Bank ofParaguay andMinistry ofFinance.
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4. Present outlook fortheeconomy
Although thestructural changes intheParaguayan economy haveinmany respects beengradual
andnon-traumatic, theynowmake forascenario differing fromthatprevailing inearly1989. Industrial
infrastructure isgrowing strongly, agricultural diversification isinfullswing andthe1995 financial
crisis hasbeenovercome withafullrecovery intrade operations.
TheGovernment willsticktoaprudent debtpolicy withadequate international reserves. The
necessary efforts willbemade tomaintain thepresent macroeconomic stability andtostrengthen growth
intheeconomy.
Thegreatenergy potential available provides theStatewithsubstantial revenue fromtheexport
ofelectricity, amounting in1996 toaround 43percentofrecorded exports ofproducts.
Inthelightofagrowth incentral government expenditure ofalmost zeroduring thefirstquarter
of1997 innominal terms -which amounts toanegative realvariation -thegreater levelofactivity
hasledtoabudget surplus, withanaccumulated surplus ofG/114,879 million being recorded during
thequarter. Thisresult hasenabled theexternal debttobeamortized uptoanamount almost double
theoutgoings andeven togenerate anincrease incurrent-account deposits amounting to
G/106,053 million.
Theincrease inmoney supply bothbefore andduring thefirstquarter of1997appears toindicate
theexistence ofagreater levelofeconomic activity, since withamoney supply greater thaninthe
previous yearprices havereacted slightly more quickly. Theretail price index shows anincrease of
5.3percentforthequarter, exceeding thefigure of4.9percentforthesame period in1996, whereas
producer prices aredown owing tothetrend ofagricultural prices andoil,interalia.
Inaddition tobeing reflected inagreater riseinprices, thehigher aggregate demand hasled
toanincrease inthetrade-balance deficit which, according toCentral Bank projections forthefirst
quarter of1997, hasnotresulted inabigger balance-of-payments current-account deficit thanks to
apositive trend intheperformance ofunrecorded exports andimports. Asregards thefinancing of
thecurrent-account deficit, thegreater partrelates tovariations ininternational reserves. Although
therehasbeenanetcapital inflow itislessthanintheprevious yearbefore, buthasamore favourable
composition, withagreater share oflong-term capital andfromanincrease indirect foreign investment.
5. Development oftrade negotiations
Given itssmall internal market, theGovernment hasencouraged thedevelopment ofan
outward-looking growth model through theopening upofexternal markets andproduction switching.
Aspartofitsnewforeign-policy strategy, Paraguay hastaken anactive partinregional
integration processes suchasMERCOSUR, while atmultilateral levelitjoined GATT in1993.
Paraguay hasbeenanactive partner intheprocess ofsetting uptheMERCOSUR customs
union andinthelatter'snegotiations withthirdcountries andtrading blocs.
After MERCOSUR wassetup,aseries ofrenegotiations wasinitiated covering thebilateral
agreements ofmembers ofMERCOSUR withtheother members oftheLatin American Integration
Association (LAIA), fortheimprovement anddevelopment oftheirpartial-scope agreements.
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5.1 Uruguay Round -World Trade Organization
Paraguay joined GATT in1993, fulfilling itsaccession commitments. TheParaguayan National
Congress ratified theGATT Accession Protocol bymeans ofLaw260of1993.
Paraguay tookpartinthesetting upoftheWorld Trade Organization which emerged from
theUruguay Round. Inthisconnection, itcarried outthenecessary internal reforms regarding standards
andprocedures relating tocustoms valuation, intellectual property, elimination ofprohibitions, and
mechanisms tocounter unfair competition, especially anti-dumping andcountervailing measures.
Paraguay hasreduced itslevels oftariff andnon-tariff protection.
Paraguayanpolicyregardingservicesisveryopen.IthasenteredintobroadGATScommitments
regarding transport, communications, tourism andfinance.
Paraguay hastaken greatinterest inenvironmental matters. Atdomestic level, ithasextensively
modified allitsprocedures regarding anti-dumping mechanisms, agriculture, health standards, plant
andanimal health standards andtechnical standards. Nevertheless, theGovernment iscontinuing to
prepare regulations covering theinclusion initslegislation ofother procedures provided forinthe
WTO framework, forexample safeguards.
5.2 MERCOSUR
Paraguay isafounder member oftheSouthern Common Market (MERCOSUR), inwhich
ithasbeenparticipating since itsigned theTreaty inAsunción in1991.
Since itsigned theAsunción Treaty, Paraguay hasencouraged theimplementation ofaCommon
External Tariff withlevels matching itsextensive commercial openness andinacontinuing spirit of
consensus andanalysis.
TheMERCOSUR Common External Tariff (CET) hasanaverage levelof11.1percent.
Theneed toadapt tothenewtariff structure hasnecessitated thecreation oftransitional
instruments which allow eachsignatory Statetomaintain anational listofexceptions totheCET, which
inthecaseofParaguay comes to399tariff items. Thenational exceptions aredefined individually
andalinear convergence timetable hasbeensetforeachofthem. On1January 2006 theitems
mentioned willreach thetariff levels laiddown fortheCET.
Inaddition, MERCOSUR hasacommon listofcapital goods andofinformatic and
telecommunications goods towhich atimetable forconvergence withtheCET alsoapplies. Under
thispre-established timetable, capital goods willhaveamodal tariff of14percentforBrazil and
Argentina in2001, andforParaguay andUruguay in2006, while intheinformatics and
telecommunications sectors theCET willbeattained in2006.
Alistofproducts haslikewise beendrawn upforeachMERCOSUR member country involving
intra-zonal tariffs, withautomatic linear tariff cutsending intheyear2000, atwhich datealltariffs
willbeatzeropercentforproducts originating inanyMERCOSUR member.
Involved asitisinthisintensive integration process, Paraguay isworking veryhard, in
accordance withitsWTO commitments, andtogether withitstrading partners, onmatters suchas
competition-protection policy, technical standards, consumer protection andintellectual property among
others, inorder toconsolidate andstrengthen theCustoms Union.
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Asaresult ofthisintegration process, Paraguay hasbeenabletocarry outimportant trading
operations with itspartners andthustobring about acontinual increase initsexports within
MERCOSUR.
Aspartofitsoutward-looking development strategy, Paraguay haspromoted within
MERCOSUR, inconjunction withitstrading partners, anexternal policy aimed attheconclusion of
trade agreements withthirdcountries.
Inthiscontext, MERCOSUR istaking thefirststepstowards thesigning ofatradeagreement
withtheEuropean Union, theinitial results ofwhich areexpected toappear towards theendof1997.
Guidelines arealsobeing drawn upconcerning thepreparation ofother tradeagreements withMexico
andtheAndean Group. Inaddition, MERCOSUR isalsoplaying anactive partintheAmerican Free
Trade Area process.
MERCOSUR hassigned trade agreements withChile andBolivia fortheestablishment of
free-trade areas. Theagreements include rules oforigin, safeguard mechanisms, andaschedule for
thetotalliberalization ofsensitive products overatotalof18years inbothcases.
5.3 Latin American Integration Association (LAIA)
Asaninstrument forencouraging theintegration process, theLAIA hasforyears confronted
major challenges.
Asarelatively lesseconomically developed member oftheLAIA, Paraguay hasbeenplaced
bytheother members ontheirmarket-opening list(NAM), which gives itpreferential access tothem.
Within theLAIA framework, Paraguay isasignatory toEconomic Complementarity Agreement
(ECA) No.18withArgentina, Brazil andUruguay, through which thefirststage ofMERCOSUR
comes intoforce. Asaresult oftheOuro Preto protocol, MERCOSUR hasacquired legalpersonality
under international law.
MERCOSUR asablociscurrently renegotiating itsbilateral andmultilateral tradeagreements
intheLAIA framework withtheother members.
6. Institutional andregulatory framework
6.1 Trade protection
Inaccordance withParaguay 'sWTO commitments, theinstitutions connected withtheir
implementation havebeenupdated andoverhauled. Thus, asregards theapplication oftrade-protection
measures,Decree15286/96setuptheTradeProtectionCommission,aninterministerialbodyresponsible
forapplying theprocedures concerning dumping andsubsidies, withthesupport ofanoffice dealing
specifically withtrade distortion.
6.2 Intellectual property
Inthefield oftheprotection ofintellectual property rights, theGovernment hasissued
Decree 14870/96 setting upaNational Council fortheProtection ofIntellectual Property Rights,
composed ofrepresentatives from fiveMinistries andthethree chiefmunicipalities. TheCouncil is
launchinganintensiveandeffectivenationalcampaigntocombatthecounterfeitingofproductsingeneral
andtoraisecivicawareness.
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Paraguay hassigned theAgreement onTrade-Related Intellectual Property Rights andwithin
thisframework hasprepared areform ofitslegislation ontrademarks, inventions, copyright andrelated
rights, which hasbeensubmitted bytheGovernment toCongress forstudy.
6.3 Competition protection andconsumer protection
Following thePresidential Summit inDecember 1996inFortaleza, theprocess ofstrengthening
MERCOSUR hasledtotheadoption, together withtheother partners, ofaJoint Protocol onthe
Protection ofCompetition andofanumber ofresolutions onconsumer protection. TheGovernment
isworking ontheintroduction ofacompetition policy andofadhocmeasures forconsumer protection,
andlegislation tothiseffect isbeing prepared forsubmission toCongress.
6.4 Customs modernization
TheWTO Agreement onImplementation ofArticle VIIwasincorporated inParaguayan
legislation under Law 444/94, "ratifying theFinal ActoftheGATT Uruguay Round", while
Decree7403/95setsouttheadditionalrulesneededforitsfullenforcementatinternallevel.Thecustoms
authorities havealsointroduced anup-to-date computer system named "Sofia" which ismaking customs
administration more flexible andeffective.
7. Directions offuture policy
In1997 aneffort willbemade tostrengthen achievements sofarinboosting theproductive
sector, withaviewtoreaching levels ofsustained growth overthelongtermagainst abackground
ofprice stability. Thegoals arearealGDP growth ofnotlessthan3percent, 8percentinflation
andmaintenance ofinternational reserves ataround US$1 billion.
Asregards regulating thesizeoftheStateadministration, theGovernment isworking onlabour
reforms appropriate tothisend.
Regarding geological andenergy resources, Paraguay possesses oneofthegreatest energy
potentials intheregion andhasinoperation orunder construction anumber ofhydro-electric dams
including thatoperated byITAIPU, thegreatest undertaking ofthistypeintheworld. Paraguay is
carrying outsubstantial reforms aimed atencouraging theprivate exploration andexploitation ofnatural
resources suchasoil,natural gasandvarious metals. Themining sector inParaguay hasbeenregarded
asrelatively newandnotveryactive inthepastowing toobstacles intherelevant Paraguayan legislation,
butthissituation hasnowbeenchanged following thesubmission toCongress ofaseries ofcontract
laws onmining concessions aswellasontheexploitation ofelectricity andnatural gas. The
hydrocarbons sector hasbeenreformed byLaw779/95 onHydrocarbons.
Inthefinancial sector, theGovernment hasconcentrated itsactivities ondrawing uprules
involving significant modifications inthemoney andcapital markets, withtheaimofboosting their
development andcreating favourable conditions foranexpansion indomestic savings andforchannelling
these savings tothevarious sectors ofproduction. Inthiscontext, billswillbeintroduced proposing
thesetting-up ofaFinancial System Consolidation Fund, thepurpose ofwhich willbetofurnish financial
assistance tointermediary institutions experiencing difficulties andprovide appropriate measures to
minimize theimpact ofleaving themarket forinstitutions withimbalances andwithsuitable coverage
forliabilities.BillshavealsobeenputbeforeCongressonrulesgoverningsecuritization,onamendments
totheCapital Market Lawandonreform ofthesocial insurance market.
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With thebacking oftheprivate sector, theGovernment hassupported theMaquila (in-bond
processing) lawwhich complements thelegalarrangements forshifting production towards export.
Intheagricultural, livestock andforestry sector, theGovernment hasintroduced changes in
itsinstitutions andactivities aimed at:
- Thepermanent updating andmodernization ofscientific research andthetransfer of
approaches andnewmethods through autonomous institutes;
- thoroughreformoftheRuralWelfareInstitute,thebodydealingwithland-reformpolicy
andland-tenure problems, withaviewtotackling social problems inthecountryside;
- overallreformoftheMinistryofAgricultureandLivestockbycreatingfiveautonomous
institutes fromformer offices oftheMinistry. These institutes willcover requirements
regarding breeding andtechnology transfer, plant andanimal health control andthe
outsourcing oftechnical assistance, with theMinistry retaining onlytheroleof
regulatory body andmaker ofagricultural policy.
Against thebackground ofitsforeign policy, Paraguay seestheAmerican FreeTrade Area
asafar-reachinginitiativewhichwillbringaboutgreatlyimprovedmarketaccessandenhancedeconomic
conditions fortheregion.
END